APi Group Corporation

Ladies and gentlemen, and 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.

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 Jacola, our Executive Vice President and Chief Financial Officer, and Sir Martin Franklin and Jim Lilley, 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 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 31st, 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 of 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.

Thank you, Adam. Good morning, everyone. Thank you for taking the time to join our call this morning. Before we get into our record 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 10, 16, 60-plus shareholder value creation framework we introduced in 2020. This is the target we are aiming to achieve at our Investor Day. As a reminder, these targets are the following. $10 billion plus in net revenues by 2028 supported by consistent -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. And $3 billion plus of cumulative adjusted pre-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 10, 16, 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 10, 16, 60-plus targets. These initiatives are pricing, improved inspection, service, and monitoring revenue mix, disciplined customer and project selection, procurement, systems, and scale, our creative M&A, and selective business pruning. And 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 record 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 and 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 our creative 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's ownership. As expected, specialty services returned to growth in the second quarter, delivering .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 history. Importantly, the double-digit organic growth and 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 to deliver -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 -to-date, and we have several more opportunities under letter of intent. We remain on track to deploy approximately $250 million in a creative, bolt-on M&A at attractive multiples this year. We also undertook some selective pruning of a small business in our specialty segment that was not accretive to our new 10, 16, 60-plus financial targets, which is the lens we'll use to continue to evaluate businesses in both segments going forward. In summary, we moved 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? Thanks, Russ, and 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 .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 MEX, partially offset by pricing improvements across the business. Adjusted EBITDA increased by .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 39 cents, representing a 6 cent 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 .8% to $1.36 billion compared to $1.18 billion in the prior year period. Organic growth of .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 .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 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 increased by .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 .7% for the three months ended June 30th, 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, 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 and 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 in EBITDA guidance is driven by updates to our business outlook, including the impact of closed M&A 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 fund for the year to be approximately 424 million, reflecting the completion of our -for-two stock split on June 30. 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.

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 service-first strategy, purpose-driven leadership, and a disciplined approach to capital allocation, positions API for sustained organic growth, margin expansion, and value-creative M&A. We are confident in our leaders' ability to execute our strategy and deliver against our new 10, 16, 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 operators and open the call for Q&A.

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 1 on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw your question, just simply press the star 1 again. If you are called upon to ask your question and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star 1 to join the queue. And your first question comes from the line of Tim Morley of William Blair. Please go ahead.

Russ, David, good morning. Hey, Jim, how are you? Doing well, thank you. So two quick ones from me. On the second quarter, the revenue in your second quarter was, well, 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.

Yeah, hey, Tim, I'm happy to take that one. So 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. And we did see a little bit of an impact from rising material costs in the pull forward of materials in the quarter that took us over the top end of the range.

OK, yeah, thanks, David. I'm following up on that. You know, your specialty business, obviously revenue looked great, but, you know, 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, you know, maybe project specific or specifically on the rising raw material costs. And, you know, do you expect that gross margin pressure in specialty to carry into the back half of the year, particularly if some of these tariffs potentially start to hit on things like copper?

Thank you.

Yeah, great, great question again, Tim. So, you know, when we think about our specialty margins in the second quarter, they were down year over year, really driven by increased project starts. And, you know, at the front end of a project that tends to be more material driven, which is lower margin. And 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. And I don't know if we can quantify the precise amount. What I would say about margins on the specialty segment is we do expect them to improve sequentially as we work our way throughout the year.

Got it. Thanks so much.

Next question comes from the line of Andy Whitman of BIRC. Please go ahead.

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 expectations. Very good. A little bit of incremental M&A helps your guidance as well. So I'm just trying to see if the forward outlook for the base businesses is changed or unchanged. I heard Paul Ford mentioned in the previous answer to the question. So 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?

Yeah, hey, good morning, Andy. Thanks for the question. You know, here big high level round 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 improvement in our second half of this outlook. Okay,

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

I would say, hey, Andy, good morning, by the way, and welcome back. I would say that the potential is there. You know, 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. So I would say the pipeline is robust. I would say the potential is there for us to over deliver on the $250 million kind of commitment, if you will. But, you know, in the same breath, we're going to be really disciplined. And so if it's $250, it's $250. If it's $235, it's $235. And if it's $290, it's $290.

Yeah. Okay. That's all I have for today. Thank you. Thanks, Andy.

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

Hi. Good morning. I think, you know, 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. And maybe flesh out a little bit more, you know, how satisfied you are with your elevator market share and sort of top line push efforts, please.

Sure. Hey, I'll take the first part, Julian, and maybe I'll hand the second part on elevators over to Russ. So I'd say our look for the safety service 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.

And Julian, just to just add a little bit of color on the elevator business, I'll talk about the existing business that we acquired, you know, about this time last year, elevated. That business is really performing as expected. They're showing, you know, kind of mid to upper single digit organic growth on 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. But it's a really good company and the positions us and, you know, in the northeast that we think will be super additive to our business. We have a number of additional opportunities that, you know, we're continuing to do some work on from a bolt on perspective. So we remain super optimistic, but we've got a long ways to go to building, you know, to building out this billion dollar elevator and escalator platform that, you know, that we stated that we believe we have the potential to do. So we're just we're just getting going. But I'm really I'm really optimistic and really excited about the direction that we're headed and the opportunities are in front of us.

That's helpful. Thank you. And then 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, you know, the profile sort of in aggregate of the acquisitions that have been announced and or closed in terms of sort of aggregate organic growth rate, any sort of margin profile, you know, how much EBITDA dollars are dialed into the guide now from acquisitions, you know, that have closed in the last 12 months or so.

The service business that was a bolt on to one of our existing, the existing companies and every one of these acquisitions is a creative. They're either at fleet average or better. So they're all a creative to, you know, really our long term 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 through M&A. I don't know if you have any specific numbers you want to share. 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 dollars of revenue in the business.

Great. Thank you.

Thanks,

Julian.

Your

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

Hi, good morning. This is David Pajon 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 corner in the corner and how you're looking at it for the rest of the year. Thank you.

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

Thank you.

Your next question comes from the line of John and wanting of CJ security piece. Your line is now open.

Hi, good morning, guys. Thank you for taking my questions that night quarter and I see the progress on on the front. I was wondering if you could drill down on the elevator acquisition that you did. If I recall correctly, you know, elevated itself had a very high even a margin compared to your corporate average. And 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 close to what elevator does over time.

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

OK, great. Thank you. And then I noticed that the seven acquisition 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 .I.s that you've been that you mentioned previously are in the international space and what we can expect there going forward.

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

Got it. Thanks, Ross. Thank

you.

Next question comes from the line of Jasper B of True Security. Please go ahead.

Hey, 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 ones.

Well, I would say that the new pipeline, you know, backlog is really, really solid. I mean, you know, we don't we we in our prepared remarks, we stated that our backlog eclipsed four billion for the first time. And that's, you know, really kind of distributed across all aspects of our business. And I would say all aspects of our business are, you know, at record levels. So it's very, very good and it's very, very, very healthy. So we feel good about where we're at. David mentioned that, you know, we expect to see sequential growth in gross margins as we work our way through the back half of the year. And that's the expectation we have on the business. And we think that the margins in our back are strong.

Yeah, and then specialty really surprised this quarter. But I guess wondering how we should think about the composition of segment organic revenue growth and margins in your third quarter outlook.

Yeah, I can I can give you some color on that, Jasper. So I expect in the third quarter, I think we asked to answer a question earlier on the safety business, mid single digit organic revenue growth in the third quarter there. I expect high single digit organic revenue growth in the specialty business in the third quarter.

OK, thank you for taking the questions.

Your next question comes from the line of Andy Kapelowitz, FCD. Your line is now open. Good

morning,

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

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

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

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

Well, we are really, I guess, pleased with the way our, you know, again, our bellwether always is, you know, inspection growth. And, you know, we stated that inspections grew for the 20th Street quarter, you know, double digit clip. So we don't see really any let off in that. And that's been really positive. And that's leading to good, strong organic growth in our in our service business. That's primarily in North America. And what we're seeing internationally with, you know, high single digit quarter growth is, I guess, really sending us a message that the sales transformation that has been initiated by our leadership there is really, you know, taking hold and taking shape. So that's all really focused on the service side of our business in, you know, in safety. And that's really positive. And that gives us good, good comfort in direction that we're going. Then you layer in, you know, really the strong project opportunities in the end markets that, you know, we pursue. And that's just a really good combination. And that's what we're seeing. And, you know, data centers, semiconductors, advanced manufacturing, you know, all are really providing robust opportunities for us. And 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 that we really need to get for that work to be beneficial to, you know, to the company and to ultimately to our shareholders. So there's a lot of opportunity out there and proposal activity, you know, even with all the noise around terrorist still the proposal activity is very, very robust. And we're just trying to be smart about what work we take and what work we

pursue. Very helpful. Thanks, Beth. Thank

you, Andy.

Your next question comes from the line of almost JP Morgan. Please go ahead.

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

Or, you know,

my first question is the North America inspection revenues have another 20 consecutive quarters double digit growth and wanted to get a more color on the pricing improvements as well as your inspection for strategies, including technology, standpoints, like I feel for activity tools, how you see the improvement of the margins of the in addition to the volume side of this business place.

Yeah, so I'm happy to take it and then if Russ has any commentary at the end. So we continue to be able to capture a little bit single digit pricing in our inspection service and monitoring revenue streams and and you know your question then on margin and the impact of AI and digital on margins going forward. I would say, you know, our expectation on all of our revenue streams is that we're going to continue to be able to expand margin into 26 27 and 28 as we pursue our 10 1660 strategic goals, and the technology and the use of technology will be a part of

that. Yeah, what I would say Tomo is that I think actually the, the technology and AI and all that stuff that comes together is probably going to be more of providing leverage from an SG&A perspective and making us more efficient and, you know, when you when you think about, you know, the labor market that's out there, you know, we need to, you know, 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. And so that's really where the focus is. But we're, we have a team that is focused, you know, basically on AI on an international basis, and you know the reality of it is, is just like most every other company we're probably in the bottom of the first inning in our in our efforts there but you know we actually are source resourcing and have a kind of an AI task force for lack of better words.

Thank you, and just one follow up on innovation side in international business and safety services. Could you talk about leveraging digital with two visions. How actually you see a customer reaction there. And could you talk about the how you excited about the disk in terms of the the volume of margin international business please.

Tomo, could you repeat your question, please.

Yes, so I would like to get more color on digital strategies in international business, especially to the visions that you showcased at the aisle day. If you see any customer feedback in a second quarters and some expectation in a second half please.

Well, I mean, the work with chub, you know chub vision and stuff is really just in its infancy as well and just really getting cranked up. I mean we see a lot of opportunity with the work that that team is doing. I mean, I think there's there's a lot of really good stuff happening there but I think we're too early to, you know, like declare victory or anything like that. I think there's a tremendous amount of opportunity, I would tell you that in a lot of ways our international businesses further along, you know in in that journey. You know our our leader there Andrew White is a bit techie himself and and I think he you know he has, you know, 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 the entire breadth of our portfolio, not just you know in the international business but I'd say it's it's too early to declare victory. I don't know David you work there for you know so do you have any other color. 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 and the more that we can use technology to serve our customers the better our business will

be. Thank you for the caller looking forward to it. Thank you very much.

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

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. So definitely separating from a few other companies. The question to you when you look at these I just want to pull the string a little bit more on how API wins with AI. You know you look at companies like Meta had their guidance for 66 to 72 billion dollars for this year and they're raising and they're looking at reaching 100 billion next year. And you've touched briefly on a few like on how API can win. Could you give us a few examples in terms of either how you win with new projects or with the ongoing maintenance and and operation of the AI behemoth network. Thanks very much.

Well, when when you're doing the inspection and service work, you know, at whether it's Meta or Microsoft or whatever but when you're doing the inspection service work at those facilities, and they come along and expand at that existing site, you know the opportunity for you to to win that expansion, the business associated with that expansion rises, you know, dramatically, because of the relationships you have and, you know, the client is, you know, interested in consistency and service and follow through and all of that other stuff. Then when you have other larger opportunities that are say more greenfield sites like say Meta's 10x site, you know, in in Louisiana, then then it's really relationship based and your ability to man work in some of these remote locations. And that's, I think, something that we have really a depth skill set and have the capacity and the workforce that that we can bring to bear on those types of project opportunities and those those opportunities, you know, the selection criteria is usually around your ability to work safely your ability to to provide, you know, the right, you know, high quality, you know, service. So, you know, skilled lead field leaders to actually execute the work, your ability to get the work done on time. I mean, because they're very aggressive schedules and so there's all these other gates and price is a very small factor that that comes into the, to the equation. And I'd also say on the on the fire 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 that magnitude. And that's, you know, an element of complexity that's a positive for a firm like ours. And so, but in the same breath, we still have to be selective and be smart about, you know, what, which projects we pursue so that we don't overextend ourselves and therefore, you know, don't deliver on the commitments that we make to that customer. So, I don't know. Does that make sense, Catherine?

Yeah. Yeah, no. And so, but it sounds to me that you can win business both at the build out, but then on an ongoing basis with ongoing services that you would do for any complex commercial building and structure. Is that correct in my, in my hearing you correctly on that?

That's correct. And the more complex the opportunities, the better off we're going to be. We don't want to find ourselves in positions for say project related work. We're, 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. Like that's just not our model. We don't do well when we just compete on price. And if it's just, if that's what it is, if somebody's going to, especially in today's world, if somebody's just going to treat it as an auction, if you will, we're just, we're not going to do well in that environment. So it's like, why, why even waste your time pursuing it? And that's why we have, you know, a fairly robust go, no go kind of checklist that we put our businesses through because we want them to actually, you know, think about should I even pursue this? And in the reality of it is, it's just going to be a price driven decision. They shouldn't.

Yep. Excellent. Thanks so much. And best of luck going forward.

Thanks, Catherine.

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

Hey, good morning, Russ David, just two quick ones for me. So on the guidance raised that was for the rest of the year, I guess the one third of the guidance raised. What got better? Was it primarily the specialty side of things?

Josh, I think I 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.

Okay, great. Thank you. And then on the on the backlog margin, it sounds that 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 that you have to think about as you know, that converts, you know, things that may or may not be outside your control and what you could do to kind of re-infest those?

Well, 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. You know, that's out of our control, but it's in our control. I mean, like we have been talking very openly since President Trump won the election that he's going to use tariffs as, you know, a lever for him to, you know, level the playing field from the trade perspective. And so you knew that it was coming. And so we've been working hard to protect ourselves, you know, 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, you know, we didn't do as well as we should. That would be one area. Weather is, you know, could be a significant, you know, issue and challenge for us, because obviously when you have poor weather conditions, you're not going to be as efficient, you know, with the deployment of your field leaders. And so that's another area that could be could be challenging. So 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 is could be a challenge as well. But the reality is, you know, everybody's known that there's going to be, you know, work, you know, availability of labor issues and challenges and shortages. And so, you know, as you are making decisions to take on, you know, whether it's, you know, master service agreements or other project related opportunities, you know, you should be factoring that into the equation. And that really should not be an excuse.

Thank you for the color, David and Russ and congrats.

And we have

one more question from Stephanie more of Jeffries. Please go ahead.

Hi, good morning. Thanks, everybody. Maybe this is I want to go back to the margin performance in the quarter was very good, you know, across both segments. Obviously, you've seen or for the consolidated level. But if we look at both segments, I was hoping maybe you could talk a little bit about the puts and takes of the margin performance. I know your analyst that you walked through several levers to achieve, you know, ultimately, your 16% plus target, you know, pricing project selection and the like. So maybe if you could just talk about, you know, the underlying puts and takes and your path to achieve some of those to achieve that target and levers to get there. Thank you.

Yeah, I'm happy to give you a little bit of color there, Stephanie. Your takes are on margin in the quarter. So our margin performance on inspection service and monitoring was strong. Continues to be we're able to get margin accretive price and that price is 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. So that was a positive. We talked a little bit about rising material costs and 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. And we believe the business did a good job of doing that during the quarter. But that did have a little bit of margin erosion during the quarter. So I think, you know, when you talk about the service mix, you talk about discipline project and customer selection, getting leverage, receiving progress in all of those areas in our past at 13 and now 16% adjusted even on margin.

Great, very helpful. And then 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 those BARs, anything you can call out on that. Thank you.

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

Got it. Thank you. Appreciate it.

Thanks, Stephanie.

And that concludes our Q&A session. I will move the conference back over to Dr. Fetcher. Our President and CEO for closing remarks.

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 and look forward to updating you on our progress throughout the remainder of the year. Thank you, everybody.

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