APi Group Corp (APG) Q2 2025 Earnings Call Transcript

good morning good morning ladies and gentlemen and welcome to api group's second quarter 2025 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 be standing by should you need any assistance i will now turn the call over to adam fee vice president of investor relation at api group please go ahead thank you good morning everyone and thank you for joining our second quarter 2025 api the safety health and well-being unfortunately consistent margin

expansion in the joint inspection service and monitoring business a return to organic growth in record backlog with strong growth across organic growth dating back to 20. importantly

our continued focus pricing improved adjusted gross margin for the three months ended June 30th was 31.2% representing a 50 basis point decrease compared to the prior year period driven by mix partially offset by pricing improvement adjusted EBITDA increased by 17.7% for the three months ended June 30th with adjusted EBITDA margin coming in at 13.7% representing a 30 basis point increase both in adjusted EBITDA was driven diluted earnings our results in more detail for supported revenues for the north america safety business continued its momentum with margin for the three months ended june 30th was 30 by 22.1 percent for the segment earnings margin was 17 representing an 80 primarily to the increase in i will now discuss our results in more detail for specialty services specialty services reported organic revenues for the The three months ended June 30th, grew 13.3% to $629 million, compared to $555 million in the prior year period, with the three months ended June 30th by favorable. Turning to cash flow, for the first six months of the year, adjusted free cash flow was $186 million, reflecting an improvement in the second quarter, As a reminder, the back half of the calendar year is season this year, 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 policy. We expect increased full year net revenues of representing adjusted EBITDA growth based to our business health. In terms of the third quarter, we expect reported net revenues of 1.985. Reported net revenue growth of 170 to 200 represents adjusted EBITDA growth of approximately 25. We anticipate appreciation to be approximately 90 million. We expect our adjusted, diluted, weighted average share count for the year to be approximately. Reflecting the completion of our three-for-two stock split, we continue to expect adjusted corporate expenses to be between 30 to 35 million dollars 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 i look forward to sharing more updates on our we will now begin the question and answer session if you

have dialed in and would like to ask a question please press star one on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw your question, just simply press the star 1 again. If you are called upon to ask your question and listening by a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star 1 to join the queue. And your first question comes from the line of Team Marui of William Blair. Please go ahead.

Russ, David, good morning. Hey, Jeff, how are you? Doing well, thank you. Two quick ones for me. On the second quarter, the revenue in your second quarter was, well, it was more than $60 million above the high end of the guidance range that you provided for the second quarter.

I'm just curious what business or businesses outperformed your own internal expectations in the quarter yes hey tim i'm 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 in the pool board of materials in the quarter that took us over the top end of the range.

Okay. Yeah. Thanks, David. I'm following up on that. You know, in your specialty business, obviously revenue looked great, but, you know, 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 you know maybe project specific or or or specifically on the rising raw material costs and you know do you expect that gross margin pressure in specialty to carry into the back half of the year you know particularly if some of these tariffs potentially start to hit on things like copper thank you yeah a great great question again tim so you know when it when we think about our specialty margins in the second quarter they were down year over year really driven by increased project starts and you know at the front end of a project that that that tends to be more material driven which is lower margin um and as you work your way through a

quarter or a project you you typically start working your margin up um rising material costs and the impact of weather did play a role in the quarter and i don't know if we can precise amount Next question comes from the line of Andy Whitman of BERT.

Please go ahead.

Yeah, great. 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 i'm just trying to see if the forward outlook for the for the base businesses is changed or unchanged i heard pull forward mentioned in the previous answer to the question so i just 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 yeah hey good good morning andy thanks for the question uh you know here big high level round numbers you know you can think of our ebitda raises as a a third of it driven by our Q2 over delivery, maybe a third of it due to M&A in the quarter, and maybe a third of it due to an increase or an improvement in our second half of the decision.

That's helpful. And then just as it relates to, I guess, capital deployment, I heard kind of the comments about, you've got a number of under LOI, still targeting $250 million.

You're kind of well over $100 million here, so you're you're doing um you're you're on track at least does it feel like the m a capital deployment russ has a potential to be maybe above that um given where you sit today with what's under contract and heading forward um i would say hey andy um good morning by the way um and welcome back um i would say that um the potential is there um you know i you know we need to continue to be disciplined you know in the companies and the businesses that you know we invite to join the api family the potential is there for us kind of commitment if you will same breath we're going to be really disciplined and so that's all i have for today thank you thanks annie your next question comes from the line of julia nichel of barclays please go ahead hi good morning um i think you know first off 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, you know, how satisfied you are with your elevator market share and sort of top-line push efforts, please.

Sure. Hey, 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 look 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 5-6 percent revenue growth in the back half of the year.

Julian just too, our business from a full time perspective, we've got a long ways.

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

Well, David can talk about the numbers, but I'll talk to you a little bit about the profile of the deals. Obviously, one of them is an elevator company, and that's kind of because we said that the service business that was a bolt on to one of our existing companies and every one of these great thank you this question comes from the line of ashish sabada of rbc capital markets

please go ahead hi good morning this is david page on for ashish thanks for taking our questions i was wondering if you could give an update on the international business chub just how that performed in the corner in the corner and how you're looking at it for the rest of the year thank you well we uh like super fired up about the business um and where that business is again um you know in the quarter i think that business has grown now organically every quarter since um since we've we've owned it we shared um a data point and i think my prepared remarks about gold

digit in the business, which they're optimizing. You know, we have an integration going on in Benelux, you know, in our monitoring centers to optimize those, but like businesses you...

Thank you.

Your next question comes from the line of John Denwanteng of CJS Securities. Your line is now open.

Hi, good morning, guys. Thank you for taking my questions. That night quarter, I'd like 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, you know, Elevated itself had a very high, even a 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 maybe get closer to what Elevated does over time.

I would say, you know, it's kind of funny because we were joking around about this as we were getting prepped.

We think that the potential for the business to get to, so to speak, the program is there, different than how we were time of the acquisition is okay great thank you and then i noticed that the seven acquisitions did i don't believe any one of them was international i was wondering if you could

speak to the opportunity there the opportunity set that you're seeing if any of the lois that you've been uh that you mentioned previously are in the international space and what we can expect there going 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, you know, as we've opened the aperture up to the international business. You know, it's on a country-by-country basis, just like it is for a company-by-company basis. You know, it has to be able to integrate that. But we do have one. Got it.

Thanks, Ross.

Next question comes from the line of Jasper Beef of True Securities. please go ahead hey good morning everyone 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 i would say that the new pipeline you know and backlog is really uh you know we don't we stated that our backlog eclipsed four

billion for the first time and that's you know really kind of distributed across all aspects of our business and i would say all aspects of our business david mentioned that you know we expect and that's the expectation that we have on the business and we think got it um 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 yeah i can i can give you

some color on that jesper um so i expect in the third quarter i think we have to answer a question earlier on on the safety business mid-single-digit organic revenue growth in the third quarter there i expect high single-digit organic revenue growth in the specialty business thank you for taking the questions your next question comes from the line of andy kapovitz at city your line is now open hey good morning everyone hey andy are you going to ask us seven questions in one question i'll try not to russ um i just wanted to ask you about i just wanted to ask you

about specialty in one sense you know you've been focused on uh sort of higher margin projects uh sort of getting rid of the low you know lost leading projects how would you sort of assess that progress here like is any of that you know impacting the quarter or is it more just as you talked about sort of materials and mix?

Yeah, I mean, Andy, as you know, business isn't linear and not everything, you know, necessarily flushes itself out in a perfectly straight line. And, you know, if you look at like our Q2 of last year, we had typically have, you know, gross margin improvement as your projects finish. And we have, so to speak, more projects start and you have a little bit of cost inflation. And, you know, we have some weather in this quarter and we think it'll only get better as we work our way through the.

Appreciate that, Russ. And then obviously, you know, non-res markets have been kind of all over the place, but your safety business is doing really well. You know, maybe just talk about sort of what you're seeing out there. Inspection and service can continue to grow double digits, you know, for the foreseeable future.

We are really, my conductors, advanced manufacturing, trying to make sure that we company out there and proposal activity, you know, even with all the noise, be smart about what work we take.

Very helpful. Thanks, Seth. Thank you, Andy.

Your next question comes from the line of Tom Osana of J.P. Morgan. Please go ahead.

Hi, good morning, everyone. Thank you for taking my question.

Good morning, Tom.

My first question is the North America inspection revenues have another 20 consecutive quarters double-digit growth and wanted to get more color on the pricing improvements as well as your inspection-first strategies including technology standpoints, like AI fields, productivity tools. how you see the improvement of the margins of the in addition to the volume side of this business place yeah so so i'm happy to take it and if russ has any commentary at the end so we continue to

be able to capture a little bit single digit pricing in our inspection service and monitoring revenue streams and and you know your question then on margin and the impact of ai and digital on on margins going forward i would say you know our expectation on span margin into 26 27 and 28 is we pursue our 10 16 60 strategic goals and the technology and the use of technology will be a part of that yeah what i would say and uh you know when you when you think about thank you and just one

follow-up on innovation side in international business and safety services could you talk about leveraging digital with two visions how actually you see a customer reaction there and could you talk about the how you're excited about this in terms of the the volumes emerging international international business, please.

Can I speak to your question, please?

Yes. So I would like to get more color on digital strategies in international business, especially to the vision that you showcased at the IL Day. If you see any customer feedback in the second quarters and some expectation in the second and a half, please. and stuff is really, and just really getting cranked up.

I mean, we see a lot of opportunity with the work that that team...

Thank you for the caller. Looking forward to it. Thank you very much.

Your next question comes from the line of Catherine Thompson of Thompson Research Group. Please go ahead.

Hi, thank you for taking my question today. Just one observation. Despite all the gloomy headlines, I think it's worth noting that a third of your EBITDA growth is from an improved outlook. So it's definitely separating from a few other companies. The question to you, when you look at, I just want to pull the string a little bit more on how API wins with AI. You look at companies like Meta had their guidance for 66 to 72 billion dollars for this year and they're raising and they're looking at reaching 100 billion next year. And you've touched briefly on a few like on how API can win but could you give a few examples in terms of either how you win with new projects or with the ongoing maintenance and operation of the AI behemoth network. Thanks very much.

Well, when you're doing the inspection, whether it's Meta or Microsoft, whoever, but when you're doing the inspection and the opportunity for you to win that expansion, the business associates that are, say, more greenfield sites, you know, in Louisiana, and your ability to man work in some of these remote locations um and that's i think something that can bring to bear your ability to ability to get the work i'd also say as the and the skill

and that's yes we still have to be selected you know we extend ourselves did that make sense catherine yeah yeah no and so what it sounds to me that you can win business both at the the build out but then on an ongoing basis with uh ongoing typical services that you would do for any complex commercial um building and structure is that correct in my am i hearing you correctly on that that's correct and um the more complex we don't want to find ourselves and that's why

we think about it.

Thanks so much and best of luck going forward.

Thanks, Catherine.

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

Hey, good morning, Russ David. Just two quick ones for me. So on the guidance race that was for the rest of the year, I guess the one-third of the guidance race, what got better? Was it primarily the specialty side other things?

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. Thank you. And then on the backlog margin, it sounds that 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, you know, that converts, you know, things that may or may not be outside your control and what you could do to kind of ring fence those?

Well, obviously, Josh, the material cost escalation is something as prices go up, whether it's because of tariffs or the combination thereof. You know, that means, like, we think he's going to use tariffs as, you know, a lever for him to, you know, level of flamethrowers coming and so we've there's some gaps and we didn't do as well as we should. It could be a significant you're not going to get the deployment of that's another area could be challenging. So take on, you know, factoring that into the equation and that really should not be an excuse.

Thank you for the color, David and Russ and congrats in the quarter.

Thanks, Josh.

And we have one more question from Stephanie Moore of Jeffries. Please go ahead.

Hi, good morning. Thanks, everybody. Maybe just to – I want to go back to the margin performance in the quarter. It was very good across both segments, obviously, you've seen – or for a consolidated level. But as we look at both segments, I was hoping that maybe you could talk a little bit about the puts and takes of the margin performance. I know at your analyst day, you walked through several levers to achieve, you know, ultimately your 16% plus target, you know, pricing, project selection, and the like. So maybe if you could just talk about, you know, the underlying puts and takes and your path to achieve some of those, to achieve that target and the levers to get there. Thank you.

Yeah, I'm happy to give you a little bit of color there, Stephanie. It takes our own margin in the quarter, so our margin performance on inspection service and monitoring was strong, continues to be. We're able to get margin accretive price and that price is part of the business. We were able to get good leverage out of our fixed cost base during the quarter, partially due to the strong organic revenue growth. So that was a positive. We talked a little bit about rising material costs and we've talked a lot over the last couple of quarters about how our business is able to protect itself at the time of proposal and being able to capture the dollar value of rising material costs and and we believe the business did a good job of doing that during the quarter um but that did have a little bit of of of margin erosion during the quarter so i think you know when you talk about the service mix you talk about discipline project and customer selection getting leverage we're seeing progress in all of those areas in our path to 13 and now 16 percent adjusted even down margin great very helpful and then just one quick follow-up can 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 you can call it on that thank you yeah absolutely um you know i'm sure i'm sure you saw in the in the release the spend on the system and business enablement in a quarter um what i'd say is is those are 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 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 so really good progress on that the team is committed they're executing well and we feel good about where that work is thank you appreciate it thanks and that concludes our q and a session i will turn the conference back over to ross inspector our president and ceo for closing remarks thank you in closing i would like to thank all our team members in dedication to our Ladies and gentlemen, that concludes today's call. Thank you everyone for joining. You may now disconnect.