APi Group Corp Q1 FY2021 Earnings Call

Good morning, ladies and gentlemen, and welcome to APi Group's First Quarter 2021 Financial Results Conference Call. All participants are now in a listen-only mode until the question-and-answer session. Please note, this call is being recorded. I will 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 first quarter 2021 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, May 12, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our first quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and our presentation. Before turning the call over to Martin, I would like to thank everyone that participated in our first-ever Investor Event on April 22nd. A replay of the webcast is available along with the presentation slides on the Investor Relations page of our website. It is now my pleasure to turn the call over to Martin.

Thank you, Olivia. I think just past the one year anniversary of our listing on the New York Stock Exchange, I'm proud of what we've accomplished so far as a public company. And I'm pleased to say that our original investment thesis that I reviewed with all of you at our Investor Event has proved to be progressing as well as we could possibly have hoped. Our first quarter results speak to the strength of the company's recurring revenue services focused business model, which drives enhanced margins. We're excited about the organic prospects for the business, and also believe there are significant opportunities to accelerate growth, service offerings and margin expansion through continued strategic M&A. As many of you know, we have always maintained a disciplined approach when it comes to M&A. That will continue to be the case here. And we will remain focused on opportunities that will be accretive, not just to the financial profile of the company, but also to the cultural story of APi and its commitment to leadership development. This is a hugely fragmented market space and we are very well-positioned to pursue a first house selection of acquisition prospects. With that, I'll hand the call over to Russ.

Thank you, Martin and good morning, everyone. Thank you for taking the time to join our call this morning. I would also like to thank you again to those who participated in our first-ever Investor Event a few weeks ago. We are pleased to deliver our first quarter results, with net revenues slightly above and margins in line with our previously communicated guidance. As you've heard me say on prior calls, the health and wellbeing of each of our employees and the communities in which we serve remain our number one priority. This focus and other foundational priorities provide the platform from which we can continue to enhance shareholder value. During today's call, I will provide a summary of our first quarter results, the outlook, including key growth drivers in margin expansion opportunities and update on strategic M&A efforts before I turn the call over to Tom. Tom will walk you through our most recent results and guidance in more detail. Before I walked through the highlights from our first quarter results, I would like to remind everyone that APi did not begin to experience negative impacts from COVID-19 until mid to late March last year. Therefore, we are comparing this Q1 against the Q1 largely free from COVID-19 last year. Also, as a reminder, our business ramps up as we move through the calendar. Our revenue is typically lowest at the beginning of the year and during the winter months, as cold or snowy weather conditions can cause delays with our work, particularly in our Specialty and Industrial Services segments, where a majority of the activity is performed outdoors. As the weather improves, so do our opportunities. During the first quarter of 2021, we experienced extreme weather conditions at several of our businesses, which tended to put pressure on margins. Therefore, we also have a relatively tough margin comparison driven by unfavorable year-over-year weather in certain we serve. All of that being said, I'm very pleased with our performance and execution in the first quarter. Key highlights from our performance for the three months ended March 31st, 2021 compared to the prior year period include the following: Number one, net revenues increased on an organic basis by 2.4% compared to the prior year period. This excludes the anticipated decline in Industrial Services. Growth was driven by increased demand and timing of projects in our Safety and Specialty Services segments, offset by project delays and job site disruptions due to continued negative impacts of COVID-19 and unfavorable weather conditions. Second, continued focusing on our ongoing goal of growing recurring inspection and service revenue, which we believe helps build a more protective mode around the business. Third, adjusted gross margins grew to 23%, which is an increase of 72 basis points. This is due to the improved mix in Safety Services and disciplined project and customer selection in Specialty Services. Fourth, an adjusted EBITDA margin expansion of approximately 20 basis points driven primarily by the factors I mentioned as drivers of gross margin expansion. I'm inspired and appreciative of the resiliency and commitment of our approximately 13,000 team members who remained focused on serving customers, despite the headwinds, both literally and figuratively that they were facing this quarter. I'd like to thank them for their continued efforts. Their ongoing leadership efforts continue to demonstrate that our leaders are a competitive advantage and help thrive shareholder value. Before turning the call over to Tom, I'd like to spend a few minutes discussing our outlook and opportunities within key end markets, followed by a summary of margin expansion opportunities to drive further value creation, including strategic M&A. We believe that our revenue diversification across geographies, end markets, customers, and projects provides us with stable cash flows and a platform for organic growth. The average size of our projects, including all three of our segments, is less than $100,000, which helps our ability to pass on raw material costs on a timely basis. Our average project duration is relatively short, so we don't have the inflationary exposure to cost of goods sold or changes in labor expense that some of our peers may experience in an inflationary environment. On contracts that are longer-term in nature, such as our multi-year master service agreements, price escalators are typically built into initial proposals. In telecom and utilities, our largest end market representing approximately 25% of our total consolidated net revenues, we continue to maintain strong, direct customer relationships and are focused on growing service revenue through multi-year master service agreements. We believe we are well-positioned to benefit from recently announced increases in capital expenditure guidance relating to the rollout of 5G with two of our national telecom customers. While these represent additional potential tailwinds, as you know, we have low customer concentration and typically no customer represents more than 5% of our annual net revenues in any given year. As I said at our Investor Event, while we do not have anything built into our budget for an infrastructure bill or stimulus that would incentivize investment in the renovation of existing infrastructure, there are certainly aspects of our business such as 5G fiber, renewable energy, portable water services, and natural gas services that would benefit from the passage of such legislation, due to our existing core competencies combined with incremental opportunities. We also continue to see strength in end markets, such as fulfillment and distribution centers, healthcare, and high-tech. These combined represent approximately 20% of our total consolidated net revenues. The work in these end markets is more complex, and we are typically awarded work based on the level of service we provide for customers as opposed to price. During our recent Investor Event, we provided an illustrative bridge of the drivers tree chart adjusted EBITDA margin expansion goal at 12%-plus by 2023. As many of you have heard us say before, these are all singles and doubles. If any of these initiatives fall short, we believe there are many other initiatives behind it to help propel growth and margin expansion. As we continue to focus on improving our mix, disciplined project and customer selection, pricing opportunities, leveraging our spend, driving operational excellence, and realizing synergies from future acquisitions, we are confident in establishing a new recently announced goal of 13%-plus adjusted EBITDA margin by year-end 2025. We believe that strategic M&A is an opportunity to accelerate the timetable to achieve our margin expansion objectives. We continue to build our global pipeline of opportunities to grow our family of market leading service providers. Our powered by APi structure provides us with the ability to leverage our scale, while also remaining entrepreneurial nimble and opportunistic at the local level with reduced bureaucracy and overhead burden. As I mentioned at our Investor Event, we are reviewing approximately 15 potential traditional APi M&A opportunities with revenues up to $100 million, while also partnering with Martin and Jim to look at several larger opportunities, with revenues ranging from low hundred million dollars up to a billion dollars. We look forward to closing on some of these opportunities as we move through the balance of the year and look forward to updating you on our expected progress. 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 and segment-level performance, as well as our strong balance sheet and liquidity. As Russ mentioned earlier in the call, net revenues, excluding Industrial Services increased on an organic basis by 2.4% compared to the prior year period. Adjusted net revenues declined by 2.1% or $17 million to $803 million compared to $820 million in the prior year period, primarily driven by the anticipated decline in Industrial Services. Adjusted gross margins for the three months ended March 31st, 2021 was 23%, representing a 72 basis point increase compared to the prior year. The increase was primarily due to improved mix and disciplined project and customer selection, offset by project delays and unfavorable job site conditions. Adjusted EBITDA margin for the three months ended March 31st, 2021 was 7.6%, representing an approximately 20 basis point increase compared to the prior year due to the factors mentioned previously. We continue to focus on driving strong free cash flow, and our balance sheet and liquidity profile remain strong. For the three months ended March 31st, 2021, adjusted free cash flow was $23 million, representing a $30 million decrease compared to the prior year of $53 million. And our adjusted free cash flow conversion rate was approximately 38%. We expected the expected decline in cash flow was primarily due to lower outstanding accounts receivable balances as we entered 2021 compared to 2020, resulting from lower revenue, higher compensation and benefit payments, and higher capital expenditures. As we have discussed, as revenue rebounds post-COVID-19, we expect to use cash to fund working capital to drive increased service revenue and higher margins leading to increased shareholder value. As I mentioned at our recent Investor Event, we expect 2021 to be somewhat of a hybrid year since we are still dealing with the impacts of COVID-19. As of March 31st, 2021, we had $972 million of total liquidity comprised of $745 million in cash and cash equivalents and $227 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 credit facility was 1.75 times. 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 March 31st, 2021, increased on an organic basis by 0.5%, primarily due to increased demand and timing for our HVAC services offset by continued negative impacts of COVID-19. Adjusted gross margins for the three months ended March 31st, 2021 was 31.5%, representing a 112 basis point increase compared to the prior year due to improved mix of work towards inspection and service revenue combined with disciplined project and customer selection. Adjusted EBITDA margin for the three months ended March 31st, 2021 was 13.5%, representing a 102 basis point increase compared to the prior year due to the factors I mentioned as drivers for the gross margin expansion. Specialty Services. Specialty Services net revenues for the three months ended March 31st, 2021, increased on an organic basis by 7%, primarily due to increased demand for fabrication and specialty contracting services, offset by project deferrals and job site disruptions driven by unfavorable weather conditions. Adjusted gross margins for the three months ended March 31st, 2021, was 12.8%, which was relatively consistent with the prior year period, as leverage from higher volumes was offset by lower productivity due to unfavorable weather conditions. Adjusted EBITDA margin for the three months ended March 31st, 2021 was 6.9%, representing an 85 basis point increase compared to the prior year, primarily due to leveraging overhead expenses with higher revenue and disciplined cost management. Industrial Services. In Industrial Services, net revenues for the three months ended March 31st, 2021, declined as expected due to decreased volumes, primarily driven by our strategic focus on improving margins, as opposed to growing top line. As Russ detailed in our Investor Event, we remain 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. Adjusted gross margins and adjusted EBITDA margin for the three months ended March 31st, 2021 was negative 12% and negative 24%, respectively, compared to 16.2% and 10.1% respectively in the prior year period. The decline was primarily driven by unabsorbed costs for leases and equipment due to lower volume. 2021 guidance. As we confirmed during our recent Investor Event, our full year guidance for 2021 remains unchanged. We expect adjusted net revenues for 2021 to range between $3.65 billion and $3.75 billion, as we focus on driving inspection and service revenue combined with our disciplined approach to project and customer selection. We expect adjusted EBITDA for 2021 to range between $405 million and $419 million. We expect capital expenditures to be approximately $55 million and normalized depreciation approximately $60 million. Our cost of capital is approximately 5%, and our adjusted mid and long-term effective tax rate remains approximately 21%. And our estimated fully adjusted diluted share count is approximately 205 million. As we look at our guidance for the second quarter, and as we said earlier this year, we expect adjusted net revenues to range from $925 million to $950 million, with adjusted EBITDA margin between 11.4% and 12.1%. Before turning the call over to Jim, I wanted to advise everyone that we plan to file two S3 registration statements later today. The first S3 completes our previously disclosed registration rights commitment to Viking Global, and the second represents a universal shelf registration. While we have no immediate plans to raise public equity or debt, we believe it is prudent to have the flexibility to access the capital markets on a timely and efficient basis as or when needed. When declared effective by the SEC, the universal shelf will allow the company flexibility from time to time to offer, to sell up to $500 million of public equity or debt. Both filings are purely administrative undertakings and are not meant to foreshadow any known or anticipated activity. I'll now turn the call over to Jim.

Thanks Tom. Good morning, everybody. We are pleased with our first quarter results, despite having a tough comparison relative to the first quarter in 2020 due to COVID-19, and the unfavorable weather conditions as Russ mentioned. We are also very pleased that the team continues to execute against our long-term strategic plans. I believe that those of you who joined us for our Investor Day saw depth in our leadership bench and gained additional insight into the various opportunities we have to drive earnings and margin expansion, which we believe should drive multiple expansion. With one full year as a New York Stock Exchange listed public company now behind us, we are proud of the track record of strong results we've accomplished in an unprecedented and challenging macroeconomic environment. The strong performance speaks to the leadership team, the strength of our business, our protective mode around the business, driven by recurring revenue and our financial discipline as we continue to focus on shareholder value creation. We believe that in addition to our strong organic revenue growth prospects and margin expansion opportunities, we also have significant M&A opportunities in highly fragmented industries. Our conservative balance sheet and liquidity profile provide us with ample capacity to absorb additional accretive acquisitions. As Tom mentioned, we ended the quarter with nearly $715 million of cash and the net debt to adjusted EBITDA ratio of 1.75 times, which is below our target long-term net ratio of two to two and a half times. As we said before, our priority for our use of cash is to explore opportunistic acquisitions as we move through the rest of the year. We're excited about potential targets and areas where we can leverage our existing competencies and infrastructure, such as fire and life safety, while also evaluating opportunities to expand our menu of service offerings in areas such as elevator and escalator services. We believe there is value in being a one-stop shop solution for building owners and operators. As Martin said earlier in the call, we will continue to remain opportunistic yet disciplined with M&A. If there are not opportunities that meet our acquisition criteria, we are content to buy back our shares because we know the most about APi and what its future offers. We have great confidence in the business and the direction we're heading. We remain confident in our previously stated long-term value creation targets and excited about our recently announced new goal of 13%-plus adjusted EBITDA margins by year-end 2025. With that, I'd now like to turn the call back over to the operator and open the call for Q&A. Thank you.

Thank you. Our first question comes from the line of Andy Kaplowitz of Citigroup.

Hey. Good morning, guys.

Hey, Andy. How are you?

Good. Russ, could you give us a little more color regarding your core Safety Services markets? You mentioned the resiliency and data centers fulfillment that you've talked about healthcare before driving your safety business. Where are you seeing more general recovery at this point across your customer base? Is inspection beginning to accelerate, getting reopening? And are you seeing customers who pulled back in the pandemic starting to spend again?

I would say the reality is that our customers, particularly in data centers and semiconductors, have not reduced their spending, and in many cases, they have actually increased it during the pandemic as more people began working remotely. There was a specific focus on the semiconductor sector in President Biden's proposed infrastructure bill, and we're currently witnessing significant activity in that area. It's crucial for us to be cautious as we identify these opportunities, as we must effectively allocate our field leaders to ensure maximum returns for our shareholders. This means we can't be the solution for everyone and have to be highly selective moving forward. Regarding inspections, we experienced strong growth of over 10% in the first quarter. We are optimistic about our focus on growing inspections, knowing we can generate $3 to $4 of service for every dollar of inspection revenue. So, yes, we expect to see further acceleration in this growth as we enhance our Salesforce under Courtney Broguard's leadership, and I hope you noticed the energy and enthusiasm she displayed during her brief presentation on Investor Day. She's exceptional.

Yeah. No. That's great to hear in inspection. So, Russ or Tom, maybe you can talk to us about how much weather impacted margin, especially in Specialty Services and then sales in Industrial. I know you had talked about Industrial being down 30% for the year. Q1 obviously was a little lower than that, but do you see Industrial recovering? And then, can you give us the discrete impact on margin in Specialty?

We don't have it itemized. All I can say is that it wasn't just Texas; it was really across the South and Southeast, all the way up to New Jersey. In New Jersey, for instance, we experienced a significant snowstorm with 30 inches of snow that our team had to manage. The way we generate revenue relies on man-hours, and it was challenging to get people to work in the field. Even when we did get them out there, their productivity was heavily affected. It would be nearly impossible to accurately quantify this impact, so I don't think it's fair to attempt it. Regarding Industrial Services, I want to remind everyone that it accounts for about 7% of our total revenue, which is a very small segment of our business. This part of our business has faced some significant challenges due to COVID. However, we see some unique opportunities before us that we are actively pursuing, and we remain optimistic that the second half of the year will meet our expectations.

Russ, maybe ask you one follow-up there. Like, if I think then about your guidance of the year, you didn't change it on the revenue side. Does it maybe slant a little bit more towards Safety? Is Safety doing a little bit better than you thought and Industrial a little worse, or should we just think status quo?

I would consider it from a status quo perspective, Andy. However, I want to emphasize that Industrial represents about 7% of our total revenue. It's a small portion of our business, and we give attention to every aspect. It's similar to having multiple children, each at different stages, and not all are equally thriving, but they all deserve care. This analogy applies to our company with over 20 businesses. Safety Services and Specialty Services both have significant opportunities, and their backlogs are strong. Currently, one area within Industrial Services is demanding most of our focus. We are actively working toward enhancing the integrity side of that sector, which is a gradual process. Transitioning from focusing on capital project-related work to an exclusive focus on integrity and service work requires time, energy, and effort. That is exactly our current objective.

Thanks, Russ.

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

Yes. Hi. Good morning, everyone.

Hey, Markus.

Good morning, Russ. I would like to follow up on your tracking of labor hours across the different businesses. How did those hours progress during the first quarter, and what were the exit rates leading into the second quarter? Thank you.

Labor hours are quite interesting. I recently reviewed data from the National Fire Sprinkler Association regarding industry labor hours. I noticed that while hours have continued to fluctuate, they haven't yet returned to 2019 levels. Our hours are tracking similarly, possibly even a bit better. Certain parts of our business were more heavily impacted by COVID than others. For example, in Europe, particularly Scandinavia and the U.K., they're just beginning to emerge from strict lockdowns, which has affected them more than the U.S. In Canada, Ontario and Manitoba recently entered complete lockdown just four weeks ago, and even those deemed essential faced stricter restrictions. Despite this, I was pleasantly surprised by how well our hours held up in Canada, even with the increased lockdowns. While we're not back to 2019 levels, we are making strong progress.

Great. That's helpful. Tom, you briefly mentioned the cash flow conversion rate of 38% in your prepared remarks. Could you provide some final insights into the various factors at play? I understand that capital expenditures have increased and there have been working capital fluctuations. Is there anything unusual regarding Industrial this quarter? Given the positive trends in Safety and Specialty and the shorter project duration in Safety, I would have anticipated better cash flow. Could you clarify the moving pieces and how you foresee this trend evolving as we approach early Q2?

We generally expect to use cash in the first quarter. This is when our capital expenditures are usually higher as we prepare for the year. We want to ensure we have all the necessary equipment for the busy periods in the second, third, and the early part of the fourth quarter. Everything has gone as we anticipated, and nothing surprised us in this quarter regarding that.

Okay. Got it. I'll get back in queue. Thank you.

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

Hi, guys and good morning. Thank you for taking my questions. I feel like we've talked to you guys a lot with kind of an earnings call, not that long ago, Investor Day. So, just maybe a couple of clarifications here today, and I guess maybe I'll build on the free cash flow. And Tom, specifically in the prepared remarks, you said this is a bit of a hybrid year. I don't know the term of art, but I'm not really familiar with that. Can you just describe what you mean by that? I understand the last year was really strong. I think the adjusted free cash flow conversion was like 115%. Is that basically implying that this year you're going to kind of equalize out to maybe the long-term target probably under that 80% target, maybe just a little bit more detail on what you mean by that comment. Thanks.

I think that makes sense. As we have mentioned, as our revenues improve and we recover, we will be building up our working capital. We had a strong performance last year, so this year we will be on the other side of that trend. We will continue to build our working capital throughout the year. We have plans to enhance our working capital by managing our Days Sales Outstanding, inventory, and contract asset and liability processes, along with negotiating better payment terms with our vendors to help offset any natural changes. Overall, it's encouraging that our working capital is growing, although it may put some pressure on our free cash flow this year.

Yeah. I would like to...

Got it.

Andre, I want to build on Tom's point. It's encouraging for us because we plan to utilize some cash this year as the business returns to normal. This makes me a bit excited. We track our cash on a daily basis and monitor all aspects of our operations in Europe, the U.S., Canada, and more, so we can see who is using cash and who isn't. It's thrilling for us to see some cash being spent right now, so you should view that positively.

I just wanted to clarify what you were trying to convey. That makes complete sense. I have a few other questions to better understand the quarter's results. The corporate EBITDA segment results were somewhat lower than what we discussed previously; I believe we had anticipated they would be higher. Tom, is there anything in the corporate segment EBITDA, which came in at $18 million this quarter, that was particularly low? Also, could you share your expectations for corporate expenses for the year so we can accurately model that?

Yeah. So, we still feel good about that going forward. We had a couple of things in the quarter, and G&A didn't come back as much as we had budgeted for, as COVID staged stronger on us. Russ mentioned Canada and Europe in particular, very strong lockdowns, and we still have some restrictions here in the U.S., so that didn't come back as strong. We also have some open critical needs that we're looking to hire in various aspects here in our corporate cost structure. And we had those budgeted coming in earlier in the quarter. And with COVID, it's made hiring a little bit slower than normal and so that didn't come through as well. And so, those are the main drivers.

Got it.

But Andy, that $20 million to $22 million a quarter is a good number. It's just a little bit in our favor. And as you pointed out, interest expense was a little bit higher in the quarter, and I think our share count is probably also higher in the quarter than most of you had. I think consensus is around 197 million, whereas the weighted average for the quarter was 200 million. And I think in Tom's comments, we're projecting that the weighted average share count will be about 205 million at year-end.

Okay. Good. I think that's all I have for now. Thanks a lot, guys.

Thank you.

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

Hi. Good morning. Maybe just wanted to understand a little bit the EBITDA margin outlook. So, I think, in the first quarter, the EBITDA margin was off about 20 bps year-on-year. It looks like the guide for the year embeds around that level of increase as well, at least at the midpoint. So, just wondered why you wouldn't see a bigger step-up in the balance of the year.

Yeah. Sure. Great question. You'll recall that we took significant actions last year in quarters two and three, and reduce people's compensation and our 401(k) benefits, et cetera. And we put those all back in Q4. So, we're going to lap those quarters here. And so, that's if you will, the offsetting to all the good news that you spoke about.

I see. And maybe help us understand sort of the scale of that temporary costs reversal, because for example, things like T&E expenses, as you said, they were narrower than you thought in Q1, probably narrower in Q2 as well. So, maybe helps scale that for us.

Last year, in the second quarter, we attributed about $19 million to the pullback from COVID-19, and in the third quarter, it was around $13 million.

Thank you. And if we look at the second quarter guidance, I didn't see much of a reference to that. Do we assume that's unchanged? Or because you had such a tough period in Q1 with weather, I think you had a 60% sequential detriment to EBITDA margin. Should we expect the kind of super normal sequential incrementals now in Q2 versus what you'd guided before?

I would go with the guidance we gave you. I'm not sure I'm totally understanding the question. I apologize. But the guidance we have is factored in what we believe our total cost structure as this quarter and gives you a good comp to prior year.

I see. So, the Q2 guide is unchanged?

Yeah. No change in our Q2 guidance.

Great. Thank you.

Our next question comes from the line of Kathryn Thompson of Thompson Research Group.

Hi. Thank you for taking my questions today. First one, supply chain. How are you managing supply chain disruptions, and just overall inflation for your businesses?

Good morning, Kathryn. Thank you for joining the call today. I want to begin by discussing the average project sizes across our businesses. For Safety Services, the average project size is $10,000, while Specialty Services stands at $70,000, and Industrial Services is significantly larger at around $700,000. In both Industrial and Specialty Services, our clients typically supply the products for installation, which minimizes our risk from rising commodity prices. While we do have some exposure in Specialty Services, it’s not as pronounced. In Safety Services, the average project size is turning over quickly, reducing our exposure to inflationary pressures. We monitor these developments weekly and provide guidance to our teams regularly. We have proactively protected ourselves in our proposals and contracts against rising costs. So far, we have experienced minimal impact from supply availability issues. However, I did hear from one of our company presidents about disruptions caused by the colonial pipeline situation, particularly in Huntsville, Alabama, where there are temporary gas limitations. Our team is managing these challenges effectively, and I believe our communication across the enterprise has been strong, allowing us to mitigate risks successfully.

Okay. Very helpful. And then, getting back to the office, as companies prepare to come back to the office and the anticipated reconfigurations that will happen, could you discuss how this is an opportunity for APG? So, it could be everything from FireSafety to HVAC or other categories that we may not take into consideration. Thank you.

From an HVAC perspective, our HVAC services companies are working to offer additional and enhanced filtration systems to various businesses. For instance, our corporate campus has utilized a Minneapolis-based HVAC services company that upgraded the filtration in both of our office buildings. Recently, we were hired by one of the largest private companies globally, also based in Minneapolis, to upgrade their corporate office facility and improve their filtration system. There are definitely opportunities for us in this area, and we are making efforts to capitalize on them. However, it's important to note that HVAC services do not represent a large part of our business, so these opportunities are somewhat limited in the context of our overall scale. As companies begin to bring employees back and retrofit their office layouts, this will affect their life safety systems, which must still comply with code requirements. We haven't yet seen a significant number of these opportunities, but we expect more as businesses become proactive about returning workers. For example, the Governor of Minnesota recently adjusted his stay-at-home order, allowing businesses more flexibility in bringing employees back. At our corporate campus, we have established a mandate for 50% of our employees to be in the office next week, with a plan to reach full capacity by August 15th. We have a manageable concern regarding the configuration of one space to ensure a safe environment for all employees. Overall, while this is a relatively minor adjustment across two buildings, we are vigilant and see potential opportunities ahead.

Okay. Great. Thank you very much.

Our next question comes from the line of Jon Tanwanteng of CJS Securities.

Good morning. Thank you for taking my question. I was curious about your expectations for Industrial profitability this year. Are you aiming to return to profitability, and if so, when? What’s in the pipeline for that segment?

I'm going to start by reminding everyone that Industrial Services accounts for about 7% of our total revenue. Our guidance and expectations for these businesses remain unchanged for the year. Do we expect to make money? Absolutely, we do expect to make money. I hope everyone sees how proactive we are in managing our businesses, and we are doing everything possible to ensure that we are enhancing the profitability of each one of them. We are optimistic about the companies and the businesses we have. I mentioned earlier that we are facing some macro headwinds in one of our businesses, and we are paying close attention to that.

Okay. Great. Thank you for that color. Russ, or maybe Martin and Jim, that the M&A markets have been hot to say the least. But are you seeing any valuations stretching beyond maybe where you're comfortable? Either in the tuck-in side or perhaps the more larger, more adjacency transformational side that you've been working on? Did it seem unless you're going to pull the trigger now that they've seen other companies go for these higher multiples. And maybe conversely, are you seeing more flows that more people are you going to cash in on the trends?

I will begin by stating a few points. Reflecting on our history with other companies, we have built our portfolio over the years through acquisitions. For every deal that became public, there were probably around 40 that didn't materialize, mostly due to valuation reasons. I don't anticipate this being much different in the current environment. This market is quite fragmented, with various types of merchandise available. Our main consideration will always be valuation, alongside a core set of criteria that must be met. However, there are still opportunities to discover the right additions. Throughout our experience, we have noticed that during cooler market conditions like the one we are currently experiencing, some valuable companies indeed become accessible. We have successfully acquired businesses in both conservative and more favorable markets. I believe there are numerous opportunities out there, and the key is maintaining discipline and not overextending ourselves to acquire something merely because it is affordable. We have always been disciplined, and that approach will continue, just as it has for the past 25 years. I don't think that is going to change now.

At our Investor Day, we discussed that the weighted average price for the acquisition of APi is approximately 7.3 times. Larger transactions will be more expensive, and we aim to offset these costs with the more traditional deals that APi has pursued under Russ's leadership over the past decade. You can expect some variation in pricing, with lower multiples for smaller family-owned businesses and higher multiples for assets owned by families or private equity firms. Our focus is to remain opportunistic, stay vigilant, and make sound decisions as we navigate the market, maintaining our usual discipline.

And Jon, I want to add my perspective. When considering the tuck-in acquisition space, it makes sense. There are various factors influencing the market. As we evaluate tuck-in acquisitions, we find the price multiples to be reasonable. We believe we offer something unique that appeals to many family-owned businesses, which presents an opportunity for us.

Great to hear. Russ, could you address how you are prepared to handle the infrastructure build, particularly regarding labor, union perspectives, and access to resources in the supply chain? Are you ready to take advantage of any developments that may arise?

I am optimistic about our prospects, Jon. Our core mission of developing exceptional leaders extends to the individuals who manage our operations with customers daily, and not many in our industry are investing in their field leaders as we are. This is significant because I believe we retain our field leaders at a superior level compared to our competitors. We have fostered an atmosphere that encourages people to join and be part of our team and the APi family, which is a distinctive opportunity for us. This is fundamentally a people-focused business, and those investing in their workforce will have a unique edge as labor markets tighten. I genuinely believe this sets us apart as a company, and I am confident it generates shareholder value.

Thank you. That was our final question for today. I will now return the call to Russ Becker for closing comments.

Thank you very much. And I'd just like to conclude our call today by thanking each and every one of you for your interest in APi. And this is really a great company. We have so many fantastic people. I look forward to the future for each of you to further to get to know us, especially once we get on the backside of the pandemic and we can see each other face-to-face, because I really believe that when you get a chance to experience the culture and the values of this organization, you will see that this is a great long-term investment. And so, again, thank you for taking the time to join us today and thank you for your interest in APi.

Thank you for participating in APi Group's first quarter 2021 financial results conference call. You may now disconnect.