APi Group - Earnings Call - Q2 2025

Executive Summary

• APi delivered record Q2 results: net revenues $1.99B (+15.0% YoY; +8.3% organic), adjusted EBITDA $272M (+17.7% YoY, margin 13.7% +30 bps), and adjusted EPS $0.39 (+18.2% YoY). Both revenue and adjusted EPS beat S&P Global consensus; guidance was raised for FY25 revenues and adjusted EBITDA.
• Guidance raised: FY25 net revenues to $7.65–$7.85B (from $7.4–$7.6B) and adjusted EBITDA to $1.005–$1.045B (from $985–$1,035M). Q3 guide: revenues $1.985–$2.035B and adjusted EBITDA $270–$280M.
• What went well: Safety Services margin expansion (segment earnings margin +80 bps YoY to 17.0%), record backlog (> $4B) and 20th straight quarter of double‑digit inspection growth; accretive bolt‑on M&A ramp (7 YTD, including second elevator).
• What went wrong: Specialty Services margin compressed 350 bps YoY due to increased project starts, rising material costs, and weather; consolidated gross margin down 50 bps YoY on mix despite pricing offsets.
• Stock reaction catalysts: Beat vs consensus on revenue and adjusted EPS, raised FY guide, backlog momentum, and acceleration of accretive M&A; watch tariff/material cost commentary and Specialty margin trajectory for near-term sentiment.

What Went Well and What Went Wrong

• What Went Well

  • Safety Services outperformed: revenue +15.8% (+5.6% organic), segment earnings +22.1%, margin up 80 bps to 17.0% on disciplined selection and pricing.
  • Record backlog eclipsed $4B; double‑digit organic backlog growth driven by cross‑sell and target end markets. “Our record backlog eclipsing $4 billion for the first time in APi Group history.”.
  • Recurring revenue engines strong: “North American safety business achieved double-digit inspection growth for the 20th straight quarter.” Pricing captured mid‑single‑digit in inspection, service & monitoring.

• What Went Wrong

  • Specialty Services margin pressure: adjusted gross margin down 350 bps to 18.1%; drivers were increased project starts (front‑loaded, more material), rising material costs, and weather; segment earnings margin down 190 bps to 11.3%.
  • Consolidated gross margin mixed: down 50 bps YoY to 30.9% (adjusted 31.2%) on mix, despite pricing improvements across the business.
  • Tariffs/material costs risk acknowledged; while contracts mitigate cost escalation, margin sensitivity remains on project work and weather/labor efficiency during execution.

Transcript

Operator (participant)

Ladies and gentlemen, welcome to APi Group's Second Quarter 2025 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 2025 Earnings Conference Call. Joining me on the call today are Russ Becker, our President and CEO, David Jackola, 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, July 31, 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 on our website. Our comments today will 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's now my pleasure to turn the call over to Russ.

Russ Becker (President and CEO)

Thank you, Adam. Good morning, everyone. Thank you for taking the time to join our call this morning. Before we get into our recorded second quarter results, I wanted to thank our 29,000 leaders for their hard work and dedication to APi. The safety, health, and well-being of each of our leaders remains our number one value. When I say safety, I don't just mean job site safety. We owe it to every one of our teammates to create an environment that's safe for them to do their job, not just physically, but also mentally and emotionally. At APi, we believe that culture drives results. We include a slide in our earnings presentation that highlights our culture and our investment in people as human beings, a key ingredient in our progress to becoming a $7 billion, 13% adjusted EBITDA margin company in 2025.

It also includes two opportunities to learn more about our culture, which is centered on our purpose of building great leaders. I encourage you to take advantage of these if you haven't done so already. I also wanted to spend a minute on one of our foundational beliefs, the care factor. To win and achieve our new long-term financial targets, we need to care about and invest in our APi teammates as human beings. A couple of months ago, at our Investor Day, we announced the start of the Care Factor Fund, an initiative designed to support APi team members and their children in offsetting the expense of unexpected mental health treatment. This is something that is important to both me and our Board of Directors, and I'd like to thank our team members for their generosity in contributing to the fund.

I'm happy to share that we have approved the first grant from the fund to one of our teammates. This is just one small way we show our teammates that the APi family cares during an important time of need. Over the last several years, our team has remained relentlessly focused on our long-term 1360/80 value creation targets we created in 2022. With our 13% or more adjusted EBITDA margin target in our sights for 2025, we are shifting our focus to the new 1016/60 Plus shareholder value creation framework we introduced in May at our Investor Day. As a reminder, these targets are the following. $10 billion plus in net revenues by 2028, supported by consistent mid-single digit organic growth. 16% plus adjusted EBITDA margin by 2028. 60% plus of our revenues from inspection, service, and monitoring over the long term.

$3 billion plus of cumulative adjusted free cash flow through 2028. Our leaders rallied behind our 1360/80 targets to deliver on our commitments, and they have done the same with respect to these new targets. We have clear plans for how we intend to deliver on our 1016/60 Plus targets. Fortunately, we don't need to reinvent the wheel. The main initiatives that enabled us to achieve our 1360/80 targets will also enable us to hit our new 1016/60 Plus targets. These initiatives are pricing, improved inspection, service, and monitoring revenue mix, disciplined customer and project selection, procurement systems and scale, accretive M&A and selective business pruning. As I like to say, we can always just be better. We will augment these initiatives with our continued focus on building great leaders and the technology necessary to support our growth.

Now, turning to our recorded second quarter results, the business continued to accelerate its momentum, delivering strong top-line growth while expanding margins. Some highlights include the following: consistent margin expansion in safety services, a growing inspection, service, and monitoring business, a return to organic growth in specialty services, record backlog in both segments, and finally, an acceleration of accretive bolt-on M&A activity, all of which I will detail shortly. For the quarter, net revenues increased by 15%, up over 8% organically, with strong growth across both segments. In our safety services segment, revenues grew organically in line with expectations by approximately 6%, while delivering 80 basis points of segment earnings margin expansion. Within safety services, we delivered strong organic growth across the North American safety business. Importantly, and in line with our strategic initiatives, the North American safety business achieved double-digit inspection growth for the 20th straight quarter.

The international business delivered another solid quarter of organic growth, along with high single-digit order growth, as that business continues to build momentum under APi Group's ownership. As expected, specialty services returned to growth in the second quarter, delivering 13.3% organic growth, as steady increases in backlog dating back to 2024 converted to revenue growth. The momentum across the business is significant, with our record backlog eclipsing $4 billion for the first time in APi Group history. Importantly, the double-digit organic growth in backlog includes contributions from our cross-sell efforts, focuses on our target end markets, and is healthy from a disciplined customer and project selection perspective. Our continued focus on our margin improvement initiatives allowed APi Group to deliver year-over-year improvements in adjusted EBITDA margin in the second quarter, with a 30 basis point increase versus last year.

Our continued strong free cash flow generation and balance sheet provide us with flexibility to pursue value-enhancing capital deployment alternatives. In the second quarter, we accelerated our M&A activity, completing six acquisitions, including our second elevator business. We have now closed seven acquisitions year to date, and we have several more opportunities under letter of intent. We remain on track to deploy approximately $250 million in creative bolt-on M&A at attractive multiples this year. We also undertook some selective pruning of a small business in our specialty services segment that was not accretive to our new 1016/60 Plus financial targets, which is the lens we'll use to continue to evaluate businesses in both segments going forward. In summary, we move to the second half of 2025 with great momentum. Our inspection, service, and monitoring business continues to expand. Our backlog is at a record high.

Our balance sheet remains strong, and we are confident in our leaders' ability to execute our strategy and deliver against our 2025 plan. I would now like to hand the call over to David to discuss our financial results and guidance in more detail. David?

David Jackola (EVP and CFO)

Thanks, Russ. Good morning, everyone. Reported revenues for the three months ended June 30th were $2 billion, a 15% increase compared to $1.73 billion in the prior year period. Organic growth of 8.3% was driven by strong project revenue growth, pricing improvements, and continued growth in inspection, service, and monitoring revenues. Adjusted gross margin for the three months ended June 30th was 31.2%, representing a 50 basis point decrease compared to the prior year period, driven by mix, partially offset by pricing improvements across the business. Adjusted EBITDA increased by 17.7% for the three months ended June 30th, with adjusted EBITDA margin coming in at 13.7%, representing a 30 basis point increase compared to the prior year period. Growth in adjusted EBITDA was driven by an increase in adjusted gross profit.

Adjusted diluted earnings per share for the second quarter was $0.39, representing a $0.06 increase or 18.2% compared to the prior year period, primarily driven by strong adjusted EBITDA growth. I will now discuss our results in more detail for safety services. Safety services reported revenues for the three months ended June 30th increased by 15.8% to $1.36 billion compared to $1.18 billion in the prior year period. Organic growth of 5.6% was driven by pricing improvements and strong growth in both service and project revenues. Our North America safety business continued its momentum with double-digit inspection revenue growth. Adjusted gross margin for the three months ended June 30th was 37.2%, representing a 70 basis point increase compared to the prior year period, driven by disciplined customer and project selection and pricing improvements leading to margin expansion in both service and project revenues.

Segment earnings increased by 22.1% for the three months ended June 30th, and segment earnings margin was 17%, representing an 80 basis point increase compared to the prior year period, primarily due to the increase in adjusted gross margin. I will now discuss our results in more detail for specialty services. Specialty services reported organic revenues for the three months ended June 30th grew 13.3% to $629 million compared to $555 million in the prior year period, driven by strong project revenue growth. Adjusted gross margin for the three months ended June 30th was 18.1%, representing a 350 basis point decrease compared to the prior year period, driven by increased project starts, rising material costs, and weather.

Segment earnings decreased 2.7% for the three months ended June 30, and segment earnings margin was 11.3%, representing a 190 basis point decrease compared to the prior year period, primarily due to the decrease in adjusted gross margins, partially offset by favorable fixed cost absorption. Turning to cash flow, for the first six months of the year, adjusted free cash flow was $186 million, reflecting an improvement of $52 million versus the prior year period and an adjusted free cash flow conversion of 40%. Free cash flow generation has been and continues to be a priority across APi Group, and we are pleased with our strong performance in the first half of the year as the business accelerates revenue growth. During the second quarter, we increased our revolving credit facility from $500 million to $750 million and extended its maturity to 2030.

At the end of the quarter, our net debt to adjusted EBITDA ratio was approximately 2.2 times. As a reminder, the back half of the calendar year is seasonally stronger from a free cash flow generation perspective. We expect that trend to continue this year, providing us with significant opportunities for continued value-enhancing capital deployment, leveraging our strong balance sheet. I will now discuss our guidance for the third quarter and full year 2025, which, as a reminder, is based on current foreign currency exchange rates. We expect increased full year net revenues of $7.65 to $7.85 billion, up from $7.4 to $7.6 billion, representing organic growth in net revenues of 4% to 7% for the year.

Moving down the P&L, we expect increased full year adjusted EBITDA of $1.5 billion to $1.45 billion, up from $985 million to $1.35 billion, representing adjusted EBITDA growth of approximately 15% at the midpoint. Our increased full year revenue and EBITDA guidance is driven by updates to our business outlook, including the impact of closed M&A activity during the quarter, our second quarter over delivery, and our latest outlook for the rest of the year. Based on most recent rates, the impact of foreign currency is immaterial to our change in guidance. In terms of the third quarter, we expect reported net revenues of $1.985 to $2.035 billion. This guidance represents reported net revenue growth of approximately 9% to 11% and organic revenue growth of 5% to 7%.

We expect Q3 adjusted EBITDA of $270 to $280 million, which represents adjusted EBITDA growth of approximately 9% to 13% on a fixed currency basis. For 2025, we anticipate interest expense to be approximately $145 million, depreciation to be approximately $90 million, capital expenditures to be approximately $100 million, and our adjusted effective tax rate to be approximately 23%. We expect our adjusted diluted weighted average share count for the year to be approximately 424 million, reflecting the completion of our three-for-two stock split on June 30th. We continue to expect adjusted corporate expenses to be between $30 to $35 million per quarter, with some timing variability throughout the year. Overall, we are pleased with the team's execution of our strategy in an evolving macroeconomic environment during the second quarter and first half of 2025. 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, David. We entered the second half of 2025 with continued positive momentum across our global business platform. We continue to accelerate organic growth while expanding adjusted EBITDA margins, growing our recurring inspection, service, and monitoring business, building on our record backlog, and improving our free cash flow generation. We believe our proven operating model, built on an inspection and service-first strategy, purpose-driven leadership, and a disciplined approach to capital allocation, positions APi Group for sustained organic growth, margin expansion, and value-accretive M&A. We are confident in our leaders' ability to execute our strategy and deliver against our new 1016/60 Plus long-term financial targets, creating value for all our stakeholders. With that, I would now like to turn the call over to the operator and open the call for Q&A.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, just simply press the star one again. If you're called upon to ask your question and listening via loudspeaker on your device, please pick up your headset and ensure that your phone is not on mute when asking your question. Again, please press star one to join the queue. Your first question comes from the line of Tim Malrooney of William Blair. Please go ahead.

Tim Mulrooney (Group Head of Global Services)

Russ, David, good morning.

Russ Becker (President and CEO)

Hey, Tim. How are you?

Tim Mulrooney (Group Head of Global Services)

Doing well. Thank you. Two quick ones from me. On the second quarter, the revenue in your second quarter was, it was more than $60 million above the high end of the guidance range that you provided for the second quarter. I'm just curious what business or businesses outperformed your own internal expectations in the quarter.

David Jackola (EVP and CFO)

Yeah. Hey, Tim. I'm happy to take that one. You're breaking down the quarter. I'd say our inspection, service, and monitoring businesses performed largely as expected. We saw really strong contract and project activity across both of the segments during the second quarter. We did see a little bit of an impact from rising material costs and the pull forward of materials in the quarter that took us over the top end of the range.

Tim Mulrooney (Group Head of Global Services)

Okay. Yeah. Thanks, David. I'm following up on that. In your specialty services business, obviously, revenue looked great, but the gross margins, 350 basis point decline. How much of that was due to rising material costs? I know you have pricing escalators and other things, but curious how much of that was maybe project-specific or specifically on the rising raw material costs. Do you expect that gross margin pressure in specialty to carry into the back half of the year, particularly as some of these tariffs potentially start to hit on things like copper? Thank you.

David Jackola (EVP and CFO)

Great question again, Tim. When we think about our specialty margins in the second quarter, they were down year over year, really driven by increased project starts. At the front end of a project, that tends to be more material-driven, which is lower margin. As you work your way through a quarter or a project, you typically start working your margin up. Rising material costs and the impact of weather did play a role on our margins in the quarter. I don't know if we can quantify the precise amount. What I would say about margins on the specialty services segment is we do expect them to improve sequentially as we work our way throughout the year.

Tim Mulrooney (Group Head of Global Services)

Got it. Thanks so much.

Operator (participant)

Next question comes from the line of Andy Wittmann of Baird. Please go ahead.

Andy Wittmann (Senior Research Analyst)

Yeah. Great. Thank you. I think, David, you addressed this question a little bit in your prepared remarks, but I just want to drill into the guidance a little bit more. I'm looking at the increase here. Obviously, the revenue here in the quarter above expectation is very good. A little bit of incremental M&A helps your guidance as well. I'm just trying to see if the forward outlook for the base business is changed or unchanged. I heard pull forward mentioned in the previous answer to the question. I just want to get my arms around, have things improved from your outlook for the balance of the year or not on an organic basis?

David Jackola (EVP and CFO)

Yeah. Hey, good morning, Andy. Thanks for the question. You're hearing big high-level raw numbers. You can think of our EBITDA raise as a third of it driven by our Q2 over delivery, maybe a third of it due to M&A in the quarter, and maybe a third of it due to an increase or an improvement in our second-half business outlook.

Andy Wittmann (Senior Research Analyst)

Okay. That's helpful. Just as it relates to capital deployment, I heard the comments about you've got a number under LOI. Still targeting $250 million. You're well over $100 million here, so you're on track at least. Does it feel like the M&A capital deployment, Russ, has a potential to be maybe above that, given where you sit today with what's under contract and heading forward?

Russ Becker (President and CEO)

I would say, hey, Andy, good morning, by the way, and welcome back. I would say that the potential is there. M&A is kind of like no different than disciplined project and customer selection. We need to continue to be disciplined in the companies and the businesses that we invite to join the APi family. I would say the pipeline is robust. I would say the potential is there for us to over deliver on the $250 million commitment, if you will. In the same breath, we're going to be really disciplined. If it's $250 million, it's $250 million. If it's $235 million, it's $235 million. If it's $290 million, it's $290 million.

Andy Wittmann (Senior Research Analyst)

Okay. That's all I have for today. Thank you.

Russ Becker (President and CEO)

Thanks, Andy.

Operator (participant)

Your next question comes from the line of Julian Mitchell of Barclays. Please go ahead.

Julian Mitchell (Equity Research Analyst)

Hi, good morning. First off, just wanted to try and understand the safety business. Are we expecting that kind of 6%-ish organic growth in the back half as well? Pretty steady sort of run right now. Maybe flesh out a little bit more how satisfied you are with your elevator market share and sort of top-line push efforts, please.

David Jackola (EVP and CFO)

Sure. I'll take the first part, Julian, and maybe I'll hand the second part on elevators over to Russ. I'd say our outlook for the safety services segment in the back half of the year is really consistent with where we've had it for the year to date. We continue to target mid to upper single-digit revenue growth in the service side of the business, low to mid-single digit on the project to get to that mid-single digit 5% to 6% revenue growth in the back half of the year.

Russ Becker (President and CEO)

Julian, just to add a little bit of color on the elevator business. I'll talk about the existing business that we acquired about this time last year, Elevated. That business is really performing as expected. They're showing mid to upper single-digit organic growth. The performance of the business is really as expected. The new acquisition that we just made is really what we're calling a tweener. I know that's just a really, really good use of vocabulary, but it's kind of, it's not necessarily a bolt-on, but it's not the size of Elevated either. It's a really good company, and it positions us in the Northeast that we think will be super additive to our business. We have a number of additional opportunities that we're continuing to do some work on from a bolt-on perspective.

We remain super optimistic, but we've got a long ways to go to building out this billion-dollar elevator and escalator platform that we stated that we believe we have the potential to do. We're just getting going, but I'm really optimistic and really excited about the direction that we're headed and the opportunities that are in front of us.

Julian Mitchell (Equity Research Analyst)

That's helpful. Thank you. I just wanted to follow up on the acquisition front, and clearly you've made good progress already this year. Sorry if I missed it, but would you mind sort of fleshing out the profile in aggregate of the acquisitions that have been announced and/or closed in terms of aggregate organic growth rate, any sort of margin profile, and how much EBITDA dollars are dialed into the guide now from acquisitions that have closed in the last 12 months or are expected to close this year?

Russ Becker (President and CEO)

David can talk about the numbers, but I'll talk to you a little bit about the profile of the deals. Obviously, one of them is an elevator company, and that's kind of because we said that. Five of the seven are in our North American safety business in the fire and security space. One of the businesses was a very, very profitable HVAC services business that was a bolt-on to one of our existing companies. Every one of these acquisitions is accretive. They're either at fleet average or better, so they're all accretive to really our long-term results. Regarding what's included in the guide, I think David already said it was about a third of our increased guidance was through M&A. I don't know if you have any specific numbers you want to share or.

David Jackola (EVP and CFO)

No, that about does it. Over the course of the year, from Q1 to the end of Q4, we expect M&A to contribute north of $200 million of revenue to the business.

Julian Mitchell (Equity Research Analyst)

Great. Thank you.

Russ Becker (President and CEO)

Thanks, Julian.

Operator (participant)

Your next question comes from the line of Ashish Sabadra of RBC Capital Markets. Please go ahead.

David Paige (AVP of Equity Research)

Hi, good morning. This is David Paige on for Ashish. Thanks for taking our questions. I was wondering if you could give an update on the international business Chubb, just how that performed in the quarter and how you're looking at it for the rest of the year. Thank you.

Russ Becker (President and CEO)

We are super fired up about the business and where that business is performing. It showed organic growth again in the quarter. I think that business has grown now organically every quarter since we've owned it. I shared a data point in, I think, my prepared remarks about seeing high single-digit order growth in the business, which really speaks to the health of their inspection and service business. We continue to see really good momentum in our international business, and we still have some work to do. They're still optimizing. We have an integration going on in Benelux that's fairly significant that has great leadership handling it. We're still continuing to do some work in our monitoring centers to optimize those. Business as usual there, and I would tell you that they're doing a great job.

David Paige (AVP of Equity Research)

Thank you.

Operator (participant)

Your next question comes from the line of Jon Tanwanteng of CJS Securities. Your line is now open.

Jon Tanwanteng (Managing Director)

Hi, good morning, guys. Thank you for taking my questions. That nice quarter, and nice to see the progress on the M&A front. I was wondering if you could drill down on the elevator acquisition that you did. If I recall correctly, Elevated itself had a very high EBITDA margin compared to your corporate average. I'm wondering if the business that you acquired was similar to that or if it was more closer to your corporate average and maybe get closer to what Elevated does over time.

Russ Becker (President and CEO)

I would say it's kind of funny because we were joking around about this as we were getting prepped. It's really, really closer to fleet average. Obviously, we think that the potential for the business to get to, so to speak, the profile where Elevated is there. We feel that way with actually every one of our businesses. It's no different than how we're looking at our fire and life safety and security businesses, where kind of the new normal from a branch perspective is 20%, and that's where we're pushing all of our businesses. At the time of the acquisition, it's really on par with fleet average and with the potential to go and improve.

Jon Tanwanteng (Managing Director)

Okay. Great. Thank you. I noticed that the seven acquisitions you did, I don't believe any one of them was international. I was wondering if you could speak to the opportunity there, the opportunity set that you're seeing, if any of the LOIs that you've mentioned previously are in the international space and what we can expect there going forward.

Russ Becker (President and CEO)

We do have one small business under LOI in our international business as we sit here, and our team is doing diligence on that company as we speak. There is no question that we've opened the aperture up to the international business. I would say that it's on a country-by-country basis, just like it is for us in North America on a company-by-company basis. In the international business, the country has to be able to kind of accept and integrate that business, and not every one of our businesses internationally is progressed to the point where we feel like they're ready for a bolt-on, but a number of them are. We're certainly doing work and looking at a number of opportunities, but we do have one small business under LOI in the international business.

Jon Tanwanteng (Managing Director)

Got it. Thanks, Russ.

Russ Becker (President and CEO)

Thank you.

Operator (participant)

Next question comes from the line of Jasper Bibb of Truist Securities. Please go ahead.

Jasper Bibb (VP of Equity Research)

Hey, good morning, everyone. I wanted to ask a two-parter about specialty projects, just hoping you could provide a bit more detail on the new business pipeline there and then also how your project selection initiatives might impact the margins for that business once you get through the ramp-up phase you talked about on some of these new wins.

Russ Becker (President and CEO)

The new pipeline and backlog is really, really solid. In our prepared remarks, we stated that our backlog eclipsed $4 billion for the first time, and that's really kind of distributed across all aspects of our business. I would say all aspects of our business are at record levels. It's very, very good, and it's very, very, very healthy. We feel good about where we're at. David mentioned that we expect to see sequential growth in gross margins as we work our way through the back half of the year. That's the expectation that we have on the business, and we think that the margins in our backlog are strong.

Jasper Bibb (VP of Equity Research)

Got it. Specialty really surprised this quarter, but I guess wondering how we should think about the composition of the segment, organic revenue growth, and margins in your third-quarter outlook.

David Jackola (EVP and CFO)

Yeah, I can give you some color on that, Jasper. I'd expect in the third quarter, I think we answered a question earlier on the safety services segment, mid-single-digit organic revenue growth in the third quarter there. I expect high single-digit organic revenue growth in the specialty services segment in the third quarter.

Jasper Bibb (VP of Equity Research)

Okay. Got it. Thank you for taking the questions.

Operator (participant)

Your next question comes from the line of Andy Kaplowitz of Citi. Your line is now open.

Andy Kaplowitz (Managing Director)

Hey, good morning, everyone.

Russ Becker (President and CEO)

Hey, Andy. Are you going to ask us seven questions in one question?

Andy Kaplowitz (Managing Director)

I'll try not to, Russ. I just wanted to ask you about specialty in one sense. You've been focused on sort of higher margin projects, sort of getting rid of the loss leading projects. How would you sort of assess that progress here? Is any of that impacting the quarter, or is it more just as you talked about sort of materials and mix?

Russ Becker (President and CEO)

Yeah. I mean, Andy, as you know, business isn't linear, and not everything necessarily flushes itself out in a perfectly straight line. If you look at our Q2 of last year, we had a number of projects coming to completion, and you typically have gross margin improvement as your projects finish. We have, so to speak, more project starts going on right now, and typically, that's at a lower gross margin. You factor in you have a little bit of cost inflation. We have some weather impacts, and all that stuff kind of put us where we are sitting in this quarter. We think it'll only get better as we work our way through the second half of the year.

Andy Kaplowitz (Managing Director)

Appreciate that, Russ. Obviously, non-res markets have been kind of all over the place, but your safety business is doing really well. Maybe just talk about sort of what you're seeing out there. Inspection and service, can it continue to grow double digits for the foreseeable future?

Russ Becker (President and CEO)

We are really, I guess, pleased with the way our, again, our bellwether always is inspection growth. We stated that inspections grew for the 20th straight quarter at a double-digit clip. We don't see really any let-off in that. That's been really positive, and that's leading to strong organic growth in our service business. That's primarily in North America. What we're seeing internationally with high single-digit order growth is, I guess, really sending us a message that the sales transformation that has been initiated by our leadership there is really taking hold and taking shape. That's all really focused on the service side of our business in safety, and that's really positive. That gives us good comfort in the direction that we're going. You layer in really the strong project opportunities in the end markets that we pursue, and that's just a really good combination. That's what we're seeing.

Data centers, semiconductors, advanced manufacturing all are really providing robust opportunities for us. We're just trying to make sure that we're being smart so that we can get the gross margins on the work that we really need to get for that work to be beneficial to the company and ultimately to our shareholders. There's a lot of opportunity out there, and proposal activity, even with all the noise around tariffs still, the proposal activity is very, very robust. We're just trying to be smart about what work we take and what work we pursue.

Andy Kaplowitz (Managing Director)

Very helpful. Thanks, Russ.

Russ Becker (President and CEO)

Thank you, Andy.

Operator (participant)

Your next question comes from the line of Tomo Sano of JPMorgan. Please go ahead.

Tomo Sano (Managing Director)

Hi, good morning, everyone. Thank you for taking my question.

Russ Becker (President and CEO)

Morning, Tomo.

Tomo Sano (Managing Director)

My first question is the North America inspection revenues have another 20 consecutive quarters double-digit growth. I wanted to get more color on the pricing improvements as well as your inspection first strategies, including technology standpoints like AI field productivity tools, how you see the improvement of the margins in addition to the volume side of this business, please.

David Jackola (EVP and CFO)

Yeah. I'm happy to take it. If Russ has any commentary at the end. We continue to be able to capture a little bit of mid-single-digit pricing in our inspection, service, and monitoring revenue streams. Your question on margin and the impact of AI and digital on margins going forward, I would say our expectation on all of our revenue streams is that we're going to continue to be able to expand margin into 2026, 2027, and 2028 as we pursue our 1016/60 Plus strategic goals and that technology and the use of technology will be a part of that.

Russ Becker (President and CEO)

Yeah. What I would say, Tomo, is that I think actually the technology and AI and all of that stuff that comes together is probably going to be more of providing leverage from an SG&A perspective and making us more efficient. When you think about the labor market that's out there, we need to. Our efforts around artificial intelligence and technology need to enable us to continue to scale our business because we're going to have less people to be able to do the work. That's really where the focus is. We have a team that is focused basically on AI on an international basis. The reality of it is, just like most every other company, we're probably in the bottom of the first inning in our efforts there. We actually are resourcing and have kind of an AI task force, for lack of better words.

Tomo Sano (Managing Director)

Thank you. Just one follow-up on the innovation side, international business, and safety services. Could you talk about leveraging digital with Chubb Vision? How actually do you see customer reactions there? Could you talk about how you're excited about this in terms of the volumes and margin in international business, please?

Russ Becker (President and CEO)

Tomo, could you repeat your question, please?

Tomo Sano (Managing Director)

Yes. I would like to get more color on digital strategies in international business, especially Chubb Vision that you showcased at the IL day. If you see any customer feedback in the second quarter and some expectation in the second half, please.

Russ Becker (President and CEO)

The work with Chubb Vision and stuff is really just in its infancy as well and just really getting cranked up. We see a lot of opportunity with the work that that team is doing. I think there's a lot of really good stuff happening there, but I think we're too early to declare victory or anything like that, Tom. I think there's a tremendous amount of opportunity. I would tell you that in a lot of ways, our international business is further along in that journey. Our leader there, Andrew White, is a bit techie himself. I think he has a really broad vision for where that can go, and that's something that we're working on making sure that we can take across the entire breadth of our portfolio, not just in the international business. I'd say it's too early to declare victory.

I don't know, David, you worked there for, so do you have any other color?

David Jackola (EVP and CFO)

No, I mean, the only thing I—it's too early to declare victory, but it's an incredible opportunity. I mean, in our international business, we've got $50 million connected devices. The more that we can use technology to serve our customers, the better our business will be.

Tomo Sano (Managing Director)

Thank you for the color. Looking forward to it. Thank you very much.

Operator (participant)

Your next question comes from the line of Kathryn Thompson of Thompson Research Group. Please go ahead.

Kathryn Thompson (Founding Partner and CEO)

Hi. Thank you for taking my question today. Just one observation. Despite all the gloomy headlines, I think it's worth noting that a third of your EBITDA growth is from an improved outlook. Definitely separating from a few other companies. The question to you, when you look at—I just want to pull the string a little bit more on kind of how APi wins with AI. You look at companies like Meta, had their guidance for $66 billion to $72 billion for this year. They're raising, and they're looking at reaching $100 billion next year. You've touched briefly on a few on how APi can win. Could you give a few examples in terms of either how you win with new projects or with the ongoing maintenance and operation of the AI behemoth network? Thanks very much.

Russ Becker (President and CEO)

When you're doing the inspection and service work at, whether it's Meta or Microsoft or whoever, when you're doing the inspection and service work at those facilities and they come along and expand at that existing site, the opportunity for you to win that expansion, the business associated with that expansion, rises dramatically because of the relationships you have. The client is interested in consistency and service and follow-through and all of that other stuff. When you have other larger opportunities that are, say, more greenfield sites like, say, Meta's 10X site in Louisiana, it's really relationship-based and your ability to man-work in some of these remote locations. I think that's something that we have really adept skills at and have the capacity and the workforce that we can bring to bear on those types of project opportunities.

Those opportunities, the selection criteria is usually around your ability to work safely, your ability to provide the right high-quality, skilled field leaders to actually execute the work, your ability to get the work done on time, because they're very aggressive schedules. There are all these other gates and price is a very small factor that comes into the equation. I'd also say on the fire and life safety and security side of it, there's only a handful of firms that have the capacity and the skills to tackle projects of both that magnitude. That's an element of complexity that's a positive for a firm like ours. In the same breath, we still have to be selective and be smart about which projects we pursue so that we don't overextend ourselves and therefore don't deliver on the commitments that we make to that customer. I don't know.

Did that make sense, Kathryn?

Kathryn Thompson (Founding Partner and CEO)

Yeah. No. It sounds to me that you can win business both at the build-out, but then on an ongoing basis with ongoing typical services that you would do for any complex commercial building and structure. Is that correct? Am I hearing you correctly on that?

Russ Becker (President and CEO)

That's correct. The more complex the opportunity, the better off we're going to be. We don't want to find ourselves in positions for, say, project-related work where, let's just say, we're not doing the inspection and service work for that customer. We don't want to be in a position where we're just competing on price. That's just not our model. We don't do well when we just compete on price. If that's what it is, if somebody's going to, and especially in today's world, if somebody's just going to treat it as an auction, if you will, we're not going to do well in that environment. It is like, why even waste your time pursuing it?

That is why we have a fairly robust go, no-go kind of checklist that we put our businesses through because we want them to actually think about, "Should I even pursue this?" In the reality of it, if it's just going to be a price-driven decision, they shouldn't.

Kathryn Thompson (Founding Partner and CEO)

Excellent. Thanks so much, and best of luck going forward.

Russ Becker (President and CEO)

Thanks, Kathryn.

Operator (participant)

Your next question comes from the line of Josh Chan of UBS. Please go ahead.

Josh Chan (Executive Director and Equity Research Analyst)

Hey, good morning, Russ, David. Just two quick ones for me. On the guidance raise that was for the rest of the year, I guess the one-third of the guidance raise, what got better? Was it primarily the specialty side of things?

David Jackola (EVP and CFO)

Josh, I think I'd attribute that to the really strong backlog that we were able to generate during the quarter, and the strong margin and strength of the backlog gave us comfort in the back half of the year.

Josh Chan (Executive Director and Equity Research Analyst)

Okay. Great. Thank you. On the backlog margin, it sounds like you're pleased with the backlog margin. I guess when it comes to realizing that backlog margin over time, obviously, you can control your own execution, but can you talk about other factors that you have to think about as that converts, things that may or may not be outside of your control, and what you could do to kind of ring-fence those?

Russ Becker (President and CEO)

Obviously, Josh, the material cost escalation is something as prices go up, whether it's because of tariffs or inflation or whatnot, or a combination thereof. That's out of our control, but it's in our control. I mean, we have been talking very openly since President Trump won the election that he's going to use tariffs as a lever for him to level the playing field from the trade perspective. You knew that it was coming. We have been working hard to protect ourselves during the time of our proposals. I'm sure we're not perfect, and I'm sure there's some gaps and some places where we didn't do as well as we should. That would be one area. Weather could be a significant issue and challenge for us because, obviously, when you have poor weather conditions, you're not going to be as efficient with the deployment of your field leaders.

That's another area that could be challenging. Those would probably be the primary two contributors. Obviously, we have to execute. That's an aspect of it. Availability of labor and things like that could be a challenge as well. The reality of it is everybody's knowing that there's going to be work availability of labor issues and challenges and shortages. As you are making decisions to take on, whether it's master service agreements or other project-related opportunities, you should be factoring that into the equation. That really should not be an excuse.

Josh Chan (Executive Director and Equity Research Analyst)

Great. Thank you for the color, David and Russ. Congrats in the quarter.

Russ Becker (President and CEO)

Thanks, Josh.

Operator (participant)

We have one more question from Stephanie Moore of Jefferies. Please go ahead.

Stephanie Moore (SVP of Equity Research)

Hi. Good morning. Thanks, everybody.

Russ Becker (President and CEO)

Hi, Stephanie.

Stephanie Moore (SVP of Equity Research)

Maybe just to—I want to go back to the margin performance in the quarter was very good. Across both segments, obviously, you've seen for the consolidated level. As we look at both segments, I was hoping that maybe you could talk a little bit about the puts and takes of the margin performance. I know your analysts say you walked through several levers to achieve ultimately your 16%+ target, pricing, project selection, and the like. Maybe if you could just talk about the underlying puts and takes and your path to achieve some of those, to achieve that target and the levers to get there. Thank you.

David Jackola (EVP and CFO)

Yeah. I'm happy to give you a little bit of color there, Stephanie. Puts and takes are on margin in the quarter. Our margin performance on inspection, service, and monitoring was strong. Continues to be—we're able to get margin and creative price in that price part of the business. We were able to get good leverage out of our fixed cost base during the quarter, partially due to the strong organic revenue growth. That was a positive. We talked a little bit about rising material costs. We've talked a lot over the last couple of quarters about how our business is able to protect itself at the time of proposal and being able to capture the dollar value of rising material costs. We believe the business did a good job of doing that during the quarter. That did have a little bit of margin erosion during the quarter.

I think when you talk about the service mix, you talk about discipline project and customer selection, getting leverage. We're seeing progress in all of those areas in our path to 13% and now 16% adjusted EBITDA margin.

Stephanie Moore (SVP of Equity Research)

Great. Very helpful. Just one quick follow-up. Is there any chance you can give a bit of an update on the systems investment that you called out at the analyst day, how it's progressing thus far, and anything you can call out on that? Thank you.

David Jackola (EVP and CFO)

Yeah. Absolutely. I'm sure you saw in the release the spend on the system and business enablement in the quarter. What I'd say is those are difficult, challenging business-led projects, but the team is performing and executing well. I've been particularly impressed with the way that team is working closely to make sure that the voices of our branch, company, and field leaders are heard each and every step along the way. Really good progress on that. The team is committed, they're executing well, and we feel good about where that work is.

Stephanie Moore (SVP of Equity Research)

Got it. Thank you. Appreciate it.

Russ Becker (President and CEO)

Thanks, Stephanie.

Operator (participant)

That concludes our Q&A session. I will now turn the conference back over to Russ Becker, our President and CEO, for closing remarks.

Russ Becker (President and CEO)

Thank you. In closing, I would like to thank all our team members for their continued support and dedication to our business. I'm truly grateful for what each and every one of you do on a daily basis. 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 Group and look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you, everyone, for joining. You may now disconnect.