APi Group Corp Q1 FY2025 earnings call

Management Statement and Operational Highlights

• General: Celebrated 10th Safety Week with TRIR below 1.0. Returning to traditional organic growth levels.
• Safety Services: Organic growth of 5.6%, with high-single digit growth in inspection service and monetary revenues and low-single digit growth in project revenues. North America inspection revenue had a double-digit increase for the 19th straight quarter.
• Specialty Services: Businesses performed in line with prior quarter, with backlog up 7% organically. Decline in net revenues moderated from the fourth quarter.
• Margin Expansion: Focus on achieving 13% or more adjusted EBITDA margin in 2025. Initiatives include improved revenue mix, disciplined customer and project selection, Chubb value capture, pricing improvements, procurement, systems and scale, accretive M&A, and selected business pruning.
• Tariffs: Limited impact on recurring services; material costs in projects managed via contractual provisions. Anticipated no material impact on 54% of net revenues from recurring services.
• Free Cash Flow: Adjusted free cash flow was $86 million in Q1, with an adjusted free cash flow conversion of approximately 45%. On track to achieve 75% conversion in 2025.
• Investor Day: Upcoming on May 21 in New York to detail new financial targets and strategic plan updates.
• Systems and Enablement: Three-year investment in systems and technology to equip branches and field leaders with data and modern tools for efficiency.

Segment Performance

• Safety Services: Organic growth was 5.6% in the quarter. Revenues for the three months ended March 31 increased by 13.4% to $1.27 billion. Adjusted gross margin was 37%, segment earnings increased by 20.6% (21.6% on a fixed currency basis), and segment earnings margin was 15.7%. The segment saw high-single digit growth in inspection service and monetary revenues and low-single digit growth in project revenues, with a double-digit increase in inspection revenue in North America for the 19th straight quarter.
• Specialty Services: Revenues decreased by 6.8% to $453 million in the three months ended March 31. Organic revenue declined 6.6% due to project and service revenue decreases and adverse weather. Adjusted gross margin was 16.8%, segment earnings decreased by 32.6%, and segment earnings margin was 6.4%. Backlog in this segment was up 7% organically.

Guidance

• Full Year 2025: Expected net revenues of $7.4 billion to $7.6 billion (up from $7.3 billion to $7.5 billion), representing organic growth in net revenues of 2% to 5%. Adjusted EBITDA is expected to be $985 million to $1.035 billion, with an adjusted EBITDA margin of 13.4% at the midpoint.
• Q2 2025: Reported net revenues are expected to be $1.875 billion to $1.925 billion, with adjusted EBITDA of $260 million to $270 million and an adjusted EBITDA margin of 13.9% at the midpoint.

Risks

• Tariffs: Potential impact on project material costs if not passed through to customers.
• Macro Uncertainty: Impact on demand for projects if tariff noise continues to affect customer decisions.
• Weather: Adverse weather can impact organic growth in the Specialty Services segment, with ~5 days lost to weather in Q1 having a mid-single-digit impact on organic revenue.
• Rural Broadband Program: Choppy revenue cadence due to states reworking proposals.

Question and Answer

• Q: Backlog and growth visibility A: Backlog is sitting right around $3.5 billion, up year-over-year. Growth visible in end markets, with no significant delays due to tariffs.
• Q: Organic growth variance A: Pulling forward materials due to tariffs boosted organic growth in the first quarter.
• Q: Tariffs impact on projects A: No significant delays in projects, with backlog continuing to build.
• Q: International business growth A: Organic growth in the international business was in line with expectations, with mid-single-digit organic growth.
• Q: Weather impact on Specialty A: ~5 days lost to weather in Q1 had a mid-single-digit impact on organic revenue in the Specialty Services segment.
• Q: Capital allocation A: Preference for accretive M&A, followed by share repurchases, with a focus on deleveraging to within the 2.5 times net leverage target.
• Q: Margin expansion and M&A appetite A: Focus on revenue mix improvement and M&A appetite for right opportunities that are accretive to long-term financial objectives.
• Q: Recession positioning A: Resilient business with variable cost structure, strong cash flow generation, and 100% confidence in the inspection service and monitoring business's ability to withstand slowdowns.
• Q: Specialty margin in Q2 A: Margins in the Specialty Services segment will begin to expand in the back half of the year but are expected to be modestly down for the full year, returning to accretive in 2026.
• Q: Project pruning and wage inflation A: Ongoing project pruning to work with the right customers and work, with good visibility on wage increases in union firms in North America's fire business.