Good morning, ladies and gentlemen, and welcome to APi Group's Second Quarter 2022 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 second quarter 2022 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. 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 4, 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 in our presentation. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia, and good morning, everyone. APi delivered another strong quarter of results, including record net revenues, adjusted EBITDA and adjusted diluted earnings per share in a volatile macro environment. Russ and Kevin will speak to the performance of the business in more detail, but I would add that in our view, APi's continued execution against its goal, despite challenges faced in an uncertain macro environment speak to the strength of the Company's recurring revenue, services focused business model and the discipline of the organization and its leadership team. With the enormous amount of opportunities in front of us, the efforts of each and every leader across our organization is contributing to the achievement of both short-term and long-term goals. I'd like to recognize their extraordinary efforts in being integral to raising the bar of performance across the entire company. As you can see from the Company's significant organic progression, including growth in organic net revenues of 14% year-to-date for the legacy APi business as well as Chubb delivering topline growth, the go-to-market strategies are working. Margins are rising, and the proportion of the business in mandatorily required safety services continues to grow towards our rate goal of 60% plus of revenue coming from inspection service and monitoring. APi is a great company with great leaders in a great sector. I do not believe the public markets have remotely acknowledged this yet, but we are in the long game and know that over time, this will change. We believe APi has a clear path to make the most of the opportunities in front of the Company, and we're excited about what lies ahead for the business as we continue to focus on shareholder value creation. With that, I'll hand over to Russ.

Thank you, Martin. Good morning, everyone. Thank you for taking the time to join our call this morning. During today's call, I will begin my remarks by commenting on our strong second quarter and year-to-date results as well as our continued forward progress towards delivering on our stated strategic goals in a macro environment that continues to be volatile. I will then provide an update on our ongoing integration progress at Chubb and the positive momentum we have across the business before turning the call over to Kevin, who will walk through our financial results and guidance in more detail. As you've heard me say on prior calls, the safety, health and well-being of each of our leaders remains our number one priority. This focus and other foundational priorities provides a platform from which we can continue to enhance shareholder value. I am pleased with our strong record results for the second quarter and the first half of the year. Revenue and adjusted EBITDA outperformed expectations despite FX headwinds, inflationary cost pressure and supply chain disruptions. We do not anticipate these macro headwinds subsiding in the second half of the year. Therefore, we are laser-focused on continuing the activities that help us deliver a strong first half of 2022, including pricing activities; focused growth in inspection, service and monitoring; strong spending controls; and disciplined project and customer selection. Key highlights from our performance for the three months ended June 30, 2022, compared to the prior year period include the following: First, as expected, our revenue momentum continued into the second quarter, and we saw growth in net revenues on an organic basis of approximately 12% and 14% on a year-to-date basis. As a quick reminder, the Chubb business will be excluded from our organic net revenues until 2023, one year…

Thanks, Russ. Good morning, everyone. I will begin my remarks by reviewing our consolidated results and segment level operating performance for the second quarter before turning to our guidance. Reported net revenues for the three months ended June 30, 2022, increased by 68.6% to $1.6 billion compared to $978 million in the prior year period. This was driven by revenue from acquisitions completed in Safety Services and strong organic growth in Safety and Specialty Services. Adjusted gross margin for the three months ended June 30, 2022, was 26.7%, representing a 282 basis point increase compared to the prior year period, driven by an improved mix of inspection and Service revenue in Safety Services, supplemented by acquisitions in Safety Services as well as improved productivity in Specialty Services. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin for the three months ended June 30, 2022, was 10.7% compared to prior year adjusted EBITDA margin of 10.8%. This was driven by an improved mix of inspection and service revenue and strong organic growth. This was offset by mix from completed acquisitions, supply chain disruptions and inflation, which caused downward pressure on margins. As Russ mentioned earlier on the call, net revenues increased on an organic basis by approximately 12%. This was driven by 20%-plus growth in inspection service and monitoring revenue in our legacy businesses. Approximately 2/3 of this growth was driven by price and pass-through material and labor costs; and 1/3 was driven by volume, which we measure through labor hours. Adjusted diluted earnings per share for the second quarter was $0.37, representing an $0.08 increase compared to the prior year period. This increase was driven primarily by strong organic growth in Safety and Specialty Services and the accretion from…

Thanks, Kevin. Good morning, everyone. We are very pleased with how the business is performing in this volatile environment. As I said on our last call during the Q&A, APi has been battling macro headwinds since its first day as a public company, yet it continues to perform very well and continues to execute against its strategic plan. We look forward to seeing how the business gets to perform when it gets even the slightest macro tailwind. Mark and I were in London last month, meeting with Russ and the leadership team of Chubb and giving a detailed review of the business and an update on the integration activity. Additionally, at our Board of Directors' meeting earlier this week in Minneapolis, senior leaders from the business segments, including Chubb, detailed their year-to-date performance, outlook for the balance of the year and long-term strategic plans. Various new corporate leaders outlined their strategic plans to us in such areas as procurement, IT, tax, ESG and other key areas of the business. We are pleased with the efforts to develop meaningful global one company go-forward plans. As Russ mentioned, we plan to hold an integration update call with investors later this year and look forward to updating investors on our progressing plan. We look forward to detailing the specific actions that have been taken, the initiatives that are underway, the savings achieved, the efficiencies captured and the planned steps across the various regions in which we operate that will occur over the months and years ahead to drive savings, efficiencies, and most importantly, to drive organic growth. It's clear to us that our strategic focus on growing inspection, service and monitoring revenue through our market-leading brands and working tirelessly to become more efficient in the way we do business is a winning formula,…

Thank you, Jim. As we look ahead to the balance of the year, we will remain focused on continuing to deliver strong operating and financial performance, while also executing on value capture opportunities in the beginning the process of strategic planning, operational improvement and budgeting process for 2023. I would now like to turn the call back over to the operator and open the call for Q&A.

[Operator Instructions] Our first question will come from Andrew Obin with Bank of America.

This is David [indiscernible] laying on for Andrew Obin. So I appreciate the commentary on Chubb's organic growth. I wanted to see how is that going versus your internal plans. And obviously, there's a lot of talk about European macro. Anything that you're seeing in sort of pipelines or orders around that volatility there?

Yes. No, we're optimistic about what we see with Chubb. Chubb has a large base of service and recurring revenue that is going to support the business through any sort of macro recessionary headwinds. And so we feel pretty good about it and where they're able to go. They've got pockets, like our Hong Kong and China business was a bit behind year-to-date from a revenue perspective, but that was mostly driven by COVID forecast, what really solid for the second half of the year, pending what potentially happens with Taiwan. So we continue to watch that very, very closely. But I would say that what we see inside Chubb has been very, very positive. Just as a reminder, our focus as it relates to Chubb is -- number one is to separate from Carrier. Number two, to take advantage of some of the initial above-the-branch cost reductions to rightsize the business. And then we are now starting to turn our attention to how do we grow. And we see opportunities for us to continue to grow the business. So I'd say, in line with expectations and optimistic about our ability to take the business forward.

Great. And if I could ask one follow-up. How are you seeing the inflationary pressures trend in the last couple of months? And do you think of APi's overall pricing is keeping pace or maybe a step ahead of the cost inflation you're seeing?

Yes. So I mean from -- on the service side of our business, we've done a very, very good job. In fact, I'd say that we've been out in front of inflation. We've seen actually margin improvements really across the entire portfolio, and that includes Chubb. And that part of it has been very positive. We've seen a little bit of a drag on some of our contract-related work, that longer-term contracts that we haven't been able to recover some of the increased costs. But in general, I feel like we've done a really good job of keeping up to it. We expect to see some level of margin improvement as inflation subsides in certain products, such as pipe. We buy a lot of steel pipe, and we've seen the price of steel pipes start to decrease. But on the component side of the business, whether that's certain valves and shrinker heads, et cetera, we have not seen any sort of reduction in the costs there yet. And so we'll continue to work hard to pass on those costs to our customers.

Our next question will come from Andy Kaplowitz with Citigroup.

Russ, it seems like you're still seeing good strength across your legacy business. Obviously, there are some concerns out there, slowing markets and warehousing. But I think you've told us in the past, it's not a huge part of your business. So maybe you can give us a little more color into what you're seeing. What are the biggest areas of strength driving the teens organic growth? And are you seeing any signs of weakness? How does your strong backlog position you for '23?

Yes. I mean our backlog is really strong for 2023 and as we move into the second half. And we continue to push the businesses to be super focused on customer and project selection to make sure that they're deploying the resources in the right place. And I attribute that strength a lot to the end markets that we serve. Data centers continue to be strong and robust. Semiconductor is very strong, robust, health care, telecommunications, 5G, our public utility, private utility customers. So the markets that we serve have seen to just be super resilient and have pushed through any sort of headwind that's been forced on them. So that part of it's been really positive. And as it relates to the Amazon effects of the world and what everybody is seeing there, that has not been traditionally a big part of our business. We focus on the service side of those types of facilities. That's our number one focus. Our one manufacturing business that we have in Specialty Services has traditionally sort of we've done one project with them on an annual basis. So it's really just not a big deal for us as that end market slows down.

That's helpful, Russ. And I just want to focus on the previous margin question in one sense. Like you mentioned the lower HVAC services margins, would you expect that contract-related pressure all year be just contracts that you kind of reset at the end of the year? And maybe any more color around other -- you mentioned sort of metals getting better maybe. How does that sort of trend over the next couple of quarters? Should we see incremental improvements from here?

Well, as it relates to the margin drag from our -- kind of the legacy HVC contract, where we feel like that's essentially behind us, we'll probably still have to battle it a little bit. But we feel like, in general, it's behind us, and that shouldn't be a real issue for us going forward. We actually think that we should see some margin lift, really specific to some of our safety services installation work because of -- especially in the domestic piece of our business that the mechanical side of the life safety space is a bigger part than it is say in Chubb. We expect to see some margin lift because of pipe prices coming down. But again, I'll reiterate, a lot of the components, the heads, devices, valves, those types of things, we haven't seen any sort of pricing relief on those types of products that we purchase.

And maybe just a quick one for Kevin then. Like how heavy a lift is it to get cash flow at or above last year -- this year in 2022, given where you're starting from the first half?

Thanks, Andy. So just -- we've talked about the first quarter and the first half of the year. So Q1 historically is our lowest quarter. We also invested in Q1 in working capital on the rate side. In the second quarter, it's also a lower quarter for us. So traditionally, you're going to see the majority of our free cash flow be delivered in the back half of the year. In the second quarter, as we mentioned in the first quarter, we continued to work down working capital on the rate side. So we saw improvement there. But the volume step-up obviously consumed more investments. So as we go into the back half of the year, we're going to stay focused on working down the rate side of things. And Q4 traditionally for us is -- from a seasonality perspective, is a lower quarter. So those two things together give us confidence in our ability to deliver the number in the back half of the year. And again, that's consistent with our historical profile of delivering the majority of our free cash flow in the back half of the year.

Our next question will come from Kathryn Thompson with Thompson Research Group.

You pointed out in today's press release that monitoring business carries 20-plus percent higher margins versus contract revenues. A few questions on that monitoring business. What is the percentage of total sales? And do you have a bogey for this business as a percentage of total sales? And how has this business performed through various cycles? And how are supply chain constraints impacting this business versus other segments? In other words, is it the same, better, worse?

The monitoring as a percent of our total revenue, Kathryn? Your question may come through super clear on our end. So is your question specific to monitoring?

Yes. So for monitoring, what is it? A percentage of total sales? What is your bogey for that segment in terms of the total sales? How has it performed to various cycles? And color on how it has been impacted by supply chain constraints?

So I mean -- so the monitoring is included basically in our service and inspection figures. We don't break those figures out. The margins are substantially higher than our contract work, approximately 20%. And the reality of it is, is that that business -- that piece of our business hasn't been overly impacted by any sort of supply chain issues. I think there's an opportunity for us as we look at Chubb's business and our domestic safety business to potentially optimize the monitoring services that we currently are providing. And we have really kind of two different models right now, our domestic life safety businesses. We typically use outsourced third-party services to -- for our monitoring the work that we sell. And Chubb has a self-performed capability, and we're continuing to look at both approaches and see what we can take advantage of to make sure that we're operating the monitoring piece of our business in the most efficient fashion that we possibly can.

Okay. And a follow-up question is more on the macro concerns, be it a recession or just an extended period of sluggishness. When you look at your business, clarify the nature of your services that are from -- that are required from a cost standpoint and can't be delayed versus some delays like where you can extend maintenance costs. So really bifurcating that, what can be kicked down the road than what is required when you look at your entire business and managing through the cycle?

Well, I mean, I think our business model, every day that goes by, becomes more and more resilient. And it's because we continue to focus on growing the services piece of the Company. And if you look at the business today versus what the business looked like in 2008, it's just dramatically different. We're really -- 15% to 20% of our business in 2008 was inspection service and monitoring. And today, it's almost 52%. And so we have continued to build that resiliency into the business. A good data point for you, Kathryn, would be how did the business perform in 2020 when the pandemic hit us. Our net revenues in 2020 were off, less than 10%, and yet our margin -- EBITDA margins improved because of the high variable cost structure that we have. And we're able to really flex down very quickly when we see any sort of pressure on our revenues and the margin opportunities that we have with those revenues. So I mean I feel very good about the business and our business' ability to perform if we go into any sort of a recessionary time. And it's really driven by the fact that we've improved mix, we have a strong backlog, and we play in the right end markets across the entire portfolio.

Our next questions will come from Julian Mitchell with Barclays.

This is Kiran Patel-O'Connor. This is Kiran on for Julian. I was hoping -- wondering if you could give us some color on organic growth by region. Are you seeing any signs of a slowdown in Europe? And I think it was noted that APG's geographic mix is now 40% international. So I was just kind of hoping if you could give us some color on growth outside of the U.S.

Kiran, this is Kevin. We can talk a little bit -- we talked about the sequential improvement in Chubb results. Obviously, Chubb is not the entirety of our international business. But on the International segment, we saw continued growth in the quarter. And you asked about Western Europe, where our businesses in Western Europe also continued to perform well and improved sequentially versus Q1 in the quarter.

Got it. And then just kind of looking a little more longer term on infrastructure stimulus. Is APG seeing any signs of project or contract work picking up for that? Or when should APG start to see the impact from the U.S. Infrastructure Stimulus Bill?

So I would answer that, Kiran, is that, number one, you really haven't seen the dollars from the Infrastructure Bill start to flow through the system. That most likely will happen in 2023. You're seeing some impacts from a rural broadband perspective already. That's helping aspects of our business as the country tries to expand broadband capabilities to more remote parts of the country. And you're seeing some of that flow through right now. The reality of it is that a lot of the infrastructure work that will come as a result of the infrastructure spending bill won't necessarily have a direct impact on our business. It's more of an indirect impact. It will create opportunities for other firms to pursue, which will create more opportunities for us with our existing customers as they flock towards some of that other work. And we'll take advantage of taking share with some of our existing customers as some of our competitors look elsewhere for other opportunities. But I don't -- we won't see really those dollars flowing into the system in any sort of significant way until 2023.

Our next question will come from Jon Tanwanteng with CJS Securities.

I was wondering if you could talk about the portfolio-managing opportunities enabled by your Chubb acquisition. You have a safety business at scale now. Is there potential to do something with the Specialty Services or maybe old industrial business? How these sellers are deleveraging or unless valued somewhere else?

Well, I think, Jon, I think we -- the way we've approached that is that every opportunity is an opportunity that we're going to continue to look at and review. And we will do what's best for the business, whether that's individual pruning, whether that's closing branches, whether that's optimizing other aspects of the business. We will continue to look at each and every opportunity and make good decisions and choices that are in the long-term best interest of the shareholders. So everything is on the table. And we talked -- we just had a board meeting. We had a lot of robust conversations and dialogue about what's best for the business strategically. And as we continue -- as our thinking continues to evolve, then we'll continue to take appropriate action in the business.

Jon, it's Jim. The last sentence of my script was -- said, while we're focused on integrating the Chubb acquisition, we remain opportunistic as we look at our business profile. And we're always evaluating opportunities before us. And while I applaud you for trying to get us to make some Wall Street Journal announcement on our conference call, we're just not there.

Understood. Kevin, I got a question for you, just the expected swap from the fixed -- excluding the fixed, that 70-30 mix, is that inclusive of the preferred that you issued to the Viking and Blackstone? Or is that just on the straight side only? And what is the rate that you're expecting to pay today?

That is exclusive. So that's just on our current debt. In rate, your question is that the rate -- what our blended rate will be going forward?

Correct. When that swap occurs.

It's going to be around 3.5%, Jon.

Our next question will come from Justin Hauke with Baird.

I guess I wanted to go back to the restructuring program you guys talked about, the $11 million here in 2Q. I was just hoping you could elaborate on kind of what you're seeing as kind of the total cost of that program going forward? And then how much SG&A savings do you think there is to come from it? And then just confirming, is that incremental too? Or is it part of kind of the margin targets you've laid out over the next couple of years?

Justin, I'll take this one. So to start, we've talked about value-capture opportunities in the Chubb business, where we've discussed $40 million as the number that we have currently that we're continuing to assess. As we continue to put together our plans, the $11 million charge that we took in the quarter, you can think of that as Phase 1 in terms of getting after that value-capture initiative. We expect that to be the majority of our Phase 1 restructuring charge. We could see a little more on that Phase 1 charge as we move through the year, maybe $3 million to $4 million. And then yes, we're going to continue to deliver against that initial number of $40 million. And with that, I would expect a further charge later as we continue to move against that value-capture initiative.

Okay. And that's part of -- so that sounds like it's not incremental to as part of the $40 million that you guys laid out initially?

Yes. Yes, that charge was associated with actions to deliver that $40 million.

Got it. And then I guess my second question here is just on the pricing, the 2/3 of the organic growth that came from pricing. That was similar to what it was, I guess, last quarter. And just trying to understand that you don't have any surcharges in that pricing. So I mean, that's more or less a permanent reset in terms of where your contract pricing is set. I just want to understand how sustainable it is.

Yes. So I would tell you that some of that price increase is fuel surcharges. I wouldn't be able to give you an exact percentage of it. But there is going to be an incremental portion of it will -- is going to be fuel surcharges that I'm assuming that fuel price is reduced to a more moderate level that we will eventually eliminate them. But in general, we should -- that our pricing should be solid, and it should -- the price increases should stay in effect.

[Operator Instructions] And our next question will come from Adam Wyden with ADW Capital.

I think a lot of the questions have been somewhat technical around inflation. And I guess my question is a little bit more qualitative as you've been [jealous] for a long time, and we've studied a lot of your competitors, some of them smaller. And I think the resounding kind of comment around inflation among your private competitors is that it provides a little bit of a headwind on service business because you locked in one-, two-, three-year contracts. But those contracts are not all signed at the same time. And so there's effectively a waterfall where those roll over. And in an inflationary environment, I think the -- at least the private consensus is that you're able to increase prices in excess of your cost such that your margins in service and other parts of your fire business might end up being higher than your pre-inflation margins. Can you talk a little bit about that kind of that dynamic in terms of near term and long term? And how you think about inflation affecting the margins of your business?

Well, so I guess, in general, I agree with you. But to the one aspect of it, Adam, is that our margins in our safety business are up. And so we have done -- in my opinion, we have done a very good job of keeping up with inflation and passing on those inflationary costs to our customers on, I guess, a faster basis, if that's the right way to put it. And so we -- I do agree with you that we should see some margin lift because our prices are higher. And as inflation subside, we should see some margin improvement that's going to come back and help the business. But in general, on the -- our service margins are up. And so we've -- our businesses have done a nice job of taking price through a very, very difficult time, and that's positive. Again, as I said earlier, where we've had the pressure is on some of our more long-term installation work where we haven't been able to go back to our clients and recover some of the cost increases that we've had to deal with.

So it's more on the fixed-price installation front. Okay. But that reset eventually anyways, right? I mean as you bid out new contracts and whatnot, those will reprice to the normal world. So in a perfect world, if inflation starts abating, you guys should be able to -- you won't have that kind of hamster wheel effect? Because I mean if I just look back at what your margins were in Safety, and I know you bought Chubb, and that's a great opportunity, but I mean, you guys were at 15% or 16%. So I mean, ultimately, you will be able to catch up with this if things abate and kind of get back to those mid-teens margins.

We -- yes, I would -- the way I would answer that, and we should see -- we feel like -- as I mentioned earlier in the call, we feel like the -- some of the impacts and the drag that we've seen on our -- on the margins in our installation work that we propose on, not bid, that we have that behind us. And we'll probably have a few battles in front of us. But the big battles are behind us, and we should hopefully be seeing some improvement in margins on the installation work as well.

Well, yes, look, recession, people have to go back to the office. And this should be, in general, good for commercial building and office and what not. So I appreciate all the time and hard work, and that's it for me.

Thank you, Adam.

At this time, there are no further questions in the queue. So I would like to turn the call back over to Russ for any additional or closing remarks.

Thank you very much. In closing, I would like to thank all of our team members for their continued support and dedication to our business. We believe our people are the foundation on which everything else is built. Without them, we do not exist. I'd also like to thank our long-term shareholders as well as those that have recently joined us for their support. We appreciate your ownership in APi and look forward to updating you on our progress throughout the remainder of the year. And thank you again, everybody, for taking the time to join the call this morning. We are pleased to share our strong second quarter results with you. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference, and we appreciate your participation. You may disconnect at any time.