APi Group - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to APi Group's second quarter 2023 financial results conference call. All participants are now in a listen-only mode until 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 Fee, Vice President of Investor Relations at APi Group. Please go ahead.
Adam Fee (VP of Investor Relations)
Thank you. Good morning, everyone, and thank you for joining our second quarter 2023 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO, Kevin Krumm, our Executive Vice President and Chief Financial Officer, and Sir Martin Franklin and Jim Lillie, our Board Co-Chairs. Before we begin, I would like to remind you that certain statements in the company's earnings press release announcement 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, August 3rd, and we undertake no obligation to update any forward-looking statements 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. Reconciliation of and other information regarding these items can be found in our press release and our presentation. It's now my pleasure to turn the call over to Jim.
Jim Lillie (Board Co-Chair)
Good morning. Thank you, Adam. APi delivered another strong quarter of results, including record net revenues, adjusted EBITDA, and adjusted diluted earnings per share in an evolving macro environment. We continue to be pleased with the momentum APi is building with an outstanding first half of 2023. Excuse me. Russ and Kevin will speak to the performance of the business in more detail, but APi's consistently strong financial results speak to the direction we are heading and the strength of the company's recurring revenue service-focused business model, as well as the discipline of the organization and its leadership team. We started this journey with Russ and the team nearly four years ago as a U.S.-focused business with approximately $4 billion in revenues. Today, we are significantly larger, with an expectation of delivering over $7 billion in revenue in 2023.
The quality of the business and our financial performance has also improved significantly. We are the number one provider globally in a growing, highly fragmented fire and life safety market. We have confidence in the team's ability to expand adjusted EBITDA margins to 13% in 2025 and beyond, as we continue to increase our inspection, service, and monitoring revenues. Since becoming a public company, the team has made measurable progress and demonstrated a track record of disciplined, predictable, and thoughtful decisions regarding capital allocation, maintaining our focus on tuck-in M&A at appropriate multiples, while consistently delivering financial results above expectations across a variable macroeconomic backdrop. We have great confidence in the business, and we believe that our laser focus on our long-term 13, 60, 80 value creation targets will generate outsized investor returns through 2025 and beyond.
As a reminder, these include organic revenue growth above the industry average, adjusted EBITDA margins of 13% in 2025, long-term revenues of 60% from inspection, service, and monitoring, and long-term adjusted free cash flow of 80%. We look forward to updating you on the progress in the second half of the year. With that, I will hand the call over to Russ to talk about the real results.
Russ Becker (President and CEO)
Thank you, Jim. Good morning, everyone. Thank you for taking the time to join our call this morning. Jim mentioned our 13/60/80 long-term shareholder value creation model that you see once again included in our presentation. As I mentioned last quarter, we are relentlessly focused on driving this strategy with our specific focus of achieving 13% adjusted EBITDA margins by 2025. I continue to speak to our leaders about how they can help us deliver on this strategy when I'm visiting our locations around the world. We are aligned as an organization in what we want to achieve and how to make it happen. During today's call, I will begin my remarks by briefly commenting on our record second quarter results, as well as our continued progress towards delivering on our stated strategic goals in a macro environment that continues to be volatile.
I will touch on the long-term organizational investment behind our inspection-first model and the benefits it is driving in our financial results. Finally, I'll recap our recent M&A activity and the positive momentum of the business before turning the call over to Kevin, who will walk through our financial results and guidance in more detail. As you've heard me say on prior calls, the safety, health, and well-being of each of our 29,000 leaders remains our number one priority. We remain grateful for their hard work and dedication to APi. We believe we have a differentiated approach to leadership development for every teammate at APi, but specifically for our field leaders who interact with our customers on a daily basis.
We will always prioritize investing in the men and women in the field as human beings and aim to provide each of them with training, leadership development, and advancement opportunities. At APi, our field leaders have careers, not just a job. We prioritize this investment because we recognize that our success only happens when our branches and field leaders are successful. This commitment is one of the foundational principles we believe will continue to enhance shareholder value. Turning to the second quarter, I'm again pleased with the record results delivered by our global team as we continue to see robust demand for the services we offer across the business.
Net revenues grew organically by 7.6% in the quarter and by 9.7% year to date, reaching $1.8 billion for the three months ended June 30, 2023, representing the ninth straight quarter of mid-single digit or higher organic growth. Importantly, and in line with our strategic initiatives, we saw a double-digit increase in inspection, service, and monitoring revenue as we march towards our long-term goal of 60% of total net revenues from inspection, service, and monitoring. U.S. Life Safety continued its strong performance with organic growth of approximately 12% in the second quarter and approximately 16% year to date, led by double-digit plus inspection growth, which we have achieved in our U.S. Life Safety business each quarter since the pandemic.
In line with our strategic initiatives, we continue to see strong year-over-year improvements in adjusted gross margin in the second quarter, up 160 basis points. I am pleased with the leadership team's ongoing commitment to driving gross margin improvements through pricing activities, growing higher margin service work, and maintaining discipline in customer, project, and end market selection. I want to take a moment to update you on a critical investment we have made over the last decade to become an inspection-first organization, and how this commitment drives financial results, allows for more disciplined customer and project selection, and helps to build a protective moat around the business. We fundamentally believe that targeting statutorily mandated inspections at existing facilities and providing excellent service on those inspections drives repeatable business and creates sticky customer relationships.
When those customers consider expansion plans, we are no longer competing solely on price, but instead can leverage our position as an excellent service provider with our customers to drive higher margin installation opportunities. We target double-digit quarterly growth in core inspection revenues, and we are continuing to build what we believe is the best global inspection sales organization focused on driving this growth. It comes down to a lot more than just selling the inspection. Inspections are a highly coordinated process requiring field and office collaboration with the customer. This multi-step process requires a significant amount of infrastructure and training to do well, as well as the right leaders in the field.
We've equipped our field leaders with best-in-class technology and invested in multiple inspection training centers and programs to help to develop our field leaders and help enable them to provide great service to our diverse customer base. Most competitors would rather pursue large installation jobs than recurring, higher margin, smaller invoice inspection work. Our investment in and commitment to the inspection-first model over the last decade is a key differentiator and has made growing inspections increasingly within our control. We believe we are ahead of any competitor who would attempt to replicate this strategy, and our investments, sales force, and scale have created a large barrier to entry. As a reminder, in most cases, these inspections need to take place at least once per year, or in some cases, more frequently.
We have data that every $1 of core inspection revenue leads to an average of $3-$4 of subsequent service revenue. On average, core inspection and service revenue comes in at 10%+ higher gross margins than project revenue. We included a slide in the presentation that shows the 10-year journey of one of our branches that was an early adopter of the inspection-first strategy and its impact on that branch's profitability over time. An underappreciated benefit of continuing to grow inspection, service, and monitoring revenues beyond service beyond serving our customers better, is the ability to then be much more selective on the installation work we choose to do, resulting in margin expansion on the project side of the business as well.
For this specific branch, EBITDA margins expanded from low single digits to mid-20% in less than 10 years. You can see the benefit of this approach come through in our consolidated results, where we have delivered gross margin expansion for six straight quarters and an improved quality of the projects in our backlog, which remains healthy and strong. Our leaders continue to execute this strategy across our branch network. I'm excited for the long-term opportunity in our international business, where we are only in the early stages of instilling this strategy. The international business continues to show progress, with another top quarter of solid growth as we continue to be intentional about targeting only work that is additive to achieving our 2025, 13% adjusted EBITDA margin target.
The $100 million value capture plan, which is another key, key contributor to our 13% target, remains on track. Moving on to M&A. Our free cash flow generation and adjusted EBITDA growth in the first half of the year gives us confidence in our ability to reduce net leverage in line with our target net leverage range of 2x-2.5x. Near the end of the year, while returning to bolt-on M&A. As you may have seen in our July press release, we announced a return to bolt-on acquisitions that are immediately accretive to our adjusted EBITDA margin before synergies. The markets we operate in are highly fragmented, and the team remains focused on identifying the most attractive opportunities within our robust M&A pipeline. I'm excited to continue to add new businesses and their leaders to the APi family.
We have strong momentum across our global platform as we enter the back half of the year, allowing us to again increase our full year financial guidance. Kevin will provide details on our updated guidance. In summary, while we remain focused on executing in the back half of the year, I am proud of our team and how we delivered on our commitments and produced record financial results so far in 2023. Our field leaders continue to be the driving force of our performance. I'm truly grateful for what each of them has done to get us to where we are today. I would now like to hand the call over to Kevin to discuss our financial results and guidance in more detail. Kevin?
Kevin Krumm (EVP and CFO)
Thanks, Russ. Good morning, everyone. Recorded net revenues for the three months ended June 30, 2023, increased by 7.4% to $1.8 billion, compared to $1.6 billion in the prior year period. Net revenues increased organically for the same period by 7.6%, driven by strong organic growth in both Safety Services and Specialty Services, led by double-digit growth in service revenues. In the second quarter, growth in Safety Services segment was approximately 1/2 driven by price and 1/2 by volume. While growth in Specialty Services segment was primarily driven by increased volumes, which we measure through labor hours.
Adjusted gross margins for the three months ended June 30, 2023, improved to 28.3%, representing a 160 basis point increase compared to the prior year period, driven by price increases, outsized growth in service revenues, and project margin expansion across both segments. These factors were partially offset by inflation, which caused downward pressure on margins. Adjusted EBITDA increased by 16.7% on a fixed currency basis for the three months ended June 30, 2023, with adjusted EBITDA margin coming in at 11.5%, representing an 80 basis point increase compared to the prior year period, primarily due to the factors impacting gross margin, partially offset by investments to support revenue growth and the continued build-out of our global capabilities and infrastructure.
Adjusted diluted earnings per share for the second quarter was $0.41, representing a $0.04 increase compared to the prior year period. The increase was driven primarily by strong organic growth and margin expansion in both Safety Services and Specialty Services, partially offset by an increase in interest expense, representing a $0.03 headwind to adjusted diluted earnings per share in the quarter. I will now discuss our results in more detail for Safety Services. Safety Services reported revenues for the three months ended June 30, 2023, increased by 6.9% to $1.2 billion, compared to $1.1 billion in the prior year period.
Net revenues increased organically by 7.3%, driven by double-digit core inspection revenue growth and robust growth in U.S. Life Safety, partially offset by planned customer attrition in our international business and increased discipline in customer and project selection in our HVAC business. Adjusted gross margins for the three months ended June 30, 2023, was 32.4%, representing record high adjusted gross margin and a 180 basis point increase compared to the prior year adjusted gross margin, driven by price increases, improved business mix on inspection, service, and monitoring revenue, as well as significant improvement in project margins, partially offset by inflation, which caused downward pressure on margins.
Adjusted EBITDA increased by 18.7% on a fixed currency basis for the three months ended June 30, 2023, and adjusted EBITDA margin was 13%, representing a 120 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin, partially offset by investments made to support revenue growth. I will now discuss our results in more detail for our Specialty Services segment. Specialty Services reported revenues for the three months ended June 30, 2023, increased by 7.1% to $555 million, compared to $518 million in the prior year period, primarily driven by double-digit growth in service revenues, led by growth in specialty contracting, infrastructure, and utility markets, partially offset by continued disciplined customer and project selection.
Adjusted gross margin for the three months ended June 30, 2023, was 19.1%, representing a 170 basis point increase compared to the prior year period, primarily driven by strong organic growth in service revenues, as well as significant improvement in project gross margins, driven by disciplined customer and project selection. Adjusted EBITDA increased by 15% for the three months ending June 30, 2023, and adjusted EBITDA margin was 12.4%, representing an 80 basis point increase compared to the prior year period, primarily due to the factors impacting adjusted gross margin, partially offset by timing of some employee-related expenses and other one-time costs. We continue to focus on driving free cash flow conversion improvements year-over-year, progressing towards our long-term goal of 80% free cash flow conversion.
For the three months ended June 30, 2023, adjusted free cash flow came in at $91 million, reflecting an improvement of $28 million versus the prior year period, and adjusted free cash flow conversion of 45%. For the six months of the year, which as a reminder, is seasonally slower than the back half of the year, we delivered $75 million improvement in free cash flow when compared to the first six months, six months of 2022.
Free cash flow generation has been, and continues to be, a priority across all of APi, and our performance in the first half of the year positions us to deliver on our 2023 guidance of at or above 65% adjusted free cash flow conversion, representing an adjusted free cash flow delivery of over $500 million at the midpoint of our updated adjusted EBITDA guidance. At the end of Q2, our net debt to adjusted EBITDA was approximately 2.9x, even with the return to margin accretive bolt-on and in the quarter. We remain laser focused on cash generation and deleveraging to our stated long-term net leverage target of 2x-2.5x, with current expectations to be below 2.5x net debt to adjusted EBITDA by year-end 2023.
Our balance sheet remains strong, with a weighted average maturity of approximately five years, with the earliest maturity in 2026. I will now discuss our guidance for Q3 and full year 2023. As a reminder, our guidance incorporates the expected impacts of foreign exchange fluctuations, which we expect to be a modest tailwind in the second half of the year when compared to 2022, after being a headwind in the first half of 2023. I'm pleased with the performance year to date and the momentum of the business, which gives us confidence to raise our prior full year guidance for reported net revenues and adjusted EBITDA. We now set full year reported net revenues at $7.015 billion-$7.075 billion, up from $6.875 billion-$7.025 billion at current currency expectations.
This represents reported net revenue growth of approximately 7%-8%. We now expect full year adjusted EBITDA of $765 million-$785 million, up from $740 million-$780 million, which represents a reported adjusted EBITDA growth of approximately 14%-17% and adjusted EBITDA margin of approximately 11% at the midpoint. In terms of Q3, we expect reported net revenues of $1.86 billion-$1.89 billion. This guidance represents reported net revenue growth of approximately 7%-9%. We expect Q3 adjusted EBITDA of $215 million-$225 million, which represents reported adjusted EBITDA growth of approximately 16%-21%.
For 2023, we anticipate interest expense to be approximately $150 million, depreciation to be approximately $85 million, capital expenditures to be approximately $95 million prior to any potential sale of equipment, and our adjusted effective cash tax rate to be approximately 24%. We expect our adjusted diluted weighted average share count for the third quarter to be approximately 272 million. Overall, I'm pleased with the results delivered by our global team in the second quarter and first half of 2023. I look forward to sharing more updates on our progress throughout the year. I will now turn the call back over to Russ.
Russ Becker (President and CEO)
Thanks, Kevin. As you've heard, APi delivered record financial results in the second quarter and the first half of the year. The business continues to perform well, and we continue to deliver on our commitments.
I'm confident in our leaders' ability to generate continued momentum in the business, build on historically strong execution, and consistently drive margin expansion in any macro environment, any macroeconomic environment, through increasing high margin inspection, service, and monitoring revenue, pricing initiatives, operational improvements, and their relentless focus on customer and project selection. As reflected in the increased guidance Kevin just went through, we have strong momentum across our global platform. Backlog remains healthy. As planned, we'll continue to focus on the right work for the right customers in the right markets. We believe we can create sustainable shareholder value by focusing on our 13/60/80 long-term value creation targets. As a reminder, these include above market organic growth and adjusted EBITDA margin of 13%+ by 2025.
As we look to 2024 and beyond, we have great confidence in the business and the direction we're heading. With that, I would now like to turn the call back over to the operator and open the call for Q&A.
Operator (participant)
At this time, if you would like to ask a question, please press star one now on your telephone keypad. To withdraw yourself from the queue, you may press the pound key. One moment while we queue. Your first question comes from John Tanwantang of CJS Securities.
Jon Tanwanteng (Managing Director)
Hi, good morning. Thank you for taking my question. My first one, just on the increased guidance, how much of that is contribution from acquisitions that you made recently and any changes in FX, any comment, that would be helpful?
Russ Becker (President and CEO)
John, I heard the first, first part of the question, so I'll answer that. The second part, you'll have to come back to me on. Our most recent acquisitions, announced as part of our July release, are in our guidance. The impact of that in the back half of the year from an EBITDA standpoint is at or around $2 million.
Jon Tanwanteng (Managing Director)
Okay, great. I was more wondering the FX contribution as well.
Russ Becker (President and CEO)
FX contribution?
Jon Tanwanteng (Managing Director)
Yeah, if any.
Russ Becker (President and CEO)
FX in the, in the back half of the year, at EBITDA will be somewhere, approximately $2 million-$4 million at current, currency expectations.
Jon Tanwanteng (Managing Director)
Okay, great. Then just looking out a little bit longer term, can you talk about the M&A pipeline that you're seeing, even with these smaller transactions that you've been doing? Are you seeing more opportunities out there, and is there an opportunity for anything that might be larger and more accelerated as you, as you look at the pipeline? Thank you.
Russ Becker (President and CEO)
Thanks, John, and thank, thank you for your continued interest in the company. Our M&A pipeline remains, you know, really robust. As we've shared in the past, you know, we've been focused on North America, primarily in our U... In, in the U.S., in the life safety space. Just partly because we, we see the same opportunities, you know, available to us, you know, in our international business. We remain focused on executing on our value capture program in that part of our business. The pipeline is really robust, and I think our company leaders do a really good job of helping us build that pipeline, along with our M&A leadership, you know, inside the company.
There's plenty of opportunities, and we, we continue to look forward to pursuing them and making sure that we add the right businesses to the APi family. On these bolt-on acquisitions, the number one criteria for us is to find the right fit, but make sure that we're culturally aligned, and we share common values. When we do that, that's one of the... I think, one of the primary benefits we have as we, as we think about, you know, why we're able to, you know, acquire these companies at reasonable purchase prices, et cetera. Lots of opportunity for us, excited for what, you know, the rest of the year is going to bring and potentially in the next year.
Jon Tanwanteng (Managing Director)
Great. Thank you, guys.
Operator (participant)
Your next question comes from Julian Mitchell of Barclays.
Kiran Patel-O'Connor (Assistant VP of Equity Research)
Hi, this is Kiran Patel-O'Connor on for Julian. I just wanted to ask on life safety, the organic growth there in the, the quarter and the first half was, was pretty strong. I was just curious how much of that organic growth that you've seen year to date is, is market related versus market share gains? Thanks.
Kevin Krumm (EVP and CFO)
Hi, Kiran, it's Kevin. I would say that, you know, the lion's share of the growth that we're seeing in the U.S. Life Safety business is share gains. We continue to, to win business, through our inspection-first model that, continues to feed, then, the service side of the business. We're going out there and, and taking business, from competition, and that's the primary driver.
Kiran Patel-O'Connor (Assistant VP of Equity Research)
Got it. That's helpful. And the market share gains are, is it, is it... I know you talked about the market being very fragmented. Is it really smaller players that you're taking it from, or are there larger competitors that you're getting these market share gains from?
Russ Becker (President and CEO)
You know, I mean, I think it's, I think it's probably a little bit of both, you know, when you, when you think about it. You know, the key driver for us there, is the continued build-out and growth of our inspection sales team. As we continue to build that group out, we will continue to, to take share. You know, as I mentioned in my remarks, you know, the more traditional way of companies, you know, capturing service and inspection work is to do the installation work first, and when the installation work is, you know, basically 90% complete, they try to approach that customer and sell them on, you know, a service and inspection contract. You know, we flipped that model on its ear and are really, really focused on calling on the already built environment.
You know, that sales force is out pounding the pavement, building relationships with potential customers. You're, you're taking that share away from, you know, whether that's a large player or a small player, and it's, it's about having a different approach and a different tactic as we go after, after that business.
Kiran Patel-O'Connor (Assistant VP of Equity Research)
Got it. Thank you. Just my follow-up would be, you know, you talked about strategic pricing initiatives, and I was just curious, you know, where are these focused and if you're getting any pushback from customers on them and if there's any churn as a result? Thank you.
Russ Becker (President and CEO)
I mean, Number one, we basically, especially in our inspection and service contracts, we build in price escalation, that is typically timed with the price escalation associated, associated with our, with our wage rate and labor increases that, that come along with it. We're, we're actively building that pricing in, you know, increase into, into these, you know, contracts as we're out, out selling and pitching them. You know, we have some. I would say in general, I would say that these price increases have been very, very sticky. We have had some attrition. Some of this attrition has been on purpose. I would say more of that potentially in the international business.
If you go all the way back to last November, to the investor day that we had in New York, and Andrew White made his presentation, he showed 5% customer attrition that, you know, basically we planned for. Some of that would come through price increases, because we had poor performing contracts that we needed to deal with the pricing on. We haven't seen 5% customer attrition. It's been probably 2%-3%, something like that. In general, our price increases have been sticky.
Operator (participant)
Great. Thank you. Your next question comes from Kathryn Thompson of Thompson Research Group.
Brian Biros (Equity Analyst)
Hey, good morning. This is actually Brian Biros, for Kathryn. Thank you for taking my questions. To start on the, I think, contract revenue was called out at high single digits in the quarter. You know, some part of the business I don't think I've heard you talk about as much. Can you talk about trends in kind of that part of the business? Can we expect solid performance like that going forward, or is this more, more of a one-time event in the quarter?
Russ Becker (President and CEO)
Our contract revenue. Good morning, Brian. Our contract revenue in the quarter, you know, was up organically, but it did not grow at the same pace on the service side. Our contract revenue, just to clarify, was higher around mid to low single digit growth in the quarter.
Brian Biros (Equity Analyst)
Okay, got it.
Russ Becker (President and CEO)
I think what you really talk about the, the margin expansion on that side of the business, which we continue to, purposefully, you know, moderate growth while we continue to focus on higher margin work with the right customers in the right end markets.
Brian Biros (Equity Analyst)
Okay, got it. Then in the presentation deck, Slide 16, nice visual showing the branch growing margins. I think you guys touched on it on the prepared remarks. Can you just maybe bucket out how many branches are either closer to the beginning of that stage or closer to the end of that journey? Just trying to get a sense of how much impact this has going forward versus just the general push for more services.
Russ Becker (President and CEO)
Well, I mean, I think it's. I mean, if you look at it from, you know, if you look at it across the entire breadth of the business, and you consider this branch, you know, I'll just say fully mature, and then if you think about our international piece of our business, you would say that it's premature. You know, we stretch across the breadth of the business. You know, if you look inside even North America, where we've, you know, been focused on this strategy for the last decade or so, we have different levels of adoption inside different parts of our business. What I can tell you, you know, I...
It'd be really hard for me to say that, you know, on a scale of one to 10, we're at a five or a six, or, or, or at a seven, because in some places, we're, we're at a 10, and some places we're probably at three or four. But what I can tell you is that, you know, basically every one of our business leaders now understands and has embraced this philosophy, and we are actively working to build out that sales force. As we continue to build out that sales force, we need to continue to recruit, train, and develop the inspectors that can go out and actually inspect, do the inspection work, which is a key component of it. We still have to then add service technicians to be able to support that work as well.
We've got the flywheel turning, I'd say, reasonably well in North America, and it's just starting to turn and probably needs a little more grease in the in our international business.
Brian Biros (Equity Analyst)
Thank you.
Operator (participant)
Your next question comes from Andy Kaplowitz of Citigroup.
Andy Kaplowitz (Managing Director)
Hey, good morning, everyone.
Russ Becker (President and CEO)
Hey, Andy, how are you?
Andy Kaplowitz (Managing Director)
Good. Russ, you mentioned U.S. Life Safety still growing low double digits organic. We talked about inspection, market share gains. I know APi is quite nimble regarding its market focus, but could you give us more color into what end markets are driving that growth? Are there any markets that you are more concerned about in terms of slowing?
Russ Becker (President and CEO)
Well, you know, really, thanks. Thank you. Really, our focus is on data centers, semiconductor, you know, healthcare. I would say to a certain degree, higher institution aviation is, you know, it has really shown some strength, as well as critical infrastructure. And those are really the primary end markets that, you know, we keep, you know, consistently trying to steer our business leaders to. You know, obviously, we remain, you know, commercial real estate, everybody's waiting for the shoe to drop there. You know, as all of these loans need to be refinanced over the course of the next 12-18 months, what kind of an impact that's going to have that, you know, if you're, if you're chasing basically developer-led commercial real estate projects, and that's what you do, that.
that is really dead in the water. Fortunately for us, that's a very, very small piece of our, of our business and, and, and the work that we do. I feel really good about the end, end markets that we're in. We can always be better, we can always be more, more disciplined, but I feel, feel good about where we're at. I can honestly tell you, like, the, the discipline, Andy, that our business leaders are showing on project selection, customer selection, and end market selection is probably at an all-time high. I'm, I'm really, really proud of it. The fact that, you know, we're showing, gross margin expansion, is a really a good demonstrator of that.
You know, we could go out and take a lot more, so to speak, project-based work if we really wanted to, to accelerate revenue growth, but it would be most likely at the expense of gross margin expansion. We have been beating and beating and beating the gross margin drum, and, you know, it's something that's very important for us if we're going to achieve this long-term target of 13%+ by 2025.
Andy Kaplowitz (Managing Director)
Well, that's helpful. Maybe the same question for Europe. You already mentioned, you know, customer attrition is lower, but, you know, how would you characterize the European markets? Looks like the growth there is a little bit lower in general. Is it still sort of mid-single digits? You know, I think that's what you told us at the Investor Day, last November.
Russ Becker (President and CEO)
Yeah, I think that's fair. You know, the one thing that I would just point you to, and going all the way back to the Investor Day, is that, you know, our international business is actually inspection, service, and monitoring makes up 60% of their revenue mix. Just as a generalized statement, the resiliency of that, of that business is really pretty high. We have continued to see robust demand, you know, in the business. You know, we have seen, you know, minimal customer attrition. You know, the customer attrition we're seeing, to be quite honest with you, is, is positive for the, for the business, and it's gonna improve our margins and the performance in, in the business. You know, we're, we're confident in the business and where the business is going.
Andy Kaplowitz (Managing Director)
Helpful. Then maybe one last one for Kevin. Just maybe on price versus cost, Kevin, I think you mentioned price and volume had about a 50/50 split in your revenue in Q2. Is that what you would expect moving forward? With steel coming down maybe a little bit since the spring, does that help your margin at all in the second half of the year?
Kevin Krumm (EVP and CFO)
Andy, yeah, thanks. The 50/50 was on the safety side of the business, and I would say, yeah, that's what we're seeing on a year-to-date basis, and it's sort of our baseline expectation as we move through the back half of the year. The material costs, you know, we look at it a little bit inflation, not necessarily always year-over-year, but versus where costs were when we started to propose on business. The work we worked on in the second quarter was largely work that we were, let's just talk on the safety side of the business, was work we were proposing, you know, sort of late Q4 last year. Versus Q4, we have seen a run-up in material costs in both steel and hot rolled coil.
That creates a bit of a headwind as we work on that, but, similarly, as those come down, and it looks like they're going to continue to come down in Q3 in the back half of the year, we should see that margin pick up that we lost on the run-up in the first half.
Andy Kaplowitz (Managing Director)
Appreciate all the color.
Jim Lillie (Board Co-Chair)
Hey, Andy, it's Jim. I just wanna chime in. Martin and I were in Minneapolis earlier this week, meeting with both the international team and the domestic team, and everybody went through their, their growth plans to get to the 13%+ EBITDA margin. You said, earlier in your, in your questions, you know, lower growth in the international business. I just wanna level set people who may be new, that remember, most of our international business was acquired by Carrier, and historically, that had negative growth over the last 10 years or so. The growth that we're seeing is well within our strategic plan and in line with making sure that we're spending behind the right initiatives. We c- we couldn't be more pleased with the performance of the international side of the business.
It's measured in balanced and thoughtful growth, as compared to its historical performance.
Andy Kaplowitz (Managing Director)
Appreciate the additional color, Jim.
Operator (participant)
Your next question comes from Chris Snyder of UBS.
Chris Snyder (Executive Director)
Thank you. Organic growth in, in the first half of the year, you know, is kind of hanging around this low double-digit level. It feels like, you know, ultimately the drivers of the business are regulation, and also share gains, which feel long lasting, and really not macro dependent. With that, what are the drivers or the headwinds or just the normalization that's gonna push the organic growth from the low doubles to the kind of the more mid-single-digit normalized level? Is it the, you know, the project selection, that you guys have been talking about?
Russ Becker (President and CEO)
100%. You know, we've been very purposeful in, you know, the installation work in our HVAC business in trying to, you know, make sure that we're, we're selecting the, the right opportunities to pursue, as well as in our Specialty Services segment, just as a whole. As I mentioned earlier, like I'm, I'm really proud of our team for the discipline that they're showing, in making sure that we're pursuing the right opportunities, and, I think it's, it's making a, a difference.
Chris Snyder (Executive Director)
Thank you for that. For my follow-up, I wanted to maybe ask about the two bolt-ons that the company talked to in the pre-announce last month. I guess what kind of surprised us was that you guys said these transactions are immediately accretive to EBITDA margins, despite obviously being, you know, kind of smaller businesses. Can you just maybe talk a little bit about that? Is that what we should expect on all bolt-ons, or is there something unique about these that they're coming on at an EBITDA margin premium? Thank you.
Russ Becker (President and CEO)
Well, I mean, the bolt-ons that we've recently executed, when we talked about them being immediately accretive, their performance is at an EBITDA margin that's currently higher than fleet average at APi. You make the assumption that, you know, they're going to continue to perform, you know, where they're at. You know, we're going to start to integrate those businesses very quickly and hopefully, continue to improve their margin, margin performance, which is, you know, really a big part of our, of our model. From day one, those businesses will be accretive, making that assumption. I would say that in general, I mean, that's our focus. We want to, as we continue to acquire companies, we want to acquire companies that are, are accretive, right?
Does that mean that we wouldn't acquire, say, a business that's in a geographic area, that maybe the performance of that business is only 11% or 12%, you know, on a pre-synergy basis? If it was in the right geographic area, it met all of our criteria from a culture, values, and fit, and we could see a clear path to, you know, how we can get that business performing at, say, 15% EBITDA margin, you know, we would certainly, we would certainly look at doing something like that. A lot of these businesses, to be totally honest with you, Chris, when, when, when we acquire them, they might tell you that their inspection, service, and monitoring is, you know, 35%, 40% of their, of their total revenues.
Usually when you start digging in, you find out that it's less than that. We have a very clear roadmap and playbook on how we can take those businesses, get that inspection first mindset, you know, instilled in, in the business and get it moving forward, you know, very quickly and get it on the right glide path. You know, geographic, you know, looking at the map and looking at geographic expansion that's complementary to our existing footprint, is something that's important for us. Especially important for us as we continue to try to broaden our base of national accounts. We're not gonna, we're not, we're not out actively looking, you know, for poor performing businesses or, you know, or anything like that, by any stretch of the imagination.
Chris Snyder (Executive Director)
Appreciate that. Thank you.
Operator (participant)
Once again, to ask a question, please press star one now on your telephone keypad. Your next question comes from Andy Wittmann of Baird. Your line is open.
Andy Wittmann (Managing Director and Senior Research Analyst)
Hey, Russ. I guess my question is just given the relative growth rates between your inspection, service, and monitoring business, that's the, the flywheel that you're really focused on growing so well and the project business where you're being so selective, are you having to move personnel to the inspection side of the business from your project side of the business, given the tight labor markets? Can you just talk about how you're staffing this growth on that inspection side?
Russ Becker (President and CEO)
Yeah. That's really a separate workforce, Andy. Good morning, by the way. It, it really is a, is a separate workforce, and what we've done is we've continued to build out that inspection sales force. We've set up centers of excellence, you know, inside the life safety business to, train, so to speak, I'll say, our, our, our new and future, inspectors, as we continue to, you know, recruit. As we build that inspection sales force, we need to build, our inspectors sales... or inspector sales force that's going to actually execute the work, and we have to be able to, to train those, those men and women. We have other centers of excellence as well, like we have a design center of excellence, where we do design overflow, and we train designers.
We have one of our businesses has developed accredited apprenticeship program for fire alarm technicians so that we can make sure that we're not letting that skilled technician need become a bottleneck for us. It's really a separate workforce, and if you're really going to have a robust inspection service and monitoring business, they need to be segregated. In general, the people that are doing your installation work, they really want to do installation work, and most of them don't want to do, you know, two small jobs every day with different customers and moving around in a van. They just have different interests, keeping them separate is very important.
Andy Wittmann (Managing Director and Senior Research Analyst)
Okay, that makes sense. I, I guess for my follow-up, Kevin, to you, could you just give us an update on the cost capture plan and the status? Maybe talk about how much cost do you expect to incur in the second half of the year, maybe the, the, the run rate of cost capture synergies that you've exited the second quarter, and how you're tracking for exiting this calendar year as you head into 2024 on those cost captures?
Kevin Krumm (EVP and CFO)
Sure. Good morning. So from a expense standpoint, our prior guide of $55 million-$65 million-
in the year is still, our expectation for full year 2023. As a reminder, that's on the back of $30 million that we had in 2022. We've talked about the 2022 charge of $30 million, should accrue to the PNL on a one-for-one basis for savings. We still expect that in the year to be between $20 million and $25 million that we expect, to accrue from a savings standpoint from last year's charge. This year's charge will be back-half loaded, but we expect to see some savings there, and they'll probably be somewhere, between $0 and $5 million, so approximately $5 million of additional savings from our 2023 activity and charge.
Jim Lillie (Board Co-Chair)
Thank you.
Operator (participant)
Your next question is from Steve Tusa of JPMorgan.
Steve Tusa (Managing Director)
Hi, good morning.
Russ Becker (President and CEO)
Morning, Steve. How are you?
Steve Tusa (Managing Director)
Not too bad. Congrats on the strong cash flow in the quarter.
Russ Becker (President and CEO)
Thank you.
Steve Tusa (Managing Director)
The, the, the commercial exposure you guys have, I think it's, like, 19% of sales or something like that, how much of that is office? Then, looking at the... That telecom and utilities bucket, is that, is, is that, like, telecom? Is that, is that mostly telecom or, or is that... I'm just trying to figure out which, what part of it is the actual like, you know, maybe power energy utilities bucket. It seems like you have a transmission, you know, piece of the pie as well. Just curious on those two parts of the pie chart.
Russ Becker (President and CEO)
In, in the, the commercial bucket, I would say a very small amount of that is sort of the, the high-rise that you're talking about. We estimate that it's inside of 5%. The remainder would be, the, the end markets or the, the, areas that, that you were referencing, being telecom and, and some of those other areas.
Steve Tusa (Managing Director)
Great. Then just a little guidance on the, on the segment sales forecast for the second half, just organically, how you expect those to trend. Are those pretty stable or accelerating or decelerating? Thanks for any info.
Russ Becker (President and CEO)
Yeah, no problem. You know, we're not guiding to specific segment breakouts in the back half of the year, but what I'll tell you is, you know, sort of our specialty businesses, we've done a good job of managing growth as we plan, focusing on the right end markets and the right customers and driving gross margin expansion. Obviously, we've talked a lot about the safety businesses and the U.S. life safety business and the performance we saw there in the first half. I would say, as you look at our back half, those are similar expectations. We're going to continue to moderate and manage growth from the Specialty Services side, and we're going to continue to capture organic growth and share gain on the Safety side.
Steve Tusa (Managing Director)
Great. Thanks a lot.
Operator (participant)
There are no further questions at this time. I'd be happy to return the call to our hosts for any concluding remarks.
Jim Lillie (Board Co-Chair)
Hey, Russ, it's Jim. Could I just jump in on one thing before you do your concluding remarks, please?
Russ Becker (President and CEO)
Sure.
Jim Lillie (Board Co-Chair)
You know, there's been a lot of conversation on the call today about M&A, so I just wanted to clarify, you know, the return to focus on the tuck-in deals. We think that we can live well within our leverage targets while staying more focused on these smaller acquisitions. Much so that when we were in Minneapolis this week, we talked about ramping up the spending and likely doubling it as we move into 2024 and still doing thoughtful tuck-in M&A, considering larger ones as they come across our desk, because we want to remain educated on what's out there in the world. The real focus, you know, in the near term, is on these tuck-in deals that Russ and the team have just done so well historically, paying appropriate multiples for them.
As I said earlier, I believe we can ramp up our spending on that and still, well, live well within our, our debt-EBITDA ratio goals. With that, Russ, I'll turn it back over to you. Thanks.
Russ Becker (President and CEO)
Thanks, Jim, for the color. In closing, I would like to thank all of our team members 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'd also like to thank our long-term shareholders as well, 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 again for taking the time to join the call. To all of our APi teammates across the globe, please know that we're grateful for everything that you do to help us win in this environment. Thank you.
Operator (participant)
This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.
