APi Group Corp Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to APi Group's Second Quarter 2022 Financial Results Conference Call. All participants are now in a listen-only mode until the question-and-answer session. Please note this call is being recorded. I will be standing by should you need any assistance. I will now turn the call over to Olivia Walton, Vice President of Investor Relations at APi Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our second-quarter 2022 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; Kevin Krumm, our Executive Vice President and Chief Financial Officer; and Sir Martin Franklin; and Jim Lillie. Before we begin, I would like to remind you that certain statements in the Company's earnings press release announcement and on this call are forward-looking statements, which are based on expectations, intentions, and projections regarding the Company's future performance, anticipated events or trends, and other matters that are not historical facts. These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. In our press release and filings with the SEC, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, August 4, and we have no obligation to update any forward-looking statement we may make. As a reminder, we have posted a presentation detailing our second-quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and in our presentation. It is now my pleasure to turn the call over to Martin.

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

Thank you, Martin. Good morning, everyone. Thank you for taking the time to join our call this morning. During today's call, I will begin my remarks by commenting on our strong second-quarter and year-to-date results as well as our continued forward progress towards delivering on our stated strategic goals in a macro environment that continues to be volatile. I will then provide an update on our ongoing integration progress at Chubb and the positive momentum we have across the business before turning the call over to Kevin, who will walk through our financial results and guidance in more detail. As you've heard me say on prior calls, the safety, health, and well-being of each of our leaders remains our number one priority. This focus and other foundational priorities provides a platform from which we can continue to enhance shareholder value. I am pleased with our strong record results for the second quarter and the first half of the year. Revenue and adjusted EBITDA outperformed expectations despite foreign exchange headwinds, inflationary cost pressure, and supply chain disruptions. We do not anticipate these macro headwinds subsiding in the second half of the year. Therefore, we are laser-focused on continuing the activities that help us deliver a strong first half of 2022, including pricing activities; focused growth in inspection, service, and monitoring; strong spending controls; and disciplined project and customer selection. Key highlights from our performance for the three months ended June 30, 2022, compared to the prior year period include the following: First, as expected, our revenue momentum continued into the second quarter, and we saw growth in net revenues on an organic basis of approximately 12% and 14% on a year-to-date basis. As a quick reminder, the Chubb business will be excluded from our organic net revenues until 2023, one year following the completion of the acquisition. That being said, Chubb is experiencing organic growth and had solid organic growth in Q2. Importantly, and in line with our strategic initiatives, we saw a 20%-plus increase in inspection, service, and monitoring revenue as we march towards our goal of 60%-plus as a percentage of total net revenues. This is important because the gross margin on this type of work is higher than the fleet average, as I'll detail in a moment, and improving mix is one of our initiatives to drive overall EBITDA margin. Our consolidated backlog also continued to increase in the second quarter, providing us with a solid foundation for growth as we move through the rest of the year. Second, adjusted gross margins grew by 282 basis points, driven by growing inspection, service, and monitoring revenue, as mentioned previously, which we believe helps to build a more protective moat around the business. As a reminder, on average, inspection and service revenue generates 10%-plus higher gross margin. And in monitoring, revenue generates 20%-plus higher gross margin and contract revenue. In addition, we continue to offset short-term margin pressures from inflationary cost increases and supply chain disruptions through pricing actions, fuel surcharges, and procurement initiatives, all of which contributed to a solid quarter. I am very pleased with how our teams have passed on inflationary cost items. And we'd like to remind everyone that our average project size in Safety Services is approximately $5,000, and the average duration of our projects is less than six months, which we believe allows us to reasonably manage inflationary variables in our supply chain. We believe these are competitive advantages as they allow us to stay focused on real-time pricing and operational efficiency to ensure true costs are reflected in the services we provide. Third, adjusted diluted earnings per share increased by 27.6% or $0.08, driven by strong operational performance and the anticipated accretion from the acquisition of Chubb. Technically, we continue to execute on initiatives in the quarter towards delivering on our key strategic objectives, such as disciplined project and customer selection, which we measure through our contract loss rate, and maintaining a safety culture that is grounded in our goal of zero incidents. An example of a metric we track relating to safety is our total recordable incident rate, or TRIR, which was 1.01, including Chubb's as of June 30. This compares to a U.S.-based industry average of 2.50. This is important not only from the human element, but also from the dollars and efficiency negatively impacted by these types of losses. Importantly, turnover among employees remains lower than industry benchmarks, which supports operational efficiency; keeps retraining and hiring costs under control; and allows for growth from within. Our historical and continuing investment in our people pays dividends in times like these when some companies see employees looking for better opportunities. Our technicians and engineers have wage and benefit packages that are very competitive, and we invest in their future and growth, resulting in our turnover being historically modest. Next, Chubb. The ongoing integration efforts at Chubb are going well, and the business continues to perform in line with our expectations. We continued to build up the depth of our team during the second quarter with new hires bringing significant international and integration experience. This includes having Andrew White as CEO of Chubb, who joined us from Emerson Electric in early May. In Andrew's first 90 days with us, he visited 15 of the 17 countries in which Chubb operates; participated in 25 town halls; and conducted 50 detailed operating reviews where Chubb's transformation roadmap was discussed. He also onboarded several new senior leaders, including new country leaders, to help ensure we are well-positioned to drive value-capture opportunities across our global footprint. We believe that a key part of the integration is developing an empowered leadership culture throughout the organization as ultimately, great leaders make better decisions, and those decisions drive incremental profitability, lead to enhanced margins across our platform, and create shareholder value. Our employees, technicians, and engineers have careers, not jobs. And we believe this investment reduces turnover, as I discussed earlier, aligns communication, and drives performance and productivity. Over the past several weeks, more than 2,200 Chubb employees have taken advantage of APi's 'I Am A Leader' learning module. This is an online learning opportunity available in seven different languages that introduces APi's foundational leadership concepts. You will hear from Andrew directly later this year at our investor update when we detail many of the value capture opportunities we have identified and the actionable, measurable, and executable multiyear plans to leverage our combined global platform. As we noted on our last earnings call, we believe we see a clear path to value-capture opportunities that are at least $40 million. And we expect this figure to continue to evolve and grow as we learn more. To that point, in the second quarter, we initiated and executed the first step of a multiyear restructuring program, including an initial charge of approximately $11 million relating to a G&A reduction and the removal of a significant amount of the above-the-branch costs across the business. Plans are also being developed that will achieve additional savings by consolidating multiple branches. And we have planned further savings opportunities relating to lease termination and other facility rationalization to name a few of the specific initiatives underway. We also believe that as we reduce organizational complexity and shift towards a more consistent branch-based operating model, we can capture savings through the elimination of duplicative costs. Progress isn't only about cutting costs and creating operational efficiency. It's about building a team, developing a meaningful strategic plan, focusing on organic growth and mix, and developing a culture that believes in the path forward and works together as a team with a common purpose and focus. It's what is happening at Chubb, and we look forward to detailing our progress with you. As we look ahead to the remainder of 2022, although the macro environment remains volatile, we believe that the resiliency of our services-focused business model strengthens the protective moat around the business, enabling us to continue our growth and execute on our long-term goals. We have and will continue to focus our efforts on growing the acyclical recurring service revenue aspects of our portfolio. We have intentionally shifted our mix of inspection, service, and monitoring revenue from approximately 15% of total net revenues in 2008 to more than 50% following the acquisition of Chubb. As you know, we are focused on driving towards 60%-plus; it's very encouraging to see strong underlying demand for our services as reflected in our organic revenue growth as well as our new record level backlog. This has given us momentum in the second quarter and provides us momentum as we move into the back half and plan for 2023. In summary, I am proud of our team and how we delivered on our commitments once again in the second quarter despite the many macro headwinds. Our field leaders continue to do amazing work for us. They drive our existence. I'm truly grateful for what each of them has done to get us where we are today. I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail. Kevin?

Thanks, Russ. Good morning, everyone. I will begin my remarks by reviewing our consolidated results and segment-level operating performance for the second quarter before turning to our guidance. Reported net revenues for the three months ended June 30, 2022, increased by 68.6% to $1.6 billion compared to $978 million in the prior year period. This was driven by revenue from acquisitions completed in Safety Services and strong organic growth in Safety and Specialty Services. Adjusted gross margin for the three months ended June 30, 2022, was 26.7%, representing a 282 basis point increase compared to the prior year period, driven by an improved mix of inspection and service revenue in Safety Services, supplemented by acquisitions in Safety Services as well as improved productivity in Specialty Services. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin for the three months ended June 30, 2022, was 10.7% compared to the prior year adjusted EBITDA margin of 10.8%. This was driven by an improved mix of inspection and service revenue and strong organic growth. This was offset by mix from completed acquisitions, supply chain disruptions, and inflation, which caused downward pressure on margins. As Russ mentioned earlier on the call, net revenues increased on an organic basis by approximately 12%. This was driven by 20%-plus growth in inspection service and monitoring revenue in our legacy businesses. Approximately two-thirds of this growth was driven by price and pass-through material and labor costs; and one-third was driven by volume, which we measure through labor hours. Adjusted diluted earnings per share for the second quarter was $0.37, representing an $0.08 increase compared to the prior year period. This increase was driven primarily by strong organic growth in Safety and Specialty Services and the accretion from the acquisition of Chubb. I will now discuss our results in more detail for Safety Services. For the three months ended June 30, 2022, Safety Services reported net revenues increased by 124% to $1.1 billion compared to $512 million in the prior year period, primarily driven by revenue from completed acquisitions. Net revenues increased on an organic basis 16% compared to the prior year period, driven by a 20%-plus increase in inspection, service, and monitoring revenue. Adjusted gross margin for the three months ended June 30, 2022, was 30.6%, representing a 121 basis point decline compared to the prior year, driven primarily by margin declines on contract revenue in our HVAC services business, which arose due to inflationary cost pressures on pre-existing longer-duration in-place contracts where inflationary costs could not be absorbed or passed on. This reduction consumed strong gross margin expansion in our core life safety service offerings, which were helped by strong organic growth, pricing initiatives, and the improved mix of inspection, service, and monitoring revenue. Adjusted EBITDA margins for the three months ended June 30, 2022, was 11.8%, representing a 287 basis point decline compared to the prior year, driven primarily by SG&A leverage impacts from completed acquisitions and the reasons provided in a review of gross margins. I will now discuss our results in more detail for Specialty Services. Specialty Services reported net revenues for the three months ended June 30, 2022, increased by 8.8% to $518 million compared to $476 million in the prior year period. This was driven by an increase in service revenue as well as increased demand at our infrastructure and utility businesses. Adjusted gross margins for the three months ended June 30, 2022, was 17.4%, representing a 246 basis point increase compared to prior year, driven primarily by improved productivity and improved mix of service revenue. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on margins. Adjusted EBITDA margin for the three months ended June 30, 2022, was 11.6%, representing a 108 basis point increase compared to prior year due to leverage on higher volumes and improved mix of service revenue. These factors were partially offset by supply chain disruptions and inflation, which caused downward pressure on our margins. We continue to focus on driving strong free cash flow, and our balance sheet and liquidity profile remained strong. For the three months ended June 30, 2022, adjusted free cash flow was strong at $63 million, with strong sequential performance in Q2 relative to Q1, which is consistent with historical trends. As expected, operating cash flows in Q2 were primarily impacted by the increase in required levels of working capital investment to support our strong revenue growth. APi has historically generated the bulk of its free cash flow in the second half of the year. And we continue to anticipate most of this to be recovered by year-end and expect our adjusted free cash flow conversion for the year to be at or above 2021 levels, on the way to our long-term adjusted free cash flow conversion target of approximately 80%. Our net debt-to-EBITDA ratio at the end of the second quarter was approximately 3.9x, and the weighted average maturity of our debt was between five and six years, with the earliest maturity in 2026. During the second quarter, we entered into a forward-starting swap arrangement to be effective January 2023 that will shift the mix of our fixed versus floating from approximately 50-50 to an estimated 70% fixed; 30% floating. I will now discuss our guidance for 2022. Before I get into the details, as a reminder, approximately 40% of our net revenues are generated outside of the United States following the acquisition of Chubb. Accordingly, going forward, we will provide details of our revenue and adjusted EBITDA on a constant currency basis and provide the impact of FX movements on our reported results and outlook. Our underlying operational expectations have not changed since the guidance provided in our Q1 earnings call. However, the strengthening dollar has negatively impacted our full-year outlook by approximately $90 million at net revenues and $10 million of adjusted EBITDA. Noting this and based on exchange rates as of the end of the second quarter, we now expect our full-year guidance to range between $6.4 billion to $6.5 billion and expect adjusted EBITDA will range between $655 million to $675 million. Again, this is unchanged on a constant currency operational basis versus our prior guidance. We remain confident in our outlook of 8% to 9% growth in net revenues on an organic basis. For the third quarter, we expect net revenues to be between $1.675 billion to $1.725 billion and adjusted EBITDA to be between $175 million to $190 million. We expect adjusted free cash flow in the quarter to be between $110 million and $130 million. We anticipate interest expense for 2022 to be approximately $120 million, capital expenditures to be approximately $85 million, and our adjusted effective cash tax rate to be approximately 24%. We expect depreciation for 2022 to be between $80 million and $85 million. From a capital allocation perspective, our near-term focus remains on deleveraging through our asset-light high free cash flow conversion operating model. We anticipate reaching a net leverage ratio of below 3.5x by year-end 2022 and approximately 2.5 as we move towards the end of 2023 and closer to our stated objective of 2x to 2.5x through reducing leverage by approximately one turn annually. We will also continue to repurchase shares when we believe our own company represents the best available investment opportunity. We expect our adjusted diluted weighted average share count for the third quarter to be approximately 270 million. I will now turn the call over to Jim.

Thanks, Kevin. Good morning, everyone. We are very pleased with how the business is performing in this volatile environment. As I said on our last call during the Q&A, APi has been battling macro headwinds since its first day as a public company, yet it continues to perform very well and continues to execute against its strategic plan. We look forward to seeing how the business gets to perform when it gets even the slightest macro tailwind. Mark and I were in London last month, meeting with Russ and the leadership team of Chubb and giving a detailed review of the business and an update on the integration activity. Additionally, at our Board of Directors' meeting earlier this week in Minneapolis, senior leaders from the business segments, including Chubb, detailed their year-to-date performance, outlook for the balance of the year, and long-term strategic plans. Various new corporate leaders outlined their strategic plans to us in such areas as procurement, IT, tax, ESG, and other key areas of the business. We are pleased with the efforts to develop meaningful global one company go-forward plans. As Russ mentioned, we plan to hold an integration update call with investors later this year and look forward to updating investors on our progressing plan. We look forward to detailing the specific actions that have been taken, the initiatives that are underway, the savings achieved, the efficiencies captured and the planned steps across the various regions in which we operate that will occur over the months and years ahead to drive savings, efficiencies, and most importantly, to drive organic growth. It's clear to us that our strategic focus on growing inspection, service, and monitoring revenue through our market-leading brands and working tirelessly to become more efficient in the way we do business is a winning formula, whether the macro environment is for you or against you. The results of APi over the last few years have proven this as the business has performed despite the challenges from navigating the COVID-19 pandemic, to dealing with supply chain disruptions, inflationary cost pressures, or foreign exchange movements. The business has shown itself to be resilient in managing the macroeconomic challenges it has encountered over the last decade or so. Its business model has purposely evolved during that period of time, and it continues to be better positioned each year to macroeconomic volatility. Should there be a recession or a slowdown, we believe that the business is positioned well, with a strong backlog and a leadership team that has done an excellent job maintaining a long-term strategic focus while also managing the business to navigate near-term volatility and deliver on our targets. While we are always planning for tomorrow, we are also looking for storm clouds overhead. And while we are focused on integrating the Chubb acquisition, we remain opportunistic as we continue to look at the business profile and are always evaluating opportunities before us to ensure that we are well-positioned to drive shareholder value. Before I turn the call back over to Russ, a little nuance change when we open the call for Q&A, but we're going to let the supply side as well as the buy side ask a few questions this time around. So both sides should be prepared to let the operator know if you're interested in asking questions. And with that, I will now turn the call back over to Russ.

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

Our first question will come from Andrew Obin with Bank of America.

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

Yes, we are optimistic about our outlook for Chubb. Chubb has a strong base of service and recurring revenue that will support the business during any macroeconomic downturns. We feel confident about their path forward. While our Hong Kong and China business has lagged in revenue this year, this is mainly due to COVID-related forecasts, which look promising for the second half of the year, depending on developments in Taiwan. We are closely monitoring that situation. Overall, what we observe within Chubb is very positive. To recap, our priorities with Chubb are to first separate from Carrier, second to utilize initial cost reductions to restructure the business, and now we are looking at opportunities for growth. We see potential to continue expanding the business, so we remain aligned with our expectations and optimistic about moving forward.

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

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

Our next question will come from Andy Kaplowitz with Citigroup.

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

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

That's helpful, Russ. I want to return to the earlier question about margins. You mentioned the lower HVAC services margins; do you think the contract-related pressures will persist throughout the year, particularly for contracts that are reset at year-end? Also, could you provide more insight on the metals market, which you indicated is improving? What should we expect in terms of trends over the next few quarters? Will we see gradual improvements from this point forward?

Regarding the margin pressure from our legacy HVAC contract, we believe that is mostly behind us. We may still face some challenges, but generally, it should no longer pose a significant issue for us moving forward. We anticipate seeing some margin improvement, particularly in our safety services installation work, especially in the domestic part of our business where mechanical services in the life safety sector play a larger role compared to others. We expect a margin increase due to declining pipe prices. However, I want to emphasize that we have not seen any price reductions for other components such as heads, devices, and valves that we purchase.

How challenging is it to achieve cash flow at or above last year's level in 2022, considering your starting point from the first half?

Thank you, Andy. We've discussed the first quarter and the first half of the year. Historically, Q1 is our weakest quarter. In Q1, we also invested in working capital related to rates. The second quarter is typically lower for us as well. Traditionally, we expect most of our free cash flow to materialize in the latter half of the year. As noted in the first quarter, we continued to reduce working capital in this area during the second quarter, and we saw improvements. However, the increased volume required additional investments. As we approach the second half of the year, we will maintain our focus on further reducing rates. Q4 is typically a lower quarter for us from a seasonal standpoint. These factors give us confidence in our ability to achieve our targets in the latter half of the year, consistent with our historical trend of generating the majority of our free cash flow during this period.

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

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

The monitoring as a percent of our total revenue, Kathryn? Your question may not have come through super clear on our end. So is your question specific to monitoring?

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

The monitoring is essentially included in our service and inspection figures, and we do not separate those numbers. The margins for that segment are significantly higher than our contract work, around 20%. Fortunately, this area of our business has not been significantly affected by supply chain issues. Looking ahead, we see opportunities to optimize the monitoring services we offer, especially when considering Chubb's business and our domestic safety operations. Currently, our domestic life safety businesses generally rely on outsourced third-party services for monitoring, while Chubb has the capability to perform these services in-house. We are evaluating both methods to ensure we manage this part of our business as efficiently as possible.

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

I believe our business model is becoming increasingly resilient with each passing day. This resilience comes from our ongoing focus on expanding the services segment of the company. Compared to 2008, our business has changed significantly. In 2008, inspection services and monitoring made up 15% to 20% of our business, whereas today that figure is nearly 52%. We've effectively built resilience into our operations. A notable example is our performance during the pandemic in 2020. Our net revenues declined by less than 10%, yet our EBITDA margins improved due to our high variable cost structure, allowing us to adjust quickly in response to revenue pressures. I'm confident in our business's ability to perform well, even in a potential recession, thanks to our enhanced mix, robust backlog, and strong positioning in high-demand markets across our portfolio.

Our next questions will come from Julian Mitchell with Barclays.

This is Kiran Patel-O'Connor. I'm stepping in for Julian. I would like to ask if you could provide some insights on organic growth by region. Are there any indications of a slowdown in Europe? Additionally, I noticed that APG's geographic mix is now 40% international, so I would appreciate any information on growth outside of the U.S.

Kiran, this is Kevin. We can discuss the sequential improvement in Chubb results. Clearly, Chubb is not the only part of our international business. In the International segment, we experienced continued growth this quarter. Regarding Western Europe, our businesses in that region also performed well and showed sequential improvement compared to Q1.

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

I would say, Kiran, that you haven't really seen the funds from the Infrastructure Bill begin to circulate in the system yet. That will likely occur in 2023. There are some effects already from rural broadband, which is supporting parts of our business as the nation works to expand broadband access to more remote areas. You're beginning to notice some of that happening now. However, much of the infrastructure work resulting from the infrastructure spending bill will not have a direct effect on our business but rather an indirect one. It will open up opportunities for other firms, which in turn will create more prospects for us with our current customers as they turn to that additional work. We plan to capitalize on gaining market share with our existing customers while some of our competitors seek other opportunities. However, we won't see significant amounts of that funding entering the system until 2023.

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

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

Well, I think we have approached this by recognizing that every opportunity is something we will continue to evaluate. We will act in the best interest of the business, whether that involves individual adjustments, closing branches, or optimizing other areas. We will carefully assess each opportunity and make decisions that support the long-term interests of our shareholders. Everything is being considered. We recently had a board meeting where we engaged in extensive discussions about what is strategically best for the business. As our thoughts develop, we will take the necessary steps for the business.

Jon, it's Jim. While we are focused on integrating the Chubb acquisition, we remain open to opportunities as we assess our business profile. We are always evaluating the options available to us. Although I appreciate your efforts to prompt a significant announcement during the conference call, we are not ready for that yet.

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

Correct. When that swap occurs.

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

And our next question will come from Justin Hauke with Baird.

I guess I wanted to go back to the restructuring program you guys talked about, the $11 million here in Q2. I was just hoping you could elaborate on kind of what you're seeing as kind of the total cost of that program going forward? And then how much SG&A savings do you think there is to come from it? And then just confirming, is that incremental too? Or is it part of kind of the margin targets you've laid out over the next couple of years?

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

Okay, so it seems that amount is not in addition to the initial $40 million you mentioned.

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

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

Some of the price increase is due to fuel surcharges, though I can't provide an exact percentage. These surcharges will be eliminated if fuel prices decrease to a more reasonable level. Overall, our pricing should remain strong, and the price increases are likely to stay in place.

And our next question will come from Adam Wyden with ADW Capital.

Many of the questions have been focused on the technical aspects of inflation. My question is more qualitative, considering your long-standing presence in the market and our analysis of various competitors, including smaller ones. A common observation from your private competitors regarding inflation is that it can create challenges for the service business due to one-, two-, and three-year contracts that are not all signed simultaneously. This creates a situation where those contracts roll over at different times. In an inflationary environment, the general consensus among private companies is that it’s possible to raise prices beyond the increase in costs, potentially leading to service margins and other segments of your business being higher than they were before inflation. Can you provide some insight into this dynamic for both the near and long term, and how you perceive inflation impacting your business margins?

I generally agree with you. However, regarding one aspect, Adam, our margins in the safety business have increased. I believe we have done a great job of keeping pace with inflation and passing those costs onto our customers more quickly. I agree that we should see some margin growth since our prices are higher. As inflation eases, we expect to see further margin improvement that will benefit the business. Overall, our service margins are up, and our teams have effectively managed to increase prices during a challenging period, which is a positive outcome. As I mentioned earlier, the pressure we have experienced is primarily related to some of our longer-term installation projects, where we have been unable to recover the cost increases from our clients.

It primarily concerns the fixed-price installation aspect. However, that will eventually reset as you bid out new contracts. In an ideal situation, if inflation decreases, you should avoid the constant cycle of cost pressures. Looking back at your margins in Safety, even with the Chubb acquisition being a significant opportunity, your margins were around 15% or 16%. So ultimately, you should be able to recover to those mid-teens margins if conditions improve.

I would answer that by saying we feel like the impacts and challenges related to our installation work are behind us. Although we may face some challenges ahead, the significant obstacles are in the past, and we should see some improvement in margins on the installation work moving forward. Thank you, Adam.

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

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

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