APi Group Corp Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to APi Group First Quarter 2024 Financial Results Conference Call. 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 Fee, Vice President of Investor Relations at APi Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our first quarter 2024 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; Kevin Krumm, our Executive Vice President and Chief Financial Officer; and Sir Martin Franklin and Jim Lillie, our Board Co-Chairs. Before we begin, I would like to remind you that certain statements in the company's earnings press release announcement 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, May 2, and we undertake no obligation to update any forward-looking statements that we may make except as required by law. As a reminder, we have posted a presentation detailing our first quarter financial performance and guidance for our second quarter and full year 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's 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. Before we provide you with a summary of our first quarter results, I would like to thank our approximately 29,000 leaders for their unwavering commitment to APi. We remain grateful for their hard work and effort. We believe that taking care of our leaders results in our leaders taking care of our customers. This is one of the foundational principles by which we will continue to enhance shareholder value. Next week marks APi's ninth straight year of celebrating Safety Week. As I've said before, the safety, health and well-being of each of our team members remains our #1 value. Our commitment to safety drives industry-leading safety outcomes across the organization. At the end of 2023, our total recordable incident rate, or TRIR, was below 1.0, which is significantly better than the industry average. We continue to strive for 0 incidents. We believe our leadership making APi a safer place to work along with the investment we make in each of our leaders' development contributes to our low turnover relative to industry benchmarks. As we have said before, we remain relentlessly focused on our long-term 13/60/80 value-creation targets, which include the following: adjusted EBITDA margin of 13% or more in 2025; long-term organic revenue growth above the industry average; long-term revenues of 60% from inspection, service and monitoring; and finally, long-term adjusted free cash flow conversion of 80%. I routinely speak to our field leaders about how they can help us deliver on this strategy when I'm visiting our locations around the world. Our leaders are aligned with what we want to achieve and how we intend to achieve it. Turning to the first quarter. In line with our 2024 plan, net revenues were essentially flat, driven by approximately 3% organic growth in service revenues, offset by divestitures, lower revenues from declining material cost pass-through and intentionally limiting organic growth in certain project-related revenues. Beginning last year and continuing into this year, we've continued our planned disciplined customer and project selection in our international HVAC and specialty businesses. Importantly, we achieved our goal of double-digit growth in core inspection revenues in our U.S. Life Safety business. This growth is key as we progress towards our long-term goal of 60% of our total net revenues coming from inspection, service and monitoring. In line with our strategic initiatives, we continue to see strong improvements in adjusted gross margin for the quarter, up 390 basis points. The strong performance in gross margin led to a record first quarter adjusted EBITDA margin of 10.9%, representing margin expansion of 180 basis points. The team continues to make meaningful progress executing our margin expansion initiatives and remains committed to building on that execution as we push towards our 13% or more adjusted EBITDA margin target in 2025. As a reminder, these initiatives include the following: pricing; improved inspection service and monitoring revenue mix; disciplined customer and project selection; Chubb value capture; procurement, systems and scale; accretive M&A and selective business pruning; and as I like to say, we can always just be better. On April 15, we entered the complementary and adjacent elevator and escalator services market with the announced acquisition of Elevated Facilities Services Group for $570 million. We have long viewed the elevator and escalator service market as an attractive adjacency due to the highly recurring nature of the business, driven by nondiscretionary statutorily driven demand. Elevated is expected to contribute approximately $220 million in annualized revenues and approximately 20% adjusted EBITDA margins. We believe Elevated is an excellent platform opportunity for us to enter the $10 billion-plus U.S. elevator and escalator services market and execute our bolt-on M&A strategy at attractive multiples. We expect to build a $1 billion-plus elevator and escalator services platform over the long term through a combination of strong organic growth; a long-term cross-sell opportunity with our existing life safety businesses; and a robust M&A pipeline. Elevated's target market, elevator and escalator services, benefits from continuous safety and regulatory requirements. It services an aging installed base with 55% of U.S. vertical transportation units being over 20 years old. Elevated also benefits from increased demand due to the growth of urbanization, declining durability and quality of elevators and modernization projects being driven by bringing aged elevators to code and compliance with safety requirements. The acquisition is expected to be immediately accretive to our 13/60/80 shareholder value-creation framework. Elevated's strong organic growth, adjusted EBITDA margin profile of approximately 20%, over 70% of revenue from inspections, service and repair and an asset-light business model driving strong adjusted free cash flow conversion is a great addition to APi. In summary, I'm sure you can tell, we are excited about Elevated. It has many of the same attractive characteristics as APi and represents a continuation of our focus on building a robust line of businesses that provide mandatorily required life safety service. It benefits from its scale in a highly fragmented market. Its business is driven by regulatory demand and a loyal customer base. It is led by an experienced leadership team and a highly skilled workforce. I intentionally used the word leadership team instead of management team because at APi, we believe that leading and managing are fundamentally different, and we aim to build great leaders throughout the organization. Along those lines, Elevated, like APi, also maintains an unwavering focus on culture and developing its teammates throughout the organization. We will update full year 2024 guidance to include expected results of Elevated following the close, which we expect to occur late this quarter. During the first quarter, we also closed on a small divestiture in our Specialty Services segment, which was expected to contribute approximately $20 million in annual revenue. As we move forward, we remain focused on delivering both the 2024 plan and our long-term 13/60/80 financial targets. We are excited about our robust pipeline of opportunities for life safety, security and elevator escalator services businesses and will continue to be thoughtful as we look for high-quality margin-accretive businesses and leaders to join the APi family. I would now like to hand the call over to Kevin to discuss our first quarter financial results and guidance in more detail. Kevin?

Thanks, Russ. Good morning, everyone. Reported revenues for the 3 months ended March 31, 2024, were essentially flat at $1.6 billion compared to $1.61 billion in the prior year period. Organic decline of 1.4% compared to organic growth of approximately 12% in Q1 2023 was driven by disciplined customer and project selection and lower revenues from declining material cost pass-through. The result of this was a 6% organic decline in project revenues. This was essentially offset by organic growth of 3% in services revenue. Adjusted gross margin for the 3 months ended March 31, 2024, grew to 30.7%, representing a 390 basis point increase compared to the prior year period, driven by price increases, outsized growth and higher-margin services revenue as well as significant margin expansion in project revenues across both segments. Adjusted EBITDA increased by 19% on a fixed currency basis for the 3 months ended March 31, 2024, with adjusted EBITDA margin coming in at 10.9%, representing a 180 basis point increase compared to the prior year period primarily due to the increase in adjusted gross margins, partially offset by growth investments and the investment in building our global capabilities and infrastructure. I'm pleased to report that adjusted diluted earnings per share for the first quarter was $0.34 per share, representing a $0.09 per share or 36% increase compared to the prior year period. The increase was partially driven by strong margin expansion in both Safety and Specialty Services and decreased interest expense, partially offset by higher adjusted diluted weighted average shares outstanding. I'll now discuss our results in more detail for Safety Services. Safety Services reported revenues for the 3 months ended March 31, 2024, increased by 1.9% to $1.21 billion compared to $1.19 billion in the prior year period. Organic growth of 0.2% compared to organic growth of 14% in Q1 2023 was driven by 4% growth in services led by double-digit core inspection revenue growth in our life safety and our U.S. life safety business and 6% organic growth in inspection services and monitoring and U.S. life safety. This was partially offset by an approximately 4% decline in organic revenue from project work, driven by planned customer attrition in our international businesses as well as disciplined customer and project selection in our HVAC business. Adjusted gross margin for the 3 months ended March 31, 2024, was 34.8%, representing a 330 basis point increase compared to the prior year period, driven by price increases, improved business mix and inspection service and monitoring revenue as well as significant margin expansion and project revenues. Adjusted EBITDA increased by 18.4% on a fixed currency basis for the 3 months ended March 31, 2024, and adjusted EBITDA margin was 14.3%, representing a 200 basis point increase compared to the prior year period primarily due to the increase in adjusted gross margins, partially offset by growth investments. I will now discuss our results in more detail for our Specialty Services segment. Specialty Services reported revenues for the 3 months ended March 31, 2024, decreased by 9.5% to $389 million compared to $430 million in the prior year period. Organic revenue declined 7.4% compared to 4% growth in Q1 2023, driven by a 14% decline in project revenues due to planned, disciplined customer and project selection and lower revenues from declining material cost pass-through. Service revenues were essentially flat. Adjusting for the exiting of one large customer relationship in our infrastructure and utility reporting unit, Services revenue would have increased by 11% in the quarter. Adjusted gross margin for the 3 months ended March 31, 2024, was 17.7% and representing a 440 basis point increase compared to the prior year period, driven primarily by disciplined customer and project selection, driving significant margin expansion in project and services revenue. Adjusted EBITDA increased by 21.4% for the 3 months ended March 31, 2024, and adjusted EBITDA margin was 8.7%, representing a 220 basis point increase compared to the prior year period, primarily due to the increase in adjusted gross margins partially offset by investments to support our service model and increases in certain legal expenses, including those associated with the completed divestitures. I'll now discuss cash flow. As we have highlighted in the past, the first quarter is consistently our lowest quarter for free cash flow generation. For the 3 months ended March 31, 2024, adjusted free cash flow was $12 million, reflecting an adjusted free cash flow conversion of 7% and representing a $12 million improvement compared to the first quarter of 2023. Adjusted free cash flow generation has been and continues to be a priority across APi and we are pleased we remain on track to achieve our adjusted free cash flow conversion target of approximately 70% for the year. During the first quarter, and as previously announced, APi reached an agreement with shareholders affiliated with Blackstone Tactical Opportunities Fund and Viking Global Equities to retire all the outstanding shares of their Series B perpetual convertible preferred stock. Blackstone and Viking each converted all their Series B preferred stock into 32.5 million shares of common stock of APi. APi repurchased 16.3 million or half of the conversion shares from Blackstone and Viking for an aggregate purchase price of $600 million or $36.90 per share. The transaction was partially financed by an incremental term facility of $300 million issued at par. On February 28, 2024, we partnered with Blackstone and Viking as they launched a secondary public offering for approximately 12.2 million shares of APi's common stock. As we mentioned before, this transaction simplifies our capital structure, eliminates the $44 million preferred dividend payment and has no impact on our M&A strategy. At the end of the first quarter, our net leverage ratio was approximately 2.8x before adjusting for the acquisition of Elevated Facilities Services Group announced on April 15 and the second quarter financing activities. On April 16, we priced a primary follow-on offering for 12.65 million shares, raising over $450 million in net proceeds. Earlier this week, we launched a $550 million incremental term loan due 2029 with proceeds expected to be used to refinance our $330 million term loan due 2026, to repay $100 million of outstanding revolver balances and the remainder for general corporate purposes, including partially funding the acquisition of Elevated. Following the transaction and financing activities, we remain in a position of balance sheet strength, providing the flexibility to continue to execute our robust M&A pipeline at attractive multiples with a specific focus on opportunities accretive to our 13/60/80 targets. As we look forward to the rest of 2024, we expect to grow our adjusted free cash flow as well as improve our adjusted free cash flow conversion, providing us a continued opportunity for value-enhancing capital deployment including our planned bolt-on M&A campaign, while reducing our net leverage ratio to approximately 2.5x around year-end 2024. I will now discuss our guidance for the second quarter and full year 2024. We continue to expect full year net revenue to range from $7.05 billion to $7.25 billion; adjusted EBITDA range from $855 million to $905 million; and adjusted free cash flow conversion for the year to be approximately 70%. This guidance has not been adjusted to include the impact from the Elevated acquisition, the divestiture announced this quarter and headwinds incurred from the strengthening dollar since our initial guidance announced on February 28, 2024. Based on our current foreign exchange rates, we expect an approximately $35 million headwind on revenue and approximately $5 million headwind on adjusted EBITDA for the full year. As Russ mentioned, we will update our full year guidance following the close of the Elevated acquisition. In addition to adjusting for the contributions of Elevated, we will also incorporate the divestiture announced this quarter and update guidance for the impact of foreign exchange movements on the full year. As we move through the year, we will continue to remain focused on disciplined customer and project selection, especially in our specialty and HVAC businesses. We expect to annualize against the majority of the planned slowdown in certain project work as we cross into the second half of 2024. This will allow for strong accelerating growth rates in both businesses in the second half of the year. In terms of the second quarter, excluding any impact from the Elevated acquisition, we expect reported net revenues of $1.75 million to $1.80 billion, reflecting the completed divestiture in Specialty Services and the foreign exchange environment. The guidance represents an organic net revenue growth of approximately flat to 2% as we lap our strong organic growth of 7.6% in Q2 2023, and as we continue to build a smaller but healthier backlog in our HVAC and Specialty Services businesses. We also expect to see a continuation of lower material costs, resulting in declining price pass-through versus the second quarter of 2023. This will result in lower projected project revenues. We expect to continue to expand adjusted EBITDA dollars and margin, which is reflected in our second quarter adjusted EBITDA guide of $220 million to $235 million, which represents adjusted EBITDA growth of approximately 9% to 16% on a fixed currency basis and adjusted EBITDA margin expansion of 140 basis points at the midpoint. For 2024, excluding any impact from the Elevated acquisition and second quarter financings, we anticipate interest expense to be approximately $150 million; Depreciation to be approximately $80 million; capital expenditures to be approximately $95 million; and our adjusted effective tax rate to be approximately 23%. We expect our adjusted diluted weighted average share count for the year to be approximately 279 million, taking into account the Series B transaction and the primary follow-on offering of 12.65 million shares executed on April 16.

Thanks, Kevin. APi's record first quarter profitability speaks to the effectiveness of our strategy and the alignment and its execution by our global team of leaders. As you've heard from us, we have great confidence in the business and the direction we are heading despite the volatile macroeconomic environment. The announced acquisition of Elevated, an expansion into the adjacent elevator and escalator services market, further strengthens APi's competitive moat and expands exposure to statutorily driven demand for our services. As we look to the years ahead, we believe we can create sustainable shareholder value by focusing on our 13/60/80 long-term value-creation targets, all of which are accelerated by the announced acquisition of Elevated. These include above-industry average organic growth; adjusted EBITDA margin of 13% plus by 2025; 60% of revenue from service, inspection and monitoring; and adjusted free cash flow of 80%. I am excited about the opportunities for the rest of 2024 and our ability to execute on our strategic plan in the years to come. With that, I would now like to turn the call back over to the operator and open the call for Q&A.

Your first question comes from the line of Kathryn Thompson of Thompson Research Group.

APG has focused on the inspection first strategy, as you've mentioned several times, increasing margins through mix and scale. Currently, it's over 50%, up from 40% before Chubb. As you enter the new elevator market, how does that align with the inspection first strategy? Looking ahead as you develop that segment, how do you envision it helping to achieve the 60% goal the company has set?

Kathryn, thanks for your support and for participating this morning. So elevators, just like fire life safety systems are required by law to be inspected for functionality and operability at least annually, and it varies based on state and local jurisdiction, again, just like the fire life safety business. If you look at Elevated's business, where we say 70% plus of their business comes from basically inspection, maintenance and repair, that falls right in line with our long-term goal of 60% of our revenue coming from inspection service and monitoring. That 70% plus is actually probably higher than that, depending upon how you want to slice and dice the modernization work, which is really their version of project-related work. And a lot of the tuck-in M&A work that we'll do as well as the organic growth that we'll see inside this business comes from the inspection service and repair side of the business. The OEMs will continue to focus on the installation side, new construction side where the independent providers are more focused on the service and repair component of it. So this fits like right down the center of the fairway for us as it relates to continuing to focus on growing that piece and component of the business. And we're super excited about the Elevated team. We're also super excited about the opportunity for us to really grow in the space.

And then just a follow-up question. Been a fair amount simplifying your capital structure for the quarter. Congratulations on that. But just to reiterate, does this change at all your capital priorities? And in particular, does it have any impact on your M&A initiatives that you've outlined previously?

Kathryn, this is Kevin. I would say in short, no. Our priorities as we came into the year was to continue to focus a good portion of our free cash flow on stepping up our bolt-on and tuck-in M&A campaign. That is still the plan. We also had planned to pay down some debt later in the year, and nothing has changed there either. So our plan as we started the year and our priorities remains the same.

Your next question comes from the line of Andy Kaplowitz of Citi.

Russ, can you give us a little more color into core safety markets? Obviously, you continue to focus on project selection, but implied in your '24 guidance continues to be a relatively significant step-up in organic growth in the second half. So what's your visibility at this point to step up? Is it really just the comp on increased project selectivity really starts in the second half? And are there any key verticals that you expect to drive the growth such as data centers?

Well, we have strong visibility in our data center sector. We are currently building a healthy backlog. Data centers are contributing to both our Safety Services and Specialty Services segments. We are also seeing significant success in the semiconductor sector. Nothing has changed regarding the end markets that our business leaders are focusing on. We continue to prioritize inspections, and the project-related work we are adding to our portfolio is solid and healthy. The sectors of health care, data centers, semiconductors, and advanced manufacturing are all the right areas for us to engage in.

Appreciate that color. And then, Russ, maybe a little bit more color into the Elevated growth profile. I know you said it would deliver $220 million annually of revenue. But what should the growth look like over the next couple of years? And maybe versus that base, should it be accretive to APG's growth or similar? And then how do you think about the synergy under cross-selling opportunities versus your core life safety business?

Yes. The business has grown at a high single-digit rate organically, and we expect that trend to continue. We aim to accelerate growth where possible and see a strong opportunity in bolt-on mergers and acquisitions, similar to the fire life safety space. There's potential for non-organic growth to complement that segment. We had the Elevated team visit yesterday to discuss integration, even though the transaction won't close until later this quarter. We talked about cross-selling opportunities and aligning our branch offices. The ideal way to foster this alignment is to have our teams work closely together. This will take some time as we identify areas of overlap, but as our business leaders build relationships, it will facilitate cross-selling more effectively and quickly. The Elevated team met with our national accounts group leader to initiate this process. It’s a journey that will require time, but we feel positive about the direction. Everyone is aligned in their mindset, and we see opportunities to leverage their customer relationships, which excites us.

Your next question comes from the line of Andy Wittmann of Baird.

I guess I wanted to ask about the services growth. I think you mentioned on the prepared remarks that it was 3% in the quarter. You also mentioned that the U.S. inspection business is growing double digit. So I guess, Russ or Kevin, could you just decompose a little bit and give some color behind the 3% growth rate? Were there larger customer exits in the international business perhaps that have held that back? Because it feels like the U.S. business is doing pretty well, but 3% is okay. But I think over time, certainly, your expectations are higher than that.

The 3% growth figure reflects total API growth across services, which includes specialty and HVAC services. I mentioned that we decided to move away from a significant customer in specialty who wouldn't accept the price increase, which mainly affected a service contract. This will negatively impact the overall number. In addition, our service revenue on the HVAC side also declined as we reevaluate those customer segments and markets. However, when we exclude these factors, our service growth for the rest of the business was actually over 6%. The inspection activities related to core life safety are still driving service demand. Additionally, last year, we experienced a large amount of service work in U.S. life safety due to freezing conditions in North America. We're optimistic about this. Overall, our service business, which we aim to grow, continues to perform well, particularly in North America, where it remains closely linked to the double-digit growth in inspections that Russ mentioned.

Okay. That's super helpful. I just thought maybe as a follow-up, you could just talk a little bit about what you're seeing out of your international life safety business, in particular. Are you seeing growth in pricing and how's the economy in Europe and the parts of Asia where you compete holding up to support your expansion there?

The international business experienced modest growth in the first quarter. We have seen consistent organic growth each quarter since acquiring the business, despite a challenging comparison from last year, when organic growth was around 11% or 10%. We still managed modest growth in this year's first quarter. Overall, the business remains resilient as we focus on key end markets, and I believe the team is now concentrating on the right areas, which wasn't the case two years ago. We are undergoing a significant transformation within our sales force, led by a new leader in the international sector. This leader is pushing to prioritize inspection and service in our sales approach, which requires adjusting our mindset, especially in the existing market. Our backlog remains roughly the same as last year, with some customer attrition as we adjust pricing and strategically allocate our workforce. I feel optimistic about the current state of the business and the momentum we are building through our value capture initiatives.

Your next question comes from the line of Julian Mitchell of Barclays.

This is Jack Cauchi on for Julian Mitchell. How is the M&A pipeline overall? You did Elevated. Could we expect active M&A over the rest of 2024? And how is the environment in terms of valuations?

Our M&A pipeline is looking strong and robust. As we evaluate opportunities in the M&A market, it's crucial for us to focus on the right aspects that align with our existing offerings, whether that means geographic relevance or the types of services provided. These opportunities must complement our margin expansion objectives, and we need to clearly understand how any new business aligns with those goals. It's also important for leadership and the team to share similar cultural values and fit, regardless of whether the target is a larger firm or a small family-owned business in Paducah, Kentucky. We must remain disciplined in our approach, as there are many promising prospects, and our team has been exceptional in assessing these opportunities. Over the past year, we have invested around $100 million in bolt-on M&A, and our intention is to accelerate this strategy. We believe that, even after the Elevated acquisition, our balance sheet provides us with the flexibility needed to pursue this additional bolt-on strategy.

Got it. And a quick follow-up. Gross margins are showing a decent increase. How is APi coping so well with wage inflation among its service technicians?

So this is Kevin. I'll take that. We've been implementing a pricing strategy for the last ten years, focusing on improving margins in our service business. Our teams are effective at managing pricing across all service elements, including labor. This has become a skill that our team has developed and continues to refine annually.

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

I wanted to follow up actually on the power question. So maybe to take that a step further, is it possible for you to kind of frame your ongoing M&A strategy and then also how that matches with the recent equity raise? So how should we infer that with your appetite to do larger deals going forward even after Elevated? And then is there a potential to expand again outside of the legacy fire and safety end and now Elevated verticals? So an update there would be great.

I don't think you're going to see us move outside of the most recent adjacency, which is the elevator and escalator space. We need to demonstrate to our investors that we can execute effectively in this area before exploring options beyond fire life safety, security, and the elevator and escalator sectors. We've always maintained a disciplined approach, and it's essential that we continue to stay focused and execute within this new vertical. There are some interesting opportunities we are considering, including a business in the fire life safety space with over $100 million in revenue that would fit well without increasing our leverage. Our recent decisions regarding our balance sheet, including the equity raise and the term loan, provide us with great flexibility to capitalize on opportunities as they arise. We will be smart and disciplined in making choices that benefit the long-term health of the business. Kevin, if you'd like to add anything, please do.

No, I think just a little bit. Russ said it well. When we think about M&A, there's sort of both bolt-on, then there's that mid-low platform and then there's the larger ones like Chubb. As we finance these, we actually are looking forward to make sure that we remain nimble enough to do what we need to do over the next 12 months. And I think he said it well. If there was something out there, we can fund bolt-on, tuck-in through ongoing cash flows, anything in that mid-level we'll flex up. We have the balance sheet to do it pretty easily. And I think we have the sort of history to pay that down and to get back into our targeted levels pretty quickly. And that's kind of how we're going to manage things that allow us to be as opportunistic as possible.

I understand. Congratulations on the Elevated deal; it seems like a great fit. I wanted to ask about the potential for cross-selling opportunities in the medium to long term. Could you discuss the sales force at Elevated and the chances to cross-sell from your legacy fire and safety business as well as Elevated's elevator services over time?

Yes, the opportunity for cross-selling is substantial. We've already made progress by introducing our sales leaders to each other, despite the transaction not being finalized yet. From my experience, it will take some time to fully implement this cross-selling strategy. It's important for our team to be comfortable sharing their customer relationships with one another; however, if they don't trust each other, it makes it more challenging. While it's easy to suggest actions, the more we bring our branch operations together, the quicker we can gain momentum in cross-selling. I believe our sales leaders can engage customers about both fire life safety inspections and elevator inspections. Educating our salesforce is essential, and it will require effort as we develop a plan over the next few months leading up to the transaction's closure. A strong example is our Omaha, Nebraska branch, where the fire life safety business operates alongside one of our Specialty Services. Both branches have flourished by sharing the same space, allowing them to easily collaborate on customer engagements. This cohabitation fosters acceleration in business opportunities, and we need our real estate team to collaborate with the leaders of our life safety and elevator businesses to replicate this success, with a strong willingness to do so.

Your next question comes from the line of John Tanwanteng of CJS Securities.

I was wondering if you could drill down into the elevator and escalator market a little bit more on the longer-term potential there for acquisitions. Do the assets there come up to sale frequently? Are the multiples similar to the ones you've seen in your core business? Are the margins and business models more similar to what you see at ESS? Or is that more of a unique asset? Any more color there would be appreciated.

I believe the elevator and escalator market is quite similar to the fire life safety and security sector. Good morning, and thank you for being here today. I think it's a textbook situation, with similar multiples. Sellers will be looking for the right fit for their business, just as we have in the fire life safety area. The market is just as fragmented. Aside from needing to refer to it as an elevator instead of a fire alarm, I see it as the same. From a mergers and acquisitions viewpoint, we should be able to operate effectively. There are specialized brokers and bankers in this industry. However, in conversations with the team yesterday, it's clear they are knowledgeable about the market, the key players, and who aligns with our culture. This presents an opportunity for us to leverage those relationships. Every senior leader on the Elevated team comes from the elevator and escalator sector, so they have a deep understanding of the market.

Yes. The only thing I would add is that the market makeup is the same, highly fragmented. They are the market leader in many areas, still hovering around the 5% range, with a few nearing 10%. Beyond that, it's quite fragmented, and they present us with a strong pipeline and targets.

Got it. And I was wondering if you could just talk about your second half expectations in the core business. I know you haven't formally updated your guidance, but you performed well in Q1. Your Q2 guidance on an earnings level looks strong. I'm just wondering if we should expect upside just for the organic core business when you do formally update your guidance for all the factors you mentioned before.

On guidance, I appreciate the question. We find ourselves in a unique situation with a significant acquisition that we aim to close soon. As of May 2, we plan to finalize it within the quarter, which we believe will provide a substantial update for the year. Historically, we've adjusted for foreign exchange impacts. Since we are nearing the completion of that transaction, we want to take our time to integrate and collaborate with the new team to gain a clearer picture of the second half of the year. We will incorporate the foreign exchange considerations as well. Additionally, I want to emphasize that there should be no major changes in our core business for the latter half of the year beyond the second quarter. We anticipate accelerated organic growth during this period. Our service business growth rates are meeting our expectations and have remained strong in the first half, and we anticipate this trend to persist. We also expect businesses involved in HVAC and international projects to achieve low to mid-single-digit growth based on their solid performance. Together, these factors contribute to our expectation of 6% to 7% organic growth in the second half of the year.

So John, Stephanie, everyone, I want to mention something about cross-selling. The other night, I noted that the Elevated team was on campus yesterday, and we had dinner with them the evening before. We invited a local business leader to that dinner. During the call, he sent me a message that mentioned getting leaders together. This morning, I connected with several Elevated leaders at dinner on Tuesday. As a first step, we invited Ben, the Regional VP for Elevated from Indianapolis, to join our Service Leaders' Summit in Columbus, Ohio this June. There’s already action happening; we’re facilitating connections. This illustrates the advantages of our focus on leadership development and investing in people. Our business leaders are typically curious and eager to integrate these newly acquired companies. This example showcases how our approach to cross-selling and sharing opportunities and knowledge will flourish. I hope this provides useful insight.

Your next question comes from the line of Steve Tusa of JPMorgan.

Congrats on the margin execution, really strong.

Thank you.

Just on kind of the trajectory for the second half on the sales side. I know you guys used to talk about like backlog and kind of some forward indicators on some of the businesses. How should we think about things as they move forward into the base business for the third and the fourth? You mentioned, I think, the 6% to 7% in the back half. And I think the comps kind of stabilize a bit in the back half. But is that a steady trajectory? Is it pretty consistent, the growth 3Q and 4Q? And then in that context, like it's hard to tell what normal seasonality actually is. You had a nice sequential step-up or you have a nice sequential step-up from 1Q to 2Q. How does that typically behave seasonally 3 and 4Q with these businesses?

Steve, this is Kevin. I will address this and then Russ can chime in with any additional insights. Looking at the second half of the year, the backlog in our U.S. life safety business, along with what Russ mentioned about the international business backlog, has remained strong and continues to improve. Specifically for U.S. life safety, we have been actively adding to that backlog. We're feeling optimistic about the backlog as we approach the latter part of the year, which is evident in our planning. As I mentioned earlier, this leads to increased project work, which you are likely aware of. On the service side of our business, our operations have performed well and aligned with our expectations during the first half of the year, and we anticipate that trend to continue in the second half as well. In contrast, we have been reducing backlog in the HVAC and specialty businesses, but we expect to see a modest return to growth in those areas during the latter part of the year, albeit at a low single-digit rate. Overall, although we do not provide segment-level guidance, the combined factors are what's contributing to the expected improvement in the second half of the year.

Yes, that makes sense. Just one last question. I assume that if you are disciplined with these projects, the price is holding up relatively well. I'm not sure if you addressed this in an earlier question, but can you provide any insight on the price trends? I know the price, in terms of flat organic, may not be very relevant since it will involve small numbers, but in the second half of the year, are you expecting any price increases?

Yes, absolutely. So we think about price the following way. We have pricing that we pushed through on the service side of the business. We expect that to be margin enhancing as it relates to services I would say in the first half of the year. Roughly that price number has been around 3% on our ongoing or recurring service revenue stream. We expect that to continue in the back half of the year. With respect to projects, we look at that sort of more as price pass-through. We don't anticipate that being a significant driver because we should annualize through that in the summer months, which is really where we started to see pricing come down last year. So we should be through it. In the back half of the year, there should be a significant impact on our growth rate, positive or negative from the price pass-through.

This is David Paige standing in for Ashish. I wanted to quickly follow up on the pruning or project selection. How much more do you think is needed until the business or customer base reaches your desired level? Additionally, I wanted to ask about pricing. I believe you mentioned that raw material or commodity costs are expected to decrease. What is the expected benefit from that for the year?

I'll answer the last part first, which was on the price pass-through. We don't expect there to be much of a headwind or tailwind as it relates to our organic growth rate from pricing through. And I would say, generally, on the project side of the business, we're really just trying to accommodate sort of the material costs run up and pass it through. So we don't think it's going to impact our growth rates and it shouldn't be a tailwind, if you will, on margins either.

I want to emphasize that the customer selection process for pruning will always be ongoing. The disciplined pruning that you are observing in our Specialty and HVAC businesses will continue into the second quarter, and this will lead to a healthier backlog, transitioning back to a growth phase that you will notice in the latter half of the year. Internationally, this process may extend until the end of the year due to some of our three-year contracts that we need to fulfill, especially since this marks the third year since we acquired the business. We are in the process of addressing some of these contracts, including some legacy agreements that will likely carry over to the end of this year and should be resolved by 2025.

That concludes our Q&A session. I will now turn the conference back over to Russ Becker for the closing remarks.

Thank you. I appreciate that. In closing, I would like to thank all of our team members for their continued support and dedication to our business. We believe our leaders are the foundation on which everything else is built and that the safety, health and well-being of each of our leaders remains our #1 value. I would also like to thank our long-term shareholders as well as those that have recently joined us for their support. We appreciate your investment in APi, and we look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody, for joining our call this morning, and we look forward to continuing to keep you abreast of the positive things that are going on in the company.

That concludes today's call. Thank you all for joining. You may now disconnect.