APi Group Corp Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the APi Group's Second Quarter 2024 Financial Results Conference Call. Please note that 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 Second 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, August 1, and we undertake no obligation to update any forward-looking statements 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 operating key 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 getting into the results, I wanted to thank our 29,000 leaders for their hard work and dedication to APi. The safety, health, and well-being of each of our leaders remains our #1 value. We continue to prioritize investing in the men and the women in the field as human beings and aim to provide each of them with training, leadership development, and advancement opportunities. At APi, our field leaders have careers, not just jobs. We prioritize this investment because we recognize that our success happens only when our branches and field leaders are successful. This commitment is one of the foundational principles we believe will continue to enhance shareholder value. We remain committed to our long-term 13/60/80 value creation targets. We believe these will lead to outsized investor returns through 2025 and beyond. As a reminder, these include the following: an 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 long-term adjusted free cash flow conversion of 80%. As I mention often with both investors and our team, we are relentlessly focused on driving this strategy with a specific focus of achieving 13%-plus adjusted EBITDA margins by 2025, which we remain confident in achieving. To be clear: We view 13% as our next checkpoint, not the ending destination, in a long-term margin expansion journey. As we move closer to the achievement of this goal, we expect to plan an investor update on our new targets and opportunities in early 2025. During today's call, I will begin my remarks by briefly commenting on our second-quarter results as well as our continued progress towards delivering on our stated strategic goals in a macro environment that continues to be volatile. I will then touch on our recent M&A activity and our focus on long-term organic growth before turning the call over to Kevin, who will walk through our financial results and guidance in more detail. Turning to the second quarter, APi delivered strong results by executing our strategy focused on margin expansion and free cash flow generation. We achieved record second-quarter adjusted EBITDA dollars and margin as well as record adjusted free cash flow dollars and conversion in an evolving macro environment. Net revenues declined by approximately 2% in the quarter compared to 7%-plus growth in the prior year period. As we have discussed over the past year, we have been strategically slowing revenue growth to focus on more profitable projects. The team has done an excellent job with this initiative, particularly in our international HVAC and Specialty Services businesses. This quarter, a combination of federal funding, permitting, and some customer delays contributed to the reduction in project revenue. We believe these delays are temporary timing shifts, not cancellations, and we expect the impacted revenue to still contribute to our full-year 2024 revenue in a meaningful way. With nearly all of the planned revenue slowing and project delays behind us, our teams are focused on healthy organic growth in the back half of this year and in 2025. I've said before that backlog would not be a great indicator of the momentum in our business while we double down on our disciplined customer and project selection initiative. And while we don't plan to provide backlog commentary on a regular basis, I wanted to share that, at the end of the second quarter, our backlog was up $500 million versus the end of the year and much healthier from an expected profitability perspective. The work the team has done in transforming our backlog and reaccelerating its growth gives me confidence in the direction we are heading as a business. I am pleased to report that U.S. life safety once again led the way from a growth perspective, where we had a record quarter of inspection revenue driven by continued double-digit organic growth which we have achieved for 16 straight quarters. This is critical as these inspection revenues drive recurring higher-margin service revenues and help APi make progress towards our 60% target for inspection, service, and monitoring revenues. In line with our strategic initiatives, we continued to see strong year-over-year improvements in adjusted gross margin and adjusted EBITDA margin in the second quarter, up 340 and 190 basis points, respectively. I am pleased with the leadership team's ongoing commitment to driving gross margin improvements through 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. The international life safety business continues to show steady progress with another quarter of organic growth, which that business has achieved in each quarter since the acquisition, even as we challenged the team to be intentional about targeting only work that is additive to achieving our 2025 adjusted EBITDA margin targets. Additionally, the $125 million value capture plan, which is another key contributor to our 13% or more target, remains on track. During the second quarter, we crossed the 50% mark in terms of realizing the savings from our $125 million value capture target and have taken actions associated with approximately $90 million of run rate savings. APi's consistently strong financial results speak to the direction we are heading in and the strength of the company's recurring revenue services-focused business model as well as the discipline of the organization and its leadership team. Moving on to M&A, we closed on the acquisition of Elevated Facility Services in early June, and it has been rewarding welcoming the team to APi. We remain excited for the opportunity to build onto the Elevated platform and become a leader in the elevator and escalator service market. In addition to Elevated, our bolt-on M&A strategy continues to progress. Through the second quarter, we have closed 6 bolt-on acquisitions with an average EBITDA multiple of approximately 5x. The markets we operate in are highly fragmented, and the team remains focused on identifying the most attractive opportunities within our robust M&A pipeline. Our free cash flow generation and EBITDA growth in the first half of the year gives us confidence in our ability to reduce net leverage below our target of approximately 2.5x by the end of the year while we continue to execute our M&A strategy. With expected adjusted free cash flow of over $600 million in 2024, we remain committed to our capital allocation priorities, which remain as follows: deleveraging to our net leverage target of 2.5x adjusted EBITDA; growing our business through executing our M&A strategy; and finally, repurchasing our shares. As an update and reflective of the share repurchase activity undertaken in the first 6 months of 2024, APi has approximately $400 million remaining under our share repurchase authorization of the $1 billion authorization from February of 2024. In summary, while we remain focused on building on the execution of our strategy in the back half of the year, I am proud of our team and how we delivered on our commitments and produced record EBITDA and free cash flow, so far, in 2024. I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail.

Thanks, Russ. Good morning, everyone. Reported revenues for the 3 months ended June 30, 2024, were $1.73 billion, a decline of 2.3% from $1.77 billion in the prior year period. Organic decline of 3.1% against a comparison of 7.6% growth in Q2 2023 was driven by disciplined customer and project selection and project delays in our specialty segment. The result of this was a 9% organic decline in project revenues. This was partially offset by organic growth of 2.4% in services revenue. Adjusted gross margin for the 3 months ended June 30, 2024, grew to 31.7%, representing a 340 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 both service and project revenues across both segments. Adjusted EBITDA increased by 13.8% for the 3 months ended June 30, 2024, with adjusted EBITDA margin coming in at 13.4%, representing a 190 basis point increase compared to the prior year period primarily due to the increase in adjusted gross margins partially offset by lower fixed cost absorption driven by lower revenues. Adjusted diluted earnings per share for the second quarter was $0.49 per share, representing an $0.08 per share or 20% increase compared to the prior year period. The increase was driven by strong margin expansion in Safety Services and decreased interest expense, partially offset by higher adjusted diluted weighted average shares outstanding. I will now discuss our results in more detail for Safety Services. Safety Services reported revenues for the 3 months ended June 30, 2024, increased by 4.4% to $1.28 billion compared to $1.23 billion in the prior year period. Organic growth of 1.5% compared to organic growth of 7.3% in Q2 2023 was driven by strength in U.S. life safety, where we once again posted double-digit inspection growth and 8% organic growth in inspection, service, and monitoring revenues. This was partially offset by a double-digit decline in HVAC revenues driven by disciplined customer and project selection and by planned customer attritions in our international business. Adjusted gross margins for the 3 months ended June 30, 2024, was 35.3%, representing a 290 basis point increase compared to the prior year period driven by price increases, improved business mix of inspection, service, and monitoring revenue, as well as significant margin expansion in both service and project revenues. Adjusted EBITDA increased by 26.4% for the 3 months ended June 30, 2024. Adjusted EBITDA margin was 15.7%, representing a 270 basis point increase compared to the prior year period. This was primarily due to the increase in adjusted gross margins and was partially offset by headwinds from operating costs which grew faster than revenues. I will now discuss our results in more detail for Specialty Services. Specialty Services reported revenues for the 3 months ended June 30, 2024, decreased by 18.4% to $453 million compared to $555 million in the prior year period. Organic revenue declined 15.3%, against a comparison of 7% growth in Q2 2023, driven by a 21% decline in project revenues due to our ongoing efforts regarding disciplined project selection, as well as a combination of federal funding delays, permitting delays, and customer delays. Service revenues were down 10% due to the exited customer relationship discussed last quarter. Adjusted for this customer, service revenues were essentially flat in the quarter. Adjusted gross margins for the 3 months ended June 30, 2024, was 21.4%, representing a 230 basis point increase compared to the prior year period driven by disciplined customer and project selection driving solid margin expansion in project and service revenues. Adjusted EBITDA decreased by 10.1% for the 3 months ended June 30, 2024, due to lower revenues. Adjusted EBITDA margin was 13.7%, representing a 130 basis point increase compared to the prior year period, primarily due to the increase in adjusted gross margins partially offset by lower fixed cost absorption. I'll now touch on cash flows. We continue to focus on driving free cash flow conversion improvements year-over-year, and I am pleased with the progress to date in 2024. For the 3 months ended June 30, 2024, adjusted free cash flow came in at $122 million, reflecting an improvement of $31 million versus the prior year and adjusted free cash flow conversion of 53%. For the first 6 months of the year, we increased adjusted free cash flow conversion by $43 million compared to the prior year period. Free cash flow generation has been and continues to be a priority across all of APi. And our performance in the first half of the year positions us well to deliver on our 2024 guidance of approximately 70% adjusted free cash flow conversion, representing an adjusted free cash flow delivery of over $600 million at the midpoint of our updated adjusted EBITDA guidance. At the end of Q2, our net debt-to-adjusted EBITDA ratio was approximately 2.7x, taking into account the Elevated acquisition and second-quarter financing activities. As a reminder: The back half of the calendar year is seasonally our strongest adjusted free cash flow generation, and we expect that trend to continue this year with second-half free cash flow allowing us to continue deleveraging to below our stated long-term net leverage target of 2.5x by year-end. I will now discuss our guidance for Q3 and full year 2024. We continue to expect full-year reported net revenues of $7.15 billion to $7.35 billion at current currency expectations. With the pushout of certain projects driven by funding, permitting, and other related delays as discussed by Russ, our current view is that the full-year revenue will be closer to the low end of our guidance. Having said that, we remain confident in the margin profile and performance of the business, which is why we have brought up the bottom end of our adjusted EBITDA range by $10 million. This is reflected in our narrowed full-year adjusted EBITDA guide of $855 million to $915 million and represents adjusted EBITDA growth of approximately 13% to 17% on a fixed currency basis. In terms of Q3, we expect reported net revenues of $1.86 billion to $1.91 billion. The guidance represents reported net revenue growth of 4% to 7% and organic net revenue growth of 2% to 5%. We expect Q3 adjusted EBITDA of $240 million to $250 million, which represents adjusted EBITDA growth of approximately 7% to 12% on a fixed currency basis. For 2024, we anticipate full-year interest expense to be approximately $145 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 average share count for the year to be approximately 279 million. Overall, we are pleased with the team's execution of our strategy in an evolving macro environment during the second quarter and first half of 2024. I look forward to sharing more updates on our progress as we move throughout the year. I'll now turn the call back over to Russ.

Thanks, Kevin. As you've heard, APi delivered strong financial results in the second quarter and first half of the year. The business continues to perform well, with record adjusted EBITDA margin and free cash flow generation. I'm confident in our leaders' ability to generate continued momentum in the business, build on historically strong execution, consistently drive margin expansion, and return to historical levels of organic growth in the back half of the year and into 2025. We believe we can create sustainable shareholder value by focusing on our 13/60/80 long-term value creation targets. And we feel confident in our ability to achieve our 13% or more adjusted EBITDA margin target in 2025. With that, I would now like to turn the call back over to the operator and open the call up for Q&A.

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

Just to get it kicked off. You discussed project delays impacting the top line for the quarter. Feedback in the field from TRG contacts has been that projects are seeing some delays but not cancellations. Could you give more color on whether these projects are just delays or cancellations? And in addition, could you discuss what you're seeing in the back half of the year? Essentially, what gives you confidence for that full-year guidance?

Thanks, Kathryn, and thank you for your continued support. It's a great question. I want to start by level-setting with everyone that we are not a projects-first company, and we are focused on growing our services business. And that's why we're comfortable beginning our work on customer and project selection last summer to build a healthier book of business. For some context on the quarter: The delays were a mix of funding, permitting, and scope changes pushing back the anticipated start times for certain projects across the business, but none of these projects are cancellations. In most cases, the issues causing the delays have been resolved, but we feel like we're about 90 days behind where we expected to be. That's why Kevin commented that we are tracking towards the low end of our full-year guide for revenue. Regarding confidence, we feel really good; like I feel like the business is in a really good place today as we move into the back half of the year, as we work our way through some of these delays. Our backlog is growing. I mentioned in my remarks that it's increased by more than $500 million since the start of the year, and the best part about it is it's healthier. Some of the customer attrition and the work that we've had to do to raise pricing and ensure that we're working with the right clients can be challenging, but I feel like our team and our business have really managed their way through that. Sometimes, when you have these delays, it becomes more challenging to navigate and manage the resources and personnel that you would utilize on existing projects. I feel like our team has done a really good job, and I'm confident that we're gaining momentum as we head into the quarter and into the back half of the year. We're currently sitting slightly behind where we thought we would be last time we talked. So I don’t know, Kevin, would you add anything to that?

Sure, Kathryn. First, I want to clarify that I misspoke during the call. We've updated the bottom end of our EBITDA range to $885 million. I mistakenly mentioned $855 million, and I apologize for that. Our current range is $885 million to $915 million. Russ highlighted the momentum in our business. Even in the second quarter, although we fell short of our revenue midpoint, we exceeded our margin expectations. Our margins remain robust, which gives us confidence heading into the third quarter. Factors that benefited us in the second quarter included the work we completed, yielding higher margins than anticipated. Our international team has excelled in managing costs and increasing their value capture, and we expect this trend to continue. Furthermore, we experienced positive impacts on margins from our business mix, which contributed to our overall performance. We feel optimistic about our margins and our execution capabilities for the latter half of the year.

Okay, great. My follow-up question is on free cash flow generation. You've indicated an acceleration of that in the back half of the year. Balancing where we are from your net debt level along with M&A, could you give us an update just in terms of your uses of cash as we focus on the back half of the year?

Yes. Just additional color on free cash flow delivery. In a normal year, we're going to deliver somewhere between 20% to 30% of our full-year cash flow conversion due to seasonality in the first half. We're going to deliver 70% to 80% of our free cash flow in the back half of the year, and that's the expectation this year. As we move through the year, deleveraging remains a priority as it has been. We're continuing to reduce our leverage from its current level at 2.7x to inside of 2.5x, but after that, M&A remains a priority. We've closed, as Russ said, on 6 bolt-on transactions in the first half of the year and spent over $600 million. We still have plans to continue investing in our pipeline and executing additional transactions in the back half of the year.

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

Russ, maybe you can talk about the overall macro environment that you see. Obviously, leading indicators are all over the place in nonres construction, but your backlog, as you said, is growing. Can you talk about the verticals that are driving that growth and update us specifically on what you're seeing in the data center market or how APG is playing in that market?

Yes. So the data center market is obviously an end market that we're very active in. It's booming; every place you look, there are numerous opportunities in data centers. Our focus is leading on the inspection and service side of data centers. We want our inspection and service relationships to lead to project-related work, and there's been a multitude of opportunities in the space. However, it's essential to note that when considering a data center expansion, we're focused on the fire life safety piece of that expansion project opportunity, which tends to be significantly smaller than the mechanical and electrical packages. These data center projects are probably over 80% mechanical, HVAC, and electrical work. We're also seeing robust opportunities in the semiconductor space, advanced manufacturing, including pharma, as well as the electric vehicle and battery space. Healthcare remains strong, and we're also witnessing some opportunities emerging in the aviation space as well as in the sports and entertainment sector.

Helpful, Russ. Maybe you could talk about the confidence you have that, if organic revenue growth remains a little light, you'll continue to offset lower growth with higher margin. I think Kevin talked about it a little bit, but is Chubb value capture actually trending higher than that $125 million that you previously gave us? Also, the new $500 million of backlog you mentioned, is that coming in at materially higher margin than your current revenue?

Well, I mean I, in my remarks, talked about margins and about the 13% margin as our target for 2025, and that's obviously the goal we've set. We also think we can continue expanding from there. I feel very confident about the opportunities in front of us as we move through the course of this year. The $500 million of backlog that's increased is, undoubtedly, healthier. While I can't quantify an exact margin improvement, it is clear that it varies by business. Directionally, it shows signs of being more favorable. Regarding the Chubb value capture, we're not going to raise the target of $125 million. We're on track to hit that and have plans in place to deliver it. We measure our progress and we're transitioning into a mode more focused on growth. The efforts led by our international sales team to focus on service and inspection work are significant, and the rewards of that work will become apparent as we move forward.

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

This is Jack Cauchi on for Julian Mitchell. The implied Q4 EBITDA is up slightly sequentially versus historically being sequentially down. Can you explain what assumptions and macro drivers are driving the difference versus prior seasonality?

Yes, sure. The primary driver of that this year is that we expect our project business to accelerate in the back half of the year, as Russ mentioned earlier, so we anticipate growth in projects in the back half of the year. Traditionally, our projects flatten out or slightly decrease from Q3 to Q4, but this year we’re expecting our projects business, with the backlog coming on, to actually increase sequentially. That’s the largest driver. We also expect margin expansion in the back half of the year, but that's typically consistent year over year, so primarily, it's the acceleration of the project business.

And just a quick follow-up. Margins were solid in both segments. You mentioned earlier raising the margin targets in early 2025. How should we think about that by segment?

We're not going to disclose our future margin targets until after we've delivered on our 2025 goals first. Nonetheless, we expect every segment of our business to improve their margins. No one will get a reprieve, meaning we expect all parts of our business to continue to grow. We aim to leverage our higher-margin businesses, but there are opportunities to improve margin across our entire portfolio, and that is the objective we will lay out early next year.

Your next question comes from the line of Heather Balsky of Bank of America.

This is Eileen Martle on for Heather Balsky. I’m wondering if you could give us some color on what you're seeing on pricing. Are you getting any pushback? And how does that factor into your second half guidance?

Eileen, this is Kevin. The short answer is we have continued our pricing focus, especially on the service side of our business. We say year in and year out, we're pushing pricing campaigns that drive margin expansion on the service side of the business. Our teams have been successful in that, though it varies internationally, but generally across our service businesses, particularly in life safety, our teams have continued to push pricing effectively, and our customers recognize the value we deliver. This pricing approach is expected to remain consistent through the back half of this year.

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

Really nice job on the margin, guys. I was wondering if you could talk more about the delays. Was there any specific end market or commonality between them? Or were several independent headwinds coincidentally hitting Q2? Additionally, what is the risk of further pushouts at this point?

I'd say it has been across every aspect of it. For example, we faced a permitting delay with a large project opportunity with one of our infrastructure customers in the Northeast, but that has been resolved, and we're actually on site now. We also had a utility client of ours that went through cycles of starting and stopping a work program we have a Master Services Agreement with, and those issues have also been resolved, and we expect to have boots on the ground in August. Our North American safety client is also experiencing project delays due to changes with their general contractors. We had some delays in our Asian business related to fire and security. So it’s been varied. That's been one of the reasons we're focused on growing our business from an inspection, service, and monitoring-first approach, as project work can introduce lumpiness into our results. This strategy differentiates us from comparisons with other companies in our sector.

Okay, fair enough. Regarding the backlog, and although I know that translates beyond your inspection and services focus, what end markets drove the backlog increase? And how much of that was from the Elevated acquisition?

Not much of it has been driven by the acquisition. Perhaps about 10% of it, maybe slightly more. In thinking about Elevated, keep in mind that over 70% of their revenue comes from service, inspections, repair, and maintenance, so their project-related work primarily consists of modernization and upgrades to existing elevators and facilities; one could argue that this is essentially service work too. The increased backlog is coming from the right areas. Reflecting on the end markets, I didn’t mention infrastructure and the opportunities there. There's an enormous amount of activity in data and semiconductor sectors. We're also seeing some uptick in the warehouse distribution center space, which has been lagging but is now showing signs of increased activity. Predictions of interest rate cuts are contributing to that trend. Healthcare remains robust with many opportunities as well. So the end markets creating this backlog are diverse, particularly in infrastructure.

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

Maybe just starting on the M&A front. Can you discuss your desired source of funding for M&A deals going forward, and your appetite for potentially larger deals, perhaps similar to or larger than the Elevated deal, especially if the transactions could accelerate your recurring revenue targets and margin profile?

I didn’t fully catch the first part of your question, but regarding the second part: If it’s the right fit, a deal similar to Elevated is something that would interest us. It has to fit the profile we’re looking for, particularly a significant recurring revenue aspect in inspection, service, and monitoring and an accretive margin profile. We must also ensure we can acquire such a business at the right price. Larger deals could be considered, but I don't foresee that being our primary focus right now. We prioritize integrating Elevated and ensuring that they have a positive experience as part of APi. It’s crucial to us that we create a supportive environment for them, as we had some of their key business leaders at our recent Board meeting, and they expressed to us that they view APi as their forever home, which indicates the importance of this effort. We do aim to expand within this space. Kevin will address the first half of your question.

Yes. In funding our bolt-on campaign, our annual approach aligns with our ability to fund via free cash flow. That's how we have structured our campaign this year and how I would expect us to continue in the future. Our generated cash flow allows us to prioritize it and ensure we're able to execute planned bolt-on M&A transactions each year.

Yes. The reality is that our tuck-in market—like last year we spent around $100 million on acquisitions. We’ve indicated that we plan to accelerate that pace this year, aiming to exceed twice what we spent last year. We maintain a robust pipeline of attractive bolt-on opportunities and feel optimistic about the transactions we're considering and the teams we're bringing into APi. Our M&A team is doing outstanding work.

Understood. Following up on margin discussions: As we talked today, margin improvement remains a priority this year and into the next. Can you explain how much of the margin expansion opportunity is reliant on the rebound in organic growth versus ongoing self-help initiatives, synergies, and other positive influences?

I'll take that, Stephanie. To provide context, over the last 8 quarters, we expanded gross margins more than 200 basis points in the back half of last year and over 300 basis points in the first half of this year. The levers we’ve been utilizing include a higher proportion of metrics from inspection, service, and monitoring. This blend will continue driving growth for years. Our ongoing focus on pricing for services also plays a crucial role as we aim to create margin expansion. Some recent changes helping our performance include the drop in material costs, but those impacts will persist in the future. We will stay concentrated on both the project side and improving margins. Eventually, we will depend on scaling operations to boost productivity, which would positively influence margins as we approach 2025 and beyond.

Okay, your next question comes from the line of Josh Chan of UBS.

I was wondering if you could break down service versus project revenue within your safety segments. With regard to the service segment, if it’s in the mid-single-digit growth range, is that the right pace going forward as you see it?

Josh, I’ll take that. In the first half of the year, our service business within the safety side maintained mid-single-digit growth. Both our international and North America teams have shown consistent performance here. As we transition into the back half of the year, we expect service free cash flow growth to sustain or even improve. On the project side, we expect some recovery; having been down largely due to the disciplined customer and project selection initiatives, we would now forecast moderate and positive growth.

Great. As the project business starts to reaccelerate, how do you plan on balancing that with the margin benefits you've received from revenue mix improvement from more service?

Yes, that’s a thoughtful question. It should still provide a benefit in Q3, but if in Q4 or any period where project business outpaces service business, that could impact our margins slightly. However, we are confident that in the back half of the year, both areas will experience growth and that our margins will continue to improve in conjunction with our strategies.

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

Congrats on the execution. It’s definitely a choppy environment out there. Could you provide us some specifics on how you expect organic growth to unfold by segment in the next quarters? There’s been a significant acceleration. The $45 million rolled over into the second half so that should help your comps. Can you offer a framework for expectations on organic growth across the segments?

Yes, Steve. This is Kevin. I’ll address that. I’ll separate it into safety and specialty segments. Safety, the first half featured mid-single-digit service growth and a small decline in project work largely impacted by HVAC and international strategies focusing on disciplined project selection. In the latter half, we expect service growth to remain steady within mid-single digits, while project work is anticipated to shift toward low single-digit growth. Key drivers contributing to this improvement will be our HVAC business and international sectors, which are expected to rebound as we effectively utilize our new backlog. Notably, our specialty segment showed service growth in the first half while project work encountered headwinds, but we foresee an improvement in project work as well, targeting toward low single-digit growth in the second half.

So, do you anticipate every segment posting positive organic growth rate in the next quarters? Or will your specialty segment stay negative in Q3 and flip positive in Q4?

Specialty is expected to be flat to slightly up in organic growth for Q3.

Your next question comes from the line of Ashish Sabadra of RBC Capital Markets.

This is David Paige on for Ashish. I just had a question on the Elevated acquisition. Can you share some early learnings from the acquisition, any positive surprises, and details regarding the integration process?

I would say the quality and depth of the leadership team has been a pleasant surprise. Our North American Safety Services segment leader toured their team and returned genuinely impressed with the people he interacted with. He mentioned a young apprentice intervening on safety compliance, emphasizing their company culture and investment in field leaders—this is an encouraging sign. I can’t point to major surprises; we acquired the business from a private equity firm, and they had prepared it well for sale, so nothing that would catch us off guard. Overall, it has been business as usual, and we are very excited about the future with the Elevated team as part of APi.

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

Thank you so much. In closing, I would really again like to thank all of our team members for their continued support and dedication to our business. I am truly grateful for what each and every one of you do on a daily basis. Your efforts truly are amazing. 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 ownership of APi and look forward to updating you on our progress throughout the remainder of the year. So thank you, everybody.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.