Prepared remarks
Good morning, ladies and gentlemen, and welcome to APi Group's Second Quarter 2026 Financial Results Conference Call. Operator instructions were provided. 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 2026 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, anticipated events or trends and 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 and 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 30, 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 enduring 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 continue 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 continue to 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 booked 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 U.S. 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 WTech's complementary fire sprinkler and suppression capabilities. The Specialty 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 businesses offer a variety of 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 APi's 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 EBITDA margins increased 10 basis points despite the near-term mix impact from the robust project environment. As a reminder, gross margins from project work are typically 10 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 2.2x, 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 consistent free cash flow generation and strong balance sheet continue to provide us flexibility to pursue acquisitions, share repurchases and reinvestment in the business through capital expenditures, supporting our 10/16/60+ financial targets. As a reminder, these targets include the following: $10 billion plus in net revenues by 2028, supported by consistent 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 Onyx-Fire, followed by WTech 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 remained 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 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, APi 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 business is executing at a high level 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 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.
Thanks, Russ, and good morning, everyone. Reported net revenues for the three months ended June 30 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 30 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 30, 13.1% on a fixed currency basis, with adjusted EBITDA margin coming in at 13.8%, representing a 10 basis point increase compared to the prior year period. Growth in adjusted EBITDA margin was driven by strong revenue growth, resulting in favorable SG&A leverage. Adjusted diluted earnings per share for the three months ended June 30 was $0.44, representing a $0.05 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 30 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 30 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 mix. Segment earnings increased by 8.6% for the three months ended June 30 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 SG&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 30 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 30 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 30, 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 SG&A expenses, including variable compensation expense. As Russ mentioned, adjusted free cash flow generation remains strong. For the six months ended June 30, 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 organic revenues increased 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 2.2x, below our long-term target ratio of 2.5 to 3x. 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 SOFR 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 closed 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 billion to $9.025 billion, up from the guidance provided on July 2, 2026, of $8.66 billion to $8.86 billion, representing 7% to 9% organic revenue growth. Moving down the P&L, we now expect full year adjusted EBITDA of $1.205 billion to $1.245 billion, up from $1.177 billion 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 2, 2026, fully incorporated the anticipated 2026 contributions from the Onyx-Fire and WTech 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 billion to $2.425 billion, representing organic net revenue growth of approximately 8% to 10%. We expect adjusted EBITDA of $325 million 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, an 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 10/16/60+ targets. With that, I'd like to turn the call over to the operator and open the call for Q&A.
Questions and answers
The call is now open for questions.
Russ, I guess I just wanted to ask about the project business here. Maybe you could just comment — 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 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 all this project work, which is great, is an inhibitor to achievement of those goals, recognizing that your profit dollars are growing nicely with it. So hoping you could just talk about the project size, margins associated with them and how that relates to your long-term margin goals?
Thanks, Andy. I hope you're well. There's no question that the project sizes are larger, and we're seeing significant increases. When I think about the fire protection, life safety space and you think about a data center, four or five years ago, a large data center job might have been $7 million or $8 million. Today, you consistently see fire projects pushing $20 million. I would say the difference is that you're able to price that work accordingly and get better gross margins on that larger project work because of the complexity associated with it and the location of where these projects are. It makes it more difficult for some firms to pursue that work, and so you can really price accordingly, and it's positive. As we commented, our project work typically has 10 percentage points less gross margin than our inspection, service and monitoring work. That is true in most cases, but on some of this larger work, we're able to get higher gross margins and close that gap more. We believe that we're still on track to achieve our 16% long-term 2028 margin expansion objective.
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 give a little bit more color within safety.
Our safety business continues to perform very well, and we're quite happy with what we're seeing. In the International Safety business, we still have work to do to convert to the mindset of recurring revenue-first service and inspection work. That is something you can't just flip a switch on; it takes time to change mindset, but we continue to push that hard and are seeing positive results. Our inspection-first strategy continues to pay dividends, we continue to optimize branch performance, and we continue to see upward results from that. On top of that, we have a robust project environment. We're really starting to see those project opportunities produce positive results in the international business as well, especially in the data center end market.
Appreciate. And then just one follow-up here. M&A is a question you get asked quite a bit. This has been a very active M&A year for you. It would be helpful to get a sense of what you're seeing in terms of M&A activity as we think through the second half of the year. Was it kind of a pull forward to the first half on timing? Or could we expect this momentum to continue? And then on that, Russ, you've always been vocal about areas you would like to expand into from an M&A standpoint. Any change in strategy in terms of end market or services you'd like to go after over the medium term?
I would say no change in strategy with respect to the disciplines we serve. We'll continue to focus on fire life safety, security, and elevator and escalator as probably our top three priorities. We also like the HVAC service space and would be interested in opportunities there if the right one came along. What you saw in the recent M&A activity is that the right opportunities came along at the right time, and because of the strength of our balance sheet, we were able to act. Being opportunistic is important to us. There are some interesting opportunities we're watching that may come in the latter half of this year. You should expect to see bolt-on M&A activity continue through the second half of the year and into 2027. As I said in my prepared remarks, we've set an annual goal to do $250 million of bolt-on M&A a year and are working to build out our capabilities — including using artificial intelligence to assist on financial due diligence — to scale toward $350 million annually because we see the opportunity there. So, strong balance sheet, opportunistic approach, and continued activity.
I'll keep this one fairly short and sweet. Just on the guide raise, in terms of what changes does it incorporate in terms of growth expectations for Safety Services versus Specialty, just if you can unpack that.
Yes. Curtis, I'll take that one. As you're looking towards the back half of the year, what I would say is we're continuing to see solid strength in our North America Safety segment and a modest improvement in our International Safety segment, and that will be reflected in the guide as well as a continuation of the robust project and service growth in our Specialty Services segment into the back half of the year.
I think you said backlog is now north of $5 billion. I believe on the second quarter call last year, you told us you had eclipsed $4 billion in backlog for the first time. Is like 25% growth in the backlog year-over-year the right way to think about it? And then looking forward, how should we think about what sounds like pretty healthy backlog growth converting to revenue?
Well, yes, that's the math. That backlog growth is across every aspect of the business, and that's a positive. The quality of the backlog is also positive; we should generate better gross margins with our backlog today than we did a year ago. I'm always reticent to talk exact figures on backlog because these large projects are longer in duration. Our average project duration that was probably at one point six to nine months is probably more like nine to 12 months today. We saw that in the quarter and we can have Adam follow up if needed. But our backlog coverage is in really good shape, and we continue to be pleased with the discipline our teams are showing from a project and customer selection perspective.
No, you got it all.
When looking at M&A, specifically the WTech and then Onyx-Fire, you mentioned they were well aligned with the culture. Can you go into a little bit more on the specifics of how these were strategic fits and well aligned culturally? And then looking at the M&A pipeline, how those acquisitions in the future could potentially fit this criteria?
Sure. I'll start with Onyx. The CEO of Onyx is Bryan Chew. I met Bryan in probably 2017 when he was still with Brookfield, and I've known him for a long time. Since Bryan took leadership at Onyx-Fire, he's been super focused on inspection service first with project work being the additional revenue, which is very similar to our approach. The acquisition increases our presence in the Canadian market and makes us a very strong player there when combined with our existing business. Bryan has built a great team, and we have confidence in their leadership. Regarding WTech, we first met Ted Wright two years ago at an M&A conference in London. We connected quickly and meshed culturally. While we do some fire suppression work in Western Europe, it wasn't a core strength for us; WTech has built a very strong fire suppression business with sprinkler and suppression expertise across several Western European countries. From that first meeting, our international leadership continued to spend time with Ted, and it became evident it was a great strategic fit. The private equity firm that owned WTech recognized the strategic fit and everything came together. Going forward, those are the types of opportunities we continue to look for. When we evaluate businesses, geography matters, the services offered matter, the receiving business must have the bandwidth to integrate, the financial profile matters, and most importantly, culture and values and fit matter. We're very focused on finding businesses that match our culture.
On the Specialty Service side, you see great growth trends there. How much of this is price versus volumes of new projects? And then how meaningful will the ongoing maintenance piece be for the new builds, particularly in markets like data centers and energy?
Kathryn, I hope you're well. The majority of the organic growth you're seeing in Specialty is coming from share and volume. In many project contracts other than MSAs, you might see 4% to 5% escalation built in year-on-year. So the lion's share of the organic growth is coming from share, which is positive. We did continue to grow the service side of the Specialty Services segment, just not as rapidly as the project side. The opportunity is strong on both fronts, and our team remains focused on growing the service side of their business as well.
Maybe I'll take the second part of your question, Kathryn, around service attachment to the project work. It's difficult to quantify because the size, magnitude and scope of projects vary. But much of the project work driving growth in the second quarter has come from existing customer relationships where we already do inspection, service and monitoring work, which improves the likelihood of getting follow-on service work after the project is complete. The average inspection size of a large data facility will far exceed our typical $1,000 to $2,000 estimate for a typical inspection in a facility, so it's an attractive opportunity. We'll continue to sharpen our estimates, but it's an attractive outlook for both of our segments.
Sticking with the Specialty business here, gross margins were up 120 basis points over last year. Can you go into a little more detail around what drove that strong margin expansion? And do you expect that momentum of gross margin expansion to carry into the second half of this year?
Yes. I'm really pleased with the gross margin in the Specialty Services segment in the second quarter, and I think that business will continue to expand their gross margins year-over-year into the back half of the year. The specific drivers were disciplined customer and project selection and focusing our field leaders on the highest dollar, highest margin activity. Specialty did a great job of getting better pricing on project work. We've also had significant improvement in our contract loss rate in the quarter, which has helped margin as well.
I would simplify that to project selection and customer selection, focusing on the right end markets. Execution has been better, and we've improved pricing in some of our lower-performing MSAs, which has helped margin expansion.
Looking for more detail on the momentum in data centers. First, what percentage of data centers is contributing to growth in both revenue and backlog this year? Second, how do you see that evolving given local opposition and concerns about concentration, leverage, returns and CapEx?
We'll answer this in parts. Data centers were a contributor to growth in the second quarter, but we don't do our end market revenue analysis on a strict quarterly basis, so I can't pin a precise number. Our backlog growth is diverse across end markets, including data centers. If I had to ballpark it, maybe 15% to 20% of the increase in the backlog came from data centers, but that's a ballpark. We've discussed earlier that we expect data centers to be roughly 10% to 11% of our revenue in 2026; it may be 10% to 12% of revenue in 2026. The opportunities in the market will dictate where it goes from there.
To build on David's comments and your question about opposition and CapEx: we've done our homework on CapEx and outlook through 2030. If you look at demand versus capacity, demand is expected to far outweigh capacity, so strength should continue through 2030. We'll be disciplined in pursuing projects where we have a high degree of confidence they will move forward. There are certain strategic regions with continued growth—corridors in central Iowa, areas in Texas, Wyoming—and even in states with some opposition like Minnesota, we'll be good advocates, making sure builds are done in an environmentally and socially responsible fashion. That's our obligation to the communities we serve, and there will be a tremendous amount of opportunity continuing in that end market.
I was wondering about the International Safety side. Could you give background on what led to relatively flat growth? Is the slower growth primarily on the inspection, service and monitoring side, or mainly in projects? What would be a successful outcome as we exit 2026?
We expect to see organic growth in that business. A number of factors contributed to the current performance. First, the macro environment and the conflict in the Middle East are headwinds. We've had some project work slip to the right, which hasn't helped timing. We've also intentionally pruned lower-performing customers on the service side. However, we're seeing positive momentum with new orders and backlog growth on the project side. Our global account strategy is taking root, the pipeline is full, and we've had good bookings. Everything points to a positive second half from an organic growth perspective. Our team is working very hard, and I have a lot of confidence in the group as we move the ball forward.
It seems on current trends you're punching well above your mid-single-digit organic growth target by 2028. I know the world has changed since you provided that target with data centers and increased M&A activity. Broadly, not looking for guidance, how are you thinking about staying above the mid-single-digit growth rate over the next 12 to 24 months?
We continue to guide our businesses to achieve high-single-digit growth in inspection, service and monitoring and low-single-digit growth in project work, which underpins our mid-single-digit long-term algorithm. What's happened is the project environment has been stronger than that algorithm, and we're taking advantage of that. If the right projects with the right clients remain available, we should see better project organic growth than the algorithm, which would be additive. That said, we must remain super focused on project and customer selection. We're a services-first business that does project work, and we will not lose sight of that as we build a resilient long-term business. In closing, I would like to thank all our teammates for their continued support and dedication to our business. We believe our people are the foundation on which everything else is built. Without them, we do not exist. 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 for taking the time to join our call today.
This concludes today's call. Thank you for attending. You may now disconnect.