APi Group Corporation Q2 2026 Earnings Call

Good morning, ladies and gentlemen, and welcome to API group's Second Quarter 2020 Financial Results conference call. All participants are now in a listen only mode until the question and answer session. We ask that all participants limit themselves to one question during 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 Walters, Senior Director of Investor Relations at APi Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our second quarter 2020 earnings conference call. Joining me on the call today are Russ Becker, our president and CEO. And David Jackola, our Executive Vice President and CFO. Before we begin, I would like to remind you that certain statements in the company's earnings press release and on this call are forward looking statements, which are based on expectations, intentions and projections regarding the company's future performance and anticipated events, or trends in other matters that are not historical facts. 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 in our press release. In filings with the SEC. We detail material risks that may cause our future results to differ from our expectations. Our statements are, as of today, July 30th, and we undertake no obligation to update any forward looking statement we may make, except as required by law. As a reminder, we have posted a presentation detailing our second 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. The reconciliation of and other information regarding these items can be found in our press release and our presentation. It is now my pleasure to turn the call over to Russ.

Thank you Adam. Good morning everyone. Thank you for taking the time to join our call this morning. I want to. Begin by thanking our 31,000 leaders for their dedication to API. The safety, health, and well-being of each of our leaders remains our number one value. We are proud that API has once again been certified as a great place to work. Marking our fifth consecutive year on the list. This achievement reflects the culture our leaders have built, one where we care for our teammates and empower them to do their best work. Our. Purpose of building great leaders defines that culture and allows us to attract, develop and retain exceptional leaders across API We believe our culture will continue to be a competitive advantage for us over the long term. The strength of our business model and disciplined execution drove another impressive quarter. As we continued to deliver robust growth and margin expansion. Net revenues, increased 13%, including 10% organic growth, with growth across both segments. Our North American safety business maintained its momentum and delivered another strong quarter, growing organically by high single digits with robust growth in both project and service revenues. This business has consistently outperformed our mid-single digit long term growth algorithm, underscoring the sustained strength of the business and the execution of our inspection first strategy.

We. See a healthy pipeline in both project and service work, much of which is. With existing customers. Reinforcing our inspection. First, flywheel and creating attractive recurring revenue opportunities in the future. International safety was flat for the quarter. However, we saw a return to organic growth in the back half of the quarter Improvements in underlying commercial indicators give us confidence that the business will continue to grow as we move through the balance of the year. Investments in our international global accounts capability are gaining traction. Both pipeline and book backlog increased during Q2 and include a number of meaningful new project awards in the data center space, which, as many of you know, has lagged the US market in both the pace and magnitude of growth. Order intake grew mid-single digits in the quarter and portfolio additions were at their highest level in more than two years. Longer. Term. There is a significant opportunity ahead in the international business as we double down on our recurring revenue and inspection. First, go to market strategy. Supplement growth through bolt on M&A and capitalize on the cross-sell opportunity that exists through Wtc's complementary fire, sprinkler and suppression capabilities. The special.

Services segment outperformed expectations in the second quarter. Net revenues increased 22% organically, with robust growth in both project and service revenues. Momentum was. Broad based demand continues to be strong across our targeted end markets. Data centers were a notable contributor. Where our business is offering a variety of service. Services, including Hvac and mechanical structured cabling, structural steel and insulated paneling, among others. Our team has remained selective in its approach to customer and project selection and has executed at a high level, translating top line growth into a 60 basis point increase in segment earnings margin. We ended the second quarter with a record backlog, surpassing $5 billion for the first time in history. End markets matter. We remain focused on data centers. Semiconductors, advanced manufacturing, health care, and critical national infrastructure within the data center market. Activity remains a meaningful source of strength across both segments, and we see a healthy pipeline of opportunities. Our size, scale, technical expertise and established customer relationships position us well to support the data center and related infrastructure, build out. While creating long term opportunities for recurring high margin inspection, service and monitoring revenue. Once the data centers are operational. I am pleased with the portfolio of offerings across our segments, which positions us well to capture current demand in this dynamic market.

Adjusted Ebit. Margins increased ten basis points despite the near-term mix impact from the robust project environment. As a reminder, gross margins from project work is typically ten percentage points lower than those on service work These attractive projects meet our disciplined customer and project selection criteria and position us well to capture the recurring inspection and service work. Following project completion. Cash flow was once again strong in the quarter, with the business generating $228 million in adjusted free cash flow. Year to date. We ended. The quarter with a net leverage ratio of 2.2 times. Below our long term target During the quarter, we repurchased approximately 1.6 million shares for $66 million. The first share repurchase under our existing $1 billion program. Our. Free cash flow generation and strong balance sheet continue to provide us flexibility to pursue acquisitions, share, share repurchases, and reinvestment in the business through capital expenditures. Supporting our ten, 16, 60 plus financial targets. As a reminder, these targets include the following. $10 billion plus in net revenues by 2020. Eight, supported by consistent mid-single or mid-single digit organic growth and accretive M&A. 16% plus adjusted EBITDA margin by 2028, 60% plus of our revenues from inspection, service and monitoring over the long term, and $3 billion plus of cumulative adjusted free cash flow through 2028.

We continue to flex our M&A muscle this quarter. In June, we closed the acquisition of Onex Fire, followed by Wetech in early July. It has been great to welcome both teams to the API family These businesses are excellent strategic fits for API. Add valuable capabilities in important geographies and most importantly, align well with our culture. Integration is progressing and we are excited to see both businesses continue to grow. As part of API. We also remain active on the bolt on front, completing three acquisitions during the quarter. This included the first bolt on acquisition completed in our elevator and escalator services business, as well as one completed in our international safety business. These are important milestones as we build out our M&A pipelines in both businesses. The industries we serve remain highly fragmented, and our bolt on. Our bolt on pipeline remains robust, with a broad range of opportunities at attractive multiples. Our value proposition as a forever home continues to resonate with sellers and their teams. Our strong balance sheet provides the flexibility to pursue larger acquisitions when the right opportunities arise, and we remain on track to deploy $250 million in bolt on M&A this year.

Looking forward, we are building the capabilities needed to support a higher volume of bolt on M&A as we work to scale annual deployment towards $350 million. Lastly, EP was named to the fortune 500 list for the first time. This is a meaningful milestone which coincides with our 100 year anniversary and reflects the dedication of our leaders, the strength of our business model, and the consistent execution of our strategy. We are proud of how far API has come and remain focused on continuing to build a durable business for the long term. I believe the best is yet to come. The. This is executing at a high level in our financial and our financial results are strong, reinforcing our confidence in our long term targets. We are encouraged by the strength in the inspection service and monitoring business. The robust project environment. Record backlog and the discipline. Disciplined execution of our M&A strategy. We are well positioned to build on this momentum in the second half of the year. I would now like to hand the call over to David to discuss our second quarter financial results and guidance in more detail David.

Thanks, Russ, and good morning, everyone. Reported net revenues for the three months ended June 30th were 2.25 billion, a 13.3% increase compared to 1.99 billion in the prior year period. Organic growth of 10.1% was driven by solid growth in inspection, service and monitoring revenues. Robust growth in project revenues and pricing improvements, adjusted gross margin for the three months ended June 30th was 31.2%, unchanged compared to the prior year period. Margins increased in both project and service revenues, driven by disciplined customer and project selection and pricing improvements, offset by project and business mix. Adjusted EBITDA increased by 14.3% for the three months ended June 30th, 13.1% on a fixed currency basis, with adjusted EBITDA margin coming in at 13.8%, representing a ten basis point increase compared to the prior year period. Growth in adjusted EBITDA margin was driven by strong revenue growth, resulting in favorable. S, G and a leverage A. Adjusted diluted earnings per share for the three months ended June 30th was $0.44. Representing a five cent, or 12.8% increase, compared to the prior year period. The increase in adjusted diluted EPS was driven by strong revenue growth and adjusted EBITDA margin expansion, partially offset by an increase in the adjusted diluted weighted average shares outstanding.

I will now discuss our results in more detail for the safety services segment Safety services reported net revenues for the three months ended June 30th were 1.48 billion, an 8.8% increase compared to 1.36 billion in the prior year period Organic growth of 4.7% was driven by solid growth in inspection, service and monitoring revenues. Growth in project revenues and pricing improvements. Adjusted gross margin for the three months ended June 30th was 37.4%, representing a 20 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements, which resulted in margin expansion in inspection, service and monitoring revenues and project revenues. Partially offset by mixed segment earnings increased by 8.6% for the three months ended June 30th, or 7.7%, on a fixed currency basis. Segment earnings margin was 17%, unchanged compared to the prior year period, driven by adjusted gross margin expansion offset by increased energy and a. I will now. Discuss our results in more detail for our Specialty Services segment Specialty services reported net revenues for the three months ended June 30th were 773 million, an increase of 22.9%, or 22%. Organically, compared to 629 million in the prior year period, driven by robust growth in both project and service revenues.

Adjusted gross margin for the three months ended June 30th was 19.3%. Representing a 120 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements, resulting in margin expansion in service and project revenues. Segment earnings increased by 29.6% for the three months ended June 30th, and segment earnings margin was 11.9%, representing a 60 basis point increase compared to the prior year period. Driven by adjusted gross margin expansion, partially offset by a expenses including variable compensation expense. As Russ mentioned, adjusted free cash flow generation remained strong for the six months ended June 30th. Adjusted free cash flow was 228 million, up 42 million versus the prior year period, representing adjusted free cash flow conversion of 68% on adjusted net income, free cash flow generation remains a priority across API, and I am pleased with our improvement in net working capital rate, allowing us to grow adjusted free cash flow while our organic revenues increase double digits. We remain on track to achieve our adjusted free cash flow conversion target of approximately 115% for the year. In line with our prior guidance. We ended the quarter with a net leverage ratio of 2.2 times below our long term target ratio of 2.5 to 3 times.

As anticipated, we completed a series of well executed capital markets actions during the quarter. We issued 500 million of 5.75% senior unsecured notes due 2034 expanded our revolving credit facility to 1 billion and proactively extended the maturity of our term loan B to 2033. While maintaining sulfur plus 175 basis points. Pricing Collectively, these actions improve our liquidity. Extend our maturity runway, and provide continued balance sheet strength and flexibility. As a reminder, our long term capital deployment priorities remain unchanged. Maintaining net leverage at stated long term targets, strategic M&A at attractive multiples and opportunistic share repurchases. I will now discuss our 2026 guidance for the third quarter and full year, which, as a reminder, is based on foreign currency exchange rates and acquisitions close to date. We are again. Raising our full year guidance for revenue and adjusted EBITDA. Based on our strong first half performance and improved outlook for the remainder of the year. We now expect full year net revenues of 8.875 to 9.25 billion, up from the guidance provided on July 2nd, 2026 of 8.66 to 8.86 billion, representing 7 to 9% organic revenue growth Moving down the P and L, we now expect full year adjusted EBITDA of 1.205 to 1.245 billion, up from 1.177 to 1.237 billion, representing an adjusted EBITDA margin of 13.7% at the midpoint, and adjusted EBITDA growth of 16 to 20% for the year.

Our increased guidance. Offsets estimated foreign exchange headwinds of approximately 30 million to net revenue and 5 million to adjusted EBITDA relative to our prior guidance. As a reminder, our prior guidance issued July 2nd, 2026, fully incorporated the anticipated 2026 contributions from the Onyx Fire and W tech acquisitions. Additional information can be found in our earnings presentation posted on our Investor Relations website. For the third quarter, we expect reported net revenues of 2.375 to 2.425 billion, representing organic net revenue growth of approximately 8 to 10%. We expect adjusted EBITDA of 325 to 335 million, representing an adjusted EBITDA margin of 13.8% at the midpoint and adjusted EBITDA growth of 16 to 19% for the full year 2026. We anticipate interest expense of 150 million, which reflects the incremental interest expense associated with the 500 million senior unsecured note issuance completed during the quarter. We expect depreciation expense of 90 million CapEx of 105 million. In adjusted effective tax rate of 23%, corporate expenses for the year of approximately 140 million, with some variability across quarters. And an adjusted diluted weighted average share count of 439 million, reflecting the repurchase of 1.6 million shares. During the second quarter. With that, I will now turn the call back over to Russ.

Thanks, David. As we look ahead to the third quarter, we see sustained momentum across the business and continued demand for our services. Our teams continue to deliver strong organic growth, expand adjusted EBITDA margins and grow the backlog at the same time, our disciplined M&A execution and robust pipeline support our long term growth strategy. This positions us well for the back half of the year as we remain focused on creating sustainable shareholder value and delivering on our ten, 16, 60 plus targets. With that, I'd like to turn the call over to the operator and open the call for Q&A.

Thank you. We will now begin the question and answer session. Please limit yourself to one question. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one. Again, we ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Andrew Wittmann with Baird. Your line is open. Please go ahead.

Great Excuse me. Thanks for taking my questions this morning., Russ, I guess I just wanted to ask about the the project business here., maybe you could just comment here. It's obviously a big, driver of the growth. You're realizing here in not just this quarter, but in recent quarters. And as a result of that, I was hoping you could comment on the average size of those projects. I have to. Imagine it's going up, what can you tell us about that?, and, and how it relates to, the margins that are available because ,, you're getting some margin leverage, but you've got big long term margin goals And I'm wondering if the mix of, of all this project work, which is great., is a, is a inhibitor to achievement of those goals, recognizing that your profit dollars are growing nicely with it. So I'm hoping you could just talk about the project size margins associated with them and how that relates to your long term margin goals. Thank you.

Yeah. Thanks, Andy. I hope you're well., there's no question that the project sizes,, are larger and we're seeing significant increases, you know, like when I think about, you know, the fire protection life safety space, you know, and you think about a data center, you know, you know, 4 or 5 years ago, a large data center job might have been 7 or $8 million. And today, you know, you consistently see fire, fire projects, you know, pushing $20 million. And,, but the, I would say the difference is, is that,. That you're, you're able to price that work. Accordingly and get and get better gross margins, you know, on, on that larger project work just because of the complexity associated with it, the location of where these projects are at ., it makes it more difficult for, you know, some firms to, to be able to pursue, you know, that work. And so you can, you know, really price accordingly. And,, it's, it's,,, it's positive., you know, is it, you know, like we comment in, in, in the,, in our,, remarks about, you know, typically we ,, our project work has ten percentage points less gross margin than our inspection service and monitoring, I would say that that is true in most cases, but on some of this larger work, we're able to get ,, higher gross margins,, on it and close that gap more.

And, we believe that,, we're still on track to achieve our 16% long term 2028 margin expansion objective.

Your next.

Question comes from. Your.

Next question comes from the line of Stephanie Moore with Jefferies. Your line is open. Please go ahead.

Great. Good morning. Appreciate the time. I was hoping you could Stephanie a bit. Good morning. I was hoping you could touch a bit on what you're seeing. Actually, on the safety side of your business. Maybe bifurcating between performance in North America as well as in Europe, and maybe any strategic actions you've made as of late to either accelerate margin performance or any other actions that might help?, you know, give a little bit more color within safety. Thank you.

Well, our safety business continues to perform very well. And we're,, actually quite happy with what we're seeing, you know, in, in, in our business. You know, we still like in the international safety business, we still have work to do to,, so to speak, convert to the mindset of like ,, recurring revenue, first service inspection work,, first and,, you know, that is something that, you know, I wish you could flick a light switch and, and change, change mindset, but that's just not the case. And so we continue to ,. To push, push the, ,. Push that hard., in the business. And we're actually seeing some really positive,, you know, results coming, coming from that. So,, but we still have work, work to do there. And,, but, you know, in general, our, our inspection first strategy., continues to, to pay dividends and we continue to optimize branch performance and see, we continue to see upward, you know, results from that. And,, it's good. And then you got the robust project environment sitting on top of it. And,, we're really, we're really just seeing that come, come forward in the international business., you know, I think that especially from a