APi Group Corporation (APG) Earnings Call Transcript & Summary

Good morning, everybody. For those of you who do not know me, my name is Stephanie Moore. I'm the business services analyst here at Jefferies. We're very happy to have APi Group with us today that includes CEO, Russ Becker; Co-Chairman, Jim Lillie; and Vice President of IR, Adam fee. Welcome. All right. Well, just to kick this off, for maybe those less familiar with APi's journey, can you give us an idea of where you are today, especially compared to, say, 2 years ago before the acquisition of Chubb.

Certainly, I'd be happy to do that. The company has actually evolved a lot. I even go back to, Stephanie, if I may go back to October of 2019 when we sold the business to J2. We were, at that time, a privately held company with about $4 billion in sales. And sold the business to Jim, Martin and Ian Ashken and the vehicle that they had established actually at that time on the London Stock Exchange. So the company over the course of almost the last 4 years now has been on quite the journey going from being privately held to publicly traded now on the New York Stock Exchange, and it's been a great journey. Since that time, we've continued to evolve the business into -- we're the largest provider of fire-life safety services in the world now. And we're approaching $7 billion in sales. As a publicly traded company, our access to capital had -- it is really one of the reasons that allowed us to pursue and execute on the acquisition of Chubb and it's been a great transaction for us so far. I feel really good about that acquisition. I feel like we're the right owner of that business as we continue to try to bring our branch-led operating model to the company and as we work to continue to integrate the business into APi.

Great. Could you maybe talk a little bit about your go-to-market strategy? I think you are specifically selling inspections first and how this can really create a flywheel effect without some of your other services?

Yes. It is maybe the most important aspect of our strategy, and I think it's something that -- it's important for our investors to really understand. And if you think about a facility like this, the fire life safety system is really divided up into 2 components. You have the mechanical side or the sprinkler side of the system, and you also have the low voltage side or the fire alarm side of the system. The -- both components of the system are required by law to be inspected at least once a year. And depending upon the state, city and jurisdiction, probably more often than that. So like a hotel like this in New York City, this system would most likely be required to be inspected at least twice a year. And that's the statutory nature of the business, and that's really the protective moat around the business. So the traditional approach in the industry is for firms to go out and sell new construction or installation projects. And when that project gets to the 95% point, they want to try to convert that customer into a service and inspection client. We have taken that path and we flipped at 180 degrees, where we have built out a sales force that actively pursues customers in the already built environment, selling the inspections first. And the reason we want to sell that inspection first is that we know from past history that we're going to generate some place between $3 and $4 worth of service work for every dollar of inspection revenue that we generate. We also know that if we execute well on the inspection and the service work that we will create a much stickier relationship with that customer. So when they do have expansion needs or remodeling needs that we're going to be in a position based on our relationship to compete for that business not on price. And I think that's something that's very important to the model. So we're actively building out our sales force really across our portfolio. And we're -- we've got boots on the ground, calling on customers, selling that inspection and building those relationships across the business.

And then maybe just to dovetail off of that. You talked about building out your sales force. Could you maybe talk a little bit about what you think makes your sales force unique or your positioning in the market maybe compared to some of your competitors?

Well, the -- starts with the sales leader and the fact that we have a proven recipe for what success looks like in that role and in that position. Like we have very clear like year 1, you need to sell x. Year 2, you need to sell why and retain x of year 1. Year 3, you need to sell Z. And so we've developed a very, very proven program that we can hold our sales team accountable to achieving their objectives. And it takes a -- the right type of person and we've developed that profile, so we can assess against that -- these individuals as we're -- through their hiring process to make sure that we're bringing the right individuals into our team, but it starts with the leadership of the company, and then it starts with the investment that we're making in these people from a growth and development perspective. And if you look at our business, one of the things that makes us a little bit unique is the large branch network that we've established over time. Some of that's just organic growth in the business. Some of it has been through our bolt-on M&A strategy. But we have probably the most extensive branch network that any of our competitors or peers have, which allows us to provide the access to call on and to service these individual customers. So some of our larger competitors in the space, they don't have that branch network. They just chase installation work around the country, which does not allow them to ultimately service those customers when the installation work is completed. And I think that's a big -- it's a big deal for us. And when we think about our bolt-on M&A strategy, geographic finding businesses that complement our geographic footprint is a huge priority for us so that we can continue to service our national base customers.

Can you provide an overview of just the competitive landscape of your market? Who do you -- who are your largest competitors? Who do you compete with primarily and then really what differentiates you?

Well, what differentiates us is without doubt is this inspection first mindset. And we've been at this for a long period of time. And one of the things that I think people probably don't understand as well is the support network it takes to have this inspection first mindset. The average project size in our Safety Services segment is less than $5,000. The average inspection is probably someplace around $1,000 or $1,500. So your average service job is going to be someplace around $4,000. And when you think about it, to sell $1,000 inspection job, then you have to have the capability to dispatch the inspector. Once the inspector has done the work, you have to be able to invoice for it, collect the receivable, well, then you have to be able to convert the deficiency report into a service proposal. And then when you get to go ahead to do the service work, you have to dispatch the folks to do the service work and the infrastructure it takes to support all of that is really extensive. And we have built that out over time, and we really are feeling the flywheel effect of that today, we've got scalability there. And it's something that allows us to continue to really rapidly grow that aspect of our business. From a competitive landscape perspective, the reality of it is, is we compete for the most part, with small family-owned businesses. There are some larger players in the space. Amcor has an element of their business is in the fire protection space, mostly project focused, not focused on inspection and service in the same way that we are. Cintas has a piece of their business that's in the life safety space as well as they're actually a customer of ours. We do some of the inspections for them just because of the nature of the technician and the skills that the technicians need to have. SimplexGrinnell, which is part of Tyco that's wrapped up underneath Johnson Controls would be a competitor of ours to a certain degree. But there's really nobody that's as focused in the industry and in the space selling inspections and this inspection first mindset like we have.

Got it. Maybe could you touch on your 13/60/80 shareholder value creation framework and what you really need to do to achieve this 13% EBITDA margin target by 2025.

All right. I'd be happy to. And we've been really promoting this across the business and every chance I get to do a town hall meeting inside one of our companies. We talk -- we spend a lot of time talking about it. The company has really paired with the 13/60/80, we have aspirational goals as well. And we talk about being the #1 people first public company that's #1 in business performance. And those are aspirational goals and something that we talk very openly about in the business. And tied with those aspirational goals are more empirical goals around 13/60 and 80. And 13% is our margin expansion goal that we expect to achieve by 2025. And there's a number of different levers that we will be simultaneously pulling over that period of time to achieve that. And first would be value capture inside of Chubb. We've publicly targeted $100 million of value capture inside that business. We're well on our way to achieving that goal as we continue to integrate and bring that business into the fold. Next, I would say is improving our mix. We've established a goal that we want 60% of our revenue to come from inspection service and monitoring as we define it, that's the 60. That's a longer-term goal than 2025, but we need to continue to improve on our mix. And we're just north of 50% of our total revenue comes from inspection service and monitoring today. So we continue to make progress on that. As we continue to grow that aspect of the business, it gives us more flexibility in the area that we call project selection and customer selection. And as we work to expand the gross margins on our installation work, we need to have robust inspection and service businesses inside our branches. That allows our people to be more selective about the project work and the installation work that they're going to pursue. And that's a big priority for us to make sure that we're working for the right clients. We have an effort that we call enterprise excellence. That includes procurement. As a public company, we have worked to centralize and stand up a full-on procurement group that will add value across the breadth of the business. Our enterprise excellence group will also be taking on initiatives of driving shared services and those types of things inside the company to help bring more scalability to the business as we continue to grow. Next would be price. We continue to be active in taking price and pursuing price. We had a lot of opportunity to take price inside Chubb just due to, I'll just say, maybe lack of leadership under the former ownership of the company. So we've been very, very, very active in taking price in all aspects of our business really, but really focused on it inside of Chubb. Strategic M&A will always be additive to the company. We need to make sure that we're making good choices in acquiring businesses that are additive to our margin expansion goal. And Stephanie, I'd like to always say this, and it sounds maybe a little bit corny to folks, but we have the opportunity to just be better. And we have certain businesses and branches inside our portfolio that perform north of 20% from an EBITDA margin perspective, which tells you based on where we're at today, we've got businesses that are at 7% or 8%. And the reality is, we know what we need to do to improve the performance of those businesses, and it starts with the branch leadership and the company leadership. And that's something that's very important to us. And we've spent a lot of time focused at APi on developing and building leaders, and we talk very openly about it. Our core purpose is building great leaders. And I feel to my core that every one of our teammates deserves to have a great leader. And when you look at an individual branch's performance, you need to be focused on -- the first question you need to always ask yourself is, do I have the right leader. And it's really as simple as yes or no. And the decisions and choices you make come after you say yes or no. So -- but that's really -- that's the 13%, and that's the margin expansion goal. The 60% is the improving our mix and the 80% is our long-term free cash flow conversion target that we're super focused on.

Got it.

A lot of talk in there.

Yes. I should give you a little break here. So you did mention the $100 million in value capture opportunities for Chubb, and I think you've called out -- you've set to about $55 million to $65 million of that this year, a lot of it in the second half. Can you talk a little bit about the key buckets for those to make those charges and kind of where you stand today and achieving those?

Well, the reality of it is, is most of the value capture is coming from optimizing the business. And when I talk about optimizing the business, it really is making sure that we have the right level of staffing and people to support the business activity. And so we are very busy making sure that the business is streamlined and that the individual countries and the individual branches inside the countries are focused in our lean and mean. And that's something, I think, that got away from them under the previous ownership and something that we've identified. So when I think about Chubb and I think about the journey that we've been on over the course of, say, the last 18 months now since we've taken ownership of the company, Step one was separation from Carrier. And our team did an amazing job doing that. Just super impressed that -- with how much progress that they made during the course of that first year. While we are focused on separation, we focused ourselves on corporate leadership and making sure that there was a lot of low-hanging fruit from a corporate leadership perspective. We brought in a new CEO to lead the business. We feel really good about him. We brought -- we basically transferred our Corporate Controller into the business as the CFO of our entire international business. So we've made a bunch of changes from a corporate perspective. Then we turned and we've focused our attention and -- on country level leadership. And we've made a number of changes at the country level. We feel like we're set at least today. We feel like we're set from a country level perspective. Now the focus has moved to individual branches and making sure that those branches are optimized. And so when you think about this value capture, it's primarily people in real estate.

Great. Now maybe taking a bit of a -- a more of a macro or a high-level view of the business and your positioning. Could you talk a little bit just about how insulated APG is from just the macro headwinds and new construction? Are your consumers still looking to expand and grow in this environment? Kind of what's the overall kind of current state of where as it stands now?

Well, when I talk to individual investors and when I talk to our team, I talk all the time about end markets and your end markets that you choose to play in absolutely matter. And we're focused -- I believe we're focused on the right end markets, semiconductor, data center, health care, critical infrastructure, all spaces that continue to see just a tremendous amount of opportunity. And so when I look at our business and where our business is at, our backlog remains very, very strong. Our funnel remain very, very strong. And I'm very, very optimistic about what the back half looks like and what next year ultimately looks like. People -- there's a lot of concern about like commercial real estate. And what's going to happen is all that commercial real estate debt comes for refinancing and the impact that, that's going to have and where interest rates are at. For us, we're fortunate. We don't do a lot of developer-led project-related work. And the reason that we don't is that real estate developers, all they care about is their cost. They don't care about necessarily value. And so that means you're competing for that business based just on price. That's not us. And we've never done very well when it's just going to be a price-based decision. Another area that's seen a lot of pressure is multifamily housing. And again, that's not an area that we play in heavily at all. So the exposure that we have in that space is minimal. And I think that as we continue to focus on end markets, that's just a positive for us. That's one of the areas of opportunity for us internationally. I don't -- I can honestly say that they weren't as disciplined about the end markets that they chose to play in. They are now, and there's more focus on that, that I think we're helping to bring to the business.

Great. And then maybe you could talk a little bit about just the tailwinds you're seeing from infrastructure spending? And when do you expect to see maybe some -- I'm sorry, infrastructure funding. And when do you expect to see some of that peak if we're even close to that now?

Well, I don't think we're even -- I don't -- I think we're in the first inning of that. I mean I think you're just starting to see some of the dollars flow in into the system. A lot of the infrastructure funding is project-related work. So it takes time for those dollars to flow in, and they need to go to the architect and engineers, they need to get designed. They need to be out for proposal and that process all takes time. You're seeing areas where there's a tremendous amount of spending is you could argue that the $30 billion that was appropriated in the chipset, I would argue to you that, that wasn't probably even necessary. The semiconductor companies were are already in the process of reshoring and had really allocated extensive amount of capitals well in advance of the chips being -- even being passed. And so the spending that you're seeing in that space is extensive. The real broadband bill that was passed, those funds were just recently allocated to the individual states. And so the individual states are making decisions. So we're seeing dollars there. It's a piece of a couple of our businesses do some real broadband work in telecommunications and fiber optic type work. So we're seeing some advantages there. But really, when I think about the infrastructure build, the way I think about it is more on a macro level that a rising tide floats all boats. And as a lot of these large infrastructure projects come to fruition, some of our competitors will chase those larger project opportunities where we won't. We'll continue to stay focused on our public utility customers and doing that type of infrastructure work. And it will create more space for us to take share with some of our existing utility customers, hopefully, allow us a chance to take some price with those customers. So that whole idea of a rising tide floats all boats and creates more space in the industry is something that I think we will ultimately be able to take advantage of, but probably not until into next year.

Got it. Maybe talk a little bit about your M&A strategy. So as you look at deals, what are the specific characteristics or metrics that you're most focused on?

So for us right now -- so if you think about with Chubb, so the company has done a tremendous amount of M&A work over the last, say, 15, 16, 17 years. We've probably done 90-plus transactions over that period of time. And I would tell you, so we hit the pause button while we focused on the separation from Carrier with Chubb. And now we've kind of restarted that engine and are really back in the market today. So first, when I think about our focus. Our focus right now today is Safety Services, North America and I would say really the United States, even more so than in Canada. We've got our business -- we had an existing business in Canada. Chubb had a business in Canada. So we're focused on integrating those businesses and really don't have the capability or the capacity maybe to really do any significant M&A in the Canadian market as it sits today. So the focus is on the United States and our Life Safety business predominantly. So when we think about that, we look at geographic footprint as a criteria, capability, it's -- whether it's on the mechanical side, sprinkler, whether it's fire alarm, security. So it's capability, geographic footprint, then ultimately it comes down to culture, values and fit. And we want to acquire businesses where the individuals that are selling that company are aligned with our values and our fit. And the reason that we want to do that is that when we find that right fit, typically that seller is really focused on finding the right home for their employees and their team. And it's not about just getting the largest -- the biggest price. And it's more about finding the right fit, finding the right home. Yes, they want a fair price, but you're not going to be out paying 10x for a business like that. You're going to be able to buy that business for 4x, 5x, maybe up to 6 or 7x. And I think that's one of the advantages of having that philosophy. But culture, values and fit is very, very important when you're thinking about bolting on a small business to one of your existing companies.

And then maybe just as a follow-up, can you talk a little bit about just what you're seeing in the landscape right now? Is there -- has it cooled down a bit just with tighter lending standards or PE involvement affecting you at all? Or just talk to just about the competitive landscape there.

So you're seeing a slowdown in the larger transactions, so to speak. So sponsor-owned companies, you're not seeing as many of those businesses come to market because of the tightness in the financial markets. But as it relates to activity and private equity buying small $10 million businesses and such, you're still seeing that activity there. Again, it's because the transaction sizes are so much smaller. And so it's -- typically, they're not going to the bank for every one of those types of deals. For us, we don't compete with private equity a great deal on these smaller bolt-on transactions. And the reason being is that if that seller is only focused on getting the highest price for their business, that's not us. And so we're not going to be -- we're not going to spend a lot of time on that transaction or that opportunity. So -- for us, and a lot of these small deals actually get sourced by our business leaders. They're active in the markets that they serve, and they bring a lot of -- they'll have a relationship with that particular seller. So they're able to share the APi story with those individuals, and it creates more of a unique opportunity where there's not a -- you're not competing with anybody for that business, and you're buying that business based on your reputation and your relationship.

Great. Well, we do have just about a minute here left, so I do want to open up. Anyone in the audience that has a specific question for the team here. All right. Well, appreciate your time, guys. Thank you so much.

Thanks for having us, Stephanie.