APi Group Corp Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to APi Group's Second Quarter 2025 Financial Results Conference Call. 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 second quarter 2025 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; David Jackola, 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, July 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 second quarter financial performance on the Investor Relations page on our website. Our comments today will 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 get into our record second quarter 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 number one value. When I say safety, I don't just mean job site safety. We owe it to every one of our teammates to create an environment that's safe for them to do their job, not just physically, but also mentally and emotionally. At APi, we believe that culture drives results. We include a slide in our earnings presentation that highlights our culture and our investment in people as human beings, a key ingredient in our progress to becoming a $7 billion, 13% adjusted EBITDA margin company in 2025. It also includes two opportunities to learn more about our culture, which is centered on our purpose of building great leaders. I encourage you to take advantage of these if you haven't done so already. I also wanted to spend a minute on one of our foundational beliefs, the care factor. To win and achieve our new long-term financial targets, we need to care about and invest in our APi teammates as human beings. A couple of months ago, at our Investor Day, we announced the start of The Care Factor Fund, an initiative designed to support APi team members and their children in offsetting the expense of unexpected mental health treatment. This is something that is important to both me and our Board of Directors. And I'd like to thank our team members for their generosity in contributing to the fund. I'm happy to share that we have approved the first grant from the fund to one of our teammates. This is just one small way we show our teammates that the APi family cares during an important time of need. Over the last several years, our team has remained relentlessly focused on our long-term 13/60/80 value creation targets we created in 2022. With our 13% or more adjusted EBITDA margin target in our sights for 2025, we are shifting our focus to the new 10/16/60+ shareholder value creation framework we introduced in May at our Investor Day. As a reminder, these targets are the following: $10 billion plus in net revenues by 2028, supported by consistent mid-single-digit organic growth; 16% plus adjusted EBITDA margin by 2028; 60% plus of our revenues from inspection, service, and monitoring over the long term; and $3 billion-plus of cumulative adjusted free cash flow through 2028. Our leaders rallied behind our 13/60/80 targets to deliver on our commitments, and they have done the same with respect to these new targets. We have clear plans for how we intend to deliver on our 10/16/60+ targets. Fortunately, we don't need to reinvent the wheel. The main initiatives that enabled us to achieve our 13/60/80 targets will also enable us to hit our new 10/16/60+ targets. These initiatives are pricing, improved inspection, service, and monitoring revenue mix, disciplined customer and project selection, procurement, systems and scale, accretive M&A, and selective business pruning. And as I like to say, we can always just be better. We will augment these initiatives with our continued focus on building great leaders and the technology necessary to support our growth. Now turning to our record second quarter results. The business continued to accelerate its momentum, delivering strong top line growth while expanding margins. Some highlights include the following: consistent margin expansion in Safety Services, a growing inspection, service and monitoring business, a return to organic growth in Specialty Services, record backlog in both segments; and finally, an acceleration of accretive bolt-on M&A activity, all of which I will detail shortly. For the quarter, net revenues increased by 15%, up over 8% organically with strong growth across both segments. In our Safety Services segment, revenues grew organically in line with expectations by approximately 6%, while delivering 80 basis points of segment earnings margin expansion. Within Safety Services, we delivered strong organic growth across the North American Safety business. Importantly, and in line with our strategic initiatives, the North American Safety business achieved double-digit inspection growth for the 20th straight quarter. The international business delivered another solid quarter of organic growth, along with high single-digit order growth as that business continues to build momentum under APi's ownership. As expected, Specialty Services returned to growth in the second quarter, delivering 13.3% organic growth as steady increases in backlog dating back to 2024 converted to revenue growth. The momentum across the business is significant with our record backlog eclipsing $4 billion for the first time in APi history. Importantly, the double-digit organic growth in backlog includes contributions from our cross-sell efforts, focuses on our target end markets, and is healthy from a disciplined customer and project selection perspective. Our continued focus on our margin improvement initiatives allowed APi to deliver year-over-year improvements in adjusted EBITDA margin in the second quarter with a 30 basis point increase versus last year. Our continued strong free cash flow generation and balance sheet provide us with flexibility to pursue value-enhancing capital deployment alternatives. In the second quarter, we accelerated our M&A activity, completing six acquisitions, including our second elevator business. We have now closed seven acquisitions year-to-date, and we have several more opportunities under letter of intent. We remain on track to deploy approximately $250 million in accretive bolt-on M&A at attractive multiples this year. We also undertook some selective pruning of a small business in our Specialty segment that was not accretive to our new 10/16/60+ financial targets, which is the lens we'll use to continue to evaluate businesses in both segments going forward. In summary, we moved to the second half of 2025 with great momentum. Our inspection, service, and monitoring business continues to expand. Our backlog is at a record high. Our balance sheet remains strong, and we are confident in our leaders' ability to execute our strategy and deliver against our 2025 plan. I would now like to hand the call over to David to discuss our financial results and guidance in more detail. David?

Thanks, Russ, and good morning, everyone. Reported revenues for the three months ended June 30 were $2 billion, a 15% increase compared to $1.73 billion in the prior year period. Organic growth of 8.3% was driven by strong project revenue growth, pricing improvements, and continued growth in inspection, service, and monitoring revenues. Adjusted gross margin for the three months ended June 30 was 31.2%, representing a 50 basis point decrease compared to the prior year period, driven by mix, partially offset by pricing improvements across the business. Adjusted EBITDA increased by 17.7% for the three months ended June 30, with adjusted EBITDA margin coming in at 13.7%, representing a 30 basis point increase compared to the prior year period. Growth in adjusted EBITDA was driven by an increase in adjusted gross profit. Adjusted diluted earnings per share for the second quarter was $0.39, representing a $0.06 increase or 18.2% compared to the prior year period, primarily driven by strong adjusted EBITDA growth. I will now discuss our results in more detail for Safety Services. Safety Services reported revenues for the three months ended June 30 increased by 15.8% to $1.36 billion compared to $1.18 billion in the prior year period. Organic growth of 5.6% was driven by pricing improvements and strong growth in both service and project revenues. Our North America Safety business continued its momentum with double-digit inspection revenue growth. Adjusted gross margin for the three months ended June 30 was 37.2%, representing a 70 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements, leading to margin expansion in both service and project revenues. Segment earnings increased by 22.1% for the three months ended June 30, and segment earnings margin was 17%, representing an 80 basis point increase compared to the prior year period, primarily due to the increase in adjusted gross margin. I will now discuss our results in more detail for Specialty Services. Specialty Services reported organic revenues for the three months ended June 30 grew 13.3% to $629 million compared to $555 million in the prior year period, driven by strong project revenue growth. Adjusted gross margin for the three months ended June 30 was 18.1%, representing a 350 basis point decrease compared to the prior year period, driven by increased project starts, rising material costs, and weather. Segment earnings decreased 2.7% for the three months ended June 30, and segment earnings margin was 11.3%, representing a 190 basis point decrease compared to the prior year period, primarily due to the decrease in adjusted gross margins, partially offset by favorable fixed cost absorption. Turning to cash flow. For the first six months of the year, adjusted free cash flow was $186 million, reflecting an improvement of $52 million versus the prior year period and an adjusted free cash flow conversion of 40%. Free cash flow generation has been and continues to be a priority across APi, and we are pleased with our strong performance in the first half of the year as the business accelerates revenue growth. During the second quarter, we increased our revolving credit facility from $500 million to $750 million and extended its maturity to 2030. At the end of the quarter, our net debt to adjusted EBITDA ratio was approximately 2.2x. As a reminder, the back half of the calendar year is seasonally stronger from a free cash flow generation perspective. We expect that trend to continue this year, providing us with significant opportunities for continued value-enhancing capital deployment, leveraging our strong balance sheet. I will now discuss our guidance for the third quarter and full year 2025, which, as a reminder, is based on current foreign currency exchange rates. We expect increased full-year net revenues of $7.65 billion to $7.85 billion, up from $7.4 billion to $7.6 billion, representing organic growth in net revenues of 4% to 7% for the year. Moving down the P&L, we expect increased full-year adjusted EBITDA of $1.005 billion to $1.045 billion, up from $985 million to $1.035 billion, representing adjusted EBITDA growth of approximately 15% at the midpoint. Our increased full-year revenue and EBITDA guidance is driven by updates to our business outlook, including the impact of closed M&A during the quarter, our second quarter over delivery, and our latest outlook for the rest of the year. Based on most recent rates, the impact of foreign currency is immaterial to our change in guide. In terms of the third quarter, we expect reported net revenues of $1.985 billion to $2.035 billion. This guidance represents reported net revenue growth of approximately 9% to 11% and organic revenue growth of 5% to 7%. We expect Q3 adjusted EBITDA of $270 million to $280 million, which represents adjusted EBITDA growth of approximately 9% to 13% on a fixed currency basis. For 2025, we anticipate interest expense to be approximately $145 million, depreciation to be approximately $90 million, capital expenditures to be approximately $100 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 424 million, reflecting the completion of our 3-for-2 stock split on June 30. We continue to expect adjusted corporate expenses to be between $30 million to $35 million per quarter with some timing variability throughout the year. Overall, we are pleased with the team's execution of our strategy in an evolving macroeconomic environment during the second quarter and first half of 2025. I look forward to sharing more updates on our progress throughout the year. I will now turn the call back over to Russ.

Thanks, David. We entered the second half of 2025 with continued positive momentum across our global business platform. We continue to accelerate organic growth while expanding adjusted EBITDA margins, growing our recurring inspection, service, and monitoring business, building on our record backlog, and improving our free cash flow generation. We believe our proven operating model built on an inspection and service-first strategy, purpose-driven leadership, and a disciplined approach to capital allocation positions APi for sustained organic growth, margin expansion, and value-accretive M&A. We are confident in our leaders' ability to execute our strategy and deliver against our new 10/16/60+ long-term financial targets, creating value for all our stakeholders. With that, I would now like to turn the call over to the operator and open the call for Q&A.

And your first question comes from the line of Tim Mulrooney of William Blair.

I have two quick questions. In the second quarter, your revenue exceeded the high end of your guidance by over $60 million. Which business or businesses performed better than your internal expectations during that quarter?

Yes, Tim, I'm happy to take that one. So you're breaking down the quarter. I'd say our inspection service and monitoring businesses performed largely as expected. We saw really strong contract and project activity across both of the segments during the second quarter. And we did see a little bit of an impact from rising material costs and the pull forward of materials in the quarter that took us over the top end of the range.

Okay. Yes. I'm following up on that. In your Specialty business, obviously, revenue looked great, but the gross margins, 350 basis point decline. How much of that was due to rising material costs? I know you have pricing escalators and other things, but curious how much of that was maybe project specific or specifically on the rising raw material costs? And do you expect that gross margin pressure in Specialty to carry into the back half of the year, particularly as some of these tariffs potentially start to hit on things like copper?

Yes. Great question again, Tim. So when we think about our Specialty margins in the second quarter, they were down year-over-year, primarily due to increased project starts. At the beginning of a project, there is usually a higher material cost, which lowers the margin. As we progress through a quarter or a project, the margins typically improve. Rising material costs and the effects of weather also impacted our margins in the quarter, though I'm not sure we can quantify the exact amount. However, we do expect margins in the Specialty segment to improve as the year goes on.

Next question comes from the line of Andy Wittmann of Baird.

I think, David, you addressed this question a little bit in your prepared remarks, but I just want to drill into the guidance a little bit more. I'm looking at the increase here. Obviously, the revenue here in the quarter above expectations, very good. A little bit of incremental M&A helps your guidance as well. So I'm just trying to see if the forward outlook for the base business is changed or unchanged. I heard pull forward mentioned in the previous answer to the question. So I just want to get my arms around, have things improved from your outlook for the balance of the year or not on an organic basis?

Yes, Andy, thanks for the question. Here are big high-level round numbers, you can think of our EBITDA raise as one-third of it driven by our Q2 over delivery, maybe one-third of it due to M&A in the quarter, and maybe one-third of it due to an increase or an improvement in our second half business outlook.

That's helpful. Regarding capital deployment, I understand you have several deals under letter of intent, still aiming for $250 million. Currently, you are exceeding $100 million, so you seem to be on track. Does it seem like the M&A capital deployment could potentially surpass that, considering your current position with ongoing contracts and future plans?

I would say welcome back, Andy. The potential is certainly there. M&A is much like our approach to disciplined project and customer selection. We must remain careful about the companies and businesses we bring into the APi family. The pipeline is strong, and there is potential for us to exceed our commitment of $250 million. However, we will continue to be disciplined. If we reach $250 million, that's what it will be; if it's $235 million, then that's the figure; and if it turns out to be $290 million, then that’s what we will take.

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

I think, first off, I just wanted to try and understand the Safety business. Are we expecting that kind of 6%-ish organic growth in the back half as well, pretty steady sort of run rate now? And maybe flesh out a little bit more how satisfied you are with your elevator market share and sort of top line push efforts, please?

Sure. I'll take the first part, Julian, and maybe I'll hand the second part on elevators over to Russ. So I'd say our outlook for the Safety Service segment in the back half of the year is really consistent with where we've had it for the year-to-date. We continue to target mid- to upper single-digit revenue growth in the service side of the business, low to mid-single digit on the project to get to that mid-single-digit, 5% to 6% revenue growth in the back half of the year.

Julian, I want to provide some insights into the elevator business. I'll discuss the existing business we acquired about a year ago, Elevated. That business is performing as anticipated, showing mid- to upper single-digit organic growth. The new acquisition we just made is what we're referring to as a tweener. It's not exactly a bolt-on acquisition, nor is it the size of Elevated, but it's a strong company that positions us well in the Northeast, which we believe will significantly enhance our business. We also have several other opportunities we are exploring for potential bolt-on acquisitions. We remain very optimistic, though we still have a long way to go in building out the $1 billion elevator and escalator platform we believe we can achieve. We're just at the beginning of this journey, but I feel very hopeful and excited about the direction we are moving in and the opportunities ahead of us.

That's helpful. And then I just wanted to follow up on the acquisition front. And clearly, you've made good progress already this year. Sorry if I missed it, but would you mind sort of fleshing out the profile sort of in aggregate of the acquisitions that have been announced and/or closed in terms of sort of aggregate organic growth rate? Any sort of margin profile, how much EBITDA dollars are dialed into the guide now from acquisitions that have closed in the last 12 months or expected to close this year?

David will discuss the numbers, but I want to touch on the profile of the deals. One of the acquisitions is an elevator company, which we previously mentioned. Five of the seven acquisitions are part of our North American Safety business within the fire and security sector. Additionally, one of the businesses acquired was a highly profitable HVAC service company that complements one of our existing operations. All these acquisitions contribute positively to our financials; they are performing at or above fleet average. In terms of our guidance, David noted that about one-third of our increased expectations stem from mergers and acquisitions.

No, that both does over the course of the year from Q1 to the end of Q4, we expect M&A to contribute north of $200 million of revenue in the business.

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

This is David Paige on for Ashish. I was wondering if you could give an update on the international business, Chubb, just how that performed in the quarter and how you're looking at it for the rest of the year?

We are very excited about the business and its performance. It demonstrated organic growth again this quarter. I believe this business has experienced organic growth every quarter since we've acquired it. I mentioned in my prepared remarks that we observed high single-digit order growth, which reflects the strength of their inspection and service business. We continue to see strong momentum in our international operations. There is still work to be done; optimization efforts are ongoing. We are currently integrating in Benelux, which is a significant undertaking, and we have excellent leadership managing that process. We are also working to optimize our monitoring centers, but operations are continuing as usual, and I can confidently say they are doing an excellent job.

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

Nice quarter and nice to see the progress on the M&A front. I was wondering if you could drill down on the elevator acquisition that you did. If I recall correctly, Elevated itself had a very high EBITDA margin compared to your corporate average. And I'm wondering if the business that you acquired was similar to that or if it was more closer to your corporate average and you can maybe get closer to what elevator does over time.

It's amusing because we were just joking about this while preparing. The metrics are actually much closer to the fleet average. We believe there's a potential for the business to reach a profile similar to Elevated. We feel this way about all our businesses. It's similar to how we view our life safety and security divisions, where the new normal from a branch perspective is 20%, and that's the target for all our operations. At the time of the acquisition, it aligned with the fleet average and had the potential for improvement.

I noticed that the seven acquisitions you made were all domestic. Can you discuss the opportunities you're seeing internationally? Additionally, are any of the letters of intent you mentioned previously targeting international markets, and what can we anticipate in that area moving forward?

So we do have one small business under LOI in our international business as we sit here. And our team is doing diligence on that company as we speak. So there is no question that we've opened the aperture up to the international business. I would say that it's on a country-by-country basis, just like it is for us in North America on a company-by-company basis. In the international business, the country has to be able to kind of accept and integrate that business. And not every one of our businesses internationally has progressed to the point where we feel like they're ready for a bolt-on, but a number of them are. And we're certainly doing work and looking at a number of opportunities, but we do have one small business under LOI in the international business.

Next question comes from the line of Jasper Bibb of Truist Securities.

I wanted to ask a two-parter about Specialty projects. Just hoping you could provide a bit more detail on the new business pipeline there and then also how your project selection initiatives might impact the margins for that business once you get through the ramp-up phase you talked about on some of these new wins.

The new pipeline backlog is very solid. In our prepared remarks, we noted that our backlog has surpassed $4 billion for the first time, and it is well-distributed across all facets of our business. All areas are operating at record levels, which is very positive and healthy. We feel confident about our current position. David pointed out that we anticipate sequential growth in gross margins as we progress through the latter half of the year. We expect the margins in our backlog to remain strong.

Got it. And then Specialty really surprised this quarter, but I guess wondering how we should think about the composition of segment organic revenue growth and margins in your third quarter outlook?

Yes, I can give you some color on that, Jasper. So I'd expect in the third quarter, I think we answered a question earlier on the Safety business, mid-single-digit organic revenue growth in the third quarter there. I'd expect high single-digit organic revenue growth in the Specialty business in the third quarter.

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

I'll try not to, Russ. I just wanted to ask you about Specialty in one sense. You've been focused on sort of higher-margin projects, sort of getting rid of the loss leading projects. How would you sort of assess that progress here? Like is any of that impacting the quarter? Or is it more just as you talked about, sort of materials and mix?

Yes. As you know, business isn't linear and things don't always progress in a straight line. For instance, in our second quarter last year, we had several projects nearing completion, which typically leads to an improvement in gross margins. Currently, we have more project starts, which usually come at a lower gross margin. Additionally, we are dealing with some cost inflation and have faced some weather-related impacts. All of these factors have contributed to our current position this quarter. However, we believe the situation will improve as we move through the second half of the year.

Appreciate that, Russ. And then obviously, nonres markets have been kind of all over the place, but your Safety business is doing really well. Maybe just talk about sort of what you're seeing out there, inspection and service kind of continue to grow double digits for the foreseeable future?

We are pleased with our inspection growth, which has now increased for the 20th consecutive quarter at a double-digit rate. We do not anticipate any slowdown in this trend, and it has contributed to strong organic growth in our service business, particularly in North America. Internationally, we are experiencing high single-digit order growth, indicating that the sales transformation initiated by our leadership is effectively taking shape. This focus on the service aspect of our Safety business is promising and gives us confidence in our direction. Moreover, the strong project opportunities in our target markets create a favorable combination for us. Sectors such as data centers, semiconductors, and advanced manufacturing are delivering significant opportunities. We are being prudent to ensure that we achieve the necessary gross margins from this work, which is crucial for benefiting the company and our shareholders. Despite ongoing concerns regarding tariffs, proposal activity remains very strong, and we are focused on being selective about the projects we pursue.

Your next question comes from the line of Tomo Sano of JPMorgan.

My first question is about the North America inspection revenues, which have seen 20 consecutive quarters of double-digit growth. I would like more details on the pricing improvements and your inspection-first strategies, including technological aspects such as AI field productivity tools, and how you anticipate this will enhance margins along with the volume growth in this business.

Yes. So I'm happy to take it and if Russ has any commentary at the end. So we continue to be able to capture low to mid-single-digit pricing in our inspection service and monitoring revenue streams. And your question then on margin and the impact of AI and digital on margins going forward. I would say our expectation on all of our revenue streams is that we're going to continue to be able to expand margin into '26, '27 and '28 as we pursue our 10/16/60 strategic goals and the technology and the use of technology will be a part of that.

What I would say is that the technology and AI are likely to provide leverage from an SG&A perspective and enhance our efficiency. Considering the current labor market, our efforts in artificial intelligence and technology must enable us to scale our business, especially since we will have fewer people available to complete the work. This is where our focus lies. We have a team dedicated to AI efforts on an international scale. In reality, like most companies, we are just beginning our journey in this area. However, we are actively resourcing and have established an AI task force, for lack of a better term.

Could you discuss the innovation aspect of your international business and Safety Services? Specifically, how are you utilizing digital strategies and what are the customer reactions? Additionally, can you share your excitement regarding the volumes and margins in the international business?

The collaboration with Chubb is just beginning, and we are really starting to ramp it up. There is significant potential in the efforts of that team, and while there are some positive developments, it is too early to celebrate any successes. I believe there are plenty of opportunities ahead. In many respects, our international business is more advanced in this process. Our leader there, Andrew White, is quite tech-savvy and has a comprehensive vision for its future. We are focused on ensuring that we expand this approach across our entire portfolio, not just within the international business. However, it's still premature to claim any victories. David, since you have experience there, do you have any additional insights?

No, it's too early to declare victory, but there’s a remarkable opportunity ahead. In our international business, we have 50 million connected devices, and the more we can leverage technology to serve our customers, the stronger our business will become.

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

I have one observation. Despite the negative headlines, it's important to point out that one-third of your EBITDA growth comes from an improved outlook, which definitely sets you apart from other companies. My question is about how API can succeed with AI. For example, companies like Meta are forecasting revenues between $66 billion and $72 billion for this year and are aiming to reach $100 billion next year. You've briefly mentioned how API can succeed, but could you provide some specific examples of how you achieve success through new projects or by maintaining and operating AI?

When you're performing inspection and service work at major facilities like Meta or Microsoft, and they decide to expand at that site, your chances of securing that related business significantly increase due to the established relationships. Clients value consistency, service, and follow-through. For larger opportunities, particularly in new locations, like Meta's 10x site in Louisiana, it's vital to have strong relationships and the capacity to service remote areas. We possess the necessary skill set and workforce for such projects. The criteria for selection often focus on safety, the quality of skilled leadership for execution, and the ability to meet tight deadlines, as schedules are quite aggressive. While price is a consideration, it's generally a minor factor. In the fire, life safety, and security sector, only a few firms have the capacity and skills to handle significant projects like these, which represents a unique advantage for us. However, we need to be strategic and selective about the projects we pursue to avoid overextending ourselves and ensure we can meet our commitments to clients.

Yes. Yes. No. And so it sounds to me that you can win business both at the build-out, but then on an ongoing basis with the ongoing technical services that you would do for any complex commercial building and structure. Is that correct? Am I hearing you correctly on that?

That's correct. The more complex the opportunity, the better we are positioned. We want to avoid situations where we are engaged in project-related work but not providing inspection and service for that customer. Competing solely on price is not our approach, and we don't perform well in those circumstances. If a project is treated like an auction, especially in today's market, we are unlikely to succeed. Therefore, it's not worth pursuing. That's why we have a thorough go/no-go checklist for our businesses, encouraging them to consider whether they should even chase certain projects. If a decision is going to be driven purely by price, they should probably steer clear.

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

Just two quick ones for me. So on the guidance raise that was for the rest of the year, I guess, the one-third of the guidance raise, what got better? Was it primarily the Specialty side of things?

Josh, I think I'd attribute that to the really strong backlog that we were able to generate during the quarter and the strong margin and strength of the backlog gave us comfort in the back half of the year.

Okay. Great. And then on the backlog margin, it sounds like you're pleased with the backlog margin. I guess when it comes to realizing that backlog margin over time, obviously, you can control your own execution, but can you talk about other factors that you have to think about as that converts, things that may or may not be outside your control and what you could do to kind of ring-fence those?

The increase in material costs is influenced by factors like tariffs and inflation, which we cannot control. We've been aware since the Trump administration's election that tariffs would be used to adjust trade balances, so we anticipated this change. We've been working diligently to safeguard ourselves during this period, though we acknowledge that we haven't been flawless and may have missed some opportunities. Weather conditions can also pose significant challenges, as adverse weather impacts the efficiency of deploying our field leaders. These two elements are likely the main contributors to our challenges. Additionally, while we need to execute our plans effectively, labor availability may also be an issue. It's widely recognized that we could face labor shortages, and as you make decisions regarding master service agreements or project opportunities, this should be factored into your strategies and shouldn't be used as an excuse.

And we have one more question from Stephanie Moore of Jefferies.

I want to revisit the margin performance for the quarter. It was impressive across both segments at the consolidated level. However, could you elaborate on the factors influencing the margin performance in each segment? At your Analyst Day, you outlined various strategies to reach your target of over 16%, including pricing and project selection. It would be helpful if you could discuss the key factors and your strategy to reach that target.

Certainly, Stephanie. Our margin performance in inspection services and monitoring was strong, and we're able to achieve margin-accretive pricing in that area. We effectively leveraged our fixed cost base this quarter, largely due to robust organic revenue growth, which was a positive outcome. While we've mentioned rising material costs previously, our business successfully managed to protect itself during the proposal process and captured the increased costs, performing well in that aspect this quarter. However, there was a slight margin erosion. Overall, as we focus on service mix, disciplined project and customer selection, and leveraging our operations, we are making progress towards our goals of reaching a 13% and eventually a 16% adjusted EBITDA margin.

Great. Very helpful. And then just one quick follow-up. Is there any chance you can give a bit of an update on the systems investment that you called out at the Analyst Day, how it's progressing thus far? Anything you can call out on that?

Yes, absolutely. I'm sure you saw in the release the spend on the system and business enablement in the quarter. What I'd say is those are difficult, challenging business-led projects, but the team is performing and executing well. And I've been particularly impressed with the way that, that team is working closely to make sure that the voices of our branch company and field leaders is heard each and every step along the way. So really good progress on that. The team is committed. They're executing well, and we feel good about where that work is.

And that concludes our Q&A session. I will now turn the conference back over to Russ Becker, our President and CEO, for closing remarks.

Thank you. In closing, I would like to thank all our team members for their continued support and dedication to our business. I'm truly grateful for what each and every 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 look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody.

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