APi Group Corporation (APG) Earnings Call Transcript & Summary

All right. Up next, we have APi Group, Adam Fee and Russ Becker from APi. Russ, I don't know if you had any intro or you just want to jump into Q&A. Happy to go either way.

No, I think my only opening remarks would be to thank everybody for their interest, and thank them for being here today, and thank you, Steve, for having us. We're super excited. We had a really productive morning and afternoon. So it's been good.

Great. Thanks for being here. Standard intro and intro question would be just what are you guys seeing quarter-to-date here, and we're always looking -- everybody is trying to get an idea of where the economy is going? What do you guys see in here, quarter-to-date in your business?

Yes. Our business continues to perform really well, and we remain really optimistic with the direction that things are heading. And you've heard me say this often, Steve, that end markets matter. And we really like the end markets where we play, data centers, semiconductor, healthcare, critical infrastructure, all continue to provide robust opportunities for us. And so we're really optimistic about how 2024 is shaping up.

And when you think about the guidance for the quarter, flat to down. I think the core is, what are the kind of bifurcated parts here that you're looking at? What kind of read should that be for us on the economy in general?

Well, I think that -- well, if you're looking at it from -- on the economy in general, I think, again, where we're playing ball, things continue to be really robust and opportunistic. So for us, we've consciously chosen to focus on margin. And I suspect there's a bit of a trade-off there from a revenue perspective. And you've seen that, like our gross margins expanded by over 200 basis points, and our EBITDA margin expanded by 100 basis points. Our plan, if you look at the midpoint of our guide, shows another 100 basis points of margin expansion. And I kind of quip from time to time that if people wanted us to turn to spigot on, we could turn the spigot on, but we would be trading that revenue growth for margins. So we've had a really intense focus on project selection and customer selection that we feel like is paying off. I'd also say that there's -- we're comping against some pretty high results from previous quarters and we expect things to continue to normalize, and we'll continue to see mid-single-digit organic growth.

So the Life Safety business has been growing pretty well for the last couple of years. Maybe just for people in the room who don't know what's the core business there? And then why has that business been growing so fast because it seemingly should be a little bit as a safety business and a services business, be a little more smooth, but it's been growing faster than we would have expected. So what's been driving the uptick there, and the strength on Life Safety?

I think it's our philosophy of driving inspections first and selling inspections. For those that listen to our quarterly earnings calls, I consistently talk about double-digit inspection growth, and we continue to see double-digit inspection growth. We also continue to see service work pull-through in that $3 to $4 range. And that's where the emphasis for us is as we continue to grow our business. And when you think about double-digit inspection growth, we're essentially -- it's taking share. And it's a highly fragmented space. Most of the share that we continue to take is from smaller family-owned businesses that don't have the infrastructure that we have to support that growth. And we feel like that's a significant strength that we have, and we continue -- that's where we continue to pound. So we're seeing good fortune there, and we feel like the recipe really works.

Are you seeing -- so the double-digit inspection growth, are you seeing on the more discretionary side? Any kind of wavering from customers on tightness of their wallets or anything like that?

Not really. I mean, I think that when we talk about the $3 to $4 of service pull-through, that's kind of inclusive of any of that discretionary spending that our customers may choose not to do. And so we continue to see that service pull-through come through very, very consistently, and we haven't seen any drop-off whatsoever.

As far as Chubb is concerned, that's now fully organic. Obviously, integrating it extremely well, delivering on expectations there, even better than expectations and execution. How is the growth dynamic playing out at Chubb relative to your expectations? And what's driving that? How are things over in Europe?

I think they're good. I think that -- well, number one, Chubb is growing organically every quarter since we've owned the business. And I attribute that to a handful of different things. I think, first and foremost, as simple as this may sound, it's like new life, new energy and new leadership in the business. We have a new sales leader. We're holding our sales people accountable. We've brought kind of this inspection -- service and inspection first mindset to their business. So we're putting people through some rigorous training, and we've had some people -- because of this whole new level of accountability, we've had some people opt out, which has actually been positive for our business. And so I feel really good about it. We've also been able to take price. If you go all the way back to November of '22 when we had our Investor Day, we showed a revenue bridge for Chubb, specifically in that revenue bridge, we showed modest organic growth over, say, a 3-year period, but we actually showed a negative 5% customer attrition. And we haven't seen that to that extent. We've probably only seen 2% to 3% customer attrition. We had a number of loss-making contracts, and we were very aggressive in taking price in those loss-making contracts. And with the expectation that we would potentially lose some customers, and we lost fewer than we thought, which tells you that we were way too cheap. So...

Yes. Yes, please go. No, just whatever price you want, I'll give you. It's fine. You don't see that very often.

No, it's been a good thing. I shouldn't laugh about it, but there were a few things that we had to square out there. But it was all good. We made some great progress.

All right. Probably some good stories. So the cost takeout and the synergies, maybe where are we there? And you guys have done a great job on taking costs out. So where do we stand on that trajectory?

Well, I mean, we're probably 2/3 of the way through. We raised our target to $125 million when we talk about value capture inside that business. I think we're at $45 million roughly to date with another potentially $40 million to $45 million coming in this year, maybe $50 million and the rest trailing into next year. But like, we continue to be very optimistic about the progress that we've made in the business and where that business is going and where it's going to ultimately end up. I mean that business is untapped potential.

What surprised you the most with -- as the integration has progressed other than the customers not wanting to leave no matter what pricing [indiscernible]?

Well, we have lost a couple. So...

Not as many as you thought?

If I'm being brutally honest with you, like my biggest surprise. For how long Chubb has been a publicly traded company, I'm surprised with where they're at on their road to being compliant. And we've got some -- a lot of work to do to get them to be SOX compliant this year, especially in the IT space. That's probably the area that has been the biggest surprise to me. They just -- I guess it was considered immaterial, so to speak. And there's a lot of work to do there to get that squared away.

So even as part of United Technologies, that vast global kind of organization, a pretty professional corporate setting there, they were not -- was it a systems thing or...

I can't speak to -- like UTC, but obviously, Carrier was a publicly traded company. And I'm way over my pay grade when I start talking about SOX compliance and everything else, so people need to understand that. But I think that the only piece of the business that was considered material was France, and the other aspects of the business have a long ways to go on that journey. And we'll get it fixed this year. I mean we've taken the core APi company through that journey and -- so we'll get it fixed. But it's probably -- you asked me what I was most surprised about. And like I said, if I'm being honest, that's probably the area that I'm most surprised. The fact that we had leadership gaps and some of those things, you knew that was coming. And so you just had to be prepared to address it and deal with it. And I learned early on in my APi Group career that if you're going to -- like our companies, not only do they need to have great leadership at the company level, they deserve to have great leadership at the company level. And then very, very quickly after I -- that became etched in my brain, I very quickly realized that if we're going to -- with the branch operating model that we've developed, that if you're going to really drive improved results in the business, you need to have the best TAM people running your branches that you can as well. And I'd stack our people up against anybody.

Yes. Maybe I'm not a big like, at this conference, like a high-level business model type of discussion guy. But I think it's important for your business and how you differentiate in managing your people, maybe just talk about the process that you have in place that enhances their productivity and gives them ownership of their business. It's differentiated.

Yes. So our purpose as a company is building great leaders. And this kind of goes back to this whole idea that every company, every branch deserves to have a really good leader running that business. And if you do not invest in these individuals from a leadership perspective, it's going to be very difficult for you to achieve your objectives. So in 2003, we basically launched our leadership development journey and really started the different programs that encompass what is APi's leader or learning and development team today. And we have everything that you think that needs to happen, like we've got online learning opportunities. My favorite one to brag about is, it was the very first online learning opportunity that we developed ourselves. It's called I AM A LEADER, and it's centered on leading self. And every one of us has an opportunity to be a better version of ourselves from a leadership perspective. And it's really -- it's a 10-minute module, 30-minute learning opportunity that since we've owned Chubb, we've translated into 6 additional languages, and we've rolled it out. We've had 17,000 of our teammates across the enterprise, participate in it. And I think that when you are investing in people, as people and as human beings, that's a differentiator. Anybody can invest in and send them -- get their OSHA 10 or OSHA 30 like -- I don't know if you guys have ever done your OSHA 10 or OSHA 30, but it's like shoving a fork in your eye. And -- no, it's true. But when you start -- when you change the vocabulary and you're investing in these people as human beings, it's a difference maker. And the men and the women in the field, I -- it makes me sad actually to say this, but the men and the women in the field have been taken for granted and people have not invested in them. And we are investing in them and we're treating them like we have a saying at APi that everyone everywhere is a leader. And I believe it to my core. And so investing in those people and showing them that the company does have a purpose and it's something bigger than themselves. Just because they chose to work with their hands, it doesn't mean that they don't want to be part of something bigger than themselves. And we've embraced that. We're investing in them. And I think it's going to be a difference maker for us over the next 10, 20 years.

So when you...

Is that long winded, sorry. I get fired up about the fact that [indiscernible].

Not at all, no. I think it's a key aspect of the story. And I guess, to a question here of what differentiates you guys, I mean that's clearly a differentiator is, how you treat the people in the field, which is the front line, obviously. So definitely wanted to get that out there. As far as the -- going back to the financials, the margins are concerned, talk about your target and what kind of levers you have to get there? How visible that is? Obviously, Chubb synergies as a part of that. But maybe outside of Chubb synergies, anything else that you're counting on to get to that margin target?

Yes, for sure. So our 2025 margin expansion goal is 13%. And so we have a number of different levers that we're pulling to achieve those results. First would be project selection and customer selection. So we want to make sure that as we're trying to enhance our gross margins, we need to be working for the right customers in the right end markets and putting our resources on the right opportunities. Second would be, we have a long-term goal that we want 60% of our revenue to come from inspection service and monitoring. We improved from 52% in total last year to 53% this year, and we need to continue to stay on that journey. The reason for that is we get roughly 10 percentage points of additional gross margin on that inspection service and monitoring work. And so the focus is going to be to continue to grow that piece of the business. Chubb value capture is obviously a big part of it. Price is a big part of it. What we call enterprise excellence. We took one of our best high potential operational leaders and put him in charge of enterprise excellence. We have a number of different projects that are running through his office. They're all based on business transformation, what's going to make a difference in our business from an efficiency perspective, scale perspective. We've got procurement reporting up through this individual. We still have a big opportunity from procurement. Strategic M&A is an opportunity for us. I think we've shared openly that we did roughly $100 million of bolt-on M&A last year. Every one of those transactions was immediately accretive to our margins. We're working to accelerate that in this fiscal year. And like -- I like to tell people is we have an opportunity to just be better. And we've got branches that operate north of 20% EBITDA margins, which means that we've got branches performing less than 10%. And we still have loss-making branches inside our Chubb business that need to be fixed. So there's a lot of opportunity for us to just continue to be better. We know what the road map is, and we just need to go execute and get it done.

How is the pricing equation work in U.S. Life Safety? What are you getting there? And then in some of the other businesses, I think there are some different pricing models or some pass-through businesses. But I guess on that one, what are you seeing from a price perspective these days?

Yes. So core U.S. Life Safety business, we're seeing consistent pricing -- our consistent ability to take price. So we aim to take roughly 5% a year on our inspection and service work, and if you put yourself in the customer's shoes, generally, our inspection is a very small percentage of that customer's annual facility maintenance budget. So the care of the customer is really that we do a quality job on the service side. We follow up with the deficiency report rapidly and follow service proposal and get the customer back in compliance with the authority having jurisdiction. So typically, on the service side, those 5% price increases are taken willingly and happily by the customer because we're giving them value back in terms of making this seamless process for them.

And is that -- when do those go effective? You don't have like -- it sounds like a product, so you don't have maybe -- it's not a list price thing? How do you kind of make sure you put that through? Is that at the turn of the calendar, then every deal kind of like goes up by that much? How does it -- what are the mechanics of getting that price?

Yes. So if we have -- in cases where we have a multiyear contract, the price escalator is built into the contract itself and in cases where we're coming back kind of an evergreen on an annual basis, we'll just come back with a new price at that time or inform them of the new price often when our labor rates change from a union perspective, so that's when we'll go to the customer with our new pricing kind of coming off of that. But our price increases are out ahead of what our typical inflation on our labor cost is. So it's margin accretive pricing on the service side of the business.

Got it. And as far as the labor inflation is concerned, what are you guys seeing there? And any contracts kind of flip over in the near term to drive any kind of change in that labor inflation rate?

No, I don't -- I mean -- no. I mean, we've seen wage escalation in that 3% to 4% range pretty consistent. Even with our union agreements, I feel like the United Association has taken a long-term view and has been reasonable in kind of any sort of contract negotiations that have occurred. One thing that people should understand is that when I talk about our labor unions, like we are not the UAW, we are not UPS, we're not -- we're signatory to probably 200 different labor unions. And like Minneapolis has its own pipefitters union, St. Paul has its own pipefitters union. So you're not dealing with -- the UAW has got 800,000 members who can -- they have actually leverage and can impact your overarching business. It's not that way in our business. And I feel like the -- our relationships with the union are very, very strong. And in fact, I would go so far to say that the United Association has the best leadership since I've been in the industry.

Okay. On the safety side, from a product offering perspective, I know the people, you have a model that makes them better. How do you differentiate versus your peers on an actual day-to-day -- from a day-to-day offering? How do you differentiate?

Well, I think -- I mean, I think it goes back to this inspection first concept. It's really one of the biggest areas that we differentiate. And I would also say that coupled with that, is this whole idea of our branch operating model. And I think that if you're going to have a really robust inspection, service and monitoring business, you actually have to have a very robust branch platform with which you can actually execute that work. If you don't have a presence in a certain market, it's pretty tough to go in and do inspection and service work in that market. And I think that's one of the things that makes us unique, like we have the broadest geographic footprint of anybody in the space. And then you take that footprint and you put this selling inspections first model into play where you're selling the inspection work and inspections are statutorily required. So the building is only 25% occupied. That customer still has to do the inspection on that Life Safety system to ensure functionality and operability. And so we've developed a program and we have a sales force that we continue to grow that is calling on those customers in existing facilities and we're taking market share as we grow that component of the business. And having that large branch network, having that sales approach and that coordinated sales approach is really a big differentiator for us. And then we think that because we're so focused on the project-related component of it, we want that work to come from those relationships that we build from doing a great job with the inspection and service work with those customers when they have expansion needs.

So that's the kind of core part of the business. I know there's another part that you're walking away from projects on, you're being a little more selective. Maybe talk about that business and how that's playing out and what kind of -- what the rationale is for that? Like why is that business back competitive right now?

I don't know. I mean, again, we can crank it up. It's just we're going to crank it up at with lower margins.

What type of business is that? Can you just describe the type of business that is?

Oh, I think it's across the board. I mean, I think you have -- I think you have certain end markets that it's not just price driven. So we want to be in the right end markets where people are valuing your safety, the quality of your work, the availability of people. Do you have the people to actually do the work? And do you have the ability to get the right people to do the work? So the more sophisticated the client, typically, the better of a company like ours is because they're evaluating everything not just on price. And if it's just going to be a price-based decision, we're going to continue to struggle. So for us, it's just being really selective. And almost always, it's who's the customer. I mean that's the reality. It's not -- we have the capability to do the work. It's -- but it's who's the customer. And certain customers -- just like you would know, certain customers value what you bring to them and certain customers don't. And we want to make sure that we're putting our field leaders on the right opportunities that they can maximize profit. And that's not just on project work. That's on service work and everything else. And just like our customers want us to show up on time to do the inspection, we need that building and facilities manager to show up on time so that our people can be efficient and because it's a team sport when you're actually out in the field doing the work.

Can we get to show hands of how many you guys appreciate my work? One. Two. I don't know, there's one over there. Would you talk -- switching back to the services business, how do you look at retention rates and attrition? I know it's not all contractual, but how do you evaluate how recurring this business actually is and how well you're doing on that front? What's your repeat customer rate, if you will, if they're not all contractual like how do you -- what's the business model around that?

Well, I can't give you an exact figure. I mean like our salespeople, a portion of their job is to retain their customers and how they get paid is to retain their customers, knowing that you're going to have some small amount of attrition. And our sales leaders really developed a really good, strong recipe book on year 1 -- if we onboard a new sales leader, year 1, you should sell X. Year 2, you need to sell Y and retain X percent of that year 1. And so we've got that -- even we've got the tools to manage it. And I think we're like everybody else, we have -- we're going to have some attrition. But I can't even tell you right off the top of my head what our customer attrition rate is. It's very -- I mean, it's very good. I think we do a great job there.

And then moving on to Specialty. I know that business was guided to be down in the first quarter. How do you think about that business moving forward from an end market perspective?

Well, I think the end markets they playing in are good. I mean they're doing primarily infrastructure work, telecommunications work, fiber optic. I mean they're playing in the right spaces to do a lot of natural gas distribution upgrades, potable water system upgrades. Water is kind of the next -- going to be the next rage, if it's not the rage in our country now. So I feel really good about it. And all -- what you're really seeing is a little bit of timing and you're seeing tremendous amount of discipline with customer selection and making sure that we're pursuing the right opportunities. But what we're seeing in the pipeline is really strong. The infrastructure build, when those dollars start flowing into the system, that will have a positive effect in our business, more indirectly. A rising tide floats all boats, competitor of ours, they'll flock to some of the opportunities that come from the infrastructure build. And that will create space for us with our existing customers that we feel like we'll be able to do more of their work and more of their programs. So I think it's going to be a positive thing for the industry in general.

And what's typically do you guys do in and around the utility -- the utility side?

We're -- in the utility space, we're primarily doing natural gas distribution type work. We do some -- in one particular business, we're doing some power distribution, but not a tremendous amount. It's a relatively small piece of our business. We have a handful of our businesses that actually still do maintenance work in some of the existing gas-fired and coal-fired utilities. So it's a little bit of a kind of a wide offering of services that we have.

And is Safety -- or sorry, Specialty, is that a core business longer term? How do you think about the difference between the 2 segments? I think it seems like there's been a lot of focus on safety, the cyclicality maybe and the construction element of Specialty is maybe a little bit less attractive. But how do you look at that business part of the portfolio longer term?

Well, I actually look at the services that we provide in Specialty as really acyclical to kind of any sort of macroeconomic challenges. We really haven't seen a slowdown in some of the opportunities that are there. And again, that's where the end markets you choose matter a lot. I think what you'll see, Steve, is you'll see us continue to do some pruning in the segment so that we can drive the same margin expectations that we have for the rest of the business. We divested kind of a traditional -- everybody who knows me knows I hate the word bid. But we divested a company that basically bid their work, and it was a project-related company, and we sold that business in the fourth quarter this past year. We've got another small company that we held for sale in the fourth quarter that we hopefully will get closed and wrapped up here shortly, and we'll continue to do some pruning. There's a few elements associated with the segment in general. Number one, it absorbs a large portion of our corporate costs. Number two, there'll be some tax reasons why we couldn't really do anything with the segment as a whole. And then lastly, and maybe the most important component of it is that from -- it's -- would be -- have a significant impact on the company's culture if we did something right now today just because the -- many of the legacy -- the original company sits in that segment. And we'll continue to evaluate it and make the best decisions for our shareholders and do what's right for the company long term.

On the flip side, what are you seeing on the M&A front? You guys have done a pretty steady amount of deals. Obviously, Chubb was a big one, but you've had a couple of bolt-ons here recently. What are you seeing in the pipeline?

Yes, the pipeline is really strong. We did $100 million of M&A over the course of the last year. That was 7 transactions. We've stated publicly that it's our goal to accelerate that in 2024 and 2025. And we really don't have any challenges with keeping that pipeline full. We have added a couple of resources to our corporate development team to support that effort. And they're very busy, which is a really good thing. So it's positive.

What are the prevailing multiples you're seeing here?

So of that $100 million that we did last year, the average multiple was 5.7x.

It's pretty cheap.

So we're a little bit different. And when we look at M&A, we look at geographic expansion, does it complement us geographically. We look at diversity in the business. So we may have a business in a particular location that's really strong in, say, fire sprinkler. And there's a $10 million fire alarm business that comes for sale that we're maybe not very strong. So that's a great complement to be able to bring fire alarm capabilities to that business. So we look at what is their product offering as a complementary to what we're doing. We look at business performance. And is it going to be complementary to what we're trying to achieve. That does not mean that we won't buy a business that's like a 7% or 8% business. And because we know if it fits us geographically or if it fits us from a product offering, we know what the recipe is to get that business to perform at 15%. It's just got to fill a couple of other gates for us, even though every one of the businesses we bought last year was value accretive on day 1. And then most importantly is culture values and fit. We're looking for sellers, and again, these are typically family-owned businesses, but we're looking for sellers that actually care about their team and care about their people and care about their legacy. Most of these sellers will continue to work for us for some period of time. But if they're interested in 2 turns or 3 turns of EBITDA, then they should just go sell their business to private equity. And they're not going to be the right fit for us from a culture perspective. And I was sharing with one of your clients earlier today that the first 2 years of my APi career, I spent cleaning up acquisitions that were made that there was zero focus on culture values and fit, and it was just like, let's go do the transaction because it seems like a good company. And I don't know about you guys, but like I don't need to hit my thumb with a hammer more than 27 times before I realize that I really don't want to do that again. And I vowed to myself that we wouldn't do that. And I feel like we've done probably close to 120 deals during my tenure at APi Group. And I can look in the eye and tell you, now there's a couple that I wish we wouldn't have done, but not because the culture, values and fit. But I can tell you that there's really only 1 that I feel like we missed on the culture, values and fit, and I learned a lesson from that.

Feel like sticking a fork in the eye is worse than hitting your thumb with a hammer. I guess, several times to do.

Yes. Well, in my concluding remarks, I think I better clarify to OSHA.

And then any questions out there? We have time for a question or 2. Just one last one. The Series B transaction, why did that make sense for you guys?

Yes. So the Series B, just some context, that was part of the funding for the Chubb transaction, and there's a mechanism as we approach [ 36 90 ] that we could force conversion to common shares. So as we've approached -- as we were approaching that price, we proactively came up with a holistic solution with the holders of the Series B to accelerate the conversion, repurchase half of the shares for cash and then work -- and then do a market and secondary offering for about 2/3 of the remaining shares. So offering went well, instead of 32.5 million shares that were converted, the original holders of the Series B now only own 4.1 million shares. So the overhang, if you will, has been removed. And we still have the capacity to execute our M&A strategy as planned and immediately accretive for shareholders. So overall, we thought it was a good outcome. The market reacted positively to it when we closed the transaction. So we're happy with the way it turned out and the demand from investors for that offering.

Great. Stay out of time. Thanks, guys. Really appreciate it.

Thanks, Steve.