Q3 2024 UL Solutions Inc Earnings Call
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Speaker Change: Hello and welcome to the UL Solutions third quarter 2024 earnings captain's call.
Speaker Change: Currently, all participants are in a listen only mode.
Speaker Change: A question and session will follow the formal presentation.
If anyone should require operator assistance during a conference, you may press star and a zero on your telephone keypad.
Speaker Change: As a reminder, this copters me and recorded. I would now like to turn a call over to your host, Mr. Kevin Arns, associate general counsel at UL Solutions. Thank you. You may begin, Mr. Arns.
Kevin Arns: Thank you. Welcome everyone to our third quarter 2024 Grinney's call. I am filling in for Mitchell Ji this quarter who is on family leave.
Speaker Change: Joining me today are Jenny Scanlon, her chief executive officer, and Ryan Robinson, our chief financial officer. During our discussion today we will be referring to our earnings presentation, which is available on the investor relation section of our website at uwell.com. Our earnings release is also available on the website.
Speaker Change: I would like to remind everyone that on-stage call we may discuss forward-looking statements within the meaning of the safe harbor provisions, or the private security litigation reform act of 1995.
Speaker Change: These four-looking statements may include, among other things, statements about U.S. Solutions results of operations, and estimates and prospects that involve substantial risk uncertainty and other factors that could cause actual results to differ in a material way from those expressed or implied in the four-looking statements.
Speaker Change: Please see the disclosure statement on slide to the earnings presentation, as well as the disclaimer is in our earnings release concerning forward-looking statements and the risk factors that are described in our quarterly report on Form 10Q for the quarter ended March 31, 2024.
Speaker Change: We assume no obligation to update any forward-looking statements to reflect events or circumstances after the daycare of, except as required by law.
Speaker Change: Today's presentation also includes references to non-gap financial measures. A reconciliation to the most comparable Gap financial measure can be found in the appendix to the earnings presentation. With that, I would now let you turn the call over to Jenny.
Jenny Scanlon: Good morning everyone and thanks for joining us.
Jenny: I'm very pleased to say that our strong performance in the first half of 2024 extended into Q3 with robust growth, including higher revenue, improved adjusted EBITDA margins and solid cash flow.
Jenny: These results showcase ongoing strength in our core business and our strategic focus on key megatrends that we anticipate will drive long-term demand for our industry-leading services.
Jenny: I'll cover three main topics before turning it over to Ryan. First, I'll highlight our strong Q3 performance. Second, notable growth achievements and customer activities. And finally, our financial position and capital allocation strategies.
Jenny: Our strong third quarter results are due to overall healthy demand for our services and focused execution by our entire team. I'm deeply appreciative of our employees, whose dedication has been crucial to our success.
Jenny: Their unwavering commitment to safety, scientific excellence, and a customer-centric approach not only defines our culture, but also propels our business.
Jenny: Q3 revenue reached $731 million, reflecting 8.1% overall growth, with organic growth of 9.3%.
Jenny: Our industrial and consumer segments showed notable strength, growing by 11.7% and 9.2% respectively on an organic basis.
Jenny: while our software and advisory segment underperformed our expectations.
Jenny: Our results reflected growth across all geographic regions.
Jenny: Adjusted EBITDA for the third quarter grew 12.3% and adjusted EBITDA margin expanded by 90 basis points.
Jenny: Our hard work resulted in a 6.1% increase in adjusted net income and we generated $215 million of free cash flow year-to-date.
Jenny: Next, let me highlight a few key achievements and drivers of performance this quarter and subsequent to its end.
Jenny: In August, we opened our cutting-edge, large-scale battery testing lab in Auburn Hills, Michigan.
Jenny: This facility, our largest laboratory investment to date, is one of the most comprehensive electric and hybrid vehicle and industrial battery testing centers in the country. It began operations with a strong backlog of industrial battery testing projects.
Jenny: As I mentioned on our last earnings call, battery testing for UL Solutions covers a wide array of energy storage systems that goes well beyond EV and hybrid automotive batteries.
Jenny: The Energy Transition covers a multitude of energy transfer and storage needs from small consumer to large-scale industrial batteries used to power heavy equipment.
Jenny: We recently hosted a customer event in Auburn Hills and also had a large presence at the Battery Show, generating overwhelming interest from automotive and industrial customers.
Jenny: Activity at the state-of-the-art lab continues to increase and we anticipate it will contribute to our growth from 2025 onwards.
Jenny: In our consumer space, we continue to be pleased with the ways our mission comes to life. Our mission matters. We've done a lot of work around lithium-ion battery safety in the past couple of years and have demonstrated progress.
Jenny: For example, the City of New York has banned the sale and rental of e-mobility devices that have not been certified for safety, which of course is what we do.
Jenny: Recent published reports about New York City indicate there has been a significant reduction in both deaths and injuries due to lithium-ion battery fires as compared to the same period in 2023.
Jenny: In fact, the city's fire commissioner said that while lithium battery fires remain a threat, he saw progress in fighting that threat and working toward zero deaths. Our work in safety-based solutions are key to this effort, and we are proud of our impact.
Jenny: Now, let me comment on our capital allocation activities. Our hard work and resilient business model, backed by an investment-grade balance sheet, allow us to generate robust cash flow.
Jenny: We continue to take a disciplined approach to capital allocation.
Jenny: Key actions this quarter included completing the acquisition of test nets, an anchor of our future hydrogen strategy, and returning value to shareholders through our regular quarterly dividend of 12.5 cents per share paid in September.
Jenny: Additionally, we successfully completed a follow-on offering of 23 million shares, including a fully exercised green shoe on behalf of UL Standards and Engagement, significantly increasing our public float.
Jenny: We are committed to maintaining a strong balance sheet with conservative leverage and investment-grade ratings, and we expect to continue to return excess capital to shareholders over time.
Jenny: Now let me turn the call over to Ryan, who will provide greater detail on our results and our outlook.
Ryan Robinson: Thank you, Jenny, and hello, everyone. I also want to thank all of our team members for delivering another strong quarter. I'll first provide more detail on our financial results, then we'll discuss our segment performance before closing with some comments on our full-year outlook.
Jenny: We are proud to report in our third quarter, on a consolidated basis, a continuation of strong growth, adjusted EBITDA margin expansion, and solid cash generation.
Jenny: As Jenny mentioned, it's encouraging to see that revenue growth once again occurred across all of our segments and all of our geographies.
Jenny: The increase reflected particular strength in the industrial segment, which delivered 11.7% organic growth, and the consumer segment, which delivered 9.2% organic growth.
Jenny: Gross margin was essentially stable as compared to the prior year with higher revenue offset by increased compensation expense on flat headcount, including the company's annual cash bonus plan and some salary increases.
Jenny: SG&A expenses increased 10.7% compared to the prior year period. Over half of the increase was related to stock-based compensation, specifically our cash-settled appreciation rights, or CSARs.
Jenny: which were part of our pre-IPO long-term incentive plan.
Jenny: Last year in the third quarter, we reduced our estimates of future performance, which resulted in a benefit to our expenses, while this year, our stronger performance resulted in some catch-up expense recognition across all of our segments.
Jenny: Adjusted EBITDA for the quarter was $183 million, an improvement of 12.3% year-over-year. Adjusted EBITDA margin was 25.0%, up 90 basis points from the same period a year ago, on particular strength in both industrial and consumer segments.
Jenny: which more than offset a modest decline in software and advisory. Adjusted net income for the third quarter was $104 million, up 6.1% from $98 million in the third quarter of 2023.
Jenny: Adjusted diluted earnings per share was 49 cents per share up from 47 cents in the third quarter of 2023.
Jenny: Now, let me turn to our performance-based segment, starting with industrial.
Jenny: The megatrends of energy transition, the electrification of everything, and industrial automation are driving tremendous innovation and demand for our services. These factors help the industrial segment deliver the strongest revenue growth of the three segments for the quarter.
Jenny: revenues and industrial rose 9.3% to 317 million dollars or 11.7% on an organic basis as compared to the third quarter of 2023.
Jenny: Those impressive gains were driven by robust demand for our ongoing certification services across most industries and also associated price increases.
Jenny: Industrial and EV battery certification demand remains robust in recent capacity. Contributions are contributing as expected.
Jenny: And as Jenny mentioned, we recently had an exciting customer event at our recently opened Auburn Hills, Michigan lab.
Jenny: Adjusted EBITDA for the industrial segment increased 10.4% to $106 million in the quarter, while adjusted EBITDA margin improved 30 basis points to 33.4%.
Jenny: The higher organic revenue was partially offset by increases in performance-based compensation, including the comparison to last year's CSAR expense.
Jenny: Now turning to the consumer segment.
Jenny: revenues and consumer were 321 million dollars up 8.8 percent from the 2020 three-quarter or 9.2 percent on an organic basis
Jenny: The improvement was driven by strong demand across all four of our service lines.
Jenny: Demand for Higher Electromagnetic Compatibility, or EMC, testing for automotive and consumer electronics.
Jenny: We are where we are a market leader remain strong. We also benefited from capacity additions We have made in the last year in the areas of consumer technology HVAC and retail
Jenny: Revenue in the quarter also benefited from a surge in demand for some technology product testing.
Jenny: Adjusted EBITDA for the quarter in consumer was $62 million, an increase of 24.0% versus the third quarter of last year. Adjusted EBITDA margin for the quarter was 19.3%, an increase of 240 basis points year over year.
Jenny: driven by higher revenues.
Jenny: Strong organic revenue growth was partially offset by performance-based compensation and the prior years CSAR benefits.
Jenny: We are adding capacity at various consumer facilities, increasing our footprint, and improving how we connect with our customers in order to meet increased sustainability related testing demand.
Jenny: year-over-year on both a total and organic basis. The improvement was driven by reduced churn and higher demand for software, particularly for retail product compliance and sustainability solutions.
Speaker Change: which was more than offset by a modest decline in advisory. As Jenny mentioned earlier, these results in software and advisory were below our expectations.
Speaker Change: Adjusted EBITDA in the quarter for software and advisory was $15 million, a $2 million, or 11.8% decrease as compared to the third quarter last year.
Speaker Change: Adjusted EBITDA margin for the quarter was 16.1%, a decrease of 260 basis points year over year, as higher revenues were more than offset by increases in both direct and company-wide performance-based compensation.
Jenny: turning to our cash generation.
Jenny: In the first nine months of 2024, we generated $394 million of cash from operating activities compared to $341 million in the same period last year. The improvement was driven by business performance and lower cash incentive payments.
Jenny: Capital expenditures for the first nine months of 2024 were 179 million dollars compared to 156 million dollars in the year-ago period. We continue to make important investments in energy transition opportunities, a focused growth area for UL Solutions.
Jenny: Free cash flow for the first nine months of 2024 was $215 million compared to $185 million in the same period of 2023.
Jenny: We finished the quarter with $327 million of cash and total debt of $802 million. The strength of our balance sheet is reflected in our investment grade credit ratings.
Jenny: A 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.
Jenny: This year you have seen examples of this in new labs we have opened like Auburn Hills and the Arkansas Retail Center of Excellence, as well as acquisitions like Tesnet and Battery Ingenieur.
Jenny: Now turning to the full-year outlook, given our strong year-to-date results and visibility into our business and end markets, we now expect full year constant currency organic revenue growth to be in the mid to high single-digit range.
Jenny: Demand remains robust from our key megatrends, particularly the electrification of everything, energy transition, digitalization, and sustainability.
Jenny: We expect to drive adjusted EBITDA margin improvement for the full year 2024 and beyond through a combination of key focus areas for the company.
Jenny: First is delivering top-line organic growth. Second is the expected mixed benefit driven by our industrial segment, which is both our fastest-growing and our highest-margin segment.
Jenny: Third is increasing productivity and fourth is strategic accretive M&A
Jenny: Based on our full-year outlook, we're excited for a setup for a strong finish to our year-end. I'll provide some additional context on the fourth quarter.
Jenny: We expect Q4 constant currency organic revenue growth.
Jenny: in the mid to high single-digit range, in line with our full-year outlook. Importantly, this growth moderates from the Q3 pace primarily attributable to two factors. First, as I said earlier, in Q3 of this year, consumers saw a surge in demand that may see a deceleration in Q4.
Jenny: Furthermore, in 2023, Q4 was our strongest quarter of growth and presents tougher comparisons.
Jenny: Year-to-date we have expanded adjusted EBITDA margins by 130 basis points year over year. In the fourth quarter we expect adjusted EBITDA margin to expand at an even faster pace compared to the fourth quarter of 2023.
Jenny: We expect this improvement in margin to be driven by higher revenue
Jenny: and to be largely offset by elevated expenses to support growth, namely in the categories of outsourced fulfillment costs and professional services.
Jenny: Performance-based compensation will also affect the degree of profit flow through on incremental revenue in the final quarter of annual and multiple year plans.
Jenny: We now expect capital expenditures to be approximately eight to eight and a half percent of revenue in 24 based on our outlays of spending year-to-date and Investments in new labs as we seek to match strong customer demand in both our industrial and consumer segments
Jenny: In summary, I'm proud of the outstanding results we delivered in the third quarter and year-to-date 2024. We are growing our business faster than the market, gaining share, improving profitability, and enhancing our already strong cash-generating profile.
Jenny: all with an investment grade rating as a foundation.
Jenny: This allows us to be active, yet selective, in deployment of our capital. Our aspiration is to be our customers' most trusted, science-based, safety, security, and sustainability partner as we look to create and deliver outsized shareholder value.
Speaker Change: Now, let me turn the call back to Jenny for her closing remarks.
Jenny Scanlon: Thanks, Ryan.
Jenny Scanlon: Our team's outstanding performance in Q3 built on the momentum of our April IPO, delivering robust revenue growth and improved margins. This positions us for strong full-year results in our debut as a public company and lays the foundation for future success.
Jenny Scanlon: As I mentioned last quarter, occasionally we will highlight for you some important and high-profile work we do as a leading expert in safety science.
Jenny: As you know, UL Solutions has decades of experience testing batteries, including lithium-ion batteries, that are a large part of the energy transition.
Jenny: As this transition accelerates, engineers and scientists from UL Solutions regularly work with local, state, and federal governments to help them understand issues related to the increased market penetration of lithium-ion batteries and large-scale energy storage.
Jenny: Over the past year, this engagement has increased to include several prominent organizations in Asia.
Jenny: in a series of workshops, often in partnership with UL Standards and Engagement.
Jenny: The R&D team from UL Solutions has conducted training and presented the results of battery safety testing and research to standards organizations, government organizations, and first responders in a variety of countries including Taiwan, Vietnam, Philippines, and Singapore.
Jenny: This year, UL Solutions battery R&D team has worked with the Republic of Singapore Air Force, USAID, and the Taiwan National Fire Agency to conduct technical training, including failure analysis case studies, demonstrations of different battery safety tests,
Jenny: and classroom instruction on advances in battery technology and safety features.
Speaker Change: So with that, I will conclude by underscoring that as an industry leader, we focus on product markets that are driven by long-term megatrends aligned with our unique offerings.
Jenny: Our strategic execution and targeted acquisitions are helping us gain market share in the growing safety, compliance, and sustainability sectors. With our investment-grade balance sheet and strong cash flow, we're well positioned to deliver exceptional long-term value to all stakeholders.
Jenny: Operator, let's please open the call for questions.
Speaker Change: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 at this time. One moment while we poll for our first question.
Speaker Change: Our first question comes from Andrew Nicholas with William Blair. Please proceed.
Andrew Nicholas: Hi, good morning. Thank you for taking my questions. I wanted to start by maybe digging in a little bit more to the consumer business.
Andrew Nicholas: really, really strong growth.
Andrew Nicholas: quarter
Andrew Nicholas: So, I guess a two-part question first, if you could maybe just spend a little bit more time talking about general sentiment amongst kind of customers there, what you're seeing in terms of
Jenny: product velocity, and then also, if there's any way to dive a little bit more into the surge in demand that you saw for technology product testing, it sounds like that's something that
Jenny: could potentially decelerate in the fourth quarter. I don't know if there's a way to quantify that or at least just explain exactly what it was that happened in the third quarter, but both of those would be helpful to understand.
Jenny: Yes.
Speaker Change: So we thank you for mentioning that, Andrew. We're pleased with the performance across consumer.
Speaker Change: The increase is both in revenue and in adjusted EBITDA margin performance.
Jenny: As you know, that segment has a few business lines, and we're pleased to see growth.
Jenny: in consumer technology testing.
Jenny: in Appliances, HVAC, and Retail and Consumer Products testing. So it was in several different areas.
Jenny: We did see a pickup, as we mentioned, in the fourth quarter, excuse me, in the third quarter.
Jenny: related to a surge of business related to new product offerings. Often we work with customers to help make sure their products are ready to go to market. And we saw an increased level of activity in the third quarter. So while we're overall confident in the fourth quarter and increased our guidance to mid to high single digits on a consolidated basis, we do see that having the potential to taper off a bit in consumer in the fourth quarter.
Speaker Change: And one thing I would add, Andrew, is we continue to see strength in customers seeking sustainability testing.
Speaker Change: So, the tailwinds from the, you know, GWP refrigerant regulations, strong safety demand there, and also that extends into other sustainability areas such as, you know, chemicals testing and indoor air quality for products.
Jenny: and we're seeing that strength in North America as well as Asia.
Andrew Nicholas: Very helpful. Thank you. And then maybe for my follow-up, switching gears a little bit to margins,
Andrew Nicholas: Good, good kind of metric to point to in terms of margin expansion year over year. Is there any way, maybe bigger picture, I don't know that you could quantify it or you'd be willing to, but
Jenny: to kind of rank order the different pieces of that margin expansion, how much of that is...
Jenny: is a consequence of really strong demand and utilization versus, you know, internal process improvement and operating efficiencies or.
Jenny: or even Price, just trying to get a sense for, you know, how much of this margin expansion trend is attributable to, you know, above average top line growth versus things that you're doing internally. Thank you.
Speaker Change: Yeah, good question. I'll make a couple comments that are that are more thematic over time rather than specific third quarter items.
Speaker Change: our core expenses, including headcount related expenses, we think we've managed well and we expect to continue to do that.
Speaker Change: Second is we have a very good growth driver that's benefiting consolidated margins by the growth and mix in industrial.
Speaker Change: and then third we have a number of horizontal initiatives across the company managing our footprint as a total company portfolio, managing and improving our digitalization of work processes including our IT costs.
Speaker Change: And then finally, for adjusted EBITDA margin, it's a geographic item, but it's an impact, we transition from private company.
Speaker Change: Cash-based incentives to public company more fairly standard public company Structures that stock-based compensation will will be an ad back It shows up in an operating income, but for adjusted EBITDA margin. It's a factor so
Speaker Change: Very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from George Tong with Goldman Sachs. Please proceed.
George Tong: Hi, thanks, good morning. The consumer business is continuing to see robust EBITDA margin expansion on a year-over-year basis, 200 bps plus this quarter. Can you talk about how much room there is left for consumer EBITDA margins to expand and whether you think the low-hanging fruit has been addressed, or whether you're still in the very early innings of driving efficiency gains in this segment?
Speaker Change: Thanks George and we are pleased with the results that we saw in consumer this quarter and we do feel like their margin is is trending toward what I would call a new normal.
Speaker Change: In addition to some of the pieces that Ryan just mentioned on the organic operating leverage and our focus on the value proposition for our customers through both pricing as well as breadth of services that we're offering.
Speaker Change: some of that investments in new lab capabilities and as Ryan alluded to some of that footprint optimization.
Speaker Change: We consolidated, as we announced earlier this year, our Retail Center of Excellence in Arkansas.
Speaker Change: and housing greater capacity under a single roof is certainly helpful.
Speaker Change: to the longer term margin. We've also been pleased with the investments that we made on the GWP refrigerant lab capabilities and continue to look at what the customer demand could be under that roof.
Speaker Change: Overall premise of our software and advisory business. Since it started is reinforcing elements of the value proposition that we offer to our tech customers and I always like to remind everybody that two thirds of our top 500 customers are purchased from both software.
Speaker Change: In advisory and check.
Speaker Change: So as we look to our performance in each side of software and advisory you know what I'm looking for in software and the Green shoots that we see is that churn is down as Ryan had mentioned contract terms are extending in duration that leads to a you know longer term a RR and.
Speaker Change: Stronger recurring SaaS revenue.
Speaker Change: You know, we look for the pipeline that turns into revenue and we look for that pipeline specifically out of our existing tech customers.
Speaker Change: And in particular in the areas of the supply chain and sustainability.
Speaker Change: And then I also look at net promoter score, which we do in every business and and continues to improve so there's some some green shoots around software and advisory and and you know I was pleased that this quarter.
Speaker Change: The largest U S based beauty retailer did select work smart, which is part of our ultra platform.
Speaker Change: As there are software to aid their ability to evaluate you know the chemical properties of the products that are on their shelves and the great thing about that ultra platform is now that introduces ultra's to their whole supply chain and positions us to cross sell.
Speaker Change: And you know address potentially a new set of customers that we havent had before so there are some green shoots here, but certainly we expect a better performance out of software and advisory we expect the sales transformation that they're going through a tick up better legs in 2025.
Speaker Change: Got it very helpful. Thank you.
Speaker Change: The next question comes from Andy Whitman with Robert W. Baird. Please proceed.
Andy Whitman: Okay excuse me.
Andy Whitman: I had a couple of questions here I guess first kind of a bigger picture question and then maybe I'll follow up with a couple of things to clarify with with Ryan, but Jenny I'm just curious as to.
Speaker Change: If you could comment on.
Speaker Change: Your exposure to the AI value chain.
Speaker Change: What types of things are you offering today and but.
Speaker Change: What types of things could you be offering in the future and what are the trends you're seeing in that business in particular.
Jenny Scanlon: Yeah, Thanks, Andy I know that's a.
Speaker Change: Really great question and a fun topic to think about you know in the near term there are some ways that AI is affecting our business positively both in the products that we're offering them, particularly true altra and also in some of our key both.
Jenny Scanlon: Industrial and consumer products.
Jenny Scanlon: So within all trusts, we've already incorporated AI, we're in the process of incorporating it into four different key areas you know the ways that we help our customers classify their products.
Jenny Scanlon: <unk> that we help our customers with that chemical analysis that I just talked about with.
Jenny Scanlon: The large beauty rich handler are the ways that we're modeling a wind forecasts for our renewables advisory business and the ways in which we're helping our customers generate content. So a hours affecting just our our our software product offerings in a positive way on the tech side, where we see it is in early <unk>.
Jenny Scanlon: Pages of like AI data centers, the ways in which our cables need to be replaced the ways in which the electrification the amount of electricity needed for those data centers is pretty significant and then we're also seeing an extension are in our ongoing certification services in our labels business because those components that go.
Jenny Scanlon: Into those data centers.
Jenny Scanlon: Typically contain UL labels are representing that they've been certified so we're seeing some great trends there we.
Jenny Scanlon: We didn't know.
Jenny Scanlon: A benchmark program for benchmarking AI, that's embedded in Pcs.
Jenny Scanlon: It's early stages, we don't expect that benchmark offering to you know significantly sway our revenue trajectory next year, but we certainly see it as a way that we continue to help our customers address the ways in which they're considering.
Jenny Scanlon: Safety and their products. So you know we're going to continue to incubate offerings, that's respond to our customers' needs and the ways in which they intend to use AI.
Speaker Change: Got it that's helpful. Thank you for that and then I just wanted to make sure that I correctly understood. What you were trying to say on the fourth quarter margin performance right.
Jenny Scanlon: You mentioned, obviously the third quarter margins were up 130 basis points, you said theyre going to be stronger, but then after that you mentioned a couple of things that were negatives like compensation costs. I think is something something about fulfillment costs. So are you, saying that margins will be sequentially.
Jenny Scanlon: The growth rate and margins will be sequentially higher in the fourth quarter than the 130 or that's underlying but ex those items that you called out they might not be as strong as the 130 I know its a nuance point, but I think one important that we all get on the same page.
Speaker Change: Yeah, and you know good question, so year to date, our adjusted EBITDA margins being up 130 basis points in the fourth quarter, we expect to report.
Speaker Change: An acceleration of that in the fourth quarter being a higher increase than that however, how hot will be tempered by those additional fulfillment costs that I mentioned the higher demand comes with some outsourced lab fulfillment some professional services and in the fourth quarter. It's the final period of some.
Speaker Change: Hum.
Speaker Change: Full year and multiple year, our incentive programs that final expenses need to be recorded in the quarter. So it's just the degree of flow through on incremental revenue will be tempered by by those factors.
Speaker Change: Okay that makes more sense. Thank you for clarifying that and that's all my questions for today.
Speaker Change: Thank you.
Speaker Change: The next question comes from Stephanie He would take P. Morgan. Please proceed.
Stephanie: Hi, Thank you and Ryan if I could just follow up on the last question.
Stephanie: Can we could you provide if at all Tom for how to think about typically the incremental margin flow through.
Stephanie: And you know that say, we weren't in the fourth quarter and what's growing mid to high single digit sunny in any particular quarter.
Stephanie: Yeah the.
Stephanie: Where in a period of increased performance. So our revenue is increasing at a pace in the second half and so we are just to give a shorter period of time to recognize any compensation in fulfillment costs associated with that so the flow through is skewed by those temporary.
Stephanie: The items are and at this point, we're not in a position to go into them in more detail and break out the components of that.
Stephanie: But the primary outcome is its a consequence of increased demand from our customers and accelerating revenue growth.
Stephanie: Okay.
Stephanie: And when looking at the industrial segment.
Stephanie: Posted double what they can't wrapping growth organic constant currency for the last.
Speaker Change: Several quarters, starting in 2020 three do you view that level of factoring growth as sustainable as we look into 2025, and just given kind of the multiyear tailwind that you've been talking about.
Speaker Change: Yeah, the thing about industrial Stephanie. Thanks for the question, we are really proud of that double digit growth that we're seeing on these projects.
Speaker Change: Rejects do tend to be longer in duration and when you look at you know the power and automation side of the business, which really reflects the energy transition and sustainability you'd look at the fact that we've added capacity are both large scale.
Speaker Change: <unk> labs are all over the World you know a couple of years ago in chunks out of China are Auburn Hills. This August Korea that we completed earlier.
Speaker Change: Earlier this year, and then newly announced an extension there.
Speaker Change: Certainly reflective of the fact that that Mega trend of the electrification of everything you know, we continue to see strength and durability in the industrial business.
Speaker Change: And then on a more macro level.
Speaker Change: We look forward to commenting more about 2025 and beyond after we complete the ended at the end of the year, but at this point, we're not going to give more specific guidance for next year.
Speaker Change: Okay understood. Thank you.
Speaker Change: Yeah.
Speaker Change: The next question comes from Shlomo Rosenbaum with Stifel. Please proceed.
Shlomo Rosenbaum: Hi, Thank you very much for taking my questions.
Shlomo Rosenbaum: First one is Ryan maybe you could come to come into a little bit about the drivers of revenue growth between volume and price European competitors.
Speaker Change: Have talked about you know pricing.
Speaker Change: In as inflation has come down, but you're seeing your organic growth accelerated at the same time is it fair to assume that the the volume is picking up.
Speaker Change: At the same time, so it's overcoming that inflationary.
Speaker Change: The impact coming down and are you able to quantify that for us in some way shape or form and then I have one follow up.
Speaker Change: Yeah. Thank you very much for the question Shlomo and as you know we report revenue in four primary service categories.
Speaker Change: Two of those certification testing in non certification testing and other services lend themselves more to price and volume we provide a defined service testing our product in issuing a report or certification.
Speaker Change: So for those we're pleased with the revenue growth those two categories grew nine and a half a percent in the third quarter and both price increases and volume can contribute to that in the third quarter. It was slightly more volume than price, but overall, we were pleased with progress in price as well.
Speaker Change: Okay. So so volume is accelerating that's the bottom line on that one.
Speaker Change: That's correct, that's correct, but our our overall revenue growth is driven by both price and volume.
Speaker Change: Factually our volume is correct yes.
Speaker Change: Got it and then this one is for you Jenny.
Speaker Change: Just in terms of how we're thinking about the impact of various administrations on on the business and we ended up with a more tariff focused the administration is that helpful to your business on the one hand because of the sourcing and software in advisory and then on the other side, maybe you know we'd have to think.
Speaker Change: [noise] about some headwinds on the China side, and maybe you could walk us through some of that and how much of your business.
Speaker Change: <unk> from China, specifically going to the U S and.
Speaker Change: Just how should we think about this.
Speaker Change: Yeah, you know first of all product safety.
Speaker Change: Universal and enduring and products coming into the United States or Europe need to have safety and our innovation is only successful and you have safety. So when you look at you know administrative policies no matter Who's in office you know we've seen.
Speaker Change: System C. In demand. If you you know you'd look back from and our growth rate from 2011 through a Democratic administration.
Speaker Change: So today through a Republican administration through a Democratic administration, it's it's been pretty consistent.
Speaker Change: So specifically as you think about in answer to your question about tariffs. We saw this in 2018 and we've continued to see the ways in which our customers react.
Speaker Change: So from China. The majority of our business is export markets the significant majority.
Speaker Change: And you know what we continue to see is customers, making decisions about where they want to house their manufacturing.
Speaker Change: To launch those products into North America or Europe.
Speaker Change: So we continue to see growth.
Speaker Change: You know low single digits in the sites that our field teams visit in China, We continue to see higher growth in the sites that our field teams visit in areas, where we've invested in new labs, such as Vietnam, India and Mexico.
Speaker Change: And we'll continue to be by our customer side, because they make decisions about where they want to house.
Speaker Change: Their manufacturing and distribution locations.
Speaker Change: Will that help the ultra business in terms of supply chain, though that's part of what I was thinking about.
Speaker Change: You know the altra business on supply chain is really focused on traceability of the materials within products.
Speaker Change: And so certainly as numbers of suppliers are in our customers' supply chain change or increase it can effect those software licenses, but I think the bigger impact is in helping our customers if.
Speaker Change: If they decide that they need to move their manufacturing facilities to other locations. We see it more on the tech side to re certified products are <unk> certified the raw materials or components that are going into those products. So it's a it's a bigger impact on the tech side.
Speaker Change: Got it thank you.
Speaker Change: Our next question comes from Jason <unk> with Wells Fargo. Please proceed.
Speaker Change: Hey, good morning, and thanks for taking my question.
Jason <unk>: It's been at least a couple of quarters, now where you've called out value based pricing as a tailwind. So I was curious if you're doing anything to get a little bit more surgical on pricing.
Speaker Change: That's part of the strategy just curious where we are in that process and there's more opportunities going forward.
Speaker Change: Thanks, Jason and that's one of my favorite topics. So I appreciate you asking it we implemented our Oracle configure price quote are in addition to having implemented a single Global instance of sales force over the last few years that has all been completed and our teams are doing.
Speaker Change: Now are really focused on training you know the thousand or so our sales team members that we have on really how to unleash the power of the analysis that they have at their fingertips and so we continue.
Speaker Change: To extend the use cases and the training around those pretty powerful engines and our ultimate goal is to make sure that we get paid for the value that we provide our customers.
Speaker Change: That's great. Thank you.
Speaker Change: I'm curious if you could talk about your expectations for Capex going forward recognizing that you've made this conscious decision to make more investments in the business they seem to be paying off well. So as you look at the H eight and a half are you know expectation that's sort of the right framework to think about as we go forward.
Speaker Change: Yeah, historically, our capex as a percentage of revenue has been a bit lower than that but we see opportunities in a number of themes around particularly around the energy transition.
Speaker Change:
Speaker Change: Have led us to invest against those those opportunities we take a pretty prudent approach to underwriting each lab investment understood understanding the underlying customer demand.
Speaker Change: And seek to to respond to the needs of our customers and have high visibility to revenue to support those those investments.
Speaker Change:
Speaker Change: We are in a period of elevated capex and we've been achieving good returns on that Capex. There are some new technologies like large batteries that were investing and so we will see we'll continue to monitor how our more.
Speaker Change: More recent large investments are performing and use as a basis to judge whether we continue this elevated level to invest against those opportunities, but we're an ROE in the in the 130 year history of U L where we're in relatively early innings of these themes of energy transition.
Speaker Change: And what I also always think as I'm pointing to point out is that our maintenance capex is fairly low and so the.
Speaker Change: Amount that we put towards Capex.
Speaker Change: Is.
Speaker Change: Pretty discretionary based on what opportunities we see ahead of us.
Speaker Change: Got it that's helpful. Thank you.
Speaker Change: The next question comes from Harry <unk> with Jefferies. Please proceed.
Speaker Change: Hello, This is harold onto on for stuff anymore.
Speaker Change: So any color that you recently completed the acquisition of a tough one.
Speaker Change: As you think about or the acquisition still in Florida, Yes, no what segments of the business would you.
Speaker Change: Requiring no if you could just give us a sense of you know the framework you use to thinking about acquisitions in the modulus of tissue.
Speaker Change: Yes.
Speaker Change: Yeah. Thanks for the question and philosophically.
Speaker Change: Where we're the market leader and we have the opportunity to invest capex to.
Speaker Change: To strengthen our position that's always our are our number one priority and and that's why you see these are investments in.
Speaker Change: The new large scale battery labs, or the new retail center of excellence to places, where we can extend our footprint and deepen our impact, but where we have opportunities to pick up a different type of intellectual property or leading you know researcher or thought leadership in an area like we saw in test.
Speaker Change: Now where are they had some really strong interesting capabilities in hydrogen that we didn't have that is absolutely. The perfect example of how we think about attractive M&A. Its accretive it gives us something that we couldn't otherwise easily get on our own.
Speaker Change: And launches us now into a space, where we can grow.
Speaker Change: By applying capex into those types of technologies, if we choose to do so so that's how we think about we look at M&A across all three of our segments. We've got relationships all over the world.
Speaker Change: And are we continue to seek our opportunities that set the timing and the profile of of what we need to grow our business.
Speaker Change: Thank you and then I guess you know just on you know you brought on a facility in Korea.
Speaker Change: The Aurora House.
Speaker Change: You know so if you could just give us a sense for it you know that there was some backlog you had before you know these came online or these running ahead of expectations or they run their along with our expectations can you just give us some color of how these investments.
Speaker Change: Oh gosh.
Speaker Change: Yes, we have an underlying philosophy and.
Speaker Change: Not investing capex until we've got clear understanding of market demand and potential commitments from our existing customer base. So the Korea labs that came online actually came because a customer asked us to invest in capacity.
Speaker Change: To help them with their growth and innovation and we're pleased with the pace that it is fulfilling its business case. Similarly in Auburn Hills, we had a set of commitments our understandings with customers both in the EV battery space and the industrial battery space.
Speaker Change: And what we're seeing is that that backlog is so selling our expectations and are looking forward to ramping up our you know the utilization and the capacity of that lab. So it matches, our philosophy that we don't invest capital until week believed at the back.
Speaker Change: Clog exists and we tend to perform to our expectations.
Speaker Change: Thank you.
Speaker Change: Alright, well. Thank you everyone for joining us today, we appreciate your support and look forward to updating you on our progress next quarter.
Speaker Change: Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Hmm.
Speaker Change: