Good morning, ladies and gentlemen, and welcome to APi Group First Quarter 2023 Financial Results Conference Call. All participants are now in a listen-only mode until the question-and-answer session. Please note, this call is being recorded. I will be standing by should you need any assistance. I will now turn the call over to Adam Fee, Vice President of Investor Relations of APi Group. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our first quarter 2023 earnings conference call. Joining me on the call today are Russ Becker, our President and CEO; Kevin Krumm, our Executive Vice President and Chief Financial Officer; and Sir Martin Franklin and Jim Lillie, our Board of 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, May 4, 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 first quarter financial performance on the Investor Relations page of our website. Our comments today will also include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our press release and our presentation. It's now my pleasure to turn the call over to Jim.

Thanks, Adam, and welcome to APi. In 2022, APi became the world's leading life safety and security services provider, with a global platform serving our customers in over 20 countries while delivering record financial performance. Today, we continue to be pleased with the momentum APi is building and with an outstanding quarter to start 2023. We have great confidence in the business and the direction we're heading. The company delivered record first quarter results to start 2023 for net revenues and adjusted EBITDA, while delivering margin-accretive double-digit organic growth across the platform. Our strong financial results speak to the consistent efforts of our 27,000 leaders and to the strength of APi's recurring revenue, statutorily-required services business model. While successfully growing the business with an inspection-first mindset, the team has never lost sight of serving our customers safely and efficiently, and we are grateful for their commitment. As we look at our road map for sustainable shareholder value creation, we believe that we can achieve outsized investor returns in the years ahead by focusing on our long-term 13/60/80 value creation targets, which include organic revenue growth above industry average; adjusted EBITDA margin of 13%, driven by our continued focus on generating 60% of our revenue coming from inspection, service and monitoring; adjusted free cash flow conversion of 80%; and a targeted net leverage ratio of 2x to 2.5x. We look forward to updating you on our progress throughout the course of this year. And with that, I'll hand the call over to Russ to walk you through our performance. Russ?

Thank you, Jim. Good morning, everyone. Thank you for taking the time to join our call this morning. Before we start, I too want to welcome Adam to our leadership team. We look forward to his contributions. Jim mentioned our 13/60/80 long-term shareholder value creation model that you see included in our presentation. We are relentlessly focused on driving the strategy through the organization and have distilled it down to an easy-to-remember and distinct phrase. I routinely speak to our field leaders about how they can help us deliver on this strategy when I'm visiting our locations around the world. Our leaders know what we want to achieve and how we intend to achieve it. Before we provide you with a summary of our record first quarter results, I would like to thank our approximately 27,000 leaders for their unwavering commitment to APi. The safety, health and well-being of each of our team members remains our number one priority. We remain grateful for their hard work and effort. We believe that taking care of our leaders results in our leaders taking care of our customers. This is one of the foundational principles from which we will continue to enhance shareholder value. This week marks APi's eighth straight year of celebrating Safety Week, which, like the Kentucky Derby, is always the first week of May. The theme this year is, I am a Safety Leader. At APi, we believe everyone, everywhere is a leader, and being a leader begins with the daily commitment to safety for ourselves, our teammates, our customers and the communities we serve. This commitment to safety drives industry-leading safety outcomes across the organization. At the end of 2022, our Total Recordable Incident Rate, or TRIR, was below 1, which is significantly better than the industry average. We…

Thanks, Russ. Good morning, everyone. I will begin my remarks by reviewing our consolidated results and segment level operating performance before turning to our guidance. Reported revenues for the three months ended March 31, 2023, increased by 9.7% to $1.6 billion compared to $1.5 billion in the prior year period. Net revenues increased organically from the same period by 12.1%, driven by double-digit growth in services revenues in both our Safety and Specialty segments. In 2022, approximately two-thirds of our growth was driven by price and pass-through of material and labor costs and one-third was driven by volume, which we measure through labor hours. This quarter, we saw this mix come in closer to 50-50, although we are keeping a close eye on the price of key inputs like pipe prices, which have been trending up in early 2023. Adjusted gross margin for the three months ended March 31, 2023, grew to 26.8%, representing a 40 basis point increase compared to the prior year period, driven by favorable mix impacts from outsized growth in our Safety Segment and services in both segments. These factors were partially offset by inflation, which caused downward pressure on our margins. Adjusted EBITDA increased by 17.6% on a fixed currency basis for the three months ended March 31, 2023, and adjusted EBITDA margin was 9.1%, representing a 40 basis point increase compared to the prior year period, primarily due to the factors impacting gross margins. Adjusted diluted earnings per share for the first quarter was $0.25 per share, representing a $0.02 per share increase compared to the prior year period. The increase was driven primarily by strong organic growth and margin expansion in both Safety and Specialty Services. This is offset by an increase in interest expense compared to the prior year period. I will…

Thanks, Kevin. APi's record first quarter results speaks to the strong momentum balanced across our global platform. Delivering the margin-enhancing double-digit organic growth, while improving backlog quality, gives us the comfort to raise our full year guidance for the business. As you've heard from all of us, we have great confidence in the business and the direction we are heading despite the macroeconomic environment. That said, we remain agile, adaptive and confident in our ability to take definitive and early actions in the face of a worsening of macroeconomic conditions. As we look to the years ahead, we believe we can create sustainable shareholder value by focusing on our 13/60/80 long-term value creation targets. These include above-industry average organic growth; adjusted EBITDA margin of 13% plus by 2025; 60% of revenue from service, inspection and monitoring; and adjusted free cash flow conversion of 80%. Coming off a great first quarter, I'm excited about the opportunities for the rest of 2023 and our ability to execute on our strategic plan in the years to come. With that, I would now like to turn the call back over to the operator and open the call for Q&A.

[Operator Instructions] We'll take our first question from Andy Kaplowitz from Citigroup.

Russ, obviously, strong growth in your core America Life Safety business. When you talk to your customers, any sort of signs of any verticals slowing? And when you mentioned that you have improved backlog quality, maybe you can give us some more color on what that means and your visibility going forward?

Yes. Thanks, Andy. Appreciate you joining us this morning. I mean you've heard me say this before, but end markets, without question, matter. And I was recently at an industry association meeting where I was able to interact with a number of different CEOs in the space. And the folks that are in semiconductor, data center, health care, aviation are seeing, I'd say, manufacturing, specifically pharma and food and beverage, those end markets are continuing to just rock and roll. And -- but if you're in Chicago and thinking about building a 50-story condo tower, that project is dead in the water. And so you're seeing developer-led opportunities really get pushed to the right or get canceled. For us, we're very fortunate that developer-led project-related work is typically price driven. We've never competed very well in that space, and so it's not a large exposure to us. But the end markets that we play in, I didn't even mention -- infrastructure and utility, which continues to be really robust as well. And so it's really all about the right end markets. And as it relates to our backlog, everybody knows how I really don't like backlog as a real benchmark for us because of the disciplined approach we take to project and customer selection. But we have visibility into our backlog and to the estimated gross margins associated with that backlog, and we feel like the quality of the backlog has really improved, really over the course of the end of last year into the first part of this year and we continue to be diligent when we're reviewing larger project-related proposals and the work associated -- and the work programs associated with that. And so we have -- we feel good about that. And if you remember, last year, we talked a little bit about our efforts to burn off some of the lower-margin project-related work in our HVAC business that wasn't able to keep up with inflation. And we feel good that we've really worked our way through that as we continue to -- even though we continue to work off some of that backlog this year.

Very helpful. And then you mentioned the increase in infrastructure and utility spending. I just wanted to ask you about specialty. Can you sustain that sort of mid-single-digit growth that you did in Q1 in that business? And are you seeing any impact from fiscal stimulus out there yet? And maybe just what's going on in telecom? Is that a more difficult environment this year?

Yes. Well, you asked a lot of questions in one question.

I'm good at that.

I think most of your peers are pretty good at that, too. But so you're really not -- I think you're seeing dollars flowing into the system like really from a rural broadband perspective, and we've seen some opportunities in our businesses that perform that work. And so that part of it has been positive. Most of those dollars are allocated to the states and the states are figuring out how to utilize those dollars. So it's kind of state-by-state on what our business leaders are seeing. Kevin and I were just out actually visiting one of our businesses that does that work just like three weeks ago, and we had actually a pretty good conversation about what they're seeing there. So -- and they're seeing -- like in Minnesota, they're seeing opportunities. And so there's work happening there. As it relates to the infrastructure bill, you're seeing those dollars are starting to flow into the system, but a lot of that work is -- takes design effort and engineering effort, and so you're not really seeing the robust opportunities. And then regarding telecom, I know a number of the large telecom providers have reduced their CapEx budgets, but they've reduced their CapEx budgets from ginormous to enormous. And so the work plans that we do, we haven't seen any slowdown in our business with that and it continues to provide opportunities. So to answer -- ultimately answer your question, there's plenty of opportunity in front of us to be able to sustain the organic growth that we showed through the first quarter. For us, it's more about really we want the business -- our business leaders to be super disciplined and focused on gross margin and, ultimately, EBITDA margin. That's how we're going to achieve our 13% goal, as being disciplined, and the growth and the opportunities are 100% there. We just need to make sure that we're picking the right opportunities for the business.

Just one quick follow-up for Kevin. You mentioned you're watching pipe prices. Have you put in maybe rising commodity prices into your guidance? Is that the reason why you raised EBITDA maybe a little less than revenue for the year?

So yes, pipe prices are one of the critical elements that we purchased. We did see a runoff here in the first quarter. I would say that our guide, generally in the back half of the year, we are not yet taking a position on inflation. That is not baked into our guide any sort of significant inflation and, therefore, pass-through of that from a revenue standpoint would flow through.

Got it. Thank you.

Our next question comes from Julian Mitchell from Barclays.

This is Kiran Patel-O'Connor on for Julian. I just wanted to ask on Chubb, how the acquisition is -- the integration is proceeding? And any updates to the synergy expectations for fiscal '23 and the cadence through the year? Thanks.

Well, we look -- we basically look at Chubb and our international business together, and I would answer that by saying we couldn't be more pleased with how the integration efforts really are progressing. And as I mentioned in my remarks, we feel like our leadership team has really come together across all aspects of the business. And so we feel really good about that and where we're at and where the business is going. And we shared some information on organic growth internationally. We don't plan to do that on a quarter-by-quarter basis, but we wanted to just give some color on really the -- really solid progress that leadership in the business has been making. We feel really good about the $100 million of value capture opportunity in front of us. We've guided to $55 million to $65 million this year, with most of it happening in the second half and we feel like we're 100% on track with that. And I just -- I mean, the long and short of it is, is that we feel really good about where we're headed with that business. Do you want to add anything?

Just a point of clarification. There's really no update from a restructuring or synergy timing standpoint from our last call. The $55 million to $65 million that Russ referenced was restructuring charge that we anticipate this year for the work we're doing there internationally, and we would expect that charge to be later in the year. And therefore, any value capture opportunities that come from the charge sales will be back half loaded really into 2024.

Understood. Thank you. And then my follow-up question was just on the comments you made on returning to bolt-on M&A later in '23. What gives you confidence to return to this bolt-on M&A? Is it strength in the cash flow later in the year? And should we expect the size of the deals to be relatively small and financed by cash on hand, or would you be willing to take on any additional debt for the right deal? Thanks.

Yeah. So we're focused primarily, from a bolt-on M&A, in smaller transactions that are accretive to our existing business, primarily in North America. We want our team internationally to really stay focused on the integration work that's in front of them. That doesn't mean that if the right small opportunity came along with the right leader that would have the capacity to handle it, that we wouldn't take a look at it. So I don't want to say that it's 100% not going to happen. But the focus is primarily in North America where we feel like the existing leadership has the capacity to integrate it. We've modeled in some dollars, so to speak, into our cash flow forecast. So even as we talked about getting delevered to that 2.4x, 2.5x by year-end, we've modeled in a modest amount of dollars for bolt-on M&A. So essentially, we would do that with cash on hand. And I suspect that if the right larger transformational opportunity would come along, I suspect that we would take a look at it, but it would have to be another kind of center-of-the-fairway type transaction for us that really, really made a lot of sense. But I would tell you that we're very, very excited to kind of turn the bolt-on M&A faucet and get it going again. And we have some really, really nice opportunities that we're digging in on right now.

Got it. Thank you.

Thank you.

Our next question comes from Kathryn Thompson from Thompson Research Group.

Hi, thank you for taking my questions today. This is just a -- first is a bigger picture question. We look at four big specular trends impacting the U.S. in particular, reshoring, near-shoring, population shift, increasing and focus on environmental and then government support for construction spending through IIJA function, Inflation Reduction Act and CHIPS Act. When you look at those four big trends in the U.S., how does APi Group capitalize on these trends? In particular, we're hearing other comments from peers and related companies focusing on how they're already seeing benefits in fire and life safety.

Well, Kathryn, I mean, I think that the fire and life safety space, specifically, to a certain degree, I think security evolves with it even though it's not as statutorily required. All of -- everything that you're seeing and you're talking about enhanced code and increased regulation in the space, is a positive for our business. When I look at things like the CHIPS Act, the semiconductors were already in process of reshoring and the $30 billion that's been allocated for that is just a drop in the bucket and really -- I don't even know if I would put it in the category of being necessary. The spend was really over the top from that perspective. And I think for us, as we centered on our culture and purpose of building great leaders and when we think about that investment and what that means from an ESG perspective and the difference that we can make in the communities we serve, we feel that in a tightening labor market that, that only benefits our company and our organization and positions us to continue to grow the business. And I think that businesses that are really focused and centered on a people-first mindset are ultimately going to win. And all of the other stuff just becomes a byproduct to a certain degree and noise to a certain degree for your efforts as you continue to look to build your business. And so, when I think about ESG and some of the things that are associated with that, I really like where our business is positioned because it's positioned around people first, and that includes diversity, equity, inclusion and other aspects like that. We think that we have some real -- from a sustainability, we have some really good opportunities in front of us that will make a difference for our customers, and we'll only add to some of the efforts that they've already started to put forward. So I really think that our company is -- because we're so centered on our purpose of building great leaders, we're positioned to take advantage of kind of these secular tailwinds that you talked about.

And then a follow-up question I have, more relates to the Chubb acquisition. You're anniversarying that. And one of the areas that you're focusing on is that inspection-first mindset with Chubb. Where are we today versus with that when you first acquired the company? And how far along in that journey are you in really converting to that inspection-first mindset?

Well, I would tell you that we're in like the bottom of the first inning, really. I mean you're taking -- it's like taking a freighter and trying to turn it 180 degrees, and it takes time and it takes energy and efforts. And our -- I know that our new sales leader inside our international business is on the call today. So hopefully, he's listening closely to the importance here and I am smiling about that. But it takes energy and time. And what was really super cool, Kathryn, is that our leader in Asia shared a story with us that we recently basically won an inspection-first contract with one of the casino properties on the island of Macau. And we celebrated that across the business and across the organization. And to me, that's -- is that mindset that we have to change first. I mean there's just -- there's still the mindset of we're going to go win an installation job, and then we're going to -- at the end of the installation job, we're going to convert it to an inspection and service contract. And that take -- it's going to take some time and energy to change that mindset. But celebrating the right behaviors is a big part of it. Probably be some -- well, there is an effort to transform our sales force going on in our international business right now. I feel very strongly that we have the right leader looking over the sales organization in that piece of the business. He's working in conjunction with Courtney Brogard, our Vice President of National Inspection Sales here in North America. And so we're gaining on it, but we have a lot of work to do there, and I'd be misleading you if I didn't tell you that.

Okay, perfect. Thanks very much.

Thanks, Kathryn.

Our next question comes from [Ian Wittmann] (ph) from Baird.

Great. I guess just a technical one to start out with here. Just on the guidance, Kevin, maybe can you talk about what the FX hit is that's implicit in your guidance for this year? I think for the balance of the year, it should be evening out a little bit. But why don't you just comment on that? And then just a point of clarification, make sure we're on the same page, Russ. You mentioned that there were some dollars on the investment side for some bolt-on M&A. I just want to make sure that the EBITDA guidance, the revenue guidance does not include any unanticipated or unannounced, I guess, I'd say, M&A through today.

Hey, Andy, good morning. I'll take them both, actually. On the first one, FX was a headwind year-on-year in the first quarter. You'll see that we did through our material. It's probably cost us somewhere around $30 million top-line. As we go through the year, we anticipate that flipping the back half of the year in our reported results and our reported guidance. We see it being more favorable in the back half of the year. For the year, all in, it's going to be slightly favorable at revenue and, therefore, very, very slightly favorable at EBITDA. On the -- your question on bolt-on, our guidance traditionally always excludes any contemplated M&A all-cap revenue or at EBITDA.

Yes. Okay. And then, I guess, just, Russ, I thought your commentary in your prepared remarks on the sales force and the investments and bringing the team in were kind of interesting. Kind of got me thinking more about that. With the company growing nicely here on the Safety segment, in particular, I guess I'm just curious, are you still hiring there, or are you expecting the productivity of the existing sales force to continue to drive sales from here? I'm just kind of wondering how you're thinking about investments in a macro that's a little bit more uncertain, although your demand seems like it's pretty good.

Yes. I would say that we continue to hire, and we continue to build out that sales team. And there's many markets that I would say that we're underrepresented in. And I view all of that as just great opportunity for the business. And if you just -- and I know you know this, Andy, but for those that maybe don't know this, we -- regardless of what's going on from a macroeconomic environment, buildings and facilities and manufacturing operations, their -- those facilities are going to -- the inspection is going to continue to be required regardless of what's going on. And so for us, that's an investment into the future in a place where we will continue to invest and build out that sales force.

Got it. That's helpful. And then I guess my final question would just be trying to get an understanding of the extent of customers on the Chubb side that you've decided to go a different direction with that you've exited. Maybe could you help us just understand how much of an impact that was on a year-over-year basis to the revenue line in the quarter? Or maybe what do you anticipate that to be as a headwind to the revenue that's implicit in the guidance that you gave here today? Just so we can kind of frame what that looks like and what your gross new sales are really adding to the business.

I think if we go back to the materials that we had last November, I think we showed -- in our revenue bridge, I think we showed customer attrition in the 5% range. And I would say that the reality of it is, it's less than that, probably in that 2% to 3% range. We've -- as some of these, so to speak, loss-making or poor performing service and maintenance contracts that we had where we were maybe a bit more aggressive on price, we didn't see the attrition that we thought we would necessarily see. So that's a positive to us. And we still have some work to do there, and we'll continue to have some work to do there probably through this year and maybe even dragging into a little bit of next year, and it will continue to be a point of emphasis for us.

Got it. That's helpful. Thank you very much. Have a good day.

Thanks a lot, Andy. Appreciate it.

Our next question comes from Chris Snyder from UBS.

Thank you. I want to ask on M&A, and particularly the tightening lending standards we're seeing in the market. Has that had any impact on the competition for deals? I would think maybe some of the smaller potential buyers out there in the market could be impacted by that.

Yeah, I mean I think what's -- for sure, anything that's larger, you're seeing, obviously, multiples are potentially coming down the -- much more difficult for, say, private equity firms to get the leverage that they would potentially be required. But on the smaller transactions and specifically the types of businesses that we want to acquire, the typical seller is not really interested in selling to private equity. The sellers and the companies that we're looking for are really more interested in finding the right home for their people and for their team. And so we stay super focused on culture, values and fit. And I think that the potential sellers are focused on the same thing as us. And so, we really find that we're still able to buy these businesses from an economically fair perspective, some place between 5x and 7x I suspect, and we still -- when we have robust opportunities in that space. So I would answer, it's a little bit of a bolt-in, but the types of companies and the types of sellers that we're looking for really aren't interested in selling their businesses to private equity. And we have, I think, a totally different story and I think a much better story to tell.

Thank you. I appreciate that. And then just kind of following up on those bolt-on. Is it fair to just assume that the bolt-ons from here will all be focused on life and fire safety? Or is there any appetite to maybe add bolt-ons in adjacent building services markets because where you can leverage the sales force -- or sorry, the workforce and kind of expand the total addressable market on the back of that? Thank you.

So, I would say that as we think about our M&A activity, again, our focus is what I would say is Life Safety and Security, and again, primarily in North America. Regarding the question on appetite for adjacencies, I would say there's appetite for adjacencies, but I don't know if that adjacency would necessarily -- we would want to be comfortable that there's the opportunity for us to scale any sort of adjacency that we move the business towards. Like in the past, we've mentioned interest in the elevator and escalator space. Well, buying up one-off $6 million elevator maintenance company in Paducah, Kentucky, probably doesn't make a lot of sense for us. But if there was an opportunity for us to enter into the space with -- as more of a platform-leading type business, there would probably be more interest in that. So we're going to make sure that we're staying laser-like focused on what our core capability is as we continue to look at adjacencies as well.

Makes a ton of sense. Thank you.

Our next question comes from Ashish Sabadra from RBC.

Hi. This is David Paige on for Ashish. Congrats on the good results here. I just had one question around -- you had mentioned in the beginning of the call, some of the new business wins. Are you taking market share from maybe competitors, or are you just growing share of wallet there? Or just maybe some more color on how you're attacking some of those new business wins you mentioned? Thank you.

Well, when you think about inspections and our growth in inspections, you can -- obviously, there's -- we're raising our prices in our inspections, obviously. But essentially, the inspection growth that we're getting is all volume and all share, right? We're taking that -- it's the already-existing built environment that our sales teams found in the pavement and calling on those types of customers, and that's essentially we're taking volume. And I mean, yes, are we converting -- are we still converting new building installations and things like that? For sure. But most of that is truly volume and share, and we obviously continue to try to focus on taking wallet as well with our existing customers wherever that's possible. And that's why you see us so focused on growth in inspections, and -- because we continue to build out our customer base. A lot of the -- one of the advantages that we are going to have from the infrastructure bill is more indirect for us than direct. And what I mean by that is that as those dollars flow into the system and creates project-related opportunities, our competitors will start to move their business towards those larger project-related opportunities, which will open up opportunities with our existing customer base for us to take more share with our existing customers. And it should also raise -- bring the opportunity for us to raise our prices because of less competition in the space. So it's -- there's obviously price involved, but we are continuing to take volume and share.

Great. Thank you.

Thank you.

Our next question comes from Andrew Obin from Bank of America.

Hi. This is David Ridley-Lane on for Andrew Obin. As you've gotten more experience with Chubb's security business, how are you kind of thinking about that service lines, characteristics, returns, et cetera? And is that an area for investment for you?

Well, it's 100% an area of investment for us. I mean like we've said this from day 1 that it's a center of the fairway deal for us. We feel that same way today. We feel like we're the 100% right owner and the right home for that business, and we won't have bought it if we weren't going to invest in the business. And for us, it's just really a matter of getting the business optimized and stabilized. We feel very strongly we need to have a really rock solid foundation in order to start putting those building blocks and growing that business as we move forward. And there's -- the markets that they serve are as fragmented as North America when we talk about that market as well. So we 100% plan to invest in it. Now, there's other opportunities inside that business as well, so like Chubb has very strong security capabilities. We're less strong in North America from a security perspective, so we feel that there's an opportunity for us to take advantage of some of that expertise in our existing business here. Same thing for our business, has much greater capability and strength from a sprinkler perspective. On the mechanical side of the life safety space, we think that we can bring that level of expertise to that business. And so there's places for us to invest from probably an M&A perspective, there's places for us to invest and grow the business from -- in an organic perspective, and there's also ways for us to continue to improve the business just from a best practice and a knowledge sharing that will allow us to really increase the performance of the business. And we're very optimistic and very bullish on what can be accomplished there. And I think -- and I attribute a big part of, so to speak -- I'm looking at Kevin as I make this comment, but I'm attributing a big part of our optimism to the leadership team that we've built out there. Like we've built out a first-class leadership team there. And it starts with the leadership and the leadership will ultimately drive superior results in that business, and I had great confidence.

Got it. And just a quick follow-up. I think the implication of some of the pricing commentary here is that you're seeing an acceleration in labor hours, just the cleanest metric of volume. Is that the right read here?

Can you take it?

Yeah. I would say that it varies across our businesses for sure. But in general, as we move sort of back half 2022 in the first half or early 2023, I would say in the aggregate, we're not seeing an acceleration per se, but we're seeing sort of the growth that we saw last year in labor hours in the back half of the year continuing in the first quarter of 2023.

Got it. Thank you very much.

Thank you.

Our next question comes from Steve Tusa from J.P. Morgan.

Hey, this is Parth Patel on for Steve Tusa. Good morning, and thanks for taking my questions. Are you seeing any impact of higher vacancy rates, particularly in office vertical?

I'm sorry, I didn't hear you.

Can you hear me now?

Yeah, try me again.

Are you seeing any impact of higher vacancy rates, particularly in office?

No. I mean, I think really, again, the inspections are statutorily required. I think that -- so we're focused on the already existing built environment, and so for us, that's an advantage that we have. And again, we don't -- we're not involved with a lot of developer-led commercial office building construction that's being shelved. And so it's just -- it doesn't have a material impact on our business, and I think that we stay focused on the proper end markets. So it hasn't had any sort of a material impact on our business at all.

Okay, great. Thank you.

Our next question comes from Adam Wyden from ADW Capital.

Hey, guys. Thank you for taking my call, and no, really nice job. Obviously, the free cash flow conversion was a lot better and things are sort of normalizing. But I had sort of more of a qualitative question. Some people sort of referenced APi as a construction company, and I think some people sort of danced around the issue, well, there's new construction down or there's vacancies down. And I think a lot of building service companies that sell into sort of the end markets that you sell into like a Watsco or an Otis elevator, they sort of give two numbers. One is sort of recurring service and recurring, and then like what is replacement in nature. I think earlier on in your sort of IPO go public process, you sort of spoke to the company being sort of 90%-plus recurring and replacement. So sort of stuff that isn't directly levered to new construction because new construction building stock is only growing about 3% a year. So maybe it would be helpful to sort of give people a sense of sort of how much of new business is sort of contractual service? How much of it is replacement? And how much of it is really levered to sort of new [instilling] (ph) up new buildings, so people can get a sense of sort of the macroeconomic sensitivity?

Yeah. So, Adam, good morning. Thank you for your interest and your support. So the 90% that you referred to is really is directed towards a recurring customer base. Basically, we're very much a relationship-based business and focus from our team, and so 90% of our revenue comes from a recurring basically same customers year-in and year-out, and we're super focused on retaining those customers. We don't break out the exact figures as it relates to inspection service and monitoring, but we're north of 50% of our total revenue comes from inspection service and monitoring. And I think that if you peel back the onion a little bit further, probably -- so then you do some math and you'd say, well, the other, say, 40 -- high 40s percentages would be installation or project-related work. And I would say of that, probably some place around -- and this is a guesstimate, so you can't really hold me to it, but I would say that it's probably some place, around 20% to 25% of that is retrofit and kind of upgrade work that if you wanted to, you could probably bucket that service work, but the way we manage it, we don't. And so a high percentage of our business is very, very economically resilient. And again, I just want to point everybody to the end markets that we serve. Like we're super focused on being in the right end markets, semiconductor, data center, health care, utility, infrastructure. Those are the end markets that we have really worked hard to push our business leaders to. I think there's some work for us to continue to do that internationally, but I mean, I would say that from a leadership perspective, we're 100% aligned on the end markets and it's just a matter of executing on that inside the business. But feel really good about the resiliency of the company.

Yeah. I think that's really, really helpful. And obviously, the resiliency is coming out in the numbers, so thanks for all the work. Appreciate it.

Thank you. So, in closing this morning, I would like to thank -- again, thank our team members who remain focused on supporting our company, customers and the communities in which we serve. The safety, health and well-being of each of our leaders remains our number one priority. I would also like to thank our long-term shareholders, our new shareholders and those who have expressed interest in APi. We appreciate your support. We are excited about the opportunities that lie ahead and really look forward to updating you on our progress throughout the course of the year. So thank you, everybody, again, for taking the time to join the call. And we're super excited about what we're going to be able to demonstrate to each of you as we work our way through the year.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.