APi Group Corporation ($APG)

Okay. Well, good morning, everyone, and thanks for joining. I'm the analyst Tim Mulrooney, that covers API Group here at William Blair. I'm required to inform you that for a complete list of research disclosures and conflicts of interest to visit our website at williamblair.com. And we're very pleased to have with us this morning at API Group CEO, Russ Becker; and Adam Walters, Senior Director of IR. We picked up API Group 2, maybe 3 years ago, still relatively early in the story and got very excited about the opportunity. I think you all were trading at about 12x EBITDA at that time.

So you're taking credit.

Yes. Okay. Okay. But we were excited because what we saw in this business was, yes, you had the specialty business, which is -- can be I think potentially more cyclical and maybe more of a construction type business, but then you have this Fire and Life Safety business, which we viewed as a real jump and very similar to many of these other types of high-quality services businesses that get very high multiples. Well, the secret is out because now you've rerated and I think everyone -- the market is valuing that business more like how they value many of these other high-quality services businesses that are out there today. And I'm really excited to dig in with you on both sides, the safety and the specialty side. But before we do that, this is a generalist conference -- we're going to do this as a fireside chat, and then we have a breakout session, by the way, after this at the Burnham A room where we can dig in more detail. We're going to do this as a fireside chat, but maybe if you don't mind, just spending a couple of minutes to give an overview on the business just in case there's anyone out here that's not so familiar with API Group.

Sure. I'm happy to do that. Thanks for having us, Tim, as well, and thank you for everybody for coming and showing interest in the company. My name is Russ Becker, and I'm the President and CEO of API. I have actually been with this company for over 30 years. I started in 1 of our operating businesses and have really been serving the company in a similar capacity that I am today since 2002. So I've seen the company through a tremendous amount of change during that period of time when I think when I started with API, we were about a $600 million, 3% business. And last year, we finished at like $7.9 billion in revenue and a 13.2% EBITDA margin. So I attribute a lot of that growth and improvement in business performance to our company's enduring purpose, which is building great leaders. And the investment that we make in our people as human beings and as leaders. And leadership development has been a huge part of our company. since I started at the parent company in 2002. And I would tell you that it defines our culture and who we are. And our culture is something that we take great pride in continuing to grow and strengthen as we continue to grow as a company. Our business is really organized into 2 different groups, if you will, or segments, we have our Safety Services segment, which is our fire protection, fire, life safety and security business. That accounts for about 70% of our total revenue. The other piece of our business is specialty services, which is where our infrastructure business lines, our HVAC business lies, we do HVAC work. We do natural gas distribution replacement and retrofit work, potable water system upgrades, fiber optics, telecommunication. We have a business that's in manufacturing, structural steel manufacturing as well. Last year, 54% of our revenue came from inspection service and monitoring. Our our goal and priority is to build a very robust inspection service and monitoring business across our entire portfolio. We have established a our 2028 shareholder value creation targets are what we call 10,660 plus. The 10 stands for $10 billion in revenue with a 16% EBITDA margin with our long-term target percent of 60% of our revenue coming from inspection service and monitoring. And company operates in over 20 countries today that will expand more with the WTech acquisition that was announced just a few weeks back. We are our company traditionally grows organically in the mid-single-digit range. We also grow inorganically through M&A. We have a long track record of winning in the M&A space. We've probably done well over 200 acquisitions since I've been the CEO of the company. And that's something that we see a lot of opportunity for continued growth for our business. And probably the last thing that I'll leave you with is that -- we have what we call an inspection first mindset at API. And what that means is these hotels are just terrible examples because the fire systems are different in here. But like if you took a 50,000 square foot medical office building, the Fire life safety system in that building is required by law to be inspected for functionality and operability at least once a year and most likely certain components of it like the fire alarm system twice a year. And we are trying to sell inspections, those inspections to the already built environment as our lead into that client relationship versus the other way around. And traditionally, in the industry, most people try to go out and bid and win. I hate the word bid, and we can talk about that, Tim. But bid and win new construction work, when they get done with executing the new construction work, they try to sell that end user and client and inspection and service contract. We're doing it just the opposite way. We're trying to win the inspections with that existing building owner and developing a relationship because we know for every dollar of inspection revenue we generate, we're going to generate some place between $3 and $4 worth of service work as a pull-through. And if we do a really good job with that client, we're going to develop a sticky relationship with them. So when they do have new expansion needs or retrofit needs we're going to be in a position based on our relationship to negotiate the work versus compete with further work on low price. And a significant difference in our business in our business model. So it's a great company.

Yes. No, that's a really good overview. So and actually do have a whole -- so on the quarterly conference calls, I have a list in my notes says don't say these words on the conference call or Russ will yell you publicly conference call. Bid as well.

I [indiscernible] but I don't know .

Bid is one of them.

I hate the word.

Yes, you don't like were bid. They're not employees, their teammates.

There teammates or leaders. I may not use the word employee.

And I've actually heard that, that leadership training is -- I've spoken to someone that's gone through it, and it sounds like it's quite the experience. Something I'd love to do someday, actually.

Then come to work for us first.

Oh, I can't just do it? Okay. Well, I'll put that in my back pocket. But yes, why don't you use the word bid. And why do you think it's better to go to market with an inspection first mindset? And when did you decide to do that? I mean have you always done that? Is that something that you've done more recently? I'd love to hear a little bit about that journey.

So on the word bid start is like that means that you're going to buy our services because we have the cheapest price. And like we have no interest in that.

You associate that with low-price work.

Yes. And so we want our clients to choose to buy our services because we present the best value. And there's a lot that comes with that. It could be safely delivering the work. It could be your speed to execute the work and timing and at some time. . I'm sure at some point, somebody is going to want to talk about data centers and -- but like it's -- your ability to execute is more important than what your cost is for most of the providers or end users. So but bid is just like it's actually forbidden to be used at API. And so like if I will correct somebody if they use the word bid. And because there's something your words matter, and just this whole idea of we're proposing and we're going to sell our services based on the value and what we bring to that particular client. Inspections first. The reality of it is, I think we first set a goal in 2006 that we wanted 50% of our revenue to come from what we called service work at the time. So we didn't even differentiate at that time between inspection and service work. And I think our mindset around like doing the inspections and stuff like that was more like we need to do the inspections to get the service work. And we didn't look at a view winning the inspections that we could actually generate like a really good gross margin and really good profitable component of our business. And that change in evolved over time. where it really got a tremendous amount of energy is when the women who leads our national inspection sales team now came to work for the company. And like I'd love to tell everybody in this room that I'm super -- I'm just like the most strategic guy. Like this whole idea of inspections first was our sales leaders, not mine. And it was because she's so damn good at it. And it started -- literally started in one of our branches where she showed up as an inspection sales leader, and she did such a good job selling inspections and then that morphed into she's the inspection sales leader for that branch. And then the guy that was actually running that business was like, hey, you're doing a kick as job. How about you take that idea to this branch and this branch and so it blossomed. And then it's like, hey, you're doing a great job. How about we take it to these next 3 branches? Well, then that happened to be -- the guy who's running our Safety Services segment was actually run in Las Vegas at the time. and we promoted him to lead 1 of our operating units, our businesses out in the Northeast. So he moved with his wife to New York. And he's like, hey, how would you come out here and you bring this to our business. And so it blossom there. And then we promoted the guy that was running that company to run the segment. And he's like, well, how about if we make this a national role -- and it just -- it's taken on a life of its own. And -- and so it's just -- it's really just evolved over time. And I would say that it got going with earnest in trying to think maybe 2016.

So you've been doing this for 10 years has been this slow transition to an inspection first mindset and now you have x percent of branches that you'd consider what's the term you use, bulletproof where your gross margin -- gross profit dollars from inspection and sales exceed the SG&A of the branch.

100%. That's -- we don't talk about this enough when we talk about our company and our business, but like a branch literally becomes bulletproof when the inspection service and monitoring business, when those departments, if you will, generate enough gross margin to cover the SG&A of the entire branch.

Yes.

It becomes bulletproof because then the project work and the project opportunities that, that branch has, they can be even more selective. And then the gross margins on that project work when they're being more selective, expand. And they get better. And so then the profitability of the branch, overarching profitability of the branch expansion is better. It gets even better. And if you look at Adam's slide deck there's a slide in there that shows the evolution of a branch, and it has kind of those points earmarked along that time line that shows. But like this particular case, the gross margins on the project were we grew by 10 percentage points.

See, that's the thing about the story that I think is maybe a little bit underappreciated. Everyone understands inherently that the service work is percentage points margin -- gross margin higher than the project work. And so as your service work is growing high single digit, your project work is growing low single digit. There's going to be some natural margin accretion from that -- but I think the part that's maybe less well appreciated is how much the being more disciplined on the projects once these branches become bulletproof, how much that's contributing to the margin as well. You gave me a statistic onetime. Maybe you can share it here, what did your average project margin look like when you took over as CEO relative to today?

Well, I can't imagine that it was me that gave you that statistic because I don't know.

Okay.

I mean so.

I think it was a dramatic number, like mid-single digit or maybe it was average branch profitability or something like that, but it like it was very low and the thought being like, well, people thought it would be so hard to just get to 10% over time. And now here you are sitting at [indiscernible]

Well, that was like the company was a 3% business when we started in 2002, and I think I shared that in my opening remarks. But yes, it's funny, and I know exactly what you're talking about because like when I first came to EPI Group, like this is going to maybe shock you, maybe it won't shock you, but like our financial goals as a company was -- and I was -- at the time we were privately held and the majority shareholder of the business was a gentleman by the name of Lee Anderson. And I was up at his summer home with him, and we spent some time -- he never has come into the office since I've been with the company. And so I was up in the summer home, we had some stuff work stuff to talk about. And traditionally, I would go and we spent a couple of hours talking about work stuff and that I'd stay and have drinks and dinner overnight and they get up early in the morning and drive back to Minneapolis. We are probably finishing up a scotch or something. And I looked at them and I said, where did 5% come from? And he looks at me and the gentleman that had my job before me his name was Jeff, and he goes, i don't know, Jeff? And I'm like, I don't know, I might seems pretty low. And I said for how much risk we take every day, I said 5% seems pretty low. And like this is a true story. And he looks at me and says, well, what do you think it should be? And I said, I don't know. Let's start with 10. He goes, Okay. So I literally like literally go back to the office, and I'm looking at this guy right here is pretty young. And so like he doesn't even know what a fax machine is, I'm guessing, but some of the KG veterans I see over here, so right up a memo, send my memo out via fax, there was like really e-mail was like in its infancy. And I sent out a fax or memo to everybody saying our new financial target is 10%. Everybody [indiscernible] but I'm not kidding you. Everybody can't be done. Industry average is 3%. And then all of a sudden, 1 of our businesses, claims, climbs, climbs, climbs gets to 10, and there's guys still running this business to this day. And -- but the best part about it was, he didn't stop at 10. He just kept on going and his business got to 20. And it's just like at API, we publish our financial results. So every 1 of our business leaders can see exactly how their company stacks up against their peers. They can see exactly how every branch stacks up with every other branch. We stack rank them, highest performance to lowest performance. We actually color coded. If you're meeting our goals, you're in green, if you're trending in the right direction, you're in yellow and if you're missing the target, you're in pink. And the only reason you're in pink is that if you put it in red, you can't see the numbers. And so you can see, and like if you have a competitive bone in your body like you don't want to be in the bottom third, right? And so you create this kind of natural draft that pulls people along. And our business has just continued to grow as we continue to increase the expectations. And we believe and we know that -- and our goal is that every 1 of our branches will operate at 20%. Now we're not there. Clearly. You know what I mean? And I suspect we'll always have a challenge or something like that where maybe you don't have the right leader and you have to make some changes and somebody does a poor job on customer selection and gets us in trouble and we have to work our way through that. But like it's real. And this is a people-centered business and when you show people showing kind of the path and share best practices and create an environment of collaboration like there's a lot of opportunity and a lot of opportunities. It's a great company, and we have a lot of continued upside.

I think that, that's part of the story that investors like so much is watching this march towards profitability when you came out with your 2025 targets for 13.% Was that 2025? Yes, 13% in '25?

Yes. 13% [ 68, ] we called it [indiscernible] came out with that in like '22.

And there were a lot of skeptics. How are they going to get to 13? And yet you did it now -- the target is 16 by 2028. And I don't have 16 in my model. I don't know how you're going to do it. But I don't have any doubt that you are. What's up with this?

I may be saying like you guys keep beating the expectation and delivering. And I think a lot of it goes back to this conversation about it's a people business and it's about culture and leadership and driving this competitive spirit in the business.

And I have no doubt that you will have a 16% number. However, I will note that, that would be upside to my model and to consensus if you do, do it. So that's the opportunity.

It sounds like a little bit of a throw down.

Russell on stage.

I like my chances.

I don't want to do that. So all right. Maybe we should get some actual numbers here because we got 8 minutes left, high single-digit in services. So if we're looking at the U.S. Fire and Life Safety business, you got high single-digit growth in services that you're expecting and low single-digit growth in the Projects business. Is that correct? .

That's correct. That's what we -- that's the guidance we give our businesses .

That's the guidance you give your businesses. So that kind of equates to a mid-single-digit growth for the full year, though I will know that the comps get tougher in the second half of the year for that business. So can you just help bridge that gap for us between the fact that the comps are getting difficult, more difficult, but you still expect that mid-single-digit growth for the full year?

Yes. So I mean, if you break it out into the 2 parts that you talked about inspection and service business, like that just continues to like get steady eddie. I mean like we continue to grow that in the high single-digit range. It starts with the -- we talked about the inspection first flywheel. It starts with that and our inspection sales leaders continue to knock on the already built environment, take share. It's continue to push price, and that business continues to just be super steady and grow at that high single-digit clip talked about the comps get tougher, obviously. I would say the project environment right now, I would say, is more robust than normal. And so there's a lot of good work out there and we talk about end markets all the time and focusing on the right end markets definitely matters. In the end markets we're focusing on are very robust right now. So that -- the project business is growing more than low single digits like the long-term algorithm would suggest. And so we see it in the work we're doing right now. We see in the backlog. There's just a lot of good work out there, whether it's data center, advanced manufacturing, aviation, -- there's just a lot of good project work out there. And we're taking advantage of that, and that's where we kind of -- even though it is tougher comps, we're still projected to continue with the mid-single-digit growth throughout the year.

Yes. That makes sense. Maybe you can talk a little bit about those end markets. I mean you're data center business I can't remember the -- I think you said it was 5% of revenue a few years ago and then 7% and now it's going to be closer to 10% this year. I don't know how that splits between your specialty business and your safety business. But presumably, some of that is in safety. Is that helping there on the project side?

Yes, for sure. I mean, our best guess, like you mentioned, is 10% as well we'll land for the year in terms of percentage of revenue coming from data center. And it's good work for both segments. I mean, like if you -- I would say specialty is probably a little bit higher than 10%. Maybe they're 11%, 12% of their work is coming from data center and safety is a touch lower, maybe 8%, 9% of their work is coming from data center. But it's really good opportunities for both businesses. I mean every data center needs a fire life safety system, right? So they have sprinkler systems, fire alarm detection systems, and we're doing the [indiscernible] lap. We've also been doing the inspection service for a lot of these hyperscalers for a long time. So it's good existing customer relationships that we already have. And so in these new data centers are being built we already have a relationship with the customer and so we're coming in and doing the installation. And then on the specialty side, a lot of good work there as well. There's fiber active cabling that goes into these data centers around the rain into the server rack that were doing -- we have an HVAC business that will do a little bit of data center work every year. Our steel fabrication business does data center work. So good opportunities across both segments. And I would also just add -- we have a business development leader who -- he's got a lot of good relationships with like these hyperscalers with general contractors. And he's been kind of coordinating our sister companies in terms of -- we have a data center opportunity in Monroe, Louisiana, who should we be getting involved, like maybe one of the fire life safety companies has a relationship there, but there's opportunities for our specialty businesses to get involved as well. So he's been doing an awesome job kind of coordinating across our -- all of our companies and making sure we're kind of attacking these opportunities as a kind of a coordinated group.

All right. That's helpful. Maybe in the last couple of minutes here, I know M&A is a big topic of conversation and an important component to your $10 billion target by 2028. Certainly, on your way there, I mean you've announced a few large acquisitions this year so far. Usually, when I see a company announced this much, it's not even a balance sheet conversation. It's like a cultural and an integration conversation. Is it fair to assume that we're hitting the pause button here for a while, while you work on those? Or do you have more appetite for M&A this year?

We have more appetite -- and I mean I don't. You want me to hesitate? .

No. .

And I would tell you, like the 3 transactions that we announced that are somewhat larger, like I don't even like but they're not that big. And as it relates to -- they're not like Chubb ask. I mean, they're not at the time we bought Chubb that was a $2 billion company that operated in 20 different countries. And you could argue that there's an element of complexity there that I feel like we've done a really nice job of navigating and I'm really pleased with where that's at. Like the WTech acquisition is a fire suppression business that's based in Mallinger Ireland, which is just north of Dublin. And Ted, I met Ted Wright, their CEO, his family founded the company. So it's actually got family origins, even though we bought the firm from a private equity firm. And Ted's been with it. Tetanus brother actually brought his parents out and then Ted brought his brother out. And it does a few things for us. It brings fire suppression, i.e., sprinkler capabilities to our business in Western Europe that we don't have that level of expertise that we need. Actually, Ted is like an entrepreneur through and through, like so he's going to bring that mindset to our business, which I think will be really, really healthy for us. Like I don't -- that business had been publicly traded, sat underneath United Technologies and Carrier and it became pretty corporate, to be honest with you. And so he's going to bring a little bit of that entrepreneurship to the company and to that culture, which is needed. -- but it's not that big a business. And like Ted fits our culture like through and through, he's already participated in our leader labs and things like that. And I was there at their they had a planning session in Portugal back a month or so ago, and I flew over to Portugal for the meeting. Like his people are like they're just cut from the same cloth, like just wonderful, wonderful people. And then Onyx, which is a Canadian-based firm. I've known Brian Chu, their CEO since probably 2017 when he was actually with Brookfield. And so we've known that firm and stayed in touch with that firm for many, many years and when it actually sold the first -- it was recently sold and then we bought it 18 months after. We just -- we passed on it at the time because we were busy integrating our existing business in Canada, and we just didn't feel like we had the bandwidth to stomach it. So we I feel like we showed good discipline in saying we couldn't -- we had a relationship with Blackstone that goes back to the Chubb acquisition and that presented itself. And so we were able to buy that business like when we did based on that relationship. And then Certicite, which was announced at the end of the year and closed here what it was at February 1. And that business is like inspection first. That's the beauty of that business. It's like a center of the fairway transaction for us. It's not -- and again, it's not that big. It's geographically complementary to our existing portfolio. So minimal overlap. It's a nonunion business. It's strong in extinguishers and portables, which is an add for us. So there's a lot to it, but it's just -- it's like -- that 1 is already rocket and rolling. And 1 of the things that we have to sell, so to speak, to these owners is really centered on our leadership development efforts. And the fact that we have a deep bench and succession planning and all that stuff that comes with it is attractive to these folks. And not everybody wants to be in this world called private equity forever. And I think one of the things that you'll hear us -- the words that you hear us use all the time when we're pitching why should you sell to us is that we're a forever home. And I actually stole that from one of the guys from the elevator business, we had them in actually presenting to our Board shortly after the acquisition of Elevated back a couple of years ago -- and his words to our Board was we found our Forever home. And thought was pretty good. So I grabbed it.

It feel like they found their spot.

So we have a lot of bandwidth -- and we've got a lot of dry powder. Our balance sheet is in a great place. And for us, it's like our #1 priority from when you think about how we're going to use our capital is -- would be M&A but we've been active in the market buying back some shares as well.

Okay. All right. That's good color. I know we're out of time, but thank you very much, we appreciate it.