Q3 2024 APi Group Corp Earnings Call
Speaker Change: Good morning ladies and gentlemen and welcome to API Groups 3rd Quarter 2024 Financial Results Conference Call.
Speaker Change: 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 APA Group. Please go ahead.
Adam Fee: Thank you. Good morning everyone. And thank you for joining our third quarter 2020 for our New Conference call. Joining me on the call today, our Respector, our President and CEO, Kevin Krumm, our Executive Vice President and Chief Financial Officer, and Sir Martin Franklin and Jim Lillie, our Board of Co-Chairs.
Adam Fee: Before we begin, I would like to remind you that certain statements in the company's earnings press release announcement and on this call are forward-looking statements which are based on expectations, intentions, and projections regarding the company's future performance, anticipated events or trends, or other matters that are not historical facts.
Adam Fee: These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
Adam Fee: In our press release and filings with the SEC, we detail material risks that may cause our future results to differ from our expectations.
Adam Fee: Our statements are as of today, October 31st, and we undertake 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 third quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics.
Speaker Change: The reconciliation of and other information regarding these items can be found in our press release and presentation. It is now my pleasure to turn the call over to Russ.
Russ: Thank you, Adam. Good morning, everyone. Thank you for taking the time to join our call.
Russ: Before we get into our results, I would like to thank our approximately 29,000 leaders for their dedication to API.
Russ: The safety, health, and well-being of each of our teammates is our number one value.
Russ: While I mention this every quarter, the events of the last few months, including the impact of the hurricanes on our teammates in the southeast, has given our organization the opportunity to put that value to practice.
Russ: I'm happy with the way our teammates stepped up to help each other and the impacted communities in which we operate.
Russ: Back in 2021,
Speaker Change: We've detailed our 13% plus adjusted EBITDA margin target by year-end 2025 as part of our broader 1360-80 shareholder value creation framework that you can find on slide 5 of our third quarter presentation.
Speaker Change: In addition to the 13% target, the 60 and 80 financial goals are long-term revenues of 60% from inspection, service, and monitoring, and long-term adjusted free cash flow conversion of approximately 80%.
Speaker Change: Over the past few years, we have communicated and executed our strategy and its key initiatives intended to achieve these goals, with a specific focus on expanding margins to reach 13% or more in 2025.
Speaker Change: The team has made excellent progress this year executing on our margin expansion initiatives with expected adjusted EBITDA margins up approximately 150 basis points. This has been accomplished by focusing on the following. First, pricing.
Speaker Change: Second, improved inspection, service, and monitoring revenue mix. Third, disciplined customer and project selection.
Speaker Change: Fourth, chub value capture. Fifth, procurement systems and scale. Sixth, accretive M&A and selective business pruning. And finally, as I always like to say, we always have the opportunity to just be better.
Speaker Change: The team's work over the last few years, executing our 1360-80 strategy, has resulted in API being the strongest it has ever been.
Speaker Change: On slide 6, we highlight the progress we have made as a business from 2021 to 2024, with 2024 expected to be a year of record net revenues, profitability, and free cash flow generation.
Speaker Change: The third quarter marks 17 quarters in a row of double-digit organic growth in inspection revenues in U.S. life safety.
Speaker Change: This performance has been a key contributor to our steady progress towards our long-term target of 60% of revenues coming from inspection, service, and monitoring.
Speaker Change: As we prepare to set new and increased financial goals for the next three years in 2025, it is gratifying to reflect on our progress since we first became a publicly traded company in late 2019.
Speaker Change: In our first year as a public company, we generated $393 million in adjusted EBITDA.
Speaker Change: This year we expect to deliver about 900 million and we have 1 billion dollars of annual adjusted EBITDA close in our sights.
Speaker Change: As we prepare to enter 2025, we plan to continue to execute our strategy, accelerate organic growth, increase margins, and expand our bolt-on M&A program.
Speaker Change: Before Kevin gets into the third quarter results, I wanted to address our Disciplined Customer and Project Selection Initiative on slide seven, which has been a significant contributor to the improvements we have made towards our 1360-80 financial targets.
Speaker Change: We have focused on dissipating customers and project selection for some time now and made it a point of emphasis in our planning cycle in early 2023.
Speaker Change: We challenged our business leaders to evolve away from large, lower margin, higher risk opportunities and focus on allocating our valuable field leaders to the best opportunities to position the business for long-term profitable growth.
Speaker Change: Our leadership team has done an excellent job executing this strategy, and it is positively impacting our financial results, allowing us to deliver adjusted EBITDA margins ahead of our expectations.
Speaker Change: We've been consistently setting new records as it relates to margins and cash flow generation as we evolve our business towards higher margin, more recurring service revenues.
Speaker Change: It is encouraging to note that our backlog is growing and healthy, with work that comes to us with a higher expected margin, lower expected risk, and smaller project sizes. This gives us confidence in re-accelerating growth in 2025 and beyond in these businesses.
Speaker Change: Equally important during this time, API's underlying core service business has grown steadily as we continue to take market share.
Speaker Change: More recently in the second and third quarters of this year, we have faced temporary timing revenue headwinds due to unexpected timing delays in certain customer projects.
Speaker Change: We expect the total impact of these headwinds on our 2024 net revenues to be approximately $150 million, with this impact predominantly driven by the specialty services and HVAC businesses.
Speaker Change: In specialty services, the delays were primarily with certain telecom and utility customers and were driven by the following, higher than expected permitting and engineering delays and slower than planned execution of federal rural broadband programs.
Speaker Change: We believe these headwinds are limited to 2024 and primarily related to certain portions of our specialty services business.
Speaker Change: Our core life safety business, which includes our fire protection, electronic security, and elevator businesses, and excludes the more project-heavy HVAC business, has made excellent progress, as highlighted on slide 8.
Speaker Change: Core Life Safety represents over 65% of total API net revenues and has consistently demonstrated strong overall organic growth led by high single-digit organic growth in inspection, service, and monitoring revenues.
Speaker Change: The life safety business has a record high backlog of approximately $2 billion, up 5% organically versus prior year, and it's the healthiest we've seen it.
Speaker Change: From 2022 to 2024, adjusted gross profit and EBITDA margins in life safety have improved considerably, with adjusted EBITDA margins expanding more than 300 basis points.
Speaker Change: We expect the flywheel, which is underpinned by our Inspection First strategy, driving outsized growth in service revenues, will continue to allow the businesses to be more selective on project revenues and drive further margin expansion across the branch network in 2025 and beyond.
Speaker Change: Starting in 2025, you will see our core life safety businesses more clearly as we have made the decision to realign the HVAC business under our specialty services segment.
Speaker Change: This change will put our HVAC business into a segment with other operating companies that serve similar customers in similar end markets to create synergies and efficiencies, which we highlight on slide 9.
Speaker Change: We enter 2025 with a lot of momentum.
Speaker Change: Organic growth of our inspection, service, and monitoring revenue streams and safety services remains strong. Organic growth in backlog and proposal activity is trending positively, providing support for a return to organic growth in project revenues.
Speaker Change: The international business is nearly finished working through its subpar inherited contracts and branch consolidation plans.
Speaker Change: On slide 10, the bolt-on M&A engine continues to accelerate and support future organic growth with 10 bolt-on acquisitions, excluding elevated, closed at reasonable multiples through October. We expect this momentum to continue in 2025 and beyond.
Speaker Change: And on slide 11, you can see the long-term benefits, which we have accelerated through M&A, of executing the initiatives behind our 1360-80 shareholder value creation framework.
Speaker Change: Our business continues to evolve into a more asset-light, services-focused, branch-led operating model with an increased mix of recurring higher margin revenues.
Speaker Change: During this evolution, our contract loss rate
Speaker Change: which measures the dollar lost on projects as a percent of total revenue.
Speaker Change: dropped from approximately 1.5% in 2019 to less than 0.4% in 2024, reflecting more disciplined customer and project selection and strong execution in the field.
Speaker Change: I'm proud of the team's execution of our strategy.
Speaker Change: We have built a strong foundation, improved the quality of our business and backlog, and expect to return to margin-decreed organic growth in 2025.
Speaker Change: We are well-positioned to achieve our 13% plus adjusted EBITDA margin target in 2025 and set new meaningfully higher targets for the following three years, which we will review during our Investor Day next year.
Speaker Change: I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail. Kevin?
Kevin Krumm: Thanks Russ. Good morning everyone.
Kevin Krumm: Reported revenues for the three months ended September 30th increased by 2.4% to $1.83 billion compared to $1.78 billion in the prior year period, driven by strong organic growth and service revenues of 9% in our safety services segment and modest benefits from favorable foreign currency exchange rates in M&A.
Kevin Krumm: This was partially offset by a 7.7% organic decline in our specialty services segment. On an organic basis, total company revenues were essentially flat for the quarter.
Kevin Krumm: Adjusted gross margin for the three months ended September 30 grew to 31 percent, representing a 200 basis point increase compared to the prior year period, driven by price increases, outsized growth, and higher margin services revenue, margin expansion for both project and service revenues.
Kevin Krumm: as well as Chubb Value Capture Savings.
Kevin Krumm: Adjusted EBITDA increased by 9.4% for the three months ended September 30 with adjusted EBITDA margin coming in at 13.4% representing an 80 basis point increase compared to the prior year period.
Kevin Krumm: This was primarily due to the factors impacting gross margin, partially offset by lower fixed cost absorption, and especially in HVAC businesses due to lower than expected revenues.
Kevin Krumm: Adjusted diluted earnings per share for the third quarter was 51 cents per share.
Kevin Krumm: representing a three cent per share or 6.3% increase compared to the prior year period. The increase was driven primarily by growth in adjusted EBITDA, partially offset by increases in interest expense and adjusted diluted shares outstanding.
Kevin Krumm: I will now discuss our results in more detail for the safety services segment.
Kevin Krumm: Safety Services reported revenues for the three months into September 30 increased by 9.7% to $1.34 billion compared to $1.22 billion in the prior year. This quarter, growth was led by the U.S. Life Safety Businesses, which posted double-digit organic growth in inspection revenues, as well as double-digit organic growth in broader inspection, service, and monitoring revenues.
Kevin Krumm: Adjusted gross margin for the three months ended September 30 was 35%, representing record third quarter adjusted gross margin and a 170 basis point increase compared to the prior year adjusted gross margin.
Kevin Krumm: Driven by price increases, improved business mix of inspection, service, and monitoring revenue, as well as margin expansion in both our project and services revenues.
Kevin Krumm: Adjusted EVTA increased by 24.3% for the three months into September 30.
Kevin Krumm: And adjusted EBITDA margin was 15.7%, representing a record for the third quarter and a 180 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin.
Speaker Change: I will now discuss our results in more detail for our specialty services segment.
Speaker Change: Specialty Services reported revenues for the three months ended September 30 declined by 13.4 percent.
Speaker Change: 7.7% on an organic basis or 7.7% on an organic basis to $493 million compared to $569 million in the prior year period. Driven by the theft
Speaker Change: driven by divestitures, a decline in service and project, and a decline in project and services.
Speaker Change: The decline in revenue was primarily driven by the exited customer relationship mentioned in the first quarter, higher than expected permitting and engineering delay, as well as slower than expected execution of federal rural broadband programs.
Speaker Change: Our adjusted gross margin for the three months into September 30 was 20.1 percent, representing a 40 basis point increase compared to the prior year period, driven by the impacts from our disciplined customer and project selection strategy.
Speaker Change: representing a 100 basis point decrease compared to the prior year period. This was primarily due to lower fixed cost absorption on lower-than-expected near-term revenues.
Speaker Change: We continue to focus on driving strong free cash flow conversion improvements year over year. For the three months ended September 30, adjusted free cash flow came in at $227 million, reflecting an adjusted free cash flow conversion of 93%.
Speaker Change: For the first nine months of the year, adjusted pre-cash flow was $361 million with conversion of 56%, representing an improvement of $124 million or slightly over 50% when compared to the first nine months of 2023.
Speaker Change: Free cash flow generation has been and continues to be a priority across AAPI, and our performance in the first nine months of the year puts us in a position to increase our full year 2024 cash flow guidance. We now expect to finish the year at or above 75% adjusted free cash flow conversion, which is up from our prior guide of 70%.
Speaker Change: As a reminder, the fourth quarter is traditionally our strongest free cash flow conversion due to seasonality.
Speaker Change: At the end of the third quarter, our net leverage was approximately 2.4 times, below our long-term target of 2.5 times even as we accelerated margin accreted bolt-on M&A.
Speaker Change: As we look forward to 2025, we will remain laser-focused on cash generation and expect to grow our free cash flow, providing us a significant opportunity for value-enhancing capital deployment.
Speaker Change: Our long-term capital deployment priorities remain, maintaining net leverage at stage and long-term targets, M&A at attractive multiples, and share repurchases, where, as a reminder, we have $400 million remaining under our current authorization levels.
Speaker Change: I will now discuss our guidance for the full year 2024.
Speaker Change: and our specialty and HVAC businesses discussed earlier in the call.
Speaker Change: We now expect full year adjusted EBITDA of $890 to $900 million, representing a narrowing of the prior range on the top and bottom end.
Speaker Change: This range reflects adjusted EBITDA growth of approximately 13-15% on a fixed currency basis and adjusted EBITDA margin of 12.8% at the midpoint.
Speaker Change: For 2024, we anticipate interest expense to be approximately $145 million, depreciation to be approximately $82 million, capital expenditures to be approximately $90 million, and our adjusted effective tax rate to be approximately 23 percent.
Speaker Change: We expect our adjusted diluted weighted average share count to be approximately $280 million for the fourth quarter and $279 million for the full year.
Speaker Change: As we look forward to 2025, we have great confidence in the business and its momentum. We plan to share our outlook early in the new year and more details about our long-term strategy at our Investor Day, which we expect to host in May in New York.
Speaker Change: I'll now turn the call back over to Russ.
Russ: Thank you, Kevin. We believe we can create sustainable shareholder value by focusing on our 1360-80 long-term value creation targets with a near-term laser focus on delivering adjusted EBITDA margins of 13% or more in 2025.
Russ: As we look to 2025 and beyond, we have great confidence in the business, our backlog, our balance sheet, and our ability to continue to evolve API into an even lower capex, asset-light business focused on high-margin, statutorily mandated services.
Russ: 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. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: Your first question comes from the line of Julian Mitchell with Barclays. Your line is now open.
Speaker Change: Well, Kevin, do you want to take that one?
Kevin Krumm: Our current guide is $890 million to $900 million, which is down from our prior guide of $885 million to $915 million.
Speaker Change: Okay, so just to clarify there, the question on the billion dollars, that was a, you know, that comment is directed towards the near term with no specific date or time at this point. It's just a near term benchmark we have internally and as Russ mentioned, we believe we have the momentum in the business to get there in the near term.
Speaker Change: Okay, thank you. That's helpful. And then, you know, maybe as a quick follow-up, I was wondering if you could just talk a bit about, you know, the M&A environment and what your current pipeline looks like at present.
Speaker Change: I'll take that. I mean, we have...
Speaker Change: If you recall last year we shared that we did approximately 100 million dollars of bolt-on M&A and we said that we were going to move into 2024 and accelerate that and we feel like we've done a really good job of that and that really excludes the the acquisition of elevated.
Speaker Change: And our pipeline remains really full. We have a number of targets that we're continuing to work on to
Speaker Change: through the fourth quarter of this year and we expect to have similar capacity and momentum as we go into 2025. So it's been it's been really good. Our corporate development team has done a really nice job and our pipeline is really robust and the opportunities are plentiful.
Speaker Change: Your next question comes from the line of Stephanie Moore with Jeff Rees. Your line is open.
Speaker Change: Hi, good morning. Thank you.
Stephanie Moore: I guess just as a follow-up, I wanted to touch on maybe the projects out of your business a little bit. You know, I think you
Stephanie Moore: called out some of these permitting and delays last quarter and throughout the quarter. And I think noted today, you do think these are limited to 2024 and confidence in the full year guide. Maybe you just give us a little bit of color on why you feel confident that these should return and rebound here by your end. Thank you.
Speaker Change: Yeah, sure, Stephanie, thank you and.
Speaker Change: Good morning.
Speaker Change: Well, when you look at the project delays, essentially everything is moving forward. It's just moving forward.
Speaker Change: in a more perky, jerky fashion, if you will. I don't know if that's really actually proper grammar.
Speaker Change: But the opportunities are continuing to move forward, you know, like we've cited.
Speaker Change: We've got a large government utility client that has a significant winterization program that went on pause and the work basically was going to restart in the third quarter and it has, and we have boots on the ground. It's just that the engineering work associated with really kicking off the installation components of it is just slower to get moving than was originally expected and we will potentially see that work pull through in the first half of next year.
Speaker Change: We have another one of the larger project-related opportunities that I think we shared some color on.
Speaker Change: It's a, you know, it's a high voltage power distribution transmission coming down from the in the northeast and
Speaker Change: The work has started there as well, but you know, we originally anticipated having, you know, probably five crews going right now doing duct bank and bolt work and
Speaker Change: Due to some interference issues with existing electrical distribution and natural gas distribution systems that are in the ground, they've got kind of like right away issues that nobody anticipated. And so they're going through, you know, re-engineering to get those issues resolved so that the work can ramp up.
Speaker Change: and move forward and some of that stuff is just you can't plan for it and it's unfortunate and it's difficult but all of those opportunities are moving forward.
Speaker Change: And we cited, you know, in our remarks, you know, the increase in our backlog. You know, our backlog is up, you know, roughly 5% organically.
Speaker Change: And that basically moving into 2025 gives us great confidence that we've got good coverage for, you know, for growth to return, you know, to the business. And so, as we work our way through some of these, you know, short term, temporary challenges.
Speaker Change: We have great confidence in where the business is moving to as we move into the end of the year and really next year.
Speaker Change: Got it. So just, and herky-jerky is a perfectly fine word in my opinion. I think that sums it up pretty well. So effectively what you're saying is...
Speaker Change: It's not that there was any kind of deterioration since 3Q. It was about as you expected, but, you know, a lot of this is outside your control. It's just kind of the timing of these, you know, there can be some changes on when things start and the ramp. It's not as if there's anything really that changed since 3Q, other than the ramp is happening, you know, maybe a little bit slower, which is really outside your control. Is that fair?
Speaker Change: That's fair. The only place I would say that we've seen any significant pullback would be in the telecom space.
Speaker Change: It's pretty well known that the federal government's rural broadband program, the way the government is administering that program and delegating and basically delegating the distribution of those funds to the states and how the states are allocating those dollars to get that program going, it's well known that that's a challenge right now.
Speaker Change: delays in the work actually getting started because they're having some of these administrative issues associated with it.
Speaker Change: That would probably be the only place that you could, you know, really point to, you know, where there's, you know, maybe some other core underlying issues, but like these other opportunities, the work is moving forward. It's just moving forward slower than anticipated due to unforeseen issues.
Speaker Change: Got it. And to be greeted here, I do want to switch over real quick to the safety services side. Could you just talk a little bit about the drivers of the margin expansion that you've seen kind of this year and kind of what drivers that should continue into 2025? Thank you.
Speaker Change: Yeah, I'll start maybe and then Kevin can add maybe more detailed color if he would choose.
Speaker Change: Number one, this inspection-first strategy that we've incorporated, and we continue to talk about double-digit inspection growth.
Speaker Change: in, you know, our core, you know, core life safety business, and that's like our key.
Speaker Change: We continue to see really good growth in inspection revenue, which leads to really good service pull-through.
Speaker Change: which is really manifesting itself and you know we didn't really I don't know that we really called it out you know specifically in our remarks but you know we get on average 10% higher gross margins on our inspection service and monitoring while even more on our monitoring than we do on our project work.
Speaker Change: And I think one thing that gets lost in the mix, in the shuffle, is that when you have a really robust inspection in service business, that allows you to be even more selective on the project portion of your business.
Speaker Change: and you get to be more selective and picky with where you're going to deploy those field leaders and your margins go up, you know, ultimately on your project work, so...
Speaker Change: That would be the first component of it that drives increased margins, and we've grown the mix of our inspection service and monitoring business to 54% of total revenue now, which is we continue to make progress towards that 60% goal.
Speaker Change: in our international business. I think when we originally bought Chubb, we had like 47 loss-making branches and we're down into single digits now.
Speaker Change: and expect that to be, you know, really very, very close to no loss-making branches by the end of the year. I don't know that we'll quite make that.
Speaker Change: but we're continuing to make significant progress there and all of that stuff is additive.
Speaker Change: to our margins, and we're seeing really good progress in the international business, so.
Speaker Change: You know, you can see, like, if you look at our contract loss rate, there's a, you know, as that has declined, there's a direct.
Speaker Change: you know, relationship with improved gross margins which ultimately lead to improved EBITDA margins, then, like, our team is really doing a great job of being selective in the work that they're choosing and the programs that they're choosing. So, Kevin, I don't know if you want to add anything.
Kevin Krumm: You highlighted the project execution that we now see in our contract loss rate and the CHUP value capture, which continues to contribute to the safety services segment. So nothing else on my end.
Speaker Change: Thank you guys, appreciate it.
Speaker Change: Thank you. Thanks, Stephanie. Your next question comes from the line of Andy Whitman with Baird. Your line is now open.
Andy Whitman: Yeah, great. Thanks for taking my question guys. I guess I just wanted to start out by checking in on the early
Andy Whitman: days have elevated. Maybe, Russ, you could talk about the level of customer and employee retention that you've seen here so far.
Andy Whitman: If you could talk about any progress that you're making on integrating in terms of your ability to cross-sell, or maybe even how the company's revenue and margins are coming out compared to the way you expected them to come out.
Speaker Change: Well, number one, um...
Speaker Change: You know, I would tell you that from, you know, say key leader retention and everything else, like we couldn't be happier.
Speaker Change: I think I can honestly tell you that, Andy, that I appreciate the leadership of that business more and more as we continue, you know, to get to know them and, you know, we were, you know, also starting to.
Speaker Change: You know, look at potential bolt-on M&As, M&A opportunities in that space, and so it's...
Speaker Change: What that's done is it's afforded us to spend more time with some of their key leaders and taking advantage of their expertise as we look at some of these other businesses.
Speaker Change: and like there's some really, really, there's some really good people. You know, we lost one leader that ran a small piece of our business, but that was...
Speaker Change: You know, I guess that was more anticipated than than anything so We feel really good about you know, where we're at with with that with the business and
Speaker Change: I really like the long-term prospects of what we're doing there. Cross-selling, you know, we're just, so to speak, getting started.
Speaker Change: We've had some joint sales meetings with them. They have a large hospital client that they brought our national accounts group in on a meeting. And so we're just really scratching the surface as it relates to the cross-selling opportunity.
Speaker Change: It's a great example, we had all of our safety professionals on campus this week for their annual collaboration.
Speaker Change: Auh
Speaker Change: meeting where they're getting together. And we had people from our international business there as well. And our elevated team was well-represented.
Speaker Change: you know, as we continue to bring our leader development.
Speaker Change: capabilities to them. It's been well received in inside their business so it's been it's been good.
Speaker Change: We expect that business to perform just as we as we shared when we first announced the acquisition going all the way back, I guess, probably June now.
Speaker Change: and so we have seen no reason why the business hasn't.
Speaker Change: It's not uncommon for some of these acquisitions to have a little dip in their results in the near-term period after the deal closes because the team is so focused.
Speaker Change: there was no real surprises with the acquisition. It was kind of a typical private equity.
Speaker Change: kind of owned Transaction where they start the business, you know from a capex perspective, you know They didn't they weren't investing in the rolling fleet and things like that. None of that
Speaker Change: you know, unexpected though. You just kind of know that going into these transactions when the owner is a private equity firm. And we're, you know, making the requisite investments in the business. So, like, I remain super optimistic about the long-term prospects for us building a broader platform in the elevator and escalator space.
Speaker Change: Great, I wanted to follow up my next question here probably with with Kevin.
Speaker Change: I guess I wanted to try to understand the 10 bolt-ons that you've done this year, for which you've paid $211 million. I was just wondering, Kevin, if you could just give us the aggregate annual revenue from those, just so we can get a sense of
Speaker Change: how those are factoring into your outlook and
Speaker Change: to give us a better sense of how meaningful those have been.
Kevin Krumm: Thanks, Andy. So listen, so you're right, we've done about 10 deals that excludes elevated.
Kevin Krumm: and the purchase price has been at or around today, at or around $200 million. We don't disclose revenue exactly on all these deals, but I would say just directionally to help you, the average annual revenue on transactions today is going to be north of $100 million.
Andy Whitman: Got it. Okay.
Speaker Change: And then my final question, Kevin.
Speaker Change: is just on the adjustments between
Speaker Change: I was just wondering what your outlook is for the convergence of those two numbers. Obviously, there's some things that are just definitional like your
Speaker Change: always going to exclude the intangible amortization on your adjusted EPS and things like that. But for the things like business transformation costs and restructuring, I mean, most of Chubb has been integrated now.
Speaker Change: But in the bigger bucket for your adjustments is in the business transformation. Is 25 a cleaner year where those numbers come down or what other things are you investing in that might cause that to be higher as we move forward?
Speaker Change: Yeah, so we've said pretty consistently that the restructuring expense with respect to, so there's, you highlighted on the two buckets.
Speaker Change: The two material buckets, you know, there's some non-service pension and a few other things in there.
Speaker Change: Tangent compensation or consideration for deals
Speaker Change: We closed.
Speaker Change: really prior to being a public company. But the two big buckets that are in there that are driving the largest gap at this point, Andy, are the BPT and restructuring. We said restructuring is related to the value capture work we're doing in CHUBB, which will largely be done at the end of 2025. And that's still our expectation.
Speaker Change: The other bucket of business process transformation, that bucket is really focused on integration work associated with
Speaker Change: primarily Chubb and now Elevated and other deals we've done. I would expect that bucket to continue.
Speaker Change: As we do larger sort of deals, platform deals and some things like that, but as you look at 2025 absent that, I would expect that bucket, like the restructuring bucket, to subside.
Speaker Change: Thank you very much.
Speaker Change: Thank you, Andy.
Speaker Change: Your next question comes from the line of Katherine Thompson with Thompson Research. Your line is open.
Katherine Thompson: Hi, thank you for taking my questions today. Just first on that, you've gained great pricing over the years, including in the quarter just reported. But given that inflation is abating somewhat, can you discuss the ability to gain pricing in that moderating inflation environment?
Katherine Thompson: Unquote.
Speaker Change: You know, I'll start, and then Kevin can add some color to it. Catherine, good morning, and thank you for joining the call. But, you know, we continue to take price. I mean,
Speaker Change: And in our business, especially like if you look at our inspection and service business, which is, you know, predominantly labor, you, you are continuing in our business. We're continuing to see, you know, wage rates.
Speaker Change: you know, increased at reasonable levels. Don't get me wrong. I mean, we're not seeing anything anything crazy happen there. And so we continue to take price, you know, across really the broader portfolio of our business. So and we see really actually good stickiness, you know, in that price. I think earlier, earlier in the year, you know, we talked about we had a business in our specialty services segment that, you know, we struggled to raise our prices and we came to a mutual agreement and, you know, walked away from a from a client relationship.
Speaker Change: and we've actually already started to do work for that customer. We haven't returned to, you know, the levels that we had, say, in 2023, but we are, you know, returning to work and doing, you know, executing on different programs for this particular customer at, you know, increased prices. So,
Speaker Change: We continue to focus on price and take price.
Speaker Change: We want to continue to work for clients that value the services and the skills that our field leaders bring to the table.
Speaker Change: And those are the right customers for us, and that's where the focus has continued to be. So it's been positive for the business. I don't know, Kevin, do you have anything more to add that's maybe more detailed?
Kevin Krumm: No, I mean, we've talked.
Kevin Krumm: about where we're going to consistently take price to drive margin, and that's on the service side of the business. And when you look at it this year, our teams in North America and internationally, I would say internationally, where they had some room to run as they came into API Group, have continued to take pricing.
Kevin Krumm: on the service side of the business to drive margin. And I think as we go forward here, it's going to be a lever we're going to be continue to be able to pull. You know, we've talked
Kevin Krumm: about ticket size and some things like that, that allows us to do that, and then of course the value we bring on site. And so I think as we go forward here, even as inflation could subside, we're going to be able to continue to work our pricing mechanics as we have.
Speaker Change: exterior building product distributor that mentions that their non-res repair model activity is picking up after COVID delays and it's been better than expected this year. Given APG services are largely non-discretionary
Speaker Change: How does APG fit into that non-res R&R activity that was delayed? Really, what are the opportunities?
Speaker Change: Man, good question, Catherine. I mean,
Speaker Change: You know I
Speaker Change: I feel like our business-related activities, you know, kind of in a world post-COVID have essentially returned to normal, so I'm not quite sure, you know, what this other firm, you know, is necessarily, you know, citing.
Speaker Change: You know our our our business, you know continues to see, you know, really really
Speaker Change: you know, opportunities and the, you know, growth and inspections, you know, I mean, again, double digits, you know, for in this quarter again, and.
Speaker Change: and that's just continued that's that all that is just continued since COVID and really you know we had a dip when COVID first hit which when nobody knew what was going on and and then it bounced back and we've just continued to see you know double-digit inspection growth you know and so
Speaker Change: I guess I'm at a little bit of a loss as it relates to what this other company is citing. I don't know, Kevin, can you help me out?
Speaker Change: Thank you. Bye.
Kevin Krumm: Well, what I would point to just on general momentum, we added it to the presentation. You can look at our backlog. It's up. Our proposal activity remains robust. We track that. Our proposal activity is up. As Russ hit on inspections, we continue to see double-digit growth there, and in our service portfolio, which...
Kevin Krumm: would be sort of not statutorily inquired, but work we're doing on the security side or service portfolio work is up as well. So we continue to see, and what we look at, we continue to see good momentum across those areas.
Speaker Change: It seems like from our perspective it can only be a positive thing for API. Thanks very much for taking my questions today. Good luck.
Speaker Change: Thanks, Kathryn.
Speaker Change: Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is open.
Speaker Change: Good morning, guys.
Speaker Change: Tammy
Andy Kaplowitz: Russell, okay, how are you? So you're still recording 3% organic growth and safety and...
If inspection services are going double-digit, it means you're your project businesses.
Andy Kaplowitz: declining. So I know a lot of the issues issue is HVAC services and you're going to comp that weakness now and you're you're moving into specialty anyway but how should we think about your project's business going forward in safety? Can it get can it get back to let's say mid-single digit growth in the current market or is there not enough good work out there for that?
There's plenty of good work out there. There's there's plenty of good work out there Andy. I mean
Speaker Change: You know, I mean, you know, if you look at if you look at our number one We were focused on project selection and customer selection, you know in that business as well
Speaker Change: We had a large hospital project in our Asian business that kind of pushed from the commencing in the first half of the year into the second half of the year.
Speaker Change: And, you know, that work is now moving forward. We actually, you know, recently booked another large, you know, hospital project that literally, when you're standing in our office in Hong Kong, you can look out the window and look down on the project site.
Speaker Change: and we've just recently put that project into, I don't even think it shows up in our backlog figures as of yet.
Speaker Change: You know, we have a business that's, you know, based in the South that, you know, does a lot of warehouse and distribution work. And that business has been slightly impacted by the high interest rate environment. And as interest rates continue to come down, we expect to see that business take off and really have a positive impact. It's a highly profitable business.
but their revenue is down some. And then you cited some of the general pruning from a project selection perspective that we've had in the HVAC business. But I think I cited in my remarks that the backlog in our North American safety business or in our safety business is at $2 billion and it's the highest it's ever been.
You know, we have really good visibility into, you know, what, you know, this next year is going to look like and we're really optimistic and it's positive.
Speaker Change: God, no, that's helpful. And then, Russ, I know, obviously, you don't want to give out those new three-year targets on margin.
But you're already delivering over 13%, you know, over the last couple quarters. I know it's a seasonal business, so.
But still, like if inspection services are much higher, project margins...
You know, as you look forward, you know, what stops you from delivering sort of mid-to-high teens, or at least how do you think about...
you know, what you could be telling us next year.
Well, come to our Investor Day in May and we'll share our targets with you. But, I mean, directionally you're correct. I mean, we're not saying that we're done when we get to 13%.
And just like anything, when you set a goal and you set a target, the first thing you need to do is deliver on that target. And we haven't done that yet.
and we expect we will do that in 2025. You know, we will be within a stone's throw if you look at the guidance that we provided as we finish out this year. So we've made, you know, really, I think, fantastic progress, you know, in expanding our margins.
And we're not going to stop. So when we get to 13%, we're not going to stop. And there continues to be upside for us.
And we're going to share that next May, you know, and we're doing a lot of work right now on kind of, you know, we're calling it 2025 and beyond, and what does that look like, you know, not just, you know, margin expansion, but, you know, where can we go from a revenue perspective and, you know, where are the growth opportunities in the business, and we feel just really, really good about the long-term prospects and the viability of where we're taking the business.
God, and just one more quick one from me, like...
you know, if you think about sort of core markets, you know, whether it's been data centers or semiconductor, LNG, whatever it is, like, generally, are those markets still giving you more opportunities? There been any delays in some of those bigger markets? And how do you think about that?
Speaker Change: Yeah, I mean...
Speaker Change: So, yes, our backlog continues to grow, and it continues, and when we talk about it growing...
It's healthier, and I think that's a really important component for folks that are joining the call today to take away is that, yes, it's growing, and it's much more healthy than it was, say, 12 months ago or 24 months ago. And so it's very positive.
Our core end markets, I mean, you don't even need to talk about data centers. I mean, the data center market is so hot.
and there's so many opportunities, you know, in the space.
Speaker Change: You know, we still see good opportunities in the semiconductor space.
She continues to have a lot of opportunities in that sector as well. Probably the only place, and I think when Stephanie from Jeffries was asking a question, and I cited the only place that we've seen any, you know, sort of...
kind of pull back from some of, you know, is in the telecom space, and a lot of that has to do with the administrative issues that the federal government has in, you know, administering the funds with the Rural Broadband Program. BEADS, I think, is what the acronym is.
And that's really the only place where we've seen, you know, any sort of true difficulty, if you will, but our backlog is super strong.
Your next question comes from the line of Josh Chan with UBS. Your line is open.
Hi, good morning. Russ, Kevin, thanks for taking my question.
When you talk about accelerating organic growth in 2025, is the primary driver there the absence of the project delays that you're seeing today? And I guess, could you talk about kind of the composition between service and project and whether both can kind of grow in 2025? Thank you.
Well, Kevin, why don't you, why don't you, do you want to grab this one? Yeah. Yep.
So as we think about 2025 going into 2025, you know, obviously with with strong backlog and the activity that I referenced earlier in the call, we feel like it's going to or we believe it's going to be more of a what I'll say is a normal year, Josh. And so.
Speaker Change: As we look at the project side of the business, we'd expect that to perform in that low to mid single digits.
and Service, which is held up this year at that mid to high single digits. That would be our expectation.
as we go through 2025 as well. Now there'll be a ramp-up period in the first half of the year, but in general we see 2025 setting up as that normal year with projects.
load of med and service Mendehyde.
That's on an organic basis.
Speaker Change: Thank you. Thank you.
Organic basis, okay, yeah, thank you. And then on your three-year targets, obviously you guys have done a great job expanding margins and likely to reach your existing target. Kind of going forward, will there be a kind of an organic growth component to the next round of targets as well? Just curious how you're thinking about what metrics are important, thank you.
Well, for sure. I mean, you know, like, there's for sure is an element of organic growth in, you know, like this long term planning that I talked about 2025 and beyond. The organic growth is a component of that, I guess.
I guess Josh, I guess we haven't really thought our way through exactly how
Speaker Change: I think it's good feedback for us and something for us to think about as we start to establish some of these targets and goals and what we share with folks like yourself as we go forward. But, you know, there's no question that
Organic growth is part of the algorithm as we think about, you know, what does the business look like in
you know, 2025 and beyond, or, you know, like through 2028, you know, we think about it from an organic growth. We think about it from a bolt-on M&A perspective. We think about it from transform, you know, transformational M&A and what does the business look like and, you know, how much of that is service? And is there another leg under the stool and all of those things?
Speaker Change: come into play as we think about, you know, 2025 and beyond. So, yes, organic growth is a component of that. We understand the importance of organic growth in the health of our business. And we'll have to think about how we...
establish and publish, you know, from, from a, you know, a target perspective, so.
Speaker Change: I don't know, Kevin, you got any thoughts on that?
Kevin Krumm: Nothin' to add, bro.
Great, yeah. Thank you both for the call and the time. I appreciate that.
Speaker Change: Thank you.
Your next question comes from the line of John Tanwantang with CJS Securities. Your line is open.
Hi, good morning guys. I was just wondering if you could give us a little more color on the M&A pipeline and kind of the timing and size of opportunities there. Do you expect, you know, some of these to close earlier in 25 or maybe late in 24 and, you know, maybe that has an effect on the accretion for the year or is it more spread out or is it more back half-weighted? Just help me understand what you're looking at in your pipeline today.
Speaker Change: Well, the reality of it is, is when you think about bolt-on M&A, John, we want that to happen consistently throughout the year. And, you know, the reality of it is, is that, you know, we don't have, like, I'm talking specifically bolt-on M&A now. You know, most of these sellers sell their business one time, and that's it.
And so sometimes they don't have usually a lot of resources.
Speaker Change: And so sometimes transactions move relatively quickly, sometimes they move relatively slowly. And, you know, some of it's based on, you know, do they have the resources? Can they pull the information together that we need, etc. And so you don't have, you know, 100% control about, you know, the timing of some of these transactions. But the goal is to have them, you know, happen, you know, consistently, you know, throughout the year so that, you know, you're balancing your workload, you know, we're not killing our team.
Speaker Change: and our people are, you know, you know, getting their work done and we just, it's kind of like you're just like clicking away and clicking away and clicking away and clicking away and you continue to do, you know, some, you know, transactions. So, you know, we expect to, you know, get, have some deal activity, get completed up here.
yet in the in the fourth quarter and we'll continue and we'll just continue right pushing right through into next year. Now the next elevated, you know, when that comes along, you know, we're always
and there's always something going on. And it doesn't mean, though, that we're going to move forward. You know, we are very disciplined in how we value these businesses and whether the business is the right fit for us.
And so, you know, it's, you know, whether, you know, we have one happen, you know, yet this year, I would say probably, probably doubtful. I suspect anything's possible, but it's probably doubtful. And most likely there'll be, you know, it would be something with if something were to happen, it would happen in 2025.
Got it. And to follow on an earlier question, are you expecting to provide something like an inorganic growth target or aspiration or perhaps, you know, a target for capital deployment towards M&A at your investor deck?
Bolt-on M&A is part of our playbook, and we've always been an acquisitive company, and it's really a big part of our DNA in who we are, and so it will be part of the playbook.
Speaker Change: You know
Speaker Change: There's always going to be an element of hesitation about saying we're going to do X amount of M&A a year Because if it's not the right if it's not the right Opportunities for us then we need to be disciplined and we need to to not do it And I don't want to get into a situation where we're we're doing deals just to do deals that would that would not
Thank you. Bye bye.
You know, so it'll be part of our playbook, it'll be part of our planning, it'll be part of how we're thinking about what the business looks like, you know, long term and in the future, but I would, I would be reticent to say we're going to do X amount of M&A each year. It just, I don't know if that would make much sense.
That concludes our Q&A session. I will now turn the conference back over to Russ for the closing remarks.
Speaker Change: Bye.
Russ: Thank you. In closing, I would like to thank all of our team members for their continued support and dedication to our business. I'm truly grateful for what each one of you do on a daily basis. I would also like to thank our long-term shareholders, as well as those that have recently joined us for their support. We appreciate your ownership of API, and we look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody. Appreciate your time this morning.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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Speaker Change: and Chris Lillie. Thank you for watching. I hope you enjoyed the video. If you did, please leave a comment and let me know. If you'd like to see more videos like this, please subscribe to my channel. I'll see you in the next video. Bye.