UL Solutions Inc. ($ULS)

Good afternoon, everyone. I'm Curt Nagle, Senior Business and Information Services analyst here at BofA. This session is UL Solutions. Really, really pleased to have Jenny Scanlon, President and CEO; and Ryan Robinson, the Chief Financial Officer, with us. We're going to start out with a few prepared remarks and a quick presentation from UL, and then we'll go into some fireside questions and then time permitting anything from the audience.

Perfect. Thanks, Curtis. We're going to do a rapid fire round of what's available out on our investor site. But just to ground people in who we are and what our industry is because we really don't have peers here in the United States. Let's go, safe harbor. There's 5 key messages that we'd like to deliver to prospective shareholders about our company. The most important one to start with is we are mission-driven. Our mission started in 1894 as a not-for-profit focused on addressing the safety science of the new technology of the day, which was electricity. That continues today. We are a global industry. It is fragmented. It is large and it is consolidating, and our mission distinguishes us in that industry. That mission results in us remaining dedicated to applied safety science as well as sustainability. And our customers tend to call us first when they have a safety science issue of some type of technology that is new and different and innovative or old technologies that can continue to present safety challenges. Our customer relationships run deep and last a very long time. My former company, USG Corporation, has been a UL customer since 1913, and we have many customers who have celebrated 50-plus years of working with us. And that matters because that delivers our recurring revenue streams as well as brings in reoccurring revenue when they build new product innovations and need those tested for safety, security or sustainability. We're global. We've got great scale and operating leverage. We are close to the world's manufacturers, and we've got a great balance sheet. It is healthy, investment grade with strong cash flow and a very disciplined capital allocation strategy. You've seen the Mark. You've seen it everywhere. Go home and have your kids count if you need to distract them, they will find dozens and dozens. This Mark represents that those products are safer than they would otherwise be and that those products have passed important safety certifications. Last year, we did $3.1 billion in revenue around the world with just shy of 15,000 employees, 14,500. We are the leader in product safety testing. We do this in 3 segments: industrial products, consumer products and then software services, software and advisory services that focus on the needs of those product tick manufacturers. And we measure our revenue by customer geography. This is not where we do the testing work. This is where our customers are headquartered. So 41% of that headquartered here in the United States, 25% last year headquartered across Greater China, which includes Hong Kong and Taiwan; and then Middle -- Europe, Middle East, Africa, largely Europe on that 17% and then Asia Pac and the rest of the world. We have 4 major service categories, and Ryan is going to take us through those.

Great. We group our services into 4 primary categories. First is certification testing. That's largely driven by regulatory requirements, and it occurs before a product goes to market. So often, there's a requirement to be lawfully sold or imported. Some authority that has jurisdiction requires an independent accredited laboratory to test and certify products to make sure they meet applicable standards. That's 28% of our revenue, but it doesn't stop there. 33% of our revenue, 1/3 of our revenue is a recurring revenue stream called ongoing certification services. And there needs to be a process to make sure that products continue to be manufactured in a manner that's reasonably consistent with the original samples we tested. So we send field engineers to every location where a product is manufactured, typically at least 4 times a year on an unannounced basis to observe the manufacturing process, look in the stock room for the components, pull supporting documentation regarding the manufacturing processes to help ensure the original product quality, safety, integrity and compliance is maintained. Part of that process is we license the UL Mark to the customer to put on their products so they can communicate quality, safety and compliance to their customers and to those authorities that have jurisdiction, so their products can be sold in those markets. So construction projects can be completed, so certificates of occupancy can be granted in the construction process. Another 30% of our revenue, we call non-certification testing and other services. So this can include performance or quality testing that may not be regulatory driven. So it includes softlines and hardlines testing, things like toys or apparel, private label products for the world's largest retailers. Also, this revenue category includes wireless product testing. And there are a lot of wireless devices connected to the Internet where governmental authorities, including in the U.S., the FCC or other authorities in other countries require wireless products to be tested to make sure they don't inadvertently interfere with other wireless products. And then finally, about 9% of our revenue is enterprise software, focusing in helping our customers reduce risk and enhance compliance in important areas including their supply chain insights and their sustainability objectives. A bit about the global testing inspection certification industry. It is a large and diverse industry. It's a broad term. So in total, over $240 billion. A portion of that is done within the manufacturers' product design processes themselves and is in-house. $99 billion on an estimated basis is outsourced. And then of that, about $38 billion is specifically product and component testing inspection and certification. And this is where we focus, and we are the world's leader in product and component testing inspection and certification. We feel we have approximately 7% global market share, and we continue to focus in this area. There is increasing globalization of where products are sold. There is a regulatory environment that often is requiring products and components to be tested and inspected. And increasingly, customers have sustainability objectives that require more and more information about the products that they develop.

So very quickly, how does this all fit together? Standards are developed by standards, development organizations all over the world. We test to 4,000 standards, 1,500 of those were written by our affiliated parent company, UL Standards and Engagement. But we sit on technical panels and advise many, many standards development organizations. When a standard has been written, you need an accreditation. That accreditation comes from, again, a myriad of accreditors globally, including OSHA or FDA or ANSI. When you're accredited to test to a standard, you then have a service. And so this is the moat that we've built, the 4,000 standards, the 650 technical accreditations and the over 350 independent services that can be combined into various testing protocols and packages to fulfill the needs of a specific innovation. And then finally, to wrap up, we have mega trends that are propelling our growth. The energy transition, the electrification of everything, the move to new sources of energy and the ways in which generation, transmission, storage and usage of energy is all shifting is driving a tremendous amount of innovation all over the world, and that is propelling -- propelled by a lot of the needs of AI data centers, but that is not the only demand driver for that energy transition. There are shifts in mobility, electric vehicles, but not just cars, agricultural products, buses, micro mobility, scooters, bikes. A lot of that is also being driven by sustainability requirements. The reality that there needs to be different uses of product, different sources of raw materials and different considerations about products at end of life. Digitalization and AI are changing the ways in which everything is used. AI embedded in products is an important consideration for us and what is the safety of that. We've seen with tariff shifts through the years, not just the last couple of years, but the risks of supply chain and seizures of that supply chain and how our customers need to adapt and change their supply chains. And frequently, that results in retesting of products. And then, of course, the myriad of regulations all over the world at federal and local levels where products need to comply with the regulations that an authority having jurisdiction has put forth. So this is the exciting power of our business. We're happy to be here, and we look forward to taking questions.

Great. Thanks very much, Jenny and Ryan. Maybe the first one, I want to focus on a point you made at the beginning of your presentation on consolidation. Large market, I think share is about 7%. So I guess, one, just fragmentation of the market. Number two, how does you all fit into that consolidation theme? Is it accelerating maybe with standards becoming more complex and innovation increasing? And is there an angle in terms of maybe outsourcing, right, some of that market where you're seeing internal testing?

Yes. It is a consolidating industry, and there are tens of thousands of testing inspection or certification labs all over the world. And we are disciplined in our approach to that consolidation. Our #1 criteria is focusing on product tick and ensuring that any tuck-in or bolt-on acquisition that we would do continues to expand our set of offerings for our product tick customers or deepen our operational footprint for services that we already have. That said, there are also just new areas that customers have needs. And we're always interested in understanding what kind of software is out there, data sources that are being evaluated that our customers need and how do we build that into our risk and compliance software business.

Okay. Very good. Megatrends, I think pretty important here. I guess how are you -- whether we're talking about energy transition, digitization, driving, I think, double-digit growth at the moment. How are you aligning with that internally in terms of building capacity, levers you're pulling to basically stay ahead of demand and capitalize on what is a powerful and multiyear opportunity.

Yes. The great news is that those long-term customer relationships give us a lot of insight into their product road maps, the opportunities that they're chasing and the challenges that they may face. So even like in the energy transition, we started down our global battery -- large-scale battery testing strategy by first opening a lab in Changzhou, China. I believe that was 2020, followed by Korea, Japan, into Auburn Hills in the United States that opened 2 -- 18 months ago and then into an acquisition that we made in Europe in Germany, Battery Engineer. And in all of these cases, the customers were looking at both the effect of what could happen with EVs and vehicle batteries as well as how were batteries and energy storage systems going to be evolving with the energy needs in the industrial environment. So it's just -- it's a great example of us choosing capital and M&A. We did both, staying ahead of the trends that our customers have, making sure that we have the capacity that they need. And even in some cases, like in Korea, a customer called us up and said, we have faster plans. We need more battery capacity, how can you help us? And we always tell our customers, we're happy to step up if there's a good ROI.

Okay. Very good. Somewhat of thematic supply chain Supply chains are becoming broader and maybe more complex. In terms of maybe regional realignments you've seen or realignments that could come, how does that impact your footprint? Does that create a multiplier effect at all in terms of your own volumes?

Yes. So going back to an overview of UL, I would say our geographic distribution now is an outcome of decades and decades of global trade where products are developed, where they're manufactured and the trading partners between countries. So over time, we have evolved. We will continue to evolve to support our customers. Fortunately, it's much easier for us to evolve the location of where our field engineers visit factories or do we expand laboratory capacity. It's easy for us than it is for our manufacturing customers to build new factories or to materially evolve their supply chain. So for many years, we have seen changes in trade patterns. Some companies have adopted China Plus One strategies where they supplement perhaps a dependent manufacturing supply chain strategy with an additional location. So we've expanded capacity in countries like Vietnam, both in Ho Chi Minh City and Hanoi, in Southeast Asia, in India, in Singapore, in Mexico as well as additional capacity in the United States. Our -- all of our regions grew last year in a period of a lot of trade uncertainty. And I think that speaks to the resilience of our business model and how we support multidirectional trade.

Okay. Very good. Industrial segment, really, really strong 4Q, I think led by automation and energy. Looking ahead, let's define it, I don't know, the next maybe 1 to 3 years, are there particular end markets where you think at least your positioning or maybe your opportunity set are in early innings? And then maybe just kind of a shorter-term question in terms of potential pullback in industrial activity given, let's just call it, a more volatile geopolitical environment, how would that affect you?

Yes. The good news, I'll take the second part first. The good news is our business isn't driven by GDP growth or driven by number, volume of products that are out in the marketplace. Our business is driven by innovation and number of SKUs in the marketplace because if you are manufacturing a single widget or 10,000 widgets at a plant, we will visit that plant 4 times a year and charge you for that inspection. So that's -- we've been resilient. When you look at our CAGR for the -- I think we published it since 2012. It is steady and growing 6.8% there. With regard to industrial, those megatrends, I keep saying they're real. And the electrification of everything, energy and automation, different sources of energy, different uses of energy. I use the AI data center example all the time, a shift to 800 DC, 800-volt DC, direct current. It is a lot more power and it is a lot less safe. And you have to change out just about every connector, every control panel, every wire, different size of wire and cable goes into that data center because of it. And then the thermal dynamics of a data center, those chips are stacked closer. They're turned on their side, they burn -- they just run hotter and they need a different type of cooling. So all of that type of innovation that we're seeing from our industrial customers around how do we do a better job around energy usage and data demands and data centers also carries into broader industrial, commercial, residential needs. And so it's one of the powers of innovation. You invent something and create something for one use, it does get moved into others over time. So we love this industrial business. We love all our businesses, but industrial is those megatrends are really propelling strong new product growth.

Yes. No, it's an interesting point, just at a point in time now and then in terms of, I guess, you get second quarter deployment, hopefully, I would imagine that would be an opportunity, too. Okay. That makes a lot of sense. So a big focus for the past few years, a lot of investment in specialized facilities and labs. Auto testing, I think, is one, and you built new capacity there. In terms of those target investments, I guess, how does that change perhaps the strategic conversations you're having with your larger OEM clients today? strengthening them, deepen them? I guess, what's the opportunity there?

Yes. The good news is, I mean, we're exposed to 35 different industries. And we focus really on our largest -- we have 80,000 customers, but our global and strategic accounts are really driving the supply chains down to those other 80,000 customers. So in the auto industry, the areas where we focus have been in the EV battery space, and in the embedded software around functional safety. You don't want to have software powering your car. And when you turn on the radio, your brake slam on or something that could be very dangerous. So that business has ebbed and flowed, particularly in Europe right now. But the good news is as a battery manufacturer is seeing maybe a slowdown in their volume of EV batteries, they've got a plant ready to go. So now they're ramping up the industrial scale battery production in there that may be going into the industrial supply chain, manufacturing plants or even into AI data centers.

Okay. Kind of somewhat of a broad AI question, and you could extrapolate this all sorts of different ways. But in terms of thinking about how does that, and again, very broadly change testing needs. I mean, on one hand, I guess, you could think about things like digital twins, digital avatars and maybe digitizing testing. But just broadly, how is AI impacting your business?

Yes. I'm going to let Ryan talk about productivity and AI, and I'll wrap it up.

Yes. So it will affect both the needs of our customers and our internal processes. And you may have seen we've recently announced the introduction of a standard that helps define the development of products and processes that have embedded AI, and we've also announced the initial certifications awarded to parties in -- Jenny, do you want to speak to that service a little bit?

I'm happy to do that. So in fact, we had an announcement today of 2 customers embedding -- using our standard for embedding AI into their products. So Hanwha Qcells has a product around controlling energy systems in data centers that is AI-powered, and it's passed the UL certification. And then Omnicon also a provider of the broader built environment and energy management systems has announced the use of our UL 3115 into their products. So we see this -- we're in really early days on this offering. But what I like about it is it demonstrates that when there is a complex technical need with the safety challenge, our customers call us first. And our scientists and our engineers are there to rely on the science, do the research and come up with good answers.

You're there to meet that need.

Yes. And then on the internal process side, we've made substantial progress with enabling technology to support our employees, increase their productivity and increase the usage of our physical assets. So we actually grew organic revenue 6.2% last year and finished the year with slightly fewer headcount than the beginning of the year. In addition to that, we announced some expense reduction initiatives that will be completed through the first quarter of next year to further create some efficiencies.

Okay. No, that's a good -- definitely a good segue. So I know both of you, your background is very much on efficiency, right? And there's just basic just efficiency. So productivity has been a bigger focus. It feels like at least you're talking about it more, right? And that's the restructuring. You're starting to see it in the margin expansion. So in terms of just the kind of onto the ground focus on operational efficiencies versus deploying AI within the organization, how do we think about, I guess, the margin expansion potential from there, I suppose?

Yes, I'll let you.

Yes. So maybe just to ground in 2025 and how that theme came through in our numbers and then how it carries forward. And you can see we grew our adjusted EBITDA last year about 21%, $179 million of incremental organic revenue, and we're able to fulfill that, which is $37 million of incremental organic expenses. So we're very focused on efficiency initiatives, supporting our employees with enabling technology and producing better outcomes for our shareholders. So that led to about 300 basis points of margin expansion in 2025. We've guided in our outlook for 2026 for additional margin expansion of between 60 basis points and 110 basis points with largely similar themes, focusing on operational execution, continuing to grow our relationships with our customers, achieving operating leverage, continuing our trends of pricing our services for the value that we provide and continuing to drive profitability improvement.

Okay. Very good. So global company, the majority -- slight majority in terms of U.S. versus international split. But thinking about the UL Mark, I mean, the brand recognition, I'm not sure could be stronger, right? 110-year lineage thereabouts.

32.

I'm sorry. Particularly in North America. So again, understanding a wide-ranging global company. But thinking about that premium brand and what that -- I guess, exporting that to the rest of the world and using that as a lever for growth, where be well known. I guess what is the importance of the all brand on expanding it more globally, I suppose?

Yes. There's 2 points on this. One, our brand is unequivocally recognized as the premier safety brand here in North America. And we do have opportunities to continue to expand that recognition outside of North America. A key piece of that is our relationship with UL Standards of Engagement, not-for-profit and UL Research Institutes, not-for-profit. We started as a singular organization. There are now 3 distinct organizations with the same mission, working for a safer world. And having UL Research Institutes, which now has a significant endowment to basically create a safety science university is focused on some of the most pressing safety challenges of the day, fire safety, electrochemical safety, mapping the chemicals in the human body, so chemical insights, safety, AI safety and new material sciences and safety of new materials. So the more work that they do and the more standards that you all standards of engagement right and the more global that they become and they are now funded in a way that they can become global, that also helps reinforce our brand. And our work reinforces the importance of what they do. So it's a great ecosystem that we have going between the 3 sides.

Okay. Very good. Switching to software. So last year, divested or I think it was last year, the EHS software business. focusing purely on the ULTRUS platform. I guess how does this sharpen your go-to-market strategy in terms of risk and compliance software in the near seg?

It helps in a couple of different ways. One, in addition to selling off the EHS, we're moving the piece of software and advisory that was focused on advisory back to our TIC businesses. And that's because our hypothesis when we put these together was that there would be cross-selling between software and advisory, and it turns out that there's more interaction between the advisory and the TIC services. So that frees up our software team to become laser-focused on their product road maps and potential M&A for in the world of governance risk and compliance software, we're focused on the risk and the compliance side. So the risks around is a product compliant and remaining compliant in markets that have ever-changing regulations. A couple of years ago, Minnesota announced you can't have nickel or cadmium in your products anymore. Well, we've got the ability to help our customers know where they would be out of tolerance on that and what they might need to reengineer and retest. Supply chain risk management is traceability into the chemical supply chain that largely is for products going into the retail environment. There are strict regulations around transport, storage, sale and disposal of chemicals in a retail environment, but really in any industrial environment. And so we help our customers trace through that and maintain compliance and have other derivative uses of the data that we have about the chemicals and their supply chain. And then a natural output of that is all of the reporting that's going to be required for sustainability, Scope 1, Scope 2, Scope 3 and you trace those all together, we've got the information about what's in those products and can help our customers do that.

Okay. Very good. And maybe just a last one, Ryan, just basic question in terms of capital allocation, rock-solid balance sheet, low leverage, priorities in terms of where bolt-on M&A might focus and then capital return. How do we think about that?

We're fortunate to be a highly cash flow generative business, high cash flow from operations. And our largest priority is to reinvest back in the business for the growth and the evolution. So that's organic capital investment. Last year, we deployed just under $200 million or about 6.5% of revenue back into the business. Over our history, we complement that growth with acquisitions, typically in more technologically differentiated areas with teams and sometimes in geographic markets that accelerate our market entry. In addition to that, we maintain a strong balance sheet. We're investment grade. We intend to continue that rating. And given the strength and stability of our cash flows, we pay a cash dividend. We've recently increased that cash dividend. And we're a newly public company less than 2 years. But over time, we'll evaluate share repurchases as a potential capital allocation. But our business generates high returns on invested capital. So we continually look for opportunities on the left side of this page to reinvest back into the business.

Strength of this makes total sense.

Thanks.

And then maybe one last for me, and then I'll see if there are any questions from the audience, just a quick word association, lightning round UL Mark.

Strong, solid growth.

Okay . Electrification?

Everything.

Everything.

Everything. All right. I like that. Margins?

Expanding.

M&A?

Renewed focus.

Renewed focus, Interesting. Okay. And then just high level one, AI?

Opportunity.

Opportunity.

Opportunity. Love it.

Exciting.

All right. Before we conclude any questions from the audience that we can take? All right. With that, Jenny, Ryan. Thank you very much.

Appreciate it.

Great to be here.

Thank you very much.