APi Group Corp Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Thanked approximately 29,000 employees for their dedication, highlighting focus on safety and well-being.
• Progress made on margin expansion initiatives with expected adjusted EBITDA margins up ~150 basis points. Key initiatives include pricing, improved revenue mix, disciplined customer/project selection, Chubb value capture, procurement/systems/scale, accretive M&A, and business pruning.
• Disciplined customer and project selection has positively impacted financial results, with backlog growing and healthy with higher margin, lower risk projects.
• Core Life Safety business represents over 65% of net revenues, with record high backlog of ~$2 billion. HVAC business realigned under Specialty Services segment.
• Momentum in inspection, service, and monitoring revenues, with organic growth strong. Bolt-on M&A engine accelerated with 10 acquisitions closed through October.
• Contract loss rate dropped from ~1.5% in 2019 to <0.4% in 2024, reflecting disciplined selection and strong execution.

Segment Performance

• Safety Services Segment: Revenues for the three months ended September 30 increased by 9.7% to $1.34 billion compared to the prior year. On an organic basis, revenues increased by 3.1%. Adjusted gross margin was 35%, a record third quarter, and adjusted EBITDA increased by 24.3% with a margin of 15.7%.
• Specialty Services Segment: Revenues declined by 13.4%, 7.7% on an organic basis to $493 million. Adjusted gross margin was 20.1%, and adjusted EBITDA declined by 19.3% with a margin of 13.6%.

Guidance

• Full year 2024: Reported net revenues expected ~$7B, adjusted EBITDA $890M-$900M, adjusted free cash flow conversion expected at or above 75% (up from prior 70%).
• 2025: Plan to continue strategy, accelerate organic growth, increase margins, and expand bolt-on M&A program. Aim to achieve 13% plus adjusted EBITDA margin target in 2025 and set new targets for subsequent years at Investor Day 2025.

Risks

• Project delays in Specialty Services and HVAC due to higher-than-expected permitting/engineering delays and slower execution of federal rural broadband program.
• Administrative issues in telecom and rural broadband programs causing delays in work start.
• Unforeseen events impacting project timelines and execution.

Question and Answer

Q: Could you provide color on the timeline to reach $1 billion in EBITDA?

A: Current guide is $890M-$900M, $1 billion is a near-term benchmark with no specific date, but momentum exists to reach it.

Q: Talk about the M&A environment and current pipeline?

A: Pipeline is full with number of targets worked on through Q4 2024, expecting similar capacity and momentum in 2025.

Q: Why feel confident project delays are limited to 2024 and will rebound?

A: Opportunities moving forward, backlog up ~5% organically, with some projects delayed due to unforeseen issues but all moving forward.

Q: Drivers of margin expansion in Safety Services and what continues into 2025?

A: Inspection-first strategy with double-digit inspection growth leading to service pull-through, improved mix of inspection/service/monitoring revenue, pruning poor-performing contracts/customers in international business, and selective project/customer selection.

Q: Level of customer and employee retention in Elevated and progress on integration?

A: High retention, cross-selling just starting, making investments in the business, optimistic about long-term prospects in elevator/escalator space.

Q: Aggregate annual revenue from 10 bolt-ons in 2024?

A: Average annual revenue on transactions is north of $100M, though exact figures not disclosed for all deals.

Q: Outlook for convergence of GAAP and adjusted results?

A: Restructuring expense related to Chubb integration will subside by end of 2025, Business Process Transformation to continue with larger deals, but restructuring expected to subside in 2025.

Q: Ability to gain pricing in moderating inflation environment?

A: Continue to take price across portfolio, with good stickiness, and wage rates increasing at reasonable levels, focusing on clients valuing services.

Q: Backlog growth and core market opportunities?

A: Backlog continues to grow and is healthier, core markets like data centers, semiconductor, healthcare, infrastructure have ample opportunities, with only telecom/rural broadband facing delays due to administrative issues.

Q: Accelerating organic growth in 2025 and composition of service vs project?

A: 2025 expected to be normal year, project side low to mid-single digits organic growth, service side mid to high single digits organic growth.

Q: Organic growth component in next round of targets?

A: Organic growth is a component of long-term planning for 2025 and beyond, though specifics on targets not yet established.

Q: M&A pipeline timing and size?

A: Bolt-on M&A expected consistently throughout the year, timing varies as transactions depend on seller resources and fit, with no specific front-loaded or back-loaded expectation, but disciplined in valuing and fitting opportunities.