APi Group Corporation ($APG)

Good afternoon, everyone. I'm Curt Nagle, the Senior business and information services analyst here at BofA. This session is APi Group. Very pleased to welcome Adam and Adam who work on the IR team. We'll structure this as a basic fireside Q&A. But if time permits, we can certainly open up to questions from the audience. So gentlemen, welcome. Thank you for coming. Appreciate it.

Thanks, Curt. Thanks for having us.

So yes, first question, maybe starting with one on what I'll call the operational DNA of APi. Inspection first, that's the playbook. Maybe I'll walk through the history of the strategy, how it's driven growth and how you've matured the model over the past, let's call it, 10, 20 years.

Yes. Happy to do that. And first, thanks, everyone, for joining us today and for listening in to learn more about APi. In terms of the Inspection First strategy, that is really part of our DNA. It's a strategy that started in one of our branches. Somewhere between 10 and 15 years ago just by an individual in that branch being entrepreneurial and thinking of a better way to run their branch. And we saw that it had really driven some great results in that branch and created a much more recurring sustainable business model and it's spread to that operating company and then that operating company President joined another operating company and its spread to that operating company. And it just kind of slowly spread. And then I would say there's probably two other inflection points. Becoming a public company actually has helped us as a business have more unified strategy and more alignment in terms of what we're doing. So since we've been public, there's been more adoption into the Inspection First strategy really across our full branch network and in North America. We do feel that, that is a mature strategy. We'll continue to execute it. And as we add new businesses to the portfolio through M&A, they become part of the next group of businesses that are putting that strategy into place. So we're really excited about it and still in the early innings of implementing that strategy internationally as well.

Mature in strategy, not mature in opportunity, right?

100%.

Yes.

Correct.

Yes. So on paper, at least conceptually, it seems kind of simple, right? You're targeting what are, in many cases, mandated services, it's a recurring model, hard to execute, right, hard to build. So number one, I mean, are you seeing competitors trying to copy or emulate the strategy? And then, I guess, what is it inherently within the culture, within the executional framework of the company that makes it so difficult for your competitors to [ log ] against you?

Yes. So we -- from time to time, we will see some competitors try to kind of copy the strategy. But largely, we actually don't as much as you might think. The reason being, if you think about the market we participate in, it's a highly fragmented market with a lot of mom-and-pop family businesses, and they have essentially run their business usually project first because they're focused on larger ticket size, larger dollar amounts, despite it being lower margin. And there's really not a catalyst for those businesses to wake up one day and flip their business model. This Inspection First strategy requires a long-term investment in dollars and time. You first need to sell the inspection. So we built the sales force, you need to dispatch the inspector, execute the inspection, create the efficiency report, turn that into a service proposal, execute the service and all. The faster you can do that to get your customer back in compliance with the fire marshal and their insurance provider, the more you become the easy button for your customer. And we find that unless you're really committed to the strategy, and we've got a separate inspection department to be fully committed to inspections. The competitors who try to dip their toes into the strategy oftentimes have some footfalls or stumble because they're getting pulled back to those higher sized project opportunities.

So they don't have -- I guess, the specialization for one, right? They don't have the scale and then obviously, building the, I guess, call the muscle memory. It seems like a pretty good moat?

100%. And like it all kind of comes from the foundation of our culture too. Having a business with a culture and our purpose of building great leaders, we have a really good alignment throughout our organization and what we're trying to do and what it takes from each individual and their respective roles to lead in those roles and to help us get there. And it's no different in the inspection for our strategy and putting that into work.

Okay. Fair enough. Let me quickly touch on market trends. We don't have to talk about data centers, right? I think we have a pretty clear idea of what's going on there and kind of where that could go, at least in the near term as a percentage of revenue. But in some of your other bigger verticals where are you seeing the most strength, what's contributing to your, I guess, the highest revenue generation right now? Where are you seeing any weakness?

Yes. So our business, as we're kind of about halfway through the first quarter or getting towards the end of the first quarter, we are seeing a lot of consistency in our inspection service and monitoring business as we have over the past few years and that business really is pretty consistent year in and year out, where we've seen a lot more strength in 2025 and so far this year is our project business, which has been out delivering our long-term organic growth algorithm. And you mentioned data centers, that is an area that's been strong, but really kind of -- end markets matter is what we believe at APi, and it's not just data centers, advanced manufacturing, warehouse and distribution space, pharmaceuticals and health care have all been markets that have shown resilience and growth this year and last year. And we've seen our backlog continue to build, and we view the backlog today as kind of healthier than -- we kind of view health as the expected margin we'd get out of it than it was a year ago or two years ago. So we feel good about where the business sits, the kind of robust activity on the project environment and the consistency we have on the inspection service and monitoring side.

Yes. Bigger and healthier margins, maybe more importantly.

Yeah. For sure.

Okay. And so a pretty decent recurring revenue stream. But just given that it's topical in terms of sensitivity to either economic downturns and inflation, what's going on with fuel, stuff like that, how insulated is the business from macro gyrations?

We believe it's very insulated. We've seen fuel spikes in the past, and we've been able to neutralize that with fuel surcharges and kind of help pass those costs through to our customers. And I kind of mentioned it, but the consistency of our ISM work and the recurring nature there and then the end markets mattering on the project side. We feel like we've already been -- if you -- depending on where you're looking, office buildings, high-rise condos and apartment buildings have been in a tough spot for a couple of years now. And we've been kind of successfully navigating that as we're focused on more owner-direct opportunities in those target end markets that we talked about.

Okay. Fair enough. So I guess sitting on the topic of recurring revenues, getting closer or fairly close to the target of 60% or so right from inspections from the servicing, right from monitoring. I think you were at 54% last year. I know what the opportunity set is, I think that's fairly clear. But in terms of hurdles to getting there, what could they be?

Yes, I can take that one. So you mentioned that we've ended at 54% this year from inspection services and monitoring, that's continued to kind of tick up year-over-year as we continue to focus our long-term algorithm on the kind of high single digits on the inspection service and monitoring and more low single digits on the project revenue side of the business. Obviously, if the project revenue side of the business is robust, that can be one of the headwinds like we saw in 2025. Just a lot of good project opportunity out there, and like we're going to obviously take advantage of that even if we're kind of growing that part of the business. A little bit more than our long-term algorithm, like it's still a great opportunity, great work for us at healthy margins. So the robust project environment can definitely be a little bit of a headwind to get into that 60% target. The other, I would say, kind of hurdle or headwind would be a lot of the bolt-on M&A, like we talk about the competitive landscape is a ton of small family-owned businesses. And like they're not worried about their gross margins or their EBITDA margins, like they're focused on chasing kind of the bigger ticket project opportunities because that helps them get their $10 million revenue for the year. So a lot of these businesses when we buy them, they're much more project-heavy focused and less inspection service and monitoring focused. With that being said, like that's part of the diligence for us is what is their mindset? Are they open minded to starting to kind of shift their strategy to align with the APi strategy of leading with inspections and driving that revenue. And if they're not, then it might not be a good fit. But yes, that can definitely be a headwind for us. So you're kind of taking -- you can take two steps forward, one step back with some of the M&A.

Right. But just a rate of growth of project business. Maybe stick on that for a second. And correct me if I'm wrong on the stats, I think historically, it's about a -- for every buck of project, you get $3 to $4 in recurring lead on revenue. For the -- I guess, the book in the new project revenue are coming on, are you still kind of holding at those rates? Or where does that stand?

So the -- I think the ratio is actually a pull through from our inspection dollar. So it's like if every dollar of inspection work we do, we typically get $3 to $4 of service revenue from those inspections. But there is -- we would expect as we have a more robust project environment now to be -- have that ultimately be a tailwind to our inspection and service work on the back end. Particularly the data center world, where we're building these data centers. We're putting in the fire protection in these data centers in rural remote locations where we happen to have branches nearby very often, and we're best positioned to be doing the inspection and service work on the back end. So the stats were a different thing, but you're not -- you're correct in the fact in the thought that those inspection opportunities that come from our inspection and service work, will then provide new inspection and service opportunities in the future as well.

Yes. Okay. Fair enough. And so, thinking about the margin profile and specifically customer selection, project selection has been a big focus. I think part of that is just you can be selective in a market like this. We talked about the higher margins. But aside from just inherent profitability, what are the other criteria that go into selections? Maybe put another way, for every project you're turning down or you're accepting, how many turn it down and why?

Yes. So like when we talk about disciplined customer project selection, I mean, there's, I would say, a couple of different kind of buckets there. One is like in this inspection for strategy, you're building good customer, good sticky customer relationships through that. Like -- those are probably the customers that you want to do project work with because you have the relationship, they're going to pay their bills, they care about the life safety systems, protecting the people and the assets in the building. It's like that's a good customer to do work with. And like that work, you're going to be winning the work based on your relationship, not based on who has the lowest price. And so you want to kind of -- you want to go after that work and like stuff that's developer-led, for example, like that's going to be the lowest price wins, and that's -- we're not interested in that. Like we want to be getting good healthy margins on the project opportunities we're pursuing. So that matters. And then I would just say like when you're -- like when you're putting together your proposal on a job like you want to make sure you're proposing it correctly, so you're not getting bad margins. You're getting good margins that you're allocating your people to work that is going to be worthwhile and not lower margin work because that's -- if you think about just one like branch leader, like that's one of the bigger strategic decisions they're going to make is how are they using their people and making sure you're using them on good opportunities and not kind of wasting their time on bad work.

I guess it's kind of a side question, how are you using technology for better project selection? Is that a focus, right, particularly if it's on the branch level, I'd imagine a lot of sort of human decision-making, but in terms of maybe adding new tools or analytics or maybe that's an opportunity that could be coming down the pipe.

I mean like just in general, technology we see, especially in next 5 years is like a really good opportunity for us. Going back to our competitive landscape like small family-owned businesses are probably not going to be investing a lot of money in technology to kind of help their teams where we have -- like we've stood up an AI team that basically their mandate is, go work with the field and figure out what's the pain point in their day-to-day and like help them get tools, whether it's AI or other technology like in their hands to kind of eliminate pain points, manually intensive stuff. So yes, there's like -- we're definitely starting to use technology for our field leaders to help them become more efficient with what they're doing. But we're definitely in the earlier innings, and there's a lot of -- yes, it's a big opportunity for us.

Could we expand on that a little bit more? I think you've given a handful of specific examples, albeit it's pretty early. But whether it's reducing error rates, whether it's cycle time, whether -- getting better route density, I mean, take your pick of operating metrics maybe unpack that a little bit in terms of general efficiency and maybe margin uplift you could see.

Yes. I can give you a couple of examples that the team is kind of working on right now. One is -- it's called APi Echo. So it's a tool that -- basically it's an app on your phone that allows our field technicians, like they don't have to take their gloves off or their -- stop what they're doing and take notes and stuff, it's recording what they're doing and then they can kind of use that to help like put together a deficiency report because it's got all the notes in the audio and everything. So like that's an easy example for them to just save a little bit of time here and there when they're interacting with customers. Another tool that we've started to roll out is a customer attrition tool. So it basically takes all this customer data and it can kind of predict when a customer could be at risk for attrition. So then you can try to make sure you spend enough time or at least thinking about, am I spending time with this customer to make sure they're happy, satisfied with the quality of service we're providing. So that's a good tool. Another tool is kind of putting in product manuals into that APi Echo tool. So if a technician is working on a fire alarm panel and there's error code 222 and they don't know what error code 222 is, they can ask it, what is error code 222 on this, whatever Honeywell fire panel, and it can tell them how -- what that means, how to resolve it. So, there is a bunch of different little opportunities like that, that are rolling out, I would say, in small pockets of the business. Seeing how it works, seeing what -- maybe there's things to kind of fix to make it better and then continue to roll it out to more parts of the business.

Okay. So an opportunity to be capitalized on. Okay. Right. So maybe just going back a bit to end markets. So advanced manufacturing, semiconductors, data centers and pharma, all markets that I think you're pretty excited about. Within these, are there any end markets that are, I guess, more accretive or margin enhancing than others?

I think within those type of target markets, they're all generally -- what we look for is the greater the complexity or -- and the complexity can come in a variety of ways, like the actual fire protection system itself. But also the location we need to do the work in, the amount of people we need to get in there and the time constraints required. All those things create a more narrow competitive set where we can make sure we're charging the price that is commensurate with the value we're bringing to the table. So all of those end markets, we are finding the ability to price our work in accordance with kind of the margin expectations we're looking for. And it's because of that complexity and some of those issues if you're looking at like a high-rise condo building or every floor is kind of a cookie cutter or the same floor, that's less complexity, less ability to differentiate yourself and more price wins those. So all -- that's why end markets do matter for us and the markets you mentioned, I think, are all markets where we're seeing those stronger margins.

Okay. So maybe just kind of sticking on that. And I think there's also been a desire to not over-index and again, not to belabor a point. Data centers would be one of them. But I guess at what point would you consider yourself over indexed to a particular market and maybe pull back because either it's drawing too many resources? Even if the margins are good, how do you think through that?

Yes. So we don't have like a hard and fast rule on, "Hey, this -- once you get to this percentage of revenue, we're not going to do projects there." We've kind of consistently said we are going to be opportunistic but not overcommitted to the data center space, and that really goes for any end market that's experiencing robust growth. With the thought being, we want to continue to operate within the framework of that Inspection First flywheel. So a lot of these data center opportunities or opportunities in those end markets we just talked about are coming from existing customers that we have relationships with on the inspection and service side, and we're having those discussions on an owner-direct basis. And that's the exact type of project opportunities that we're looking to do. And if we happen to have a year where there's an abundance of those like 2025, we're happy to be opportunistic in those years. But yes, we're -- we've gone from, I think, 6% of data center or high tech exposure, which includes data center in 2024 to 8% in 2025. So we've made a step change in terms of increased exposure there, but a small step. And I don't think you'll see us in any of the areas of some of the other competitors that have kind of putting all the eggs in that basket.

Sure. Okay. Fair enough. Shifting to elevator business, right? So I think that's what I'll call maybe a newer greenfield opportunity. You made a relatively large acquisition through Elevated a couple of years ago. $10 billion market, I think it's fairly similar in terms of the dynamics of all the attractive recurring revenue streams and things like that and mandated work. A couple of questions. One, just how does the competitive set look compared to other markets? What gives APi the right to win and then just the balance of organic versus inorganic growth?

Yes. So we became interested in the elevator market years ago for a lot of the same reasons we love the fire market. There's nonrecurring demand for services that are regulatory mandated and elevators are of highly important mechanical system that when they go down, the customers want them fix right away. So there's really great demand dynamics and recurring revenue dynamics in that space. And we found -- we thought that Elevated was the right business to kind of put our foot into that space. And since then, we've -- nothing has really changed in our long-term thesis. We really believe that, that's a place we'll continue to invest behind. And we've said in the past, we want to have a $1 billion elevator platform. In terms of like the competitive dynamic, there's the OEMs that are manufacturing and they also have a service arm and then there's independent service providers. And we're one of the larger independent service providers with ambitions to be the largest. And the right to win is really quite simple. There is an opportunity to just be a local service provider that builds relationships, is attentive and responsive to these customers. If you kind of look around or ask around in a lot of different cities, you'll find that there's just an appetite for more responsive elevator service. And it's -- there's an opportunity to be that local provider that partners and provides excellent service. And we're nonunion, so we're also able to kind of go to market with a bit lower price than the competition. But really, what our right to win is providing that excellent service day in, day out. And then retaining those customers by being their partner. And we don't have like a 1-800 number that they need to call and wait on hold to kind of get to their local provider. They're going to call someone that they know by name who's going to pick up the phone and be ready to provide service for them.

Is that a friction being nonunion in, I don't know, a city like New York City or Chicago or there are others that you probably put in that bucket?

Yes. There's certain cities that have more union and nonunion dynamics, where we've -- being nonunion, we'll -- there's plenty of areas to grow in that space, where we'll -- like you probably won't see us trying to open up a greenfield elevator shop in the middle of downtown Chicago in the next few months, but there's tons of cities that we feel like are underserved and that fit what we're looking to do really, really well. And there's a big market out there that's nonunion that we're ready to kind of go after.

Okay. I mean just again, thinking about the inspection versus playbook. Any verticals where you feel you're -- maybe put elevator side because we've talked about that where either you're just kind of not a participant or underscaled and look attractive?

In terms of like a new leg on the school type of thing, there's nothing really -- like elevator was something we had looked at for years before we really pulled the trigger on something. Right now, there's not anything kind of in the [ on deck ] circle, if you will. We're always evaluating opportunities really along those same lines of recurring demand nondiscretionary services. But we actually feel like there's a long runway of opportunity within the lanes we're in right now with fire, electronic security, elevator escalator. So more focused on and continuing to grow there right now.

Okay. And then maybe turning to capital allocation. One, just a basic question of just how the M&A pipeline is looking that's been a pretty important part of the growth strategy, and it's been accretive. And then number two, in terms of thinking about -- I guess, the playbook internationally, that business is, I guess, you could say it's gone through a bit of a restructuring, it's on a sounder operating sort of footprint right now. How should we think about international as a lever of growth?

Yes, so the M&A team is certainly busy. The pipeline there is super robust. They did a great job in 2025. And then even in 2026 here, they closed the CertaSite deal, which we announced in February, and then they've closed four additional bolt-ons kind of to date, and they have several other deals that they have under LOI that they're actively looking at. So pipeline is super robust. There's a ton of opportunity there, like we've talked about, super fragmented markets. So there's just a ton of opportunities that bubble up from our existing businesses. On the international front, we've kind of opened the aperture there to start doing deals internationally like that business is in a good spot. It's not every single branch or country, just like in North America, if the branches that are performing at a high level, like they're ready to do M&A, add branches that may have some integration or just not performing as high, then like we're not going to distract them with M&A. So it's more like a branch-by-branch, country-by-country basis. But like they have a pipeline and they're actually looking at a few deals right now. And I would suspect we see them do at least kind of one deal in 2026. And I would say kind of the same thing on the elevator side of the business like that business is in a good spot, and they kind of did one cleaner deal in 2025 and like their pipeline is being built out, and I would kind of suspect the same thing. Like they're actively looking at some deals right now, and I would think they would get at least one done in 2026. So as those parts of the business start to kind of flex the M&A muscle, that helps, obviously, with the robustness of the pipeline.

Okay. Fair enough. And then just looking on capital allocation leverage. I think you're below two now, approaching one maybe by the end of the year, maybe by '27. Appetite for repurchases?

Yes, nothing planned right now. We think there's enough opportunities on the M&A front to kind of...

Keep that dry powder?

Yes. But obviously, like you never know. There is a war in Iran going on right now. You never know what's going to happen, but nothing planned for 2026 as of right now.

Okay. Fair enough. And then maybe I'll open it up to questions, if anyone would like to ask any, and then I'll have one more. Cool. Rapid fire. Word association. Inspection First?

Core to our strategy.

Elevated?

Big opportunity.

Data center?

Opportunistic but not overcommitted.

Good answer. Gross margins?

Continuing to grow.

And bolt-on M&A? Which we touched on.

Part of our DNA. Yes.

Okay.

Yes. That's an interesting -- I like that. It keeps me on my toes for the end of this. Yes.

Keep it interesting. All right. Well, I think we'll wrap it there. I really appreciate the conversation. Thanks so much for your time.

Thanks for having us.

Thanks for joining us.