All right, we're going to move on with Russ Becker from APi Group. Thanks, guys, for CEO of APi Group. We usually just start this off with a bit of a state of the union, what you're seeing out there, and your business, what you think is most important longer term. Then we'll get into the Q&A.
Great. Is this on?
It is. Yep.
Good morning, everybody. Thank you for taking the time to join us, and thank you for your interest in the company. State of the state, feel really good moving into 2025. Feel like our business is really well positioned. 54% of our revenue is coming from inspection, service, and monitoring. We feel like we continue to grow the recurring component of the company. Our backlog is at all-time highs. I think on an organic basis, we're up 9% on a year-on-year basis. As we move into 2025, we feel really good about where we're at. We feel good about the end markets that we serve. For us, it's just a lot of blocking and tackling and continuing to move forward with our bolt-on M&A strategy and the work that we're doing. We're in a good spot.
Can we just delve into the safety business? You guys have done a great job of transitioning the portfolio over time. Talk about the various business models there and what you're seeing in each of those, whether it's the really recurring inspection, some of the upgrade work you do. Obviously, new construction is less important, but just talk about how that business model works over time.
I think the biggest differentiator for us in that space is the focus that we have on growing the inspections. And for those of you that are newer to the story, this building is not really a fair comparison because it's pretty damn nice, and it's pretty big. But a typical.
It's either one next door.
Yeah. I'm looking forward to seeing it, actually. Maybe one day we'll graduate to that building.
I'm hoping to graduate to that building as well at some point.
A typical commercial real estate or office building has a fire protection system in it. There are two components to that fire protection system: the sprinkler system and the fire alarm system. Those systems are required by law to be inspected for functionality and operability at least once a year. Most of the time, it is twice a year or even quarterly. The biggest thing for us is we are growing the inspection side of our business. We are out building a sales force that is calling on the already built environment and selling inspections to building owners and property managers. The reason that we do that is that we have data that shows we are going to generate someplace between $3 and $4 worth of service work on an annualized basis for every dollar of inspection work that we do.
One of the biggest bellwethers for us is double-digit inspection growth. We've grown our inspection business in the U.S. at a double-digit clip every quarter since the pandemic. We continue to build out our sales force so that we're able to do that. We're kind of in flight of bringing that service-first, inspection-first mindset to our international business that didn't have that when we acquired the business three years ago.
Can you talk about how you can carry that across the pond? What's different? What your experience of the last year and change is kind of telling you the challenges and the opportunities on that front?
Internationally, I think one of the biggest differences for us is that that business, kind of if you look at it in the buckets that it falls in, a third of our revenue comes from security, a third of our revenue comes from fire alarm, very little of that is really sprinkler, and then a third of it comes from fire extinguisher. The rules are different, if you will. What we are doing, though, is so like security, as an example, that is not statutorily required to have those systems inspected. Obviously, if you have CCTV or camera systems and card access systems and they do not work, you are going to fix them. There is no statutory requirement that they have to be inspected. That is a difference. What we are doing is bringing that kind of sell that first mindset.
They used to capture service work in the more traditional sense, like some of our peers did in the U.S., where they would go sell the new installation project. Then when the installation project was coming to a close, they would turn around and try to sell the service work. We are building out a sales team there as well that is selling service to the already built environment. It is a little bit nuanced, but it is really very, very similar.
Right. Right. If you get out in front of that and you approach it the way you're approaching it, that's kind of like better for everybody.
100%.
That's a big improvement for the business.
100%. We brought in a new sales leader in our international business. He is doing a fantastic job. He is really competitive. He has brought just a whole new mindset to that sales team. We've had some turnover and some change with those folks as he's brought a different element of accountability to the group. It's been really refreshing. He's done a really good job.
Stepping back to the U.S. business, you guys talk about a growth rate, mid to high single digits on that on the U.S. safety side. We're trying to figure out what's going on in the economy. You guys are not that economically sensitive. In that business, kind of where would you see if you were to see some pullback at all of your customers, where would you see that? What are you seeing today? What are you watching for with all this uncertainty? Obviously, you're way more insulated with your inspection and services side.
I mean, I think for us right now, we're just seeing more noise than anything. We're clearly watching tariffs and what the impact that the tariffs could potentially have. For us, the biggest commodity that we buy is pipe. We're obviously watching hot rolled coil prices. We're pretty protected. When President Trump won the election, we knew that tariffs would be one of his hammers, if you will, that he would utilize. We were very proactive in making sure that on the installation side of our business, we were protecting ourselves. You also have to remember the average project size for us is very small and typically our quick hitting. The exposure that we have there is not super high. We want to make sure that we continue to stay out in front of it.
For us, I think, Steve, a big part of it is end markets. The end markets we serve continue to show positive resilience. The demand is really high, whether that's data centers, semiconductors, for the most part, advanced manufacturing. We feel really good about kind of where the business is sitting today and the resiliency that we have to kind of operate through all this noise. I was at this CEO breakfast, and they were talking about the volatility in the economy and leading through that. I was like, this is just like every day. You just need to be kind of agile and open-minded and know that this is the world that we live in today. I feel like our business leaders are prepared to lead their businesses through that.
Maybe talk about that growth algorithm and how that gets built up when it comes to, I mean, price is such a tough thing to calculate for you guys because it's labor hours, right? Maybe just talk about how you discern the rate of volume activity and then how that kind of translates into your actual revenue growth. How much is coming from an actual volume of activity versus maybe a price or a value?
When you look at, again, this, maybe talk specifically about the U.S., the expectations are very similar for our international business. We have guided our businesses to high single-digit growth in the inspection and service side and low single-digit growth in the installation part of the business. That kind of gets you that mid-single-digit range. We continue to grow the inspections at a double-digit clip. That is almost all share. We build price increases into our proposals and into our agreements. For the most part, you are taking share there. I think that is one of the biggest advantages for us. Really, the way that we continue to build resilience into the business model is those buildings exist. They are not going away regardless of what happens to the economy.
That is what gives us confidence that we're going to be able to continue to grow the business organically.
Who are you taking share with and who are you taking share from? Is there a flavor to that that's consistent across those? Because that's obviously a lot of share gains.
Yeah.
Because the market is probably growing what, low to mid?
Yeah, I would say low, low single digits.
Yeah, yeah.
The beautiful thing about, especially on the fire side of the business, is that I hate to say this, but when there's actually a catastrophe, it drives code change. Increased codes is actually quite beneficial for our business. That's an aside. In general.
That would be a market driver.
That's a market driver, for sure. In general, we're taking that share from small family-owned businesses. Even though you've seen kind of over the last, I don't know if you want to call it five years, ten years, whatever, you've seen a lot more private equity interest, especially in the fire space. Still, the lion's share of our competitors are small family-owned businesses on a kind of city-by-city location basis. That's who we're competing with. I don't want to take anything away from them because that's like the core to our bolt-on M&A strategy. These are really good people, good hardworking people. Typically, they have less resources, so they're less sophisticated. It's easier. Like your average inspection is probably less than $1,000.
For these family-owned businesses, it's a lot easier for them to go out and win a $500,000 installation job or retrofit job than it is to build up that same revenue base, $1,000 at a time. They don't have the infrastructure, and they don't have the resources, and they don't have the people. A lot of times, they're doing it just because they did the original install or something like that. That's who we're taking that share from in general.
Is there any particular customer that they may own a few buildings, and you're doing one building, now you're doing two? I mean, or is it still the customer base obviously is fragmented, but is there a flavor for the customer that you resonate more with? Not really.
I would say not really. I mean, again, we're going to be more focused on the right-end markets. That strip mall that has a Starbucks in it is probably not going to be the place that we're going to do so well with. The more sophisticated, the more complex, those types of customers we're going to clearly do better at just because we bring more expertise to the table. No, not really.
I guess, is there a national account element to any of this? I mean, I think it's pretty local, right?
We have a business inside of APi that we call National Service Group. It is basically a sales engine to sell national accounts for our individual branches then to turn around and service. We do have an engine inside APi that is attempting to sell accounts on a national basis and a regional basis.
Just turning back to international, and Chubb, maybe just talk about more of the integration there. Where are you from that perspective? I think you're pretty much at the end of the plan period. Is there more to go there, or are we now, from an operating perspective, a pretty solid run rate on margins?
The margins are going to continue to improve there.
Right.
We're not.
I guess the integration phase, the integration phase.
Yeah. So there's kind of two. We have more work to do. All right. We identified roughly $125 million of basically synergies because for the most part, that's we're taking costs out of the business. I think through the end of the year, we're at $90 million. We've got $35 million to go, of which the lion's share of that will come through 2025 with a little bit of it moving into 2026. The way I would tell you, there's some significant integration work. Like we're consolidating our monitoring center footprints, and that work is ongoing. We're integrating our Benelux business. If you recall, we had bought SK Fire Safety before Chubb. There's a significant integration going on there. Our business leader there, his name's Fokke de Vries, is doing a fantastic, fantastic job.
The way I'm looking at it, Steve, is like it's business as usual. We still have stuff that we're doing that we're going to continue to do. My brain has kind of switched to business as usual. We've opened the aperture up as it relates to bolt-on M&A. We're looking at some things now internationally. We feel like the business probably won't go do something in Benelux just because of that integration work that's going on. Would we do something in the U.K.? 100%. You're seeing us open up the aperture because we feel like we're in a much, much better place. To be honest with you, I just really couldn't be happier with where that business has come in the three years that we've owned it.
Ultimately, what's the long-term growth rate you see for Chubb? I would assume it's a little less than the U.S., than you target in the U.S., or you think you can.
Fleet average. We expect that business to grow organically, mid-single digits. We guided that business the exact same way we guided our North American safety business, high single digits on inspection and service and low single digits on project work. I would tell you that when we rolled up our plans, that's what we saw.
It's amazing what can be done with kind of a corporate orphan that doesn't get the real attention that it needs. That business didn't grow for 15 years.
Flat to declining.
Yeah.
I would say that I think knowing that we actually want to own them actually matters. We did not own that business. I remember myself and three of my colleagues spent the first, when the deal closed, we spent about 10 days over in the U.K. and moving around the U.K. and Western Europe and visiting a bunch of our branches. I would tell you, two days in, I had seen more branches and more of the business than the previous leader of the company, much less the CEO of Carrier at the time. I mean, that's the way we operate. I think we were on day two, and one of my colleagues was asked, "When are you going to sell us?" It was like, "Yeah, we're not.
We're actually excited to own you. For those of you that don't know the company very well, our enduring purpose as a company is building great leaders. If you think about it in the context of you've got 500 branches internationally, and every one of those branches needs to have a great leader in order for you to win in that market. Each of those companies needs to have a great leader. I mean, if you just think about it in the context of a people-centered business, investing in people as leaders and as human beings actually matters in our case. When we bought Chubb, we very quickly recognized that there was a void in their culture that wasn't good or bad. It didn't exist.
We were able to insert ourselves and bring the leader development programs that we had built over time in North America. Very quickly, we had some translation and things like that that we had to address. We were able very quickly to start to bring those opportunities to that team. It took off like wildfire. Not only was it orphaned, but it was not invested in. These people had no idea what it was like for somebody to say, "Yeah, I actually care about you, and I care about your growth as a human being." That matters, especially in a people-centered business. We have a Leader Lab going on right now in Rotterdam. I was actually going to go, but I came here, Steve.
Appreciate that.
No, I actually was going to go, so.
Maybe just one other way how that gets institutionalized into the culture. Just kind of hammer home the point of the things you do to differentiate on that leadership development front. Another example of what you guys do to make it more institutional.
We don't have enough time. I mean, these Leader Labs I mentioned, we started having Leader Labs for the first time, I think, in 2003. We have one every spring, one every fall. We do spring and fall in the U.S., spring and fall now in Western Europe, spring and fall in Asia-Pacific. In North America, I've never missed one. I left early from one, and I regret it to this day. It's 100% leader development, no spreadsheets, no business. It's like, "You're showing up, and we're going to take the time to invest in you as a leader and as a human being." People know I'm not a facilitator. I'm a participant. People know how important this is to me and then ultimately to the institution. It really, really matters.
One of the things that is really interesting, and we'd be more than willing to share this with anybody in this room, but we have a saying at APi, "Everyone everywhere is a leader." We encourage every single one of our team members to believe in their brain, in their mind, and to invest in themselves that they are actually a leader. If you're going to do something like that and say something like that, you have to give people the opportunity to opt in to grow and develop as a leader. We created an online learning opportunity. It's 30 minutes long, and it's called I Am a Leader. We have three pillars of leadership at APi: Leading Self, Leading Others, and then Leading Teams and Businesses. This I Am a Leader learning opportunity is centered on Leading Self.
We all can do a better job of leading selves and improving ourselves and being a better version of ourselves, right? I think we've had 7,000 of our team members in the U.S. opt in to participating, and we've had 7,000 internationally opt in. Here's the interesting part about internationally. It probably took us five or six years to get to, say, 5,000 in North America. It took us six months to get to 5,000 internationally. I share that because it just gives you a glimpse of how these people were.
Yeah. They buy in, and you also are probably better at understanding scaling it.
100%. I'm serious. Reach out to Adam. We can share a link with you. If you want to steal it, you're welcome to steal it. You can put J.P. Morgan on it instead of APi. I'm a big believer that a rising tide floats all boats. If we can help your organization be better, then we're helping in general. We're helping our communities and our societies as a whole.
I manage like four people, so I don't know.
I don't know.
Chandra, what do you say? I want to get Chandra going. Just back to the business on the specialty side, a significantly smaller piece of the portfolio than it's been. What are you guys seeing there? Maybe just talk about the visibility you have on the pickup that you've embedded in your guidance for this year.
Yeah, I mean, we feel good about where the business is at. I mean, as we move into 2025, their backlog is up organically, what?
Double digits.
Double digits. I mean, their backlog is in a really good place. We feel like the really disciplined customer pruning and customer selection that we went through last year and then some of the project delays are behind us. We also think we've learned a little bit as it relates to some of the programs that we've taken on. I feel like that business is in a really good place to have good organic growth in 2025, just like the rest of our business.
Just the margins. You guys are clearly delivered on what you said you were going to deliver on on margins. What's the philosophy on the next step? Is it going to be another kind of three-year target at some point at your Investor Day? How are you going to approach this? Will it be an incremental margin algorithm? What's the approach to margins, thinking a bit more longer just framework-wise?
I'll let Adam because he's really organizing the Investor Day and everything else. We've been working on some of our long-range planning probably going back 12 months ago. As we started to think about what does the next iteration of APi look like, we plan to share kind of our next targets at our Investor Day in May. They definitely will be higher. We will continue to expand our margins and drive increased growth in the business. As it relates to the levers, it's really a lot of the same, Steve. I mean, I've been sharing a little bit. If you look at our North American business, North American safety business specifically, and that branch operating model, right?
If you said that we have a bunch of branches, and they sit in a cluster like this, and the average is right around 15 or 15% plus from a margin perspective, we need to take that whole cluster, right, from 15-17% or higher. You know what I mean? I'm just saying. We need to tighten the cluster instead of having—and it's pretty tight now in North America. Whereas if you look at our international business, the cluster is probably a little looser just because we haven't owned it as long. We need to tighten it. We need to take that from, say, 13-14% to the 15-16-17% range, just like we're going to take our North American business. The things that we need to do in those branches are really the same. It's price.
It's growing the inspection service and monitoring. It's being disciplined on customer selection and project selection. It's over here having procurement support that work. I would say that we actually had a question from one of our investors this morning was around, like, "Do you have any major projects?" Kind of in the same vein as your question. The answer is yes, we do have some platform. We need the next iteration of our field service module. You know what I mean? So that we can continue to provide a more productive, easier work environment for our field leaders, right? The more efficient that we can make them, the more they're going to enjoy their job, the better job they're going to do servicing our customers. It all kind of works hand in hand.
That software, that's most.
Yeah, it's technology. And we're obviously operating on a platform right now, but it's like, what's next and what's the next iteration of that? And that's kind of just normal evolution the way I'm looking at it.
Are branch closures a part of this? I mean, given you're so local and you want your services top-notch, it seemed that that wouldn't be a significant part. How much of a role do branch closures play?
is probably very little in the international, but there would be more potential for branch closures internationally. We did close a branch in the U.S. this year.
One branch?
One branch.
Then branch closure really isn't a big part of it.
No, it's not. I mean, if people think that we're not going to prune there as well, we're going to prune there. When you look at our operating model, this branch-led operating model, you can hand the best person, like, "Here's the recipe book. Here's the playbook." If you're average at best, we're still going to get average results. You still have to start with, "Do I have the best damn leader in that branch? Yes or no?" When you have a really good leader in that branch and you hand them the playbook, that's when things really will take off. Adam's got his one in his investor deck or one of his investor decks. He's got probably 74 of them out there. There's a slide in there that shows an evolution of a branch, and you should check it out.
Because that's possible, what happened in that branch is possible in every single branch that we have. It starts with the right branch leader. Then it's sell inspections first and then all the other stuff. I think one of the things that is a little bit, can be even confusing to some of our field leaders, is we talk about this inspection first mindset, inspection and service and everything else. They think that we're going to get out of the installation, the installation part of it. Really what we want to do is just shrink that component of it. What happens when you have a really robust inspection and service and monitoring business in your branch, it allows you to be even more selective on the project work that you do, and your gross margins skyrocket. That's a beautiful thing.
That's a beautiful place to be.
Right. On the M&A front, before we get to the audience, just talk a bit about the pipeline you guys talked about on the earnings call and then Elevated and what your intentions are in elevator maintenance.
I'll maybe hit elevators first. We entered the elevator space last year, about halfway through the year. We're very excited. The reason that we really like the elevator escalator space is the statutory nature of that business as well. It's very similar to the fire and life safety business. And Elevated is roughly a $200 million business, so it's not a huge business. We think that there's a billion-dollar platform opportunity for us. As it relates to M&A, we are going to walk before we run. What I mean by that is that we're going to buy a company and kind of gauge how they do from an integration perspective. Really, we haven't done any bolt-on M&A inside the business. The reality of it is I don't know.
We have a team at APi that's led by a woman by the name of Anna, but she's really the quarterback. The business has to own the integration. I want to make sure that we do a really good job of integrating the first one. When that gets done and that goes well, we will go do the next one. I am taking a walk before we run approach. Nobody should read anything more into it than it's just like, "Let's make sure that we don't screw it up by doing too much too fast and being very disciplined as we approach it.
I guess it's elevator maintenance. That sounds like it's a big focus now.
Oh, yeah, for sure.
Okay. Any questions out there? In the core business, what are you focused on from an M&A perspective in the other parts of business or that's more of a margin story?
I'd say in our core business, I mean, we spent roughly $250 million on M&A last year. In general, if you look at it, our average multiple on our bolt-on M&A is less than six times. If you're paying less than six times in general for every dollar of purchase price you get, you're going to get roughly a dollar of revenue. That's just the way the math works when you're paying reasonable multiples for these businesses. Our goal would be to do another $250 million this year, another $250 million next year, and continue to build out our geographic footprint. I would say the only—I don't know if it's a significant difference, but the only difference would be the fact that we've actually opened the aperture up to our international business, as I mentioned earlier. We're looking at some opportunities there.
We did one small one last year in Australia. We have got a few things that we are looking at now that would be complimentary to our international business just in general. We are being smart about it, but we have opened our eyes and opened the field up a little bit.
Just one last one on free cash flow. You guys have done a good job of generating cash. What's the outlook there? Any moving parts on cash flow we have to be that are notable here this year, next year?
No, nothing notable. Our target for this year is 75%, which is in line with our increased target for last year. We think there's a working capital opportunity that we'll continue to attack. We feel like we can stay kind of in line with where we generated last year while returning to more normalized organic growth levels by going after working capital this year.
Lastly, just on buyback, is that any consideration of a buyback if some of these deals don't come your way? Multiples may be just a little bit too high for you. I mean, you guys definitely don't pay a lot for these companies, but on the elevator side, maybe they're a bit higher. What's the view on buyback?
Yeah. We've been actually active in the market buying back some shares recently. I think we've been pretty open that, number one, we're going to pay down debt, reduce our leverage. We obviously are inside our target, so do not get to use that excuse anymore. Second would be I'd rather do M&A with our excess cash. Buybacks would be third. We feel like our share price is undervalued. We like the leadership team of the company. We do not have to do a lot of diligence on the business. We've actually been active. We think our shares are undervalued. We've actually been actively buying back some shares recently.
Oh, interesting. Okay. Anything else? All right. We're good.
All right.
Thank you.
Thanks, Steve.
Thanks a lot. Really appreciate it.