Conference Transcript - APG 2026-06-03

Tim Mulrooney, Analyst — William Blair

Well, good morning everyone, and thanks for joining. I'm the analyst Tim Mulroney that covers API Group here at William Blair. I'm required to inform you that for a complete list of research disclosures and conflicts of interest to visit our website at williamblair.com. And we're very pleased to have with us this morning at API Group, CEO Russ Becker, and Adam Walters, Senior Director of IR. We picked up API Group two, maybe three years ago, still relatively early in the story and got very excited about the opportunity. I think you all were trading it to about 12 times EBITDA at that time.

Russ Becker, CEO

So you're taking credit?

Tim Mulrooney, Analyst — William Blair

Full credit. But we were excited because what we saw in this business was, yeah, you had the specialty business which is you know can be I think potentially more cyclical and you know maybe more of a construction type business but then you have this fire and life safety business which we viewed as a real gem and very similar to many of these other types of high quality services businesses that get very high multiples well the secrets out because now you've re-rated and I think everyone you know the market is valuing the that business more like how they value many of these other high quality services businesses that are out there today and you know I'm really excited to dig in with you on both sides the the safety and the specialty side but before we do that this is a generalist conference we're gonna do this as a fireside chat and then we have a breakout session by the way after this at the Burnham A room where we can dig in more detail we're gonna do this as a fireside chat but maybe if you don't mind just spending a couple minutes to give an overview on the business just in case there's anyone out here that's not so

Russ Becker, CEO

familiar with api group uh sure i'm happy to do that thanks for having us um tim as well and thank you for everybody uh for for coming and showing interest in in the company um i um my name is russ becker and i'm the president ceo of api i have actually been with this company for over 30 years. I started in one of our operating businesses and have really been serving the company in a similar capacity that I am today since 2002. So I've seen the company through a tremendous amount of change during that period of time when I think when I started with API we were about a 600 million dollar 3% business and last year you know we finished at like 7.9 billion in revenue and a 13.2% EBITDA margin. So I attribute a lot of that growth and improvement in business performance to our company's enduring purpose, which is building great leaders and the investment that we make in our people as human beings and as leaders. And leadership development has been a huge part of our company since I started at the parent company in 2002 and I would tell you that it defines our culture and who we are and our culture is something that we take great pride in and continuing to grow and strengthen as we continue to grow as a company our business is really organized into two different groups if you will segments. We have our safety services segment, which is our fire protection, fire life safety and security business that accounts for about 70 percent of our total revenue. The other piece of our business is specialty services, which is where our infrastructure business lies, our HVAC business-wise, we do HVAC work, we do natural gas distribution, replacement, retrofit work, potable water system upgrades, fiber optics, telecommunication. We have a business that's in manufacturing, structural steel manufacturing as well. Last year 54% of our revenue came from inspection, service and monitoring. Our goal and priority is to build a very robust inspection, service, and monitoring business across our entire portfolio. We have established our 2028 shareholder value creation targets are what we call 10, 16, 60 plus. The 10 stands for $10 billion in revenue with a 16 percent EBITDA margin with our long-term target of 60 percent of our revenue coming from inspection, service, and monitoring. And the company operates in over 20 countries today that will expand more with the WTEC acquisition that was announced just a few weeks back. um we are um you know our company traditionally grows organically in the mid single digit range we also grow inorganically through M&A we have a long track record of winning in the uh in the M&A space we've probably done well over 200 acquisitions since I've been the CEO of the of the company um and that's something that um you know we see a lot of opportunity for continued growth for our business. And it's probably the last thing that I'll lead you with is that we have what we call an inspection first mindset at API. And what that means is these hotels are just terrible examples because the fire systems are different in here. But like if you took a 50,000 square foot medical office building, the fire life safety system in that building is required by law to be inspected for functionality and operability at least once a year and most likely certain components of it like the fire alarm system twice a year and we are trying to sell inspections those inspections to the already built environment as our lead into that client relationship versus the other way around and traditionally in the industry most people try to to go out and bid and win I hate the word bid and we can talk about that Tim but bid and win new construction work when they're X when they get done with executing the new construction work they try to sell that end user and client an inspection and service contract we're doing it just the opposite way we're trying to win the inspections with that existing building owner and developing a relationship because we know for every dollar of inspection revenue we generate, we're going to generate someplace between three and four dollars worth of service work as a pull through. And if we do a really good job with that client, we're going to develop a sticky relationship with them. So when they do have new expansion needs or retrofit needs, we're going to be in a position based on our relationship to negotiate the work versus compete with for the work on low price and that is a significant difference in our in our business and our in our business model so it's a great company

Tim Mulrooney, Analyst — William Blair

and yeah yeah no that's a really good overview thank you so and I actually do have a whole so on the quarterly conference calls I have a list in my notes that says don't say these words on the conference call or Russ will yell at you publicly on the conference call.

Russ Becker, CEO

I don't yell. Bid is, well. I knee knock, but I don't yell.

Tim Mulrooney, Analyst — William Blair

Bid is one of them.

Russ Becker, CEO

I hate the word.

Tim Mulrooney, Analyst — William Blair

Yeah, you don't like the word bid. They're not employees, they're teammates. Or they're leaders.

Russ Becker, CEO

They're leaders. Teammates are leaders. I do not use the word employee.

Tim Mulrooney, Analyst — William Blair

And I've actually heard that leadership training is, I've spoken to someone that's gone through it and it sounds like it's quite the experience. It's something I'd love to do someday actually. But wait-

Russ Becker, CEO

Are you gonna come to work for us first?

Tim Mulrooney, Analyst — William Blair

Oh, I can't just do it? Okay, well, put that in my back pocket. But yeah, why don't you use the word bid? And, you know, why do you think it's better to go to market with an inspection first mindset? And when did you decide to do that? i mean have you always done that is that something that you've done more recently i'd love to hear a

Russ Becker, CEO

little bit about that journey so on the word bid um to start is like that means that you're going to buy our services because we have the cheapest price yep and like we have no we have no interest in that you associate that with low price work yeah and so we want our clients to choose to buy our services because we present the best value you know and there's a lot that comes with that it could be safely delivering the work it could be your speed to execute the work in timing and you know I'm sure at some time I'm sure at some point somebody's gonna want to talk about data centers and but you know like you're yeah it's like your ability to execute is more important than you know what your cost is for most of the providers or end users so but bid is just like it's actually forbidden to be used at API and so like if I will correct somebody if they use the word bid and because there's something your words matter and you know just this whole idea of we're proposing and we're gonna sell our services based on the value and what we bring to that particular client inspections first you know the reality of it is I think we first set a goal in 2006 that we wanted 50% of our revenue to come from what we called service work at the time so we didn't even differentiate at that time between inspection and service work and I think our mindset around you know like doing the inspections and stuff like that was more like we need to do the inspections to get the service work and we didn't look at and view winning the inspections that we could actually generate like a really good gross margin and really really good profitable you know component of our of our business and that that changed and evolved you know over over time where it really got a tremendous amount of energy is when the woman who leads our national inspection sales team now um came to work for the for the company and like i'd love to tell everybody in this room that i'm super strict i'm just like the most strategic guy like this whole idea of inspections first was our sales leaders not mine and uh and it was because she's so damn good at it and and it started literally started in one of our branches where she showed up as an inspection sales leader and she did such a good job selling inspections and then that morphed into she's the inspection sales leader for that branch and then the guy that was actually running that business was like hey you're doing a kick-ass job how about you take that idea to this branch in this branch yep and so it blossomed and then it's like hey you're doing a great job how about we take it to these next three branches well then that happened to be the guy who's running our safety services segment was actually running Las Vegas at the time. And we promoted him to lead one of our operating units, our businesses out in the Northeast. So he moved with his wife to New York. And he's like, hey, how about you come out here and you bring this to our business? And so it blossomed there. And then we promoted the guy that was running that company to run the segment and he's like well how about if we make this a national role you know and it and it just it's taken on a life of its own and and so it's just it's really just evolved over time and and I would say that you know it got going with earnest in

Tim Mulrooney, Analyst — William Blair

trying to think maybe 2016 okay so you've been doing this for 10 years has been this uh slow transition to an inspection first mindset and now you have x percent of branches that you'd consider what's the term you use bulletproof where your gross margin gross profit dollars from inspection and sales exceed the SG&A of

Russ Becker, CEO

the branch. 100% that's that's we that's we don't talk about this enough when we talk about our company and our business but like a branch literally becomes bulletproof when the inspection servicing monitoring business when when those departments if you will generate enough gross margin to cover the SG&A of the entire branch yeah it becomes bulletproof because then then the project work and the project opportunities that that branch has they can be even more selective and then the gross margins on that project work when when they're being more selective, expand. And they get better. And so then the profitability of the branch, overarching profitability of the branch expands. It gets even better. And if you look at, you know, Adam's slide deck, it's, you know, there's a slide in there that shows the evolution of a branch. And it has kind of those points earmarked along that timeline that shows, but in like this particular case, the gross margins on the project work grew by 10 percentage points.

Tim Mulrooney, Analyst — William Blair

See, that's the thing about this story that I think is maybe a little bit underappreciated. Everyone understands inherently that the service work is 10 percentage points margin, gross margin, higher than the project work. And so as your service work is growing high single digit and your project work is growing low single digit, there's going to be some natural margin accretion from that. But I think the part that's maybe less well appreciated is how much the being more disciplined on the projects once these branches become bulletproof, how much that's contributing to the margin as well. You gave me a statistic one time. Maybe you can share it here. What did your average project margin look like when you took over as CEO relative to today?

Russ Becker, CEO

Well, I can't imagine that it was me that gave you that statistic because I don't know. Oh, okay.

Tim Mulrooney, Analyst — William Blair

And but OK, I mean, so I think it was a dramatic number, like mid single digit or maybe it was average branch profitability or something like that. But it sounded like it was very low. And the thought being like, well, people thought it would be so hard to just get to 10 percent over time.

Russ Becker, CEO

And now here you are sitting at. Well, that was that was like the the company was a three percent business when I started in 2002. 2002, and I think I shared that in my opening remarks, but yeah, you know, it's funny, and I know exactly what you're talking about, because, like, when I first came to API Group, like, this is going to maybe shock you, maybe it won't shock you, but, like, our financial goals as a company was 5%, and I was, at the time, we were privately held, and the majority shareholder of the business was a gentleman by the name of Lee Anderson, and I was up at his summer home with him and we spent some time he never has come into the office since I've been with the company and so I was up at his summer home we had some stuff work stuff to talk about and traditionally I would go and we'd spend a couple hours talking about work stuff and then I'd stay and have drinks and dinner and overnight and I'd get up early in the morning and drive back to Minneapolis and we were probably finishing up a scotch or something and I looked at him and I said I said, where did 5% come from? And he looks at me, and the gentleman had had my job before me, his name was Jeff, and he goes, I don't know, Jeff? And I'm like, I don't know. I'm like, seems pretty low. And I said, for how much risk we take every day? I said, 5% seems pretty low. And like, this is a true story. And he looks at me, says, well, what do you think it should be? and I said I don't know let's start with 10 he goes okay so I literally like literally go back to the office now I'm looking at this guy right here he's pretty young and so it's like he doesn't even know what a fax machine is I'm I'm guessing but you know some of the cagey veterans I see over here you know so write up a memo send send my memo out via fax there was like really email was like in its infancy, and I sent out a fax or memo to everybody saying our new financial target is 10%. Everybody bitched. Like, I'm not kidding you. Everybody can't be done. Industry average is 3%. And then all of a sudden, one of our businesses climbs, climbs, climbs, climbs, gets to 10. And this guy's still running this business to this day. But the best part about it was he didn't stop at 10. He just kept on going and his business got to 20 and and it's just like in at API we publish our financial results so every one of our business leaders can see exactly how their company stacks up against their peers. They can see exactly how every branch stacks up with every other branch. We stack rank them highest performance to lowest performance. We actually color code it. If you're if you're meeting our goals you're in green if you're trending in the right direction you're in yellow and if you're missing the target you're in pink and the only reason you're in pink is that if you put it in red you can't see the numbers you know and and so so you can see and like if you have a competitive bone in your body like you don't want to be in the bottom third right and so you create this kind of natural draft that pulls people along and our business has just continued to grow as we continue to you know increase the the expectations and you know we we we believe and we know that in our goal is that every one of our branches will operate at 20% now we're not there and clearly you know what I mean and you know I suspect we'll always have you know you know a challenge or something like that where maybe you don't have the right leader and you have to make some changes and you you know or somebody does a poor job on customer selection and gets gets us in trouble and we have to work our way through that um but like it's real and um and you know this is a people-centered business and uh um when you show people you know you show them you know kind of the path and you know share best practices and you can create an environment of collaboration like there's a lot of opportunity and a lot of opportunities it's a great company and with a lot of you know continued upside

Tim Mulrooney, Analyst — William Blair

i think that that's part of the story that investors like so much is watching this march towards profitability when you came out with your 2025 targets for 13 percent

Russ Becker, CEO

was that 2025 yeah 13% and 25 yep yep 1360 80 we called it 1360 came out with that in like 22

Tim Mulrooney, Analyst — William Blair

and and there were a lot of skeptics how are they going to get to 13 and yet you did it now the target is 16 by 2028 and I don't have 16 in my model I don't know how you're going to do it but it I don't have any doubt that you are what's up what's up with this I'm just saying like you guys keep beating the expectation and delivering and I think a lot of it goes back to this conversation about it's a people business and it's about culture and leadership and you know driving this competitive spirit in the business and I have no doubt that you will hit the 16 number however I will note that that would be upside to my model and to consensus if you do do it so that's the opportunity sounds like a little bit of a throwdown I like my chances so all right maybe we should get some actual numbers here so we got eight minutes left you know high single digit and services so if we're looking at the US Fire and Life Safety business you got high single-digit growth in services that you're expecting and low single digit growth in the projects business is that correct that's correct that's what

Russ Becker, CEO

we that's that's the guidance we give our businesses that's the guidance you

Tim Mulrooney, Analyst — William Blair

give your businesses so that kind of equates to a mid single digit growth for the full year though I will note that you know the comps get tougher in the second half of the year for that business so can you just help bridge that gap for us between the fact that the comps are getting difficult more difficult but you still expect that mid

Russ Becker, CEO

single digit growth for the full year yeah so i mean if you break it out into the two parts that you talked about the inspection and service business like that just continues to like it's steady eddie you know i mean like we continue to grow that in the high single digit range it starts with the you know we talked about the inspection first flywheel it starts with that and our inspection sales leaders continue to knock on the already built environment um you know take share you know it's continue to push price and that business continues to just be super steady and grow at that high single digit clip um talked about the comps get tougher obviously i would say the you know the project environment right now i would say is more robust than normal and so um You know, there's a lot of good work out there, and we talk about end markets all the time, and focusing on the right end markets definitely matters, and the end markets we're focusing on are very robust right now, so that the project business is growing more than low single digits like the long-term algorithm would suggest. And so, you know, we see in the work we're doing right now, we see in the backlog, there's just a lot of good work out there, whether it's data center, you know, advanced manufacturing, aviation, there's just a lot of good project work out there. And we're taking advantage of that. And that's where you kind of, you know, even though it is tougher comps, we're still projected to, you know, continue with the mid-single-digit growth throughout the year.

Tim Mulrooney, Analyst — William Blair

Yep, that makes sense. Maybe you can talk a little bit about those end markets. I mean, your data center business. you know uh i can't remember the name i think you said it was five percent of revenue a few years ago and then seven and now it's going to be closer to ten percent this year um i don't know how that splits between your specialty business and your safety business but presumably some of that is in safety, is that helping there on the project side?

Russ Becker, CEO

Yeah, for sure. I mean, our best guess, like you mentioned, is 10% is what will land for the year in terms of percentage revenue coming from data center. And it's good work for both segments. I mean, like if you, I would say specialty is probably a little bit higher than 10%, maybe they're 11, 12% of their work is coming from data center and safety is a touch lower, maybe eight, 9% of their work is coming from data center. But it's really good opportunities for both businesses. I mean, every data center needs a fire life safety system, right? So they have sprinkler systems, fire alarm detection systems. And, you know, we're doing the installation lab. We've also been doing the inspection service for a lot of these hyperscalers, you know, for a long time. So it's good existing customer relationships that we already have. And so when these new data centers are being built, you know, we already have a relationship with the customer. And so we're coming in and doing the, you know, the installation. and then on the specialty side a lot of good work there as well there's you know fiber optic cabling that goes into these data centers you know around the rain into the server rack that we're doing we have an HVAC business that'll do a little bit of data center work every year our steel fabrication business does data center work so good opportunities across across both segments and I would also just add we have a business development leader who he's he's got a lot of good relationships with like these hyperscalers with general contractors and he's been kind of coordinating um you know our sister companies in terms of we have a data center opportunity in monroe louisiana who should we be getting involved um like maybe one of the fire life safety companies has a relationship there but there's opportunities for our specialty businesses um to get involved as well so he's been doing an awesome job kind of coordinating across our you know all of our companies and you know making sure we're kind of attacking these opportunities you know as a kind of a coordinated group okay all right that's helpful maybe in the

Tim Mulrooney, Analyst — William Blair

last couple of minutes here you know I know M&A is a big topic of conversation and you know an important component to your 10 billion dollar target by 2028 certainly are on your way there I mean you've announced a few large acquisitions this year so far Or, you know, usually when I see a company announce this much, you know, it's not even a balance sheet conversation. It's like a cultural and an integration conversation. Is it fair to assume that we're, you know, hitting the pause button here for a while while you work on those? Or do you have more appetite for M&A this year?

Russ Becker, CEO

Oh, we have more appetite. and um i mean i declare i don't um you want me to hesitate no and uh and uh i would tell you like um like the three the three transactions that we announced that are that are somewhat larger like i don't even like like they're not that big you know what i mean and you know as it relates to um it's they're not like chubb-esque you know what i mean they're not like at the time we bought Chubb that was a two billion dollar company it operated in 20 different countries and you know you could argue that there's an element of complexity there that I feel like we've done a really nice job of of navigating and I'm really pleased with where that's at like the WTEC acquisition is a fire suppression business that's based in Mullinger Ireland which is just north of Dublin and Ted I met Ted Wright their CEO his family founded the company so So it's actually got family origins, even though we bought the firm from a private equity firm. And Ted's been with it. Ted and his brother actually bought his parents out, and then Ted brought his brother out. It does a few things for us. It brings fire suppression, i.e. sprinkler capabilities to our business in Western Europe that we don't have that level of expertise that we need. actually Ted is like an entrepreneur through and through like so he's gonna bring that mindset to to our business which I think will be really really help healthy for us you know like I don't that business you know had been publicly traded sat underneath you know United Technologies and carrier and became pretty corporate II to be honest with him and and so he's gonna bring a little bit of that entrepreneurship to to to the company and to that culture which which is needed but it's not that big a business and like ted fits our culture like through and through he's already participated in our leader labs and and things like that so um and i was there um you know at their um they had a planning session in portugal back a month or so ago and i flew over to portugal for the for the meeting like his people are like they're just cut from the same cloth, like just wonderful, wonderful people. Um, and then, um, Onyx, um, which is a Canadian based firm. Um, I've known Brian Chu, um, their CEO since probably 2017, um, when he was actually with Brookfield. Um, and, uh, and so we've known that firm and stayed in touch with that firm for many many years and when it actually sold the first it was recently sold and then we bought it 18 months after right um we just we passed on it at the time because we were busy integrating our existing business in canada and we just didn't feel like we had the bandwidth to to stomach it so we i feel like we showed good discipline and saying we couldn't we had a relationship with Blackstone that goes back to the Chubb acquisition and that presented itself and so we were able to to buy that business like you know when we did based on that relationship and then Certisite which was announced at the end of the year and closed on here what was it February 1st and you know that business is like inspection first that's the beauty of that business it's like a center of the fairway transaction for us it's not again it's not that big it's geographically complementary to our existing portfolio so minimal overlap it's a non-union business it's strong in extinguishers and portables which is an ad for us so there's a lot to it but it's just you know it's like that one's already rocking and rolling and you know one of the things that we have to to you you know, sell, so to speak, to these owners is really centered on our leadership development efforts. And the fact that we have a deep bench and succession planning and all that stuff that comes with it is attractive, you know, to these folks. And not everybody wants to, you know, be in this world called private equity for forever. And I think one of the things that you'll hear us the words that you hear us use all the time when we're pitching why should you sell us is that we're a forever home and and I actually stole that from one of the guys from the elevator business we had him in actually presenting to the to our board shortly after the acquisition of elevated back a couple couple years ago yeah and his words to our board was we found our forever home and and I thought it was pretty good so I grabbed it yeah yeah so so we have a lot of bandwidth and and we've got a lot of dry powder a balance sheet is in a great great place and and for us you know that's like our number one priority from when you think about how we're gonna use our capital yep is is would be M&A yep but we've been active in the market buying back

Tim Mulrooney, Analyst — William Blair

some shares as well. Okay, all right. That's a good color. I know we're out of time, but thank you very much, Russ.

Russ Becker, CEO

Yeah, thank you.