Q4 2024 UL Solutions Inc Earnings Call
Good morning and welcome to the UL Solutions 4th quarter 2024 earnings goal. All participants will be in listen only mode should you need assistance, please signal conference specialists by pressing the start key followed by 0. After today's remarks, there will be an opportunity to ask questions, to ask a question, you may press star, then one on your touchstone phone to withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Mitchell G, senior.
Vice president of corporate finance. Please go ahead.
Thank you and welcome everyone to our 4th quarter and full year 2024 earnings call.
Speaker Change: Joining me today are Jenny Scaling, our chief executive officer in Ryan Robinson, our chief financial officer.
Speaker Change: During our discussion today we will be referring to our earnings presentation, which is available on the investor relations section of our website at UL.com.
Speaker Change: Our earnings releases also available on the website.
Speaker Change: I would like to remind everyone that on today's call we may discuss forward looking statements within the meaning of the safe harbor provisions.
Private securities litigation Reform Act of 1995.
Speaker Change: These forward looking statements may include, among other things, statements about you all solutions, results of operations, and estimates and prospects that involve substantial risks.
Speaker Change: Uncertainties and other factors that could cause actual results to differ in a material way from those expressed or implied in the forward looking statements.
Speaker Change: Please see the disclosure statement on slide 2 of the earnings presentation, as well as the disclaimers that are earnings release concerning forward looking statements and the risk factors that are described in our annual report on Form 10K for the year ended December 31st, 2024.
Speaker Change: We assume no obligation to update any forward looking statements to reflect events or circumstances after the day here of.
Speaker Change: Except as required by law.
Speaker Change: Today's presentation also includes references to non-GAAP financial measures.
Speaker Change: A reconciliation to the most comparable GAAP financial measure can be found in the appendix to the earnings presentation.
Jenny: With that I would now like to turn the call over to Jenny.
Jenny: Good morning everyone and thanks for joining us.
Jenny: This time last year we were gearing up for our IPO and the roadshow to highlight what makes you all solutions unique and worth your time and investment.
Jenny: As we met with potential investors we talked about how we are a global safety science leader and a mission-driven growth company in the fragmented and consolidating testing, inspection and certification industry.
Jenny: Hallmarks of our business include long standing deep customer relationships and recurring revenue streams, global scale and operating leverage, a healthy balance sheet and a disciplined capital allocation strategy aligned with the megatrends propelling growth.
Jenny: Against this backdrop I'm delighted to report that you all solutions has concluded an extraordinary year with another quarter of outstanding performance.
Jenny: In our first year as a public company we've delivered strong organic growth.
Jenny: Enhanced profitability and generated robust cash flows while maintaining an investment grade balance sheet.
Jenny: What's particularly gratifying is the balance strength we've seen across all segments service offerings and geographic regions.
Jenny: The key mega trends we've identified, including the global energy transition, the electrification of everything and digitalization continue to drive strong demand for our industry leading services.
Jenny: I'll cover 3 areas before turning the call over to Ryan. First, our full year performance highlights.
Jenny: Second, notable achievements and activities across 2024 and third, our financial position and capital allocation strategy for 2025.
Jenny: 2024 marked a pivotal year in UL's 130 year history.
Jenny: Our successful transition to a public company while maintaining focus on delivering superior results demonstrates the exceptional execution capabilities of our team.
Jenny: I want to express my deep appreciation to our employees whose dedication to safety, scientific excellence, and customer service defines our culture and drives our success.
Jenny: Ryan will dive into the 4th quarter numbers in a minute, so let me hit the high notes of our full year 2024 results.
Jenny: We built strong momentum across the course of the year, delivering revenues of 2.9 billion, up 7.2% versus 2023 and up 8.7% on an organic basis.
Jenny: Our industrial segment led the way with 9.4% full year growth, including 11.9% on an organic basis.
Jenny: While our consumer segment grew 5.6%, including a 6.9% on an organic basis.
Our software and advisory segment completed the year with 5% top line growth including 4.4% on an organic basis.
Jenny: Our results reflected growth across all geographic regions.
Jenny: Adjusted for the full year grew 16.5% and adjusted Ebi margin expanded by 190 basis points.
Jenny: We generated an 18.8% increase in adjusted net income and $287 million of free cash flow for the full year.
Jenny: Next, let me highlight our major accomplishments this year as well as a few achievements and drivers of performance this quarter and subsequent to its end.
Jenny: After a long and proud history as a private company, we completed our successful initial public offering in April as well as a follow on offering of shares from our largest shareholder in September.
Jenny: We made two acquisitions in our industrial segment related to the global energy transition battery testing company battery engineer, and hydrogen testing company Testnet.
Jenny: Our recent accelerated pace of capital spending resulted in the opening of our state of the art battery testing lab in Auburn Hills, Michigan. We also expanded capacity at our Mexico lab to meet growing product demand in Latin America and announced plans to construct an advanced automotive and battery testing center in Korea.
Jenny: Finally, let me comment on our disciplined approach to capital allocation activities during the year.
Jenny: Our strong revenue growth and resilient business model along with an investment grade balance sheet allowed us to generate robust cash flow.
Jenny: Key actions in addition to the two acquisitions I just mentioned this year included reinvesting organically $237 million in capital expenditures to drive growth.
Jenny: Paying down $166 million of borrowings from our credit facility and paying $100 million in dividends.
Jenny: We believe that we enter 2025 and then even stronger position than when we began our public company journey.
Jenny: Management team remains focused on maintaining our investment grade rating and conservative leverage while actively pursuing strategic M&A opportunities and returning excess capital to shareholders.
Jenny: Now I'll turn the call over to Ryan for a detailed review of our 4th quarter results in 2025 outlook.
Ryan: Thank you, Jenny and hello everyone. I also want to thank all of our team members for delivering another strong quarter and full year 2024. Jenny did an excellent job of summarizing our outstanding financial results for the full year, and I'll focus my comments on the 4th quarter and segment results before closing with some comments on our initial 2025 full year Outlook. We are proud to report in our 4th quarter on a consolidated basis, a continuation of strong growth.
Adjusted but down margin expansion and solid cash generation, as Jenny mentioned, it's encouraging to see that revenue growth once again occurred across all of our segments and all of our geographies.
Ryan: Now let me dive into the details of the quarter.
Ryan: Consolidated revenue of $739 million was up 8.0% over the prior year quarter.
Ryan: Including organic growth of 9.5%.
Ryan: The increase reflected particular strength in the industrial segment which delivered robust 13.9% organic growth.
Ryan: Cost of revenue for the quarter increased by 6.0% as compared to the prior year period due to increased depreciation related to capacity expansion, services and materials cost related to high volumes and labs start up an employee compensation.
Ryan: SGNA expenses as a percentage of revenue decreased 200 basis points.
Ryan: 33.8% in the Euro quarter to 31.8% in Q4 of 2024.
Ryan: Adjusted Ibada for the quarter was $169 million and improvement of 27.1% year over year.
Ryan: Adjusted Ian margin was 22.9%, up 350 basis points from the same period a year ago on particular strengths in both the industrial and consumer segments.
Ryan: Our effective tax rate for the full year was 16.9% and in the fourth quarter we benefited from a reduction in uncertain tax positions as a result of the expiration of a statute of limitations.
Ryan: Adjusted net income for the 4th quarter was $102 million up 64.5% from $62 million in the fourth quarter of 2023.
Ryan: Adjusted diluted earnings per share was 49 cents.
Ryan: up from 29 cents in the 4th quarter of 2023.
Ryan: Now let me turn to our performance by segment starting with industrial.
The mega trends of global energy transition, the electrification of everything and digitalization are driving tremendous innovation and demand for our services in the industrial segment, helping it once again deliver the strongest revenue growth of the three segments for the quarter.
Ryan: Revenues in industrial rose 11.6%.
To $328 million or 13.9% on an organic basis as compared to the 4th quarter of 2023.
Ryan: This marks 7 consecutive quarters of double digit organic revenue growth.
Ryan: Those impressive gains were driven by growth in all of our service lines in the quarter we believe ongoing certification services growth benefited from increased activity for manufacturers ahead of potential tariffs.
Ryan: Certification testing growth was led by energy and automation.
Ryan: And we expect a normalization of demand in ongoing certification services in 2025.
Ryan: Adjusted Ibida for the industrial segment increased 32.9% to $105 million in the quarter while adjusted EBA margin improved 510 basis points to 32.0%.
Ryan: The higher organic revenue was partially offset by increases in services and materials.
Ryan: Now turning to the consumer segment.
revenues and consumer were $309 million up 5.5% from the 2023 quarter or 6.5% on an organic basis. The improvement was driven by demand across non-certification testing and other services.
Ryan: Certification testing as well as ongoing certification services.
Ryan: We saw particularly strong demand across retail and consumer technology.
Ryan: Adjusted down for the quarter and consumer was $49 million an increase of 25.0% versus the fourth quarter last year, adjusted but down margin for the quarter was 14.6%, an increase of 230 basis points year over year driven by higher revenues.
Ryan: Solid organic revenue growth was partially offset by increases in employee compensation. Expense actions taken in 2023 reduce the impact of these cost increases and contributed to margin improvement. We mentioned last quarter how we're adding capacity at various consumer facilities increasing our footprint and improving how we connect with customers in order to meet increasing testing demand and that work continues.
Ryan: Our third segment is software and advisory revenues for that segment were $102 million an increase of 5.2% year over year.
Ryan: On both a total and organic basis.
Ryan: The improvement was driven by strong demand for software, including retail product compliance.
Ryan: And sustainability solutions.
Ryan: Adjusted I do for the quarter for software and advisory was $19 million.
Ryan: Up
Ryan: A 5.6% increase as compared to the 4th quarter of last year, adjusted Ebi down margin for the quarter was 18.6%, flat year over year.
Ryan: As higher revenues were offset by increases in services and materials.
Ryan: Turning to our cash generation for the full year 2024 we generated $524 million of cash from operating activities that compares to $467 million in the prior year. The improvement was driven by business performance and lower cash incentive payments.
Ryan: Capital expenditures for the full year 2024 for $237 million compared to $215 million in 2023.
Ryan: We continue to make important investments in global energy transition opportunities throughout 2024, which remains a focus area for UL solutions.
Ryan: free cash flow for the full year was $287 million compared to $252 million in 2023, despite a higher level of growth investments.
Ryan: We finished the year with $298 million of cash and cash equivalents. The strength of our balance sheet is reflected in our investment rate credit ratings.
Ryan: A robust balance sheet and cash flow generation give us great flexibility to invest in organic initiatives, a creative acquisitions, and to pursue a number of value enhancing ways intended to produce best in class shareholder returns as Jenny said in 2024 we opened new labs, we broke ground on others and completed two acquisitions to better align our business with the mega trends driving demand for our services.
Ryan: In addition, we paid down $166 million on our credit facilities and returned $100 million to our shareholders through quarterly dividends.
Ryan: Now turning to our initial 2025 full year outlook.
Ryan: As a reminder, organic growth is constant currency and excludes acquisitions and divestitures.
Ryan: We expect 2025 consolidated organic revenue growth to be in the mid single digits range as compared to our full year 2024 results. It's a testament to the strength and diversity of our offerings and the outstanding execution by our team that we believe we're in a position to deliver mid single digit revenue growth following 8.7% organic revenue growth in 2024.
Ryan: We expect to drive further adjusted Ibadan margin expansion improvement to approximately 24% for the full year 2025, which I'm pleased to say is in line with our longer term targets communicated last April at the time of the IPO.
Ryan: As a reminder, we have a number of ways to drive margin expansion for the company. They include operating leverage from top line growth.
Ryan: A mixed benefit as industrial growth outpaces the other segments and it continued focus on productivity gains.
Ryan: Additionally
Ryan: We look at M&A opportunities in our strategic and markets that present a path to margin and earnings accretion.
Ryan: While also evaluating portfolio realignment.
Ryan: We expect capital expenditures to be approximately 7 to 8% of revenue in 2025 with investments in new labs and customer facing software continuing as we seek to match continued strong customer demand in all three segments.
Ryan: This is down modestly from a rate of spend in 2024 as a percentage of revenue.
Ryan: with flat sequentially and still above our longer term historical average.
Ryan: We estimate our effective tax rate in 2025 to be approximately 26%. This compares to an effective rate of 16.9% in 2024. With the anticipated change due primarily to additional implementation of the OECD's pillar 2.
Ryan: Provisions which affects how multinational corporations are taxed.
Ryan: We also experienced a benefit in 2024 from a significant release of tax reserves that is not expected to recur in 2025.
Ryan: While our guidance is for the full year 2025, let me provide you with some additional color with regard to seasonality.
Ryan: As a reminder, Q1 is typically our lowest revenue quarter in terms of dollars given the lunar New Year holiday impact on our customer operations and fewer UL work days as compared to the other quarters. This results in slightly less operating leverage and therefore profitability in Q1 compared to the other quarters.
Ryan: In addition, we face increasingly challenging comps in the second half of 2025.
Ryan: We enter 2025 with strong momentum growing faster than the market while improving profitability and cash generation. Our investment grade balance sheet provides flexibility for strategic capital deployment as we work to deliver superior shareholder value.
Jenny: Now let me turn the call back to Jenny for her closing remarks.
Jenny: Thanks Ryan.
Jenny: 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: In late December we announced that the US Federal Communications Commission named UL Solutions as lead administrator of the new US Cybertrustmark program which will help equip qualifying smart products such as.
Jenny: voice activated speakers or kitchen appliances with a cybersecurity safety label.
Jenny: We were honored to receive this designation as you all solutions will support the FCC and other stakeholders and establishing the technical requirements and other details that will help launch and grow the program.
Jenny: The voluntary cybertrustmark program is designed to help consumers make informed decisions about the products they bring into their homes differentiate trustworthy products in the marketplace and create incentives for manufacturers to meet cybersecurity standards.
Jenny: Congratulations to our team for all of their hard work on this program.
Jenny: To wrap up our exceptional 2024 performance built on our successful IPO and should position us strongly for 2025 and beyond.
Jenny: Well we've just achieved remarkable results in our long history in many ways we're just getting started.
Jenny: We stand on the shoulders of generations of safety scientists who have made the world a better place, and we carry that legacy forward with pride.
Jenny: We believe the mega trends driving our markets from the global energy transition to sustainability align well with our capabilities and market position.
Jenny: With our strong balance sheet, robust cash flow and clear strategic direction we believe that we're well positioned to deliver exceptional long term value to all stakeholders.
Jenny: Let's open the line for questions.
Jenny: We will now begin the question and answer session to ask a question, you may press star, then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys to withdraw your question, please press star, then 2.
Jenny: At this time we'll pause momentarily to assemble our roster.
Speaker Change: And our first question comes from Stephanie Yee from JP Morgan. Please go ahead.
Stephanie Yee: Hi, good morning.
Speaker Change: I was wondering if you can.
Speaker Change: I was wondering if you can comment on your 2025 outlook by each of your three segments.
Speaker Change: Sure, uh, well, we're, we're pleased to continue our path of growth after a strong year in 2024.
Speaker Change: And we see opportunity in each of the three segments, the primary trends within the industrial segment, uh, continue.
Speaker Change: Uh, our progress in consumer, um, including adding some new capacity and improving those operations continue and we're pleased with progress in the last quarter with software and advisory, particularly on the software side of the business.
Speaker Change: Uh, so I say our, our.
Speaker Change: Our outlook for revenue growth is on a consolidated basis, but we see each of the segments contributing to that.
Speaker Change: And I guess could you um
Speaker Change: Comment on comparison versus 2024, in particular with industrial weather you expect the strength to continue. I noticed you mentioned that ongoing certification, maybe there are some pull forward into the 4th quarter, maybe that piece is going to moderate or normalize in 2025, but any other um comparison is 24 in the industrial set that you could provide.
Speaker Change: Great question, Stephanie and I'll start just by saying, you know, we are really proud of the fact that our industrial team has 7 consecutive quarters of double digit growth and what we saw in 2024 is every end market every region and so it comes down to uh those mega trends that we talk about the global energy transition is real and we see it in power and controls, uh, we see it in the uptick in.
Speaker Change: data centers, particularly to serve the AI market which uh those data centers need about twice as much power as a normal data center, um.
Speaker Change: And that kicks into that digitalization trend and the ways in which, you know, you have to change out, you know, hardware or storage systems to better use power to be more efficient and then surround that with cooling and HVAC systems and energy storage systems and you know and then extended to the grid so these trends in industrial are real.
Um, and, uh, we're excited about working with our customers on both, uh, new, uh, certification testing and non-certification testing and then you know we also understand that there's a balance of, you know, all four of our service lines across each of our segments and um you know, so we have to look at the way that those services balance across all of that demand.
Speaker Change: an ongoing certification services are affected by manufacture activity.
Speaker Change: And it's difficult to precisely attribute increases and ongoing certification which we experienced in Q4 directly to tariff anticipation, however, we did see a material pick up in revenue.
Speaker Change: And so as an example for the 1st 3 quarters of 2024, ongoing certification grew about 8%.
Speaker Change: In Q4 it grew about 12%.
Speaker Change: And the increase in growth on a consolidated basis contributed about 1% to our consolidated revenue growth.
Speaker Change: And it's possible that pulling forward some of that demand may result may result in slightly lower growth in 2025 and that's comparison in Q4 in particular.
Speaker Change: OK, I appreciate that. Um, if I can just ask one question on certification testing um across the portfolio, it seems like it had been growing very strongly through the 3rd quarter and the 4th quarter it decelerated a little bit to 6%. Um, you kind of comment on what's driving the trend there. Is there any potential risk, um, to certification testing in a more deregulatory environment under the current administration.
Speaker Change: Yeah, uh
Speaker Change: We don't believe that there is a threat to certification testing, um, some of this is timing, uh, some of it is, uh, what demand our customers and customers have and you know as you know we had talked in the 3rd quarter that uh consumer was particularly strong in the 3rd quarter and it's no reflection on um the 4th quarter we just had a really strong 3rd quarter and consumer, so I think across the board, uh, we're very.
Speaker Change: uh, confident and focused on both our certification testing and our non-certification testing and the demands around that because you can't have innovation without safety.
Speaker Change: OK appreciate it thank you.
Speaker Change: Next question comes from George Tong from Goldman Sachs. Please go ahead.
George Tong: Hi, thanks, good morning. You, uh, talked about.
George Tong: Hi, uh, you talked about mega trends, uh, around energy transition, the electrification of everything, digitization, uh, all driving demand and industrial since these trends are very much long standing should the industrial segment be able to sustain the double digit growth that you've seen over the past 7 quarters into the foreseeable future.
George Tong: Yeah, um, appreciate the question, um, our, our revenue guidance is on a consolidated basis, but we do see opportunity in each of the segments.
George Tong: I would say the fundamental things that have been driving industrial, uh, we don't see material changes, uh, in those, in those tailwinds, uh, we'll continue to invest against those those opportunities, um, our comparisons are getting uh steeper, um, and we want to set realistic expectations, uh, that we expect to achieve.
Speaker Change: Understood, um, and then you touched on this a little bit earlier, um, but can you elaborate on how you expect a higher tariffs to impact the business either positively or negatively across the business.
Speaker Change: Yes, George, you know, hysterically tariffs have not had a material impact on our business and as you know our revenues largely not dependent on volumes but dependent on the product innovation new product development life cycles.
Speaker Change: Now what we've seen and we've seen this, you know, since, uh, 2017, 2018 when tariffs were first introduced on, you know, Chinese goods, appliances, and, and other items, um, what we've seen was that um actually in the early days our revenue increased in 2018, um, and across 2019, so, uh, and the majority of that was organic and where that comes from is as a manufacturer when you're.
Speaker Change: Facing tariffs, you're thinking about how do you balance out your costs.
Speaker Change: And your situation so you may start to shift shift your supply chain, change where you're manufacturing products you may change out raw materials, um, and you're most likely value engineering your products to swap out components or um you know, just change the overall design.
Speaker Change: In many cases, each of those require retesting. So for us, um, you know, regardless of tariffs, we follow our customers as they make the good business decisions that they make about their product cost their manufacturing locations their end market mix.
Speaker Change: Very helpful thank you.
The next question comes from Andrew Nicholas from William Blair. Please go ahead.
Speaker Change: Hi, good morning, this is Tom Rash on for Angie Nicholas. Thanks for taking my question.
Speaker Change: Um, I wanna touch on the Martin guy.
Speaker Change: I want to touch on the margin guy for 2025, so you plan to reach a 24% long term margin target, um, I was wondering if you can provide your thoughts on how you think about that and then jumping off point the 2026 and beyond and kind of the structural margin expansion going from there and how high can those levels can go. Thank you.
Speaker Change: Yeah, we, we appreciate the question, Tom, and.
Speaker Change: Uh, you're right at the time of the IPO we were coming off uh 2023 where we recorded 21.0% adjusted Ebi margin.
Speaker Change: And we had said that we had.
Speaker Change: A longer term targets.
Speaker Change: greater than 24% so that that would be a 300 basis point uh increase we're pleased to increase 190 basis points uh in 2024.
Speaker Change: And we were comfortable guiding towards approximately 24%, which would be another 110 basis points, uh, improvement this year, so.
Speaker Change: Moving towards those longer term objectives uh in our second year as a public company.
Speaker Change: Um, we're not gonna stop there. We do see opportunity in all three segments uh to grow from there we're not in a position to update that longer term guidance, uh, more precisely at this point, but we're, we're pleased with the progress that our teams are making.
Speaker Change: Thank you, and then on the certification and no certification testing in the quarter. I was wondering if you could provide some detail um on the balance between volume and pricing driving growth there and then if possible we can have that also at the segment level between industrial consumer. Thank you.
Speaker Change: You know, on, on a consolidated basis those two revenue streams in the quarter comprise about 57% of our consolidated revenue and.
Speaker Change: Uh, they lend themselves better to price volume, um.
Speaker Change: Comparisons because we we are paid to complete a test. There is a, there is a measurable unit of activity, um, and those revenue categories grew roughly 8% uh in the quarter and it was pretty even mix between price and vol volume and we're pleased with that, um, we're continuing to show the ability to uh gradually increase in compound price uh over time as well as getting increased demand and volume.
Speaker Change: Uh, from our customers.
Speaker Change: The next question comes from Andy Whitman from Baird. Please go ahead.
Uh, yeah, great, thanks. uh, I just, I guess I just wanted to talk about the margins, um, a little bit different way. I mean, obviously the, the, the quarter had very good adjustede down margin expansion, um, so I was just wondering, uh, maybe for you, Ryan, if you could just talk about was, was there a comp issue that made the Ibida expansion.
Speaker Change: So strong here. I'm just trying to think, you know, 350 in the quarter I would more than last quarter and and more than what you're guiding for the year ahead, so I just wanna understand um if there's something in there I think it might have to do with the prior year CSA expense that didn't repeat, but if there was anything else besides that, maybe you could just talk about um the build up to this year's margin performance.
Speaker Change: Yeah, thank, thank you for the question. I, I'd say the primary thing is operating leverage when we grow on an organic basis 9.5%, uh, we get disproportionate flow through so I think if you look at the relationship of organic revenue growth to organic expense growth.
Speaker Change: Um
Speaker Change: Top line is is the primary explainer um we did have some CSA expense in the 4th quarter of last year and that reduced operating income and adjusted Ebita.
Speaker Change: Um, this year we're adding back stock-based compensation.
Speaker Change: Um, but that's not the story. The dollar amounts are similar and if you look at.
Speaker Change: Um, operating income margin which uh removes that noise of stock-based compensation and CAS is about 300 basis points of expansion, so, so I would say, you know, overall we had good expense management, um, and when you grow businesses at this pace, you get higher flow.
Speaker Change: OK, yep, that makes sense, appreciate that and then um I guess 22 other ones quickly here just as it relates to the the potential pull forward.
Speaker Change: On the um ongoing cert test uh understand that it's always hard to totally deduce I thought your your data that you provided earlier in here about the 4th quarter being up 12% was helpful, but uh I mean the tariffs haven't been in effect yet. I would imagine it takes more than a few months, um, to kind of stockpile, I guess for lack of a better term.
Speaker Change: Are you seeing so far in the quarter that there's there's a downtick in the on the ongoing search or maybe you could describe why maybe you don't think that's going to at least benefit uh the first quarter here if not the second when we've got a little bit of a reprieve, a little longer reprieve than many expected, um, even if a couple months ago on the tariffs.
Speaker Change: Yeah, um, yeah, we're, we're not in a position to talk about first quarter, uh, activity yet and, and you're right, it's.
Speaker Change: It's difficult to know the exact drivers we can't objectively say that we had an increase in activity and help, help quantify that and and um.
Speaker Change: Following, um.
Speaker Change: clarity on the election and the likely impact on tariffs that that likely did have an impact, but, but it's very difficult to, to isolate that as a, as a single factor.
Speaker Change: And Andy, I would ask
Speaker Change: Customers have been facing tariffs since 2017. So when I'm out talking to them like I was just in Mexico recently. They've made a lot of decisions they make decisions around their product mix, they make decisions around how their value engineering they make decisions around where they're putting factories and in many cases those decisions, you know, they've they've, they've made them and now they're figuring out.
Speaker Change: You know, the right positioning for where they put their inventory or how they're going to manage their pricing, so this all plays out over a long period of time. And so we may have seen a little bit of a reactionary shift in the 4th quarter of customers were positioning themselves for 2025, but you know we're not expecting, you know, we're expecting it to all balance out over time as it always has.
Speaker Change: Yeah, OK, and then just a quick punch list one here, right? What's the um if if FX rates were to stay where they are now just for us to all calibrate our models here. What is the FX headwind either in dollar terms or percentage terms, uh, as you affect as you look at the 2025 revenue versus the 2024 revenue.
Speaker Change: Yeah, um, there, there have been some movements in the currency markets are.
Speaker Change: Um
Speaker Change: In, in local markets typically we do business in the in the currency of our customers so the euro and the yen, uh, the RMB, um.
Speaker Change: Based on current what the market is predicting as forward rates that would have uh just under 1% headwind on a on a reported basis for a full year 2025.
Speaker Change: Um
Speaker Change: And it certainly will be different than that number but that's what the the wisdom of the market right now, um, as a reminder our expenses in those markets we pay our people in those currencies, so the majority of those items, the majority of the revenue headwind is offset by an expense.
Speaker Change: Change
Speaker Change: And so as uh just put it in context we had revenue, uh, we have currency headwind in 2024. That was about $24 million in revenue but an EBA basis it had a $5 million impact, so 19 was offset with.
Speaker Change: The translation of expense reduction.
Speaker Change: Super helpful thank you so much have a good day.
Speaker Change: Thank you.
Speaker Change: The next question comes from Josh Chan from UBS. Please go ahead.
Josh Chan: Hi, good morning, Jenny and Ryan. Thanks for taking my questions.
Josh Chan: Uh, maybe a bigger picture margin questions, not that you have visibility into doing 24% put the margins that, that's the level is, is obviously solidly above what, you know, the, the company did pre-IPO obviously ahead of 23 and 2024.
Josh Chan: And so, I guess, as you
Josh Chan: Take a step back, you know, what is enabling you to achieve 24% margins versus maybe high teens to low twenties several years ago.
Josh Chan: I think the best place to start on that, Josh is really fundamentally.
Josh Chan: I'm in my 6th year here. Ryan's in his 8th year here. We each came, uh, from industries that have a strong focus on continuous improvement, um, we've put forth, you know, a number of changes both in a single global instances of technology that then have, you know, 2nd and 3rd order effects in business processes, productivity, and uh overall improvements on behalf of our customers and customer service.
Josh Chan: Uh, we continue down a path of location consolidation that gives us um you know.
Josh Chan: In our overhead, uh, we've extended our positions with our global and strategic accounts and really focused on uh their innovation needs and then down their supply chains and so it's not one singular thing. I think it's an overall attitude of continuous improvement that uh our entire executive team and and leadership team has as a philosophy.
Speaker Change: Great. Uh thank you for that, Jenny, and, and congrats on that. Um, and then, uh, for your 2025 guidance of mid single digit organic growth. I was wondering if you could give us some color in terms of the drivers behind, you know, volume versus price versus uh lab capacity increases kind of how much all of those pieces are adding to, to the total organic growth. Thank you.
Josh Chan: Yeah
Josh Chan: Um, thanks for the question. I, I would say we expect continuation of what we experienced in 2024, so we're still making progress on our pricing processes we're still expanding capacity, uh, we're still improving our go to market processes and acquiring new customers and growing our share of wallet.
Josh Chan: Um, so I, I would say we, we don't anticipate a material change in the mix of what what's driving revenue growth.
Speaker Change: Great. Uh thanks, Ryan, and thank you both for your time.
Speaker Change: The next question comes from Stephanie Moore from Jeffreys. Please go ahead.
Speaker Change: Good morning. This is Carol Anta on Stephanie Moore, so I guess um just wanted to touch on the M&A front, you know, you guys have done.
No, um, um, if you tech acquisitions in 2024, um, just wanted to know how you're thinking about 2025, uh, on the M&A front, uh, would you be, uh, is a company interested in uh looking at doing any platform or larger deals or just continue to focus on on talking deals, um, any specific segments the company is looking to target um um anything around, you know, you, um, M&A policy would be great.
Speaker Change: Thanks Harold and uh we've we're very active in every one of our segments in being in conversations, uh, all over the world, you know, for.
Speaker Change: Uh, any size scale that makes sense with our strategy and our strategy is around product safety, our strategies around product safety being propelled by those mega trends and what we find, uh, time and time again in these conversations is because we've been in business for 130 years and we're recognized as an attractive permanent home.
Speaker Change: For many founders across safety security and sustainability in product tech, um, you know, the way we see it is M&A timing reflex opportunities as they're presented to us and as we go through that analysis around strategic fit, um.
Speaker Change: The, you know, interface with the mega trends and uh overall supporting our mission so that's how we think about it.
Speaker Change: Great, thank you, um, and I guess, um, you know, you guys have you know looks as though you know you have several megatres of focusing on, but in the global H5 it seems as though that's been a really like the company is leaned in, so you know if you could.
Speaker Change: You know, talk, discuss, and then, uh, did the mind trends you're seeing there and any other increased investments um with with respect to your law that you'll be trying to make in 2025.
Speaker Change: I guess just to piggyback off the last um question. I'm sorry if I missed it, but could you provide, you know, your, um, what you expect pricing to rent in 2025, um, uh, what's internal internal inflation running in the company and I guess on those price increases any push back you're getting. Thank you.
I'll start with the mega trends and then I'll let Ryan answer the pricing uh our continued focus on that global energy transition. It's real, so, you know, we've uh completed last year our Auburn Hills, Michigan battery Lab are uh Korea battery lab we've, uh, announced uh extensions, uh, into, uh, our Mexico labs that also reflect the needs that are tied to these underlying trends in the global.
Speaker Change: Energy transition and the electrification of everything, uh, we also announced, uh, just last week our global fire Science Center of Excellence, uh, investments that we're making and where that really fits in again on this energy transition on these mega trends is testing the the building and the fire safety and one of the biggest challenges in battery safety is thermal runaway and so testing connectors and closures and other building and fire safety.
Speaker Change: Products is essential and this is needed all over the world and we're also excited about investing in a greater degrees of applied R&D in those areas.
Speaker Change: So we're continuing down our trajectory of cap X uh to support uh these what we view as exciting developments, uh, in all parts of the world, and they are connected, you know, as I said earlier, when you look at digitalization and you talk about uh the way that that's changing, uh both consumer technology, uh, it's also changing the, the power energy needs in data centers and that is contributing to the increased.
Speaker Change: Uh, growth in our uh generation changing the needs around transmission, changing the needs around storage, changing the needs around usage, um, so it all fits together, uh, with both our industrial and our consumer business and we love these megatrons.
Speaker Change: And then in regard to uh internal inflation, um.
Speaker Change: We, we've definitely seen a moderation in the last two years in wage inflation compared to a few years ago it's still a competitive market, uh, for talent, uh, people costs are our largest expense.
Speaker Change: Um
Speaker Change: But I would say it's a, it's a slower pace of growth we're pleased that we offset that last last year uh with our pricing initiatives, um, so at this point we're not anticipating material headwinds in.
Speaker Change: Uh, wage and other cost inflation.
Thank you.
The next question comes from Arthur Truslove from City. Please go ahead.
Arthur Truslove: Hi Danny. Hi Ryan. Thanks very much for uh taking my questions, um, a few if I can, um, first question from me, um, obviously, uh, there could be a reasonably substantial FX headwind in 2025.
Arthur Truslove: Can you, which obviously you touched on, can you just talk about um the the impact on margins arising from FX because clearly you're uh your peers talk about this quite a lot and I was just wondering whether you could sort of say, uh whether there is a margin headwind arise or indeed tailwind arising from um FX.
Arthur Truslove: Second question, um,
Arthur Truslove: You talked about the potential pull forward of revenues within ongoing certification.
Arthur Truslove: Um, are you able to say, um, you know, whether that was within the industrial division or whether it was in the consumer division or was it indeed a bit of both keen to sort of understand um a little bit about that and then I guess the third question really on the consumer side, um, so obviously margins that were a little bit below what consensus had in mind but obviously still up. I was just wondering if you could talk about how significant
the contribution of staff incentives were to any margin headway and I just wanted to confirm that it was right to think that any in any sort of staff bonuses awarded in Q4 or creed in Q4 would relate to the full year 2024, so not just Q4 performance, um, thank you.
Arthur Truslove: Yeah, I'll, I'll start by by going a little bit deeper into foreign exchange and the.
Arthur Truslove: The impact of of our on our business model, um, and.
Arthur Truslove: The current, the current forward rates would imply roughly a 1% uh headwind.
Arthur Truslove: Um
Arthur Truslove: I would say to to.
Arthur Truslove: To see the impact on our business.
Arthur Truslove: We do break out historically the impact of FX on a constant currency basis, uh, in revenue and on operating income so you can infer the impact on um.
Arthur Truslove: On
Arthur Truslove: Expenses and we do that also by each segment, uh, so there's a fair amount of detail on the historic relationship.
Arthur Truslove: We are, we are a profitable company, so when there is a reduction in revenue.
Arthur Truslove: That's more impactful than the reduction in expenses, so it does it we're not immune to it but it's offset it's mostly offset by uh reduction in the translated cost of of expenses.
Arthur Truslove: Um, I would say you and you what you will see in that by segment is that our consumer segment uh is.
Arthur Truslove: is
Arthur Truslove: More susceptible to FX changes, uh, it is a very global business, um.
Arthur Truslove: Uh, all of our businesses are global, but that, but that business in particular, uh, has had a bit more FX volatility.
Arthur Truslove: OK
Arthur Truslove: Uh, and then ongoing certification, uh, services, um.
Arthur Truslove: did
Arthur Truslove: In in my comments we talked about it in the context of industrial, um, so it's reasonable and for that it had a larger impact on industrial and consumer.
Arthur Truslove: Um, but ongoing certification services are important revenue stream, um, for both our consumer and industrial segment we don't break out that that revenue, those revenue streams, uh, by segment, um, but it is reasonable to think that that was a bigger impact in industrial.
Speaker Change: Incentives on consumers, yeah.
Arthur Truslove: Um
Arthur Truslove: So we, we recognize incentives in our expenses, uh, over the period in which we're earned that they're earned, so there weren't material changes in the 4th quarter.
Arthur Truslove: related to incentives.
Arthur Truslove: compared to last year there were changes in the geography in which they're reported and what those incentives were from cash settled incentives to uh stock-based compensation.
Arthur Truslove: dollar amount in the Q4 of last year and Q4 this year was very similar.
Speaker Change: The next question comes from Shlomo Rosenbaum from Stiefel. Please go ahead.
Shlomo Rosenbaum: Hi, thank you for taking my questions. uh, Jenny, you touched on this a little, but maybe you could take, uh, you know, just go back and give us some more detail on what's going on in the demand for the battery labs and are you uh thinking of uh building new ones, you know, uh, can you discuss any plans you might have over the next several years in that area, um, and that you've mentioned I think beforehand a lot of what you're building you have a lot of kind of I don't know if you call it pre leasing, but a lot of demand to.
fill it up, um, you know, can you discuss, you know, how this is trending and is this going in the way that you thought better, you know, worse, just start on that and then I have a couple of follow ups.
Shlomo Rosenbaum: Great, uh, our battery testing business is going very well and when you step back and look at the progression, you know, we opened Changzhou, China in 2021 we opened, uh, we, you know, then announced the Korea battery lab. We announced the building of the North American battery lab and last year we did the acquisition of battery engineer in Germany.
Shlomo Rosenbaum: Uh, that serves as a, as a hub for a European uh battery lab and perspective so we've got global coverage and uh we continue to see uh this growth in battery testing needs, uh, not just in vehicles, but in vehicles you need to not just autos, you know, buses, commercial vehicles, construction equipment, agricultural equipment.
Shlomo Rosenbaum: had electrification of everything is occurring across all vehicles.
Shlomo Rosenbaum: But even more broadly than that, uh, the energy storage systems that are required as there's a shift in energy sources, you know, or you set to renewables, the more opportunity or requirements or needs that there are to uh store that energy that's created uh for you sometimes that uh not out of the wind's not blowing, so the rapid growth and the AI data centers also contributing.
Shlomo Rosenbaum: Uh, to the types of industrial scale batteries as well as just the overall industrial environment as they're shifting uh their sources of fuel and adding in their needs for energy.
Shlomo Rosenbaum: So
Shlomo Rosenbaum: So we are very pleased uh with what's going on in our battery labs and uh we continue to believe.
Shlomo Rosenbaum: At this global energy transition uh will propel that business.
OK, thank you, and then Ryan on slide 11 in the presentation, you have a comment on the margin the revenue growth partially offset by increases in services and materials.
Speaker Change: Uh, is, is, what, what does this mean exactly? Is that wage inflation like what are the materials and what are the services do you have consultants in there?
Shlomo Rosenbaum: Yeah, um
Shlomo Rosenbaum: So sometimes when volume grows we we.
Shlomo Rosenbaum: subcontract a portion of our testing services, uh, to other parties, some, sometimes, uh, a test is very complicated and we're accredited uh for every part of the test that needs to do and need to be done in other times we choose to work with partners, uh, for portions of it.
Speaker Change: Uh, so the comment there was just with 13.9%.
Shlomo Rosenbaum: organic revenue growth.
Shlomo Rosenbaum: Our
Shlomo Rosenbaum: Expenses related to our volunteer related expenses related to.
Shlomo Rosenbaum: We put it in a category services and materials broad category, but it's mostly outsource labs and professional services and let me add Slomo, I think you'll risk our our capex philosophy is that we want to uh understand what the demand is in the marketplace in advance of us, uh, committing capital and so what you also see sometimes in services and materials is that we're out there working with customers to service their demand, but we haven't completed our capacity.
and therefore we need to uh supplement that with outside professional services.
Shlomo Rosenbaum: Is that what was going on this quarter was primarily there's so much uh volume that it was mainly subcontracting to handle the volume.
Shlomo Rosenbaum: I would say it was both.
Shlomo Rosenbaum: I would say it's both we we are um.
Shlomo Rosenbaum: We're evaluating some new service lines.
Shlomo Rosenbaum: Um, and
Shlomo Rosenbaum: Uh
Shlomo Rosenbaum: A mix of that is third party services and that may change over time if we see sustained demand that fits.
Shlomo Rosenbaum: Uh, with our customers' needs and ways that that provide attractive returns we may bring that capability.
Shlomo Rosenbaum: In-house over time.
Shlomo Rosenbaum: Great thank you.
Shlomo Rosenbaum: Great. Thank you very much.
Shlomo Rosenbaum: The next question comes from Jason Haass from Wells Fargo. Please go ahead.
Speaker Change: Hey, good morning and thanks for taking my questions. I'm curious if you could talk about the drivers of the acceleration in the software business, which was nice to see. I remember last quarter you announced the win of a large beauty retailer, so I was curious if that um helped drive that acceleration. Thanks.
Speaker Change: I'm so glad you asked because I love talking about uh the prospects of our software business and in particular the way that Ultras our platform is helping contribute to growth there and um we saw software growth really in all of our businesses and all of our regions. I do wanna give a little shout out to our Japan team. They're out there, uh, doing a great job with software, but um we're we are seeing is to your point particular strengths in the retail product compliance, um, so you know, as we indicated last.
Speaker Change: order a large beauty retailer, uh, coming on to, uh, our works platform, um, which extends through their supply chain. We also saw strength in ESG, uh, data and reporting, as well as, uh, you know, the benchmarks offering that we have that, uh, you know, really helps, uh, compare and contrast, uh, the, the strength of processors in um in systems so.
Speaker Change: You know, I would say our sales transformation is taking root.
Speaker Change: Um, the things I've been looking for is, you know, is renewal turned down is average contract renewal times up are we seeing improvements in annual recurring revenue. Are we seeing increases in bookings and um.
Speaker Change: You know, all of these things contributed to our 4th quarter organic growth and software.
Speaker Change: That's great to hear.
Speaker Change: You still have plenty of capacity and the existing facilities you've built, um, are, are you waiting to see how, how supply chain shifts, um, just any insights to how you're thinking about that would be helpful. Thank you.
Speaker Change: I'll start our teams have no shortage of good ideas. They're out there talking to customers every single day, uh, from our field engineers who are, you know, making hundreds of thousands of visits in a year to customers, uh, factory locations to our engineers and our safety scientists who are getting insight into new product development pipelines, uh, to our global and strategic accounts managers who are out there talking, uh, with our largest customers, those.
Speaker Change: customers all over the world, so no shortage of ideas that come in and then you know our process is to really evaluate, uh, where do we believe uh those services, those needs are durable and then what is the best way for us to be providing them and we continue uh to really fundamentally uh be very pleased with the outcomes of our capex, our return on on capital there and uh
Speaker Change: continue to invest where there are great returns.
Speaker Change: Got it thank you.
Speaker Change: This concludes our question and answer session. I would like to turn to the conference back over to Jenny Scanlon for any closing remarks.
Speaker Change: Thank you everyone for joining us today as always we appreciate your support and we look forward to updating you on our progress in the next quarter.
Conference has now concluded. Thank you for attending today's presentation. You may not disconnect.