UL Solutions Inc. (ULS) Earnings Call Transcript & Summary

I'm Andrew Steinerman. Welcome to the Ultimate Services Investor Conference. This is the UL Solutions discussion. To my right is Jenny Scanlon, CEO; and to her right is Ryan Robinson, CFO. They're in the TIC industry. That's Testing, Inspection and Certification. And I've really enjoyed learning about your industry over the last couple of years. It really has, I would think, for U.S. investors or U.S. analysts come to be appreciated as one of your best business services subsectors that I cover. And I just want to say thank you.

So here's a funny question, Jenny. Out of the T and the I and the C, which of those businesses do you like the best? And why?

I love them all.

I'm sure you do.

So -- and as you know, we've got 2 businesses and 3 segments. So 2 of our segments are in the Testing, Inspection and Certification. And of that, 33% of our revenue is recurring, and that really comes from that inspection side, the ongoing certification services. And so that's a really great ongoing engine for the 1/3 of our business that comes from that. So I probably like that best from a revenue stream. But the most fun thing you can do is watch products being tested. I always say we light things up, we blow them up, we drown them.

Keep us safe.

I say we have to do inherently unsafe things to keep people safe. And so it's really satisfying to visit our labs and watch those testing processes.

So talk a little bit about industrial tech versus consumer tech and where you've kind of favored the company. Certainly, industrial tech has experienced higher organic revenue growth than was previously talked about back at the IPO.

Yes. Industrial -- the difference between industrial and consumer for those of you who don't know us, first of all, we're a mission-driven growth company. Both of those segments grow. And both of those segments fulfill our mission of working for a safer world. The real distinction is in industrial products, which we've segregated our customers into those who are largely in the B2B space are industrial. Those are big risky products. And if something goes wrong, it's not just reputationally destroying. It's not just a big insurance claim. People can die. And as a result, the value of testing to standards and complying with those standards, the value of that to protect our customers is pretty high. Consumer also can be pretty risky. Lithium-ion batteries in hover boards or e-mobility devices or your laptops, those blowing up have thermal runaway and can cause real damage very quickly. But there's also a lot of performance and quality testing that goes on in the Consumer side that's still trying to keep our customers' brand reputation safe and their customers safe from unfortunate things happening. But often the risk in the Consumer side is less. And as a result, there's a different value proposition on pricing. And they're also smaller products, and they actually require more human intervention to test.

Okay. So would you say that Industrial product TIC is really your top focus?

They are connected, but industrial is the core of our core. If you look back 130 years, we were founded around electrical safety on the heels of the World's Fair in Chicago in 1894 when Tesla and Edison were fighting over AC and DC Current and GE and Westinghouse. But the trick was our founder was brought to make sure that electricity being embedded in products was safe, and the way that it was installed was safe. And that went to electrical shock as well as fire. That is still the core of our core. And that is Industrial. The largest part of Industrial is in the core of our core.

That makes sense. Okay. So Industrial, TIC, for you guys have been growing high single digits. I know that is somewhat of an outperformance. And could you just give us a sense, particularly kind of looking back on this year, what's driven that outperformance within Industrial? And then you could imagine my follow-up question is, okay, is high single digits sustainable for the Industrial side of your business?

I'm going to give Ryan a chance to weigh that.

Sure. Well, thank you for the question, Andrew. Our growth in Industrial has been driven by several megatrends that have moved the business forward for several years. So 2023 was double-digit revenue growth. 2024 was double-digit revenue growth, and we're high single-digit revenue growth in Industrial this year. So those megatrends include energy transition. So the sources of electrical energy generation, now the quantity of electrical energy generation, the growth and proliferation of devices that connect to the electrical grid, driven by new and innovative uses of electrical energy, including data centers. And that leads to more and more products that need testing, innovation and new types of energy storage, energy transmission devices. And I don't think we're through that product cycle. I think that will continue for some time.

Right. So did you say is high single-digit growth in the Industrial side sustainable?

We have not given guidance beyond 2025, nor have we signaled any material change in the trend of the business.

Okay. Something that you could tell me if I'm off here, Ryan, but the question I get the most is what percentage of UL's revenues are tied to data center or renewable energy that's tied back to data center. And I don't think I've ever seen a revenue mix chart that kind of neatly answers that question.

Yes. So foremost, it's helpful to ground that UL is a broad and diverse business, and we touch many different industries, at least 35 general industrial codes. And data centers are a driver of growth. There are more and more products that are being redesigned for specialty uses like data centers, energy transmission systems, energy storage systems, cooling systems. And we have not broken out what portion, but it is affecting many parts of our business, and it depends on the scope. Things like wind energy generation, we test wind turbines, photovoltaic panel arrays for energy generation, energy storage systems, all are being affected by the quantity of electrical energy, even if they're not specifically used within the 4 walls of a data center.

So would it be hard to break down a pie chart like that? Like I remember your IPO pie chart did not break out data center. Like is this a hard thing to do?

Let me add to that. It's -- what makes it difficult is that, put yourself in the manufacturer's shoes, they may not be making products specifically for data centers. So you take a big chiller manufacturer. You've got your beautiful new building across the street. They probably put half a dozen chillers on top of that.

No. They're on the floor.

They're on the floors. There you go. And every data center needs well over 100 right now if it's an AI-powered data center. Well, that manufacturer may not necessarily, at least in the onset, be distinguishing that, that innovation is going to go into a data center versus not? Maybe they are. But when we test, we don't always know what that end use case is because we're testing that it's safe. And so that makes it a little more difficult for us to break it out. But that said, what I want to emphasize is whether your data center or in the Industrial environment, the need to optimize energy usage to reduce the cost of energy is essential. And so all of our customers in that energy ecosystem are really focused on the innovation around how do they create products that are using less energy that are doing a better job of storing energy, that are thinking about being a backup source for energy. And I've not seen it, but I have this hypothesis that similar to Moore's Law and computing power, we're going to see some type of law in energy usage and rapid proliferation of product innovation, which we're seeing today across our Industrial customers.

Okay. So Ryan, this one is also for you. So the margin expansion, the EBITDA margin expansion with Industrials has been really impressive. Is this just operating leverage tied back to the strong growth? Or are there things within the company where your mix shifting to higher-margin testing types? I'm not really sure. I'm just asking, is it all operating leverage?

Yes. So there are a number of initiatives that are improving margins and operational efficiency across the business.

In Industrial.

In Industrial, so footprint optimization, consolidating where we do the work, broadening our service offerings, including large.

A footprint, you mean more labs. Is that what you mean?

Yes, location and the role of the laboratories.

Moving them to lower electrical cost locations as well that can change.

Yes. We made some progress in our pricing initiatives that contribute to margins and revenue growth. We've continued to grow internationally. We've grown in a number of new markets outside the United States, and all those contribute to operating leverage.

Okay. And how is utilization in your labs now? That's not just an Industrial question, that's the overall TIC question. Like is there still a lot of room left that you could fill in and have high utilization that will drive margins?

Yes. I would say there is. We measure our laboratory utilization across a number of different service lines. And we have some laboratories that are fairly capital intensive, and we seek to run them 24/7 to maximize the use of those facilities. And we have others that are not utilized to that capability to that capacity. So over the network, there is more capacity.

Yes. And I do want to point out, there's a number of different ways to extend utilization and productivity in labs that's different than a typical manufacturing environment. We don't have to add a full line to add capacity. Let's say there's a new test type. You may just need to buy a new piece of equipment, and you've already got a technician or an engineer trained on that standard, but there's a different, more productive way of doing it.

Okay. Consumer, I remember going back to second quarter, had a blip. I remember it was tariff-induced or tariff uncertainty. Do we feel like that's all behind us? Like when you look at the Consumer Product division, is pipeline growing through the summer now? In other words, have clients totally adjusted to the current tariff situation?

I think our customers have adapted to the new normal. I don't think they necessarily know what all of the answers are, but they continue to realize that they have to make decisions that will benefit their long-term profitability and those decisions may be moving their plant locations. It may be swapping out those raw materials, changing features and functions or just increasing prices to consumers. They're doing it all.

Right. And when your clients kind of switch their supply chain or diversify their supply chain, does UL Solutions make more money?

We -- typically, if a product is changing its design, swapping out raw materials, getting a new supplier, we will need to retest some or all of that product. If you're moving a factory location, we will frequently certify that factory location if it's back in the United States to building codes and other ways to help get that plant started up. If you're doing, let's say, a China Plus One strategy, now we'll do those ongoing certification services. Those inspections maybe will continue in China because you're still producing there. And we've added another location in Vietnam or Indonesia or somewhere. So there's lots of ways that you get a small bump as a result of all of the shifting supply chain.

Right. The Consumer margins aren't as high as the Industrial margins. And my guess is it's -- of course, Industrial is your core of your core. How sustainable are the margins in Consumer? And should they go towards Industrial margins over time?

Yes. They will never be as high as Industrial margins. But that said, they've crossed over 20%. And I think that it's sustainable for them to continuously improve. The reason why they will never be as high as Industrial margins is there is just inherently a lot more human labor involved in testing Consumer products. So you think about just even the number of samples to bring a sample and I'm going to go back to chillers. A truck shows up at one of our labs, there might be 2 samples on it. You've got a couple of engineers and a couple of technicians who take a little bit of time to make sure that product meets all the features and functions and then they start launching the test. And that test series, it could be 3 months, it could be 6 months to get through it all. On the Consumer side, you may have 1,000 samples coming in a day to a lab. You've got to have human beings unwrap those samples, log those samples, get all the metadata about those samples and then run through those in 3 days and turn around and get that certification back out the door. It is just much more labor-intensive in our Consumer business.

Okay. If we could -- let's go back to data center and the growth around renewable energy. I know there's data center build out around the world, but more so in the United States and out of the global TIC companies, you're the one that's based in the U.S. Do you feel like you're getting a disproportionate share of those opportunities in the U.S. related to data center and renewable energy because you're based here and culturally aligned?

Yes. And I also think -- there are 70 UL standards right now that we've identified that we're testing to for data centers. And it's always helpful for our customers to know that we at UL, even on the solutions side, on the commercial side of our enterprise, have been involved in the crafting of those standards and the science behind those in the advocating for what our customers believe that they need to see in that standards process. And I think that relationship with our teams sitting on standards, technical panels all over the world, not just UL standards, but ISO, IEC, other standards, our investment in that thought leadership gives us a leg up with new innovation in very complex safety risky products.

Right. And do you think that's enough to say that you'll grow faster than the overall TIC industry because you're U.S.-centric, the data center build-out is U.S.-centric. You have these reputations for trust around standards. Is that such a needle mover to say that alone will drive above-industry growth?

I think historically, if you look at it, we have grown at above-industry rates. And as Ryan said, we don't see any reason to have changed our feeling about that. So I think we'll continue to be leaders in this space.

Right. You could use the word you want, but I would say you've grown a little faster than the industry. Given the data center build-out, shouldn't this be kind of a more uplifted outperformance relative to the industry?

Yes. I would say it's a different business mix. And some of the other more broadly defined testing inspection certification industry participants, they participate in other industries that have their own cycles. And so there just could be differences in the business.

Yes.

That's true. That's true. Okay. Why don't we open it up for questions? Are you considering opening up new labs? Obviously, when you think about where the business should be done and you mentioned the cost of electricity, like it just makes me feel like maybe that you have to refootprint your labs.

We have been. So for example, even here on Long Island, we announced a shift from Melville and closing down that lab that had originally been opened 40 years ago plus focused on products being exported to Europe. We've been shifting that footprint, moving out of that space and shifting that down to Mexico up to Northbrook out to Research Triangle Park. We continue to do that around the world across the board. So we'll constantly look for ways in which we can run our labs in a more integrated fashion and have a smarter footprint in what we've been doing.

And so to meet kind of U.S. standards for safety, you don't necessarily have to be in a lab in the U.S.

No. In fact, our customers prefer that, that testing occurs close to where their R&D is occurring.

Makes sense.

And that way, there are some tests that are witness testing. There are sometimes that they want to adapt the product while they're there in the lab. So we tend to go where our customers go, but we do have a very strong North American U.S.-based footprint.

So I know I've been asking a lot of data center questions. Why don't you just tell me other areas that you're excited about heading into '26, where you feel like your specialty will really bode well for growth?

Yes. One of the areas back to labs, we announced our new fire research Center of Excellence in Northbrook that we had a groundbreaking in August. It won't come online until 2027, but it will continue to extend our research in fire safety, our leadership in fire safety. So we're excited about that investment because that's an investment that's -- I mean, that's an asset for decades. It's not an asset for a few years. And then I also think just when you look at our software and advisory space, extending -- doubling down in some key areas in software such as our supply chain traceability and that connection into ESG reporting is an area that we expect to see continued uplift.

Ryan, before when I asked you about -- it was really about Industrial operating leverage and margin expansion. You mentioned higher price realization. My question is, in the past -- and maybe we'll talk more generally, not just Industrial. In the past, when I asked you how much of your organic revenue growth comes from price, how much comes from volume, you said there are similar contributors. And now that we're getting more price, is it fair to say that it's a larger contributor to organic revenue growth? And is it sustainable?

Yes. In the last quarter, we had about 7% revenue growth, and we said that there was similar contribution from price and volume in our testing activities, our certification testing, our non-certification testing, and we're pleased with that mix. We're always striving to add more value to our customers to deserve to be appropriately compensated for the value that we're providing, and we're looking for ways to do that. So we think that there's still opportunity to serve our customers better and better. And hopefully, we'll be compensated for that. Right.

And in terms of pricing -- rational pricing from competitors, like has this been a market where you felt like your competitors that also provide TIC services have also been increasing price?

What we focus on is win rates of projects. And we continue to believe that our value proposition that we're offering is very competitive and that our win rates and our Net Promoter Scores continue to go up.

Have you disclosed your Net Promoter Score?

We have not publicly disclosed it, but it is something we track very closely, and we're pleased with the continued progression there.

Do you consider disclosing that?

We might. We might.

I'll have you know this some companies put it in their annual report. Is it a third-party measured Net Promoter Score?

Yes. Okay.

Yes, I would think about sharing that. Okay. Great. Look again for questions. If not, I'm going to jump into Software and Advisory business. Go ahead.

[indiscernible]

Yes. Rather than compare to any particular company, we can talk about the attributes of that business model. And most importantly, that team, the Industrial segment team serves the manufacturers of higher risk, often mission-critical devices. The failure of those could lead to material safety risks or productivity or uptime consequences. So often, they're more complicated products. They could have a number of mechanical and electrical subsystems that need to be tested. Importantly, many of those manufacturers highly value the UL mark to communicate the quality and regulatory compliance of their products. So that's a valuable attribute. And then the mix of services is different than some other businesses. So we're pleased that -- pleased with the profitability of that business and then it's been growing pretty materially over the last several years.

Okay. Another question.

[indiscernible] everybody just [indiscernible]

What we saw in particular in Consumer in the second quarter, and it was really in the month of May was a number of customers delaying making decisions, delaying getting samples to us. Maybe they said, "Hey, you've won this quote, you're going to test this product, but then the samples didn't show up. The prototypes weren't there." And some of that was because they were regrouping on their product design decisions, how they were going to take cost out, value engineering those products, maybe thinking about moving the assembly locations. It's easier to move assembly in Consumer than it is to pick up and move an Industrial plant. We're feeling like it's back to a more typical cycle for us, what we're hearing from our customers. So hard to say. We're keeping an eye on it, but it feels like they worked through that first set of emotion and now we're just trying to make rational decisions given the availability of whatever information they have on any given day about where tariffs are going to land for them.

I'm going to go back to one of my earlier questions where I was asking about what percentage of particularly your Industrial business is tied to data center and renewables. And I remember you said, hey, we're really tied to like 35 different industries. Does that mean that when you look at both the direct and indirect? And then Jenny, I hear you that you're like, hey, for cooling manufacturers is our customer, we don't know who they're selling to. But do you think -- like we use a word like a lot of our Industrial business is tied directly or indirectly a medium -- like just use some word. I know you're not going to give a percentage, but is it the majority tied to data center and renewable energy within Industrial? Or just some qualitative word that helps us dimension it, direct and indirect together or you could say pass.

Yes. Well, and I'm going to say pass only because it would be difficult for us to really parse through that granularity of data.

I thought your answer was [indiscernible].

Yes. But if you look at back to the key markets within our Industrial business. So power and automation. Power and automation is being affected by this massive energy transition that's underway, and data centers are propelling that energy transition. So the indirect could be the data center that's being built in Indiana is going to suck up the capacity of a medium-sized town there, electricity-wise. So now you've got to find other ways to save energy and generate new energy to compensate for the fact that, that data center went in.

Agree.

So power and automation directly, indirectly, it's all around this need for energy, the growth for energy, the energy transition. built environment, the thermal dynamics, the fire suppression systems needed for data centers. Interesting and substantial, but there's a lot of interesting and substantial needs for the built environment around fire safety. So data centers don't feel disproportionate there. Wire and cable shift from AC to DC, different size, high voltage, medium voltage. Again, data centers are using that, but so is the Industrial environment.

Okay. Last question. Where are you in your own internal investment cycle? When we think about like '26, is this going to be a bigger internal investment year? We talked a little bit about opening up labs. But do you think of '26 as an investment year? Or do you feel like, oh, we've been investing all along, not notably different.

Yes. Over the past several years, we've increased the pace of capital investment back in the business relative to the period before that. That eased somewhat in 2025, but we said a lot of that is timing. We see a lot of opportunities to continue to invest in growth of the business. And I think it will be in different forms. We have made a lot of progress in the enabling technology infrastructure of the business. And we've announced some exciting capacity expansions. A couple of examples. In Japan, we announced a new laboratory of high-voltage electromagnetic compatibility testing to help make sure high RPM, high-voltage electric motors are safe and don't inadvertently interfere with other parts of the automobile ecosystem. We announced a new fire laboratory that Jenny mentioned in Northbrook. The majority of that spending is in both those started.

Right. But just say again, is '26 more of a capital-intensive year than '25?

Yes, we haven't given that outlook, but we have said some of the reduction in '25 is timing so that would mean that it would be in 2026.

That's what I meant. Okay. Great. Time for one last question if someone has it.

Maybe just on software [indiscernible].

Yes, I wanted to get to that. Yes. Sorry, go ahead.

It's been a little while since you introduced sort of the ULTRUS [indiscernible] around it. How much of the opportunity there? Is cross-selling to existing customers, other software solutions [indiscernible]?

Yes. I think it's definitely both. So the cross-selling opportunity, both -- we've said a significant portion of our global and strategic accounts buy from both TIC and Software and Advisory. And continuing to extend our reach into those customers with new features and functions and new opportunities within the ULTRUS platform, it's really been benefited by the search engine optimization and other abilities to serve up marketing pieces, try now, buy now types of opportunities once they're within ULTRUS. But we're also just continuing to see new avenues, new customers who better understand the fact that we win different awards for leadership in the governance, risk compliance, various slices and dices of the software space and are really recognized as a leader in many areas, and we're getting new logos there.

All right. Jenny, let's end there. Thank you, Ryan. Thank you, Jenny.

Thank you very much.

Thank you.