APi Group Corporation (NYSE:APG) Q4 2023 Earnings Call Transcript February 28, 2024
APi Group Corporation beats earnings expectations. Reported EPS is $0.44, expectations were $0.43. APi Group Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to APi Group’s Fourth Quarter and Full Year 2023 Financial Results Conference Call. All participants are now in a listen-only mode until the question-and-answer session. Please note that this call is being recorded. [Operator Instructions] I will now turn the call over to Adam Fee, Vice President of Investor Relations at APi Group. Please go ahead.
Adam Fee: Thank you. Good morning everyone, and thank you for joining our fourth quarter 2023 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; Kevin Krumm, our Executive Vice President and Chief Financial Officer; and Sir Martin Franklin and Jim Lillie, our Board 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 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, February 28, and we undertake no obligation to update any forward-looking statements we may make, except as required by law. As a reminder, we have posted a presentation detailing our 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, Jim.
James Lillie: Thank you, Adam and good morning everyone. 2023 was another tremendous year for APi with record net revenues, record adjusted EBITDA, record reported and adjusted earnings per share and record adjusted free cash flow. As I mentioned on the last call, our strategy of evolving away from lower margin, higher risk opportunities while focusing investments on service revenue expansion continues to yield the desired results, margin expansion and stronger free cash flow generation. Under Russ’s leadership, API has successfully acquired and integrated over 100 companies over the last 20 years, helping supplement organic growth as the business scaled from approximately $600 million in revenues over 20 years ago to nearly $7 billion globally in 2023.
With the progress made in reducing our net debt to adjusted EBITDA to 2.3 times, we are excited to build on our track record of disciplined, predictable and thoughtful decisions regarding capital allocation as we keep our focus on bolt-on M&A at accretive multiples and margins. We have great confidence in the business as demonstrated by our stock buyback and we believe that our laser focus on our longer term 13/60/80 value creation targets will generate continued exceptional performance through 2025 and beyond. As a reminder, our financial goals include adjusted EBITDA margin of 13% or more in 2025, long-term organic revenue growth above the industry average, long-term revenues of 60% from inspection, service and monitoring, and long-term adjusted free cash flow conversion of 80%.
Our confidence in the leadership team and the foundation for long-term value creation is stronger than ever. And with that, I’ll hand the call over to Russ. Russ?
Russell Becker: Thank you, Jim. Good morning everyone. Thank you for taking the time to join our call this morning. We remain grateful for the hard work of our 29,000 leaders and their dedication to APi. The safety, health and wellbeing of each of our teammates is our number one value. I used the word teammates intentionally instead of employees, which, like the word bid is another one of the words I try not to use. I’m proud that APi has once again been recognized as a military friendly employer for 2024. We remain committed to providing opportunities for veterans and their spouses to build careers and develop as leaders. As many of you know, we have hired thousands of veterans over the years and thank them not only for their service, but also for helping to drive API forward.
In January, we shared our 2023 Sustainability Report on our website, a significant milestone in our commitment to building a more sustainable business. Our sustainability report serves as a comprehensive overview of our ESG activities to date, highlighting key strengths, opportunities and strategic priorities which include leadership, safety, environment, inclusion and governance. APi Group’s commitment to our values as an organization and our purpose of building great leaders positions us to be successful as we broaden the scope of our opportunities to develop a more sustainable business. 2023 was a year of record financial results for API. We delivered strong organic growth, record adjusted EBITDA margins and improved adjusted free cash flow generation in an evolving macro environment.
Net revenues grew organically by 5.4% in 2023, finishing the year at a record $6.9 billion. This growth was driven by approximately 10% organic growth in service revenues partially offset by consciously controlling organic growth in project revenues as we continued our disciplined customer and project selection in our HVAC and specialty businesses. Importantly, we achieved our goal of double digit growth in inspection revenues as we make progress towards our goal of 60% of our total net revenues coming from inspection, service and monitoring. U.S. life safety once again posted solid organic growth of approximately 10% for the year following over 20% organic growth in 2022. In line with our strategic initiatives, we continue to see strong improvements in adjusted gross margin for the year up 180 basis points.
The strong performance in gross margin led to full year 2023 adjusted EBITDA margin of 11.3% represent margin expansion of 100 basis points. The team has made strong progress this year executing our margin expansion initiatives and remains committed to building on that execution as we push towards our 13% or more adjusted EBITDA margin target in 2025. As a reminder, these initiatives include the following; pricing, improved inspection service and monitoring revenue mix, disciplined customer and project selection, Chubb value capture, procurement systems and scale, accretive M&A and selective business pruning and as I like to say, we can always just be better. In December, we announced an increase in the Chubb value capture target from $100 million to $125 million.
Exiting 2023, we have realized approximately $40 million of the $125 million value capture target and we remain on track to realize the remaining $85 million. 2023 was the first year in APi’s history with adjusted free cash flow over $500 million. We ended the year with record adjusted free cash flow of $537 million, representing approximately 69% conversion of Adjusted EBITDA. Our strong adjusted free cash flow generation helped us deliver on our commitment of reducing net leverage to under 2.5 times by the end of 2023. Moving on to M&A, over the last 12 months, we returned to accretive bolt-on M&A with approximately $100 million spent on acquisitions in our safety service segment this year, building on our long track record of integrating businesses and supplementing organic growth through acquisition.
As we enter 2024, we are excited to accelerate our M&A activity and the team continues their hard work prioritizing the most attractive opportunities in our pipeline, which are strong cultural fits. In December, we closed the previously announced sale of a traditional design bid build heavy civil contracting company without a complementary service opportunity. This business generated $73 million of revenue in 2023 while under APi’s ownership. In summary, while we remain focused on executing our strategy in 2024, I am proud of our team and the record financial results achieved in 2023. Today, we announced we reached an agreement with Blackstone and Viking to retire all of the outstanding shares of their Series B Perpetual Convertible Preferred Stock.
I’ll let Kevin provide more details related to the transaction. However, I’ll highlight that the Series B transaction represents another step in our journey to drive value for our investors by simplifying our capital structure, reducing our adjusted diluted share count and providing immediate accretion to adjusted earnings per share, while having no expected impact on our focus on opportunistic M&A. I would now like to hand the call over to Kevin to discuss our fourth quarter financial results and guidance in more detail. Kevin?
Kevin Krumm: Thanks Russ. Good morning everyone. Reported revenues for the three months ended December 31, 2023 increased by 3.3% to $1.76 billion, compared to $1.7 billion in the prior year period. Organic growth of 1.5% was driven by strong services revenue, organic growth of 5% partially offset by disciplined customer and project selection, and lower material costs, leading to a 3% organic decline in our projects business versus the prior year. Adjusted gross margin for the three months ended December 31, 2023 grew to 30.1%, representing a 230 basis point increase compared to the prior year period, driven by continuous price increases, outsized growth and higher margin services revenue, as well as the significant margin expansion in our projects business across both segments.
Adjusted EBITDA increased by 13% on a fixed currency basis for the three months ended December 31, 2023, with adjusted EBITDA margin coming in at 11.8%, representing a 110 basis point increase compared to the prior year period, primarily due to the factors impacting gross margin partially offset by investments to support revenue growth and the investment in building our global capabilities and infrastructure. I’m pleased to report that adjusted diluted earnings per share for the fourth quarter was $0.44 per share representing an $0.08 or 22% increase compared to the prior year period. The increase was driven primarily by strong margin expansion in both safety and specialty services and decreased interest expense. I will now discuss our results in more detail for safety services.
Safety services reported revenues for the three months ended December 31, 2023 increase by 3.1% to $1.24 billion compared to $1.2 billion in the prior year period. Organic growth of 1% comping off an 18% plus growth in Q4 2022 was in line with expectations and was driven by double digit core inspection revenue growth in our U.S. life safety business and 5% organic growth in inspection service and monitoring in U.S. life safety. This was partially offset by flat organic growth in the project business, driven by planned customer attrition in our international business, as well as disciplined customer project selection and lower revenue from declining material cost pass through in our HVAC business. Adjusted gross margin for the three months ended December 31, 2023 was 35.1%, representing a 270 basis point increase compared to the prior year adjusted gross margin, driven by continued price increases, improved business mix of inspection, service and monitoring revenue, as well as a significant margin expansion in our projects business.
Adjusted EBITDA increased by 18.8% on a fixed currency basis for the three months ended December 31, 2023 and adjusted EBITDA margin was 15.3%, representing a 210 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin partially offset by investments made to support revenue growth. I will now discuss our results in more detail for our specialty services segment. Specialty services reported revenues for the three months ended December 31, 2023 increased by 2.9% to $525 million compared to $510 million in the prior year period, driven by a 12% growth in service revenues, partially offset by a 10% decline in projects revenues due to disciplined customer and project selection, and lower revenue from declining material cost pass through.
Adjusted gross margin for the three months ended December 31, 2023 was 18.1%, representing a 140 basis point increase compared to the prior year period, driven primarily by disciplined customer and project selection, driving significant margin expansion in our projects business. Adjusted EBITDA increased by 11.3% for the three months ended December 31, 2023 and adjusted EBITDA margin was 11.2%, representing an 80 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin, primarily offset by timing of year end incentive true ups. Cash flow. As we have highlighted throughout the year, the fourth quarter is our strongest quarter for free cash flow generation and 2023 was no different. For the three months ended December 31, 2023, adjusted free cash flow was $300 million, reflecting an adjusted free cash flow conversion of 144%.
For the full year, adjusted free cash flow was $537 million with conversion of 69% representing an improvement of $125 million or approximately 30% when compared to 2022. Adjusted free cash flow generation has been and continues to be a priority across APi and we are pleased that we are able to exceed our adjusted free cash flow conversion target of 65% for 2023. On December 19, we paid down $175 million of our term loan debt, resulting in total repayments in 2023 of $475 million and leaving $330 million outstanding on our term loan due 2026, which leaves our weighted average maturity at approximately five years. At the end of the year, our net leverage ratio was approximately 2.3 times even as we continued margin accretive bolt-on M&A. As we look forward to 2024, we expect to grow our adjusted free cash flow as well as improve our adjusted free cash flow conversion, providing us a significant opportunity for value enhancing capital deployment.
As Russ touched on earlier, we have reached an agreement with Blackstone and Viking to retire all the outstanding shares of their Series B Perpetual Convertible Preferred Stock issued at the time of the Chubb transaction. Blackstone and Viking will each exercise their respective right to convert all their Series B preferred stock into common stock, resulting in approximately 32.5 million shares of common stock. Upon conversion, APi will repurchase one half of the converted shares from Blackstone and Viking for an aggregate purchase price of approximately $600 million. The transaction is expected to be financed by an incremental term loan of $300 million plus cash on hand and available credit. As a part of the agreement, Blackstone and Viking intend to effect a coordinated secondary public offering with the goal of selling approximately 8.1 million shares of APi’s common stock.
Following the sale, it is expected that any remaining common shares owned by Blackstone and Viking would be subject to a 90-day lockup. We are pleased to proactively agree to a holistic approach to retiring our Series B preferred stock with only a modest expected increase in net leverage ratio to approximately 3 times, preserving the strength of our balance sheet. Throughout 2024, we’ll continue to focus on generating strong free cash flow, allowing us to accelerate M&A spend versus 2023 while reducing our net leverage towards our long-term target of less than 2.5 times. This transaction collectively is expected to provide some substantial benefits to APi and its common stockholders as it simplifies our capital structure, preserves our strong opportunistic balance sheet, reduces adjusted diluted share count by 16.3 million shares, provides immediate accretion to adjusted earnings per share, eliminates preferred dividend payments of $44 million annually and has no significant impact on our reacceleration of bolt-on M&A.
I will now discuss our guidance for Q1 and full year 2024. Based on current exchange rates, we expect full year reported net revenues of $7.05 billion to $7.25 billion, representing mid-single digit organic growth and net revenues driven by expected double digit core inspection organic growth and high single digit service growth mixed with low single digit projects growth as we remain focused on disciplined customer and project selection in our specialty and HVAC businesses, primarily in the first half of 2024. We expect full year adjusted EBITDA of $855 million to $905 million, which represents adjusted EBITDA growth of approximately 9% to 15%. On a fixed currency basis an adjusted EBITDA margin of 12.3% at the midpoint. In 2024, we expect to take another step forward in terms of adjusted free cash flow conversion with a 2024 target of approximately 70% as we move towards our long-term target of 80%.
In terms of the first quarter, we expect reported net revenues of $1.56 billion to $1.61 billion. This guidance represents an organic net revenue decline of approximately 4% to 1% as we lap our strong organic growth of 12.1% in Q1 2023 and as we continue to build a smaller, but healthier backlog in our HVAC and specialty services businesses. We also expect to see a continuation of lower material costs resulting in declining price pass through versus the first quarter of 2023, which results in lower reported net revenues. However, those impacts as seen in 2023 will allow us to continue to expand adjusted EBITDA dollars and margin, which is reflected in our first quarter adjusted EBITDA guide of $165 million to $180 million. This represents adjusted EBITDA growth of approximately 9% to 20% on a fixed currency basis and adjusted EBITDA margin expansion of 180 basis points at the midpoint.
For 2024, we anticipate interest expense to be approximately $150 million, depreciation to be approximately $80 million, capital expenditures to be approximately $95 million, and our adjusted effective cash tax rate to be approximately 23%. We expect corporate expenses to be approximately $30 million per quarter, with some timing variability throughout the year. We expect our adjusted diluted weighted average share count for the year to be approximately $270 million, taking into account the Series B transaction announced earlier today. Finally, we expect to end 2024 with our net leverage ratio at approximately 2.5 times. I will now turn the call over to Russ.
Russell Becker: Thanks Kevin. As I said on our last call, I’m confident in our leaders’ ability to build on historically strong execution by delivering consistent double digit core inspection organic growth, as well as consistently driving margin expansion across the business. As we look to 2024, we have great confidence in the business, our backlog and our balance sheet. We believe we are well positioned to improve our free cash flow generation, giving us significant flexibility to pursue value creative capital allocation alternatives, including but not limited to accelerating our bolt-on M&A strategy. Longer term, we are focused on creating sustainable shareholder value by delivering on our 13/60/80 targets with a near-term focus on generating adjusted EBITDA margins of 13% or more in 2025. With that, I would now like to turn the call back over to the operator and open the call for Q&A.
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