Good morning, everyone. Thanks for being here. My name's Andrew Nicholas, and I'm the business services analyst here at William Blair. Before getting started, I am required to inform you that for a complete list of research disclosures and potential conflicts of interest, please visit our website at williamblair.com. I am very pleased to welcome UL Solutions here today to kick off the 46th Annual Growth Stock Conference. We have UL Solutions Chief Executive Officer, Jennifer Scanlon, Chief Financial Officer, Ryan Robinson, here today. We're going to take the time and hand it over to them for a presentation to learn more about their business.
All right. Thanks, Andrew. It's early morning. We're going to keep the energy up, and I'm going to start. I love how full this room is, so thank you for coming. We're going to start with a little safe harbor before we jump into our next. Do I have this? Okay. How'd we do? Safe harbor. You've all seen it. Next slide. You're going to hear five themes from us at UL Solutions today. We are a 132-year-old company, and we are a global leader. The first theme is that our leadership is predicated on our mission. We are a mission-driven growth company, our mission, working for a safer world, and we are in a very large, fragmented, and growing industry of testing, inspection, and certification. Second message, we are grounded in science. Our dedication to safety science matters.
It matters to our customers, and it fuels our leadership. Third, those customers, those 80,000+ customers that we have, are long-term customer relationships, and we support those relationships through account management, our business model, and of course, the UL Mark that you all have seen. You may not realize it, but you'll see it everywhere. The UL in a circle that shows that products are meeting the safety standards and have been tested, inspected, and certified. Our scale also matters. We need to be close to where R&D is happening, and we need to be close to where those products are manufactured. We've got global scale and operating leverage to continue to expand our margins.
Finally, we have a healthy balance sheet, and Ryan will talk about that a little later, but it is supported by a very disciplined capital allocation strategy that supports both organic and inorganic growth, and we target best-in-class shareholder returns. On the next slide, you'll see the UL Mark. You'll now see it everywhere. In fact, when we did our IPO two years ago, one of our analysts challenged his children over the weekend to have a scavenger hunt of the UL Mark. I think they found 68 in their house. It shows that product can be trusted because a third party has tested, inspected, and certified the safety, security, or sustainability of that product. How do we do this? We are $3.1 billion in revenue, 15,000 employees globally. We had 6.2% organic revenue growth last year and adjusted EBITDA of $792 million.
We do this through two businesses, three segments. Our first business is testing, inspection, and certification, and it has two segments. Industrial, where our customers' products are being sold into the B2B space for the most part, and Consumer, where our customers' products are being sold into the B2C space. Ryan will talk more about those two segments in a minute. Our third segment is Risk and Compliance Software. This is software that those product TIC customers as we call it, testing, inspection, certification, that those product TIC customers use to support the risk and the compliance requirements to get their products to market globally. We measure our revenue by customer geography. This is where our customers are headquartered. Not where we perform the work, but where our customers are headquartered.
41% of our customers are in the U.S., 25% are across Greater China, including Hong Kong and Taiwan, followed by Europe, Middle East, and Asia, and then the rest of the world. Our customers are seeking to get their products into global markets, not just the North American very highly regulated market, but markets all over the world, and we help them do that. What you'll see on the next slide is we help them do that with four distinct sets of services. The first service is certification testing. This is where the product actually results in that UL Mark being on it. The second service is ongoing certification services. This is 33% of our revenue, which is recurring revenue. What happens here is to keep that Mark, that Mark is a license that a product manufacturer has licensed from us.
To keep that UL Mark on their product, we need to visit their manufacturing facilities, any facility that has manufactured that product with that UL Mark on it, typically unannounced, typically four times a year, and we charge them for those visits to ensure that they are manufacturing in accordance with the standards that we tested to. There's a second type of testing, that third circle, non-certification testing and other services. There are frequently regulations that are still required, such as FCC regulating EMC wireless, electromagnetic compatibility, anything with a transmitter or receiver needs to be tested. That doesn't need to be certified on an ongoing basis because it's being manufactured through software, not through the physical. There's other types of non-certification testing, such as quality and performance. That type of testing also falls into the non-certification testing and other services.
Finally, the software that I referenced, the risk and compliance software, but there's also software within our testing, inspection, and certification businesses. That is also recurring revenue. 42% of our revenue is recurring. In the product TIC space, we are the global leader. We have number one, we estimate market share by revenue for outsourced product testing, inspection, and certification. You can see the next 10 participants in the product TIC market space comprise about 27% of the market, and indeed, it's very fragmented. There are thousands and thousands of testing, inspection, and certification houses all over the world in this fragmented and growing marketplace. I said earlier we differentiate ourselves through science. That science starts with deep technical relationships that we have with standards development organizations. Those are listed on the left side of this slide. You'll see one in green, UL Standards & Engagement.
UL Standards & Engagement is our largest shareholder, is a strategic partner in the development of standards, and is a bit of our secret sauce in us providing them the technical leadership and the customer sensing information that they need to develop standards. Our technical teams work with standards development organizations all over the world. Those standards then, to test to those, you need to be accredited. There are accreditation agencies in every country in the world. Here in the U.S., OSHA is one of the leaders, as well as FDA, FCC, ANSI, many. To achieve and maintain those accreditations, we have over 650 around the world that cover 29 countries where our labs exist.
That combination of testing to a standard and being accredited to do so creates our service catalog, where we have over 350 independent services that we can offer to our customers that help them get their products to market. Our growth is fueled by some key megatrends, the biggest one being the energy transition. A few years ago, we estimated that the amount of energy required was going to double or triple by 2050, and then AI data centers took off.
When you look at the amount of energy that is needed to fuel the digitalization and AI, and you look at the ways in which those energy sources are evolving and changing through different types of sustainability or different uses, such as a shift to 800 direct current volt power into data centers, it is a whole new world out there of product development, product innovation to fuel these shifts. Additionally, supply chain risks, the need for transparency, the need for our customers to move where maybe their raw materials or their manufacturing facility, their supply chain is located, that frequently results in needing to retest a product. Then, of course, regulatory compliance continues the need for that to proliferate. I'm going to turn it over to Ryan to talk about our segments.
Great. Thank you very much, Jenny, good morning, everyone. I'm going to go a little bit deeper into our three segments and then some information about our operating model and our financial profile. I think by discussing our segments and what we do for what types of customers, you'll understand the model a little bit more deeply. Our largest and our most profitable segment is our Industrial segment. This largely serves manufacturers of finished products or components that are sold in business-to-business end markets. In these markets, often the UL Mark is valued as part of how a product is sold, and the quality, and safety, and regulatory compliance of that product is communicated through the sales process. You can see we serve several different markets within industrial.
Energy and automation includes manufacturers of power control systems, large energy storage systems, manufacturers of wind turbines, manufacturers of solar panels, basically large commercial devices that attach to the electrical grid. This space is going through significant transformation, including product innovation fueled by data center product innovation. Also within industrial is our materials business. This includes performance materials like wire and cable, performance plastics that are used in printed circuit boards, in insulation systems, and increasingly, performance plastics are used in a wide array of products. Third category is building products, which includes our legacy fire safety business. As I look around this room, I see fire alarm systems, I see sprinkler systems, I see building products, including drywall or ceiling panels.
Those are types of products that UL will test to make sure they comply with standards that are set to help create a safer environment for all of us. Then finally, advisory is complementary professional services valued by our industrial manufacturing companies, typically for things like the energy production for wind farms or indoor air quality assessment, sometimes the regulatory compliance related to medical products. There are a number of services that are provided within this advisory capacity. Second is our consumer segment. Many of you may know UL and the UL Mark through products like consumer electronics, HVAC equipment, retail and consumer products, and we work with manufacturers of end products and also large global retailers to help make sure their products are both compliant with standards and eligible for importation into various countries, and also meet the brand owner's safety and compliance requirements.
Often, very large retailers have private label businesses and they legally are the role of a product manufacturer, they want to make sure that their supply chain is compliant in delivering high quality, high performing products that these retailers put their brands on. Third is our risk and compliance software segment, which is an enterprise software business that supports reduction of risk, supply chain transparency, and sustainability data for our testing, inspection, certification customers in a number of areas. It includes products that are used by large manufacturers and large retailers for supply chain information, including chemical and solution product safety. If there is a mishap related to those chemicals, the holder is best prepared about how to respond to that, how to train their employees for their work environments, and to handle those chemicals, as an example. Finally, some things about our financial model.
As Jenny mentioned, across those four primary revenue streams, roughly 42% of our revenue is contractually recurring revenue streams. The 33% that is ongoing certification services is typically a contract that's entered into on an annual basis, and then we fulfill it over the course of a year, and we grant the use of the UL Mark as a license to those customers. Our enterprise software business, roughly 9% of revenue, is typically a multiple year license and extends. This leads to relatively high cash flow from operations and free cash flow. It has led to strong and durable growth. Our business is fueled by product innovation, so as new technologies come to market, it influences product design, either for new capabilities or the replacement of existing components to help the product reduce cost for the manufacturer.
Each of those changes results in a need to retest and recertify. It has led to strong growth for UL for a long period of time. Finally, as Jenny said, we have a conservative financial profile. We have less than one time funded debt to EBITDA, and that enables us to pursue growth initiatives, including a recent acquisition that we announced in April to complement and grow our consumer segment. Finally, you can see a long history of growth and resilience on the top line. Since 2011, our revenue has grown 6.8% on a compound annual growth basis. The large majority of that is organic growth, both through price and volume, growing our customer base, growing our service portfolio, growing the geographies in that we serve.
We've complemented that with some acquisitions, to provide new capabilities to grow and serve our customers in new ways. You can see over the last several years, the profitability reported here is during our time preceding the IPO in April 2024. Since then, we've had a strong track record of improving our profitability, improving our cash flow generation, and driving best-in-class shareholder returns. I'd say those are some key takeaways about our business model. At this point, I think we were going to open it up for general questions from the audience.
Yeah. We'll save some of the questions for the breakout room. I'm just going to ask a few here with the 10 minutes, 15 minutes that we have. I guess the first one that I'd like to ask is just on new product development. Obviously, UL's business is tied to new product SKUs, innovation in products. How would you characterize the current environment for product velocity relative to the last 10 years? Maybe we can talk about some of the drivers of that as well.
Yeah. I'm always an optimist on growth. I think that smart manufacturers are always focused on innovation. Innovation can be big step changes, like embedding AI in your product, in a product that's never had technology embedded in it, or it can be a series of small things, those all new and improved changes to features and functions within a product.
Both of those extremes end up frequently requiring testing, inspection, certification or retesting to keep the product in the market. We keep an eye on where our customers are innovating. We spend time with our largest customers, our global and strategic accounts, with a view to their product roadmaps. We know what they believe is coming to market in the next couple of years so that we can help them get that there faster. We continue to be optimistic that innovation and growth is a great cycle.
Have you noticed a kind of step change in that sort of velocity over the past couple of years, whether it's tied to AI specifically or any other kind of post-COVID market changes?
I think the best thing to look at is large companies' reported expenditures on CapEx or new product development, R&D. A lot of times what you'll see, and I think what we're seeing right now, is a shift to a certain mega trend. If you're in the HVAC industry, you're manufacturing coolers, chillers. I like to say chillers are hot right now in data centers. You've shifted. You may not be producing as many new models for chillers that are going to go on top of a commercial structure. You're trying to get as much R&D into the step change of the way you use energy and what's happening in a data center. A lot of times it can shift, but it can also shift and grow. We are absolutely seeing those mega trends propel growth.
Great. Ryan, you mentioned briefly a recent M&A that you announced. I think it's expected to be closed later this year, the acquisition of Intertek's E&E segment.
Eurofins.
Eurofins, excuse me. Can you speak a little bit to that transaction? What makes you optimistic about the strategic rationale there? Maybe just use that as an opportunity to talk about the consolidation strategy in a fragmented market broadly.
Yeah. We're excited about this acquisition. It is about a $200 million run rate portion of another testing, inspection, certification company called Eurofins. They focus more in life science. This business is highly complementary to the types of services that we provide, electrical and electronics, product safety and wireless testing. It has a good geographic reach. It can be aligned with UL's business. They bring important capabilities and speed and customer service that are complementary to how we run the business. We're excited about the opportunity to create value. We think we acquired it at a reasonable price and have identified sources of value creation. As I mentioned, it's complementary. It extends services that we do now, mostly to new geographies and new customer sets. We're excited, and we anticipate that it'll close in the fourth quarter.
That extension, that complementary nature is consistent with the overall M&A strategy, right? If you could maybe speak to other geographies that might be of interest, other specialties that you're particularly focused on, and then maybe within the framework of the broader capital allocation strategy.
Yeah.
Yeah. Our strategy is to deepen our leadership in product inspection, testing, and certification. When you look at the entire market, there is a lot of that world that we are not interested expanding into. The example that Ryan gave of us getting a carve-out from Eurofins. Eurofins is focused on life science. We have no interest in life sciences as part of our strategy. Our strategy as we're out there looking around the world is where are there either portions of industry that we're not strong enough in certain regions? For example, why we're excited about this Eurofins carve-out is a lot of R&D is moving to Central and Eastern Europe. We do not have, today, a significant lab footprint in Central and Eastern Europe. This acquisition gave us that strength. Additionally, Korea, one of the most innovative countries in the world, its growth is fueling.
We have been investing capital in recent years in building out our labs in Korea, extending our battery testing capabilities, extending our EMC wireless capabilities. This acquisition gives us a step change for that footprint in Korea. That, I would say, sums up our philosophy, is where can we go deeper in product TIC? Back to industrial or consumer, are there parts of that product TIC industry that we actually don't have a significant piece in? We'll continue to look at acquisitions that would extend us into other industry verticals that focus on product where we don't have testing strength today.
You mentioned Korea. There's parts of Central Europe that you're now focused on because some product development and R&D is moving there. How much of that was already in motion? Are there geopolitical or tariff-related impacts that are driving some of those shifts?
There are definitely geopolitical and tariff-driven impacts that are causing our customers' supply chains to shift. We started seeing that in the first Trump administration in 2017, 2018 when you look at our consistent revenue growth. I always say our customers are really smart. They're trying to figure out what is the best cost, best service location to produce their products. Some plants are easy to move. An assembly line, on small appliances, it's easy to find another one, outsource that manufacturing, move it. My former world, which I came from manufactured drywall, you put in a plant and it was there for 40 years. You couldn't pick it up and move it 8 mi across the border, into Mexico from the U.S. It is there permanently.
In both those cases, though, customers are then figuring out where in their supply chain can they value engineer, swap out suppliers, change the way that that supply chain is hooked together. Like I say, when that happens, there's frequently an opportunity for us to help them either get that new plant set up, test the supply chain, test the all-new and improved product with a different type of plastic that's in it or a different raw material. That movement, it's been going on since 2018, and it's just continuing.
Makes sense. Maybe a question for Ryan, just on margins. You highlighted the significant kind of expansion since going public. Can you speak to the drivers of that improvement, the runway for margin expansion, and I think part of what we've seen even in the results to start this year is the benefits of a restructuring program that you announced. If you could just hit on the margin piece, that'd be helpful.
Yeah. We've been very pleased with the progress of our operating teams, serving our customers, driving revenue growth, but also doing it very efficiently. We've had high flow-through of incremental revenue to incremental profitability, both adjusted EBITDA and operating income. It's a product of many years of investment and design of infrastructure to support our employees, to support our customers. Common systems, common operating processes, better operating metrics about how we run the business, and that allows us to better utilize and support our employees so that they're more productive and better utilize our physical locations, including our laboratories, so we have higher throughput. Our physical plant of laboratories and equipment is largely a fixed cost, so the more volume that we can put through that with some marginal labor, the higher flow-through and higher profitability.
The model has operating leverage that leads to higher profitability with that growth.
Where would you characterize kind of utilization and lab capacity today versus maybe five years ago? Do you feel like you're in a really good spot, or is there still some room to run?
I'll start. I welcome Jenny. I think there definitely is room to run.
Definitely
Then a comparison to five years ago, the company had a history of operating on a fairly decentralized basis, both by the divisions of the company and by geography. It was difficult to have common metrics around utilization of employees or physical locations, so it's really hard to compare. A foundational step was that enabling technology redesign of the business processes, alignment on the metrics so that we have shared visibility and we can set goals and we can continuously improve.
There were two other fundamental pieces of our strategy, we named it the Alpha strategy, that we launched in 2021. One was creating integrated labs so that you could put more testing types under a single roof. As Ryan said previously, each one of our business units, each one of our operating units may have had their own individual labs and management structure. We've been creating this integrated lab model, having those common metrics, which gives us better visibility into utilization, which leads both me and Ryan to say yes, there's upside there. The second thing is we've been very deliberate on centers of excellence around the world. Here in Northbrook is a center of excellence. It's our oldest, largest lab.
We closed down a lab out on Long Island, highest electrical cost lab that we had in the world, and it takes a lot of electricity to test electrical products. We shifted that to being an engineering office, moved equipment and people to Northbrook, to Research Triangle Park down in Raleigh, and to Mexico. Where we see ourselves butting up against capacity needs, either through lab technicians, engineers, or equipment, it's easier to add those at a lower cost into these fewer centers of excellence that we've created.
Great. Well, I think we're mostly out of time here. We are going to move to Adler for the breakout, for anyone interested in continuing the conversation. Thanks, Jenny.
Thank you very much.
Thanks, Ryan, for being here.
Thank you very much.