Q1 2024 APi Group Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to E. P. I group first quarter 'twenty 'twenty four financial results Conference call. All participants are now in a listen only mode until the question and answer session. Please note. This call is being recorded I will be standing by should you need any assistance.
I will now turn the call over to Adam fee, Vice President of Investor Relations at a P. I agree. Please go ahead.
Adam Fee: Thank you good morning, everyone and thank you for joining our first quarter 2024 earnings Conference call. Joining me on the call today are Russ Becker, our president and CEO, Kevin Krumm, Our executive Vice President and Chief Financial Officer, and Sir Martin Franklin and Jim When we are born co chairs before we begin I would like to remind.
Adam Fee: And you that certain statements in the company's earnings press release announcements and on this call are forward looking statements, which are based on expectations intentions and projections regarding the companys 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.
Adam Fee: 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 detailed material risks that may cause our future results to differ from our expectations. Our statements RASM today may <unk> and we.
Adam Fee: <unk> no obligation to update any forward looking statements, we may make except as required by law.
Adam Fee: As a reminder, we have posted a presentation detailing our first quarter financial performance and guidance for our second quarter and full year on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our <unk>.
Adam Fee: Yes release, and our presentation now.
Adam Fee: Now my pleasure to turn the call over to Russ.
Russell A. Becker: Thank you Adam Good morning, everyone. Thank you for taking the time to join our call. This morning.
Russell A. Becker: Before we provide you with a summary of our first quarter results I would like to thank our approximately 29000 leaders for their unwavering commitment to API.
Russell A. Becker: We remain grateful for their hard work and effort.
Russell A. Becker: We believe that taking care of our leaders results and our leaders taking care of our customers. This is one of the foundational principles by which we will continue to enhance shareholder value.
Russell A. Becker: Next week March Epi's ninth straight year of celebrating safety week.
Russell A. Becker: As I've said before the safety health and wellbeing of each of our team members remains our number one value.
Russell A. Becker: Our commitment to safety drive industry, leading safety outcomes across the organization.
Russell A. Becker: At the end of 2023, our total recordable incident rate or T. Our IR was below 1.0, which is significantly better than the industry average we continue to strive for zero incidents we.
Russell A. Becker: We believe our leadership, making epi a safer place to work.
Russell A. Becker: Along with the investment we make in each of our leaders development contributes to our low turnover relative to industry benchmarks.
Russell A. Becker: As we've said before we remain relentlessly focused on our long term $13 60, 80 value creation targets, which include the following adjusted.
Russell A. Becker: Adjusted EBITDA margin of 13% or more in 2025.
Russell A. Becker: Long term organic revenue growth above the industry average.
Russell A. Becker: Long term revenues up 60% from inspection service and monitoring.
Russell A. Becker: Finally long term adjusted free cash flow conversion of 80%.
Russell A. Becker: Our routine are routinely speak to our field leaders about how they can help us deliver on this strategy when I'm visiting our locations around the world.
Russell A. Becker: Turning to the first quarter in line with our 2024 plan.
Russell A. Becker: Net revenues were essentially flat driven by approximately 3% organic growth in service revenues offset by divestitures lower revenues from declining material costs patch pass through and intentionally limiting organic growth in certain project related revenues.
Russell A. Becker: Beginning last year and continuing into this year, we continued our planned disciplined customer and project selection and our international International HVA C and specialty businesses.
Russell A. Becker: Importantly, we achieved our goal of double digit growth in core inspection revenues in our U S life safety business.
Russell A. Becker: This growth is key as we progress towards our long term goal of 60% of our total net revenues coming from inspection service and monitoring.
Russell A. Becker: In line with our strategic initiatives, we continue to see strong improvements in adjusted gross margin for the quarter.
Russell A. Becker: Up 390 basis points.
Russell A. Becker: The strong performance in gross margin led to record first quarter adjusted EBITDA margin of 10, 9% representing margin expansion of 180 basis points.
Russell A. Becker: The team continues to make meaningful meaningful progress executing our margin expansion initiatives and remains committed to building on that execution as we push towards our 13% or more adjusted EBITDA margin target in 2025.
Russell A. Becker: As a reminder, these initiatives include the following.
Russell A. Becker: Improved inspection service and monitoring revenue mix.
Russell A. Becker: Disciplined customer and project selection.
Russell A. Becker: Chubb value capture.
Russell A. Becker: Procurement systems and scale.
Russell A. Becker: Accretive M&A and selective business pruning and as I like to say, we can always just be better.
Russell A. Becker: On April 15th we entered the complementary and adjacent elevator and escalator services market with the announced acquisition of elevated facilities services group for $570 million we.
Russell A. Becker: We have long viewed the elevator and escalator service market is an attractive adjacency due to the highly recurring nature of the business driven by non discretionary statutorily driven demand.
Russell A. Becker: Elevated is expected to contribute approximately $220 million in annualized revenues and approximately 20% adjusted EBITDA margins.
Russell A. Becker: We believe elevated is an excellent platform opportunity for us to answer the $10 billion plus U S elevator and escalator services market and execute our bolt on M&A strategy at attractive multiples.
Russell A. Becker: We expect to build a $1 billion plus elevator and escalator services platform over the long term through a strong through a combination of strong organic growth.
Russell A. Becker: A long term cross sell opportunity with our existing life safety businesses and a robust M&A pipeline.
Russell A. Becker: Elevated elevate its targeted market elevate elevator and escalator services benefits from continuous safety and regulatory requirements.
Russell A. Becker: It services and aging installed base with 55% of U S vertical transportation units being over 20 years old.
Russell A. Becker: Elevated also benefits from increased demand due to the growth of urbanization declining durability and quality of elevators.
Russell A. Becker: And modernization projects being driven by bringing aged elevators to code and compliance with safety requirements.
Russell A. Becker: The acquisition is expected to be immediately accretive to our $13 60, 80 shareholder value creation framework.
Russell A. Becker: Elevated strong organic growth.
Russell A. Becker: Adjusted EBITDA margin profile of approximately 20%.
Russell A. Becker: 70% plus of revenue from inspection service and repair and an asset light business model driving strong adjusted free cash flow conversion is a great addition to API.
Russell A. Becker: In summary, I can I'm sure you can tell we are excited about elevated it has many of the same attractive characteristics as API and represents a continuation of our focus on building a robust line of businesses that provide mandatorily required life safety service.
Russell A. Becker: It benefits from its scale in a highly fragmented market.
Russell A. Becker: Its business is driven by regulatory demand and a loyal customer base it.
Russell A. Becker: It is led by an experienced leadership team and a highly skilled workforce.
Russell A. Becker: Intentionally used the word leadership team instead of management team because that API, we believe that leading and managing are fundamentally different and we aim to build great leaders throughout the organization.
Russell A. Becker: Along those lines elevated like API also maintains an unwavering focus on culture and developing its teammates throughout the organization.
Russell A. Becker: We will update full year 2024 guidance to include expected results of elevated following the close which we expect to occur late this quarter.
Russell A. Becker: During the first quarter. We also closed on a small divestiture in our specialty services segment, which was expected to contribute approximately $20 million in annual revenue.
Russell A. Becker: Similar to the divestiture completed in the fourth quarter. This business was highly cyclical and largely focused on large lower margin project work in the energy sector as.
Russell A. Becker: As we move forward, we remain focused on delivering both the 2024 plan and our long term 30, 60 80 financial targets.
Russell A. Becker: We are excited about our robust pipeline of opportunities for life safety security and elevator escalator services businesses, and we will continue to be thoughtful as we look for high quality margin accretive businesses and leaders to join the API family.
Russell A. Becker: I'd now like to hand, the call over to Kevin to discuss our first quarter financial results and guidance in more detail Kevin.
Kevin S. Krumm: Thanks, Ralph good morning, everyone.
Kevin S. Krumm: Reported revenues for the three months ended March 31, 2024 were essentially flat at $1 6 billion compared to $1 six 1 billion in the prior year period organic decline of one 4% compared to organic growth of approximately 12% in Q1 2023 was driven by disciplined customer.
Kevin S. Krumm: Project selection and lower revenues from declining material costs pass through the result of this was a 6% organic decline in project revenues.
Russell A. Becker: This was essentially offset by organic growth of 3% and services revenue.
Russell A. Becker: Adjusted gross margin for the three months ended March 31, 2024 grew to 37% representing a 390 basis point increase compared to the prior year period, driven by price increases outsized growth and higher margin services revenue as well as significant margin expansion and project revenues across both segments.
Russell A. Becker: Adjusted EBITDA increased by 19% on a fixed currency basis for the three months ended March 31, 2024, with adjusted EBITDA margin coming in at 10, 9%, representing a 100 basis 180 basis point increase compared to the prior year period, primarily due.
Russell A. Becker: The increase in adjusted gross margins, partially offset by growth investments and the investment in building, our global capabilities and infrastructure I'm pleased to report that adjusted diluted earnings per share for the first quarter was 34 per share representing a 9% per share or 36% increase compared to the prior year.
Russell A. Becker: Period, the increase was partially driven by strong margin expansion in both safety and specialty services and decreased interest expense, partially offset by higher adjusted diluted weighted average shares outstanding.
Russell A. Becker: Now discuss our results in more detail for safety services.
Russell A. Becker: Safety services reported revenues for the three months ended March 31, 2024 increased by one 9% to $1 two 1 billion compared to $1 9 billion in the prior year period.
Russell A. Becker: Organic growth of 2% compared to organic growth of 14% in Q1, 2023 was driven by 4% growth in services.
Russell A. Becker: Led by double digit core inspection revenue growth in our life safety and our U S life safety business and 6% organic growth in inspection services and monitoring in U S. Life safety. This was partially offset by an approximately 4% decline in organic revenue from project work driven by planned customer attrition.
Russell A. Becker: <unk> and our international businesses as well as disciplined customer and project selection in our HVAC business.
Russell A. Becker: Adjusted gross margin for the three months ended March 31, 2024 was 34, 8%, representing a 330 basis point increase compared to the prior year period, driven by price increases improved business mix of inspection service and monitoring revenue as well as significant margin expansion in project revenues.
Russell A. Becker: Yeah.
Russell A. Becker: Adjusted EBITDA increased by 18, 4% on a fixed currency basis for the three months ended March 31, 2024, and adjusted EBITDA margin was 14, 3% 14, 3%, representing a 200 basis point increase compared to the prior year period, primarily due to the increase in adjusted gross.
Russell A. Becker: Margins, partially offset by growth investments.
Russell A. Becker: I will now discuss our results in more detail for our specialty services segment.
Russell A. Becker: Specialty services reported revenues for the three months ended March 31, 2024 decreased by nine 5% to $389 million compared to $430 million in the prior year period organic revenue declined seven 4% compared to 4% growth in Q1 2023, driven by a 14.
Russell A. Becker: Percent decline in project revenues due to planned disciplined customer and project selection and lower revenues from declining material cost pass through.
Russell A. Becker: Service revenues were essentially flat adjusting for the exiting of one large customer relationship and our infrastructure and utility reporting unit services revenue would have increased by 11% in the quarter.
Russell A. Becker: Adjusted gross margin for the three months ended March 31, 2024 was 17, 7%, representing a 440 basis point increase compared to the prior year period, driven primarily by disciplined customer and project selection driving significant margin expansion and project and services revenue.
Russell A. Becker: Adjusted EBITDA increased by 21, 4% for the three months ended March 31, 2024, and adjusted EBITDA margin was eight 7%, representing a 220 basis point increase compared to the prior year period, primarily due to the increase in adjusted gross margins, partially offset by investments tombs.
Russell A. Becker: Support our service model and increases in certain legal expenses, including those associated with the completed divestiture.
Russell A. Becker: I will now discuss cash flows as we have highlighted in the past the first quarter is consistently our lowest quarter for free cash flow generation for the three months ended March 31, 2024, adjusted free cash flow was $12 million.
Russell A. Becker: Reflecting an adjusted free cash flow conversion of 7% and representing a $12 million improvement compared to the first quarter of 2023 <unk>.
Russell A. Becker: Adjusted free cash flow generation has been and continues to be a priority across API and we are pleased to we are pleased we remain on track to achieve our adjusted free cash flow conversion target of approximately 70% for the year.
Russell A. Becker: During the first quarter and as previously announced API reached an agreement with shareholders affiliated with Blackstone Tactical opportunities Fund and Viking Global equities to retire all of the outstanding shares of the series B perpetual.
Russell A. Becker: Perpetual convertible preferred stock Blackstone and Viking each converted all their share of series B preferred stock into 32 5 million shares of common stock of API, API repurchased $16 3 million or one half of the conversion of the conversion shares from Blackstone Viking for in AG.
Russell A. Becker: <unk> purchase price of $600 million.
Russell A. Becker: Or $36 90 per share the transaction was partially financed by an incremental term facility of $300 million issued a part.
Russell A. Becker: On February 28, 2024, we partnered with Blackstone and Viking as they launched a secondary public offering for approximately $12 12 million shares of Apis common stock.
Russell A. Becker: As we mentioned before this transaction simplifies our capital structure eliminates the $44 million preferred dividend payment and has no impact on our M&A strategy at the end of the first quarter. Our net leverage ratio was approximately two eight times before adjusting for the acquisition of elevated facility services group and.
Russell A. Becker: On April 15th and the second quarter financing activities.
Russell A. Becker: Yes.
Russell A. Becker: On April 16, we priced a primary follow on offering for $12 six 5 million shares raising over $450 million in net proceeds earlier. This week, we launched a $550 million incremental term loan due 2029 with proceeds expected to be used to refinance $330 million or 300.
Russell A. Becker: $30 million term loan due 2026 to repay $100 million of outstanding revolver balances and the remainder for general corporate purposes, including partially funding the acquisition of elevated.
Russell A. Becker: Following the transaction and financing and financing activities, we remain in a position of balance sheet strength, providing the flexibility to continue to execute a robust M&A pipeline at attractive multiples with a specific focus on opportunities accretive to our 13 60 80 targets.
Russell A. Becker: As we look forward to the rest of 2024, we expect to grow our adjusted free cash flow as well as improve our adjusted free cash flow conversion, providing us the continued opportunity for value enhancing capital deployment, including our planned bolt on M&A campaign.
Russell A. Becker: While reducing our net leverage ratio to approximately two five times around year end 2024.
Russell A. Becker: I will now discuss our guidance for the second quarter and full year 2024.
Russell A. Becker: We continue to expect full year net revenue to range from seven five to $7 25 billion adjusted EBITDA range from $8 $855 million.
Russell A. Becker: Two $905 million and adjusted free cash flow conversion for the year to be approximately 770%. This guidance has not been adjusted to include the impact from the elevated acquisition the divestiture announced this quarter and headwinds incurred from a strengthening dollar since our initial guidance announced in February.
Russell A. Becker: 2008 2024.
Russell A. Becker: Based on our current foreign exchange rates, we expect approximately 35, approximately $35 million headwind on revenue and approximately $5 million headwind on adjusted EBITDA for the full year as Russ mentioned, we will update our full year guidance. Following the close of the elevated acquisition and adjusted and in addition to.
Russell A. Becker: Adjusting for the contributions of elevated we will also incorporate the divestiture announced this quarter and update guidance for the impact of foreign exchange movements on the full year.
Russell A. Becker: As we move through the year, we will continue to remain focused on disciplined customer and project selection and our specialty in HVAC businesses, we expect to annualize against the majority of the planned slowdown in certain project work as we cross into the second half of 2024, so will allow for strong accelerating growth rates in both businesses and.
Russell A. Becker: The second half of the year.
Russell A. Becker: In terms of the second quarter, excluding any impact from the elevated acquisition. We expect reported net revenues of $1 75 to 180 billion reflect reflecting the completed divestiture and specialty services and the foreign exchange environment.
Russell A. Becker: The guidance represents an organic net revenue growth of approximately flat to 2% up as we lap our strong organic growth of 17 or seven 6% in Q2, 2023, and as we continue to build a smaller but healthier backlog in our HVAC and specialty services businesses.
Russell A. Becker: We also expect to see a continuation of lower material costs, resulting in declining price pass through versus the second quarter of 2023.
Russell A. Becker: This will result in lower projected project revenues, we expect to continue to expand adjusted EBITDA dollars and margin, which is which is reflected in our second quarter. Adjusted EBITDA Guide of 220 to 235 million, which represents adjusted EBITDA growth of approximately nine.
Russell A. Becker: To 16% on fixed currency basis, and adjusted EBIT da margin expansion of 140 basis points at the midpoint.
Russell A. Becker: For 2024, excluding any impact from the elevated acquisition and second quarter financings, we anticipate interest expense to be approximately $150 million depreciation to be approximately $80 million capital expenditures to be approximately approximately $95 million and our adjusted.
Russell A. Becker: Effective tax rate to be approximately 23% we.
Russell A. Becker: We expect our adjusted diluted weighted average share count for the year to be approximately 279 million taking into account the series B transaction and the primary follow on offering of 12 65 million shares executed on April 16th.
Russell A. Becker: I would now like to turn the call back over to Ross.
Ross: Thanks, Kevin Api's record first quarter profitability speaks to the effectiveness of our strategy and the alignment and its execution by our global team of leaders.
Ross: As you've heard from US we have great confidence in the business and the direction. We are heading despite the volatile macroeconomic environment.
Ross: The announced acquisition of elevated and expansion into the adjacent elevator and escalator services market further strengthens <unk> competitive moat and expands exposure to statutorily driven demand for our services as.
Ross: As we look to the years ahead, we believe we can create sustainable shareholder value by focusing on our 13 60 80 long term value creation targets all of which are accelerated by the announced acquisition of elevated <unk>.
Ross: These include above industry average organic growth adjusted EBITA margin of 13% plus by 2025, 60% of revenue from service inspection and monitoring and <unk> and adjusted free cash flow of 80%.
Ross: I am excited about the opportunities for the rest of 2024 and our ability to execute on our strategic plan in the years to come.
Speaker Change: With that I would now like to turn the call back over to the operator and open the call for Q&A.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: You wish to ask a question. Please press star one on your telephone keypad.
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Speaker Change: Your first question comes from the line of Kasserine Thompson of Thompson Research Group. Your line is now open.
Kathryn Ingram Thompson: Hi, Thank you for taking my questions today.
Kathryn Ingram Thompson: APG.
Kathryn Ingram Thompson: Focused on the inspection of our strategy.
Kathryn Ingram Thompson: As you've outlined several times growing margins through mix and scale.
Kathryn Ingram Thompson: And so today, it's north of 50%.
Kathryn Ingram Thompson: 40% prior to Chubb.
Kathryn Ingram Thompson: You enter into a new end market with the <unk>.
Kathryn Ingram Thompson: Elevator.
Kathryn Ingram Thompson: With this I'll dinner and Markus.
Kathryn Ingram Thompson: How does that fit in to the inspection of our strategy.
Kathryn Ingram Thompson: And as you go down the road and building out that segment.
Kathryn Ingram Thompson: Where do you foresee it contributing to the 60% in Turkey, the company's outlined thank you.
Speaker Change: Good morning, Catherine Thanks for your support and for participating this morning.
Speaker Change: Elevators, just like fire life safety systems are required by law to be inspected for functionality and operability.
Speaker Change: At least annually and it varies based on state and local jurisdiction again, just like fire life safety business.
Speaker Change: If you if you look at elevated business.
Speaker Change: Where we take 70% plus of their business comes from basically inspection maintenance and repair.
Speaker Change: That falls right in line with our long term goal of 60% of our revenue coming from inspection service and monitoring that 70% plus is actually probably higher than that depending upon how you want to slice and dice. The modernization work, which is really their version of project related work and.
Speaker Change: And a lot of the.
Speaker Change: The tuck in M&A work that we'll do as well as the organic growth that we'll see inside this business.
Speaker Change: Comes from the inspection service and repair side of the business.
Speaker Change: Oems.
Speaker Change: We'll continue to focus on the installation side, new construction site.
Speaker Change: Where the independent.
Speaker Change: Providers are more focused on the service and repair component of it. So this fits.
Speaker Change: Right down the center of the fairway for us as it relates to continuing to focus on.
Speaker Change: Growing that that piece and component of the business and we're super excited about.
Speaker Change: The elevated team.
Speaker Change: We're also super excited about the opportunity for us to really grow in this space.
Speaker Change: Thanks.
Speaker Change: And then just a follow up question.
Speaker Change: And at Paramount simplifying the capital structure the quarter, congratulations on that but just.
Speaker Change: To reiterate.
Speaker Change: Yes.
Speaker Change: Does this change at all your capital.
Speaker Change: Priorities.
Speaker Change: In particular this will have an impact on your M&A initiatives that you've outlined previously.
Speaker Change: Hi, Catherine this is Kevin.
Kevin S. Krumm: I would say in short no.
Kevin S. Krumm: Our priorities as we came into the year was.
Kevin S. Krumm: To continue to focus a good portion of our free cash flow on stepping up our bolt on and tuck in M&A campaign.
Kevin S. Krumm: That is still the plan. We also plan to pay down some debt later in the year and nothing has changed there either so our plan as we started the year on our priorities remains the same.
Speaker Change: Perfect. Thank you very much.
Kevin S. Krumm: Your next question comes from the line of Andy Kaplowitz of Citi. Your line is now open.
Andrew Alec Kaplowitz: Hey, good morning, everyone.
Andrew Alec Kaplowitz: Hey, Andy how are you.
Andrew Alec Kaplowitz: Good how are you Russ can you give us a little more color on core safety markets. Obviously continue to focus on project selection.
Andrew Alec Kaplowitz: But implied in your 'twenty guidance continues to be a relatively significant step up in organic growth in the second half. So what's your visibility at this point to step up or is it really just the comp on increased project selectivity really starts in the second half and are there any key verticals that could drive the growth such as data centers.
Andrew Alec Kaplowitz: Well clearly data centers.
Andrew Alec Kaplowitz: So I mean, we've.
Speaker Change: The answer is we have really good visibility we're building backlog.
Andrew Alec Kaplowitz: As we speak and we're building really good LTE backlog as we speak Dave.
Andrew Alec Kaplowitz: Data centers.
Andrew Alec Kaplowitz: Is contributing.
Andrew Alec Kaplowitz: In our <unk> services segment as well as our specialty services segment. So.
Andrew Alec Kaplowitz: And we also see strong.
Andrew Alec Kaplowitz: Strong.
Andrew Alec Kaplowitz: Wins in the semiconductor space.
Andrew Alec Kaplowitz: So I don't think that anything has changed as the as it relates to the end markets that our business leaders are focused on today, and we're still leading with inspections, but the project related work.
Andrew Alec Kaplowitz: That were bringing bringing onto our books as a good healthy work in healthcare.
Andrew Alec Kaplowitz: Data centers semiconductors advanced manufacturing are all the right places for us to break.
Speaker Change: I appreciate that color and then maybe a little bit more color into the elevated growth profile. I know you said it would deliver $220 million annually of revenue, but what should the grilles look like over the next couple of years and maybe.
Speaker Change: Versus that base should it be accretive tpg's growth there similar and then how do you think about the synergy under cross selling opportunities versus your core life safety business.
Speaker Change: Yes, so I mean organically.
Speaker Change: High single digits, and we don't see any reason for that to change.
Speaker Change: Obviously, we would like to continue to accelerate that.
Speaker Change: If we possibly can.
Speaker Change: A really strong opportunity for us in the bolt on M&A space, It's very similar highly fragmented market just like the fire life safety spaces. So we see some opportunity there for so to speak Nonorganic growth.
Speaker Change: To continue to.
Speaker Change: Complement that business in the cross selling opportunity, we actually had some we actually had the elevated team on campus yesterday and.
Speaker Change: And really even though the transaction is not scheduled to close until later on in the quarter.
Speaker Change: But started conversations around what integration looks like and had some conversation around cross selling and how we can potentially align.
Speaker Change: <unk> offices and branch locations.
Speaker Change: In the best way for Us to do that is to get people sitting next to each other and that obviously is going to take a little bit of time.
Speaker Change: For us to sort that out where we've got.
Speaker Change: But.
Speaker Change: Getting that real estate footprint mapped out and consolidated is going to take a little bit of time for us to do that but the more.
Speaker Change: Our business leaders get to know each other and.
Speaker Change: Really develop relationships the easier in the faster you can facilitate cross selling opportunities, but the elevated team met with our business leader from our National accounts group yesterday.
Speaker Change: Kicked that process off and so.
Speaker Change: That's a journey and it's going to take some time.
Speaker Change: We're we feel really good I mean everybody's attitude is kind of in the right place and everybody is thinking about it the same way I mean, theres going to be some opportunities for us to take advantage of their customer relationships.
Speaker Change: And thats something that that we're excited about.
Speaker Change: I appreciate the color.
Speaker Change: Thanks, Andy.
Speaker Change: Your next question comes from the line of Andy Wittman of Baird. Your line is now open.
Andrew John Wittmann: Yes, Thanks for taking my question I guess.
Andrew John Wittmann: Gives me I wanted to ask about the.
Andrew John Wittmann: The services growth I think you mentioned on the prepared remarks that it was 3% in the quarter.
Andrew John Wittmann: You also mentioned that the U S.
Andrew John Wittmann: Inspection business is growing double digits, so I guess, Russ or Kevin could you just decompose.
Andrew John Wittmann: Decompose, a little bit and give some color behind the 3% growth rate.
Speaker Change: We're there.
Speaker Change: Larger customer exits in the international business, perhaps that have held that back because it feels like U S businesses doing pretty well, but 3% is.
Speaker Change: Okay, but I think overtime, certainly youre expectations are higher than that.
Speaker Change: Hey, Andy This is Kevin I'll take a shot at that first the 3% number was total API growth.
Kevin S. Krumm: On services. So that includes specialty also include services on the HVAC HVAC side of the business.
Kevin S. Krumm: I referenced in my commentary I believe the fact that in specialty.
Kevin S. Krumm: We walked away from a significant customer that wasn't willing to take the price increase that was largely a service contract. So in that number thats going to be a drag.
Kevin S. Krumm: Similarly on the HVAC side of the business as we continue to think through those customer sets and those in March our service revenue was also down on HVAC. If you pull those two and set them aside our service our service growth was actually on the rest of the business was north of 6% I believe.
Kevin S. Krumm: And so really that inspection on sort of the core life safety is still driving sort of the pull through on service. The only other thing I'll say there is <unk>.
Kevin S. Krumm: Generally.
Kevin S. Krumm: We do have other service type of work.
Kevin S. Krumm: And in the quarter of last year in U S life safety predominantly we saw a significant amount of work related to freezes sort of frees up that was happening in North America, and so we're comping against that but underlying our service business, where we wanted to grow continues to grow well and is still.
Kevin S. Krumm: Especially in North America, where we track it and track it versus inspections is still highly correlated to that that 10% or that double digit growth for us referenced.
Speaker Change: Okay. That's super helpful. I, just thought maybe as a follow up you could just talk a little bit about what youre seeing out of your international life safety business in particular.
Speaker Change: Are you seeing growth in pricing and how is the economy.
Speaker Change: In Europe, and parts of Asia, Recompete holding up to support your expansion there.
Speaker Change: Okay.
Speaker Change: Yes, so so the international business grew modestly in the first quarter.
Speaker Change: So again.
Speaker Change: We continue to see good organic growth on a quarter by quarter basis. Since we've owned the business unit coming off a tough comp I think they had organic growth in the first quarter of last year at 11% or 10% or something like that Andy.
Speaker Change: So, but we did show we did grow modestly in the first quarter of this year and in general.
Speaker Change: The business continues to hold up as we continue to kind of focus.
Speaker Change: On a couple of fronts really focusing on the right end markets and I think the team is focused on the right end markets I don't know that I could have said that to you two years ago, but I think today. The team is focused on the right end markets.
Speaker Change: And we're going through really kind of a sales force.
Speaker Change: Transformation I don't know if thats the right word but.
Speaker Change: But we are really we have a new sales leader in our international business and he is going through an effort to kind of bring that scene inspection and service mindset selling that first so a little bit of a different market over there, but just even taking the concept that we're going to sell inspection and <unk>.
Speaker Change: <unk> first into the already built environment takes a mind shift change.
Speaker Change: And so we're going through that with that with that sales force but.
Speaker Change: Our backlog in our international businesses.
Speaker Change: Sickly sitting right on top of where it was a year ago plus.
Speaker Change: Plus or minus.
Speaker Change: And.
Speaker Change: We've seen some customer attrition as we continue to take price and make sure that we're making smart decisions about where we are deploying our most important resource and that's our people.
Speaker Change: So I feel really good about where the business is at.
Speaker Change: And really the momentum that they continue to grain.
Speaker Change: As they go through their value capture efforts.
Speaker Change: Thank you very much.
Speaker Change: Thanks, Andy.
Speaker Change: Your next question comes from the line of Julian Mitchell of Barclays. Your line is now open.
Speaker Change: Hi, Good morning. This is Josh <unk> on for Julian Mitchell.
Josh: Is the M&A pipeline overall, you did elevated can we expect active M&A over the rest of 2024 and how is the environment in terms of valuations.
Speaker Change: M&A market our pipeline is really good strong robust.
Speaker Change: I would tell you that.
Speaker Change: For us we knew.
Speaker Change: Need to continue to focus on the right stuff.
Speaker Change: As we're looking at at the M&A market.
Speaker Change: It needs to be complementary to our existing offerings whether thats.
Speaker Change: Geographically or the types of services that the business provides.
Speaker Change: It needs to be complementary to our margin expansion goals.
Speaker Change: And either that or we have to see a clear path to that business being complementary to our margin expansion goals.
Speaker Change: The leadership and the team needs to align from our culture values and fit perspective, and that doesn't that whether thats, an elevated or a small family owned business in Paducah, Kentucky, and we need to continue to be disciplined as we look at it there are there are many good <unk>.
Speaker Change: Opportunities and our team is doing a fantastic job I'd say, an amazing job.
Speaker Change: Vetting.
Speaker Change: <unk> opportunities and.
Speaker Change: Youll continue to see us make significant progress I think we we spent.
Speaker Change: Roughly $100 million on bolt on M&A over the course of the last year and we've said that we its our intent to accelerate that and we feel that with the flexibility we have on our with our balance sheet.
Speaker Change: Even even with doing the elevated acquisition, we still have the flexibility to accelerate that bolt on tuck in strategy.
Speaker Change: Got it thank you and a quick follow up gross margins are showing a decent increase how as APG coping well with wage inflation among its service technicians.
Speaker Change: So hey, this is Kevin I'll take that.
Kevin S. Krumm: Now at the end of the day, we've been on a pricing campaign.
Kevin S. Krumm: For the last decade, and we say consistently that we look to take margin expansive pricing on the service side of the business.
Kevin S. Krumm: Our businesses do a really good job of staying in front of that and continuing to price for all elements on the service side that we need to price price through of which labor is one so.
Kevin S. Krumm: I would say, it's just it's a muscle our teams developed and they continue to work and flex it annually.
Speaker Change: That's helpful. Thank you.
Speaker Change: Your next question comes from the line of Stephanie more of Jefferies. Your line is now open.
Stephanie: Hi, good morning, Thank you.
Stephanie: One of the.
Stephanie: Good morning, I wanted to follow up actually on the prior question. So maybe to take that a step further is it possible for you to kind of frame your ongoing M&A strategy and then also how that matches with the recent equity raise.
Stephanie: How should we infer that with your appetite to do larger deals going forward.
Stephanie: Even after elevated and then is there potential to expand again outside of the legacy fire and safety and then now elevated vertical so an update there would be great. Thank you.
Speaker Change: Yes, I don't think youre going to see us dominant answer the latter half of your question first Stephanie and then Kevin can add any color that he would like around our balance sheet.
Speaker Change: The flexibility we have there but.
Speaker Change: I don't think youre going to see us stray outside really of.
Speaker Change: The most recent adjacency the elevator and escalator space I mean, we.
Speaker Change: We're kind of a.
Speaker Change: I don't know, we're going to we're going to show.
Speaker Change: The street, and our investors investors and folks that.
Speaker Change: We've got the capability to execute.
Speaker Change: In this space before we really get.
Speaker Change: Two curious about.
Speaker Change: Strain outside of say the fire life safety security and now the elevator and escalator space and I think that's part of our we've always been pretty disciplined from that standpoint, I think we need to to stay disciplined and.
Speaker Change: Execute.
Speaker Change: Inside this new vertical that we brought into the API family and I think we'll show you that we have the capability and the capacity.
Speaker Change: To do that.
Speaker Change: We've got we've got some interesting opportunities that we're looking at.
Speaker Change: Nothing that I would say.
Speaker Change: I'd say, we've got some opportunities that we're looking at that are so to speak bigger than a tuck in but we're not looking at anything that is.
Speaker Change: I don't know Chubb ask Ashish I don't know if thats, the right way to put it or not.
Speaker Change: Sure.
Speaker Change: But we're so we've got some things that.
Speaker Change: What we have.
Speaker Change: 100, plus million revenue business in the fire life safety space that we're looking at.
Speaker Change: That would be interesting and a good fit that.
Speaker Change: Increase our leverage I mean, so we have really good flexibility I mean with everything that we've done.
Speaker Change: The moves and the decisions that we've made around our balance sheet and.
Speaker Change: With the equity raise and even the series B and now with the term loan.
Speaker Change: I think just gives us just great flexibility and optionality.
Speaker Change: <unk> continued to take advantage of the opportunities as they present themselves.
Speaker Change: We're going to be smart, we are going to be disciplined and we're going to make good choices for the business long term.
Speaker Change: Kevin do you want to add any color no I think just a little bit rough set of well when we think about M&A. There is sort of both bolt on and then there is that mid low platform and there is a the larger ones like Chubb went as we finance. These we actually are looking forward to make sure that we remain nimble enough to do what we need to do over the next 12 months and I think he said it well.
Speaker Change: There is something out there we can fund bolt on tuck in through ongoing cash flows.
Speaker Change: Hang in that mid level.
Kevin S. Krumm: We'll flex it up is we have the balance sheet and do it pretty easily and I think we have the sort of history.
Speaker Change: To pay that down and to get back into our targeted levels pretty quickly and thats kind of how we're going to manage things.
Speaker Change: Allow us to be as opportunistic as possible.
Speaker Change: Understood. Thank you and then just as a follow up and again congratulations on the elevated deal. It does seem to be a fantastic year I wanted to ask on the maybe medium to long term.
Speaker Change: Ross selling opportunities of this business.
Speaker Change: If you could talk a little bit about the sales force with an elevated and then the ability over time to kind of cross sell opportunities from the legacy your legacy fire and safety side, and then obviously with Lyft.
Speaker Change: On the elevated elevate our services.
Speaker Change: Okay. Thank you.
Speaker Change: Yes, so I mean.
Speaker Change: Again.
Speaker Change: Cross selling opportunity.
Speaker Change: Is real it is significant and I would say we've taken one step.
Speaker Change: Even though the transaction Hasnt closed we've taken one step forward by just introducing sales leaders.
Speaker Change: And getting people acquainted with each other my.
Speaker Change: My experience tells me that.
Speaker Change: That that this will take a little bit of time for us to really execute on this cross selling strategy.
Speaker Change: And.
Speaker Change: It's funny because you want your people to open up their customer relationships.
Speaker Change: To their peers and if they really don't know their appear and they really don't trust their peer it's more difficult for them to open up that customer relationship.
Speaker Change: And so.
Speaker Change: It's easy for me to say, we should do this or you should do this or anything like that but.
Speaker Change: The more we bring our branch operations together and Cohabitate.
Speaker Change: The faster, we'll be able to achieve really momentum as it relates to cross selling do I think that a.
Speaker Change: Sales leader in our business can walk into a customer and sell.
Speaker Change: Fire life safety inspections, and sell elevator inspections, I do and.
Speaker Change: And I think that theres the opportunity for us to educate our sales force, but that's going to take some energy and effort and for us to really kind of develop a plan here over the next couple of months as we work towards getting the transaction closed I've got a great. We have a really great real life.
Speaker Change: Sample.
Speaker Change: In Omaha, Nebraska, and our branch office, we have a fire life safety business that Cohabitate space with one of our specialty services business.
Speaker Change: Yeah.
Speaker Change: Each of those branches has like absolutely thrived.
Speaker Change: By kind of living in the same quarters and they drag each other to the same customer sites and say Hey, we've got customer ABC and do you guys do any work for them and now come with me and and and it's really it's accelerated because of this idea that they are in the same in the same space and living under the same roof.
Speaker Change: And that's really the work that we need are real estate people to start working with the leaders of our life safety businesses and.
Speaker Change: In elevated business to two.
Speaker Change: To execute on that and there is a total willingness to do it.
Speaker Change: We also think that there is an opportunity, especially in the elevated <unk>.
Speaker Change: <unk> two.
Speaker Change: Basically organically open up shops in some of the branches that that we have existing footprints already so, but it's going to take some it's going to take some effort and it's not going to happen overnight and so we have to just I want to make sure that we're being realistic about setting expectations with with everyone about the energy it's going to take.
Speaker Change: For us to really execute on that.
Speaker Change: Okay.
Speaker Change: Great. Thank you so much.
Speaker Change: Thanks, Kevin.
Speaker Change: Your next question comes from the line of Jon <unk> of CJS Securities. Your line is now open.
Jon: Alright, Thank you for taking my questions.
Jon: I was wondering if you could drill down into the elevator and escalator market.
Jon: Little bit more on the longer term potential there for acquisitions.
Jon: Do the assets their confidence how frequently are the multiple similar to the ones you've seen in your core business or the margins in business model is more similar to what you see at <unk> or is that more of a unique asset and any more color there would be appreciated.
Speaker Change: I think it's I think it's very very similar to the fire life safety and security space, John and I should say good morning, and thank you for participating before I before I get carried away here, but.
Speaker Change: I think I think it's slide textbook and I think the multiples are going to be similar I think the the.
Speaker Change: The sellers are going to be looking for the right home for their business just like how.
Speaker Change: How we've executed in the fire life safety space.
Speaker Change: It's just as fragmented as the fire life safety and security space, So I think that.
Speaker Change: Other than you got a brush it often call it an elevator versus the fire alarm I think it's the same.
Speaker Change: And so I think from a from an M&A perspective, it'll be it'll be we'll be able to.
Speaker Change: Ron.
Speaker Change: <unk>.
Speaker Change: There's there's boutique brokers slash bankers in the space, but the reality of it is in specialty and just talking to the team yesterday is that they know the market. They know the players in the market. They know who is aligned culturally with us and.
Speaker Change: I think that.
Speaker Change: I think that.
Speaker Change: That's.
Speaker Change: Something that we will be able to take advantage of those those relationships.
Speaker Change: Every one of the senior leaders on the elevated elevated team has come from the elevator and escalator space. So they know the market very very well.
Speaker Change: Yes, the only thing I would add is that the market. The makeup is the same highly fragmented there.
Speaker Change: A market leader in a lot of the markets they play in.
Speaker Change: Still in that 5% range Theres, a couple where there may be 10%, but outside of that it's highly fragmented and they have they come to us with a robust pipeline of targets.
Speaker Change: Got it. Thank you and I was wondering if you could just talk about your second half expectations in the core business I know you haven't formally updated your guidance, but you did perform well in Q1 your Q2 guidance on an earnings level look strong.
Speaker Change: I'm just wondering if we should expect crop sizes for the organic core business. When you do formally update your guidance for all the factors I mentioned before.
Speaker Change: Well just on guidance.
Speaker Change: Hey.
Speaker Change: The elevated and then I'll talk about the back half, but I'll try and tackle guidance here to John.
Speaker Change: I appreciate the question.
Speaker Change: We're sort of in this non traditional spot where we have a material acquisition were looking to close or here on may 2nd.
Speaker Change: As we said, we're looking to close it in the quarter and we believe it to be sort of a material update for the year. We also had a history of rolling FX through but noting where close to closing that transaction, we want to take our time and bring that in and work with that team better understand what their back half of the year looks like.
Speaker Change: So we intend to do that and we'll bring in sort of the FX element, but the other thing we're trying to say in this guide that we communicated today as there should be no significant changes.
Speaker Change: On the base business as we look at the back half of the year.
Speaker Change: Beyond Q2, and when you look at the back half of the year.
Speaker Change: We're expecting to see accelerated organic growth our service business, our service growth rates, where we want them to have held up in the first half of the year, we expect that to continue in the back half of the year and then we expect the businesses that have been going through so that would be HVAC the project business in specialty.
Speaker Change: <unk> business on the international side to annualize against the work great work those teams have been doing.
Speaker Change: To start to show sort of low to mid single digit growth on the project side. The two of those together or sort of what's delivering that 6% to 7% organic.
Speaker Change: In the back half of the year.
Speaker Change: Got it that's helpful. Thank you.
Speaker Change: So John Stephanie everybody I'm going to just add a bullet point about this whole cross selling so on the other night I mentioned to the elevated team was.
Speaker Change: On campus yesterday, and we had a dinner with them the previous evening.
Speaker Change: And we invited one of our local business leaders to attend that dinner and while we're sitting here and during the course of the call. He sent me a note and read something to the point about getting leaders together from the earnings call. This morning, I had the chance to connect with many of the elevated leaders at dinner Tuesday, as our first bullet being fired.
Speaker Change: We invited Ben who is the regional VP for elevated out of Indianapolis to join our service leaders summit in Columbus, Ohio. This June.
Speaker Change: I mean theres already work going on.
Speaker Change: We're getting people cannot cross pollinated and.
Speaker Change: I mean, that's one of the beauties of our business and this focus on leadership development and investment in people like our business leaders are generally curious people and they want to.
Speaker Change: These new newly acquired companies.
Speaker Change: They surround them and.
Speaker Change: And bring them warmly into the business and this is just a good example of how.
Speaker Change: This whole idea of cross selling and sharing opportunities and knowledge and everything else is going to come to fruition. So hopefully that's helpful color.
Speaker Change: Your next question comes from the line of Steve Tusa of Jpmorgan. Your line is open.
Charles Stephen Tusa: Hey, good morning.
Charles Stephen Tusa: Hey, good morning, how are you.
Charles Stephen Tusa: Congrats on the on the margin execution.
Charles Stephen Tusa: Strong.
Speaker Change: Thank you.
Charles Stephen Tusa: Just on kind of the trajectory for the second half on the sales side.
Charles Stephen Tusa: Yes.
Charles Stephen Tusa: You guys used to talk about like backlog and kind of some forward indicators on some of the businesses.
Charles Stephen Tusa: How should we think about that.
Charles Stephen Tusa: As they move forward into that in the base business for the third and the fourth you mentioned.
Charles Stephen Tusa: I think the 6% to seven in the back half.
Charles Stephen Tusa: And I think the comps kind of stabilize a bit in the back half but.
Charles Stephen Tusa: Is that a steady trajectory is it pretty consistent the growth <unk> and <unk> and then in.
Speaker Change: In that context like it's hard to tell what normal seasonality actually is you had a nice sequential step up or you have a nice sequential step up from <unk>, how does that typically behave seasonally.
Speaker Change: <unk> with these businesses.
Speaker Change: Hey, Steve This is Kevin I'll take a uptick established this and then Russ can add anything that makes sense. After I would say when you look at the back half of the year.
Kevin S. Krumm: Our backlog and our U S life safety business, and then you talked a little bit about backlog in our international business that has held up and continue to become healthier and and frankly on the U S life safety side.
Kevin S. Krumm: We've continued to add to it so we feel really good on the safety side about the backlog as we head into the back half of the year and that's reflected in.
Kevin S. Krumm: And I said earlier, so that drives projects work as you may know or I think as you know and so and I said earlier on the service side of the business. Those businesses have continued to perform very very well and as expected in the first half of the year and we expect that to continue in the back half of the year as well where we've been.
Kevin S. Krumm: Shrinking the backlog and get into I'll say, a smaller but healthier backlog is in the HVAC business in the specialty business.
Kevin S. Krumm: And what Youll see in those businesses in the back half of the year as well will be.
Kevin S. Krumm: We should see a return to growth it'll be low single digits, but we should see a return to growth in those businesses as well in the back half of the year and sort of the combination of all of that we don't guide.
Kevin S. Krumm: At a segment level, but the combination of all of that really is what's driving that.
Kevin S. Krumm: That improvement in the back half of the year, you asked about seasonality that.
Kevin S. Krumm: That obviously doesn't impact growth rates, so much but just more sort of volumes.
Kevin S. Krumm: What we generally see in our business because.
Kevin S. Krumm: It's predominantly a northern hemisphere business and some of the work we do a lot of the work we do is outside especially in specialty is.
Kevin S. Krumm: Our two largest quarters from a revenue standpoint, and any given youre going to be the second quarter in the third quarter, that's going to drive.
Kevin S. Krumm: Sort of growth on a fixed cost base. So those are generally going to be our two largest margin performing quarters as well and then off of Q3, we usually stepped down sequentially into the fourth quarter a lot of it weather related.
Speaker Change: Yes that makes sense and then just one last one.
Speaker Change: How is I would assume if you are.
Speaker Change: Discipline on these projects that price is holding up relatively well I'm not sure. If you touched on it on an earlier question, but.
Speaker Change: Any any color on like in <unk>.
Speaker Change: I know price in terms of like flat organic maybe not be that relevant logs kind of small numbers, but in the back half for you are you counting on any price running through.
Speaker Change: Yeah, absolutely. So we think about price the following way we have pricing that we pushed through on the service side of the business, we expect that to be margin enhancing as it relates to services I would say in the first half of the year roughly that price number has been around 3%.
Speaker Change: On our ongoing or recurring service revenue stream, we expect that to continue in the back half of the year with respect to projects, we look at that sort of more price pass through.
Speaker Change: Anticipate that being a significant driver because we should annualize lives through that.
Speaker Change: In the summer months, which is really where we started to see pricing come down last year. So we should be through it in the back half of the year, there should be significant impact on our growth rates positive or negative from the price pass through.
Speaker Change: Great Great color congrats on the execution and congrats on the deal as well thanks.
Speaker Change: Thanks, Steve.
Speaker Change: Your next question comes from the line of Ashes Sabedra of RBC. Your line is open.
Speaker Change: Hi, Good morning. This is David page on for Ashish. Thanks for taking my question.
David: I just had a quick follow up on the pruning or the project selection, how much more of that.
Speaker Change: Feel like you need to do until the business or to customer basis.
Speaker Change: Where you want them to be ultimately.
Speaker Change: And then one more on the just following up on the price or the price cost.
Speaker Change: And it looks like I think you mentioned that raw material costs or commodity costs going to be lower what's the tailwind there for the year. Thank you.
Speaker Change: Okay.
Speaker Change: I'll answer the last part first which was on the price pass through.
Speaker Change: <unk>.
Speaker Change: We don't expect there to be.
Speaker Change: Much of a headwind or tailwind as it relates to our organic growth rates from pricing through and.
Speaker Change: And I would say generally.
Speaker Change: On the project side of the business, where we're really just trying to accommodate.
Speaker Change: Sort of the material costs run up and pass it through so we don't think its going to impact our growth rates and it shouldnt be a tailwind if you will on margins either.
Speaker Change: And I can I can handle the pruning component of your question I would tell you that.
Speaker Change: For the most part.
Speaker Change: The pruning work from our customer selection perspective will number one will never stop.
Speaker Change: But.
Speaker Change: Some of the real disciplined joining that especially that you are seeing in our specialty and <unk> businesses.
Speaker Change: As Kevin's earlier remarks is really China.
Speaker Change: We will go continue through the second quarter.
Speaker Change: You see that backlog become healthier in that.
Speaker Change: And a component of it going back to more of a growth mode Youll.
Speaker Change: Youll see that in the second half of the year internationally, it'll probably continues through more through the end of this year from some of our customers has been a lot of that has to do with the fact that we had some three year contracts that we had to.
Speaker Change: Honor, if you will and.
Speaker Change: This will be like really the third year that we've owned the business and it will take us through that period of time to prune some of those and we've been dealing with those some of those customer contracts, but we do have some legacy contracts there that we're still dealing with that some of that.
Speaker Change: We will carry through the end of the year and should be cleaned up into 2025.
Speaker Change: Great.
Speaker Change: That concludes our Q&A session I will now turn the conference back over to Ross Becker for any closing remarks.
Russell A. Becker: Thank you I appreciate that in closing I would like to thank all of our team members for their continued support and dedication to our business. We believe our leaders are the foundation on which everything else is built and that the safety health and wellbeing of each of our leaders remains our number one value I would also like to thank our long term shareholders.
Speaker Change: As well as those that have recently joined us for their support we appreciate your investment in API and we look forward to updating you on our progress throughout the remainder of the year. Thank you everybody for joining our call. This morning, and we look forward to continuing to keep you abreast of.
Speaker Change: Positive things that are going on in the company.
Speaker Change: That concludes today's call. Thank you all for joining you may now disconnect.
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