Earnings Call Transcript - APG Q4 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to APi Group's Fourth Quarter and Full Year 2024 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.

Adam Fee, Vice President of Investor Relations

Thank you. Good morning, everyone, and thank you for joining our fourth quarter 2024 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; David Jackola, our Interim Chief Financial Officer; and Sir Martin Franklin and Jim Lillie, our Board of 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, February 26, 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 fourth 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. A reconciliation of and other information regarding these items can be found in our press release and our presentation. Additionally, we'll be posting an investor update presentation on the Investor Relations page of our website later today. It's now my pleasure to turn the call over to Russ.

Russell Becker, President and CEO

Thank you, Adam. Good morning, everyone. Thank you for taking the time to join our call this morning. We remain grateful for the hard work of our 29,000 leaders and their dedication to APi. The safety, health and well-being of each of our teammates is our #1 value. As a side note, we are very thankful that our four teammates that were involved in the Toronto plane crash last week have returned safely to Minneapolis and are recovering well. I'd like to thank our APi teammates who supported these individuals on their return to Minnesota. I'm also proud that APi has once again been recognized as a military-friendly employer for 2025. We remain committed to providing opportunities for veterans and their spouses to build careers and develop as leaders. 2024 was another solid year for APi with record net revenues, record adjusted EBITDA, record adjusted earnings per share, and record adjusted free cash flow in an evolving macro environment. As I mentioned on the last call, the team's work executing our 13/60/80 shareholder value creation framework, has resulted in APi being the strongest it has ever been from a revenue, profitability, and cash flow generation standpoint. In 2024, specifically, our leaders delivered progress against each of our 13/60/80 financial targets. First, adjusted EBITDA margins expanded by 140 basis points to 12.7%, putting us in a position to surpass our target of 13% or more adjusted EBITDA margin for 2025. Second, we increased the mix of inspection, service, and monitoring revenues from 52% in 2023 to 54% in 2024 on our way to our long-term target of 60%. And last, we improved adjusted free cash flow conversion from 69% in 2023 to 75% in 2024. Now I will highlight our 2024 full year results. Net revenues grew by 1.3% in 2024, finishing the year at a record $7 billion. This growth was driven by acquisitions, strong organic growth in inspection, service, and monitoring revenues in Life Safety, and pricing improvements, partially offset by divestitures and an organic decline in project revenues driven by a purposeful focus on disciplined customer and project selection and higher-than-expected delays in certain customer projects in our HVAC and specialty businesses. Importantly, we achieved double-digit growth in inspection revenues in our U.S. Life Safety business for the year and in the fourth quarter, representing the 18th quarter in a row as we make progress towards our goal of 60% of our total net revenues coming from inspection, service, and monitoring. In line with our strategic initiatives, we continue to see strong improvements in adjusted gross margin for the year, up 250 basis points. The strong performance in gross margin led to a full year 2024 adjusted EBITDA margin of 12.7%, representing margin expansion of 140 basis points. We expect to see continued margin expansion in 2025 and beyond, largely driven by the same initiatives we've been executing for the past several years, including improved inspection, service, and monitoring revenue mix, disciplined customer and project selection, Chubb value capture, pricing improvements, procurement, systems and scale, and selective business pruning. Regarding Chubb and our international business, as we exit 2024, we have realized more than $90 million of the $125 million value capture target, and we remain on track to realize the rest of the savings in 2025 and early 2026. 2024 was another year of strong free cash flow with record adjusted free cash flow of $668 million, representing approximately 75% conversion of adjusted EBITDA. Our strong free cash flow generation helped us to repay $100 million of our term loan on December 31, 2024, and delivered on our commitment of reducing net leverage to under our target of 2.5x, ending the year at 2.2x. The strength of our balance sheet allows for flexibility to pursue value-enhancing capital deployment alternatives, such as continuing our track record of disciplined M&A or opportunistic share repurchases. As a reminder, we have approximately $400 million of authorization remaining on our share repurchase program. In 2024, we accelerated our spending on accretive bolt-on M&A to approximately $250 million. In addition, during the first half of the year, we entered the complementary and adjacent $10 billion-plus elevator and escalator services market with the acquisition of Elevated. We have long viewed the fragmented elevator and escalator service market as an attractive adjacency due to the highly recurring nature of the business, driven by nondiscretionary, statutorily-driven demand. We expect to build a $1 billion-plus elevator and escalator services platform over the long term through a combination of strong organic growth, a long-term cross-sell opportunity with our existing life safety businesses, and a robust M&A pipeline. Looking ahead, we are excited about the pipeline of M&A opportunities we see across fire protection, electronic security, and elevator and escalator services. Our team remains hard at work, prioritizing the most attractive opportunities. In summary, I am proud of our team and the record financial results achieved in 2024. As we begin 2025, I have great confidence in our ability to continue to expand margins and grow free cash flow, but importantly, return to traditional rates of organic growth, driven by the following: continued strong organic growth in inspection, service, and monitoring revenues; pricing improvements; and accelerating growth in our backlog, up high single digits in total and up double digits organically in Specialty Services. Positive progress working through project delays, annualizing the impact of disciplined customer and project selection, including the exited customer relationship mentioned in the first quarter of 2024. Finally, our international business begins 2025 with less than five loss-making branches after having over 50 at the time of the acquisition. I'm grateful for our international teammates for their great work transforming our business over the past three years to position it for long-term profitable growth. In 2025, we began operating in our newly aligned segments with our HVAC business moving from safety services to specialty services. This change will provide opportunities to enhance our shared services capability in the specialty segment and allow the HVAC business to receive increased focus from the leadership team, putting it in the best position to win with its customers. Additionally, the change also sets up the Safety Services segment as more of a pure-play life safety business focused on fire protection, electronic security, and now elevator and escalator services. I would now like to hand the call over to David to discuss our fourth quarter financial results and guidance in more detail. David?

David Jackola, Interim Chief Financial Officer

Thank you, Russ, and good morning, everyone. Reported revenues for the three months ended December 31, 2024, increased by 5.8% to $1.86 billion compared to $1.76 billion in the prior year, driven by organic growth of 4.7% in Safety Services and benefits from M&A. This was partially offset by a 7.6% organic decline in Specialty Services and on an organic basis, total company net revenues grew by 1.3%. Adjusted gross margin for the three months ended December 31, 2024, increased to 31.1%, representing a 100 basis point improvement compared to the prior year driven by planned disciplined customer and project selection, pricing improvements, and value capture initiatives in our international business. Adjusted EBITDA increased by 16.3% for the three months ended December 31, 2024, with adjusted EBITDA margin coming in at 13%, representing a 120 basis point increase compared to the prior year driven primarily due to the factors impacting gross margin, partially offset by lower fixed cost absorption in the Specialty Services segment. I am also pleased to report that adjusted diluted earnings per share for the fourth quarter was $0.51, representing a $0.07 or a 16% increase compared to the prior year period. The increase was driven primarily by strong adjusted EBITDA growth and was partially offset by increased interest expense and adjusted diluted weighted average shares outstanding. I will now discuss our results in more detail for Safety Services. Safety Services reported revenues for the three months ended December 31, 2024, increased by 13% to $1.40 billion compared to $1.24 billion in the prior year period. Organic growth was 4.7% driven by double-digit inspection revenue growth in our U.S. Life Safety business and 7% organic growth in inspection, service, and monitoring revenues across the segment. Project revenues grew low single digits in the quarter. Adjusted gross margin for the three months ended December 31, 2024, was 35.7%, representing a 60 basis point improvement compared to the prior year period, driven by planned disciplined customer and project selection, pricing improvements, value capture initiatives in our international business, and improved business mix of higher-margin inspection, service, and monitoring revenues. Going forward, we will be reporting segment earnings for each segment, which aligns with our historical reporting of adjusted EBITDA by segment. Segment earnings increased by 18.5% for the three months ended December 31, 2024, and segment earnings margin was 16%, representing a 70 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin. Now I will discuss our results in more detail for our Specialty Services segment. Specialty Services reported revenues for the three months ended December 31, 2024, decreased by 11.8% to $463 million compared to $525 million in the prior year period. This was driven by divestitures and a decline in project and service revenues driven by delays as well as the impact of the exited customer relationship that we first mentioned in the first quarter. Adjusted gross margin for the three months ended December 31, 2024, was 17.3%, representing an 80 basis point decrease compared to the prior year driven primarily by lower fixed cost absorption and stranded costs from delays, partially offset by the favorable impact from planned disciplined customer and project selection. Segment earnings decreased by 22% for the quarter, and segment earnings margin was 9.9%, representing a 130 basis point decrease compared to the prior year period, primarily due to the decrease in adjusted gross margin and lower fixed cost absorption. Turning to cash flow, as we've highlighted throughout the year, the fourth quarter is our strongest quarter for free cash flow generation due to seasonality, and 2024 was no different. For the three months ended December 31, 2024, adjusted free cash flow was $307 million, reflecting an adjusted free cash flow conversion of 127%. For the full year, adjusted free cash flow was $668 million, with conversion of approximately 75% representing a $131 million improvement or 24% when compared to 2023. Free cash flow generation has been and continues to be a priority across APi, and we are pleased that we were able to meet our increased adjusted free cash flow conversion target of 75% for the year. At the end of the year, our net leverage ratio was approximately 2.2x well below our long-term net leverage target of 2.5x even as we continue margin accretive bolt-on M&A. As we look forward to 2025, we expect to continue to grow our free cash flow, providing us a significant opportunity for value-enhancing capital deployment. Finally, we are happy to announce that we have successfully remediated all prior year material weaknesses and have concluded that our internal control over financial reporting was effective as of December 31, 2024. And maybe I'll go off script for a second to express my gratitude to all of our leaders in our branches, in our companies, and the central team that did just a great job to get us there. I am grateful. Turning to our 2025 guidance, based on current foreign exchange rates, we expect full year reported net revenues of $7.3 billion to $7.5 billion, representing a return to traditional rates of organic growth in net revenues, driven by high single-digit organic growth in inspection, service and monitoring revenues in Safety Services, and a return to mid-single-digit organic growth in our Specialty Services segment, following the first quarter, which is impacted by challenging weather-related comparables. We expect full year adjusted EBITDA of $970 million to $1.02 billion, which represents adjusted EBITDA growth of approximately 10% to 15% on a fixed currency basis and adjusted EBITDA margin of 13.4% at the midpoint, which is up 70 basis points versus 2024. In 2025, we expect to continue to make progress in terms of free cash flow growth with the 2025 adjusted free cash flow conversion target of approximately 75%, while returning to organic revenue growth. In terms of the first quarter, we expect reported net revenues of $1.625 billion to $1.675 billion, this guidance represents reported revenue growth of 2% to 5% and a low single-digit organic net revenue decline at the midpoint. We expect first quarter adjusted EBITDA of $185 million to $195 million, which represents adjusted EBITDA growth of approximately 7% to 13% on a fixed currency basis and adjusted EBITDA margin of 11.5% at the midpoint, up 60 basis points versus last year. For 2025, we anticipate interest expense to be approximately $145 million, depreciation to be approximately $90 million; CapEx to be approximately $100 million, and our adjusted effective cash tax rate to be approximately 23%. We expect corporate expenses to be between $30 million and $35 million per quarter with some timing variability throughout the year. We expect our adjusted diluted weighted average share count to be approximately $284 million for the year.

Russell Becker, President and CEO

Thanks, David. Nice job. Our record results in 2024 once again demonstrate the strength of our recurring revenue services-focused business model and the ongoing execution of our strategy by our teammates. We begin 2025 with positive momentum and the demand for the services we offer is strong across the global platform. We remain relentlessly focused on growing inspection, service, and monitoring revenue. That combined with the accelerating growth in our backlog provides a solid foundation for returning to traditional rates of organic growth in 2025, while continuing to expand our margins. We remain focused on creating sustainable shareholder value by delivering on our 13/60/80 targets with the near-term focus on generating adjusted EBITDA margins of 13% or more this year. As a reminder, we will be hosting an Investor Day on May 21 in New York for professional investors where we will be detailing new, meaningfully higher long-term financial targets and updates to our strategic plan. With that, I would now like to turn the call back over to the operator and open up the call for Q&A.

Operator, Operator

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

David Paige Papadogonas, Analyst

This is David on for Ashish. Congrats on the good results here. Just curious if you could double-click on some of the key variables that will drive EBITDA margin expansion to 13%, 13% plus going forward?

Russell Becker, President and CEO

Thank you for joining us and for your question. I would say that we are consistently focusing on the same areas. The first step is disciplined customer and project selection. It's crucial for us to choose customers who truly appreciate the services we offer and the expertise we bring to their sites. Additionally, we are working on improving the mix of our revenue, increasing the share that comes from inspection, service, and monitoring. As mentioned in our prepared remarks, we've grown that from 52% of total net revenues in 2023 to 54% in 2024, and our goal is to reach 60%. Pricing remains an important area of focus for us. Procurement is another potential opportunity that we believe is still in the early stages, and we see significant potential there. I also want to mention that we are progressing well with Chubb value capture; we have reached $90 million towards our $125 million target and are making good strides. Furthermore, we are working on business process transformation by moving towards more shared services and leveraging the scale of our company. Strategic M&A is also a lever we can utilize. It's important to remember that we have the opportunity to improve continuously. Recently, I saw a report highlighting the performance of our branches across the portfolio, and we are advancing our branch efficiency. Some branches are achieving EBITDA margins above 20%, while others are in the mid-single digits, and we need to help those branches improve. We know the strategies that will guide us, and we will remain focused on our key objectives.

Operator, Operator

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

Kathryn Thompson, Analyst

And a very nice job on the year and achievements since going public. Want to step back and look at the force for the traces is something that you have focused on early on as a public company in terms of recurring revenues in particular how to manage through various cyclical downturns. As we look at the resegmentation going forward, where are we today in terms of how you think about managing your business in light of some concern about economic slowdown? And how is your business model set up to manage these fluctuations?

Russell Becker, President and CEO

Thanks, Kathryn. And I always appreciate the perspective that you bring to the calls and to your questions. I feel like if you look at the evolution of the business, every year, we continue to build a greater sense of resilience into our model. It starts with that whole idea of driving inspection, service, and monitoring to 60% of our total net revenues. That resiliency component provides the opportunity for us to be more immune to fluctuations in the economy. This includes even potential cost increases associated with tariffs. We price our inspection and service work in real time, allowing us to pass those increased costs on quickly to our clients. This selective focus on inspection service and monitoring enables better project work selection, helping to enhance margins and ensure resilience. Looking at our business today versus where we were in 2008 and 2009, we have made tremendous progress. I feel like we're in a really good place. Lastly, our cost model is approximately 70-75% variable, meaning we can flex quickly if needed. If you go back to our results in 2020 during COVID, you saw us exercise that flexibility and achieve positive results.

Kathryn Thompson, Analyst

Yes. Very much appreciate that. And one follow-up just more tactically about the commentary about project delays. Is it more weather, permitting, financing? Or is it related to large projects or more localized market, small project issues? And just really bigger picture, trying to understand if this is more onetime or something that we'll be managing throughout the year?

Russell Becker, President and CEO

Yes, Kathryn. The project delays cited last year are mostly behind us. We have some government clients that I would say continue to get in their own way somewhat. However, we have built lessons learned into our plan, allowing us to better forecast and budget our resources. As we move into this year, I would say that Q1 is more normal this year than it was last year. Last year was extremely positive concerning weather. Q1 has historically been our quietest quarter of the year due to seasonality, and we're dealing with more normal weather conditions this year.

Operator, Operator

Your next question comes from the line of Mulrooney with William Blair.

Timothy Mulrooney, Analyst

Yes. I just want to build on Kathryn's question a little bit. Can you just level set us where we stand with respect to those project delays that you experienced late last year? I think there were three that you called out publicly for a headwind of $150 million in 2024. And we get a lot of questions on those. So I'm curious on those specific three, have those moved forward? And then are there any other large specialty projects out there where you are seeing unexpected delays early on here in 2025?

Russell Becker, President and CEO

No. Of the three, I would say that one is done. The second is a government entity that we've built into our plan. We're doing the work now. The third was initially a permitting issue and became a right-of-way issue, which slowed things down, but we have personnel on-site, and as winter passes, we expect work to ramp up. These delays have been accounted for in our plans. There are always delays in our projects; however, nothing like we faced last year is currently anticipated for this year. Overall, we feel better prepared as we move into 2025, and so there is no fourth delay to be concerned about.

Timothy Mulrooney, Analyst

Okay. That's really helpful. Just building on that a little bit, you did mention that one federal project. I guess I'm curious, this is something else we get questions on. How much of your specialty business or I guess how much of your business overall is driven by projects funded even partially by federal funds like that federal rural broadband project? Just curious if there's any notable government exposure risk that you could highlight on investors given everything going on in the headlines.

Russell Becker, President and CEO

I don't, I mean, as it relates to our business, I mean, it’s not material in our total revenue. I'd have to have Adam circle back with you for more specific figures. I would just be guessing. When the infrastructure bill was signed two years ago, a rising tide floats all boats, and if anything gets cut, it would affect the overarching industry with a trickle-down impact that arrives later. I’m not particularly concerned. My focus is on monitoring tariffs and their effect on inflation, rather than federal funding risks. We're aware of potential commodity increases, primarily in steel pipe prices, as we have seen small increases recently but were not surprised—it's something we've anticipated with the changing administration.

Operator, Operator

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

Joshua Chan, Analyst

David. Maybe one quick question on guidance. You did mention that Q1 is impacted by weather. I guess, does that mean it has a disproportionate impact on specialty? And could you just kind of talk to whether the 5% type of organic growth you had in safety in Q4 is roughly sustainable for the year?

David Jackola, Interim Chief Financial Officer

Yes. Thanks, Josh. Thanks for the question. I guess what I'd say about our Q1 guidance and the impact on weather is that Q1 is going to look a lot like Q4. And as we get into Q2, Q3, and Q4, we'll start seeing the specialty business return to more traditional rates of growth. But the growth formula and safety will be largely the same in Q1 and all of 2025 as it was in the fourth quarter of 2024.

Russell Becker, President and CEO

Thanks for that softball. And I would say that, number one, it starts with the branch leader, and we need to have really good quality branch leaders leading all of our branches. Inside those branches, we have multiple departments, and we need to have really good people leading those departments. That's where it starts. I would say, adopting this inspection-first mindset and making sure we're developing and bringing on inspection sales leaders in those branches to start selling inspection because we know we're going to get $3 to $4 of pull-through service work alongside that takes a lot of energy and effort. Secondly, ensuring disciplined customer and project selection is crucial for success.

Operator, Operator

Your next question comes from the line of Harold Antor with Jefferies.

Harold Antor, Analyst

This is Harold Antor on for Stephanie Moore. So I just wanted to talk about M&A expectations for the year; leverage is pretty in check. What are you guys seeing on the M&A front? How competitive is this space? And as you think about M&A, are you looking to do it in the safety space or more on the elevator spaces? Just any comments around there? Also, any willingness to do another large platform deal?

Russell Becker, President and CEO

Yes. Thank you so much. We shared that we spent roughly $250 million on bolt-on M&A at mid-single-digit multiples. Our plan and goal is to execute similarly this year, aiming for another $250 million on bolt-on M&A during the year, focusing on fire, life safety, security, and elevator and escalator spaces. We're also looking internationally at opportunities we believe would be great bolt-on acquisitions. Currently, we have yet to do any bolt-on M&A internationally, but we're now examining that area closely. As it pertains to elevator and escalator space, we aim to execute one acquisition and do it well before pursuing more. The worst thing we could do is overwhelm our team with multiple acquisitions right away. Our pipeline remains robust, and there are plenty of opportunities for bolt-on M&A in the U.S. The market is still very fragmented. Lastly, about transformational M&A, we are very disciplined and need to ensure the opportunity matches our interests, especially in the fire and life safety space, where we've seen operabilities trading at high multiples.

David Jackola, Interim Chief Financial Officer

Yes. Thank you for that question. Our revenue guide for the year is reliant on a flywheel model yielding mid- to upper single-digit growth in service revenue, with a low to mid-single-digit project revenue growth. That forms the basis of our guidance. Achieving the top end of our guidance would depend on an acceleration in service and the project revenue improving better than low to mid-single digits.

Russell Becker, President and CEO

The only thing I would add to David's remarks is price will play a factor as we need to be diligent about pricing strategy and the markets we target. Our branch leaders need to be strategic about their customer selections, which directly influences the end markets they operate in. Certain markets are more resilient and strong against ongoing macro events. Ultimately, while we could grow our revenues at any cost, it would come at the margin's expense. We intend to show that we can achieve mid-single-digit organic growth while simultaneously expanding margins.

Operator, Operator

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

Andrew J. Wittmann, Analyst

So Russ, you've been asked this question several times. What is your strategic outlook? You noted that the multiples for pure-play fire life safety companies are quite high right now. With the benefit of these trades happening in the market, does it change how you're looking at the composition of your business, especially in specialty?

Russell Becker, President and CEO

Thanks, Andy. I hope you're well. We continue to examine our entire business, not just specialty. If we have a branch in our North American safety business that isn't performing, we consider all options. We expect that business segments contributing to our long-term margin goals will thrive. We are taking a selective pruning approach across our business, including specialty, to ensure alignment with our long-term goals. We maintain a disciplined focus on this strategy.

Andy Wittmann, Analyst

Okay. Fair enough. I wanted to further discuss the transformation costs this quarter, as they were notably high compared to other quarters in your history. What drove that increase? And what should we expect in 2025?

David Jackola, Interim Chief Financial Officer

Yes. Thanks for the question, Andy. When you look at what we've got in our adjustments, contingent consideration will largely carry over into 2025. We have non-service pension costs and benefits. The restructuring costs were tied to the Chubb value capture program, which increased in Q4 compared to the rest of the year, and should conclude in 2025. The VPT costs were up in the quarter, including integration costs related to the Chubb business and Elevated transaction. As we enter 2025, we expect the SOX deployment work to be behind us, the final stages of the cyber rollout to complete, and the expectation for integration costs associated with larger platform deals or system IT investments going forward.

Operator, Operator

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

Jonathan Tanwanteng, Analyst

You mentioned the semiconductor project that has slipped. One of your large customers has experienced difficulties recently. What is your exposure to that customer, and do you see risks associated with the CHIPS Act?

Russell Becker, President and CEO

This slippage has nothing to do with funding. It relates to changes in leadership for the project rather than monetary allocation. We're advancing the project on schedule. I'm not concerned about potential issues with the CHIPS Act affecting our operations. Our business structure is designed to mitigate risks, especially given the scale of typical contracts. We're focused on growing our inspection service and monitoring segments rather than high-stakes project work.

David Jackola, Interim Chief Financial Officer

Yes. You heard right; we expect our interest expense to be about $145 million this year, consistent with our adjusted free cash flow conversion target of 75%. This also reflects a projected more than 10% year-over-year increase in adjusted free cash flow. We plan to invest in net working capital to grow the business organically this year.

Russell Becker, President and CEO

In closing, I would like to thank all of our team members for their continued support and dedication to our business. Our people are the foundation on which everything else is built. Without them, we do not exist. I also want to thank our long-term shareholders as well as those who have recently joined us for their support. We look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody, for taking the time to join our call.

Operator, Operator

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