Q1 2024 UL Solutions Inc Earnings Call
Greetings and welcome to the U L solutions first quarter 2024 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr. Mitchell G Senior Vice President Corporate Finance you all solutions. Thank you you may begin.
Thank you welcome everyone to our first quarter 'twenty 'twenty four earnings call. Our first earnings call as a public company.
Joining me today are Jenny Scanlon, our Chief Executive Officer, and Brian Robinson, Our Chief Financial Officer.
During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website at <unk> Dot com or.
Our earnings release is also available on the website.
I would like to remind everyone that on today's call. We may discuss forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
These forward looking statements may include among other things statements about you all solutions results of operation and estimate and prospects that involve substantial risks uncertainties and other factors that could cause actual results to differ.
Differ in a material way from those expressed or implied in the forward looking statements.
Please see the disclosure statement on slide two of the earnings presentation as long as the disclaimers in our earnings release concerning forward looking statements and the risk factors that are described in our quarterly report on Form 10-Q.
We assume no obligation to update any forward looking statements to reflect events or circumstances. After the date hereof, except as required by law.
Today's presentation also includes references to non-GAAP financial measures a reconciliation to the most comparable GAAP financial measure can be found in the appendix to the earnings presentation.
With that I would now like to turn the call over to Jack.
Good morning, everyone and thanks for joining us.
We had a strong start to 2024 driven by outstanding execution from our team leading our ability to anticipate important tailwind from the megatrends that define our industry today.
Our results fuel our mission working for a safer world, while achieving attractive shareholder returns expected by a newly public company.
During our IPO process. We presented you all solutions is a global business services company with a well established financial profile position us for long term growth expanded profitability and durable free cash generation.
We expect these things to be consistent in our first quarter results bode well for our future performance.
Four topics for today's call first given that this is our first earnings call as a public company I'll provide a brief overview of your wireless solutions.
Second I'll highlight key elements contributing to our strong first quarter performance.
Third I will highlight some key customer and growth achievements from the quarter.
Finally, I'll emphasize our strong financial position and reiterate our capital allocation plans as a public company.
Well many of you know our story some don't but let's start on slide five with an overview of you all solutions.
We are able be to global business services company focused on independent product testing inspection and certification employing more than 15000 talented individuals around the world.
On slide six you can see we have three segments organized across the two businesses, which have grown at a 6.9% CAGR since 2011.
Our testing inspection and certification business affectionately called check by the industry is comprised of our two largest segments industrial and consumer.
Our tech business provides extensive solutions to a wide array of customers, helping them quickly take new products and systems to market with fewer safety security and sustainability risks.
We focus on product check on our customers' innovation and new product development processes, and the eco systems required to manufacture and distribute those products safely.
Our second and.
And third segment is software and advisory, which complements and extends the value proposition of the Czech business by unleashing the power of our data.
Our integrated service portfolio spans four service categories certification testing ongoing certification services non certification testing and other services and finally.
San Francisco.
We have you all solutions would like you to focus on five key themes, which you can see on slide seven.
First we are a mission driven growth company in a large growing consolidating yet still highly fragmented industry.
We believe that as a 2022 we have the largest global market share and product check 7% by revenue.
Second we are dedicated to safety science and ESG.
Customers know that you all solutions will apply science to help solve their most pressing safety security and sustainability challenges.
Third.
Our customer relationships Ranjit.
Our 80000, plus customers span over 35 industries and even more important just how loyal our customers are.
Amongst our top 500 customers in 2023, we had a retention rate of 99%.
Our business model in these customer relationships resulted in 45% of our revenue being generated from ongoing certification services and software both of which have recurring revenue streams.
Fourth we are a global leader in an industry that has significant entry requirements. We have built a wide and deep competitive moat and that moat. It starts with the vast number of accreditation that allow us to attract customers who want to sell their products in over 110 countries.
Finally, we are fiscally strong.
Backed by our healthy balance sheet and strong free cash flow, we are well positioned to fund our ambitions.
We employ a disciplined capital allocation strategy that provides flexibility in how we deploy capital and aim to generate returns for our shareholders.
As the global safety Science later, we help our customers manufacturers vapor products.
Strengths in product security and enhance their products and their company's sustainability.
We are relentless in that pursuit investing in our people and processes to enhance our capabilities for the continuously evolving risks and global markets.
Now, let me provide my thoughts on the quarter.
Our first quarter performance demonstrated the strength of our business bolstered by organic.
Our robust organic revenue growth achieved in all segments and all regions.
We could not have achieved these results without focused execution led by our experienced team for whom I am truly grateful.
Our employees' relentless emphasis on safety science and customer Centricity shapes, our culture and enhances our business.
Our team delivered organic growth of seven 5%, resulting in revenue for the first quarter of $670 million.
S dollars, we experienced particular strength in our industrial segment and improving trends in our consumer segment.
Importantly, we experienced growth in all three segments across all geographic regions, which was partially offset by the reality that as a global company, we experienced FX impacts.
Adjusted EBITDA grew 18% and adjusted EBITA margin expanded by 200 basis points are.
Our hard work resulted in a 13% increase in adjusted net income and generated 84 million of free cash flow.
Next on slide eight let me highlight a few achievements this quarter.
The megatrends of energy transition propelled growth.
Our Korean advanced Battery laboratory came fully online this quarter. This new facility provides Korean automotive customers with improved access to the latest large battery safety technology enjoys other you all solutions laboratories in the United States, Europe, and China in unifying our customer center.
Industrial and EV battery technology solutions.
One of our largest global account Siemens worked with us to achieve and license. Our first certification that relies on products stimulation and a digital model.
This remarkable accomplishment has potentially wide ranging implications for future product innovation processes that could dramatically improve customers speed to market.
In our consumer segment, our North American retail center of Excellence opened in Arkansas.
This lab is our largest lab investment in the retail and consumer products sector in our history.
100000 square foot space is one of the most advanced retail testing laboratories in the United States and serves the most important retailers in North America.
This new lab also provides our team with greater capacity and extended capabilities to serve our retail customers.
As part of our ongoing efforts to better align our software offerings with what our customers need and want we launched ultra our new brands that unifies, our flagship software to help customers meet regulatory supply chain and sustainability challenges.
Altra serves over 10000 customers around the world and across industries.
Since January we've integrated 70% of our revenue generating software portfolio under this bold new brands, bringing.
Bringing clarity and awareness to our software offerings and strategy has helped our customers understand how they can eliminate cumbersome individual point solutions.
Ultra has already brought us our lead generation and new opportunity funnel.
Finally, let me comment on our capital allocation philosophy.
Post a history of having a strong balance sheet robust cash flow generation and disciplined approach to capital allocation.
Our history and foundation and position us to deploy capital in a variety of ways that we expect to generate shareholder returns.
As we report in todays segment highlights, we constantly analyze options to invest in the business.
We have no shortage of ideas for organic Capex that supports our customers' innovation extends our productivity and augments our revenue growth.
We continue to evaluate a focused set of M&A opportunities in a disciplined manner, ensuring our investments will enhance our global capabilities or extend our market leading footprint.
We are committed to maintaining a strong balance sheet with conservative leverage and investment grade ratings, and we expect to return excess capital to shareholders.
Now, let me turn the call over to Brian will provide greater detail on our results and our plans.
Thank you Jenny and Hello, everyone I want to thank all of our team members for delivering another strong quarter I will first provide more detail on our financial results. Then ill then discuss our segment performance.
I would to report and our first release as a public company a continuation of strong gross adjusted EBITDA expansion and solid cash generation, it's encouraging to see that the growth occurred across all of our segments and all of our geographies now let me dive into the details of the quarter consolidated revenues of 670.
A million dollars were up six 5% over the prior year quarter, including organic growth of seven 5%. The increase reflected particular strength in the industrial segment, which delivered 10.0% organic growth.
Adjusted EBITDA for the quarter was $131 million, an improvement of 18% year over year on strength in industrial and consumer.
Adjusted EBITDA margin was 19, 6% up 200 basis points from the same period, a year ago, and particular strength from the consumer segment expansion and a reduction in long term incentive expenses adjusted net income for the first quarter was $61 million or 28 cents per adjusted diluted.
Sure up 13.0% from $54 million or 26 per adjusted diluted share in the first quarter of 2023 for the first quarter. We had two compensation items that affected our expense comparisons in the first quarter of 'twenty 'twenty four expenses from <unk>.
Cash settled appreciation rights under our private company structure were $11 million lower than Q1 2023.
Offsetting this comparative benefit in Q1, 'twenty 'twenty four was a $9 million increase of higher employee benefit expenses, driven by higher health care costs.
Now, let me turn to our performance by segment starting with industrial.
As we mentioned previously the industrial segment was the strongest driver of growth for the quarter revenues in this segment rose nine 3% to $295 million or 10.0% on an organic basis as compared to the first quarter of 2023, those impressive gains were driven by.
Robust demand for electrical products and components certification testing as well as strength in renewable energy and building products and markets. We also saw growth in ongoing certification services across most industries due in part to price increases and we experienced growth in non certification testing.
<unk> and other services adjusted.
Adjusted EBITDA for the industrial segment increased seven 5% to $86 million in the quarter, while adjusted EBITDA margin declined 40 basis points to 29.2 is increased compensation costs and professional fees rose faster than the increase in revenue.
Now turning to the consumer segment revenues in consumer where $286 million up 4.0% from the 2023 quarter or five 8% on an organic basis. The improvement was driven by strong demand for non certification testing and other services for consumer technology.
Particularly for higher electromagnetic compatibility or E. M C testing for automotive and connected devices as well as improved retail demand. In addition strength in medical devices led to improvement and certification testing <unk>.
Adjusted EBITDA for the quarter and consumer was $35 million, an increase of 66, 7% versus the first quarter of last year adjusted EBITDA margin for the quarter was 12, 2% an increase of 460 basis points.
Year over year, driven by higher revenues expense management actions taken in 2023 to improve our cost structure and a reduction in long term incentives, which was offset by an increase in bad debt expense consumer completed several cost structure improvements in the past year, including relocating to labs.
George laboratories into larger more cost efficient locations, which contributed to margin improvement.
Our third segment is software and advisory revenues for that segment were $89 million, an increase year over year of 6.0%, including four 8% on an organic basis. The improvement was driven by advisory services, particularly for customers in the renewable energy generation industry.
Adjusted EBITDA for the quarter and software and advisory was $10 million flat as compared to the first quarter of last year adjusted EBITDA margin for the quarter was 11, 2% a decline of 70 basis points year over year as higher revenues were more than offset by increases in compensation expenses.
Turning to our cash generation in the quarter. We entered 2020 for building on our record of strong cash flow generation, we delivered $141 million of cash generated from operating activities compared to $161 million in the first quarter of 2023.
The decline reflects higher working capital outflow due in part to the timing of incentive payments in 'twenty 'twenty four we paid out a long term incentive plan in the first quarter.
Last year, we paid out the same instrument in the second quarter.
Capital expenditures were $57 million in the quarter down from $63 million in the year ago period, we continue to make important investments in energy transition opportunities a focused growth area for U L solutions free cash flow for the quarter was $84 million compared to $98 million for the first quarter.
2023.
We finished the quarter with $344 million of cash and equivalents on the balance sheet and a net leverage of 0.9 times net debt to trailing 12 month adjusted EBITDA the strength of our balance sheet is reflected in our investment grade credit ratings.
Robust balance sheet and cash flow generation give us great flexibility to invest in organic initiatives accretive acquisitions and to pursue a number of value enhancing ways to produce best in class shareholder returns.
Now turning to our full year outlook on a constant currency basis, we continue to expect organic growth to be in the mid single digits range driven by continuing strong deal wins from the electrification of everything and the Digitization.
And sustainability Megatrends.
We expect to drive adjusted EBITDA margin improvement in 2024 and beyond through a combination of key focus areas for the company.
First is delivering topline organic growth, where we look for product chip market to grow in mid single digits and for our market share in that area to expand as our investments to scale our business take hold.
We are driving increased productivity through the automation and digitalization of work through higher utilization of our people and our facilities and by streamlining and standardizing our processes and our metrics. Finally, as we look at M&A, we will concentrate on strategic areas of focus with an eye.
On a rapid path to margin and earnings accretion, we will continue to evaluate our pipeline of tuck in acquisition opportunities.
We continue to expect capital expenditures to be approximately 7% to 8% of revenue in 2024.
We also thought it would be helpful to share a couple of mechanical items to assist in modeling our outlook.
On may 1st we completed the divestiture of our payments testing business in the industrial segment for a base sale price of $30 million that business had annualized revenue of approximately $40 million. The divestiture allows our industrial segment to focus on its core product safety services.
Additionally, our IPO in the second quarter will affect to income statement items in particular.
First virtually all cash settled appreciation rights have either matured or were converted to stock settled appreciation rights as a result as.
As a result of the value at the IPO closing a $9 million pre tax expense will be recorded in Q2, 2024, which will reduce adjusted EBITDA by $9 million. These awards have historically created mark to market expense volatility.
The value of the converted awards was established upon the IPO they will no longer have mark to market volatility.
Second since public companies have a limitation on the tax deductibility of executive compensation, we have reduced the value of some deferred tax assets post IPO, which will result in an increase in the Q2 provision for income taxes of $5 million.
Now back to the Big picture a U L solutions, we are focused on creating long term value for our stakeholders as our results demonstrate we're continuing to build on our world class product testing inspection and certification business and our software and advisory businesses to achieve our ambition of being our <unk>.
<unk>, most trusted science based safety security and sustainability partner, let me turn the call back to Jenny for her closing remarks. Thanks.
Thanks Ryan.
In summary, we are proud of how our team performed in the first quarter and we look forward to continuing to post solid results for the full year and beyond.
While we are newly public we are not newly for process and our results reflect our ongoing trend of profitability over the long term.
We are a leader in a highly fragmented industry positioned to gain share at an inflection point, that's being driven by ever more complex demands from customers and regulators to ensure safety compliance and sustainability.
Our capabilities today are second to none and are easily identified by our iconic brand and differentiated offerings.
Our customer relationships built over years, even decades drive high retention rates and revenue predictability.
Our strong balance sheet and robust cash flows we'd love to deliver outsized long term returns for all stakeholders.
We are thrilled to have made the leap to the public markets and I'm excited for what the future holds for you all solutions.
Operator, let's please open the call for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star two if he'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask that you each keep to one question and one follow up. Thank you are.
Speaker Change: Our first question comes from the line of.
Stephanie with Morgan Stanley. Please proceed with your question.
Hi, This is Stephanie from J P. Morgan good morning, Jennie and Ryan Congrats on the first quarter.
Thank you Stephanie.
Stephanie from.
From JP Morgan.
I was wondering if you can give us an update on how the Michigan battery life is tracking.
Yeah, we're thrilled about our long term investment and plans to address you know industrial battery safety and the EV industry and we continue to make progress on the build out of that lab and expect it to come online by the end of this year.
Okay sounds great.
And I appreciate the guidance you gave for the full year I was wondering if he can be a little bit more specific in terms of how much you expect margins to improve in 2024.
Yeah.
Margin expansion progression is over a long term and there are some key areas that we intend to really launch progress.
He's got a great footprint strategy as we're continuing to ensure that we've got the right types of center of excellence in the right locations. So we're making some progress in adding to our lab capacities, both in the United States, Mexico and around the world.
And right sizing, our we're expecting this year our continuation of the work that we've done on our configuration price quote our single Global instance of sales force to help extend the efficacy of our go to market strategy and helped our sales teams are really balance.
The the right margins are for every type of service that we offer.
And then we're continuing to expand and extend our productivity across all our labs by finding ways.
To better utilize and transmit all of the data that we have on all of the tests and inspections and certifications that we conduct and find better ways to extend our productivity.
So you know over the long term, we are targeting over 24% EBITDA margins, but we haven't listed you know each step of each way in each year.
Okay. It sounds good I appreciate the color.
Thanks, Stephanie.
Thank you. Our next question comes from the line of Georgetown with Goldman Sachs. Please proceed with your question.
Hi, Thanks, Good morning, and congrats on your first quarterly print as a public company.
Thank you you mentioned that.
Of course, you mentioned that the pricing represented a tailwind to growth in the industrial business can you discuss how much pricing contributed to growth in the in the quarter in industrial as well as in consumer and software and advisory.
Thank you very much George we appreciate the question and as you know you will solutions provides many services and we report them in four primary service categories two of them ongoing certification services and software.
They comprise about 45% of our revenue and they're largely recurring revenue streams that are updated annually, so theyre less suited to price volume metrics.
Other 55% of our revenue from certification testing and non certification testing.
Mostly testing services with specific deliverables that were paid for those services grew about 8% in the first quarter and we had similar contributions from both price and volume and then and we will keep our focus on price and volume at a consolidated level rather than comment at a particular segment level.
Got it that's helpful and then within the industrial segment can you elaborate on trends that youre seeing in electrification in renewables that can help sustain the positive revenue growth momentum you're seeing.
Yeah, I'm happy to comment on that charge you know as I.
I mentioned earlier, we're excited about our global battery strategy and we're focused on both building and acquiring labs that test and certify both industrial batteries and EV solutions, and we really believe that our our leadership distinguishes itself because of our science space.
Integrated set of solutions across this global network of laboratories. So as we look at these energy transition challenges and the ways in which are both.
Our customers' needs the way in which they generate they store they transmit and they use energy in a.
You know a more sustainable fashion.
And then that ties into the ways in which products are both designed and manufactured a we think that staying close to our customers R&D centers and there are manufacturing sites all over the world with our capabilities is a great opportunity for us to extend our value.
Very helpful. Thank you.
Thank you. Our next question comes from the line of Heather <unk> with Bank of America. Please proceed with your question.
Hi, Thank you so much for taking my questions.
To start I was hoping you could talk about your organic sales growth this quarter it was a.
Fairly strong where did you see outperformance, especially versus maybe what you were planning internally and thoughts on those trends pursuant persisting for the rest of the year.
Yeah, we are really encouraged as we say by the electrification of everything and and you know you look in our industrial businesses and in in all regions.
In all markets.
We're seeing continued strength.
We're really pleased with the way that our energy and industrial automation markets are growing all over the world and when you look at the fact that.
You know our battery strategy, it's not just reflective of Evs is reflective of all sorts of products that need electrification you know tractors trucks buses lawnmowers Jetskis and then you look at the charging networks are charging speed or range or battery life.
We just continue to see strength and excitement in our set of capabilities that we have to help all of our customers all over the world in these areas.
That's really helpful. Thank you and my follow up is actually just a housekeeping question.
For the and Ryan This is touches on probably your favorite topics you saw him. He talks about unscripted remarks can you just remind us the impact from CSR last year. What it was this quarter and then also are you adding back IPO costs in your adjusted number and and and how much were those in and 124.
Yeah. So the the CSR difference between Q1 last year in Q1. This year was $11 million. It was a $10 million expense in the first quarter of last year, and a $1 million benefit this year and Thats, just a slight mark to market difference from our year end valuation to a first quarter difference.
We're not adding back IPO related expenses and adjusted EBITDA in the first quarter, specifically costs related to transaction execution were about $2 million.
There are other costs as part of being a public company that that will continue to have but specifically the transaction costs were $2 million.
Thank you very much and well look forward to and we don't need those update so thank you very much yeah. So when we say Oh well yes.
Thank you. Our next question comes from the line of Andy Wittmann with Baird. Please proceed with your question.
Oh, great. Thank you.
And so we're going to go.
Talk about the health care costs are I guess I think Ryan you mentioned this in your script, you said was up $9 million year over year I was just wondering.
Speaker Change: How expected those were if there were some just individual large claims that drove that is there something that's changing in your plan or your ear.
Your modeling of that that we should know about.
Hum.
Any comments there would be helpful. Thanks.
Okay. Yeah. Thank you. Thank you very much Andy yes, as a people based business compensation employee benefit costs are material part of our cost structure, particularly in the United States. We did see an increase in <unk>.
Employee benefit costs in the first quarter the largest contributor that was health care, that's not the only contributor.
And we think our trends are generally consistent with what others are reporting overall across the industry both in medical care as well as pharmaceutical Theres an increase we felt it more.
Sharply in the first quarter.
And that was higher than we had anticipated it's.
It's difficult to forecast, what healthcare utilization and cost will be but.
But it's something we continue to monitor and as we reach out to our advisors in the space.
We're not alone in this situation.
Got it.
That's helpful context, I appreciate that maybe.
Maybe you could just talk a little bit journey about.
The divestiture here.
Obviously, you saw it as noncore just as you look at that one can you talk about why it was non core other options that you might be considering is there potential for other divestitures here do you think and then just wanted to sneak a quick third one and Brian for you just if you could talk about the share count.
I just wanted to make sure that with all the <unk> that vested in the second quarter of the switch from cash settled two stock if that changes the share count I would just want to make sure that we have that.
For the rest of the year I know you had some comments in your press release on that.
I want to make sure that we have the pro forma I guess, you would for the IPO share count sorry for the third one but I thought it would be helpful.
Yeah, absolutely let me give you some context on the recent divestiture and then our broader focus on growth but.
We've emphasized a lot that we are in product tech and we like product tick.
It's a it's just a it's great growth, it's less cyclical it plays to our strength and our science based leadership and it's something that really matters to our consumers.
Consumers and industrial customers.
So as we are.
Execute our long term long range planning and look at our investment choices in this particular area, which was of the aid payments testing business. So if you picture chips on credit cards and testing the security of the of that technology, It's an area that Oh.
We didn't warrant as being as important for future investment to our broader strategy.
As a as it would be to a different owner. So it made sense for us to divest that business to a group that is interested in and focusing on that growth area.
But truly for us our business development teams I'd much prefer to have them focus on growth.
And we are not expecting right now any additional divestitures into the future.
And then on the on the final question about share count.
We will soon file our 10-Q and in that we'll have a subsequent event note that details many things related to the initial public offering including the mass related to those Sis are conversions I would say.
Between the March 31st Dave.
Yeah.
Coincidently there was a.
Exploration and maturity.
So we will will assist everyone, what's kind of walking down the share count differences the impact of the incentive instruments in that subsequent no I'd say, that's the that's the easiest way to give you the exact detail.
Thank you very much.
Yeah.
Thanks, Andy.
Thank you. Our next question comes from the line of Andrew Nicholas with William Blair. Please proceed with your question.
Hi, Good morning. This is Daniel Maxwell on for Andrew today.
Start off maybe what youre seeing in the consumer business. It seems like maybe there is some continued momentum there from from mid 2023 experiences.
So if you can frame what youre seeing there maybe in terms of number of skus or general customer sentiment and relatedly.
What youre seeing in terms of product life cycles, and any change to the upside or downside there over the last couple of months.
Yeah, I'll start I would say what we're really seeing is I think a return to a level of innovation and new product development, particularly in.
In the areas of.
Yeah wireless devices and medical devices as as Brian indicated.
We're seeing that from customers and in every market.
Also in our.
Retail focused business our non certification.
Testing services in those areas we're seeing.
Continued growth in number of Skus and a growth in the amount of testing again in every market around the world.
And then finally I think something to now you know we've added capacity in consumer and a number of different places we've got a new HVAC lab down in Texas, We talked about our C. P retail center of excellence in Bentonville, Arkansas, We added some M seek capacity last year here.
In the United States sudden and all of those are you know like all of our Capex. We're seeing a good good returns on that invested capital. So there's there's some real strength in some tailwind for the consumer right now.
Great. That's helpful. And then for my follow up maybe a little bit more on the M&A pipeline and the opportunities that youre seeing there any changes to valuations youre seeing across different markets and then and then maybe.
If any one specific area its sticking out that's attractive for tuck ins either segment wise or geographically.
Thank you very much Daniel Yes, we continue to pursue a pipeline of acquisitions, including tuck in acquisitions to extend our leadership position in several areas I would say in particular, we're focused on.
The key investment themes that we've spoken to including energy transition.
That includes our industrial segment.
And things related to.
How energy is generated how energy is transmitted how it stored and how it's how would you used.
So we continue to be active.
Speaker Change: We have not seen material changes on the valuation front it.
It is an attractive sector with both financial and strategic participants.
So there has not been a material change I would say the pointed out and valuations and one other piece I would like to add.
Our focus on product tick is our most important emphasis are there are some interesting elements in you know what I would call product ticked adjacent areas that could extend the value of our advisory services or the <unk>.
<unk> of our software businesses that support our product tech customers. So we've got you know that's.
A wide lens of of opportunities that we always continue to evaluate.
Great. Thanks.
Thank you. Our next question comes from the line of Stephanie Miller with Jefferies. Please proceed with your question.
Hi, good morning, Thank you.
Hi, Good morning touch this morning, I wanted to touch on the North American retail center of Excellence that you highlighted that you opened in Arkansas. If you think about the opportunity of this new center can you maybe outline not only the top line opportunities just given the massive expansion and scale that you have there but also what this can mean from a margin standpoint.
How it differs from Adi strategies in the past or maybe.
Maybe a bit more decentralized anything there would be great. Thanks.
Absolutely.
It's really a funds facility to visit because we do such a wide range of product testing from you know these are the metals in jewelry to how long candles burned to having a two storey rain room to see what happens to tenths or other really supposedly waterproof.
Structures, what's great about this lab is that we were able to take our capabilities from a number of different locations and consolidate them under one roof, which really helps our customers are both are in so far as you know any types of visits or witness test.
Or anything else that's appropriate for them to do across the board on products, but it also provides this great customer experience opportunity, where our customers can witness how their products are actually being used and make decisions about their suppliers or their design or are you.
Other elements that are important to their merchandising strategy. So it's really an exciting lab and as I said, we were able to take equipment and consolidate from a few other locations and will continue to do so.
You know as the timing and the opportunity is correct. So it's an exciting space, that's definitely improved our utilization and our capacity.
Got it got it and just maybe a follow up question on the software and advisory business our margin performance for the quarter I think you called out some higher.
Increases in compensation, just trying to kind of rationalize the.
Speaker Change: Margin performance that we saw in <unk> and for Q.
<unk>, if you could just give us a bit more color, whether it's around seasonality as the year progresses. Some other onetime costs, just trying to get a sense of.
What is probably a more consistent margin profile for that segment. Thanks.
Okay.
Thank you very much for the question.
I would say one of the one of the changes that we called compensation broadly included those employee benefit expenses and medical you can see the change in margin.
On a dollar basis is is one or $2 million can make a big difference in that segment.
So I would say that.
That was the the primary factors.
We do anticipate.
Dissipate margin expansion in that segment.
Particularly as software grows and contributes a high incremental margins.
We're seeing growth in our advisory segment, particularly related to renewable energy. So in this theme of energy transition, we're seeing support and software and advisory.
Or wind and renewable projects as well as products on the industrial side.
In wind and in.
In solar.
To answer your question, we anticipate margin expansion as we continue to grow the software and advisory segment, Yeah, and just one more lined out we are not satisfied with our margins in copper and advisory today.
And see you know.
It is the business that has the greatest drop through so our emphasis on revenue and growth and in particular with.
With the ultra launch.
You know, we expect to relentlessly pursue our expansion of our EBITDA margin in software and advisory.
Great. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Arthur Trust left with Citi. Please proceed with your question.
Thank you very much everyone and well.
Well done on the first quarter.
A few from me if I may so.
The first one.
Your consumer division margin for <unk>.
Hundred and 60 basis points EBITDA level.
The productivity has played a part of that and obviously revenue as well are you expecting that kind of level of progression, sorry, 460 basis points to persist through the year.
And how should we think about that as we went through the year.
Second question a bit of a boring one but your guidance for the year is mid single digit organic growth obviously.
You just started as a public company.
And obviously you did seven and a half per cent in Q1, what exactly do you mean by mid single digit is seven and a half mid single digit.
If you could just sort of say what.
The range is off a mid single digit high single digit.
And indeed, what low single digit that would be really helpful. And then final one from me clearly industrial very strong 10% organic growth in the first quarter.
U a E.
Could you see reasons why that number comes down.
Oh, you know as you see things today is it reasonable to think about sort of level might persist for the rest of the year. Thank you.
Yeah.
Great. Thank you very much Arthur really good questions.
We are pleased with consumers five 8% organic growth in the 460 basis point adjusted margin expansion that was up $14 million and.
And as Jenny said, the consumer team took steps to improve the efficiency of the operations, including two major Rab lab relocations, the North American retail center of excellence as well as move to a large lab in Shenzhen in South China now that said roughly half of that increase was the difference in CSR expense that I mentioned.
Also in Q1 last year consumer had some severance costs, which benefited the comparison to this year. So in all the operating improvements drove material margin expansion, but the majority of the changes were related to those significant Q1 2023 items. So we do what we do and.
Dissipate some ongoing margin improvement, but we did want to clarify kind of the extraordinary items in the first quarter of last year.
And then in regard to.
What is mid single digit mean and exactly what are the are the brackets of those.
I would say seven 5% is right on the edge of mid single digits.
So I would say that that falls within that language honestly, we haven't.
Britain out the exact edges of those what that means for the remainder of the year and also this connects to your third question about our industrial.
Revenue performance.
As we progress in the year, we do anticipate some steeper compares we had really strong fourth quarter for instance of last year, but but our vitality of our business is strong we're looking forward to executing through the rest of the year and serving our customers.
That led us to the comment about mid single digit revenue growth.
Thank you. Our next question comes from the line of Jason Haas with Wells Fargo. Please proceed with your question.
Hey, good morning, and thanks for taking my questions just a follow up on that last question in terms of what you've seen so far in the quarter to date period.
Organic growth rates continue to trend at the levels that you saw in <unk>.
Or maybe.
Maybe can attempt to moderate on the tougher compares.
You know I think the best way to think about it is particularly when you look at our industrial business a project or not.
And our revenue recognition is over the duration of those projects and so as we continue to you know our balance.
Balance our throughput and our capacity.
You know we feel really good about the results that we saw in the first quarter.
And just in general we would.
We would refrain from commenting on activity in this in this quarter.
Got it Okay. That's fair and then I also wanted to follow up on the software business.
It looks like from what would get you from the disclosures. It was revenue was flat.
Year over year in.
And <unk> I imagine that you are expecting some growth in that business going forward. So Chris if you could talk about when you expect to see.
Some inflection and growth from ultra or some of your other initiatives there. Thanks.
Yeah, and I wanted to clarify the distinction between our software and advisory segments and our software service line, So that software services revenue.
Comprises all of our software at about 90% of that is managed by and reported under the software and advisory segment, but there is 10% of that that's managed by our other segments.
Emphasizing the software that's managed by the software and advisory segments. It did grow slightly ultra was launched at the end of January and we're really encouraged by the opportunities that our sales teams have out there to discuss a broader set of capabilities.
And software solutions with our customers.
As those individual point solutions.
We look at them.
New software revenue churn rates renewals other pieces and you know we're encouraged by the growth prospects that alturas is allowing us to pursue.
Great. Thank you.
Thank you. Our next question comes from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.
Hi, Thank you.
One question just about trends and then a couple of housekeeping ones Jenny could you talk a little bit about <unk>.
Any changes that you expect to be in the revenue drivers for the rest of the year versus what you've seen in the first quarter. It's a pretty strong quarter. I noted that the comps are getting a little bit harder, but are you expecting any areas to kind of step up or step down in terms of kind of their contribution to growth and you don't have to break it out by units, but maybe budgets.
General areas of what you're seeing.
You know I think what we're seeing across the board and in every one of our operating units and every one of our regions is you know this general strength associated with you know what I'm going to call the electrification of everything the need for more.
Sustainable energy sources and products.
That connection and that transformation from the physical to the digital as well as this general demand for transparency across supply chain, but that ultimately ties to sustainability reporting.
Speaker Change: As you know we look across the board.
We're saying you know just again in general strength, and heating and cooling and residential and commercial space broader industrial environments energy storage the way in which the grid has to change to handle wind and solar and renewable energy.
Sources and storage systems.
All of these pieces that are just feeling the mega trends that are driving our areas of emphasis so you know I'm excited about these trends and.
Don't see any reason to believe that they're slowing down.
Okay, Great and then Ryan just a couple of like housekeeping stuff for modeling.
First of all what was the EBITDA that might be going away with the divestiture or if you prefer to see what was the annualized EBITDA last year and then.
I didn't see any breakout of intangible amortization of the quarter or is that going to be something that youre going to be adding back to net income or is that somewhere in that it's going to be separated out or that's going to show up in the queue Howard.
How are we going to get a view on that with the acquisition strategy.
Yes.
I would say the the divestiture, which is $40 million on a on a trailing revenue basis.
Had a modestly positive contribution margin, but it's but it's small in the big picture of you well. So we didn't think it worthy of.
Oh of adjusting down we will we will manage expenses to offset.
That.
And then in regard to amortization, we will detail that in the queue.
There'll be a lot more detail a lot more information on that.
And the debentures I mentioned was in the industrial segment.
It could have some impact on expense allocation among overhead allocation among the three segments. So if that's material will help people understand that as well.
Q coming out today.
Hum.
It will be out soon it'll be out soon.
Okay. Thank you.
Thank you as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Josh Chan with UBS. Please proceed with your question.
Hi, Good morning, Jeanine Ryan.
So you mentioned in your ability to raise price with the testing services earlier could you just talk to your ability to raise price in the recurring pieces of your business kind of how should we think about that going forward. Thank you.
Yeah with regard to the way our recurring revenue.
Revenue works when you look at ongoing certification services. Those are the visits that our field engineers typically make four times a year to our customers manufacturing locations all over the world.
To ensure that products are being manufactured in accordance to the standards that we certified.
Those are annual contracts with our customers and those contracts are required for the life of the product in the market that bears a mark on it.
So we work with our customers in the fourth quarter of each year and reset those contracts and that's the timing of when any price increases go through.
With regard to the 10% of our recurring revenue that software services.
As we are extending the length of those software contracts that gives us the opportunity to.
Add in appropriate pricing moves and so while that doesn't happen all in the same quarter typically if it happens.
Speaker Change: At the timing of those renewals and then as part of the new software as a service sales.
Is that helpful. Okay. Yeah, that's really helpful. Yeah. Thanks, So thanks, Alex Yeah I really.
Speaker Change: That and then for my follow up could I ask about the industrial segment margin.
Mentioned that it was a little bit lower this quarter versus last year because of compensation.
I assume that for the full year, you'd probably expect expansion in margins. So could you just talk through what changes to drive that margin expansion in industrial for the for the full year. Thank you.
Yeah, we do expect full year expansion for the industrial margin.
Our first quarter overall is slightly lower revenue than the other quarters. So for instance last year. It was about 23% of our full year revenue.
But our expenses are continuing.
So.
Smaller changes in things like employee benefit costs health care costs or in the case of industrial professional services related to some of the investments in growth initiatives we have.
It had a impact on the margin in the first quarter.
But you're correct, we anticipate on a full year basis for that to increase.
Okay, great. Thank you for the color and thanks for your time.
Thank you, ladies and gentlemen, we have come to the end of our time allowed for questions I'll turn it back to MS. Scanlon for any final comments.
Thank you everyone for joining us today, we appreciate your support and we look forward to updating you on our progress next quarter.
Thank you very much everyone.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.