APi Group Corporation (APG) Earnings Call Transcript & Summary

All right. We're going to move on with Russ Becker from APG. Thanks, guys for -- CEO of APG. And we usually just start this off with a bit of a state of the union, what you're seeing out there and your business, what you think is most important longer term, and then we'll get into the Q&A.

Great. Is this on?

Yes it is. Yes.

Good morning, everybody. Thank you for taking the time to join us, and thank you for your interest in the company. State of the state, I feel really good moving into 2025. I feel like our business is really well positioned. 54% of our revenue is coming from inspection, service and monitoring. So we feel like we continue to grow the recurring component of the company. Our backlog is at all-time highs. I think on an organic basis, we're up 9% on a year-on-year basis. So as we move into 2025, we feel really good about where we're at. We feel good about the end markets that we serve. And for us, it's just a lot of blocking and tackling and continuing to move forward with our bolt-on M&A strategy and the work that we're doing. So good -- we're in a good spot.

Can we just delve into the safety business? You guys have done a great job of transitioning the portfolio over time. Talk about the various business models there and what you're seeing in each of those, whether it's the really recurring inspection, some of the upgrade work you do. Obviously, new construction is less important. But just talk about how that business model works over time.

Well, I think the biggest differentiator for us in that space is the focus that we have on growing the inspections. And for those of you that are newer to the story, this building is not really a fair comparison because it's pretty damn nice. But -- and it's pretty big. But typical...

So you see the one next door.

Yes. I'm looking forward to seeing it actually. Maybe 1 day, we'll graduate to that building.

I'm hoping to graduate to that building as well at some point.

But like a typical commercial real estate or office building, has a fire protection system in it, and there's 2 components to that fire protection system, the sprinkler system and the fire alarm system. And those systems are required by law to be inspected for functionality and operability, at least once a year, most of the time, it's twice a year or even quarterly. And so the biggest thing for us is we are growing the inspection side of our business. So like we're out building a sales force calling on the already built environment and selling inspections to building owners and property managers. And the reason that we do that is that we've got data that shows that we're going to generate some place between $2 or $3 -- $3 and $4 worth of service work on an annualized basis for every dollar of inspection work that we do. So the -- one of the biggest bellwethers for us is double-digit inspection growth. We've grown our inspection business in the U.S. at a double-digit clip every quarter since the pandemic. And we continue to build out our sales force so that we're able to do that. And we're kind of in-flight of bringing that service-first, inspection-first mindset to our international business that didn't have that when we acquired the business 3 years ago.

Can you talk about the -- how you can carry that across the pond? What's different, what your experience over the last year and change is kind of telling you the challenges and the opportunities on that front?

Well, internationally, I think one of the biggest differences for us is that, that business kind of if you look at it in the buckets that it falls in, 1/3 of our revenue comes from security, 1/3 of our revenue comes from fire alarm, very little of that is really sprinkler and then 1/3 of it comes from fire extinguisher. And kind of the rules are different, if you will, and so what we're doing though is -- so like security, as an example, that is not statutorily required to have those systems inspected. Obviously, if you have CCTV or camera systems and card access systems and they don't work, you're going to fix them. But there's no statutory requirement that they have to be inspected. And so that's a difference. But what we are doing is bringing that kind of sell that first mindset. So there they used to capture service work in the more traditional sense like some of our peers did in the U.S. where they would go sell the new installation project. And then when the installation project was coming to a close, they would turn around and try to sell the service work. And we're building out a sales team there as well that's selling service to the already built environment. So it's a little bit nuanced, but it's really very, very similar.

Right, right. And so if you get out in front of that and you approach it the way you're approaching it, that's kind of like better for everybody.

100%.

Big improvement for the business.

100%. And we brought in a new sales leader in our international business. He is doing a fantastic job. He is really competitive. And he has brought just a whole new mindset to that sales team. And we've had some turnover and some change with those folks as he's brought in a different element of accountability to the group. It's been really refreshing. He's done a really good job.

So stepping back to the U.S. business, you guys talk about a growth rate mid- to high single digits on that -- on the U.S. safety side. We're trying to figure out what's going on in the economy. You guys are not that economically sensitive. But in that business, kind of where would you see -- if you were to see some pullback at all of your customers, where would you see that. And what are you seeing today? What are you watching for with all this uncertainty. Obviously, you're way more insulated with your inspection and services side. But...

Well, I mean, I think for us right now, we're just seeing more noise than anything. And we're clearly watching tariffs and what the impact that the tariffs could potentially have. So like for us, the biggest commodity that we buy is pipe. And so we're obviously watching hot-rolled coil prices. We're pretty protected when President Trump won the election, we knew that tariffs would be one of his hammers, if you will, that he would utilize. And so we're very proactive in making sure that on the installation side of our business, we were protecting ourselves. You also have to remember, the average project size for us is very small in typically our quick hitting. So the exposure that we have there is not super high, but we want to make sure that we continue to stay out in front of it. For us, I think, Steve, a big part of it is end markets and the end markets we serve continue to show positive resilience in the demand is really high, whether that's data center semiconductors for the most part, advanced manufacturing. So we feel really good about kind of where the business is sitting today and the resiliency that we have to kind of operate through all this noise. I was at this CEO breakfast and they were talking about the volatility in -- like the economy and leading through that. And I was like, this is just like every day, like you just need to be kind of agile and open-minded and know that this is the world that we live in today. And I think -- I feel like our business leaders are prepared to lead their businesses through that.

Maybe talk about that growth algorithm and how that gets built up when it comes to -- I mean, price is such a tough thing to calculate for you guys because it's labor hours, right? Maybe just talk about the -- how you discern the rate of volume activity and then what -- how that kind of translates into your actual revenue growth? How much is coming from an actual volume of activity versus maybe a price or a value.

Well, when you look at -- again, let's just maybe talk specifically about the U.S., the expectations are very similar for our international business. But we've guided our businesses to high single-digit growth in the inspection and service side. and low single-digit growth in the installation part of the business, and that kind of gets to that mid-single-digit range. And we continue to grow the inspections at a double-digit clip. And that is almost all share. So you're taking -- we build price increases into our proposals and into our agreements. But for the most part, that's -- you're taking share there. And that's the -- I think one of the biggest advantages for us and really the way that we continue to build resilience into the business model is like those buildings exist they're not going away regardless of what happens to the economy, and that's what gives us confidence that we're going to be able to continue to grow the business organically.

Who are you taking share with? And who are you taking share from? Is there a flavor to that that's consistent across those because that's obviously a lot of share gains because the market is probably growing, what, low to mid?

Yes, I would say low single digits. But the thing -- the beautiful thing about like -- especially on the fire side of the business is that I hate to say this, but when there's actually a catastrophe, it drives code change and increased codes is actually quite beneficial for our business. So that's on the side. In general...

And that would be a market driver.

That's a market driver for sure. But in general, we're taking that share from small family-owned businesses. And even though you've seen the kind of the -- over the last, I don't know if you want to call it, 5 years, 10 years, whatever, you've seen a lot more private equity interest in -- especially in the fire space. Still the lion's share of our competitors are small family-owned businesses on a kind of city-by-city, location basis. And that's who we're competing with. And they're -- I don't want to take anything away from them because that's like the core to our bolt-on M&A strategy, and these are really good people, good hard-working people. But typically, they have less resources. So they're less sophisticated, it's easier -- like your average inspection is probably less than $1,000. And so for these family-owned businesses, it's a lot easier for them to go out and win $500,000 installation job or retrofit job than it is to build up that same revenue base $1,000 at a time. And so they don't have the infrastructure and they don't have the resource and they don't have the people. And a lot of times, they're doing it just because they did the original install or something like that, and that's who we're taking that share from in general.

And is there any particular customer that they may own a few buildings and you're doing 1 building, now you're doing 2. I mean, is -- or is it still -- the customer base obviously is fragmented, but is there a flavor for the customer that is -- that you resonate more with. Not really?

I would say not really. I mean, again, we're going to be more focused on the right end markets that strip mall that has a Starbucks and it is probably not going to be the place that we're going to do so well with. And the more sophisticated, the more complex, those types of customers we're going to clearly do better at just because we bring more expertise to the table. But no, not really.

And I guess, is there a national account element to any of this? I mean, I think it's pretty local, right?

So there is -- so we have a business inside of APi that we call National Services Group. And it is basically a sales engine to sell national accounts for our individual branches then to turn around and service. So we do have an engine inside APi that's attempting to sell accounts on a national basis and a regional basis.

Just turning to -- back to international and Chubb, maybe just talk about more of the integration there. And where are you from that perspective? I think you're pretty much at the end of the plan period. Is there more to go there? Or are we now at -- from an operating perspective, a pretty solid run rate on margins?

Well, the margins are going to continue to improve there. And so we're not...

I guess the integration phase, the integration phase.

Yes. So there's kind of 2 -- there's -- we have more work to do, all right? So we identified roughly $125 million of basically synergies because for the most part, that's we're taking costs out of the business. I think through the end of the year, we're at $90 million. So we've got $35 million to go, of which the lion's share of that will come through 2025 with a little bit of it moving into '26. But the way I would tell you -- so -- and there's some significant integration work like we're consolidating our monitoring center footprints, and that work is ongoing. We're integrating our Benelux business. If you recall, we had bought SK FireSafety before Chubb. And so there's a significant integration going on there. Our business leader there, his name is Fulco de Vries, he's doing a fantastic job. But the way I'm looking at it, Steve, is like it's business as usual. And we still have stuff that we're doing that we're going to continue to do. But like my brain has kind of switched to like business as usual. We've opened the aperture up as it relates to bolt-on M&A. So we're looking at some things now internationally. We feel like the business probably won't go do something in Benelux just because of that integration work that's going on. But would we do something in the U.K., 100%. And so you're seeing us open up the aperture because we feel like we're in a much, much better place. And to be honest with you, I just really couldn't be happier with where that business has come in the 3 years that we've owned it.

And what's the -- ultimately, what's the long-term growth rate you see for Chubb? Is it -- I would assume it's a little less than the U.S. than you target in the U.S.? Or you think you can...

Fleet average. We expect that business to grow organically mid-single digits. We guided that business the exact same way we guided our North American Safety business, high single digits on inspection and service and low single digits on project work. And I would tell you that when we rolled up our plans, that's what we saw.

It's amazing what can be done with a kind of a corporate orphan that doesn't get the real attention that it needs. That business didn't grow for 15 years.

Flat to declining. And I would say that I think being a -- like knowing that like we actually want to own them actually matters. Like we didn't own that business. Like I remember myself and 3 of my colleagues spent the first -- when the deal closed, we spent about 10 days over in the U.K. and moving around the U.K. and Western Europe and visiting a bunch of our branches. I would tell you 2 days in, I had seen more branches and more of the business than the previous leader of the company. Much less the CEO of Carrier at the time. I mean, like we just -- that's the way we operate. And I think we were on day 2 and one of my colleagues was asked, when are you going to sell us? And it was like, yes, we're not. Like [indiscernible] actually excited to own you. And for those of you that don't know the company very well, but our enduring purpose as a company is building great leaders. And if you think about it in the context of you've got 500 branches internationally, and every one of those branches needs to have a great leader in order for you to win in that market. And then each of those companies need to have a great leader. I mean, if you just think about it in the context of a people-centered business, investing in people as leaders and as human beings actually matters in our case. And when we bought Chubb, we very quickly recognized that there was a void in their culture that wasn't good or bad. It didn't exist. And we were able to insert ourselves and bring the leader development programs that we had built over time in North America. And very quickly, we had some translation and things like that we had to address. But we were able -- very quickly to start to bring those opportunities to that team. and it took off like wildfire. And so not only was it orphaned, but it was like not invested in, like these people had no idea what it was like for somebody to say, like, yes, I actually care about you, and I care about your growth as a human being, that matters and especially in a people-centered business. And like we have a leader lab going on right now in Rotterdam. I was actually going to go, but I came here, Steve. No, actually, I was going to go.

What -- maybe just one other way how that gets institutionalized into the culture. So just kind of hammer home the point of the things you do to differentiate on that leadership development front, another example of what you guys do to make it more institutional.

We -- like we don't have enough time. And probably -- I mean, like -- so these leader labs I mentioned, like we started having leader labs for the first time, I think, in 2003. We have 1 every spring, 1 every fall. We do spring and fall in the U.S., spring and fall now in Western Europe, spring and fall in Asia Pacific. And in North America, I've never missed one. And it's -- and I left early from one and I regret it to this day. And it's on 100% leader development, no spreadsheets, no business, and it's like you're showing up, and we're going to take the time to invest in you as a leader and as a human being. And people know like, I'm not a facilitator, I'm a participant. And so people know how important this is to me and then ultimately to the institution. And it really, really matters. One of the things that is really interesting, and we'd be more than willing to share this with anybody in this room. But we have a say at APi, everyone everywhere as a leader. And so we encourage every single one of our team members to believe in their brain, in their mind and to invest in themselves that they are actually a leader. And so if you're going to do something like that and say something like that, then you have to give people the opportunity to opt in to grow and develop as a leader. So we created an online learning opportunity. It's 30 minutes long, and it's called I am a leader. And we have 3 pillars of leadership at APi, leading self, leading others and then leading teams and businesses. And so this -- I am a leader learning opportunity is centered on leading self. And we all can do a better job of leading selves and improving ourselves and being a better version of ourselves, right? And I think we've had 7,000 of our team members in the U.S. opt in to participating, and we've had 7,000 internationally opt in. But here's the interesting part about internationally. It probably took us 5 or 6 years to get to, say, 5,000 in North America, it took us 6 months to get to 5,000 internationally. So I share that because it just gives you a glimpse of like how these people were...

Yes, they buy in and you also are probably better at scaling it.

100%. But -- and I'm serious, like reach out the Adam, we can share a link with you. If you want to steal it, you're welcome to steal it. You can put JPMorgan on it instead of APi. But I'm a big believer that a rising tide floats all boats. And if we can help your organization be better, then we're helping in general, we're helping our communities and our societies as a whole.

I manage like 4 people. So I don't know, [ Sean ], what do you say, want to [indiscernible] going. So just back to the business on the specialty side. A significantly smaller piece of the portfolio than it's been. What are you guys seeing there? And maybe just talk about the visibility you have on the pickup that you've embedded in your guidance for this year...

Well, yes, we feel -- I mean, we feel good about where the business is at. I mean as we move into 2025, their backlog is up organically, what?

Double digits.

Double digits. So I mean, their backlog is in a really good place. We feel like the really disciplined customer pruning and customer selection that we went through last year and some of the project delays are behind us. We also think we've learned a little bit as it relates to some of the programs that we've taken on. So I feel like that business is in a really good place to have good organic growth in 2025, just like the rest of our business.

And then just the margins, so you guys are clearly delivered on what you said you were going to deliver on margins. What's the philosophy on the next step? Is it going to be another kind of 3-year target at some point at your Investor Day? Or how are you going to approach this. Will it be an incremental margin algorithm? What's the approach to margins, thinking a bit more longer [indiscernible] framework-wise?

Well, I'll let Adam because he's really organizing the Investor Day and everything else. But we've been working on some of our long-range planning probably going back 12 months ago. And as we started to think about like what is the next iteration of APi look like. So we plan to share kind of our next targets at our Investor Day in May, and they definitely will be higher, and we will continue to expand our margins and drive increased growth in the business. As it relates to like the levers, it's really a lot of the same, Steve. And I mean, like I've been sharing a little bit like if you look at like our North American business, North American Safety business specifically, in that branch operating model rate. So like if you said that we have a bunch of branches, and they sit in a cluster like this. And the average is right around 15% or 15%-plus from a margin perspective. We need to take that whole cluster, right, from 15% to 17% or higher. You know what I mean, but I'm just saying. And we need to tighten the cluster instead of having -- and it's pretty tight now in North America, whereas if you like look at our international business, the cluster is probably a little looser just because we haven't owned it as long, and we need to tighten it. And we need to take that from, say, 13%, 14% to the 15%, 16%, 17%, just like we're going to take our North American business. And so -- but the things that we need to do in those branches are really the same. It's price. It's growing the inspection service and monitoring. It's being disciplined on customer selection and project selection. It's over here, having procurement support that work. And I would say that we actually had a question from one of our investors this morning was around like do you have any major projects. So kind of in the same vein as your question. And the answer is yes, we do have some platform like we need the next iteration of our field service module. You know what I mean, so that we can continue to provide a more productive easier work environment for our field leaders, right? The more efficient that we can make them more they're going to enjoy their job, the better job they're going to do servicing our customers at all kind of works hand in hand.

That's software, that's...

Yes, it's tech. And we have -- we're obviously operating on a platform right now, but it looks like what's next and what's the next iteration of that. And that's kind of just normal evolution the way I'm looking at it.

Is it -- are there are branch closures a part of this. I mean given you're so local and you want your services top-notch, it seem that, that wouldn't be a significant part, but like how much of all the branch closures play?

They're -- so probably more -- probably very little in the international, but there would be more potential for branch closures internationally. We did close a branch in the U.S. this year and...

1 branch.

1 branch.

So that branch closure really isn't a big part of it.

No, it's not. But like -- but any -- I mean if people think that we're not going to prune there as well, we're going to prune there, if like -- so like when you look at these -- our operating model, this branch-led operating model, like you can hand the best person like here's the recipe book, here's the playbook. But if your average at best, we're still going to get average results. So you still have to start with, do I have the best damn leader in that branch? Yes or no. And when you have a really good leader in that branch, and you hand them the playbook, that's when things really will take off. And Adam's got his 1 in his investor deck or one of his investor decks. He's got probably 74 of them out there. There's a slide in there that shows an evolution of a branch, and you should check it out. And because that's possible. What happened in that branch is possible in every single branch that we have. But it starts with the right branch leader and then it's sell inspections first and then all the other stuff. And I think one of the things that is a little bit can be even confusing to some of our field leaders as we talk about this inspection-first mindset, inspection and service and everything else, they think that we're going to get out of the installation, the installation part of it. And really, what we want to do is just shrink that component of it. But what happens when you have a really robust inspection and service and monitoring business in your branch, it allows you to be even more selective on the project work that you do and your gross margin skyrocket. That's a beautiful thing. That's a beautiful place to be.

Right. On the M&A front, before we get to the audience, just talk about -- a bit about the pipeline you guys talked about on the earnings call. and then elevated and what your intentions are in elevator maintenance?

So I'll maybe hit elevators first. So we entered the elevator space last year -- about halfway through the year. We're very excited. The reason that we really like the elevator escalator space is the statutory nature of that business as well. It's very similar to the Fire Life Safety business. Elevator is roughly a $200 million business. So it's not a huge business. We think that there's a $1 billion platform opportunity for us. As it relates to M&A, we are going to walk before we run. And what I mean by that is that we're going to buy a company and kind of gauge how they do from an integration perspective. And really, we haven't done any bolt-on M&A inside the business. So the reality is, I don't know. Like we have a team at APi that's led by a woman name of Anna, but she's really the quarterback. She's really -- the business has to own the integration, and I want to make sure that we do a really good job of integrating the first one. When that gets done and that goes well, then we'll go do the next one. So I'm taking a walk before we run approach. Nobody should read anything more into it than just like let's make sure that we don't screw it up by doing too much too fast and being very disciplined as we approach it.

But I guess, it's elevator maintenance, that sounds like it's a big focus now.

Yes, for sure.

Okay. Any questions out there? And in the core business, what are you focused on from an M&A perspective in the other parts of the business or where that's more of a margin story?

So I'd say in our core business, I mean we spent roughly $250 million on M&A last year. In general, if you look at it, our average multiple on our bolt-on M&A is less than 6x. And if you're paying less than 6x, in general, for every dollar of purchase price you get, you're going to get roughly $1 of revenue. That's just the way the math works, when you're paying reasonable multiples for these businesses. And our goal would be to do another $250 million this year, another $250 million the next year and continue to build out our geographic footprint. I would say the only -- I don't know if it's a significant difference, but the only difference would be the fact that we've actually opened the aperture up to our international business, as I mentioned earlier. And so we're looking at some opportunities there. We did 1 small one last year in Australia. But we've got a few things that we're looking at now that would be complementary to our international business just in general. So we're being smart about it, but we have opened our eyes and open the field up a little bit.

And then just 1 last one on free cash flow. You guys have done a good job of generating cash. What's the outlook there? Any moving parts on cash flow, we have to be -- that are notable here this year, next year?

No, nothing notable. We -- our target for this year is 75%, which is in line with our increased target for last year. We think there's a working capital opportunity that we'll continue to attack. So we feel like we can stay kind of in line with where we generated last year while returning to more normalized organic growth levels by going after working capital this year.

And then lastly, just on like buyback. Is that -- any consideration of a buyback if some of these deals don't come your way, multiples may be just a little bit too high for you? I mean you guys definitely don't pay a lot for these companies. But on the elevator side, maybe they're a bit higher? What's the view on buyback?

Yes. So we've been actually active in the market buying back our -- buying back some shares recently. And so I think we've been pretty open that number one, we're going to pay down debt, reduce our leverage, we've -- obviously are inside our target. So I don't get to use that excuse anymore, and second would be, I'd rather do M&A with our excess cash. But then buybacks would be third, but we feel like our share price is undervalued. And we like the leadership team of the company. And so we don't have to do a lot of diligence on the business. So we've actually been active. We think our shares are undervalued. And so we've actually been actively buying back some shares recently.

Interesting. Okay. Anything else? All right. We're good. Thank you.

Thanks, Steve.

Thanks a lot. Really appreciate it.