APi Group Corp Q4 FY2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to APi Group's Fourth Quarter 2020 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 now turn the call over to Olivia Walton, Vice President of Investor Relations at APi Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our fourth quarter 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 earnings press release announcement and on this call are forward-looking statements, which are based on expectations, intentions, and projections regarding the company's future performance, anticipated events or trends, and other matters that are not historical facts. These statements are not a guarantee of future performance, and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. In our press release and filings with the SEC, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, March 24, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our 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, and good morning, everyone. 2020 was a year of unique milestones for the company. We became a listed company on the New York Stock Exchange, completed several complementary acquisitions, and proactively managed the challenges of the pandemic, while executing on our long-term goals for the business and delivering results for our shareholders. We believe that the resilience of our people, as well as our recurring revenue services-focused model, have allowed us to continue to execute against our long-term strategies. We are grateful for the focus and ongoing leadership efforts across the entire organization. We see significant opportunities for continued organic growth for APi, whether it be through much-needed infrastructure investment, providing retrofit and upgrade services for existing buildings, delivering the services required for new technologies, such as 5G, or supporting the growth of life safety service contracts for existing customers. Equally attractive as the organic growth prospects, we see multiple avenues for expansion through strategic acquisitions. The markets in which the company operates are highly fragmented. We believe that with thoughtful and disciplined M&A, we can accelerate the growth and service offerings of the business. With that, I'll hand the call over to Russ.

Thank you, Martin. Good morning, everybody. Thank you for taking the time to join our call. The health and well-being of each of our employees and the communities in which we serve remains our number one priority. Our strong results for 2020 and solid outlook for 2021 reinforce the focus and commitment of our entire organization to serving customers safely and efficiently, despite macro headwinds faced in today's environment. I am proud of our team. We believe that the tough decisions and sacrifices made across the organization in 2020 strengthened the business and allowed us to continue to execute on our long-term goals. I will start by providing a summary of our financial results, drivers of margin expansion, and key trends in each segment before turning the call over to Tom, who will walk you through our 2020 results and 2021 guidance in more detail. Key highlights from our performance for the year ended December 31, 2020, compared to the prior year period include the following: First, primarily due to the negative impacts of COVID-19 and disciplined project selection, adjusted net revenues declined by 8% or $306 million to $3.5 billion. This compares to $3.8 billion in the prior year period. Second, continued success in our ongoing goal of growing recurring service revenue, which we believe helps to build a more protective moat around the business. Service represented approximately 40% of our consolidated net revenues. Third, adjusted gross margins of 24.2%, which is an increase of 260 basis points, with all three segments successfully driving margin improvements. In our Safety and Specialty Services segment, margin expansion was driven by a mix of work, increased labor productivity, job site conditions, and improved pricing. Fourth, adjusted EBITDA margin expansion of 56 basis points, driven primarily by gross margin expansion and early execution of largely temporary cost containment efforts to counteract the negative impacts of COVID-19. Fifth, adjusted diluted earnings per share of $1.22, exceeding street consensus estimate by 4.5% or $0.06 per share. Sixth, operating cash flow of $496 million, representing a 68.1% or $201 million increase from the prior year. Our ability to execute amidst the ongoing COVID-19 pandemic and its related disruptions is a testament to a variety of factors, as we discussed in our last call, including our differentiated leadership culture, relentless focus on growing recurring service revenue, the diversification across end markets, customers, and projects, compelling industry dynamics, relative variability of our cost structure, and our broad geographic footprint, which allows us to maintain close relationships with local decision-makers while also having the ability to execute for our national-based customers. We remain focused on our pre-COVID-19 objectives, and we'll continue to focus on driving margin expansion through the following: First, improving our mix and continuing towards our long-term goal of over 50% of our net revenues across all of our segments to come from recurring service revenue. Second, disciplined project and customer selection, with a continued focus on reducing our contract loss rate. Third, organic growth through attracting new customers and increasing work from repeat customers, increased demand for services, and pricing opportunities. This includes increasing wallet share with our individual customers. Fourth, strategic M&A execution. Our pipeline of incremental M&A opportunities is robust, and we expect to continue to explore opportunistic acquisitions. Our balance sheet is strong, and we have significant capacity to absorb additional accretive transactions. We view this as an important tool to increase and accelerate shareholder value. Fifth, driving margin expansion through what we refer to as our business process transformation project. This includes ongoing efforts to tie our technology platforms with improved business processes which we expect will allow us to move closer to a true shared services model, and ultimately allow for better leveraging of our SG&A. This also includes efforts to further leverage purchasing and procurement scale to drive margin expansion. We are excited about the opportunities that lie ahead for the business. We entered the year in 2021 with a strong backlog, which is slightly higher than it was a year ago. End markets that we serve, such as data centers, fulfillment and distribution centers, high-tech, and healthcare, have continued to show their resilience through COVID-19, just like we feel our business has shown that resiliency. Safety Services: In our largest segment, Safety Services, our number one priority is to grow inspection and service revenue. We continue to build a national and coordinated inspection sales force to drive our go-to-market strategy of selling inspection work first, which we believe will lead to further service revenue growth. In most cases, our inspection work is covered by statutory requirements. Nearly all facilities that have existing life safety systems are required by law to have that system inspected on an annual basis, regardless of whether the facility is filled to capacity or empty. Historically, for every dollar of inspection revenue, we have the opportunity to generate between $3 and $4 of service work. We also know that if we execute well on our inspection and service work that we will create a much stickier relationship with our customers that allows us to negotiate and participate in higher-margin project-related work in the future. Specialty Services: In Specialty Services, our goal is to partner with well-capitalized customers who have projects that continue to progress, despite macro volatility, which contributes to the economic resiliency of our business. An example of this is our work with private and public utility customers with large committed capital programs for the replacement of existing natural gas and water distribution systems. We expect growth in this segment to be supported by secular tailwinds, including 5G infrastructure build-out, natural gas distribution, and grid modernization. The work in this segment is typically executed under Master Service Agreements and provides us with a high degree of visibility. Lastly, Industrial Services: In Industrial Services, which we anticipate will represent less than 10% of our total net revenues, we have a strategic focus on improving margins through disciplined project selection rather than growing the top line. We are focused on growing the integrity side of pipeline transmission, which is statutorily driven as transmission companies are required by law to maintain their existing pipeline systems to ensure they are safe. 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'll start by reviewing our consolidated financial results and segment-level performance as well as our strong balance sheet and liquidity, and conclude by discussing our 2021 guidance. Adjusted net revenues for the three months ended December 31, 2020, declined by 5.5% or $51 million to $864 million compared to $925 million in the prior year period. The decline was primarily attributable to negative impacts of COVID-19 and disciplined project selection. For the year ended December 31, 2020, total adjusted net revenues declined by 8% or $306 million to $3.5 billion compared to $3.8 billion in the prior year period. The decline was primarily attributable to negative impacts of COVID-19, combined with disciplined project selection, which led to a decrease in volume of projects. Adjusted gross margins for the three months ended December 31, 2020, were 25.4%, representing a 183 basis point increase compared to the prior year. The increase was primarily due to a higher mix of service revenue in Safety Services and disciplined project selection and execution in Industrial Services. For the year ended December 31, 2020, adjusted gross margin was 24.2%, representing a 260 basis point increase compared to the prior year, due to the drivers Russ mentioned earlier in the call. Adjusted EBITDA margin for the three months ended December 31, 2020, was 11.8%, which was consistent with the prior year period due to gross margin expansion, offset by increases in costs associated with the transition to a public company. For the year ended December 31, 2020, adjusted EBITDA margin was 10.9%, representing a 56 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. Our strong cash generation has continued, and our balance sheet and liquidity profiles remain strong. For the year ended December 31, 2020, adjusted free cash flow was $443 million, representing a $107 million increase compared to the prior year of $336 million. Our adjusted free cash flow conversion rate was approximately 116%, 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 revenue resulted in reductions in our accounts receivable and other fluctuations in our working capital balances that drove positive cash flow generation. Our operating cash flow for the year ended December 31, 2020, included $39 million of benefit resulting from the deferral of certain payroll taxes under the CARES Act. This will be repaid in two equal installments in the fourth quarters of 2021 and 2022. During the fourth quarter, we deployed our cash flow prudently with a $30 million of accretive share repurchase. As of December 31, 2020, we had $745 million of total liquidity, comprising of $515 million in cash and cash equivalents and $230 million of available borrowings under our revolving credit facility. We had approximately $1.4 billion of gross debt outstanding, and our net debt to adjusted EBITDA ratio, calculated in accordance with our borrowing agreement, was 2.4 times. Subsequent to year-end, we received approximately $230 million of cash proceeds resulting from the exercise of approximately $60 million outstanding warrants, which further strengthened our liquidity profile. I will now discuss our results in more detail for each of our three segments, beginning with Safety Services.

Safety Services net revenues for the three months ended December 31, 2020, declined on an organic basis by 8%, primarily due to the 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 year ended December 31, 2020, net revenues declined, on an organic basis, by 9.8%, due to the factors I mentioned for the fourth quarter. Service revenues represented approximately 44% and 40% of segment net revenues for the three-month and year ended December 31, 2020, respectively. Adjusted gross margins for the three months ended December 31, 2020, were 32.7%, representing a 169 basis point increase compared to the prior year due to an improved mix of service work. For the year ended December 31, 2020, adjusted gross margin was 31.9%, representing a 186 basis point increase compared to the prior year, primarily driven by the mix of work towards inspection and service revenue. Adjusted EBITDA margin for the three months ended December 31, 2020, was 13.4%, which was relatively consistent with the prior year period. For the year ended December 31, 2020, adjusted EBITDA margin was 13.7%, representing a 55 basis point increase compared to the prior year due to an improved mix of service work and stronger project execution.

Specialty Services net revenues for the three months ended December 31, 2020, declined, on an organic basis, by 8.8% and primarily, due to the negative impacts of COVID-19, such as project deferrals and job site disruptions, along with the timing of projects. For the year ended December 31, 2020, net revenues declined on an organic basis by 6.2%, due largely to the negative impacts of COVID-19, such as project deferrals, job site disruptions and timing of projects. Adjusted gross margins for the three months ended December 31, 2020, were 18.8%, representing a 10 basis point increase compared to the prior year. For the year ended December 31, 2020, adjusted gross margins were 17.5%, representing a 101 basis point increase compared to the prior year due to increased labor productivity and improved pricing. Adjusted EBITDA margin for the three months ended December 31, 2020, was 12.5%, representing a 45 basis point decline compared to the prior year due to the negative impact of COVID-19 and stronger contributions from our joint ventures in the prior year period. For the year ended December 31, 2020, the adjusted EBITDA margin was 12.1%, representing a 48 basis point increase compared to the prior year due to continued focus on project selection, pricing improvements, and stronger contributions from our joint ventures in 2020.

In Industrial Services, net revenues for the three months ended and the year ended December 31, 2020, declined on an organic basis by 19.6% and 13.9%, respectively. The decline in both periods was primarily due to a decrease in volumes as a result of our strategic focus on improving margins as opposed to growing the top line and the negative impacts of COVID-19. Adjusted gross margin for the three months ended December 31, 2020, was 13.8%, representing a 351 basis point increase compared to the prior year, primarily driven by disciplined projects and customer selection, better project management, and favorable job site conditions, including weather. For the year ended December 31, 2020, adjusted gross margin was 16.3%, representing a 900 basis point increase compared to the prior year due to the factors I mentioned for the fourth quarter. Adjusted EBITDA margin for the three months ended December 31, 2020, was 12.6%, representing a 143 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 year ended December 31, 2020, adjusted EBITDA margin was 13.6%, representing a 698 basis point increase compared to the prior year, due largely to gross margin improvements mentioned earlier. Now I'll move to 2021 guidance.

As detailed in our March 12 press release, we expect adjusted net revenues for 2021 will range between $3.65 billion and $3.75 billion. We expect adjusted EBITDA for 2021 will range between $405 million and $419 million. We expect capital expenditures for 2021 to return to a more normalized level of approximately $55 million. And as previously mentioned, we are investing in our business process transformation systems, processes, and procedures, and we spent $13 million in 2020 of our total anticipated spend of approximately $50 million. I will now turn the call over to Jim.

Thanks, Tom. Good morning, everybody. APi's execution against its goals, despite the pandemic and its ability to deliver on its financial goals, speaks to the strength of the company's recurring revenue services-focused business model. Despite the challenges 2020 presented, the team's continued focus on driving higher-margin growth across all the segments continued to deliver results. We demonstrated the company's ability to generate cash and ended the year with a strong balance sheet and plenty of capacity to absorb additional accretive acquisitions. We are looking forward to holding our first Analyst and Investor Day on Thursday, April 22. We plan to highlight our commitment to driving strong free cash flow and earnings, outlining future growth and margin expansion opportunities, in addition to providing expanded discussion about the company and certain key strategic initiatives, including an update on the M&A environment. With the progress achieved in 2020, we remain confident in our previously stated long-term value creation targets, which, as a reminder, are: delivering long-term organic revenue growth above the industry average; continuing to leverage our SG&A; expanding adjusted EBITDA margins to over 12% by fiscal year 2023; maintaining adjusted free cash flow conversion of over 80%; generating high single-digit average earnings growth; and targeting a long-term net leverage ratio of 2 times to 2.5 times. As you know, with the conversion of the warrants, while we ended the year slightly above 2 times, our current net debt to EBITDA ratio is about 1.8 times. I'd like to now turn the call back over to the operator, and open the call for Q&A.

Our first question comes from Andy Kaplowitz of Citigroup.

Russ, you mentioned that APi's backlog was slightly higher than a year ago at the end of the year, but you're forecasting high single-digit organic growth for your major segments in '21. We know you've got easier comparisons, but can you talk about what is giving you confidence in forecasting the growth acceleration? And given we're already at the end of Q1, can you give us any update on whether Safety and Specialty has continued to recover in Q1?

Well, regarding Q1, we've provided guidance where we feel Q1 is going to fall. We're confident in the guidance that we've provided. We're still continuing to deal with COVID as well as some weather impacts in that we felt during the month of February, but we feel good about where we're at as we come and work our way through the rest of the quarter. As we look at the segments, as we moved into the beginning of the year, both Safety and Specialty Services backlogs were up, and Industrial Services was down as was the plan all along as we continue to focus on the right project and customer opportunities for us in that segment, and we continue to try to drive the growth in the right mix, i.e., the integrity work associated with the transmission system. Also, Andy, I think if you recall, I had shared at one point, I think it was during our third quarter call, that inspection revenues in Safety Services on a year-over-year basis were up 6% at the end of the quarter. While I'm happy to share with everybody that inspection revenues ended the year up 8%. So we continue to show some growth and actually accelerated some of that through the fourth quarter, which is a positive momentum builder for us as we move into this fiscal year. Because, again, going back to some of our earlier remarks, we know that we're going to generate between $3 and $4 worth of service work off of that inspection work. And that's really where the focus and the emphasis for us is inside that segment. So those two items, I guess, give us good confidence as we move into this year.

Russ

Andy, it's Jim. I know you would be disappointed if I didn't correct you on the fact that we have a good comp in front of us. I just want to remind everybody that we didn't have COVID in Q1. And so Q1 is actually a relatively tough comp as compared to last year. But as Russ said, I think there's a lot of quarter of progress. If you look at the PowerPoint presentation, relative to the earnings call, I believe service revenue represented about 44% in the fourth quarter. So certainly, we're seeing the focus of driving service revenue, which is a higher-margin profile, helping us as we move into this year.

Jim, that's exactly what I would follow up on. The service up 44% in Q4. Would you say you're really starting to take more share in terms of growing the number of like Safety Services contracts? And where do you think you could get that level of service to in 2021?

Well, again, we're continuing to try to grow that aspect of our business. I mean, I think we've shown 7% organic growth in our forecast for this year. And the reality of it is, some of that will be project-related growth, but it's our focus and our emphasis, and we want the lion's share of that to come from inspection and service work.

Great. And then just finally, Russ, you gave detail already on sort of expectations for sales and margin. But do you see margin growing relatively equally in 2021 for your two larger segments? And you talked about sort of the progress you're making on the structural cost out. Maybe you can give us a little more color there? And how much temporary cost headwind is coming back in '21?

Well, the reality is, regarding the cost, and Tom, you can complement my response, is that for the most part, other than travel and entertainment in those types of expenses, which really haven't normalized yet, most of the temporary cost cuts have been returned and the business is operating at a more normal capacity and a more normal level. And we expect that to maintain itself probably through the lion's share of the year. There are certain travel and entertainment types of expenses that will probably never come back to the business, and that's a positive thing, and that's a good thing. But, in general, we're back to a much more normalized level. We're expecting to make general progress towards our margin expansion goals, again. And we've provided guidance that we expect this fiscal year to finish between 11% and 11.25% on an EBITDA basis, and we fully expect that we will achieve that.

Yes. I just would add, Andy, remember that we took the big SG&A cuts in Q2 last year. So on a comparative basis, we'll see that be the tougher comparable, and then Q3 and Q4 will be more natural, see the growth in that EBITDA as we march through the year and as we see COVID lessening the impact on our business.

Your next question comes from the line of Markus Mittermaier of UBS.

Maybe I'll just follow up on this margin element, and how you think about getting towards that 12% target by 2023? Appreciate the guide for this year at 11% to 11.25% from last year's just under 11%. If I think in the big bucket, Russ, that you mentioned in your prepared remarks, mix, project selection, business transformation, how would that sort of like incremental accretion on the margin sort of split between these different buckets, just roughly? And then as Tom said, you have $13 million in on the cost side for the business transformation out of the $50 million. How should we think about that over the next 2, 3 years here as you get towards that 12% target?

Well, we don't break out the individual buckets, if you will, of where we find the margin expansion. Recall, for us, it's more about hitting singles than any one silver bullet. And that contribution is going to come from a number of places: number one, project selection and customer selection is one of the bigger factors that will lead to a reduction in our contract loss rate. So that's one area. Second would be continuing to improve our mix. We reported that approximately 40% of our revenue came from service, as we define it. As we march towards 50, that will contribute to our margin expansion goals. Inside business process transformation, there are really two buckets. One is moving towards a shared service model, which will allow us to leverage our SG&A. The second would be, as we work to increase and stand up a true procurement department, if you will, and really try to leverage the scale of the business and drive the reduction in our costs. Next would be improved and increased pricing opportunities that we continue to work with the different businesses. Follow that with strategic M&A and ensuring that our M&A is accretive to our margin expansion goals. That is very important to us. Finally, I would say that there is an opportunity to just be better and improve our execution across the businesses. I can't tell you exactly which specific bucket will contribute how much, but it's a combination of all of those efforts that's going to allow us to achieve that margin expansion goal of 12%, and we have high confidence that we will achieve that.

Great. And then maybe just for Tom on that $13 million you've mentioned on the cost that you had in 2020 already on business process. How should we model the remaining $37 million or so over the next years?

Yes. I think as we look at that, we think the majority of it will come in 2021, and then the remainder in the first half to three quarters of 2022.

Okay. That's helpful. And then just briefly on grid. You flagged grid, obviously, as an upside out of the potential infrastructure investments. How big is that for you today in your mix on the specialty side?

Let's wait for Congress to actually approve an infrastructure bill, and then we can give you some color.

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

This is Trish Gorman on for Julian. So just maybe one question on industrial. It made really good margin progress last year from 11.2% to 13.6%. So now margins are the same as Safety and higher than Specialty. Can you guys just talk a little bit more about the rationale for the unwind in 2021?

Is your question, Trish, just to confirm, you're asking about the rationale for divesting the two businesses in 2020?

Yes. And just wondering if you can give some more color there because the margins seem to have performed well this year.

I think, first of all, that was a deliberate strategy. It was primarily about enhancing our focus on selecting projects and customers, while making sure the contract terms we were operating under were advantageous and that the risk profile was appropriate for us. So, it was a very intentional approach. Secondly, we have one business in that segment that has some connection to the oil and gas industry. As that market has become more constrained, it has compelled us to be very disciplined in our project and customer selection. We are also taking this opportunity to shift our emphasis towards the integrity aspect within the transmission space. This will drive our service work, and we plan to continue in this direction.

Got it. That's helpful. And then maybe a follow-up just on the cash flow outlook for this year. I think you mentioned CapEx around $55 million. Near term, in 2021, is 80% EBITDA conversion still the target? And then maybe if you could talk more about the working capital movements through the year? If there's anything to call out there?

Yes, sure. So yes, we're very comfortable that in the coming year, the 80% target is good. The working capital movements, if you think about it, with the down lever that we had in revenue due to COVID-19, our receivables declined, and that provided positive cash flow as we move through 2021 and see it improving quarter by quarter. We anticipate that, that will grow, and that's a positive for us as we're adding more revenue adding to profitability, but it will be absorbed as we put the working capital numbers back up to traditional levels.

But Trish, there's no unique callout to what's occurring in cash this year. As the business ramps up, you'll see more investment dollars and an increase in receivables.

Your next question comes from the line of Andy Wittmann of Baird.

I was a bit surprised that the corporate expense EBITDA was lower than expected in the quarter, at least lower than I thought based on our previous conversations. Tom, could you address if there was anything notable in the corporate EBITDA expense this quarter?

Yes. No. I think as we march through the year, and we've got our segment team members all aligned and getting them into the actual segments, we had a little bit of move of costs from the corporate to the segments where they're actually delivering their energies. So other than that, I would look at our run rate that we think, on a going-forward basis, we'll be in that $22 million a quarter kind of ballpark you could think about.

Okay. So this quarter, I believe we have 11, if I'm not mistaken. A jump to 22 seems significant. What is the difference between this quarter and the 22 you mentioned?

Yes. And what we're talking about there is we restored some of the benefits to the year, the 401(k), and some of those items were moved out of the corporate and into the various allocations to the segments in the fourth quarter. So it was a disproportionate down lever in that quarter, but it was picked up in the segments in the quarter.

Okay. And then I guess, Russ, you mentioned timing in Safety, particularly around the mechanical offerings that you provide. I think you mentioned that last quarter as well or something very similar to that last quarter. So I was just hoping you could give us a little bit of discussion around what that means? Have these projects that were delayed in 3Q, 4Q on time commenced here in 1Q? Or what are they waiting for to progress?

Yes. Well, a lot of the deferrals we had related to our HVAC services and specifically to the project-related work in the healthcare space. Everything was on hold in the healthcare sector as we went through the middle part of last year, as the industry was bracing for COVID and trying to sort that out, with the financial situations that they found themselves in. So we're seeing that activity start to ramp up. I would suspect that we'll see more of that in Q2 and Q3 than we will in Q1. But everything that we were planning on, from all appearances today, is moving forward.

I have one final question. I wanted to discuss the acquisitions, particularly the large European platform you mentioned earlier on the call. Europe has experienced more lockdowns than we've had in the U.S., including some recent announcements in Germany. I’m curious about the impact on your business there and how it’s performing relative to your initial expectations. Since you acquired it during COVID, I assume your expectations factored in some COVID effects. However, this is a dynamic situation, and these acquisitions are significant, so I thought it would be useful to get an update from you.

Yes, that's a fair question. I would say that in the fourth quarter, SK performed in line with expectations. There is no question that they are experiencing impacts due to the increased lockdowns. While we are not in Germany, we are primarily operating in the Benelux region and Scandinavia. We are actually beginning to see some relief regarding the restrictions. The positive aspect of the business is that more than 50% of the revenue comes from services, and that has been progressing. However, we are noticing some fluctuations. We feel optimistic about where they will end up for the year, which is very encouraging. But yes, we are managing this situation, just as they are over there and as we are here. Overall, things have been in line with expectations.

Your next question comes from the line of John Tanwanteng of CJS Securities.

I just want to get a little more color on if you're seeing any inflationary pressures in your various end markets? I know that people have been seeing steel prices or fuel prices rising, and the availability of pickup trucks is kind of lower right now. And maybe there's other components that then maybe impacted by this. Just have you priced any that into your guidance? And are you seeing any right now?

Yes. I mean, well, for sure, right? Commodity prices have been rising for some period of time. I would point you to a couple of factors that bode well for our business model. Number one is our average project size. If you look at Safety Services, our average project size is $10,000. In Specialty Services, it is $60,000. So these are very quick-turn projects, and you're not going to be vulnerable to some of the rapid escalation, specifically around steel pricing. That part of it has been positive for us. Most of the materials in Specialty Services and even in Industrial Services are supplied by our customers, not necessarily being supplied by us. We are, to a degree, somewhat immune to that. With all that being said, we've been tracking commodity prices on a weekly basis for a long time. We communicate regularly with our businesses about where we see commodity prices going, and about how to properly protect themselves from rapid escalation in their proposals and contract documents. We've been all over it for some time, and we feel really good about how we've managed it.

And then just from the M&A perspective, do you see any changes in your ability to drive at least the smaller tuck-ins at your historical valuation levels, I think 4 times to 5 times EBITDA, in the current environment, where acquisition multiples have skyrocketed?

We have a robust funnel of M&A opportunities in that typical APi tuck-in model, and we continue to see and execute in that same 4 times, 5 times, 6 times range. For the most part, we're buying from family-owned businesses. Those sellers are focused on finding the right fit and the right home for their business and for their employees. So when you find that, you have a much greater success rate acquiring those businesses at lower multiples. Private equity-owned firms, not so much. It really matters who the ownership is and the size of the business.

And then last one. This is recent, so I'm not sure if you have a view, but I believe Intel is a very large customer of yours. How meaningful is their announcement to increase their foundry investment in Arizona by $20 billion? Did you build those facilities out or service them? And how meaningful is that to you?

Intel is a very good customer of ours, and we do business at their Chandler, Arizona facility. So any sort of expansion announcements and those types of things are typically positive for us.

We have time for one more question. Your final question will come from the line of Kathryn Thompson of Thompson Research.

On Industrial Services, I appreciated the color you've given, and you've done a great job with demonstrated margin improvement with job selection. Just pulling the strings a little bit more, how much more is there to go in terms of the margin opportunity? And could you give a little bit more color, perhaps a good example of a type of project where you are doing a better job at choosing projects? Just for those that are dialed in.

I think there's margin opportunity in every one of our segments, not just Industrial Services. I would point out that Industrial Services is a relatively small piece of our business, representing less than 10% of our total revenue. The biggest thing for us is to continue to focus on the mix of the business that we do, focusing on the maintenance and integrity side of the existing transmission systems versus the new capital component of our different customers' budgets. For us, again, most of the time, when we talk about customer selection and project selection, it's really customer selection. It's being prudent with who you work for. Typically, it's not centered around a particular type of project, if you will. We have the capabilities to do the work. It's ensuring that we're working for the right customer and the right person. So we lump it together when we talk about customer selection and project selection, which can be deceptive. The primary focus for me is who is the client. That typically drives whether you have success or not in relation to the work and the services that we offer.

Russ, if I could supplement what you said, one of the things that when we came on the scene with APi, they were in the process of implementing modified contracts with customers so that, as an example, how we treat weather delays and who pays for that. Do we get compensated when it's raining for 5 days? Does it start getting compensated on the second day or the third day? Because neither of us can control the weather, but we shouldn't be penalized for that. The team has done a good job of looking at the negative variables that impact the margins and modifying our contracts to address that and improve margins.

Periodically, we spent a bit of time with bids on the ground talking to key players in the field, including more recently with a major non-res contractor that focuses on a variety of maintenance. One of the interesting things that we are finding, I wanted to see if you're also seeing this trend, is as people are thinking about coming back to work in a more consistent way, they noted an uptick in fire alarm work, particularly as building managers are taking the opportunity to upgrade these systems in anticipation of more folks coming back to work. Is this something that you're seeing? And what type of work are you seeing that is driving anticipation of a post-COVID world?

That's an interesting observation. I wouldn't say that we have seen that, specifically in fire alarm. We certainly like the fire alarm space, and it's an emphasis and focus for us from a growth perspective. But I can't say that we've specifically seen an uptick in fire alarm work just because of being in a post-COVID world.

Okay, great. And final question, just inflation has been, at the end, we've been focusing on going into '21, and that starts playing through. Understanding you're doing more inspection and services, though you still have to manage certain aspects of inflation. Maybe just a little more color in terms of how inflation may or may not be impacting your business now?

I think that we've been fortunate to be able to pass those costs along. Our workforce is primarily union. The wage rates are well-established for the men and women doing the work in the field. It is easy for us to understand when those escalation and when it's going to go into effect. That's a big chunk of our cost in the services we deliver. Additionally, we point to just the small portion of job sizes we handle; the quick turnaround projects allow us to adjust our pricing as we continue moving along. The inflation aspect is baked into and factored into our forecast and guidance for the year, and we do not anticipate having any substantive issues managing the inflation in rise in commodity prices.

Thank you. I will now return the call to Russ Becker for closing comments.

Thank you, everybody. I want to reiterate my gratitude to all of the employees of APi for their shared sacrifice and commitment in putting the company first during the course of this last year. They have delivered great results, and I hope our shareholders feel the benefit. Thank you for taking the time to join us on the call this morning, and we appreciate your continued interest in the company. It is a great company, and we look forward to sharing our journey with you. Thank you.

Thank you for participating in APi Group's fourth quarter 2020 financial results conference call. You may now disconnect.