APi Group Corporation (APG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to APi Group's Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by should you need any assistance. I will now turn the call over to Adam Walters, Senior Director of Investor Relations at APi Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our second quarter 2026 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; and David Jackola, our Executive Vice President and CFO. Before we begin, I would like to remind you that certain statements in the company's earnings press release and on this call are forward-looking statements, which are based on expectations, intentions and projections regarding the company's future performance, anticipated events or trends and other matters that are not historical facts. These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. In our press release and filings with the SEC, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, July 30, and we undertake no obligation to update any forward-looking statement we may make, except as required by law. As a reminder, we have posted a presentation detailing our second quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and our presentation. It is now my pleasure to turn the call over to Russ.

Thank you, Adam. Good morning, everyone. Thank you for taking the time to join our call this morning. I want to begin by thanking our 31,000 leaders for their dedication to APi. The safety, health and well-being of each of our leaders remains our #1 value. We are proud that APi has once again been certified as a Great Place to Work, marking our fifth consecutive year on the list. This achievement reflects the culture our leaders have built, one where we care for our teammates and empower them to do their best work. Our enduring purpose of building great leaders defines that culture and allows us to attract, develop and retain exceptional leaders across APi. We believe our culture will continue to be a competitive advantage for us over the long term. The strength of our business model and disciplined execution drove another impressive quarter as we continue to deliver robust growth and margin expansion. Net revenues increased 13%, including 10% organic growth with growth across both segments. Our North American Safety business maintained its momentum and delivered another strong quarter, growing organically by high single digits with robust growth in both project and service revenues. This business has consistently outperformed our mid-single-digit long-term growth algorithm, underscoring the sustained strength of the business and the execution of our inspection first strategy. We continue to see a healthy pipeline in both project and service work, much of which is with existing customers, reinforcing our inspection first flywheel and creating attractive recurring revenue opportunities in the future. International safety was flat for the quarter. However, we saw a return to organic growth in the back half of the quarter. Improvements in underlying commercial indicators give us confidence that the business will continue to grow as we move through the balance of the year. Investments in our international global accounts capability are gaining traction. Both pipeline and book backlog increased during Q2 and include a number of meaningful new project awards in the data center space, which as many of you know has lagged the U.S. market in both the pace and magnitude of growth. Order intake grew mid-single digits in the quarter, and portfolio additions were at their highest level in more than 2 years. Longer term, there is a significant opportunity ahead in the international business as we doubled down on our recurring revenue and inspection first go-to-market strategy, supplement growth through bolt-on M&A and capitalize on the cross-sell opportunity that exists through WTech's complementary fire sprinkler and suppression capabilities. The Specialty Services segment outperformed expectations in the second quarter. Net revenues increased 22% organically with robust growth in both project and service revenues. Momentum was broad-based. Demand continues to be strong across our targeted end markets. Data centers were a notable contributor where our businesses offer a variety of services, including HVAC and mechanical, structured cabling, structural steel and insulated paneling, among others. Our team has remained selective in its approach to customer and project selection and is executed at a high level, translating top line growth into a 60 basis point increase in segment earnings margin. We ended the second quarter with a record backlog, surpassing $5 billion for the first time in APi's history. End markets matter. We remain focused on data centers, semiconductors, advanced manufacturing, health care and critical national infrastructure. Within the data center market, activity remains a meaningful source of strength across both segments, and we see a healthy pipeline of opportunities. Our size, scale, technical expertise and established customer relationships position us well to support the data center and related infrastructure build-out while creating long-term opportunities for recurring, high-margin inspection service and monitoring revenue once the data centers are operational. I am pleased with the portfolio of offerings across our segments, which positions us well to capture current demand in this dynamic market. Adjusted EBITDA margins increased 10 basis points despite the near-term mix impact from the robust project environment. As a reminder, gross margins from project work is typically 10 percentage points lower than those on service work. These attractive projects meet our disciplined customer and project selection criteria, and position us well to capture the recurring inspection and service work following project completion. Cash flow was once again strong in the quarter with the business generating $228 million in adjusted free cash flow year-to-date. We ended the quarter with a net leverage ratio of 2.2x, below our long-term target. During the quarter, we repurchased approximately 1.6 million shares for $66 million, the first share repurchase under our existing $1 billion program. Our consistent free cash flow generation and strong balance sheet continue to provide us flexibility to pursue acquisitions, share repurchases and reinvestment in the business through capital expenditures, supporting our 10/16/60+ financial targets. As a reminder, these targets include the following: $10 billion plus in net revenues by 2028, supported by consistent mid-single-digit organic growth and accretive M&A; 16% plus adjusted EBITDA margin by 2028; 60% plus of our revenues from inspection, service and monitoring over the long term; and $3 billion plus of cumulative adjusted free cash flow through 2028. We continue to flex our M&A muscle this quarter. In June, we closed the acquisition of Onyx-Fire followed by WTech in early July. It has been great to welcome both teams to the APi family. These businesses are excellent strategic fits for APi, add valuable capabilities in important geographies and, most importantly, align well with our culture. Integration is progressing, and we are excited to see both businesses continue to grow as part of APi. We also remained active on the bolt-on front, completing 3 acquisitions during the quarter. This included the first bolt-on acquisition completed in our elevator and escalator services business as well as one completed in our international safety business. These are important milestones as we build out our M&A pipelines in both businesses. The industries we serve remain highly fragmented, and our bolt-on pipeline remains robust with a broad range of opportunities at attractive multiples. Our value proposition as a forever home continues to resonate with sellers and their teams. Our strong balance sheet provides the flexibility to pursue larger acquisitions when the right opportunities arise, and we remain on track to deploy $250 million in bolt-on M&A this year. Looking forward, we are building the capabilities needed to support a higher volume of bolt-on M&A as we work to scale annual deployment towards $350 million. Lastly, APi was named to the Fortune 500 list for the first time. This is a meaningful milestone, which coincides with our 100-year anniversary and reflects the dedication of our leaders, the strength of our business model and the consistent execution of our strategy. We are proud of how far APi has come and remain focused on continuing to build a durable business for the long term. I believe the best is yet to come. The business is executing at a high level, and our financial results are strong, reinforcing our confidence in our long-term targets. We are encouraged by the strength in the inspection, service and monitoring business, the robust project environment, record backlog and the disciplined execution of our M&A strategy. We are well positioned to build on this momentum in the second half of the year. I would now like to hand the call over to David to discuss our second quarter financial results and guidance in more detail. David?

Thanks, Russ, and good morning, everyone. Reported net revenues for the 3 months ended June 30 were $2.25 billion, a 13.3% increase compared to $1.99 billion in the prior year period. Organic growth of 10.1% was driven by solid growth in inspection, service and monitoring revenues, robust growth in project revenues and pricing improvements. Adjusted gross margin for the 3 months ended June 30 was 31.2%, unchanged compared to the prior year period. Margins increased in both project and service revenues driven by disciplined customer and project selection and pricing improvements, offset by project in business mix. Adjusted EBITDA increased by 14.3% for the 3 months ended June 30, 13.1% on a fixed currency basis with adjusted EBITDA margin coming in at 13.8%, representing a 10 basis point increase compared to the prior year period. Growth in adjusted EBITDA margin was driven by strong revenue growth, resulting in favorable SG&A leverage. Adjusted diluted earnings per share for the 3 months ended June 30 was $0.44, representing a $0.05 or 12.8% increase compared to the prior year period. The increase in adjusted diluted EPS was driven by strong revenue growth and adjusted EBITDA margin expansion, partially offset by an increase in the adjusted diluted weighted average shares outstanding. I will now discuss our results in more detail for the Safety Services segment. Safety Services reported net revenues for the 3 months ended June 30 were $1.48 billion, an 8.8% increase compared to $1.36 billion in the prior year period. Organic growth of 4.7% was driven by solid growth in inspection, service and monitoring revenues, growth in project revenues and pricing improvements. Adjusted gross margin for the 3 months ended June 30 was 37.4%, representing a 20 basis point increase compared to the prior year period driven by disciplined customer and project selection and pricing improvements, which resulted in margin expansion in inspection, service and monitoring revenues and project revenues, partially offset by mix. Segment earnings increased by 8.6% for the 3 months ended June 30 or 7.7% on a fixed currency basis. Segment earnings margin was 17%, unchanged compared to the prior year period, driven by adjusted gross margin expansion offset by increased SG&A. I will now discuss our results in more detail for our Specialty Services segment. Specialty Services reported net revenues for the 3 months ended June 30 were $773 million, an increase of 22.9% or 22% organically compared to $629 million in the prior year period, driven by robust growth in both project and service revenues. Adjusted gross margin for the 3 months ended June 30 was 19.3%, representing a 120 basis point increase compared to the prior year period driven by disciplined customer and project selection and pricing improvements resulting in margin expansion in service and project revenues. Segment earnings increased by 29.6% for the 3 months ended June 30, and segment earnings margin was 11.9%, representing a 60 basis point increase compared to the prior year period, driven by adjusted gross margin expansion partially offset by SG&A expenses, including variable compensation expense. As Russ mentioned, adjusted free cash flow generation remains strong. For the 6 months ended June 30, adjusted free cash flow was $228 million, up $42 million versus the prior year period, representing adjusted free cash flow conversion of 68% on adjusted net income. Free cash flow generation remains a priority across APi, and I am pleased with our improvement in net working capital rate, allowing us to grow adjusted free cash flow while organic revenues increased double digits. We remain on track to achieve our adjusted free cash flow conversion target of approximately 115% for the year, in line with our prior guidance. We ended the quarter with a net leverage ratio of 2.2x, below our long-term target ratio of 2.5 to 3x. As anticipated, we completed a series of well-executed capital markets actions during the quarter. We issued $500 million of 5.75% senior unsecured notes due 2034, expanded our revolving credit facility to $1 billion, and proactively extended the maturity of our Term Loan B to 2033, while maintaining SOFR+ 175 basis points pricing. Collectively, these actions improve our liquidity, extend our maturity runway and provide continued balance sheet strength and flexibility. As a reminder, our long-term capital deployment priorities remain unchanged, maintaining net leverage at stated long-term targets, strategic M&A at attractive multiples and opportunistic share repurchases. I will now discuss our 2026 guidance for the third quarter and full year, which, as a reminder, is based on foreign currency exchange rates and acquisitions closed to date. We are again raising our full year guidance for revenue and adjusted EBITDA based on our strong first half performance and improved outlook for the remainder of the year. We now expect full year net revenues of $8.875 billion to $9.025 billion, up from the guidance provided on July 2, 2026, of $8.66 billion to $8.86 billion, representing 7% to 9% organic revenue growth. Moving down the P&L. We now expect full year adjusted EBITDA of $1.205 billion to $1.245 billion, up from $1.177 billion to $1.237 billion, representing an adjusted EBITDA margin of 13.7% at the midpoint and adjusted EBITDA growth of 16% to 20% for the year. Our increased guidance offset estimated foreign exchange headwinds of approximately $30 million to net revenue and $5 million to adjusted EBITDA relative to our prior guidance. As a reminder, our prior guidance issued July 2, 2026, fully incorporated the anticipated 2026 contributions from the Onyx-Fire and WTech acquisitions. Additional information can be found in our earnings presentation posted on our Investor Relations website. For the third quarter, we expect reported net revenues of $2.375 billion to $2.425 billion, representing organic net revenue growth of approximately 8% to 10%. We expect adjusted EBITDA of $325 million to $335 million, representing an adjusted EBITDA margin of 13.8% at the midpoint and adjusted EBITDA growth of 16% to 19%. For the full year 2026, we anticipate interest expense of $150 million, which reflects the incremental interest expense associated with the $500 million senior unsecured note issuance completed during the quarter. We expect depreciation expense of $90 million, CapEx of $105 million, an adjusted effective tax rate of 23%, corporate expenses for the year of approximately $140 million with some variability across quarters and an adjusted diluted weighted average share count of 439 million, reflecting the repurchase of 1.6 million shares during the second quarter. With that, I will now turn the call back over to Russ.

Thanks, David. As we look ahead to the third quarter, we see sustained momentum across the business and continued demand for our services. Our teams continue to deliver strong organic growth, expand adjusted EBITDA margins and grow the backlog. At the same time, our disciplined M&A execution and robust pipeline support our long-term growth strategy. This positions us well for the back half of the year as we remain focused on creating sustainable shareholder value and delivering on our 10/16/60+ targets. With that, I'd like to turn the call over to the operator and open the call for Q&A.

[Operator Instructions] Your first question comes from the line of Andrew Wittmann with Baird.

Great. Russ, I guess I just wanted to ask about the project business here. Maybe you could just comment here. It's obviously a big driver of the growth you're realizing here in, not just this quarter but in recent quarters. And as a result of that, I was hoping you could comment on the average size of those projects. I have to imagine it's going up. What can you tell us about that and how it relates to the margins that are available because you're getting some margin leverage, but you've got big long-term margin goals. And I'm wondering if the mix of all this project, which is great, is an inhibitor to achievement of those goals, recognizing that your profit dollars are growing nicely with it. So hoping you could just talk about the project size, margins associated with them and how that relates to your long-term margin goals.

Yes. Thanks, Andy. I hope you're well. There's no question that the project sizes are larger, and we're seeing significant increases. Like when I think about the fire protection, life safety space and you think about a data center, 4 or 5 years ago, a large data center job might have been $7 million or $8 million. And today, you consistently see fire projects pushing $20 million. But the, I would say, the difference is that, that you're able to price that work accordingly and get better gross margins on that larger project work just because of the complexity associated with it, the location of where these projects are at. It makes it more difficult for some firms to be able to pursue that work. And so you can really price accordingly. And it's positive. Like we commented in our remarks about typically, we -- our project work has 10 percentage points less gross margin than our inspection, service and monitoring. I would say that, that is true in most cases, but on some of this larger work, we're able to get higher gross margins on it and close that gap more, and we believe that we're still on track to achieve our 16% long-term 2028 margin expansion objective.

Your next question comes from the line of Stephanie Moore with Jefferies.

Great. I was hoping you could touch a bit I was hoping you could touch a bit on what you're seeing actually on the safety side of your business, maybe bifurcating between performance in North America as well as in Europe. And maybe any strategic actions you've made as of late to either accelerate margin performance or any other actions that might help give a little bit more color within safety?

Well, our safety business continues to perform very well. And we're actually quite happy with what we're seeing in our business. We still, like in the international safety business, we still have work to do to, so to speak, convert to the mindset of like recurring revenue for service inspection work first. And that is something that I wish you could flick a light switch and change mindset, but that's just not the case. And so we continue to push the -- push that hard in the business, and we're actually seeing some really positive results coming from that. But we still have work to do there. But in general, our inspection first strategy continues to pay dividends, and we continue to optimize branch performance and see -- we continue to see upward results from that, and it's good. And then you got the robust project environment sitting on top of it. And we're really just seeing that come forward in the international business. I think that, especially from a data center end market perspective, it's been lagging what we've experienced here in the U.S. and now we're really starting to see those opportunities produce positive results in the international business as well.

Appreciate it. And then just one follow-up here. And I think M&A is a question that you guys get asked quite a bit. Quite frankly, this has been a very active M&A year for you guys. So it's always helpful, maybe just to get a sense of what you're seeing in terms of M&A activity as we think through the second half of the year? Was it kind of a pull forward in the first half on timing? Or could we expect this momentum to kind of continue? And then on that, Russ, I think you always are pretty vocal about maybe areas you would like to expand into from an M&A standpoint. So any change in strategy in terms of maybe end marketer services that you would like to go after over the medium term?

So I would say no change in strategy as it relates to the disciplines that we serve. We're going to continue to focus on fire life safety, security, elevator and escalator would be probably our top 3 priorities. And we do like the HVAC service space as well. And if the right opportunity came along there, we would certainly take -- be interested in taking a look. I think what you saw just with the M&A activity that, so to speak, we've been really active in is that the right opportunities came along at the right time. And we, because of the strength of our balance sheet, we are able to pounce. And to me, that was something that's always been important is that when we look at M&A is like we want to be in a position to be opportunistic. And because of our balance sheet, we are. And there's some interesting things that we would certainly be willing to roll up our sleeves on that will probably come in the latter half of this year that we're keeping our eye on. But you will, for sure, see the bolt-on M&A, the work our corporate development team is doing on bolt-on M&A, you're going to see that carry forward through the second half of the year and right into 2027. And as I said in my prepared remarks, we set our -- kind of our annual goal is to do $250 million of bolt-on M&A a year. And we're in the process right now of working with our corporate development leader to build out his team and our capabilities and taking advantage of artificial intelligence to assist us on things like financial due diligence so that we can do $350 million of bolt-on M&A because we see the opportunity there. So again, going back to strong balance sheet, going to be opportunistic, and you should expect to see continued activity. And that was two questions, Stephanie.

Your next question comes from the line of Curtis Nagle with Bank of America.

Great. I'll keep this one fairly short and sweet. Just on the guide rate, I guess, in terms of just what changes does it incorporate in terms of -- or growth expectations for Safety Services versus Specialty? Just if you can unpack that?

Yes. Curtis, I'll take that one. As you're looking towards the back half of the year, what I would say is we're continuing to see solid strength in our North America Safety segment and a modest improvement in our International Safety segment, and that will be reflected in the guide as well as a continuation of the robust project in service growth in our Specialty Services segment into the back half of the year.

Your next question comes from the line of Jasper Bibb with Truist Securities.

I think you said backlog is now north of $5 billion. I believe on the 2Q call last year, you told us you'd eclipse $4 billion in backlog for the first time. I guess is like 25% growth in the backlog year-over-year the right way to think about it? And then looking forward, I guess I'm just wondering how we should think about what sounds like a pretty healthy backlog growth converting to revenue.

Well, I mean, yes, I mean, that's the math. I mean -- and so -- and that backlog growth is across every aspect of the business. And so that's a positive. The quality of the backlog is positive, i.e., we should generate better gross margins with our backlog today than we did say a year ago. So that's all positive. I'm always reticent to talk exact figures on our backlog and everything else because if all of a sudden, it goes from $5.1 million to $5 million, everybody is like the sky is falling, Chicken Little, and the reality is our backlog is really strong. But these large projects are longer in duration in general. And so our average project duration that was probably at 1.6 to 9 months is probably more like 9 to 12 months. That would be something that we could have Adam actually do some work on and follow up on. So we're seeing that. But our backlog coverage is in really good shape. And we continue to be pleased with the discipline that our teams are showing from a project and a customer selection perspective. I don't know, David. Did I hit anything that Jasper asked?

No, you got it all.

Your next question comes from the line of Tomohiko Sano with JPMorgan.

This is [ Evan ] on for Tomo. When looking at M&A, specifically the WTech and then Onyx-Fire, you mentioned it was well aligned with the culture. And can you go into a little bit more on the specifics of how these were strategic fits well aligned with your culture? And then looking at the M&A pipeline, how those acquisitions in the future could potentially fit this criteria?