Conference Transcript - APG 2026-09-09

Speaker 1

All right.

Speaker 3

Well, good morning, everybody. Welcome to Jeffrey's 2026 Industrials Conference. We are, well, actually, for those who may not know me, my name is Stephanie Moore. I'm Jeffrey's Transportation and Business Services Analyst. We're very pleased today to have the team from API Group. We have CEO Russ Becker and then Adam Walters, who leads their investor relations efforts. So the format is just fireside chat. But again, we really appreciate you both being here today thanks for having us um okay so to kick things off um i want to touch on the specialty segment which is maybe where we probably wouldn't have started last year if we were covering this company long enough but there's been a lot of excitement quite frankly on the specialty side of the business and it's delivered some really strong organic growth year to date so could you remind us you know maybe just high level what's driving the demand in this segment how much of this is efforts that are more so your own efforts and concerted effort to go after this business and then how much of this is just you know maybe some end market dynamics that have been particularly healthy or beneficial for you guys yeah so that's um you know that business if you

Speaker 1

go back to 2024 you know for those of you that follow the company you know for for multiple years that business went through some kind of disciplined customer project selection and you know made sure the work they're going after was in good end markets with good customers at good margins and they've really come out of that you know disciplined customer project selection with a lot of strength and we kind of saw it back even in you know 2025 as we kind of got halfway through the year last year they really started to see some strength and I would say it's not specific pockets it's really broad based across that you know the businesses within specialty but also across various end markets you know data center has obviously been a point of strength in that you know the specialty business has seen a lot of good opportunities on the data center build out as well as you know kind of the service from data centers as well you know critical national infrastructure has been a point of strength as well for specialty whether it's water treatment plant work or you know even just you know fiber optic cabling we're starting to see some of the be funding flow through to our customers, which has been good work on the fiber side. You know, advanced manufacturing continues to be good. Semiconductor work continues to be good. So, you know, is that business going to go to 20% every single quarter? No, you know, obviously. But they're seeing a lot of strength across the business and across a lot of different and diverse end markets. And so, yeah, we're really pleased with how that business has been growing the last year And then, you know, maybe, Russ, I'd love your perspective.

Speaker 3

Given the strength that you're seeing, particularly in specialty, have you ever seen from an end market standpoint maybe the robust growth that we have seen before?

Speaker 2

Or is this just kind of a function of you do see these kind of cyclical patterns where you see some of this growth kind of come through, whether it is because of infrastructure, CapEx spends, legislation, or is this truly an unprecedented time? well i noticed that she asked me that question because i'm probably almost two times as old as him and i've been through it um three times as long as him um i would say that what you're seeing uh specific to the data center market is unprecedented um i haven't seen anything like it in in my career um in the industry i mean if you if you look at the industry if you take data centers out and you look at the industry in general you know as a kind of on a macro basis the industry was flat to declining and data centers basically has buoyed the entire in the entire sector so and I think the biggest difference is maybe not necessarily the quantity but the size and the size of the of the data center projects are they're they're big and and that's probably just the best way to put it but you know there's other end markets that are that are really robust you know Adam touched on it but you know certain aspects of advanced manufacturing you know like if you look at like Eli Lilly as an example what they're the investment they're making primarily in GLP-1s, whether that's in their home state in Indiana or what they're doing in Milwaukee. We happen to be involved with the Milwaukee opportunity. You're seeing that be really robust. Semiconductors continues to be robust. I don't know that I would credit that necessarily to reshoring and some of the policies or not. That's always leave that up to each individual of the site, but you are seeing, you know, critical infrastructure and a number of opportunities there continue to provide a lot of opportunity. So, but I would say that the data center component of it is the part that I'm going to put in the unprecedented bucket.

Speaker 3

And then just for those who that might, you know, fear the data center build out as a bubble or it's, you know, the longevity of it, or we're, you know, we start to be concerned that maybe we're going to get kind of a little too much exuberance. And how would you kind of just walk through the life cycle in which API can participate in just this data center build out?

Speaker 2

Well, at the end of our last call, I tried to make sure I took the opportunity to remind everybody that this is API is a services company first, that is going to take advantage of the robust project environment and that has not changed since our last call and it will not change in advance of our next call and it won't change a year from now you know our focus is going to be on continuing to build out the inspection and service component of our business but we want to take advantage of the data center market i would tell you that the way we're looking at the data center project, you know, opportunity is that we're putting our people to work on projects that are committed. And we're being prudent about, you know, how we're allocating our people. I mean, our people are precious gems and we need to make sure that, you know, protecting them and we're putting them to work on our good customer with our good customers on good customer sites in places where people are going to value their expertise in their work and so we are being very I think being very prudent in how we're looking at customer selection and project selection and where we're going to continue to to put to put our people to to work So, and, you know, like we talked about our backlog being at a record level of over $5 billion. If we don't have a signed contract, it's not in our backlog. So, you know, when we talk about that, you know, we're actually managing that quite well. And I think we've got the company really in a really good position. Also, we are spending the time to do our own work and not just speculate on, you know, what does the data center, you know, opportunity and opportunity set continue to look like. If you look at the projected demand curve that's going to come with AI as companies start to ramp up and utilize AI more, like the data center build out is not going to keep up to the demand. And so unless you're going to stop using this, then, you know, the opportunity is going to continue to come. And it's just you have to make sure you're putting your people to work in the right places. Power is the next opportunity that's going to come right behind it because there's not enough power to support the build out and the capacity requirements that are coming from data centers. So, I don't know. Did I answer your question?

Speaker 3

You did. Maybe switching here to safety, because I think we've maybe exhausted data centers, because I do think you're right. The services side of the business, and particularly what we're seeing in safety, I think is still a really important aspect here. And I think a question that I've certainly been receiving the last couple months has been maybe on the differentiation and growth between North America and international. So maybe talk a little bit about organic growth performance, North America and international, and maybe what actions are being done behind the scenes at international.

Speaker 2

Well, I mean, I'm going to start answering your question by saying business isn't linear. And I think sometimes people think that, you know, business just automatically goes in a straight line like this, and that's just not the reality of where it's at. Our North American business continues to see really strong organic growth in our inspection and service business, which is, again, the bellwether we want you to measure us by. We're obviously seeing, you know, good organic growth on the project side of the business as well. But we are going to continue to focus on double-digit growth and inspections and continuing to build out our inspection sales force to support that work. and we continue to make really good progress there so we we continue to have um really feel really good about it in the international business um we went through a concerted effort to improve our discipline as it relates to project selection and customer selection and so you know over the course of say the end of 2025 you saw a kind of flattish growth like in backlog not growth but flattish you know kind of it stayed static and we're starting to see as we got more focused on making sure that we're selecting the right projects we also had some project work slide out to the right on us which is not necessarily the best combination when you're trying to be more disciplined from a project selection and a customer selection perspective we've seen increase increases in our backlog here over the last couple of months we've seen an increase in orders, which is primarily on the service side. So we have a new business leader over there that came from the U.S. He will double down on the service first mindset. And I said service first mindset purposely because the inspection environment and the statutory nature of both the European market and the Asia Pacific market are different than what they are in North america um but he he will bring double down that effort from a service perspective in selling service work first um so we're we're really optimistic about the long-term growth algorithm for the international business um and we have expectations that it'll be no different than what we're seeing um in north america do you add anything to that yeah i would i would just add that like we tried to hit on it you know on the last call but the north american business is just

Speaker 1

seeing so much strength i mean they've been growing above algorithm for a year plus and you know russ russ mentioned it but the inspection service and monitoring you know that business is just super steady continues to grow in that mid to upper single digits like we would expect you know each and every quarter and the project environment is just super robust and you know we're taking advantage of that right now but it's going to convert to a lot of good long-term you of recurring revenue on the inspection and service side.

Speaker 3

I appreciate that. I do want to follow up on the inspection and services side of North America because, you know, as you noted, you have been outperforming what I think would be the overall market growth rate, whatever that might be. But it's quite robust, what you've seen on the ISM side. So what is the primary factors that have enabled you to gain share?

Speaker 1

If you could kind of list or bucket, what are the major contributors to this yeah i mean if you just think of just the industry and in general and how they go to market and what their strategy is most of the industry is going to be project focused right and so they have maybe they have 20 technicians and there's not inspection and service and project technicians there's just 20 technicians and so when they're focused on project work if you have a five hundred thousand dollar project opportunity they're certainly going to be focusing there and saying their technicians to that work versus the $1,000 inspection. Our business is the exact opposite where we have dedicated inspection sales leaders. We have dedicated inspectors that are not going to be pulled off of their, you know, inspections to go do project work. And same thing on the service side, you have dedicated service technicians. And so the way we are going to market is our inspection sales leaders, they're out there actively knocking on the already built environment trying to take share from our competitors who again are focused on on project work and what you typically see is these businesses that are focused on project work there may be maybe they keep delaying the inspection a week or they don't show up on time at 6 a.m when you need to be running water into the parking lot to make sure you got enough pressure and you got a cone off an area of the parking lot and so it causes disruption and it's like really an inconvenience to the facility manager if you're not doing the simple stuff right like showing up on time showing up the day you're supposed to and so our focus on it where we have people selling it and we have technicians that are dedicated to it really helps us take share because that quality of service is going to be much higher when you when you have a heightened focus on and so like when I just think about our growth ahead of market I mean obviously you have price you know which is going to be three four five percent each year which is going to be baked into your inspection contracts you're going to have some growth just from market growth and new facilities, you know, being built. And then the rest of the growth is going to be from our inspection sales leaders taking share. And so that focus on it and our go-to-market strategy being inspection first and inspection focused is what allows us to continue to grow ahead of just general market growth in the industry.

Speaker 2

And the only thing I would add to that, Stephanie, is the infrastructure required, like the back office infrastructure that's required to support a really robust inspection and service business is significantly different than what's required to support a project business and so you know just reminding everybody that the industry remains highly fragmented you know while there are some you know we have some public company peers specifically mcore that's in this space but mcore's business is project-based you know they're not as interested in doing the inspection service work you know most of our competitors are still small family run businesses and to make the investment in people and personnel that it takes to you know manage a robust inspection and service department like the average inspection ticket is a thousand dollars you know like yes when we do the inspection for meta it might be two hundred thousand dollars but your average ticket size is a thousand bucks and so you need somebody to sell that Then when you sell it, you need somebody to dispatch the inspector. Then once you do the work, you obviously have a deficiency report that you have to process, but then you have an invoice that you have to generate. You have to collect that. Collecting $1,000 receivable is like a pain in the ass. And so you have to have the infrastructure that's built to support that. And a small family-run business that's doing $15 or $20 million in revenue, they're typically not interested and willing to make the investment. that they need to make to really have a robust inspection service business.

Speaker 3

I have a list of follow-ups to both your answers, but I think the first follow-up that I would maybe start with would be, I think it's an area that you talk about quite a bit, and this is a people business, and you mentioned it earlier, and culture does matter. So maybe you could talk a little bit about how you kind of make sure that the culture and then obviously translates into service every day consistently outperforms your peers.

Speaker 2

Well, culture trumps everything. And our culture is centered on our purpose of building great leaders. And we have 32,000, 33,000 teammates across the globe now. We endeavor to invest in each and every one of them as a leader and as a human being. And I think that our culture differentiates us from our peers. and it's something that like we actually walk the walk as it relates to investing you know in our people and you know when you when you're in an environment where people talk about the tightness of the labor market and everything else the number one most important thing you can do is keep the people that you have and if you're not investing in those people you're not going to keep them not in today's not in today's world and especially the men and women that are working in the field Like there's nobody in our industry that's making the same investment in their field leaders like API is. And I think that that is something that I take a tremendous amount of pride in. And, you know, like not uncommon at a conference like this for somebody like yourself to say, what keeps you awake at night? And most people would say, you know, labor and can't find skilled labor and all this other stuff. I would tell you, culture for us as we continue to grow API, you know, towards our goal of 10 billion in revenue by 2028, which is clearly in sight. You know, investing in our culture and strengthening our culture is, you know, our number one mandate. And, you know, we do a lot of bolt on M&A and, and, you know, the most important, you know, you can talk about the financial profile of the business, you can talk about all of the other stuff. But at the end of the day, culture values and fit and finding people that align with your values is the most important aspect of what we do from an M&A perspective. And I, you know, it's obviously as the company's gotten bigger, it's much more difficult for me to touch every one of our acquisitions. But like, trust me, I try to spend time with every potential acquisition that we're going to make. and I hope I don't offend anybody by my next comment but like at API I have a no asshole rule and I have no interest at this stage of my career much less 10 years ago but I have no interest in working with assholes and and that's like you want to screw up your culture hire an asshole or acquire an asshole and and excuse me but sorry about that and our chief people officer is joining us with us today and we're having a meeting with somebody and I said

Speaker 3

I have a no asshole rule and she said you know there's a book called the no asshole rule and I said no I actually don't so she bought it for me and so I thought I wrote it no but I think it is an important point and it's actually I did want to touch on this as well because Adam you talked about maybe some of the efforts that have been driving your your outperformance from an organic growth standpoint and one of which is some of the efforts from your sales leaders and taking sheriff so at your analyst day you did talk about maybe increasing the number of sales people that you have so maybe just remind us you know where you are in the terms of kind of taking some of those concerted efforts to ramp up those dedicated inspections um the ism sales people yeah so

Speaker 1

courtney brogard who leads she's she's kind of the one that invent is probably not the right word but invented the inspection first mindset and she was she implemented that at the sacramento branch that she was at and you know that the idea kind of grew from there and so she leads the inspection sales you know across her North America business she has a bottoms-up bill like she has her 2026 targets as how many IMAs we call them IMAs inspection sales leaders how many IMAs do we want and she does that bottoms up so Minneapolis and I'm kind of just making these numbers up but Minneapolis maybe she wants three IMAs and we have two so you got to add one there in Phoenix maybe we have one and she wants three so you got to add two there so she has her bottoms up build and i would say that's like a 2026 target and as we continue to grow and continue to build that um you know inspection book of business that ima count is is going to continue to grow with it and so we're making good progress i mean there's obviously a focus on on hiring these people and and and training them up and she has a monthly refresher and so this monthly refresher is for new IMA so somebody that's you know a couple weeks in and it's a three-day program where she's going through with them like what how do you attack your market how do you spend your time and so she's going through the playbook it's also for people that are six months into the program and so these people have been out there trying to sell they have wins and they have areas where they're struggling and so it's helping them work through like where are you struggling and you're with your peers as well right you're with other IMAs that are new to the program and so there's a lot of just refreshing talking through like how to attack where you're struggling and also just meeting other people you know that are IMAs and there's a lot of good kind of networking there as well to kind of share ideas and everything so she's got the program built out and that continues to be a focus on kind of growing that IMA headcount that so that can continue to support that double digit inspection girl she's got big aspirations and uh if you're ever having a bad day you should pick up the phone and call her because in seven minutes you'll feel better um about about the future and

Speaker 2

uh one one thing i would just remind everybody it's just like you know like you know he used phoenix as an example like we have one and we want three like it's not as easy as just saying we're going to go hire two, two new sales leaders. And because when a sales, inspection sales leader is fully ramped up, you need four inspectors to support the work that they sell once they're fully ramped up. It's going to take them some time to get ramped up, but when they're fully ramped up, you need four inspectors. And, you know, we consistently say that we're going to get three to four dollars worth of service work for every dollar on average of inspection work that we do from from that customer over a 12-month period and which means that for every inspector that you add you need to add someplace between three and four service technicians so you know so for every sales leader you're adding you're adding someplace between 12 and 16 people to your team and if it's a 40 or 50 million dollar branch like phoenix's it's probably not probably not that big of a deal if it's a 10 million dollar branch like we have in say jackson tennessee that's going to be a bigger left yeah you know so it's not it's not as easy as saying go out and hire another 40 inspection inspection sales people because you've got to have the infrastructure behind it to build to build that out and uh we are making really good progress on it and there's no question in my mind that we'll achieve our goals and our objectives. But there's a lot more to it than just hiring sales leaders. The other component of it that I'll mention, if anybody's thinking about this, there's not a single market that any one firm in this country, I don't care what people tell you, nobody's got more than 10% share in any single market. I tell the story, and I know Buffalo's not Houston, Texas, But we have owned a business in Buffalo for over 20 years now. And we made a small bolt-on acquisition there like three or four years ago. I can't even remember. But they were hands in the air. Like, we own Buffalo. We own Buffalo. And our sales leader went out there and they did a market study on the Buffalo market to see how much share that we had. Four percent. But they owned Buffalo.

Speaker 3

And so, like, there's so much opportunity for us to keep taking share. um like not in his career will will we run out of opportunity notice i didn't say my career but his career so so maybe jumping to the elevator side so another ask if your portfolio we even touched on so i believe you expanded an elevator in 2024 my ears are blurring together but i think around that time how is that expansion gone the last couple years you know are you finding elevator to be as attractive as you know what you're seeing and maybe the fire some of your other end markets uh i really remain bullish on the elevator space um you know there's there's

Speaker 2

ample opportunity for us to to grow that business i mean that's a 275 million ish business for us as we sit here today um we've said publicly that we expect to build a billion dollar you know platform in the space. We've done a handful of acquisitions in the space. One, we called it a tweener. That's about a year ago. We did more of a pure play bolt-on, you know, this year. We've bought some accounts and some other things like that in the space. So I would tell you that we're in the bottom of the first inning. We're just getting cranked up and getting going. We've added to the to the leadership team there to build out the support structure that that we need in order for us to to really accelerate the business and you know I I'm very purposeful in my remarks about like bolt-on M&A in the elevator space like so we did our first pure bolt-on and now we're in the process of so to speak integrating that and we want to make sure that we do a good job of integrating that before we go do another bolt-on because you know if we don't take a walk before you run approach to that one of the worst things you can do is overload a business with you know like all of a sudden it's like hey stephanie here's three bolt-ons good luck you know and that would screw up the bolt-ons and it would screw up the core business and so So we are being very purposeful in taking a walk-before-you-run approach. And once we get through this integration, we'll kind of pick up our head, say, how did that go? And, you know, it's going well. But then we'll start charging forward and we'll do some more. So very optimistic, though.

Speaker 3

Maybe just to round out the conversation thus far, Can you talk a little bit about the cross-selling opportunity, whether it's the cross-buyer or safety, but also maybe some of the growth that you're seeing on the project side, or whether it's the data centers or the like? Just talk about, is there a future opportunity where you could see some incremental growth in cross-selling?

Speaker 2

So we have a business development leader that kind of sits with one foot on each side of the fence, both primarily in North America, but he's got one foot on each side of the fence as it relates to safety services and specialty. And I would say that he spends, I don't know, 80% of his time, 85% of his time on the data center space. And I think that's probably a little bit of a, I don't know if it's a secret or not. We're not trying to keep it a secret, but there's probably more opportunity in our specialty business on the data center front than there is even in the safety services from a fire and security perspective. So having him, you know, kind of working on both sides of the fence on both pieces of our business has been super helpful in creating opportunities, probably even more so for the specialty business than the safety business. So that's happening, and we're seeing the results of that kind of show up probably more in our backlog today than, so to speak, flowing through in our P&L at this moment. As it relates to the elevator space, and because a lot of people have an interest in that, as we continue to make progress in co-locating our elevator businesses with our fire business, we see more opportunities from a cross-selling perspective. so like every elevator mod has fire retrofit opportunities and but in in just human nature is like if I don't have a relationship with you like say you work for the elevator or the fire business and I'm the elevator person and I don't have a relationship with you and I don't know if you're going to do a good job or not so good job the chances of me bringing you into one of my really good customers and one of my good customer relationships is probably not very high but if we co-locate and we start having potluck on Friday afternoon I don't know if you guys have potluck where you're from or not but on Friday afternoon you start to get to know people you build trust and then you start bringing you know you're more willing to bring people into your client relationships and so as we continue to make progress in co-locating our fire and our elevator business, we continue to see more and more cross-selling opportunities, you know, generated. And that'll just take a little bit more time, but we're definitely making progress on it.

Speaker 1

I would just add, too, I mean, if you, and it's not, you know, some of this is M&A, too, but if you just, like, pulled up a map of the API locations, there's not a ton of dots that do fire life safety, electronic security, elevator and escalator services at scale. and so the opportunity there is like it's ginormous in terms of like some of it is going to be you know cross-selling between the branches some of it's going to be adding people organically maybe you gotta maybe you gotta add a fire alarm technician to start getting more fire alarm capabilities some of it's going to be um through mna you're going to add capabilities into certain geographies but like we have a we have a pretty good footprint but we don't have a ton of branches

Speaker 3

is where you do all those services that we want to be offering at scale and so the just the opportunity there is um to just keep making progress towards that is is is really big i do want to touch a bit on the margin front obviously you've given your your 10 16 60 targets and of that is the 16 margin target by 2028 um you know based on the guidance for this year it does assume you know you know a slight acceleration and expand margin expansion next year and the year after, but relatively stable. But what closes the gap from the margin of performance today to eventually hit that 16% target?

Speaker 2

I think it's the same levers we've been pulling. And I mean, you know, I'm not trying to dodge your question or escape your question by any stretch of imagination. It starts with project selection and customer selection. We need to continue to grow inspection service and monitoring as a percentage of our mix, which is tough based on the large project environment that we have. Even though we're getting better gross margins on like our data center work, it's still not the same margin as you get on say an inspection. So that's a bit of a headwind for us right now, but not overly concerned about it. It's enabling, you know, from a business process perspective, you know, we need to get common business systems so we can take advantage of our size and scale. We don't talk about this enough, but we actually have opened up a global capability center in Bangalore that's going to allow us to leverage our scale even more so that we have, you know, quite a few team members, you know, working at now. I'm super impressed with the quality of our team in Bangalore. It's taking care of procurements and opportunity we talk about branch optimization all the time but we have a goal that we want every one of our branches to get to 20 we still have some opportunity there strategic m&a you know matters and making sure that we're being wise about the companies that we buy and add to the api family matters and i tell people this all the time that we have an opportunity to just be better and you know one of the one of my greatest strengths is also one of my greatest weaknesses is that I'm never satisfied and it's a great strength if you're an investor because you know somebody's going to be continuing to drive the business but sometimes the weakness part of it

Speaker 3

comes where I don't stop to celebrate the wins and it's tough for me to stop and sometimes and celebrate the wins but we do have opportunity to to just be better and then last question you know focusing on M&A you touched on this and it's a variety of different factors but you know what is your appetite potentially expanding into whether it's a vertical or maybe you have a little bit of exposure now but it's not as large as fire or elevator you know what's the general maybe larger skill appetite for M&A strategy like for another leg under the stool yes um well um number one I'm just gonna take one step back before I take a step forward it's like

Speaker 2

there is so much room for us. Adam talked a little bit about it, but there's so much room for us right now. If you look at our North American business, we have a very small security footprint, you know, so there's a tremendous opportunity for us to build our security footprint from an M&A perspective. If you look at, you know, we just made the WTEC acquisition that adds fire suppression capabilities for us in Western Europe, but like we still have a ways to go. And so there's a lot of opportunity there. We continue to do work on what is the next leg under the stool look like and if I if I knew what it kind of directionally where we were going I would definitely foreshadow it and you know but right now I I would be at a loss to tell you what that next leg of the stool is. If it if we find it would we have interest in potentially pursuing it and doing something? For sure you know our our balance sheet is very very strong you know we have a lot of dry powder and a lot of capability um you know as we sit here right now today and um but i don't know what that next like looks like but we continue to look and continue to do work great well that about wraps up time thank you both for your time thank you thanks definitely thank you for being here appreciate your interest