APi Group Corporation (APG) Earnings Call Transcript & Summary

I'm Heather Balsky, BofA's Business and Information Services analyst. And I'm excited to have the team from APi Group, including Russ Becker, President and CEO; and Adam Fee, Vice President of Investor Relations. So to kick off, I thought I would ask the question, especially for folks who might be new to the story. Can you share what APi does, an overview of your history and sort of detail your value proposition?

So -- sure. Thank you, everybody, for attending. Thank you, Heather, for inviting us to participate and we're happy to be here. So APi as a company has got roots to stretch back. And we have -- I think our oldest company has roots -- well, Chubb Fire & Security goes back to the early 1800s. And approximately 70% of our $7 billion in revenue comes from Safety Services, which is fire, life safety and security work. And most recently, as we move into the elevator and escalator inspection service and repair business with the announced acquisition of Elevated elevators. But it's -- we have a business model that's focused on selling the inspections first. And one of the reasons that we like the life safety space is that for a commercial office building like this, the fire life safety systems are required by law to have their suppression systems and their fire alarm systems inspected at least annually. In a building like this, it's probably more like quarterly and for functionality and operability. And we have good data that shows that we're going to generate some place between $3 and $4 worth of service work from every dollar of inspection revenue we generate. So we feel like that is a recession-proof business model. And as we like to say, the protective moat around the business. The other 30% of our revenue comes from specialty services, which is really a more diverse set of offerings for our clients, primarily in the infrastructure space. So we're doing telecommunications work, natural gas distribution system retrofits, potable water system retrofits. We do a lot of industrial maintenance work for our clients.

That's helpful. And drilling down on the life safety space, what do you think differentiates APi against its competition? And are there benefits to your scale?

There's no question that there's benefits to our scale. And I think really the biggest differentiator -- I think there's 2 differentiators for us, Heather. Number one would be this mindset of we're going to sell inspections into the already built environment. And traditionally, in the industry, most of our peers lead with selling new construction projects. And when that project-related work is nearing completion, they look to try to sell to their customers the inspection and service work. And we have flipped that model on its ear. And we are really focused on going to buildings and facilities that are already built and occupied and selling that inspection work. And again, remember, that's the statutory required work that has to happen on those life safety systems. And we found not only when we do a really good job with the inspection, and we do a really good job with the service work, that we build much stickier relationships with our clients. So when they have expansion needs, we're available in there, and we're not competing for that business just based on price. And we think that, that's one of the things that is going to help us on our march towards our 13% EBITDA margin expansion goal. I think the second thing that I would tell you that differentiates us is centered on our purpose as a company, and our purpose is building great leaders. And as a company and an organization, a long time ago, we realized that if we were going to maximize the profitability and perform at the level that we felt like we were capable of performing, we needed the best [indiscernible] leaders that we could possibly bring into the business. And we have 500 branch locations across the world. Every one of those branches needs to have a great leader. And I say this all the time when I'm talking to our people. Every individual team member at APi deserves to have a great leader. And the only way you're going to accomplish that is by investing in people, as people. And we have a really robust learning and development team that's centered on leadership development. We bring our leadership development efforts to the men and the women in the field. We're investing in those. It makes me sad to say it, but the industry has left the men and the women in the field behind. And I think, to a certain degree, has kind of taken an approach that those folks are less then. And we fundamentally don't believe that at APi. We believe that we need to put the men and the women in the field at the center of our thinking and our decision-making, and do everything we can to make their lives easier and more productive and a better place for them to work, so that they want to stay with the company for the long haul. And we really truly believe that we will maximize and enhance shareholder value by investing in every one of our team members as a leader.

I think it has come up in meetings today, very people-led organization, and your branches, the leadership there has a lot of autonomy. And so I want to ask, you operate a branch-led business. And it sounds like you're talking about it already, but your approach to synergies across branches, shared resources and thoughts around standardization across the branches over time. How do you strike the right balance?

I mean it's a great question. And I think depending upon who you ask, you're going to probably get a different response. And when we were talking about this earlier, I basically said on a scale of 1 to 10, I'd put us at 5 or 6. And we want our branch leaders to be entrepreneurs. Like we want them to own their P&L. We want them to own their relationships in the marketplace. We don't want to -- if 9 or 10 as being a robot, like we don't want robots. We want people who are going to use their brains every day that they go to work and they're going to work hard. And then we want to take the things that need to be standardized and should be standardized, and we want to standardize them. And the reality of it is that the people that are leading our businesses are the part of our business that they like. They like going out, winning work, executing work and building great teams. And so we -- the more of the noise stuff that we can take away from them and we can let them do those things, that's where we're going to ultimately win. When you think about it, like 85% of our North American safety businesses use a design technology called AutoSPRINK. And the reality of it is, I don't really care if they all use AutoSPRINK or if they use Hydrotec or HydroCAD or whatever. I mean there's obviously scale from a licensing perspective and things like that, that come into play. But at the end of the day, when that designer -- if we had this designer sits down to design this system. At the end of the day, they're going to be different because they're two different designers who have 2 different experiences and educations and everything else. And that doesn't make them good or bad. It just makes them different. And I think that's one of the things that we've always embraced at APi is that we're going to share best practices. We're going to share ideas. We're going to take a best of approach to how we do things. And we're going to challenge people to lead and use their brains and own their results.

Makes a lot of sense. I appreciate that. And switching gears a little bit. M&A has been a core part of your business growth strategy. Can you talk about your general philosophy, priorities, what the pipeline looks like from here?

Sure. So we have kind of two lanes that we look at M&A from. First would be the more traditional tuck-in bolt-on or whatever you want to call it, M&A strategy. And you might be buying a $5 million revenue company, a $10 million revenue company and then bolting that business on to one of your existing companies and that's might give you additional geographical coverage. It might give you an additional service offering. Maybe you strong and suppression work in one market, but weak on fire alarm and you can buy a $5 million fire alarm business bolting on to your existing company. Is the margin profile accretive? Or do we see a clear path for that margin profile to be additive to what we're trying to accomplish as a company. And then next and not last but next, and maybe the most important, as you get through those 3 gates, comes down to culture, values and fit. And you have to be thinking about is this somebody I'd like to have a beer with. And does this person share values with me. And it's very, very important if you want that business to win when you bring it into one of your existing operations? And then lastly, does the company that you're bolting that business on to have the capacity to take it on and help with the integration. Integration can't just sit at corporate. It's got to be a shared responsibility. And I think it's something that's very important. That's part of our evaluation process when we look at bolt-on M&A. Next would be the lens, which would be larger, maybe more transformational-type acquisitions. Chubb Fire & Security falls squarely into that bucket. The recent acquisition of Elevated elevators falls squarely into that bucket. That's an adjacency to our existing service offerings that we find super attractive. It's like the life safety space, like in a do-over. The only difference is, is that the technician is going into service an elevator. The elevator and escalator space has the same statutory requirements as the fire life safety, that elevator is required by law to be inspected for functionality and operability just like life safety systems. So we feel like we've had an interest in this space for a long time. And recently with Bank of America's help, we were able to acquire Elevated, and we're very excited to build the platform from there. So -- but kind of two buckets. And we look at them kind of through independent lenses, and we feel like we're -- with some of the financing activity that the company has undertaken over the course of the last few months, we have great flexibility and optionality with our balance sheet that's going to allow us to continue to accelerate our bolt-on work and continue to keep our eye open for, is there another Elevated coming, is there another opportunity for us to add to the APi family.

All right. That's helpful. And back to the core business, you're on a...

Can we ask Adam one. [indiscernible] I mean, other than looking good, you should actually have to say something.

Yes. Well, Adam, I should ask you -- well, I was going to ask you about the core business, and I'll ask about that, but maybe we'll ask sort of a popular question among some investors about your guidance, and your guidance for the year seems a big step-up in organic sales growth in the back half. I feel like that's probably been a lot of your time spent on answering this one. Can you help us understand the dynamics there? And what gives leadership confidence in the plan?

Yes. So I think there's three things that give us confidence in kind of what our guidance implies for the back half. One, the continued strength in our inspection, service and monitoring business, that's something that is consistent in pretty much any macroeconomic times. So we continue to expect that to have strong results in the back half of the year. But really, it's going to be driven by recovery of the projects business. So if you think back to Q3 and Q4 of last year, we saw lower organic growth driven by the projects business because of customer and project selection and specialty and HVAC because of lower price pass-through dynamic that was a headwind on sales. So we're going to now lap those in the back half of this year. So we'll have easier comps. Second half of last year, it was 1% to 2% organic that we'll be comping against. And as we're approaching the back half of the year, we're seeing improvements in our backlog as well. So our backlog improved sequentially. Our life safety backlog is as high as it's ever been for this time of year, and we're seeing backlog stabilize in places like HVAC and specialty at a much healthier expected gross profit margin. So all those things together are giving us that confidence. And this year is really just shaping kind of the opposite shape as last year where we started off really strong from an organic perspective and had those headwinds in the back half, and now we'll kind of have an opposite shape to you.

And correct me here, when you think of your backlog, is it 9, 12 months of visibility? Is that the right framework to think about it, yes.

Yes, that's the right way to think about it.

And then -- I guess that transitions us to the company is on a path towards 60% of your sales coming from inspection, service and maintenance, remind us where you are today and what's getting you towards that 60% goal?

Yes. So we're at 52% today and pro forma for the Elevated acquisition, that will take us up to 53%. And really, to get us to that 60% goal, it's really the same formula that's gotten us to where we've been today. It's that inspection first strategy, that's a real differentiator in our go-to-market, and investing behind that inspection sales force so that we can continue to drive double-digit organic inspection growth across the business, which then pulls through the service work to help our customers get back in compliance if it's fire or elevator inspection. So as long as we're investing behind that sales force and continue to execute our pricing strategy, we'll see growth in inspection, service and monitoring in the high single-digit range compared to project growth in the lower single-digit range. And organically, we'll continue to turn our way there and use M&A to accelerate the process over time.

I mean, touched on this, but the company has been strategically pruning project revenue. I guess to start, what's typical project work? And kind of what metrics are you looking at today when deciding whether or not you want to retain or pursue certain projects?

So typical project work in our Safety Services segment is really either new installation or major retrofits and upgrades of either fire protection, sprinkler systems, alarm systems, security systems in our Chubb business. So it's really the installations and major retrofits and upgrades of those types of systems. And in our specialty segment, it's more installation of utility infrastructure. So critical infrastructure like electric grid, telecom, natural gas distribution, potable water system, things of that nature. And really, what we have been focused on is choosing the right end markets and the right customers. And when we think about that, it's really on the project side, we're challenging our business leaders to propose on projects at a certain margin that we think is appropriate for the value we're bringing to the projects. So it's really a margin-driven kind of initiative there that is going to help us get to our 13% margin target and focusing on -- and project and customer selection is a big part of that.

The only thing I would maybe add to that, Heather, is that some of that pruning in our international business has just been poor performing contracts that we inherited as part of the acquisition. And if you go back in time, some of those contracts were 3 years in nature, and so we're kind of coming to the end of that here at the end of 2024 based on when we closed on the acquisition. So some of that is just purposeful pruning on just underperforming, poor performing. A lot of that's just service and maintenance contracts.

So is it fair to assume -- as you move into the back half of the year, you're now transitioning from the more severe heavy lifting regarding project pruning, but it's still an ongoing journey to some extent?

So like this whole idea of customer selection, project selection is not a new concept that we just cranked on, turned on, but we've doubled down the emphasis and the focus on it as it relates to driving expectations towards that margin expansion goal of 13%. So to a certain degree -- going back to the earlier conversation that our backlog typically, from a coverage perspective, is 9 to 12 months, we started this enhanced level of customer selection, project selection about this time last year. Theoretically, we're getting through that period of time. And we're never going to stop. And price is something that's very important. We've brought additional price discipline into the businesses. And I think that there is going to be continued opportunity for us to look for the right places and the right customers and clients that value our services that aren't going to just make decisions based on what you're a buck higher.

That makes a lot of sense. I mean and that segues us to the margin question, which is so, all of this has put you on a path towards 13% plus EBITDA margins by 2025. Part of it is the pruning, but can you just walk us through the components of the expansion.