APi Group Corporation (APG) Earnings Call Transcript & Summary

thank you for joining us again. We're very excited to have APi Group with us. We've got Russ Becker, who is the CEO and President of APi; and then we have Adam Fee who is the VP of Investor Relations. Russ as I walk over to you, it's been -- APG has been public now for almost 5 years. So maybe talk about what you're most proud of at the company? Has there been any big challenges that you've overcome? And then maybe talk about why APG is so unique and what competitively differentiates the company?

You're talking about specifically -- thank you for having us. Are you talking specifically about what am I most proud of over the last 5 years from kind of the day of becoming public?

From when you went public?

I would say that we protected our culture. And for those of you that don't know the company very well, our culture is centered on our purpose, our enduring purpose, and our enduring purpose is building great leaders. And early in my APi Group career, I've learned that we needed really good leadership at every level of our business, from the company President to the branch leaders to the department leaders. And we started a journey of leadership development in the company back probably in 2003. And as we moved into this period of time of being a public company, preserving our culture, in fact, maybe even enhancing that culture is something that I'm very proud of. And I do think that it is one of the things that makes APi a truly unique company. And when you have 500 branches in 22 countries around the world, every one of those branches needs to have a great leader. Every one of those countries needs to have a great leader. Every one of our businesses needs to have a great leader, and it's something that's important. And I think that in the day-to-day grind of being a public company, I think you can lose track of that. And this whole idea of being able to keep your eye on the long term, it's easy to say when you're measured every single quarter. And so for us, I think that's one of the things I'm most proud of. I also am proud of the fact that we've really -- like with the acquisition of Chubb Fire & Security, which was a large transaction. And I think we had a lot of folks that were a little bit skeptical about our ability to not only acquire that business, but to acquire that business and integrate it and bringing along in our way, in the APi way and instill our culture in that business and improve the results and grow the business organically and improve margins and all that stuff. And the fact that we've made as much progress as we've had has been really rewarding. And I was mentioning to you when we were just catching up, I was recently in Hong Kong and Macau, China, visiting our teams in Asia Pacific and spent -- I got a chance to spend 1.5 days or so in the Hong Kong office. And that's a very, very high-performing business, and you walk out of there and like the quality of people, it just -- there's so much energy and it's just so fun to be around that. And it's just like -- you're like, I know why they kick ***. And it's because of the quality of the people and the quality of the leadership that we have in that business. And that's spread across all of our business. I'd even tell you this, but yesterday, I stopped in Texas on my way here and one of our larger North American safety businesses was having their branch leaders meeting. And I got a chance to go in and spend some time with them and interact with them. And like there's a reason that, that business does as well as it does. And it's the quality of the people in that room, and it was really, really rewarding.

So Russ, I think you're almost answering my next question, but I'll ask it anyway and we'll see if it's the right answer, is that, again, one of the questions I get often is the markets are growing at what they're growing at, but you seem to outperform and you seem to take share. So why is that? Why are you able to continuously take share. And with the algorithm for you guys, I think, is mid-single digit plus growth, we will talk about that. But how do you get there, for instance, nonres is not growing that fast?

Well, I think a big reason for that is really this whole idea of selling inspections first and where we're spending our time. I mean most firms in our space go after the inspection and service work the traditional way. They try to get new building project and when the new building project is 90% complete, they try to get access to the owner, and then they go try to sell them a service contract. Where we have really focused on building out a sales team that is centered on selling into the already built environment. So for those of you who don't know, a commercial office building or a building like this is required by law to have their fire protection systems inspected at least annually. And in a building like this, it's probably quarterly would be my guess. And their service pull-through comes from every one of those inspections. And for us, we have data that shows that we get $3 to $4 of annual service pull-through for every dollar of inspection work that we do during the course of that year. And so for us, as we continue to build out that sales force, that's where we're really taking that share because you get the service pull-through. Then if you do a great job, you develop a really solid relationship with that customer. And when they do have project work, you're more than likely going to be negotiating with the customer for that work versus competing for it on price.

That's helpful, Russ. And so look, I should get out of the way now, you put out an update. So maybe Russ, you or Adam can answer these questions. But I just want to clarify a couple of things with the update, right? And I took quick notes as I've kind of been up here. But you said you're in line with $890 million to $900 million in EBITDA, right, ex currency. Can you -- What is ex currency? Like how much of an impact is that? Can I ask you that.

Yes. You'll see the exact number in a week or so, but a couple of million bucks. The dollar strengthened from when we originally put out our guide at our Q3 earnings to today. A couple of million bucks would be the ex currency part.

Okay. Helpful. And then for '25, you said 73 to -- $7.3 billion to $7.5 billion in revenue, right, $970 million to $1.02 billion in EBITDA. So I've gotten a lot of questions around cadence. So maybe any initial comments around cadence. Do we start off slower in organic growth and then speed up? And then embedded in that because you didn't talk about organic versus inorganic, is kind of mid-single digits for the year I would assume because that's kind of what's in line with what we have. But do you start out slow and then kind of speed up to get there? Any thoughts on cadence would help.

Yes. I think what you'll see is more return to normalcy. That's the way we've been framing it...

We kind of talked about that.

Where we do have some seasonality to our business. Q1 last year actually is a tough comp for us because we had abnormal seasonal temperatures to the good, where this year feels like it's more normal...

Colder.

Colder. So I think you'll -- yes, that's exactly what you're going to see. You're going to see us get back to more of a normal cadence. First quarter is always our slowest quarter, and it's going to ramp up as we work our way through the year.

Got it. And colder impacts specialty more than safety or not?

Traditionally, it does. That's fair.

Okay. And growth rates for the year kind of similar between the 2 segments for the year? Is that the way to think about or...?

Yes. And what we've shared -- what we've been sharing pretty broadly with the group, and I think you see that in our guidance is that we are pushing our businesses for high single-digit growth in the inspection service and monitoring and specialty does have a services side of their business. And we want to see low single-digit growth in the project side of their business. And if you look at our revenue mix being around 54% in that inspection service and monitoring space that averages into that mid-single-digit organic growth. And that's what you really saw in that guide that we put out early this morning.

Very helpful, Russ. And then just like stepping back a little bit, you've talked about some project delays in specialty, like what's embedded in the guide for them? Or have you seen them kind of move forward and end? Or like are there still some project delays that are impacting specialty in particular in the first half of the year?

I would say move forward and be smarter about it and understanding the nuances of your clients. So I think we pointed to a government-owned public utility that's a customer of ours who -- again, it's a government entity, so you should anticipate that it's going to be a herky-jerky and not going to be smooth. And I don't know that we did a very good job of anticipating that last year as it relates to how we were planning our work and planning our business, which ultimately leads to your forecasting. And I think that we've gotten smarter about that. And even we're working for this client right now, but it's playing out more like we learned that it's herky-jerky. And so -- and that's baked into our forecast and the guidance that we provided.

Yes. So Russ, we understand that's baked in that also probably doesn't help your profitability, right? So like as you go forward, you can sort of think about that more to -- because, again, you're probably good. We'll get to that. But generally, the fewer projects you have like that, the less interruption you have in quotes and should help your profitability, right?

No question about it. And I mean the reality of it is, is that on your project work, the smaller you can keep your crew size impacts profitability, I mean, because it's more manageable. There's a lot of factors that go into what makes your project work. I mean to be honest with you, there's a lot of factors that go into what makes your service work profitable. And a lot of it has to do with who is your clients, who is your customer. Not every one of them is the same. So -- but there's a lot of factors that go into affecting that.

Helpful. And so just kind of a little bit more color into the markets, right? I know that you're quite diverse, especially in safety. But maybe talk about what's driving growth in '25. We've talked about data centers before, advanced manufacturing, health care. But -- so I know you're not tied to any one market, but where is the growth going to come from in '25, you think?

Well, I mean, the end markets that we're serving like really aren't changing. Like you just listed them. And I mean that's where our focus continues to be. I'll just continue to point you to the inspection first mindset. And for us, it's continuing to grow those inspections at a double-digit clip like we've done for -- I think every quarter since COVID, we've grown our inspections at a double-digit pace. And we're seeing the service pull-through. And if we can continue to do that that's where you're going to continue to see the growth specifically in the safety business.

Russ, 2 things I want to clarify there. So inspections, you still think you can grow double digits, but inspection service, the goal is high single digits. Is that...?

That's correct.

Okay. And then domestic versus international, you said you were just in Hong Kong, right? Like so how is international growing these days? Chubb, you've talked about value capture has been very good. You were in the process of closing underperforming branches. So are you done with all that. Like where do you think the growth is international in '25.

Well, we expect the international business to grow mid-single-digit organic, just like the rest of our business. And that's showing up in our plan as well. I mean it's not being masked by the North American safety business by any stretch of the imagination. As it relates to value capture, I think we've identified $125 million of Chubb value capture. We're at -- I think we finished the year at $90 million. And so we've got -- still got some work to do here in 2025. Some of that will probably drag into '26, Andy. But like I'm really happy with where our international business has come. And we're seeing -- we've had organic growth in that business every quarter since we've owned it. So we're kind of through our sales force transformation. We have a program there, we call it GPS, growing performance through sales which is, I know, a corny acronym, I'm not big on all the acronyms, but they've got to call, everything's got to have a name to it these days.

Easy to remember.

Actually, it's hard to -- for whatever reason that one is hard for me to remember. I don't because I think it's bu*****. But like our sales leader, like our international sales leader like he's a competitive guy, and I love that about him and done a really good job of transforming that sales team. So we have kind of a reinvigorated sales team. The work that they're doing is really good. The pruning for the most part of those poor-performing contracts is, for the most part, done. Like I don't even -- like even some of the value capture, and I know that we still have some rightsizing to do like specific in our monitoring business in certain regions like Benelux and stuff. That will continue to flow through as part of this Chubb value capture. But as far as like I'm thinking about the business, I'm thinking about it like it's just business as usual. Just go run your business, go lead your business and here's what the expectations are, and this is what we have to do.

Helpful. So I think you guys are pretty insulated to sort of changing U.S. geopolitical environment, the new administration. But maybe talk about if we do have tariffs, we have them on China already, we have them on steel and aluminum. Any sort of planning you guys are doing, anything that we should think about in terms of price versus cost? How do you think about that?

Yes. Well, I'll give you the kind of the broader answer, and then Adam can add some color to it. But like we've been talking about tariffs for couple of months already with our business leaders. We've told them that you need to start protecting yourselves in your proposals. I would tell you on that 54% of our revenue that's inspection, service and monitoring, we have very little risk there. On inspections, you -- basically, you have no materials. You just have labor. And then your service work, you're pricing it in real time. So as price increases come associated with tariffs, you're going to be passing that along kind of in real time. So it's really on your project work that you have to be really smart about it, and you need to make sure that you're building that in some of those potential cost increases into your proposal. The biggest place for us to continue to keep our eye out on is pipe prices. And how pipe prices are impacted. And we buy very little product that's manufactured in China. So some of that, we're pretty immune to but we need to keep our eye on pipe prices and how pipe prices continue to evolve. So I don't know if you...

No, I think you said it well. I think it should -- it's still too early to tell. Should there be any impact on prices, we would anticipate it playing out similar to coming out of COVID when there was inflation in our material costs where we would pass it through to the customer.

It's a straight pass-through, right, Adam, because pipe prices did go up a lot, you just pass it through. Now it's really dollar for dollar, right? It could impact margin in quotes, but it's dollar for dollar when you do it.

Yes, exactly. You'd have a higher growth figure in the same gross profit dollars is the way to think about it?

Okay. That's helpful. And so I asked you already about inspection service. You seem quite confident about both sides of that business. You have that goal of reaching 60. I think you've said publicly that 60 is just medium-term target, and you could do more than that over time. So I think I get that. The only thing I'd ask you, Russ, is like it's hard to maintain double-digit growth forever in inspection. So like how do you keep reinventing yourself to do that? Because that is not easy to do, right? And same thing with high single-digit growth for inspection service. That's not easy. You know that.

Yes. But if you -- I agree with you, but if you take a step back and you look at the markets that we serve and then you look at the fragmentation in the market. But if you look at the market like we are just -- we are so underpenetrated in every market. So like I look at Minneapolis, St. Paul as an example, if you say that, that's just a territory. And I think we have 3 inspection sales leaders in that marketplace. We should have probably 6. And then you say to yourself, why don't you just go out and hire 3? And because if you hire 3 sales leaders and you have to have probably 4 inspectors right behind them to be able to do the work. And then if you're going to get $3 to $4 worth of service work off of every dollar of inspection, that means you need to have some place between 12 and 16 service technicians right behind them. And those folks don't grow on trees. And you need to -- and then there's this whole element of finding the right people so that like you have a high-quality team and you have a really good team. And so like as we think about our business and where our business is going to go over the next, say, 3, 4, 5 years, I'm confident that we can sell the inspections. It's making sure that we've got the right people coming along behind to actually do the work and do the work really well and service our clients. So -- but there's so much opportunity, Andy, for us to continue to grow that aspect of it. And for sure as the number keeps getting bigger, it gets harder to. You know what I mean. I get that.

You're doing a good job there. So I'm going to ask you one more question, and I'll open up to the audience, and then we'll keep going. But embedded in your '25 guidance, clearly, is that 13%-plus target that you had for adjusted EBITDA. But it's been sort of a journey to get there, right? Like the balance between margin and growth, it's balance. And so if I look over the last several quarters, you've had lower organic growth as margins have really spiked up. So you said at the beginning of this conversation, Russ, that this is going to be a more normal year, right? But like can you balance continuing to grow margin and getting back to that mid- to high single-digit growth that we're used to at this company.

Yes.

I know you're going to say. But do you want to say -- or do you just want to say that?

Well, I mean, it's kind of a show-me story, isn't it, you know what I mean. So I can sit up here and blow smoke up your a** all day long. And at the end of the day, it's show me. I mean I think our track record shows it like if one of Adam's presentation some place, there's a slide that shows how the company performed between 2010 and 2020, and we showed 7% organic growth through there. And people, I think, lose track of the fact that when I came to APi, I know some of you people think I'm old. But I came to APi in 2002, we were a 3% business. And so it's not like we haven't improved our margins over a period of time and growing this business both organically and inorganically. So I -- it's easy for me to sit up here and have confidence and say, yes, we can do that. But I also think that if you go back, do a little bit of work, look at the track record in the history of the company, you'll see that. And I would also say that a lot of you folks don't really know me that well. But like I am a person who -- when we make a commitment, like I'm going to die trying to take that hill. And that's something that's just ingrained to me. I was giving a speech a week or so ago, and I was talking about my mother. And I've said, not only is she a warrior and taught me perseverance and resilience, but I also said she raised me well. And that came from my mother, so mom, I'm plugging you again...

Mother knows best. All right. I like it. Any questions from the audience. Nobody wants to ask about how you raised. Okay.

It's really not a great story.

Yes. So let me ask you then about deal making because that's -- M&A is a big part of the strategy as well. So we already talked about Chubb a bit, there's Elevated too. So maybe on the Elevated side, how do you think about that time line? You've talked about it a $200 million-plus platform going to $1 billion. How do you think about the time line to get that to $1 billion? How should we think about it?

Well, I'm not going to sit up here and paint ourselves into a corner. That would be silly by me. So like my goal for this year is pretty simple. It's like we think that we see a market that's fragmented just like Fire, Life Safety and Security space, right? And -- but -- so my goal for this year, though, is I want to just see us execute one bolt-on, and I want to see how they integrate that bolt-on into their existing business.

One bolt-on in the elevator space.

In the elevator space. Now if that happens, let's just say, in April, and it goes really well, then I'd be open-minded to saying we're going to do another one in September. But as I'm sitting here, I'm just saying a reasonable goal for that would be if we can really do one this year and do it well. And like there's a little bit of a show-me story for them, like they got to show us that they can do it. And that's important. We could go out and buy 3 elevator companies tomorrow and give them to the team at Elevated and just screw the whole thing up and that's what we don't want to do. So like that's just the way my brain is thinking, Andy, is like let's do one. Let's do it really well. And if it does go really well, then let's go to the next one and do the next one.

Got it. Are you happy with their performance so far as you've...

Yes. Generally, I would say that I am. I mean I think that they're fighting the same stuff that everybody else is fighting. But in general, I think it's a great company, and I'm really excited about it, especially when I think about it building some momentum and getting some actual scale there. $200 million is not that big.

Yes. Agreed. Okay. And I think fairly recently, you called the M&A environment robust. So maybe elaborate on what you're seeing out there. Net leverage is 2.4x. So balance sheet is in good shape. But if you look at '25, you talked about the one bolt-on for Elevated. But do you see any transformational deals on the horizon? Or do you not need to do that in '25? Like how do you think about that?

Well, we certainly don't have to do anything, right? We're in a really great spot. Our balance sheet is really strong. We've got a lot of flexibility to be really choosy and selective. And so I think that you're going to see us continue to take that approach. We're always kind of looking and digging on something and sticking our nose in on certain things. And if we find something that's really interesting to us, I suspect we would try to move it forward. Valuations on larger private equity-owned businesses continue to be outsized. There was one that was recently, it's not a huge company, $200 million business. I think it traded for 22x or something like that. We didn't even get a book because we're not going to pay that kind of a multiple for a business. So it's not worth us putting any effort into something like that. So we're going to continue to be disciplined. And meanwhile, we'll just keep chipping away and clocking away at these small bolt-ons like we did roughly $250 million of bolt-on M&A last year. When you buy them -- I think our average multiple last year was under 6x. And so under 6x, you're getting roughly $1 of revenue for every dollar of purchase price that you get. And that is a great model, and you create value with every one of those transactions that you do, and we continue to have a lot of opportunities. Our business leaders source most of those transactions. And so we do. We continue to have a lot of opportunity coming forward.

Russ, just one more question on that. Can you find deals still at close to those multiples out there? I think you've talked about white spaces in your portfolio such as fire alarms, we talked about Elevated maybe internationally. Can you find valuations at those multiples.

You can. Yes, for sure, 100%. I think if you go back to '23, our average multiple was under 6x. '24, the average multiple was under 6x. '22, we didn't do anything because of Chubb. But historically, we've been -- we've paid under 6x. And so I suspect we'll continue to do that. And even with the entree of private equity into the Fire, Life Safety space, the reality of it is if that seller is so focused on price, they're not going to fit us from a culture, values and fit perspective, like the types of sellers that we are really focused on finding care about their legacy, a lot of them care about the company name and those types of things, and they care about finding the right home for the people on their team. And when you can find that alignment, it becomes less and less and less about price. They want to be paid a fair price, but it becomes less and less about price. And most of these people are just good, hard-working American people. You know what I mean? So I think we can continue to do it. We are turning our attention to our international business as our results continue to improve there, we feel -- are feeling more and more confident. I wouldn't say that it's carte blanche every country that we have the same confidence in, but that's no different than what's happening here. We don't -- not every one of our companies has the same capability to handle the M&A. But we are looking at some opportunities internationally as well now.

So I know you suggested, I think publicly, you talked about getting your international business to 15%, I think, by this year. But that begs the question, backing up to the company level about new margin targets, I mean you probably don't want to tell me exactly now, you want to leave something for May. But at the same time, 60% of your sales are going to be high-margin inspection or service, which tends to be much higher than project margin, 1,000 basis points. I think we've talked about in the past. Is a target in the high teens reasonable for the company? You can answer or not answer the question, public forum.

I'll just say it's going to be better. And I'll let you...

Let me do the analytics.

I'll let you do the analytics, but it certainly will be better. At our last Investor Day, we did lay out a target for Chubb to be at a 15% margin business by 2025, and we will be there this year. And then it will keep going.

Excellent. So maybe just digging into specialty for a little -- for a minute or 2. Can you give us a little more color into that market. Obviously, we know it's big in utilities, telecom. We talked about the delays a little bit. It seems like it's going to resume growth here in '25. But maybe talk about what you're seeing in the major end markets in that segment.

We see a tremendous amount of continued activity. I mean obviously, with the new administration, I think that causes people some consternation on whether certain programs are going to get canceled or not get canceled. I don't know that, that would have a direct impact on our business. I've long said that like things like the infrastructure bill doesn't directly affect us, but it indirectly does because of this whole idea of rising tide floats all boats. And as the industry -- if the industry is seeing positive momentum even we'll see positive momentum because of that. But if you look at it from where our backlog sits as we entered 2025, it's significantly better than what it was 2024. Proposal activity has remained really robust. So we feel really good about where we're positioned as we head into '25.

And just one other color -- one other question about specialty. You moved HVAC from safety to specialty. So maybe a little more color on what that is going to do or is doing for you, right? I think you've talked about streamlining your overall specialty business, adding shared service synergies. But color an impact to specialty and confidence level that specialty can be a mid-single-digit plus grow over time and expand margin over time.

Yes, I'm not concerned about specialty in general being able to grow mid-single digits and expand their margins. And we will continue to look at that portfolio of businesses. And if there's businesses that aren't going to be accretive to our long-term margin expansion goals, we will either fix them or we will do something else with them. Moving the HVAC business over there, I mean, there's a couple of reasons for it. It sets up the Safety Services business as more of a pure-play services kind of segment, if you will. And I'd also tell you that the individual that leads our Specialty Services segment is much better equipped to help those HVAC businesses improve their performance. He kind of came from that space. And so from a leadership perspective, we feel like he's going to be able to have a greater impact and add more value and help those businesses improve their performance more rapidly.

So Russ, I know you always get this question, but I'll ask you again. So like your valuation has been -- language is maybe too strong, but it's been a little bit lower partly because of specialty because of these project delays. So like how do you as a management team or Board think about specialty with safety? Are there any synergies, especially since you moved HVAC over to specialty? How do you think about the long-term portfolio and the fit together?

Well, I think there are synergies for sure. And like if you look at, say, Meta as an example, we have more revenue opportunities in our Specialty Services segment on, say, Meta expansion than we do actually on a Fire, Life Safety and Security opportunity. So like if you look at how we're trying to sell to the Metas of the world, we're selling all of our services, not just the fire protection or not just the security. So there's synergistic opportunities there. You also have to remember that our specialty services business covers a significant amount of our corporate expenses as it sits today, and it's not linear. So if you just lop that branch off the tree, we would have a kind of a different challenge that we would have to address. I'm not saying that that's a reason to not. I'm just saying that that's a real challenge. And so as it sits today, we've chosen to prune and to look at the businesses in there that would be better off in a different home than where we are and what our goals and objectives are.

Makes total sense. And then just talking about cash flow, free cash flow conversion has been improving slowly but surely. Maybe talk about what's embedded in the '25 guide because I don't think you really talked about cash for '25. So would you expect continued improvement in conversion or maybe puts and takes around cash flow as you see it?

I would -- Adam, he can give a little bit more color. He's probably more of the number cruncher than me. We expect to see continued improvement in free cash flow conversion. I mean there's lots of opportunity for us to continue to be better. And we continue to work for -- towards our long-term goal of 80% free cash flow conversion as we define it. And we made really, I think, significant progress this year. I'd say the only point thinking about puts and takes is that as we continue to grow revenue, I mean, that's the biggest source or use of cash, if you will, is funding receivables and receivable growth. And I would actually hope that would be a good problem to have. Do you want to add anything?

No, I think you said it well. We certainly will grow our free cash flow dollars every year. That's the plan there. Conversion will maybe bump around a little bit depending on how fast we're growing the top line.

Adam, is it fair to say that conversion will be better in '25 than '24?

We'll tell you in a week, but I think it will be right in the same area.

Okay. And so last question, what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? Are there any emerging industry trends that are, perhaps, being overlooked in the current discourse?

Emerging trends. I mean, obviously, AI and the impact that AI can potentially in a positive fashion have on our business. I mean that's something that I'm personally embracing. And we're actually resourcing AI differently, just some -- a change that we've made within the last, what, few months. And we're trying to focus our AI efforts in the direction of how can we enable our field leaders to be more efficient as they continue to go out and do their job. So that would be probably the largest thing that we're trying to keep our eye on. I mean there's obviously lots of other big issues, especially affecting the United States like immigration, like our industry needs immigration and needs some resolution to our immigration policy in the country. So there's lots of challenges and issues there as well, and we probably could talk forever about other stuff, too, Andy.

Very nice. Well, we are out of time. So Russ, Adam, thank you very much for joining us.

Yes, thank you for having us.

Thank you for being here.