APi Group Corporation (APG) Earnings Call Transcript & Summary

I know we'll have a few stragglers coming in, but let's get started. Again, we're very excited to have APi Group with us today. We've got Russ Becker, who is the CEO, President of APi Group; and David Jaco, who is the CFO. Russ, as I sort of make my way to you. Let me ask you kind of a softball question, like you've been CEO of a public company now for about 5 years, right? Like maybe biggest challenges and what you're most proud of so far? And then maybe it's a very unique business model, as you and I have talked about many times. So what keeps you ahead of the crowd. What keeps you differentiated?

What am I most proud of survival.

That's why I won't ask you a question because I knew I get a colorful answer.

It's funny. We just were having a conversation like when we were privately held everybody talks about, I never want to be a public company CEO. I never want to be a public company CEO. I never want to be a public company CEO. And I've actually been having a lot of fun as a public company CEO. I think it's actually made me better at my job, and I feel like I'm a better CEO today than I was 5 or 6 years ago. And one of the biggest challenges this is really not the answer to your question, but one of the biggest challenges is how do you balance delivering a quarterly result, delivering a yearly result yet also having the ability to take a longer view. Like -- so like last May, we launched our 10/16/ 60+ kind of the next 3 years of our where we're going to take the business. And like you have to be able to look out that far and to make good decisions and choices, yet deliver on a quarterly and yearly result. And that's not always as easy as certain folks in this room might think and the pressure that you have to deliver that quarter the result can be tough. I would say that one of the biggest challenges was just around this whole idea of SOX and compliance. And probably the biggest surprise was actually the lack of SOX compliance inside the international business. And Chubb was a public company for many years going back to United Technologies and Carrier. And yet they were a long ways away from actually being compliant. And so even -- so there was that aspect of it. And then -- but as the private company, there was -- that's just that whole regulatory environment and all the stuff that comes with that was a big lift for our business. But like what am I most proud of, like -- the fact that we've been able to basically grow the company from $4 billion to pushing $8 billion and yet continue to enhance our culture and our culture is centered on our purpose of building great leaders. And I think that's like something that is unique to APi. And I think probably one of the least talked about aspects of APi is the strength of our culture and the quality of our people, and it's because of this investment we make in them as human beings and as leaders.

That's a good answer. And then maybe just a follow-up on that, Russ like, so again, the competitive advantage of the company, like you leave with inspection goes to service. Why do you think competitors haven't been more aggressive or can they copy you and it seems like you can grow your itself mid- to high single digits in that world, inspection service for the foreseeable future. But do you worry about capacity constraints at some point or other market headwinds?

You're like the master of...

I ask 5 questions in one. But you're used to that. You call me out all the time.

It's like trying to keep track of all the questions that you do.

Differentiation.

Well, I mean, the biggest differentiation, you answered the question for me is this idea of inspections first, and then it's like, why don't people copy you?" and I think that -- if you really take a step back, yes, there's been private equity enter into our space. But the reality of it is the majority of our competitors remain small family-owned businesses. And for those small family-owned businesses, it's much easier for them to grab a new installation project, say, $1 million installation project versus building up a really robust inspection department, $1,000 at a time. And so we've been at it for an extended period of time now. We've built up the infrastructure that it takes to support building a robust inspection service and monitoring business. And I think that's something that's played to our advantage. And we've built out a really, really robust branch network, and that's supportive to having a robust inspection service and monitoring business. So even if you look at one of our largest competitors in the space, they don't have the same branch footprint that we do. So they're booming around the country doing large installed jobs and that works for them, that's where their interest lies. But that's not how we're trying to build our business. We're trying to build our business with the inspection first mindset. And I think that's one of the biggest differentiators. And it takes effort to build that out. And we feel like we have the scale to continue to grow it. I don't know if -- I think one of your questions in there was around like will we run out of runway. The answer is no. If you look -- like if you just take the largest metropolitan areas in the United States of America, I don't think there's a market that we have more than 5% market share. And so for us, and our ability to continue to drive inspection growth, which leads to pull-through service work, the opportunity is boundless.

I knew you can keep track of my questions.

I try.

You're pretty good. So this one might be for you, Russ or for David, like you came out today, you serve my next question, which is about update on the quarter you kind of gave us that. So like any sort of highlights that you want to talk about? I think you guided within your algorithm sort of mid-single-digit plus organic. Margins look pretty good, I think, versus -- the Street. Any sort of highlights you talk about as you left Q4, I think you said you'd be better than the midpoint of your guide for Q4. So any highlights you want to talk about what drove the business, any highlights about the guide. Obviously, we'll find out more when you report next week, but we kind of force you into this every year. So sorry about that.

Sure. I'll give it a go. The fourth quarter was, as we described it in the press release that came out earlier this morning. A lot like Q3, there's a lot of great momentum in the business, both on the service inspection and monitoring revenue streams. As well as on the project work in our business is being propelled by a really strong project environment right now. Fourth quarter was our best quarter of the year from a year-over-year margin expansion perspective. We felt confident that our margins were going to improve in the second quarter into third, third into the fourth. And they did that. And so as we exit 2025, we're going into Q1 a really good position. The backlog is strong. There's a lot of momentum and nothing really that looks to knock it off the momentum in the business right now.

Got it. And just -- you cannot answer this question, Dave, but just seasonality in '26, normal?

Normal.

Okay. Thank you.

He gets the softball.

I'll give you more softball. So -- but to that point, David, and maybe this is for us, like you talked about general strength across Safety Services, but maybe what's driving the organic growth as you transition to '26. Like I know we don't like to talk about specific projects, but is it all the same areas, data center, advanced manufacturing, semiconductor, any others that I'm not mentioning and generally the same thing as '25?

Well, I mean, I think for us, critical infrastructure continues to provide opportunities more in the specialty services space. Health care continues to be robust. You hear more and more people talking about life sciences, which creates opportunities, especially in certain pockets in the country. So it's there's a lot of opportunity out there if you're in the right end markets.

And I often think to myself, like I shouldn't ask Russ the question of TAM because each project is different. At the same time, the more complex the project, the more there's a need for inspection and service, right? Like so these big data centers have more TAM for you guys as an example.

Well, for sure, I mean, a new data center that comes on, like I've shared in the different investor meetings that we've had this morning, one of the biggest things that's changed, like with the new build size of -- or new build component of data centers is just the size of the projects. And just because the data center installation work is worth $50 million, doesn't mean you're going to have $5 million a year of inspection service and monitoring It's going to be significantly less than that, especially in new facilities. Because you're not going to generate the same pull-through service in a brand-new facility that you would in an older facility, and that goes for data centers, just like it goes for warehouses just like a medical office building. And so for us, like we want to make sure that we're taking good care of our data center customers that were doing their inspection service and monitoring today that leads to a different environment when you're proposing on the work because they're more interested in you because of your ability to get the work done safely with a high degree of quality in the schedule and the time frames that they've laid out. And that's what's important for us. But we clearly, our priority as a company is to grow the inspection service and monitoring of our business, first and foremost, and the project work is gravy.

Just is the project work like because maybe 2 years ago, we started asking about data centers, right? And to your point, you want to leave with inspections. But given how much demand is there out there, can you find projects that are better than you thought in terms of pricing or install margin or whatever you want to talk about.

Well, the short answer to that is yes. All right? Now in the same breath, you are committing resources to these large data center projects. So you're taking resources from some place. So like for us, because we have separate departments for inspections, separate departments for service, we're not taking resources from there. We're taking resources from different project opportunities and putting them on data centers. And so if you're going to sacrifice other project opportunities, need to make sure that you're getting a higher margin on the work that you're doing. And you should. These data centers, the size and the complexity of them, they're not super complex, but the size makes it complex and they're in remote locations. More and more often, they're in remote locations because they're being cited next to available power. And like one of our clients has a project in Northern Louisiana. And not everybody can man a project in Northern Louisiana. We can. And because of our ability to do that, you should be able to price that in.

I agree. Is data center 10% of the business, something like that?

What's that?

Is data centers, 10% of sales, something like that?

Well, actually, I thought it was about 10% of sales, but apparently, that was corrected this morning is 8% revenue in 2025, probably headed towards 10% in 2026.

Okay. Helpful. So maybe an update, you mentioned your branches. And so one of the big sort of things that you're doing is branch optimization, as you've talked about many times. And so at your last Investor Day, you said a little less than 10% of your brands in North America were not very profitable. That means under 10% margin. While you had 40% of your brands internationally that were under 10% margin. Maybe you could update us on the progress of getting these kinds of branches up? Like I assume you're making progress, but you tell me.

So at our Investor Day last May, we reported that our North American Safety branches, median margin was 17%. And internationally, I think we said 13%. And we will improve on that over the course of this year. I would guess that there will be some place around 100 basis points will be able to move that median into the right. We have an established goal that we want every one of our branches to perform at a minimum of 20%. And so obviously, there's opportunity there for us to continue to work on it. You're always going to have a straggler or two that you're dealing with for a myriad of different reasons, and that's kind of the nature of it when you have as many branches as we do. But that median will continue to move to the right. And I've got a lot of confidence that we'll be able to do that.

Russ, I mean, I think you've done a good job, especially internationally versus what most people thought Chubb could do way back when. So to that point, like when I see still 40% that are relatively low margin, how hard is it to get those branches to back to, like, I think your rate that you want to be at international is 18%, right? So how difficult is it -- because it seems like that would be the low-hanging fruit, right, to go after the least profitable branches, but it's easy for me to say as I just sit here. It's a lot harder to do it.

Yes. I mean I think the thing that people have to understand is that a really high-performing branch. It's got nothing to do with the playbook. It's got everything to do with the branch leader. It's got everything to do with the branch leader. And so we -- like we've been on this journey of leadership development since 2003. And so we have a 20-year jump in North America on the international business as it relates to what does that look like? And in one of our meetings this morning, we actually -- somebody asked about like where do your branch leaders come from? And almost every one of them is promoted from within which means that we're growing and developing and bringing the right people into our branches that ultimately can take on a branch leadership role. I mean that's been a 20-year -- 20-plus-year journey and our international business, we're 4 years into it. And so they're just -- they're behind. And it's like it never moves as fast as you want it to, but until you can really ascertain and determine like, do I have the right leader at this branch? You'll never get there. It's like I joke around all the time. It's my favorite time of year because I get my favorite report of the year, and that's my rolling 5-year branch history report. So it's revenue and EBITDA, every branch in the company. And so I can see it's going like this over 5 years, this if it's going like this.

You know what to do.

Well, you have to start asking yourself, the first question you ask yourself is, do I have the right leader and then you have to be able to -- if you can ask yourself that, then you have to be able to answer yourself objectively -- yes or no. And if the answer is yes, then you're going to take a different path. If your answer is no, you're going to take a different path. And sometimes answering that question objectively is harder than you think it is.

Interesting. That's good color. So Specialty Services, the growth over the last several quarters has inflected. I think you're waiting for some bigger government projects to start up, but maybe what changed in your business to allow that inflection. I'll keep it to one question for now and then keep going.

So can you say that again? I didn't...

The Specialty Services is inflected. And I think you're waiting for some bigger government projects start, but what else happen in the business, like you're obviously exposed to telecom utilities. So where is the growth inflection coming from in specialty?

Well, I think you got to take even a step further back. If you -- and I'm sure you remember this, but like some of that was purposeful on our part.

Of course.

Where we were -- had an increased focus on project and customer selection and very specifically in purposely pruned some of the project work that we were doing in the segment. And it took a little longer, so to speak, for that to kind of turn and get headed back in the right direction. And we feel really good about the end markets that we're in, in specialty as well. And so -- so leadership matters. I think one of the things that we did, we realigned the HVAC piece of our business in specialty. We feel like the leadership there is better -- in a better position to help that piece of the business. I'd also tell you that the leadership inside the HVAC businesses stepped up their game and are delivering a much better result on top of it. So I think there's a combination of things that have happened there that have allowed that business to really get going in a really, really solid direction.

Got it. So Russ, just like -- so was it more that you cleared out the lower margin projects, whatever in '23, '24, and then you kind of allow the business to grow again in '25? Or did something else happen in the market? So is it more -- because you had -- to your point, you would controlled projects for a couple of years. So was it more you got everything out and then you allow specialty to grow or did something else improve like one of the main markets or maybe...

Well, I mean there's an element there to any like we learned as we went through this, you kind of alluded to it, but like we took on a government program that as we built into kind of our projections and our forecast, government were ramping like scale like this -- like that's a mistake. I think government related, you know what I mean, like -- and so our people learned a hard lesson on top of it. So in the project side of your business, and this is one of the reasons that we're building our business to be inspections first and service first, is that when you dedicate resources to a project and a project slips, you still have those resources. So what are you going to do with those resources? So like in this government program that I alluded to, it slipped dramatically out to the right, and you still have those resources and it has -- it's going to have an impact on your business. So you have to plan accordingly. And I think that was a valuable lesson that our business leaders learned. It's like plan accordingly and budget and forecast accordingly.

And discount when you need to.

Discount where you need to and the reality is we could have taken other programs because we had available resources, but we didn't think we had available resources.

Got it. That's helpful. I'm going to open it up to the audience in a second, but let me ask you one more question about Specialty here around margins. So like margins may be a little more sluggish to turn than growth? I mean it does seem like margins turned positively recently. But do you see sort of more consistent positive inflection now? And I think you've talked about a lot of initiatives, right? You've talked about project execution, fleet optimization, G&A efficiency. Do they begin to kick in now more significantly?

Yes. We expect -- going all the way back, I think, to the second quarter of last year, we said that we would see sequential margin improvement across specialty as we worked our way through the year, and you saw that. Well, you'll see that, I guess, when we release next week, maybe I'm giving you some more shadowing.

You already reported this morning, so you're fine.

But I'm not worried about it actually. And -- but so that we expect to see margin improvement in that business as we continue throughout 2026 as well. And we have the same high expectations from margin in Specialty as we do in Safety. Maybe they'll never quite get there or there will always be chasing it, but the expectations for margin improvement are there.

Any questions from the audience? anyone to ask a question? I'm going to get a question from the audience one of these days. Okay. So price versus cost. I think you've said many times that margin-accretive pricing is very important to the business. So maybe has that evolved as you've been a public company like you changed at all how you price projects or...

Project specific or just...

Inspection and service pricing in general, I shouldn't have said projects. I should have said pricing in general.

Well, I mean, actually, there are kind of 2 different animals. You know what I mean, because your project work, you're pricing it in real time and you have to make a decision as you price to work on what your margin expectations are. And so but you should be taking that price and you should be, so to speak, maximizing the pricing opportunity in every one of your projects. I think inspection and service and monitoring, you have to be more disciplined in how you look at price on a year in and year out basis and making sure that you have escalators built into your agreements if you're taking on say, 5-year inspection contracts, you need to make sure you have adequate price built into those agreements. I would say that we have for sure gotten better and more sophisticated at how we look at price. I don't know I'm even going to say since we become a public company, but since we acquired Chubb. And David can speak to this because he lived it for the 2.5 years, he was over there. But like they did a leading up to our acquisition. They did a poor job of taking price on a regular basis, if at all. And so we inherited a number of poorly priced contracts that we had to be very aggressive on. And I think that provided actually a wake-up call to the North American safety business saying, "Oh, maybe we need to be thinking about price a little bit about a little bit differently. And I think we've gotten better because of that. And I think really it's more because of how poorly Chubb had done it, has been a lesson learned for the entire organization. I don't know.

No, I think that's spot on. And like delivering price year-over-year is really about having a mindset that the services that you're providing in the marketplace command value and that we owe it to our shareholders, to our teammates and to our field leaders to be getting that value for every work that we do and just getting that mindset into our teammates is really the discipline that it took.

I mean the reality of it is, Andy, when you think about like an inspection, your average inspection is $1,000. So when you think about whatever facility it is, the budget -- annual budget for that facility, if it's $1,000 or $2,000 it's like really nothing -- and so...

It's really important.

So like if you're doing a kick-ass job of taking care of that facility and that property manager and that building owner whether you're priced at $1,000 or $1,100 or $1,200 doesn't matter. Because their time is worth the $200. And I think sometimes folks lose track of this idea that like how much of a team sport, the inspections are because you're going into these facilities and you're interacting with the property manager or the building owner, you're tripping fire alarms. You might be running water, which means you're flowing water out into the parking lot, which means you have to maybe cordon off part of the parking lot, so people's cars aren't in a way and all of that stuff, like these property managers, they -- I shouldn't say they don't care about $200 because I'm sure they do care about $200 but they also recognize the fact that their time is worth $200.

So I don't worry about price versus cost for you guys really, but commodities are volatile. Sometimes you have exposure to metal piping, things like that. You guys feel good about price versus cost right now?

100%. I mean we watch it. Every Monday, we get kind of an update on like what's happening in certain commodity prices. The one that I focus -- I suppose I focus on to. But I primarily focus on hot rolled coil because that's an indicator of what's going to happen with pipe prices. And we've seen I would say, a slow increase like which I'm going to say I'm going to put in the manageable category. I also watch copper, too. But but primarily a watch hot-rolled coil. We talked about it all the time. We have what we call monthly leaders calls where we probably have, I don't know, David, 250 people from around the country -- around the world participate in these leaders calls probably every other month, we'll have a procurement update. You know what I mean, where they're providing updates on what's going on inside procurement, but also what's happening with commodity prices. If we start to witness any sort of, say, rapid escalation in commodity prices, we're talking about like protect yourself at the time of your proposals, when your proposals are going in. So like even before President Trump won the election, in his previous administration, he used tariffs as a hammer you ran on tariffs, like so if you didn't know he was going to use tariffs as a hammer, then shame on you. And so we feel like we have been out in front of that wave since day one in protecting ourselves and everything else. So I feel like we've done a pretty good job on that front.

That's helpful. And then, obviously, M&A is an important part of your overall strategy. I know you committed to $250 million of bolt-on M&A per year. I think you've talked about taking a step forward, adding to elevated service platform to get closer to that $1 billion in revenue and then adding maybe to international business this year. So can you give us more color on your M&A pipeline? Can you find deals at reasonably attractive valuations?

Yes. So like we've been sharing through the course of this morning, the pipeline remains really robust for bolt-on M&A. And I would tell you that pipeline is maybe opening a little bit because we've opened up the aperture to the international business. And so we've got some really good stuff going on in the international business for really the first time since we've owned Chubb, which is exciting for us. So I feel like we're still able to buy bolt-ons for 5x, 6x, maybe 7x but what you'd consider reasonable multiples to acquire these companies. Companies that are in that $20 million to $30 million or maybe $40 million of EBITDA especially in the fire and security space, continue to attract a lot of PE interest and they drive up the multiples. And they're paying very, very high multiples for these businesses. We recently announced the acquisition of Certisite. We're really excited about this business. It's not a huge company. It's plus or minus $90 million in revenue. We paid a healthier margin for this -- or multiple for this business, but 90% plus of their revenue is inspection and service works.

That's what you like.

And so it's like straight down the fairway. So from a strategic fit, it's not like we just bought more and paid and overpaid for it. This is a great strategic play for us. So we're excited, and we're really excited to welcome the Certisite team into the APi family. But you're still seeing a lot of pressure in that $20 million to $30 million EBITDA kind of range from private equity. As it relates to the elevator space, like we're really, really excited. We did one deal last year. It was more of a tweener. So it's a stand-alone business that sits next to elevated underneath APi elevator. We have a number of real live bolt-ons that we're working on right now in the elevator space that I suspect that will get done in a relatively short order. We're taking a walk before you run approach in the elevator space. Let's get one done, get it integrated, see how it goes, learn our lessons and then we'll go do another one. But we want 100% see the opportunity to take that business to $1 billion plus in revenue.

It's good to hear. And Russ, I mean, you did, as you know, because you showed a scribble on a napkin, the 1 to 2 deals to get to $10 billion. So we're expecting that at some point over the next few years. I think David, you were at a competitor conference talking about fire alarms, electronic security, fire suppression, elevated services, all areas where you already had a leg but you could add to it with a larger deal. So it seems like from what you're saying, Russ, on the $20 million to $40 million that it's harder to do larger deals right now, but you tell me, I don't want to put words in your mouth. So a bigger transformational deal when?

It's probably not if. It's probably when.

I would say that when the time is right. Okay. How is that?

I mean -- it's succinct.

I mean -- well, I mean, I think the beautiful thing about where we're at today is we don't have to do anything. And that's a great place.

You shouldn't let me push you into something.

Not going to. So that's one thing I -- nobody here has to worry about it. So -- and -- but we don't have to do anything. And we constantly look and take a peek under the covers at larger transactions and it's got to be the right fit. And I feel like we've demonstrated our capability of doing larger transactions with Chubb. But we still have to be disciplined in how we look at these larger deals and make sure that it's the right fit for the business. And I mean, everybody, you have our word on that, that we're going to be disciplined that way.

And then I have to ask you the obligatory Safety and Specialty together question. So any changes in the thought process? I mean, you obviously have a good strategy to make them both better. But maybe you can talk about are there synergies these days between the two businesses? Like how do you feel about them? And if someone came and offered you a bag, would you take it?

Well, the old adage that everything is for sale, everything technically is for sale. So nothing changes on that front. There's more synergies there than I think most people think about. When we talk about data centers, I think most people actually think that we're talking 100% only fire life safety and security and that's not true. We actually -- as a percentage of total revenues, I think our specialty business had more data center work as a percentage of their overarching revenues than our safety business did. And so like leveraging customer relationships with some of these hyperscalers, like it's happening every single day and we're taking advantage of those relationships that are swinging both ways.

Interesting. And then I think at the Investor Day, you talked about a need to build systems and applications to make that $10 billion sales platform. So maybe just an update on how you're going -- how you're doing with these systems application. And are you using AI at all to help you to build a stronger APi?

I'll talk a little bit about AI and then I'll turn it over to David to talk about the system stuff. So at APi, we view AI as an opportunity, not as a threat. And we've actually stood up an AI team inside the organization. And we took a really, really smart leader of ours and he's got 5 people on his team and his mandate is to focus kind of his early work on the -- our field leaders, the men and the women that work in the field and how can we develop some tools that will make their jobs easier, make their jobs more efficient, more productive, they can see more of our customers. But like just to give you a simple example, like you can see a day where AI designs the fire alarm system for a new improvement project. And you're not in your designer is -- AI is taking it, say, from 0 to 85% and our designer is taking it from 85% to 100%. Like you can see that day coming. Same thing on the suppression side, same thing on the security side. And so we're investing the resources to make sure that we're I don't want to say we're on the front end of it, but we're out in front of it, and we're taking advantage of some of the -- some of the capabilities and tools that are already present today.

Got it.

The system project. So the system project has won a lot of hard work, but we're where we want to be on that project. So we've done the data cleansing work that you need to make a successful system implementation. The system itself is designed and built. Our teams are actively testing the system as it is, and we'll roll it out or deploy it in our pilot company sometime in the first half of this year. So a lot of hard work where we want it to be. But the added benefit, I think, is to really maximize your AI investment as well as to get a new system, a new business system working as it should. It really does require putting a lot of time, energy and attention on your data. And so the clean data that we're getting as a result of the system work, I think, is really going to enable us to do a lot more with AI once that system is providing the solid foundation for our business.

Got it. So running out of time. So let me ask you this last question, Russ. So 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?

Well, you talk so fast. I don't know if I really caught the first part of your question.

Top 2 or 3 innovations that you're focused on or structural changes.

Well, I think one of the things that is a little bit unique about us, I mean, probably AI and technology enablement would be the way I'd answer those questions. But I think that if you go back to the Investor Day and you go back to 10/16/ 60+, we've said that basically, the drums that we need to beat to achieve those goals aren't changing and I think if you think about organizational discipline and about really good companies, there's no flavor of the day. They don't feel -- they don't like we don't need technology to necessarily enable us to achieve our goals. Technology will help us achieve our goals, but it's not an excuse to not achieve our goals. Does that make sense?

Totally does.

And so we just wanted to help us be more efficient. It's going to help us grow our business because it's going to free up people. And to me, like what we're doing and being consistent in our behaviors and our ability to execute is what's going to deliver 10/16/ 60+, and that's exciting to me.

Awesome. Thank you very much, Russ and David. Thank you. Appreciate it.

Thank you, everybody. Appreciate you being here.