Good morning, ladies and gentlemen, and welcome to the APi Group Third Quarter 2020 Financial Results Conference Call. Please note, this call may be recorded. 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 third quarter 2020 earnings conference call. Joining me on the call today are Sir Martin Franklin, and Jim Lillie, our Board Co-Chairs; Russ Becker, our President and CEO; and Tom Lydon, our Chief Financial Officer. Before we begin, I would like to remind you that certain statements in the company's 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, November 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 third quarter 2020 financial performance on our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and our presentation. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia. We're very pleased with our third quarter results as well as the progress we've made during our first year as a public company. As I've said before, we did not expect to be stress-tested this quickly. We believe that our results support the investment thesis we had when we first met Russ and the team. The culture and priorities of the company stand out during difficult times, and we are proud of how everyone within the company has persevered as we navigate the COVID-19 environment surrounding us. We remain focused on our goal of building upon APi's proven track record of organic growth within its niche business services markets, complemented with disciplined and accretive M&A. We're excited about our recently announced acquisitions. These businesses are highly complementary, help expand our geographical reach in the important U.S. market and establish a beachhead for expansion on the continent in Europe. With that, I'll hand over the call to Russ.

Thank you, Martin. Good morning, everybody. Thank you for your interest in APi. I hope you and your families are staying healthy and safe. Before I provide you with a summary of our strong third quarter financial results, our M&A progress, our positive outlook and our increased guidance, in honor of today being Veterans Day, I would like to start the call by thanking the servicemen and women as well as their spouses across our country for their sacrifices. The values and culture at APi have long been influenced by our leadership's respect and reverence for the values of the U.S. military. We are committed to hiring our nation's veterans. We have a long history of hiring and supporting veterans and have hired an average of 450 veterans annually over the past 3 years. I am very pleased with our results for the third quarter, particularly considering the ongoing impact of COVID-19 and the resurgence of COVID-19 in certain areas of the country. Tom will take you through our results in more detail. I am proud of how our team has continued to show commitment and dedication to serving customers safely and efficiently. The safety, health and well-being of all of our employees and constituencies is our #1 priority. I'd like to thank all of our leaders for their energy and enthusiasm during these challenging and unprecedented times. As evidenced by the recent surge in COVID-19 cases, we will be dealing with the effects of the pandemic into next year. However, we remain confident that we are well-positioned and well-capitalized to continue to execute on our long-term goals. We work hard to be proactive and preemptive in how we operate our business. We believe that our early expense reduction actions, strong cash flow generation, conservative balance sheet and liquidity profile provide us with a stable foundation to continue to navigate the uncertain economic climate. Our ability to execute amidst ongoing COVID-19-related disruptions is a testament to a variety of factors, which I'd like to cover in more detail. First is our differentiated leadership culture. In a people-centered business, individual growth, both personal and professional, is a key ingredient in our long-term success. We believe that one of our core pillars of success is our distinct leadership development culture predicated on building great leaders. Our cross-functional leadership development platform is designed to enable independent company leadership, cultivate broad management skills, enhance organizational flexibility and empower the next cohort of leaders across our businesses. Many of our employees who are veterans have gone through this program. We believe that great leaders are a competitive advantage and create shareholder value. Second is our relentless focus on growing recurring service revenue, which we believe helps to build a more protective moat around the business. As I mentioned on our last call, we define service as inspection, testing, maintenance and repair as well as work executed under our master service agreements and blanket contracts. Service represents approximately 40% of our consolidated net revenues. Our long-term goal is for over 50% of our net revenues across all of our segments to come from recurring service revenue. Third is the benefits of having a services-focused business model that is well diversified across various markets, customers and projects. This provides us with stable cash flows and a platform for organic growth. Maintenance and service revenues are predictable through contractual arrangements. Our average project size is well less than $1 million across all of our segments. Fourth is the compelling industry dynamics. APi's operations are focused on end markets and services that often have statutory requirements that tend to be economic cycle agnostic. In our Safety Services segment, our go-to-market strategy of selling inspection work first differentiates us from our peers and ultimately creates a stickier client relationship that we believe leads to recurring revenue, higher-margin and growth opportunities. These inspections are often required by law in already built facilities and are required regardless of whether the facility is filled to capacity or empty. In our Specialty Services segment, we are focused on partnering with customers that have projects we believe are more macro economically resilient, such as telecom customers expanding 5G technology or our work with private and public utility customers with large committed capital programs. We believe that the long-term investments being made by our customers in this sector provide us with a high degree of visibility and contribute to the economic resiliency of our business. Fifth is the relative variability of our cost structure. The variable cost nature of our business allows us to expand and contract our workforce as market conditions dictate without incurring significant trailing costs or severance. This is another aspect of the protective moat around our business. The last point I'd like to touch on is our broad geographic footprint. We have more than 200 locations, primarily in the U.S. and Canada and with an expanding platform in Europe. This footprint allows us to maintain relationships with local decision-makers while also having the ability to execute multi-site services for national account customers. In addition, we support margin growth by leveraging our scale to benefit from procurement savings resulting from enhanced purchasing power. We continue to invest in back-office infrastructure that we anticipate will further help us leverage our scale as we move towards a more shared services model. While we don't know what the future impact of COVID-19 may be, we remain cautiously optimistic while being realistic. With the election behind us, we hope that perhaps an infrastructure bill might become a reality. While not in any forecast, we certainly would expect to benefit from infrastructure investments. We remain focused on our pre-COVID-19 objectives and opportunities in front of us. We believe that the markets in which we operate are highly fragmented and lend themselves to continued opportunistic acquisitions. We recently announced the acquisition of SK FireSafety Group, a leading provider of critical safety services in the active fire and life safety markets in Benelux and Scandinavia. Through this acquisition, we have established a European platform for international organic and acquisition expansion to complement our position in the U.K. We also announced 3 additional planned acquisitions in our Safety Services and Specialty Services segments, and we remain on track to close all of these by the end of the year. We are excited to welcome the leaders of these businesses to the APi family. Our recent acquisitions meet the key criteria for APi's acquisition strategy, which include the following: alignment of values and culture fits; history of strong free cash flow generated; experienced management team with a proven record; service growth component and accretive to APi's financial profile. Our pipeline of incremental M&A opportunities is robust, and we expect to continue to explore opportunistic acquisitions as we move through the balance of the year and into 2021. Our balance sheet is strong. We ended the quarter with a net debt-to-adjusted EBITDA ratio of 1.8x, and we have plenty of capacity and bandwidth to absorb additional accretive transactions. Before I turn the call over to Tom, I'd like to conclude my remarks by reminding you of our long-term value creation targets. These include the following: one, deliver long-term organic revenue growth above the industry average; two, continue to leverage our SG&A; three, expand adjusted EBITDA margins to over 12% by fiscal year 2023; four, adjusted free cash flow conversion of over 80%; five, generate high single-digit average earnings growth; and sixth, target long-term net leverage ratio of 2 to 2.5x. I would now like to hand the call over to Tom to discuss our financial results in more detail.

Thanks, Russ, and good morning. I will start by reviewing our consolidated financial results, segment level performance as well as our strong balance sheet and liquidity, and conclude with providing an update of our expectations for the remainder of 2020. Adjusted net revenues for the 3 months ended September 30, 2020, declined by $93 million or 8.9% to $953 million compared to $1 billion in the prior year period. The decline was primarily attributable to the negative impacts of COVID-19. For the 9 months ended September 30, 2020, total adjusted net revenues declined by $255 million or 8.9%, to $2.6 billion compared to $2.9 billion in the prior year period. The decline was primarily attributable to the negative impacts of COVID-19, combined with improved project and customer selection, which led to a decrease in the volume of the projects. Adjusted gross margins for the 3 months ended September 30, 2020, was 24.3%, representing a 159 basis points increase compared to the prior year. The increase was primarily due to our strategic focus on improving margins as opposed to growing the top line in the Industrial Services segment, combined with improved project execution. In our Safety and Specialty Services segments, margin expansion was driven by a mix of work, increased labor productivity and improved pricing. For the 9 months ended September 30, 2020, adjusted gross margins was 23.8%, representing a 284 basis point increase compared to the prior year due to the drivers I mentioned for the third quarter. Adjusted EBITDA margins, excluding corporate, for the 3 months ended September 30, 2020, was 15%, representing a 183 basis point increase compared to the prior year, driven by gross margin expansion and early execution of our largely temporary SG&A cost containment efforts, counteracting the negative impacts of COVID-19. Adjusted EBITDA margin, including corporate, was 12.1%, which is relatively flat compared to the prior year period due to increase in costs associated with our transition to a public company and certain COVID-19-related expenses. For the 9 months ended September 30, 2020, adjusted EBITDA margin, excluding corporate, was 13.1%, representing a 192 basis point increase compared to the prior year, driven by gross margin expansion and early execution of our largely temporary SG&A cost containment efforts, counteracting the negative impact of COVID-19. Adjusted EBITDA margins, including corporate, was 10.6%, representing a 70 basis point increase compared to the prior year due to the drivers I mentioned. We continued to execute on our cost mitigation efforts in the third quarter and had approximately $13 million of COVID-19-related SG&A cost savings, bringing our 2020 year-to-date total to approximately $32 million. Our strong cash generation has continued, and our balance sheet and liquidity profile remained strong. For the 9 months ended September 30, 2020, adjusted free cash flow was $301 million, representing a $194 million increase compared to the prior year period of $107 million. And our adjusted free cash flow conversion rate was approximately 108%, exceeding our goal of approximately 80%. The increase in cash flow was primarily driven by changes in working capital levels as the decline in net revenues resulted in reductions in our accounts receivable and fluctuations in our working capital balances that drove positive cash flow generation. Our operating cash flow for the 9 months ended September 30, 2020, included approximately $26 million of benefits resulting from the deferral of certain payroll taxes under the CARES Act. We are estimating an additional $14 million of deferral payroll tax benefit in the fourth quarter. The total of approximately $40 million will be repaid in 2 equal installments in the fourth quarters of 2021 and 2022. As of September 30, 2020, we had approximately $699 million in total liquidity, which consisted of $467 million in cash and cash equivalents and $232 million available for borrowing under our revolving credit facility. At that same date, we had $1.2 billion in outstanding indebtedness under our term loan and no amounts outstanding under our revolving credit facility. Our net debt-to-adjusted EBITDA ratio, as calculated according to our credit facility, was 1.8x. Following the end of the third quarter, to replenish the balance sheet cash used for recent acquisitions, we entered into an incremental $250 million term loan facility, which supports our strong liquidity position. I will now discuss the results in more detail for each of our three segments, starting with Safety Services. Safety Services net revenues for the 3 months ended September 30, 2020, declined by 14.4% or $68 million to $404 million compared to $472 million in the prior year period. The decline was primarily due to negative impacts of COVID-19, such as building access restrictions and shelter-in-place orders, along with the timing of demand for our mechanical services. For the 9 months ended September 30, 2020, net revenues declined by $143 million or 10.7% to $1.2 billion compared to $1.3 billion in the prior year period due to factors I mentioned previously, along with the timing of contract revenue. Service revenue represents approximately 40% of the segment's net revenues for the 3 months ended September 30, 2020, up from 34% in the prior year. Service revenue outperformed relative to contract revenue as expected, increasing by 1.5% or $2 million to $160 million compared to $158 million in the prior year period. For the 9 months ended September 30, 2020, Service revenue represented approximately 39% of segment net revenues, up from 34% in the prior year period. And Service revenue increased 0.3% or $1 million to $462 million compared to $461 million in the prior year period. Adjusted gross margins for the 3 months ended September 30, 2020, was 32.7%, representing a 259 basis point increase compared to the prior year due to improved mix of service work and increased efficiencies. For the 9 months ended September 30, 2020, adjusted gross margin was 31.6%, representing 188 basis point increase compared to the prior year, primarily driven by continued shift in mix of work towards inspection and service revenue. As we've mentioned on prior calls, on average, we estimate that gross margins on inspection and service revenue are approximately 10% higher than gross margins on contract revenue. Adjusted EBITDA margins for the 3 months ended September 30, 2020, was 16.1%, representing a 317 basis point increase compared to the prior year due to factors I mentioned as drivers of the gross margin improvement. For the 9 months ended September 30, 2020, adjusted EBITDA margins were 13.8%, representing an 80 basis point increase compared to the prior year due largely to the factors I've mentioned for the third quarter. Specialty Services. Specialty Services net revenue for the 3 months ended September 30, 2020, declined by 1.7% or $7 million to $400 million compared to $407 million in the prior year. The decline was primarily due to negative impacts of COVID-19, such as project deferrals and job site disruptions, along with the timing of demand from our customers and the timing of projects. For the 9 months ended September 30, 2020, net revenues declined by $58 million or 5.2% to $1 billion compared to $1.1 billion in the prior year due largely to the factors I've mentioned for the third quarter. Adjusted gross margins for the 3 months ended September 30, 2020, were 18.8%, representing a 57 basis point increase compared to the prior year due to increased labor productivity and improved pricing. For the 9 months ended September 30, 2020, adjusted gross margin was 17.1%, representing a 135 basis point increase compared to the prior year due largely to the factors mentioned for the third quarter. Adjusted EBITDA margins for the 3 months ended September 30, 2020, were 14.3%, representing a 74 basis point decline compared to the prior period, due primarily to the timing of income from joint ventures being stronger in the prior year. For the 9 months ended September 30, 2020, adjusted EBITDA margin was 12%, representing an 81 basis point increase compared to prior year due to continued focus on project selection, pricing improvements and stronger contribution from our joint ventures in the 2020 year-to-date period. Industrial Services, excluding 2 businesses that we classified as held for sale at the end of 2019, we divested earlier this year, Industrial Services adjusted net revenues for the 3 months ended September 30, 2020, declined by 11.6%, or $20 million to $153 million compared to $173 million in the prior year period. For the 9 months ended September 30, 2020, adjusted net revenues declined by $55 million or 12.5% to $385 million compared to $440 million in the prior year period. The decline was primarily due to decreased volume as a result of our strategic focus on improving margins as opposed to growing the top line and the negative impact of COVID-19 on our customers. Adjusted gross margin for the 3 months ended September 30, 2020, was 16.3%, representing a 362 basis point increase compared to prior year, primarily driven by the team's continued productivity increases due to improved project and customer selection, project management and favorable job site conditions. For the 9 months ended September 30, 2020, adjusted gross margin was 16.9%, representing a 1,029 basis point increase compared to the prior year due to the factors I mentioned for the third quarter. Adjusted EBITDA margins for the 3 months ended September 30, 2020, were 14.4%, representing a 455 basis point increase compared to the prior year, primarily as a result of our strategic focus on improving margins as opposed to growing the top line. For the 9 months ended September 30, 2020, adjusted EBITDA margin was 13.8%, representing 831 basis point increase compared to the prior year due largely to the gross margin improvements mentioned earlier. Before turning the call over to Jim, I'd like to provide our latest expectation for the remainder of 2020. As Russ stated earlier, we are cautiously optimistic, yet realistic in our outlook. Market conditions as a result of COVID-19 remain uncertain. However, we are both pleased and comfortable raising our 2020 guidance. We believe that our adjusted net revenues for the year will range between $3.475 billion to $3.525 billion, up from $3.4 to $3.5 billion. Adjusted EBITDA will range between $360 million to $370 million, up from $345 million to $355 million, and adjusted EPS will range from $1.11 to $1.15, up from $0.94 to $1 per share-based on our adjusted diluted share count of 176 million. We expect capital expenditures for the year to be approximately $40 million and normalized depreciation to be approximately $60 million. Our cost of capital is approximately 5%, and our adjusted mid and long-term effective tax rate remains approximately 21%. I will now turn the call over to Jim.

Thanks, Tom, and good morning, everybody. As you heard today, we are pleased with our results this quarter, particularly in light of a difficult macro environment. While the pandemic continues to have a negative impact on net revenues across our 3 segments, as expected, our proactive approach to managing risk across our platform and the strength of our recurring revenue services-focused business model has yielded results. Shortly following the end of the quarter, we proactively managed our capital structure by opportunistically accessing the debt capital market for an incremental term loan facility of $250 million to provide us with additional financial flexibility to continue driving growth and creating shareholder value. As a reminder, there are outstanding warrants that will result in approximately $245 million of cash coming into the company, which can be used for additional accretive acquisitions or other corporate needs. As Russ mentioned earlier in the call, we remain confident in our previously stated long-term value creation targets and believe the resilience of our people as well as our recurring revenue services-focused business model will drive results and have allowed us to continue to execute our long-term goals for the business. As we look at the calendar for investor engagements over the next couple of months, we look forward to participating in the Baird Industrial Conference tomorrow, a virtual non-deal roadshow, with Barclays as well in December and yet again with CJS and their conference in early January. We plan to participate in additional conferences and NDRs as we move towards the spring and also plan to host an Analyst Investor Day sometime in the spring where we will share our 2021 outlook and our plans for expansion. I would now like to turn the call back over to the operator and open the call for questions.

And your first question is coming from Markus Mittermaier with UBS.

Quick question on the guide, thanks a lot for that, and what it implies. Maybe can you talk us through your thinking here. If I do the math here, it implies basically a high single-digit down Q-on-Q, is that kind of normal seasonality, it's kind of in line with what you saw last year, maybe a little bit better? Or is that still COVID impact that you're cautiously modeling here? And then on margin, maybe can you walk us through the cadence of the temporary cost-out? How do they come back? What's your current plan? Again, if I look at the Q4 implied, it looks like you're gearing us towards a roughly 10% margin. So just thinking through the various puts and takes here on costs coming back and the top line guide, maybe let's start there.

And we appreciate UBS' coverage of the company as well. So when you think about it, all right, the fourth quarter is typically, we start to see some seasonality kick in, both from a revenue perspective as well as from an SG&A perspective. As revenues slow, SG&A will remain fairly consistent within the existing businesses. The other aspect of it as well is that we are continuing to bring the temporary cost containment measures back into play in the businesses. And I would say, for all intents and purposes that we're almost back to 100%. And so that's going to be adding some incremental cost to our overhead structure. We have some businesses that are continuing to remain on, I'll just say, reduced working with reduced wages. But that has become the exception now, and there's just a handful of us at corporate that are still not taking any compensation.

Okay. Got it. And then, Jim, you mentioned the warrant conversion and sort of the cash contribution or potential cash contribution from that, maybe can I tie that your overall thoughts on M&A. You've talked about, obviously, continuation of bolt-ons. You've also talked about transformational acquisitions in the past. To what extent would you say SK FireSafety is that transformational transaction that you talked about? Is there more of that nature that you're thinking about given your leverage situation? Or how would you advise us to think about the strategy going forward? Is it leaning more towards bolt-ons? Or is there other larger transactions that you're thinking about?

Markus, we're running a parallel path. So the historical M&A that the company has done with small regional companies, local companies, has continued if you think of the acquisition announcement we've made just at the end of the third quarter. We have 3 of those little bolt-on transactions that will close by the end of the year. We continue, though, to have conversations for things of scale. I wouldn't say that SK is transformational; I think it was opportunistic. It's around $175 million of revenue in U.S. dollars. And so I think that, that is an appropriate-sized transaction. But as you know from our prior conversations, we're willing to look at things much larger, $500 million, $600 million, $700 million. We have the intellectual bandwidth within the organization to do a larger size. We certainly have the liquidity. We're not relying on the conversion of the warrants. But that really represents almost a one-for-one on what we did in the debt markets. And so our leverage ratio will be low. We have confidence in our ability to continue to generate cash. So we feel pretty good about that. And so M&A is certainly in our line of sight. Russ will actually be with Martin and I in the next couple of days to go through some of the larger M&A transactions. So we're confident that we'll be able to execute as we move through the balance of the year and into 2021. If I could just kind of jump back to what Russ was talking about the fourth quarter. We've said all along since the beginning of the pandemic that the revenue is shifting off to the right. And ultimately, you're going to be squeezed on revenue just because the calendar is going to end. And so I think that, that's really more reflective of where we see the fourth quarter rather than any change in our customers' outlook, the business's focus. We're simply just running out of time. We're heading into high holiday activity. So more days will fall out of the calendar. But there's nothing systemically challenging within the business other than the things we've discussed already.

Okay. Got it. That's very helpful. So basically, in Safety Services, that 14.4% drop you had in the quarter, you've mentioned access restrictions, mechanical service windows may be shifting. So we should really think of that COVID impact more of a delay, not that these projects evaporate? Is it really sort of you think about this as being pushed out to the next possible window whenever that is? Or how would you think about that?

I think that, that's a very fair statement. But also, it's a tough comp on a year-over-year basis. We had a good fourth quarter last year in this segment. And so while people don't have a great track record of knowledge of the company, the weather was favorable last year, the weather hasn't been terrible so far this year. But those are really the primary drivers. It's a tough comp, and all the things that you just mentioned.

Markus, I would like to add that although we do not disclose our contract backlog, it has remained quite consistent year-over-year compared to last year, possibly increasing by around $100 million. The situation mainly involves delays, as Jim mentioned, and we believe the company is in a strong position.

Your next question is from the line of Andy Kaplowitz with Citigroup.

Russ, maybe I can follow up on your last comment. You talked about the backlog. You mentioned service was up a little bit in the quarter. I mean it's early to talk about '21, especially during the pandemic. But at the same time, you do have your specialty business that looks like it's starting to turn and you mentioned service up in safety. So any initial thoughts about '21 and the confidence level around growth in the businesses, maybe you have more confidence in 1 segment versus another, but any initial thoughts that you'd have?

We are currently finalizing our budget for 2021. I haven't reviewed the specific figures yet, but we are confident in our business model. In Safety Services, our key indicator is inspections, and we have emphasized the importance of selling inspections first. Year-over-year, inspections have increased by 6%, which is what we reported at the end of the second quarter. We have maintained this growth through the third quarter despite the pandemic. We believe that our continued focus on growth and service will benefit the business as we enter 2021. Additionally, our mechanical services should experience a rebound in activities that were postponed this year. We have consistently mentioned that Specialty Services is resistant to economic cycles, and that assessment continues to be valid. We feel very confident as we approach fiscal 2021.

Great. You mentioned the temporary benefits coming to an end. However, even without the $13 million in benefits, you achieved nearly an 11% adjusted EBITDA margin. I understand that you may not want to adjust your margin target, but as we enter 2021, could you share how much structural cost has been removed from the business considering factors like ERP implementation and back office consolidation? Have these efforts accelerated more than anticipated during the pandemic?

I'll let Russ answer that, but you're right, Andy. We're not going to change our macro goals.

There are various factors to consider. As we work on reducing costs, we are also facing new expenses related to our transition into a public company. It's important to manage these expenses and factor them into our future forecasts. This is not a straightforward situation; it involves more than just looking at the expenses eliminated in individual businesses. We need to take a broader perspective. Tom, do you have anything to add?

No. I think you said it well.

And then, Tom, maybe 1 quick follow-up for you on free cash flow. Obviously, good performance, 110% of EBITDA almost this year. Is Q4 conversion still expected to be pretty good? I mean, seasonally, I would guess it would be relatively strong. And is there any way to highlight how much 2020 has been unusual for you because, obviously, we know your target is 80%?

Yes. Well, it has been unusual. I think the way to think about how it's been unusual is if you just kind of take a look at the drop in AR, that's driving a big piece of that improved cash performance, and that's the direct connection to the revenue decline. We do expect fourth quarter to continue to throw cash off as it has in the past on a relative basis.

I would tell you, Andy, that we want to use some of that cash to fund working capital, which means we're putting more people to work and getting more activity within the businesses. And that's why I think it's important for people to continue to look at our cash flow conversion goal of 80%. You can't just look at it at any one point in time. You have to look at it over a wider range of time because we want to put some of that cash back to work.

And you'll typically see us also have cash come in through the first couple of months of the first quarter. And then we start to have it typically go back out, as Russ said, for the right reasons. We're growing revenue, growing activity, and we're increasing receivables and our working capital needs.

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

We've had some fairly long questions. So I'll try and keep it concise. Maybe the first one around the handful of acquisitions that are collectively due to close in the next couple of months. Perhaps help us understand what the free cash flow conversion profile of that sort of $25 million or so of aggregate EBITDA is? And also, what's the expected 3 or 5-year ROIC on those various transactions?

Well, we would expect the free cash flow conversion on those businesses to be over 80 percent. They're right down the middle of the fairway as it relates to our business model. They're all focused on the recurring revenue services component. And so we would expect the cash flow conversions to be right in our target range. We don't track return on invested capital. That's not a metric that we currently utilize. We're focused on EBITDA and whether that's going to be accretive to our overall margin expansion goals.

Okay. Fair enough. And then perhaps my second question would be around the balance sheet. So you saw obviously the 1.8x end of Q3 leverage ratio. There's a lot of moving pieces now with cash out for the deals, the EBITDA coming in, the warrant conversion. So maybe help us understand, let's say, end of this year or early next once all those things have played out, where do you see the leverage position being?

Yes. So as we look to project through the end of the year, on a net basis, we think we'll be in kind of that 2.5% to 3% range, right in that midpoint kind of good place you expect us to land.

Yes, I believe your question is about our long-term target leverage, which is 2% to 2.5%. If we receive the additional $200 million from warrant proceeds, totaling approximately $250 million, and $245 million comes in, then the leverage ratio that Tom mentioned would be slightly lower.

Yes. Julian, this is Jim. If you consider that we ended the quarter at $1.8 million, it will be around 2.5 to 3 times, but that's primarily due to the calendar as we made acquisitions in the fourth quarter. We fully anticipate being at a normalized year within the range that Martin mentioned.

I see. So the implication would be you can carry on doing acquisitions from early next year. There's no sort of digestion period or anything like that?

No, we'll be fine. We'll be fine.

Your next question comes from the line of Andrew Wittmann with Baird.

I want to begin with the Industrial Services segment. The margins were impressive, and it's clear that the team has been focused on increasing profitability in relation to revenue, which is great. Tom, I'm curious if there were any unusual factors in the quarter, such as larger projects that wrapped up favorably from an accounting standpoint, or anything that we should consider regarding how to project the strong margin performance into the future.

Yes. No, there was nothing unusual in the quarter from something closing out better, that was working through different quarters. What was delivered in the quarter was very consistent with what we had expected for the Industrial Services segment. We do expect the fourth quarter there to be smaller, just out of normal seasonality.

Great. That makes sense. And then, Russ, I was hoping you could just talk a little bit more about some of the delays that you've seen. It sounded like it was mostly in the mechanical portion of the Safety Services segment. I was just wondering about the nature of those projects. Are those build-outs of commercial offices? Or if you could just be a little bit more specific so we could understand which key markets are being mostly affected by the delays today.

I would say probably health care in Safety Services is the primary place where we saw some things push out to the right. We haven't seen anything canceled. But not commercial real estate. When you think about the end markets that we serve, I mean, we're not in that developer-led market to any great extent. And I think that's one of the advantages that we have. That doesn't mean we don't do any commercial office work. But I'd say health care is the primary end market. Specialty Services had some of our industrial clients delay some of their outage work, if you will, maintenance outage work or whether it's a mining operation had scheduled planned outages. A number of those were delayed and pushed out just because they didn't want to have the risk of a COVID outbreak in the middle of that maintenance outage that would potentially delay the start-up of their facilities.

Got it. That's helpful. And then I guess my last question here is just regarding the acquisition in Europe and opening up that new growth opportunity. I just was hoping you could talk a little bit about how you, as a historically North American focused company, got comfortable with certainly the same types of businesses, but really in new markets and the new market dynamics that come with different cultures, different regulations, different labor rules. And certainly, probably a different customer set, a similar customer type, but different customers themselves. All those things are important, I think, as you decided to put capital there. I was just hoping you could walk us through a little bit of the process that you went through to get comfortable with this deal.

We have a long-standing business in the U.K. and are keen to expand our platform there and throughout Europe. SKG presents a strong opportunity for us, aligning perfectly with our goals. The services SKG offers match well with our Safety Services, and we’ve already begun working together to optimize our vendor relationships. I don’t see SKG as a challenging fit; it's a manageable size and we really appreciate their leadership team, which is very solid. Additionally, Martin Franklin's involvement with Nomad Foods brings valuable European market experience that we can utilize. Overall, we feel confident and excited about this venture. We're even looking into a few small acquisitions to enhance SKG, which we believe will serve as a strong foundation for future growth.

Andrew, we'll see you at your conference tomorrow. I'm just going to tee up as we're talking about acquisitions, and since we have Martin on the phone, a lot of people have asked us about multiples that we've paid. But Martin, do you want to give some color just on how we're thinking about acquisitions and multiples?

Yes, absolutely. Investors who are familiar with the industry have likely noticed that some service companies, like Service Logic, are being valued at EBITDA multiples of 14 to 16 or more. Those who have known us for a while understand that's not where we position ourselves. While we would like to operate at those levels, we aren't looking to buy at those prices. We aim to find a balance between small and large acquisitions. Smaller companies typically transact at mid-single-digit multiples, which is a standard for them. As you move to midsize companies, those multiples start to increase, as evidenced by SKG. This approach serves as our model for considering acquisitions. We are focused on our entry multiple in APi, which has provided returns for investors and has significant potential ahead. Our philosophy remains grounded in the rigorous criteria we've followed for many years: acquiring companies that fit well within our framework and are valued appropriately. We don't believe in a one-size-fits-all strategy. While we remain opportunistic, we see plenty of potential for smaller acquisitions. Additionally, an important aspect of our strategy is that the pricing for these smaller acquisitions allows for self-funding as we grow. The market is highly fragmented with many companies available, enabling us to expand into different geographic areas without needing extra capital. This remains a top priority for our acquisition strategy.

Thank you for your question.

Congrats on a great Q3. Can you give us a little more color in the safety business? I'm surprised the revenue was down as much as it was in Q3, why was that? And then is that something that just sets you up for kind of an easy comparison next year?

Well, I'll say not to that part of the question. I'll let Russ answer the first part.

It's not completely straightforward; we have mechanical services integrated within our safety services, which was where the main impact occurred. Additionally, certain locations were affected by COVID to varying degrees. Therefore, we also need to assess this on a geographic level. For instance, markets like New York faced significant challenges compared to the rest of the country, affecting their recovery and ability to return to normal operations. We monitor man hours weekly for each of our companies, and we've seen a gradual increase in man hours. However, some markets, including New York, are experiencing slower recovery rates due to differing shelter-in-place mandates. We are pleased with the current state of the business, but it has taken longer for some areas to regain normal levels. We manage this across all parts of the business. In Canada, we are the leading provider of life safety services, and cities like Toronto experienced stricter lockdowns than other areas. We continue to observe man hours slowly returning to normal levels, but the pace varies by business, necessitating tailored decisions based on each market's unique situation.

Okay. Russ, it might be too soon to say, but there has been speculation that after the election and with the positive vaccine news, some of the postponed projects could start progressing. Are you noticing any increase in activity as a result of these developments?

Well, I think it's much too early. I mean the vaccine is not going to be readily available to Everyday America for a number of months. And so we are looking at our business, and we are continuously planning like there's the second wave and what's going to happen, what is your plan, so that you can respond and react. And we expect that things are going to change again by markets. So like if you look at it, like yesterday, the governor of Minnesota came out with more restrictive actions because of COVID. Now I don't think it's going to affect our business at all. But you have to continue to observe what each individual community and state is doing so that you can properly respond and react to the market conditions that you have. And I think that we've demonstrated that we are proactive and we are going to manage our individual businesses based on the situations and the conditions that we're faced with. But I think it's too early to tell. Our backlog is solid. I mean that gives us great confidence as we move into 2021 and beyond. But like, I call it productive paranoia. And it means it's like always keep one eye open in the back of your head and to make sure that you're in a position where you can respond to the conditions that you're faced with.

No. And good job on flexing the estimates. The EBIT margins in light of the top line are very impressive.

One of the things that you have to also think about, though, relative to the election, and I'll just call it, relative certainty as we head into next year. As Russ mentioned on the call, there are infrastructure opportunities for us, both in Safety and in the Specialty Services business. If Congress gets its act together, and moves forward on infrastructure, we just view that as kind of an upside surprise. We're not planning for anything, but it is a tailwind if it happens.

Your next question comes from the line of Kathryn Thompson with Thompson Research.

And I appreciate the color on the multiples with acquisition, that was actually, the part I was going to hunt down, so thanks, James, for that. But following up on your 3 remaining acquisitions, which you're going to be closing this quarter. Could you give a little bit more detail, just bigger picture in terms of the strategic thinking of how these companies fit into the growth trajectory for the company? And then also understand that many are just part of the bigger picture, but really want to be able to think. Because when you explain these 3, it gets a richer of how you're thinking strategically going forward.

Thank you, Kathryn, for your question. We truly appreciate it. All three of these transactions align well with our geographic presence, which is crucial as we develop our platform, especially in Safety Services. The acquisition in Specialty Services also fits well with our existing operations. This geographical alignment is a major advantage for us. Each acquisition focuses on service and recurring revenue, which is beneficial. The teams we're bringing on board align with our culture and values, providing a wonderful opportunity to enhance the APi family with quality talent. We know from an operational standpoint that our purchasing power can significantly improve their business results right from day one. There is substantial opportunity for growth as we discuss our corporate clients and our 200-plus locations across North America, and we aim to expand that further. Particularly in Safety Services, as we continue to add locations, we will be better positioned to serve our corporate clients in inspections throughout the U.S. and Canada. These businesses fit perfectly within our strategic goals.

Okay. And then just following up on the margin color you gave. I appreciate that there is a mix between a greater service and also improved efficiencies. For the quarter, at least, could you help us parse out in greater detail that how much of it was mix versus efficiencies and cost cutting measures? I mean you talked about it generally, but it would be helpful to say, well, listen, half of it was mix versus and the other half were cost cutting.

Yes, I think you're on the right track. It's challenging for us to provide more specific information than what you've mentioned. It's a combination of several factors. We experienced some pricing improvements and enhanced execution. During the COVID period, we've had instances where we can reach locations more quickly due to fewer vehicles on the road. However, there's also a counterbalance as we can't have two people in a truck for a project, resulting in two vans being needed. It's a bit of everything, but overall, it's about managing costs, improving execution, and continuing our efforts to lower our contract loss rate.

Okay. And then, I guess, at least into my last question for the day. There's been a great deal of focus on project selection and reducing your loss rate overall. Could you give an update just in terms of how these best practices towards that goal are being implemented across the organization? And then what is the ultimate goal in terms of the margin upside to this specific initiative? And just a final point for that, where are you today versus a year ago in this journey?

We've made progress on reducing our contract loss rate, which was 1.5% last year. Our goal this year is to cut that rate in half, and we are on track to achieve that. While we aren't completely there yet, we are improving. If we reduce the loss rate from 1.5% to 0%, that represents a significant gain that will positively impact our margin. It's concerning to think about losing money while servicing some customers, so we need to be disciplined and improve our processes. We have always had a notification process for larger opportunities, but we have now implemented a stricter go/no-go checklist. This checklist is available as an app for our team to use before they even begin preparing a proposal for clients. For larger opportunities, my approval is required before proceeding, even if it involves a master service agreement with multiple smaller opportunities. This helps us enforce discipline in our business and to be selective about the clients we choose to work with. Ultimately, it comes down to understanding who the customer is and making sure we're working with the right ones.

And Kathryn, it's Jim. A very good question. It's all part of our path to the 12% plus. We don't have any home runs built into this. It's all a bunch of singles and doubles. So we're not reliant on any one item to get us to that margin expansion goal for 2023. With that, Kathryn, I don't mean to cut you off, but we're a little bit over the time. We have CJS out there, which, as everybody knows, was the first guys to launch coverage on us. And so I think we should end with them, let them get their question. But I know you guys have other calls, and we have calls with investors. So if we have John in CJS.

Yes. One moment. And John's line is open.

We really appreciate your support. A lot of my questions have been answered, and I know we're short on time, so I'll just keep it to one. Just wanted to drill into SKG a bit. I was wondering, first, what was the contribution you're expecting in your Q4 guidance from SKG?

It's about $0.015 or about $4 million in EBITDA, and call it, $40 million in revenue. Well, I guess everybody heard my answer to John's question. I'm not sure if John heard it. But with that, why don't we wrap it up? Russ, do you want to close this out?

No. Yes, Jim, I would. I just want to take the opportunity to thank everybody again for joining the call this morning. And really thank you for your interest in APi. We're very proud of where we're at today. It's been a long journey for the first year being a public company amidst the pandemic. But we have a great team at APi. I'm very proud of our people and feel very fortunate and blessed to be able to work alongside them. So thank you, and we look forward to visiting with each of you in the coming days.

Thanks, everybody.

Thank you, ladies and gentlemen. This concludes today's conference call. We thank you for participating, and it's now that you could disconnect your lines.