APi Group Corp Q3 FY2024 Earnings Call

Good morning, ladies and gentlemen and welcome to APi Group's Third Quarter 2024 Financial Results Conference Call. All participants are now in a listen-only mode until the question-and-answer session. Please note this call is being recorded. 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 Third 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 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 or 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, October 31, 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 third 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 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. Before we get into our results, I would like to thank our approximately 29,000 leaders for their dedication to APi. The safety, health and well-being of each of our teammates is our number one value. While I mention this every quarter, the events of the last few months including the impact of the hurricanes on our teammates in the Southeast have given our organization the opportunity to put that value to practice. I'm pleased with the way our teammates stepped up to help each other and the impacted communities in which we operate. Back in 2021, we detailed our 13% plus adjusted EBITDA margin target by year-end 2025 as part of our broader 13/60/80 Shareholder Value Creation Framework that you can find on Slide 5 of our third quarter presentation. In addition to the 13% target, the 60% and 80% financial goals are long-term revenues of 60% from inspection, service and monitoring, and long-term adjusted free cash flow conversion of approximately 80%. Over the past few years, we have communicated and executed our strategy and its key initiatives intended to achieve these goals with a specific focus on expanding margins to reach 13% or more in 2025. The team has made excellent progress this year executing on our margin expansion initiatives with expected adjusted EBITDA margins up approximately 150 basis points. This has been accomplished by focusing on: first, pricing; second, improved inspection, service and monitoring revenue mix; third, disciplined customer and project selection; fourth, Chubb value capture; fifth, procurement, systems and scale; sixth, accretive M&A and selective business pruning; and finally, as I always like to say, we always have the opportunity to just be better. The team's work over the last few years executing our 13/60/80 strategy has resulted in APi being the strongest it has ever been. On Slide 6, we highlight the progress we have made as a business from 2021 to 2024, with 2024 expected to be a year of record net revenues, profitability and free cash flow generation. The third quarter marks 17 quarters in a row of double-digit organic growth in inspection revenues in US Life Safety. This performance has been a key contributor to our steady progress towards our long-term target of 60% of revenues coming from inspection, service and monitoring. As we prepare to set new and increased financial goals for the next three years in 2025, it is gratifying to reflect on our progress since we first became a publicly-traded company in late 2019. In our first year as a public company, we generated $393 million in adjusted EBITDA. This year, we expect to deliver about $900 million and we have $1 billion of annual adjusted EBITDA within our sights. As we prepare to enter 2025, we plan to continue to execute our strategy, accelerate organic growth, increase margins and expand our bolt-on M&A program. Before Kevin gets into the third quarter results, I wanted to address our disciplined customer and project selection initiative on Slide 7, which has been a significant contributor to the improvements we have made towards our 13/60/80 financial targets. We have focused on disciplined customers and project selection for some time now and made it a point of emphasis in our planning cycle in early 2023. We challenged our business leaders to evolve away from large, lower-margin, higher-risk opportunities and focus on allocating our valuable field leaders to the best opportunities to position the business for long-term profitable growth. Our leadership team has done an excellent job executing this strategy and it is positively impacting our financial results, allowing us to deliver adjusted EBITDA margins ahead of our expectations. We've been consistently setting new records, as it relates to margins and cash flow generation, as we evolve our business towards higher margin, more recurring service revenues. It is encouraging to note that our backlog is growing and is healthy with work that comes to us with a higher expected margin, lower expected risk and smaller project sizes. This gives us confidence in reaccelerating growth in 2025 and beyond in these businesses. Equally important during this time, APi's underlying core service business has grown steadily as we continue to take market share. More recently, in the second and third quarters of this year, we have faced temporary revenue headwinds due to unexpected timing delays in certain customer projects. We expect the total impact of these headwinds on our 2024 net revenues to be approximately $150 million, with this impact predominantly driven by the Specialty Services and HVAC businesses. In Specialty Services, the delays were primarily with certain telecom and utility customers and were driven by higher than expected permitting and engineering delays and slower than planned execution of federal rural broadband programs. We believe these headwinds are limited to 2024 and primarily related to certain portions of our Specialty Services business. Our core Life Safety business, which includes our fire protection, electronic security and elevator businesses and excludes the more project-heavy HVAC business has made excellent progress as highlighted on Slide 8. Core Life Safety represents over 65% of total APi net revenues and has consistently demonstrated strong overall organic growth led by high single-digit organic growth in inspection, service and monitoring revenues. The Life Safety business has a record high backlog of approximately $2 billion, up 5% organically versus prior year and is the healthiest we've seen it. From 2022 to 2024, adjusted gross profit and EBITDA margins in Life Safety have improved considerably, with adjusted EBITDA margins expanding more than 300 basis points. We expect the flywheel, which is underpinned by our inspection-first strategy, driving outsized growth in service revenues will continue to allow the businesses to be more selective on project revenues and drive further margin expansion across the branch network in 2025 and beyond. Starting in 2025, you will see our core Life Safety businesses more clearly, as we have made the decision to realign the HVAC business under our Specialty Services segment. This change will put our HVAC business into a segment with other operating companies that serve similar customers in similar end-markets to create synergies and efficiencies, which we highlight on Slide 9. We entered 2025 with a lot of momentum. Organic growth of our inspection, service and monitoring revenue streams in Safety Services remains strong. Organic growth in backlog and proposal activity is trending positively, providing support for a return to organic growth and project revenues. The international business is nearly finished working through its subpar inherited contracts and branch consolidation plans. On Slide 10, the bolt-on M&A engine continues to accelerate and support future organic growth with 10 bolt-on acquisitions, excluding Elevated, closed at reasonable multiples through October. We expect this momentum to continue in 2025 and beyond. And on Slide 11, you can see the long-term benefits, which we have accelerated through M&A of executing the initiatives behind our 13/60/80 shareholder value creation framework. Our business continues to evolve into a more asset-light services focused branch-led operating model with an increased mix of recurring higher-margin revenues. During this evolution, our contract loss rate, which measures the dollar loss on projects as a percent of total revenue dropped from approximately 1.5% in 2019 to less than 0.4% in 2024, reflecting more disciplined customer and project selection and strong execution in the field. I'm proud of the team's execution of our strategy. We have built a strong foundation, improved the quality of our business and backlog and expect to return to margin accretive organic growth in 2025. We are well positioned to achieve our 13% plus adjusted EBITDA margin target in 2025 and set new, meaningfully higher targets for the following three years, which we will review during our Investor Day next year. I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail. Kevin?

Thanks, Russ. Good morning, everyone. Reported revenues for the three months ended September 30 increased by 2.4% to $1.83 billion compared to $1.78 billion in the prior year period, driven by strong organic growth in service revenues of 9% in our Safety Services segment and modest benefits from favorable foreign currency exchange rates and M&A. This was partially offset by a 7.7% organic decline in our Specialty Services segment. On an organic basis, total company revenues were essentially flat for the quarter. Adjusted gross margin for the three months ended September 30 grew to 31%, representing a 200 basis point increase compared to the prior year period, driven by price increases, outsized growth in higher-margin services revenue, margin expansion for both project and service revenues, as well as Chubb value capture savings. Adjusted EBITDA increased by 9.4% for the three months ended September 30 with adjusted EBITDA margin coming in at 13.4%, representing an 80 basis point increase compared to the prior year period. This was primarily due to the factors impacting gross margin, partially offset by lower fixed cost absorption in our Specialty and HVAC businesses due to lower-than-expected revenues. Adjusted diluted earnings per share for the third quarter was $0.51 per share, representing a $0.03 per share or 6.3% increase compared to the prior year period. The increase was driven primarily by growth in adjusted EBITDA, partially offset by increases in interest expense and adjusted diluted shares outstanding. I will now discuss our results in more detail for the Safety Services segment. Safety Services reported revenues for the three months ended September 30 increased by 9.7% to $1.34 billion compared to $1.22 billion in the prior year. This quarter, growth was led by the US Life Safety businesses, which posted double-digit organic growth in inspection revenues, as well as double-digit organic growth in broader inspection, service and monitoring revenues. This was partially offset by a low single-digit organic decline in project revenues driven by planned customer attrition in our international business and project delays in our HVAC business. On an organic basis, Safety Services revenues increased by 3.1%. Adjusted gross margin for the three months ended September 30 was 35%, representing record third quarter adjusted gross margin and a 170 basis point increase compared to the prior year adjusted gross margin, driven by price increases, improved business mix in inspection, service and monitoring revenue as well as margin expansion in both our project and services revenues. Adjusted EBITDA increased by 24.3% for the three months ended September 30 and adjusted EBITDA margin was 15.7%, representing a record for the third quarter and a 180 basis point increase compared to the prior year period primarily due to the factors impacting adjusted gross margin. I will now discuss our results in more detail for our Specialty Services segment. Specialty Services reported revenues for the three months ended September 30 declined by 13.4% or 7.7% on an organic basis to $493 million compared to $569 million in the prior year period driven by divestitures, declines in service and project revenues. The decline in revenue was primarily driven by the exited customer relationships mentioned in the first quarter, higher-than-expected permitting and engineering delays, as well as slower-than-expected execution of federal rural broadband programs. Our adjusted gross margin for the three months ended September 30 was 20.1%, representing a 40 basis point increase compared to the prior year period, driven by the impacts from our disciplined customer and project selection strategy. Adjusted EBITDA declined by 19.3% for the three months ended September 30 and adjusted EBITDA margin was 13.6%, representing a 100 basis point decrease compared to the prior year period. This was primarily due to lower fixed cost absorption on lower than expected near-term revenues. We continue to focus on driving strong free cash flow conversion improvements year-over-year. For the three months ended September 30, adjusted free cash flow came in at $227 million, reflecting an adjusted free cash flow conversion of 93%. For the first nine months of the year, adjusted free cash flow was $361 million, with conversion of 56%, representing an improvement of $124 million or slightly over 50% when compared to the first nine months of 2023. Free cash flow generation has been and continues to be a priority across APi and our performance in the first nine months of the year puts us in a position to increase our full year 2024 cash flow guidance. We now expect to finish the year at or above 75% adjusted free cash flow conversion, which is up from our prior guidance of 70%. As a reminder, the fourth quarter is traditionally our strongest free cash flow conversion due to seasonality. At the end of the third quarter, our net leverage was approximately 2.4 times below our long-term target of 2.5 times even as we accelerated margin accretive bolt-on M&A. As we look forward to 2025, we will remain laser-focused on cash generation and expect to grow our free cash flow providing us a significant opportunity for value-enhancing capital deployment. Our long-term capital deployment priorities remain maintaining net leverage at stated long-term targets, M&A at attractive multiples, and share repurchases, where, as a reminder, we have $400 million remaining under our current authorization levels. I will now discuss our guidance for the full year 2024. We expect full year reported net revenues of approximately $7 billion, revised from the low end of our prior guidance, which was $7.15 billion. The $150 million reduction in revenue expectations for the year reflects the impacts of the project delays in our Specialty and HVAC businesses discussed earlier in the call. We now expect full year adjusted EBITDA of $890 million to $900 million, representing a narrowing of the prior range on the top and bottom-end. This range reflects adjusted EBITDA growth of approximately 13% and 15% on a fixed currency basis and an adjusted EBITDA margin of 12.8% at the midpoint. For 2024, we anticipate interest expense to be approximately $145 million, depreciation to be approximately $82 million, capital expenditures to be approximately $90 million, and our adjusted effective tax rate to be approximately 23%. We expect our adjusted diluted weighted average share count to be approximately 280 million for the fourth quarter and 279 million for the full year. As we look forward to 2025, we have great confidence in the business and its momentum. We plan to share our outlook early in the new year and more details about our long-term strategy at our Investor Day, which we expect to host in May in New York.

Thank you, Kevin. We believe we can create sustainable shareholder value by focusing on our 13/60/80 long-term value creation targets with a near-term laser focus on delivering adjusted EBITDA margins of 13% or more in 2025. As we look to 2025 and beyond, we have great confidence in the business, our backlog, our balance sheet and our ability to continue to evolve APi into an even lower CapEx asset-light business focused on high-margin statutorily mandated services. 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 Julian Mitchell with Barclays. Your line is now open.

This is Kenyon Pelletier on for Julian. Thanks for taking my question. Maybe to start, earlier on the call, you guided to just under $900 million in EBITDA at the midpoint. And you mentioned that you have $1 billion of EBITDA in your sights. Could you provide any color on what the timeline might be to get there?

Well, Kevin do you want to take that one?

Yes, our current guidance is $890 million to $900 million, which is a decrease from our previous guidance of $885 million to $915 million. The reference to the $1 billion is intended for the near term, but we do not have a specific date or time frame at this moment. It serves as an internal benchmark. As Russ mentioned, we believe we have the momentum in the business to reach that target soon.

Okay. Thank you. That's helpful. And then maybe as a quick follow-up. I was wondering if you could just talk a bit about the M&A environment and what your current pipeline looks like at present?

Sure. We previously mentioned that last year we completed around $100 million in bolt-on M&A, and we've indicated our intention to accelerate this into 2024. We believe we've made great progress toward that goal. Our pipeline is very active with several targets we are pursuing as we approach the end of this year, and we anticipate maintaining this momentum and capacity as we head into 2025. Our corporate development team has performed exceptionally well, and we have numerous opportunities available.

Great. Thanks for the color.

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

Hi, good morning. Thank you. I wanted to follow up on the project side of your business. Last quarter, you mentioned some permitting delays, and today you noted that you believe these issues will be limited to 2024 and expressed confidence in the full year guidance. Could you share more about why you feel assured that these challenges will resolve and improve by the end of the year? Thank you.

Yes, thank you, Stephanie. Good morning. When we look at the project delays, everything is progressing, albeit in a more uneven manner. Opportunities are still advancing. For instance, we have a significant government utility client with a major winterization program that paused but is set to resume in the third quarter. We have teams on-site; however, the engineering phase related to the installation is taking longer than expected. We anticipate that this work may carry into the first half of next year. Additionally, we have another large project involving high-voltage power distribution from the Northeast that has also commenced. We initially expected to have around five crews working on duct bank and bulk tasks, but we encountered unforeseen interference from existing electrical and natural gas systems, leading to unexpected right-of-way challenges. The team is currently re-engineering to resolve these issues so we can proceed with the work. Unfortunately, some of these challenges are not predictable. Despite this, all opportunities are still advancing. Our backlog has increased organically by about 5%, which gives us confidence that we have solid prospects for growth as we navigate these short-term challenges. We are optimistic about the business's direction as we near the end of the year and look ahead to next year.

Got it. So sporadic is a perfectly fine word in my opinion. I think that sums it up pretty well. So effectively, what you're saying is it's not that there was any kind of deterioration since the third quarter. It was about as you expected, but a lot of this is outside your control. It's just the timing of these changes on when things start and the ramp. It's not as if there's anything really that changed since the third quarter, other than the ramp is happening maybe a little bit slower, which is really outside your control. Is that fair?

That's fair. The only place I would say that we've seen any significant pullback would be in the telecom space. It is well known that the federal government's rural broadband program's administration is challenging right now. Proposal activity remains really strong, but you see delays in the work actually getting started because they are encountering some administrative issues with that. So that would be the only area with significant difficulty, if you will. But our backlog is super strong.

Got it. And to Kevin here, I do want to switch over real quick to the Safety Services side. Can you just talk a little bit about the drivers of the margin expansion that you've seen this year and what drivers should continue into 2025? Thank you.

Yes. I'll start maybe and then Kevin can add more detailed color if he wishes. But number one, this inspection-first strategy that we've incorporated, and we continue to talk about double-digit inspection growth in our core life safety business is key, and we continue to see really good growth in inspection revenue, which leads to service. We didn't really call it out specifically in our remarks, but on average, we get 10% higher gross margins on our inspection, service and monitoring than we do on our project work. So when you have a robust inspection and service business, it allows you to be even more selective on your project portfolio, ultimately boosting margins on those projects. We've grown the mix of our inspection, service and monitoring business to 54% of total revenue now, which is we continue to make progress towards that 60% goal. Then our international business continues to do a really nice job of pruning poor-performing contracts and customers, as well as optimizing and improving branch performance. We've made tremendous strides in eliminating loss-making branches in our international business. I think when we originally bought Chubb, we had about 47 loss-making branches, and we're down to single digits now, expecting that to be really close to no loss-making branches by the end of the year. This all adds to our margins, and we are seeing really good progress in the international business. The decline in our contract loss rate has a direct relationship with improved gross margins, ultimately leading to improved EBITDA margins. Our team is doing an excellent job of being selective in the work that they are choosing and in the programs they're executing.

I don’t know, Russ. You highlighted the project execution that we now see in our contract loss rate and the Chubb value capture continuing to contribute to the Safety Services segment. So nothing else on my end.

Thank you guys. Appreciate it.

Thanks, Stephanie.

Your next question comes from the line of Andy Wittmann with Baird. Your line is now open.

Great. Thanks for taking my question, guys. I guess I just wanted to start by checking in on the early days of Elevated. Maybe Russ, you could talk about the level of customer and employee retention that you've seen here so far? If you could talk about any progress that you're making on integrating in terms of your ability to cross-sell or maybe even how the company's revenue and margins are coming out compared to the way you expected them to come out?

Well, number one, I would tell you that from key leader retention and everything else, we couldn't be happier. I appreciate the leadership of that business more and more as we continue to get to know them. We've also started to look at potential bolt-on M&A opportunities in that space. It’s afforded us to spend more time with some of their key leaders and take advantage of their expertise as we assess other businesses. We lost one leader that ran a small piece of our business, but that was more anticipated than anything. We feel very good about where we are with the Elevated business and its long-term prospects. Cross-selling is just getting started. We’ve had joint sales meetings with them. They have a large hospital client that they brought our national accounts group in on a meeting, so we're just scratching the surface on the cross-selling opportunity. As a great example, we had all of our safety professionals on campus this week for their annual collaboration and meeting, and we had personnel from our international business there as well, and our Elevated team was well represented. Bringing our leader development capabilities to them has been well received. We expect that business to perform as we shared when we first announced the acquisition. We have seen no reason why the business hasn’t performed as expected. Typically, after closing a deal, there can be a dip in their results, but we have experienced no surprises with the acquisition. It was a typical private equity transaction where the previous owners didn't invest adequately in aspects like the rolling fleet. None of that was unexpected and our requisite investments in the business are underway. I remain very optimistic about the long-term prospects for building a broader platform in the elevator and escalator space.

Great. I wanted to follow-up my next question here, probably with Kevin. You mentioned that you’ve done 10 bolt-ons this year for which you’ve paid $211 million. I was just wondering, Kevin, if you could just give us the aggregate annual revenue from those, just to get a sense of how those are factoring into your outlook and give us a better perspective on how meaningful those have been?

Thanks, Andy. We've done about 10 deals that exclude Elevated, and the purchase price has been at or around $200 million. We don't disclose exact revenue from all these deals. I can say, directionally to help you, the average annual revenue on transactions to date is going to be north of $100 million.

Got it. Okay. My final question, Kevin, is about the adjustments between GAAP and your adjusted results. I'm curious about your outlook for the convergence of those two numbers. There are definitional aspects, like excluding intangible amortization from your adjusted EPS. But regarding business transformation costs and restructuring, most of Chubb has been integrated now, and the larger portion of your adjustments relates to business transformation. Will 2025 be a cleaner year with those numbers decreasing? Or are there other investments that might lead to higher adjustments as we move forward?

Yes. We've said consistently that the restructuring expense is related to the value capture work we’re doing in Chubb, which will largely be done at the end of 2025. That’s our expectation. The other bucket of Business Process Transformation is primarily focused on integration work associated with Chubb and now Elevated and other deals we've done. I’d expect that bucket to continue as we engage in larger deals and platform adjustments. But as you look at 2025, absent that, I would expect that bucket like the restructuring bucket to subside.

Thank you very much.

Thanks, Andy.

Your next question comes from the line of Kathryn Thompson with Thompson Research. Your line is open.

Hi, thank you for taking my question today. First, you've achieved strong pricing over the years, including in the most recent quarter. With inflation easing somewhat, can you discuss your ability to maintain pricing in this moderating inflation environment?

Well, I'll start and then Kevin can add some color to it, Kathryn, Good morning and thank you for joining the call. But we continue to take price. In our business, especially like if you look at our inspection and service business, which is predominantly labor, we are continuing to see wage rates increase at reasonable levels. We continue to take price across really the broader portfolio of our business. So we see good stickiness in that price. Earlier in the year, we talked about a business in our Specialty Services segment that we struggled to raise prices, and we came to a mutual agreement and walked away from a client relationship. We’ve already started to do work for that customer again, although we haven't returned to the previous pricing levels. We are executing on different programs for this customer at increased prices. We will continue to work for clients that value the services and skills that our field leaders bring. Those are the right customers for us, and that’s where our focus has continued to be.

Yes, we've consistently talked about where we're going to take pricing to drive margin on the service side. This year, our teams in North America and internationally continue to take pricing on the service side to drive margins. As we go forward, it's going to be a lever we can continue to use. We’ve talked about ticket size and some strategies that allow us to do that, alongside the value we bring on-site. As inflation subsides, we still anticipate being able to work our pricing mechanics.

Okay. Great. That's very helpful. This is earnings season, so you pick up some great nuggets from companies that have already reported, including a large exterior building product distributor that mentioned that their non-res repair and remodel activity is picking up after COVID delays, and it's been better than expected this year. Given APG services are largely nondiscretionary, how does APG fit into that non-res repair and remodel activity that was delayed? What are the opportunities?

Yeah. Good question, Kathryn. Our business-related activities in a world post-COVID have essentially returned to normal. I’m not quite sure what this other firm is citing. Our business continues to see ample opportunities and growth in inspections—again, double digits for this quarter. That continued post-COVID; we had a dip initially when COVID first hit, and then the recovery has led to continued double-digit inspection growth. I'm a bit at a loss regarding what this other company is noting. Kevin, can you help clarify?

What I would point to is the general momentum: our backlog is up, and proposal activity remains robust, which we track. Our proposal activity is up from last year. As Russ mentioned, inspections are continuing to show double-digit growth. We see growth across our service portfolio too, which is not statutorily required. So we're in a solid position.

It seems like from our perspective, it can only be positive for APi. Thanks very much for taking my questions today. Good luck.

Thanks, Kathryn.

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

Okay, how are you? You're still recording 3% organic growth in Safety. If inspection and service are growing double digits, it means your project business is declining. I know a lot of the issue is HVAC services, and you're comping that weakness now as you're moving into Specialty anyway. But how should we think about your projects business going forward in Safety? Can it get back to mid-single-digit growth in the current market? Or is there not enough good work out there for that?

There are plenty of good opportunities available, Andy. We are concentrating on selecting the right projects and customers in that sector. One significant hospital project in our Asian division has been rescheduled from the first half of the year to the second half, and that project is progressing well. Additionally, we secured another major hospital project that is visible from our Hong Kong office, and it has recently been added to our backlog. In the South, we have a business that focuses on warehouse and distribution work, which has been slightly affected by the high interest rate climate. However, as interest rates decline, we anticipate that this business will grow and have a positive effect. Although revenue has decreased somewhat, the business remains highly profitable. We've mentioned customer pruning regarding project selection in the HVAC sector. Our backlog in the North American safety business is at $2 billion, which is its highest level ever. We have a clear outlook for the upcoming year, and we are very optimistic about it.

Got it. No, that's helpful. And then, Russ, I know you don’t want to give out new 3-year targets on margin, but you're already delivering over 13% over the last couple of quarters. I know it's a seasonal business. Still, if inspection services are much higher project margins, as you look forward, what stops you from delivering mid- to high-teens? Or how do you think about what you could be telling us next year?

Come to our Investor Day in May, and we will share our targets with you. But directionally, you're correct. We're not saying we're done once we get to 13%. When you set a goal, you need to deliver on that target, and we haven't done that yet. We expect to achieve that in 2025, and we'll be close, as we finish out this year. We've made fantastic progress expanding our margins. We won't stop at 13%. There's still upside for us, and we're going to share that next May. We’re doing a lot of work now on this initiative of 2025 and beyond. What does that look like regarding margin expansion, revenue growth opportunities, and we feel really good about the long-term prospects and viability of where we are taking the business.

Got it. And just one more quick one for me. Backlog, I know you don’t love to talk about backlog, Russ, but is it still growing sequentially? If you think about core markets like data centers, semiconductor, LNG, are those markets still providing opportunities? Have there been delays in any of those larger markets? How do you view that?

Yes, our backlog continues to grow and improve in health. That’s important for those joining the call to take away. It’s much healthier than it was 12 or 24 months ago. Our core end-markets, especially in data centers, have a lot of opportunities, and we're seeing strong prospects in semiconductor and healthcare. The infrastructure space, critical infrastructure, continues to have many opportunities as well. The only area we’ve seen significant pullback is in telecom, which relates to administrative issues the federal government has faced in administering rural broadband programs. That’s the only area where we’ve encountered challenges. Our backlog is really strong.

Your next question comes from the line of Josh Chan with UBS. Your line is open.

Hi, good morning. Russ, Kevin. Thanks for taking my questions. When you talk about accelerating organic growth in 2025, is the primary driver there the absence of the project delays you’re seeing today? Can you talk about the composition between service and project and whether both can grow in '25? Thank you.

Yes, as we think about 2025, we anticipate it will be more of what I can label a normal year. As we look at the project side of the business, we’d expect that to deliver low to mid-single digit growth and service, which has held up this year in the mid to high single digits, to remain similarly positioned in 2025. There will be a ramp-up period in the first half, but in general, we're positioning 2025 to be a robust year with projects low to mid and service mid to high on an organic basis.

Organic basis. Okay. Thank you. And then on your three-year targets, you've done a great job expanding margins, and you’re likely to reach your existing target. Going forward, will there be an organic growth component to the next round of targets as well? Just curious how you're thinking about what metrics are important. Thank you.

For sure, there is an element of organic growth in this long-term planning I spoke about for 2025 and beyond. Organic growth is a component of that. We haven't precisely decided how to establish and communicate targets from this perspective, but organic growth is a crucial metric. We recognize the importance of organic growth and the business's health overall, and we will consider how to include it in future target metrics. So yes, organic growth is part of our outlook for 2025 and beyond.

Nothing to add, Russ.

Okay, thank you both for the color and appreciate that.

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

Hi, good morning guys. I was just wondering if you could provide a bit more color on the M&A pipeline and the timing/size of opportunities. Do you expect some of these to close earlier in '25 or later in '24, and how might that affect the accretion for the year? Or is it more spread out?

For bolt-on M&A, we want transactions to happen consistently throughout the year. Most sellers only sell their business once, and sometimes they lack the resources to move quickly. Transactions can proceed quickly or slowly based on those factors. The goal is to balance the workload effectively. We expect some deal activity to close in this fourth quarter, and we’ll continue pushing through into next year.

Got it. And to follow on an earlier question, do you expect to provide a target for capital deployment towards M&A at your Investor Day?

We haven't determined what we'll publish in terms of metrics and targets, but bolt-on M&A is part of our playbook. It's an inherent component of our company’s strategy. We'll always pursue attractive opportunities, but we don’t want to set arbitrary goals; we must be disciplined. M&A will factor into our planning as we consider the future of the business, but we're wary of announcing specific amounts because if the right opportunities don't materialize, that could misalign shareholder interests.

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

Thank you. In closing, I would like to thank all of our team members for their continued support and dedication to our business. I’m truly grateful for what each one of you do on a daily basis. 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 we look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody. Appreciate your time this morning.

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