APi Group Corp Q3 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to APi Group's Third Quarter 2025 Financial Results Conference Call. Please note this call is being recorded. I'll be standing by should you need any assistance. I'll 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 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, October 30, 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 our 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 this morning. Before we get into our record third quarter 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 #1 value. Last month, during September, we recognized Suicide Prevention Month and Construction Suicide Prevention Week. We use this as an opportunity to encourage all of our team members to engage in meaningful conversations about mental health. These conversations are a simple way to embrace the care factor and show our teammates we care about their well-being, including physical and mental health. In addition to the care factor, another one of our foundational beliefs is our central premise, which means that at APi, we recognize that our success only happens when our branches and field leaders are successful. One way we are supporting our branches and field leaders as part of our central premise is through investments in market-leading systems and technologies, including artificial intelligence. We see market-leading technology, not as tools that will replace our field leaders, but rather as a way to empower our branches and field leaders to accelerate their speed of doing business. Work more safely and better serve our customers as we grow into a $10 billion company. A few examples of these investments include the following: APi Echo, which allows our field leaders to record conversations and summarize key notes without having to leave the field or remove their safety gloves. One code, which provides quick access to situation-relevant fire protection code, saves time for our estimators, designers and field leaders. Connected glasses, which allow our remote experts to guide field leaders in real time, resulting in quicker service to our customers with a higher first-time fixed rate and an AI-enabled predictive tool, which flags customers who have a high attrition risk. This tool allows our local teams to take proactive steps to engage customers and focus on strengthening specific customer relationships. Finally, last year, we launched our global step safety platform, which allows our team members to document and manage safety activities in the field from a mobile device. Establish the safety standards and strategies and gives our leaders better data and visibility into safety metrics to better protect our teammates and help us continuously improve. We are still in the early innings piloting these technologies, but we believe our business-led approach to investing in technology will empower our 29,000 leaders, increased teammate satisfaction and drive growth and margin expansion as we work towards our 10/16/60+ financial targets. As a reminder, these targets are $10 billion 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 have clear plans for how we intend to deliver on our 10/16/60+ targets with a continued focus on the main initiatives that are enabling us to achieve our 13/60/80 targets. Those initiatives are consistent organic growth, improved inspection service and monitoring revenue mix, disciplined customer and project selection, pricing branch and field optimization, procurement, systems and scale accretive M&A and selective business pruning. And as I like to say, we can always just be better. Now turning to our record third quarter results. The business continues to have strong momentum, delivering robust top line growth while expanding margins. Some highlights include the following: Strong growth in inspection service and monitoring revenues led by double-digit inspection growth in North America for the 21st straight quarter, record backlog in both segments. And finally, accretive bolt-on M&A activity at attractive multiples. For the quarter, net revenues increased by 14%, approximately 10% organically, with strong growth across both segments. In our Safety Services segment, revenues grew organically by approximately 9%, led by North American safety while delivering 40 basis points of segment earnings margin expansion. As expected, Specialty Services continued its strong growth in the third quarter, delivering approximately 12% organic growth with sequential margin expansion. Our continued focus on our margin improvement initiatives allowed APi to deliver year-over-year improvements in adjusted EBITDA margin in the third quarter, with a 10 basis point increase versus last year. We continue to see great momentum in our business, particularly on the project side in North America, where we are being opportunistic but not overcommitting in the high-tech space. These project opportunities are in line with our disciplined customer and project selection are primarily sourced from our existing inspection and service relationships, our margin accretive to our overall project book of business due to their complexity and size and provide a long-term recurring inspection and service revenue opportunity for our local branches. The third quarter was another strong quarter for free cash flow generation. Our consistent free cash flow generation and strong balance sheet provides us with the flexibility to pursue a range of value-enhancing capital deployment alternatives as we head into 2026. We continue to execute our M&A plan, completing 4 bolt-on acquisitions in the quarter, bringing our total for the year to 11 completed bolt-on acquisitions. We remain on track to deploy approximately $250 million in bolt-on M&A at attractive multiples this year. Our pipeline remains robust and continues to grow. Now including fire protection, electronic security, and elevator services opportunities globally. Most importantly, our value proposition as a forever home for their team continues to resonate with sellers. In summary, we moved through the fourth quarter and into 2026 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 targets and our 10/16/60+ shareholder value creation framework. 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, everybody. Reported revenues for the 3 months ended September 30 were $2.1 billion, a 14.2% increase compared to $1.83 billion in the prior year period. Organic growth of approximately 10% was driven by continued growth in inspection, service, and monitoring revenues, strong growth in project revenues, and pricing improvements. Adjusted gross margin for the 3 months ended September 30 was 31.5%, representing a 50 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements, partially offset by mix. Adjusted EBITDA increased by 14.7% for the 3 months ended September 30, with adjusted EBITDA margin coming in at 13.5% representing a 10 basis point increase compared to the prior year period. Growth in adjusted EBITDA was driven by strong revenue growth and adjusted gross margin expansion, partially offset by investments to support growth. Adjusted diluted earnings per share for the third quarter was $0.41, representing a $0.07 or 20.6% increase compared to the prior year period. The increase was driven primarily by growth in adjusted EBITDA and a decrease in interest expense. I will now discuss our results in more detail for safety services. Safety Services reported revenues for the 3 months ended September 30 were $1.4 billion, a 15.4% increase compared to $1.2 billion in the prior year. Organic growth of 8.7% was driven by continued growth in inspection service and monitoring revenues, strong growth in project revenues, and pricing improvements. Our North America Safety business continued its momentum with double-digit inspection revenue growth. Adjusted gross margin for the 3 months ended September 30 was 37.3%, representing an 80 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements leading to margin expansion in inspection service and monitoring revenues and project revenues. Segment earnings increased by 18.6% for the 3 months ended September 30, and segment earnings margin was 16.8%, representing a 40 basis point increase compared to the prior year period primarily due to the increase in adjusted gross margin, partially offset by investments to support growth. I will now discuss our results in more detail for our Specialty Services segment. Specialty Services reported organic revenues for the 3 months ended September 30 were $683 million, an increase of 11.6% compared to $612 million in the prior year period, driven by strong growth in project revenues. Adjusted gross margin for the 3 months ended September 30 was 19.3%, representing a 60 basis point decrease compared to the prior year period, driven primarily by increased project starts mix and increased material costs. Segment earnings increased 3.8% for the 3 months ended September 30, and segment earnings margin was 11.9%, representing an 80 basis point decrease compared to the prior year period, primarily due to the decrease in adjusted gross margin. Turning to cash flow. We continue to focus on driving strong free cash flow conversion improvements year-over-year. For the 3 months ended September 30, adjusted free cash flow came in at $248 million, up $21 million versus last year, representing an adjusted free cash flow conversion of 88%. The strong free cash flow in the third quarter drove adjusted free cash flow of $434 million year-to-date, up $73 million versus last year and representing a conversion rate of 58%. Free cash flow generation has been and continues to be a priority across APi, and we are pleased with our performance year-to-date as the business accelerates revenue growth. We expect to finish the year at approximately 75% adjusted free cash flow conversion in line with our prior guidance. As a reminder, the fourth quarter is traditionally our strongest for free cash flow conversion due to seasonality. At the end of the third quarter, our net debt to adjusted EBITDA ratio was approximately 2.0x below our long-term target, allowing us the flexibility to pursue value-enhancing capital deployment opportunities in the remainder of the year and into 2026. As a reminder, our long-term capital deployment priorities remain: one, maintaining net leverage as stated long-term targets. Two, strategic M&A at attractive multiples and three, opportunistic share repurchase. I will now discuss our guidance for the fourth 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 $7.825 billion to $7.925 billion up from $7.65 billion to $7.85 billion, representing reported revenue growth of 12% to 13% and organic growth in net revenues of 7% to 8% for the year. Moving down the P&L. We expect full year adjusted EBITDA of $1.015 billion to $1.045 billion, compared to our previous guidance of $1.05 billion to $1.045 billion, representing adjusted EBITDA growth of approximately 15% at the midpoint and adjusted EBITDA margin above our previously stated 2025 goal of 13%. Our increased full year revenue and adjusted EBITDA guidance is driven by updates to our business outlook, including our third quarter over delivery, our latest outlook for the remainder of the year, and the impact of closed M&A during the quarter. Based on most recent rates, the impact of foreign currency is immaterial to our change in guide. For 2025, we anticipate interest expense to be approximately $145 million, depreciation to be approximately $85 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. We continue to expect adjusted corporate expenses to be approximately $35 million per quarter with some timing variability throughout the year. As expected, our EBITDA adjustments for restructuring were 0 in the third quarter as we brought those programs to the conclusion at the end of the second quarter. Overall, we are pleased with the team's execution of our strategy in an evolving macroeconomic environment during the year. I look forward to sharing more updates on our progress next quarter. I will now turn the call over to Russ.

Thank you, David. We entered 2026 with strong momentum across our global platform. We are continuing 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 established operating model, which is based on our inspection and service-first strategy, purpose-driven leadership, and a disciplined approach to capital allocation, positions APi for ongoing organic growth, margin expansion, and strategic mergers and acquisitions. We are confident in our capabilities and in our leaders’ capacity to execute our strategy and meet our new financial targets of 10/16/60+, creating value for all of our stakeholders. Now, I would like to turn the call over to the operator and open the floor for questions and answers.

Our first question comes from the line of Andy Kaplowitz from Citigroup.

Russ, as organic growth, as you know, has been accelerating in Safety Services, could you give us some more color on how that broke down? For instance, are you seeing a boost in your project business given a bigger data center tailwind? Or would you say it's more broad-based growth, given your comment in the prepared remarks, I'm not overcommitting to high tech?

We're experiencing strong activity in the data center sector across both of our segments. Heading into the year, data centers represented about 7% to 8% of our total revenue, and that may increase to 9% or 10% due to the positive trends we're observing in this area. While it isn't a major part of our overall revenue, we're also witnessing solid activity in the semiconductor industry and advanced manufacturing. Additionally, there are opportunities arising in aviation, and health care remains robust, along with critical infrastructure. We have always been confident about the markets we are engaged in, and we are currently seeing strong activity. One notable difference today compared to one or two years ago is the size and complexity of some projects, which limits the number of companies that can effectively participate and meet schedules, thus creating opportunities for us.

Very helpful. And then you mentioned sort of 11 bolt-ons now, still reiterating $250 million plus this year, but it almost seems like you're ahead of plan on M&A. So maybe you can give us a little more color around the progress you're making. Obviously, you've been adding to your Elevator platform, you mentioned multiple other platforms. So just update us on sort of where you are. Is that the right observation and maybe a little ahead? How do you think about it?

I believe we are right on track. We have expected activity in the fourth quarter that we still need to execute on. Whether that amounts to $275 million is uncertain and will depend on our ability to finalize the deals in our pipeline. The concept of being a forever home for sellers continues to resonate with us, and we are experiencing a lot of positive activity. Our main focus remains in North America, particularly in the fire and security sector. We completed one deal this year in the Elevator segment and have several others in progress. We are also noticing increased activity in our international business, although that varies by country based on their capacity to take on additional acquisitions.

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

And while considering the growth priorities alongside mergers and acquisitions, approximately 45% of the end markets, according to our calculations, are benefiting from reindustrialization. Although, as you've mentioned, there are significant opportunities for growth in smaller segments such as the elevator segment, how do you find the right balance between various industry verticals and broader trends in the U.S.? For example, our analysis of data center construction indicates that scaling companies like APi will see significant benefits. Are you anticipating a shift in the mix of your revenues due to reindustrialization, or how do you reconcile that with consolidating a segment like elevators and escalators?

Thank you, Kathryn, for being here with us. The size and complexity of some projects present opportunities for companies like ours, as there are only a few national players capable of handling fire life safety for large data center projects. This gives us an advantage. Our geographic footprint also works to our benefit. The data center market tends to follow power availability, leading to some concentration in certain areas, though we are beginning to see data centers relocating to more remote locations. This requires teams willing to travel, which is another advantage we hold. For instance, one of our clients is planning to construct a large data center in El Paso, Texas, where we have a strong fire life safety presence, allowing us to support that project effectively. As we consider our investments, whether in inspection services and monitoring or consolidating in the elevator sector, we are managing to pursue both avenues successfully due to our business structure. We have sufficient resources in the elevator space to expand the business while also focusing on current operations. We continually monitor the flow of large project opportunities, allowing us to ensure we have the necessary resources to execute our work. One crucial aspect of our industry that often goes unrecognized is that having too much work can be detrimental compared to having too little. Therefore, we carefully evaluate project opportunities to ensure we are compensated fairly for our services. We regularly discuss this, and I believe we are effectively managing both areas.

Very helpful with that. And following on that comment of too much work, are there markets that are generally better margin as you go towards your margin profile? Are there markets now that you would like to grow that you see as better margin markets as you focus on growth going forward?

I believe the current end markets we are operating in offer the best margin opportunities for the company. This is due to factors such as size and complexity, along with our capability to deliver. The timelines for these data centers are quite demanding, which means it's essential to have the right personnel in place. When deploying our team to these projects, it's crucial that the margin opportunities exist. Therefore, it comes down to size, scale, complexity, schedule, and our ability to deliver, and we deserve to be compensated accordingly, which we are experiencing.

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

I guess I want to kind of build on the margin questions here a little bit and just kind of get your assessment, Russ, on the margin performance in the quarter. 10 basis points. You got a lofty 2028 goal. I know one quarter does not make the trend. But just you mentioned some things like, I don't know, materials costs and talking about some investments for growth. And there's that inherent growth margin trade-off that is such a focus for your company. Obviously, you look back at last year, you got big margin gains as a result of kind of slowing down some of the projects that you took on. I guess I wanted to ask you kind of are you at the right balance of growth, it's much better here, but you're not getting quite as much margin. So what's your assessment of kind of your balance between those things? And as you head into '26, you need to maybe throttle down the growth to make some progress towards that big 2028 margin guidance?

Thank you for being here, Andy. First off, we won't claim we can achieve anything we can't actually deliver. We're a competitive team, and I believe our margin expansion goal is realistic, and we intend to meet it. I think we're successfully balancing organic growth within our current portfolio. As you pointed out, business isn't always linear. We expect to see our margins continue to grow as we progress through this year and into next year. I'm optimistic about how we're managing this. David, do you have any additional insights to share?

Yes, I'll add a few points. Russ. Thanks for the time, Andy. Thanks for the question. Underlying, we've seen really good margin expansion in our inspection service and monitoring work. And we're able to continue to get margin-accretive pricing, and we expect that to continue into the future. And I'd say we're still in the early phases of a lot of this contract work that is driving organic revenue growth, particularly. This comment is in the Specialty Services segment, and we'll see margins expand sequentially again in Q4 and into 2026. As those projects move deeper into completion, we tend to move margins up on our projects as we get closer to completion, and we're still in early days in many of those projects. I think there's a lot of opportunity to grow margin. Last thing I'd say is we did deliver a strong quarter and raised our guide for the year. And with that comes some increase in corporate costs and variable compensation that impacted margin in the quarter as well.

Okay. Any specific comments on maybe elaboration on the materials and the investments?

We are focused on investing in our sales team, especially in the inspection service and monitoring area. Our goals for 2028 are quite ambitious, and to achieve them, we need to more than double our sales team and bring in additional inspectors. Therefore, when we discuss investments, it mainly relates to enhancing our sales team and leadership.

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

I think in terms of organic growth, certainly a really strong year, and it seems like it's just getting stronger. I guess you are tracking ahead of your mid-single-digit kind of long-term growth rate. So maybe could you comment on sort of the sustainability to grow mid-single digits on top of the very strong growth this year? Or how are you thinking about kind of the cadence, whether this pulls anything forward or whether you can kind of grow on top of this?

Yes, great question. Thanks for being with us, too, Josh. I'll take you back to the organic growth algorithm that we shared at our Investor Day in late May. And when you think about our safety services side of the business, we expect mid- to upper single-digit growth. That's kind of mid- to upper single-digit growth in the service side of the business, driven by both price and share gain and then low to mid-single-digit growth on the project side. Then likewise, we expect mid-single-digit growth over the long term in our specialty business, and we believe that, that algorithm is sustainable over the long run. And to a point that Russ made earlier, when we put out frameworks and expectations we deliver against them. As we've gone deeper into the year where you've seen that outsized revenue growth is really in the project part of the business, where we've got an expectation over the long term of that being in the low to mid-single digits. And that was more in the mid- to upper single digits, double digits in places in the third quarter. So do I believe it's sustainable? Yes, and we'll continue to deliver against that growth algorithm.

Great. Thanks, David for the color there. And then I guess in terms of the guidance, you moved up the revenue guidance nicely, I think, over $100 million at the midpoint. And then you kind of nudged up the EBITDA guidance at midpoint. So could you talk about the translation there in terms of the much higher revenue and then kind of the slightly higher EBITDA?

Yes. I'd be happy to, Josh. When you think about what's moving up our revenue guide for the year, it's the same answer that I gave you on the last question which is increased or continued strong strength in the project environment. And we've talked publicly for the last couple of years on how the project side of our business on average is at a lower gross margin than the inspection service and monitoring stream. And so that mix impact influences, and we've talked over the last couple of quarters how as we're ramping up projects, they tend to come in at a lower margin both through at the early part of the project and get marked up as we go through the work, and you see that dynamic in the fourth quarter as well.

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

This is Ethan on for Tomo. Looking at the M&A pipeline, you guys had 4 bolt-on acquisitions in the quarter and a strong track record of value accretive M&A. What's kind of the current status of that M&A pipeline? And are there any particular geographics or service lines that you're prioritizing for future bolt-on acquisitions?

The pipeline is expected to maintain the same regular pace as it has in recent years. We are focused on ensuring good choices for the businesses we integrate into the APi family, with culture and fit being our top priority. We will continue to see a cadence similar to what we've seen over the past couple of years, and we have positive opportunities ahead. Most of our transactions have occurred in our North American safety business, particularly in fire protection, followed by electronic security and elevators, which are considered equally important. Our activities in North America will continue until our international business is more prepared for additional mergers and acquisitions. We are actively exploring opportunities in our international base business, but readiness varies by country. Some nations are better positioned to handle bolt-on acquisitions, and we use similar criteria in North America. Overall, you should anticipate consistent activity, and we are also evaluating larger opportunities available in the market, reflecting positive developments from an M&A perspective.

Thank you for providing some insights. Regarding your investments in the sales team, how is the labor availability and technician retention? Are you experiencing any wage pressures or capacity constraints?

I would emphasize that, first and foremost, when it comes to people in general—not just in sales—our focus on investment in our inspection service and monitoring business is crucial. The key principle in managing people and talent is retention; we need to maintain the staff we have. Our retention rate is very strong, above 90%, which is largely driven by our commitment to developing great leaders and the ongoing investment we make in every team member, including those in the field. This focus sets us apart. First, we need to retain our current employees. Secondly, we must actively seek talent from nontraditional sources, and I believe our team is progressively improving in this area. While we are not yet perfect, we are making strides in attracting individuals from unconventional backgrounds. It is also essential to have the ability to train these new hires. We have established various training programs and centers where we can train inspectors and fire alarm technicians, benefiting the wider company network. To achieve our goals, particularly our 10/16/60+ objectives, we will need to expand our workforce and think creatively about how we approach talent acquisition. I feel our team is doing well in recognizing and addressing the needs of our workforce. If our business leaders cite a lack of personnel as a barrier to growth, I see that as an excuse. The reality is everyone in the industry knows that securing skilled employees has been challenging for the past decade. Stating that you cannot find qualified individuals is simply not an acceptable rationale; we need to approach this creatively and develop our business accordingly. Overall, I think our team is performing admirably in this regard, and it requires strong leadership to succeed.

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

This is Harold Antor on for Stephanie Moore. Just wanted to get an update on Elevated. I think you guys have owned the acquisition a little bit over a year now. So just I guess, what's the organic growth running in that business? How is the cross-selling running? How many cities have you been in? Just any conversations about how that integration is going?

I think Elevated is performing very well, with high single-digit organic growth, nearing double digits. We feel confident about where that business stands. The cross-selling is just beginning, and as the teams get to know each other better, it will only accelerate, which is very encouraging. We previously mentioned that we acquired a company in the elevator sector. This acquisition doesn't serve merely as an addition to Elevated; it's more of a transition period for us. It's a sizable business that we are managing independently. Overall, we are very pleased with the performance of our elevator business at this time.

Great. Just focusing on Specialty, we had another strong quarter. Can you provide an update on the size of the pipeline compared to the last time we spoke? I know you're not giving a formal guidance for 2026, but considering the double-digit growth we expect to exit 2025 with, do you think this positions us for 2026 to potentially exceed the mid-single-digit organic growth? Any comments on this would be appreciated.

Well, we do not disclose our backlog by segment, but it remains at record highs across both segments. We feel very optimistic about our progress as we approach the fourth quarter and move into 2026. Our targeted growth rate is mid-single-digit organic growth, as David mentioned earlier. We are committed to seizing opportunities that align with our goals and can enhance our margins. As we head into 2026, we anticipate maintaining that mid-single-digit organic growth. David, do you have anything to add?

I would like to highlight that regarding the momentum question, if you examine our guidance for the full year, it reflects a very strong forecast for the fourth quarter as well. We expect mid- to upper single-digit organic revenue growth and our highest margin expansion during this quarter. Therefore, we feel confident that we are entering 2025 with strong momentum. The project backlog is now behind us. Most importantly, as Russ previously mentioned, this project work will create significant inspection service and monitoring opportunities for our team, which will support growth throughout the 2028 strategic period.

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

Maybe my first question would just be around the acquisition sort of contribution, not so much the pipeline of unannounced deals and all that. But just if I look at the announced and closed transactions and so forth. I think M&A contribution to revenue this year is sort of mid-single digits. When you look at the acquisitions that have closed or expected to close by year-end, how should we think about the M&A sales contribution for next year? As it looks today, again, just based on the announced closed and about to close deals. And color on the sort of profitability for those newer acquisitions in aggregate?

You're asking a 2026 budget question, Julian.

of announced sort of closed deals nothing perspective or what have you.

The best year I can give you on that is that about $1 of purchase price it is about $1, maybe a little bit less in revenue over a 12-month period. And so if you shape that out, you'll get a pretty good sense, I think, of what that will contribute next year, and we expect our deals to be accretive to fleet average from a margin perspective.

That's helpful. And then maybe just circling back to the operating leverage question that's come up a handful of times on this call. So is the core assumption leaving aside any outsized acquisitions that might have a different margin profile? But if we just look at the business as it is today, should we assume that, that sort of mid-high teens operating leverage that you've delivered year-to-date, that's a good sort of run rate for the year ahead, just looking at the shape of end market growth rates and the attendant kind of mix differences and all that.

Julian, when you mention operating leverage, are you referring to EBITDA growth? Could you clarify that for me?

Sure, Adam. The incremental EBITDA margin for the third quarter was in the mid-teens, similar to the mid-teens in the first half. Your overall EBITDA margin was 13.5%, while the incremental EBITDA margin, reflecting the change in EBITDA over the change in sales, was more like the mid-teens. Can we consider that a good run rate based on the current end market mix?

Yes. I think as you're modeling out into 2026 and beyond, I'd model a somewhat higher incremental going into the future.

Your next question comes from the line of Jasper Bibb from Truist Securities.

Following up on the data center comments. Based on what you're seeing in the backlog trend for that sector, should we expect the revenue contribution from data centers to continue to build over the next few quarters, maybe to materially higher number than the 9% to 10% you cited earlier on the call?

I don't expect it to be significantly higher. It may reach around 10% or 11% of our revenue, but I would be surprised if it reached 12%. It's important to note that the fire life safety component of these projects is considerably smaller compared to others in the data center space. For instance, the HVAC and mechanical work on a large data center could be valued at about $500 million, while the fire life safety aspect might only be around $10 million to $15 million for the same job. We're also seeing some exceptionally large projects where the fire life safety costs are higher, but the mechanical costs are still approximately ten times that amount. The sizes of these contracts vary, which is why it won't impact us as much as it might affect some competitors in the industry.

Okay. Super helpful context. And then hoping you could maybe update us on early progress on your tech investments and any key milestones thinking about the ERP, for example, we should keep in mind as we think about '26.

Yes, absolutely. Thanks for the question. Our tech investment, this is our ERP investment in our Safety Services segment. I'd say is progressing largely as we expected. These are difficult projects, but I'm really pleased that the team is progressing and they're progressing, doing it a lockstep with our business and making sure that this is a business-led project that's meeting the business needs of our branch leaders, our field leaders, and our company leaders. So that is moving forward. We're out of the blueprinting phase and we are currently deploying in our pilot company. So really moving forward as we expected. As you think into 2026 from a cost perspective, 2025 is going to be the high watermark for spend on that system deployment project. It will step down a bit as we go into 2026 and then step down further in 2027 as we get near and approach conclusion.

Our final question comes from the line of Jon Tanwanteng from CJS Securities.

Many of those have already been addressed. The only question I have is regarding the expectation that incremental margins will be higher going forward. Should we interpret that to mean there won't be any significant project launches scheduled in the upcoming quarters? I understand that this is beneficial for growth, but it has implications for margins in the quarter. Is that the correct interpretation?

Yes, I view this whole project start topic that has affected our year-over-year margins for the past couple of quarters as something that occurs at a turning point. As we transitioned from a decline year-over-year to a significant increase year-over-year in revenue during Q2, it had an effect. We saw an increase of about $50 million to $60 million in revenue quarter-over-quarter in the Specialty segment in the third quarter. So that had an impact. However, as we move into the fourth quarter, I expect our margins in the Specialty segment to be positively impacted year-over-year, and this trend will continue into Q1 and Q2 of next year. It will just be part of the natural fluctuations in our margins and shouldn't be considered a significant issue.

This concludes the Q&A session portion of today's meeting. I'd now like to turn the call over to Russ Becker 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, for joining the call this morning.

This concludes today's meeting. You may now disconnect.