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spk03: Greetings. Welcome to the UL Solutions Second Quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A -and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now turn the conference over to your host, Mitchell G., Senior Vice President of Corporate Finance. You may begin.
spk13: Thank you. Welcome, everyone, to our Second Quarter 2024 earnings call. Joining me today are Jenny Scanlon, our Chief Executive Officer, and Ryan Robinson, our Chief Financial Officer. During the discussion today, we will be referring to our earnings presentation, which is available on the investor relations section of our website at ul.com. Our earnings release is also available on the IR section of our website. 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 of the Private Security Litigation Reform Act of 1995. These forward-looking statements may include, among other things, statements about UL Solutions results of operations and estimates and prospects that involve substantial risks, 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. Please see the disclosure statement on slide 2 of the earnings presentation, as well as the disclaimers in our earnings release concerning forward-looking statements and the risk factors that are described in our quarterly report on Forum 10Q for the period ending March 31, 2024. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date hereof, except as required by law. Today's presentation also includes references to non-GAAP financial measures. A reconciliation to the most comparable GAAP financial measure can be found in the appendix to the earnings presentation. With that, I will now turn the call over to Jenny.
spk06: Good morning, everyone, and thanks for joining us. This is our second quarterly report as a public company, and I'm really pleased to say we had another strong quarter. We reported meaningful growth across all of our segments and geographies, improved margins, and generated solid cash flow that has been a hallmark of our business. These results reflect outstanding execution and a keen focus on our core business. Safety science underpins important megatrends that we expect will continue to drive demand for our industry-leading services for years to come. Innovation without safety results in failure. I have three key topics I'll cover on today's call. First, I'll highlight key elements contributing to our strong second quarter performance. Second, I'll highlight some key growth achievements and customer activities from the quarter. Finally, I'll touch on our strong financial position and capital allocation actions. Let me start by sharing my thoughts on our strong second quarter results. I like to say that while we are newly public, we are not newly for-profit, and this mantra is echoed in our ability to once again deliver profitable growth. We could not have achieved these results without focused execution led by our experienced and technically accomplished team, for whom I am truly grateful. Our employees' relentless emphasis on safety, science, and customer centricity shapes our culture and enhances our business. In the second quarter, our team achieved organic growth of 8.4%, resulting in $730 million of revenue. We continued to experience stamina in our industrial segment. We benefited from improving trends in our consumer segment, and we posted a solid quarter for software and advisory. Importantly, our results were well-balanced with growth in all three segments across all geographic regions and service lines. Adjusted EBITDA grew 11.6%, and adjusted EBITDA margin expanded by 120 basis points. Adjusted net income increased by 5.6%, and in the first six months of the year, we delivered $131 million of free cash flow. Now let me highlight a few key achievements from the quarter. In our industrial segment, our Korean advanced battery lab that came fully online last quarter is experiencing a rapid ramp up in activity, serving Korean automotive customers with the latest large battery safety technology. Construction of our Auburn Hills North American Battery Lab is progressing on schedule, and we expect to open in August with a strong backlog of work ready to go. And I want to emphasize a key point. Battery testing at UL Solutions is so much more than EV and hybrid automotive batteries. The electrification of everything spans a broad spectrum of energy transfer and storage needs from small consumer to large scale industrial batteries used to power heavy equipment. These two new facilities expand our already impressive suite of offerings across the full set of industrial and automotive battery testing. We were active on the M&A front in the industrial segment with two acquisitions, one in the quarter and one subsequent. In May, we acquired German battery testing and simulation company Battery Engineer, who has expertise in specialized cell, small modules, and battery system performance testing. This acquisition expanded our global battery testing footprint, adding opportunities in the European market to our already impressive portfolio. And in July, we acquired another company based in Germany called Testnet Engineering, a leader in hydrogen component and system testing. This acquisition deepens our expertise in clean energy testing and enhances our ability to impact global decarbonization efforts. We believe hydrogen technology will play a significant role in the transition to lower global emissions from transportation and energy systems. We are excited to expand our capabilities in this important area. In our consumer segment, as the HVAC industry continues to drive towards sustainable solutions through the transition to more environmentally friendly refrigerants, we have focused on strategic initiatives and capital investments to support our customers' needs. Our foundational research for the safe transition to the next generation of refrigerants helped solidify our thought leadership position in the future of HVAC safety and performance. We planned for an expected surge in demand for our services and we completed a expansion of our HVAC Performance Center of Excellence in Plano, Texas in the second half of last year. Customer reception to the new chambers has been overwhelmingly positive and we are seeing strong and durable demand. In our software and advisory segment, we are making good progress with balanced growth. Sustainability continues to be a key driver of demand while the energy transition was also a contributor. Finally, let me comment on our capital allocation activities. Our hard work and focused business model put us in an enviable position with regard to our investment grade balance sheet, robust cash flow generation, and disciplined approach to capital allocation. During the quarter and subsequent to its end, we were active on multiple fronts. First, we completed divestiture as well as the two acquisitions I just mentioned. Second, organically we announced plans to construct an advanced automotive and battery testing center in Korea to further serve the automotive industry. The new lab, when complete, will expand our current battery testing capacity in the region and add EV charger testing and other capabilities to our suite of offerings. It leverages the technology used in our Korea advanced battery lab, which we opened last year. This new lab is expected to open in the second half of 2025. Third, we returned cash to shareholders in the form of our first regular quarterly dividend as a public company of 12.5 cents per share in June. We are committed to maintaining a strong balance sheet with conservative leverage and investment grade ratings. We expect to continue to return excess capital to shareholders. Now I'm going to turn the call over to Ryan, who will provide greater detail on our results and our outlook.
spk11: Thank you, Jenny, and hello everyone. I also want to thank all of our team members for delivering another strong quarter. I'll first provide more detail on our financial results, then discuss our segment's performance before closing with some comments on our full year outlook.
spk04: We
spk11: are proud to report in our second earnings release a continuation of strong top line growth, adjusted EBITDA margin expansion, and solid cash generation. As Jenny mentioned, it's encouraging to see that organic growth once again occurred across all of our segments, geographies, and service lines. Now let me dive into the details of the quarter. Consolidated revenues of $730 million were up 6% over the prior year quarter, including organic growth of 8.4%. The increase reflected particular strength in the industrial segment, which delivered .6% organic growth. Adjusted EBITDA for the quarter was $173 million, an improvement of .6% year over year on strength across all three segments. Adjusted EBITDA margin was 23.7%, up 120 basis points from the same period a year ago on strength in both consumer and the software and advisory segments. Adjusted net income for the second quarter was $94 million, or 44 cents per adjusted diluted share, up .6% from $89 million, or 42 cents per adjusted diluted share in the second quarter of 2023, despite $5 million of additional pre-tax interest expense. As a reminder, our IPO occurred in the second quarter and then affected two income statement items in particular. These items are not adjusted for in our non-GAAP financials. First, virtually all our cash settled appreciation rights, or CSARS, have either matured or were converted to stock settled appreciation rights. As a result of the value at the IPO closing, we recorded a $9 million pre-tax expense in Q2-24, which reduced adjusted EBITDA by $9 million. These awards have historically created -to-market expense volatility, which will no longer occur as the value of these converted awards was established upon the closing of the IPO. They will no longer have -to-market volatility. Second, since public companies have a limitation on the tax deductibility of executive compensation, we reduced the value of some deferred tax assets post-IPO, which resulted in an increase in the Q2 provision for income taxes of $5 million. Now let me turn to our performance by segment, starting with industrial. The mega trends of energy transition and the electrification of everything are driving tremendous innovation and demand for our services, while the Internet of Things is spreading across the industrial infrastructure. These factors help the industrial segment deliver the strongest growth of the three segments for the quarter. Revenues in organic basis as compared to the second quarter of 2023. Those impressive gains were driven by robust demand for ongoing certification services and certification testing for engineered materials, energy and automation, and building products. This was partially offset by the sale of our payments testing business, which closed May 1st, as well as some FX impacts. Adjusted EBITDA for the industrial segment increased .6% to $97 million in the quarter, while adjusted EBITDA margin declined 30 basis points to 30.9%, driven by increases in compensation costs, including $4 million of the IPO CSAR conversion expense, as well as higher M&A diligence expenses. Now turning to the consumer segment. Revenues in consumer were $322 million, up .2% from the 2023 quarter, or .1% on an organic basis. The improvement was driven by strong demand for non-certification testing and other services for consumer technology, particularly higher electromagnetic compatibility or EMC testing for automotive and connected devices, as well as improved retail products demand. In addition, strength in HVAC led to improvements in certification testing. Adjusted EBITDA for the quarter and consumer was $61 million, an increase of .3% versus the second quarter of last year. Adjusted EBITDA margin for the quarter was 18.9%, an increase of 210 basis points year over year, driven by higher revenues and expense management actions taken in 2023 to improve our cost structure. As we detailed on the last call, consumer completed several cost structure improvements in the past year, including relocating two large laboratories into larger, more cost-efficient locations, which contributed to the improvements in margin. This more than offset $4 million of the CSAR conversion cost within consumer. Our third segment is software and advisory. Revenues for that segment were $94 million, an increase year over year of 6.8%, including a .7% increase on an organic basis. The improvement was driven by higher demand for software and advisory services. Adjusted EBITDA for the quarter for software and advisory was $15 million, an improvement of 25% as compared to the second quarter of last year. Adjusted EBITDA margin for the quarter was 16%, an increase of 240 basis points year over year, driven by higher revenues and cost structure improvement actions. Turning to our cash generation in the first six months, we delivered $244 million of cash generated from operating activities compared to $220 million in the first half of 2023. Capital expenditures were $113 million in each of the first half of this year and last year, and were primarily geared towards higher return gross investments in both periods. We continue to make important investments in energy transition opportunities, a focus area for UL solutions. Pre-cash flow was $131 million compared to $107 million in the first half of 2023, in part reflecting lower cash incentive payments. We finished the quarter with $295 million of cash and cash equivalents on the balance sheet and net leverage of 0.9 times net to trailing 12-month adjusted EBITDA. The strength of our balance sheet is reflected in our investment grade ratings. We believe a robust balance sheet and cash flow generation give us great flexibility to invest in organic initiatives, accretive acquisitions, and to pursue a number of value enhancing ways to produce best in class shareholder returns. Now turning to our full year outlook, on a constant currency basis, we continue to expect organic growth to be in the mid single digit range. We expect organic growth in the second half to also be in the mid single digit range. This is driven by continuing strong tailwinds from the electrification of everything, along with digitalization and sustainability megatrends. In addition, for modeling purposes, we expect the revenue impact of the two acquisitions Jenny discussed, DI and Testnet, to be less than $10 million in 2024. In addition to this incremental revenue, these two companies give us expanded capabilities and a broader footprint around battery and alternative fuel technologies. We expect to drive full year adjusted EBITDA margin improvement in 2024 and beyond through combination of key focus areas for the company. First is delivering top line organic growth, where we look for the product tick market to grow mid single digits and expect our market share to expand as our investments take scale and the business grows. Second, we are driving increased productivity through the automation and digitalization of work, through higher utilization of our people and our facilities and by streamlining and standardizing our processes and our metrics. Finally, as we look at M&A, we will continue in strategic areas of focus with an eye towards margin and earnings accretion. We will continue to evaluate our pipeline of acquisition opportunities. We now expect capital expenditures to be in the range of 7.5 to 8.5 percent of revenue in 2024. This is up slightly reflecting CAPEX in the two acquisitions we have closed and are planned to continue to pursue high return growth investment opportunities. In summary, I'm proud of the strong results we delivered in the second quarter and in the first half of 2024, which position us well to deliver on our goals for the full year and beyond. We believe we are growing our business faster than market, gaining share while improving profitability and enhancing our already strong cash generating profile. This positions us to be active yet selective in our deployment of capital. We are creating and delivering shareholder value on our path to being our customers most trusted, science-based, safety, security and sustainability partner. Now let me turn the call back to Jenny for her closing remarks.
spk06: Thanks, Ryan. In summary, we are proud of how our team performed in the second quarter, delivering strong top line growth and solid margin improvement, which we believe sets us up to deliver impressive full year results in our first year as a public company and beyond. We are a leader in a highly fragmented industry focused on product markets that we believe will be driven by long-term mega trends that favor our unique suite of offerings. Our focused execution and targeted M&A strategy position us to gain share and help accelerate our ability to ensure safety, compliance and sustainability. We believe we have the strong investment grade balance sheet and robust cash flow profile to deliver outsized long-term returns for all shareholders. As we continue on this journey of being a public company, occasionally, I will highlight for you some important awards or notable events because it helps bring to life some of the amazing work and technical expertise we have in so many areas of safety science. So today, I'm going to talk about the environmental impact of refrigerants, those used in everything from drinking fountains to industrial chillers. This has been a growing concern for decades. As major transformations for refrigerants within the industry emerge, phasing down outdated and climate damaging refrigerants will be a continuous challenge in years to come. In March, Brian Rogers, UL Solutions' principal engineer for HVAC, was invited to the White House to discuss this important safety concern. UL Solutions has been working hard on this issue since the late 1980s, and the knowledge that we can offer to solve these safety challenges are extremely deep. This is just one of many examples in which our experts are invited to meetings at the highest levels to help shape the needed safety outcomes for consumers and indeed for our entire society. With that, I will wrap up by saying we are thrilled to be building on the momentum we had leading up to our April IPO, and I'm excited for what the future holds for UL Solutions. Operator, let's please open the call for questions.
spk03: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you have a question.
spk04: Our first question comes
spk03: from the line of Stephanie Yee with JP
spk04: Morgan.
spk07: Hi, good morning. Congrats on a strong quarter.
spk06: Thanks, Stephanie.
spk07: So when I look at organic revenue growth in the first half, it was 8%, which I would consider to be high single digits. You may have seen your full year guide at mid single digits growth. Could you, you know, is that for conservative reasons? Are you expecting some deceleration in growth in the back half because the back half is expected to be mid single digits? Or is there like a tough year over year comparison issue in any particular segment that you can kind of highlight?
spk06: Well, absolutely. Stephanie, as you highlighted, we are pleased with the 8% first half growth organically. And if you look at the back half of last year, our second half comps are a bit more challenging because we saw some growth drivers begin to accelerate in the second half of last year. Our organic growth in Q3 last year was .5% and Q4 was 8.3%. So we're comfortable giving realistic guidance that we expect to deliver.
spk07: Okay, that's helpful. And you mentioned some improving trends within consumer, especially retail. It seems like EMC trends are still strong. Do you expect those improving trends to continue in the back half of the year?
spk06: You know, we are seeing some confidence in consumer in our customers reinvesting in R&D and innovation. And we, you know, as I mentioned, those global warming potential type of tests that we talked about in the HVAC business continues to be that type of driver for the consumer business. So, you know, we think that our customers see confidence in the consumer space and that they're making investments in R&D and innovation.
spk04: Okay, great. Thank you. Thank you. Our next question comes from the line of George
spk03: Tong with Goldman Sachs. Please proceed with your question.
spk02: Hi, thanks. Good morning. Organic revenue growth in the industrial segment accelerated to around .5% in the quarter, despite the comps in the prior year period becoming considerably more difficult. Can you elaborate on some of the tailwinds you're seeing on the industrial side and the extent to which they should persist into the second half of the year?
spk06: Absolutely, George. And there is tremendous stamina in industrial. It's driven by those mega trends that we talk about, the electrification of everything. You know, we see great demand in power and controls. I mentioned the Korea battery lab that came online and we've seen great market demand from that. In the built environment, we're seeing an increase in demand around things like warehouse solutions and fire suppression and fire resistive and containment products. So, there's a lot of different pieces in industrial that really flow through this demand that is reflected by the electrification of everything and those trends that are, those mega trends that are out there.
spk11: And George, just to add on that, you're right. We are laughing at a period where we had double digit organic growth in the second quarter of last year. The five consecutive quarters of double digit organic growth for industrial.
spk02: Great. That's helpful. And then turning to the consumer business, the margins, the down margins expanded 210-fifths on a -over-year basis. Can you talk about whether that pace of margin expansion is sustainable and some of the efficiency initiatives that you're undertaking to continue to unlock margin expansion going forward?
spk06: Indeed, we are seeing improved cross-structural, the cost structure in the segment. We had a number of expense management actions in 2023. And when you look across occupancy, new labs, better efficiencies, IT costs, we continue to believe that there are, the consumer margins are durable and there's additional margin expansion opportunities.
spk04: Got it. Very helpful. Thank you. Thank you, George. Thank you. Our
spk03: next question comes from the line of Andrew Nicholas with William
spk04: Blair.
spk03: Please proceed with your question.
spk12: Hi. Good morning. Thank you for taking my question. I wanted to ask first on software and advisory. You talked last quarter and again this quarter about some of the momentum with Altris in particular. I'm just curious, how much of the improved growth in that segment would you attribute to that product versus, you know, Salesforce execution or any other strategic shifts that you've made over the past several quarters?
spk06: Well, I think the Salesforce execution is tied to the growth in software and advisory. We had mentioned in the past that we're undergoing a commercial transformation there. And we did see equally balanced growth this quarter between both the software and the advisory side of the business. But Altris, we believe, is really helping propel what we're seeing in the pipeline. You know, two thirds of our top 500 customers purchase both TIC and software and advisory. And we've been very focused in using Altris to help extend the value proposition of those modules that are within that Altris umbrella. We've had a number of additional releases within Altris, particularly in the sustainability software. And, you know, we continue to see favorable results or favorable indications, I should say, from the marketplace about the value of those products.
spk12: Great. Thank you. And then for my follow up, maybe on a different topic, throughout your prepared remarks, you talked about maybe new labs, whether it's the HVAC Center in Texas or the Advanced Battery Lab in Korea, experiencing pretty quick ramp up in activity. And I'm just wondering if that is consistent with what you have historically seen with new labs and if it affects your kind of willingness to invest in similar initiatives going forward. Just feels like the uptick is more immediate than maybe I would have otherwise expected. So any context there would be great. Thank you.
spk06: Andrew, I really appreciate you calling that out because it reflects a philosophy that we have around capital investment is that we really want to see potential demand before we even start breaking ground on a lab. And so many of these, our customers come to us and will ask us if we're willing to extend our footprint or our capacity to accommodate their growth. And we saw that in a number of cases. So like the Korea lab that we talked about that came online last year, I think it was pretty close to capacity within that quarter. We're excited about the backlog that we're seeing for the North American Battery Lab that will come online in August. So it is reflective of our philosophy and the ways in which we deploy capital. So when we talk about that growth capital, we are grounding that growth capital in market-based research and facts based on our customer conversations.
spk11: Yeah, and I would just build on that in particular related to batteries, which large capacity batteries are a relatively new technology. And we've made investments in China, in Korea, in North America, and then the surrounding technologies in many other locations for things like charging and the plastics and casings that are used in batteries. So the revenue growth we saw in the customer demand, particularly in Korea, gave us the confidence to make that additional investment. It's definitely early days in North America. We don't have that battery open yet, that lab open yet, but we'll continue
spk04: to evaluate. Thank you. Thank you. Our next question
spk03: comes from the line of Heather Valsky with Bank of America. Please proceed with your question.
spk08: Hi, this is Emily Marzol on for Heather Valsky. Good morning. Good morning, Emily. Good morning. Wondering if you could give us an update on your pricing initiative, what you're seeing in the market, if you're getting any pushback on pricing.
spk06: We continue to be focused on the configuration price quote software that we've implemented and deploying that across our entire set of commercial teams. And our pipeline remains strong. The evidence that we look to is really our net promoter scores, which we keep a close eye on, conduct that quarterly. And our response rates continue to be strong and we continue to trend upward. And the data point that I look most closely at is perceived value. And our customers continue to express that they perceive value from the services that we offer. So that leads me to continue to believe that pricing is holding in a really strong way.
spk08: Okay, thank you. And I guess the next question, you had two German acquisitions in the quarter. Could you talk to us a little bit about your M&A opportunities, what you're seeing? Is it a geographic approach? Is it a capacity or capabilities approach? Like, what are you seeing in the market?
spk06: It's a great question because we are active in M&A globally. We've got a number of prospects and a number of opportunities that we evaluate all over the world. So it's a bit coincidental that we closed two in Germany this quarter. That said, our M&A philosophy is to be the acquirer of choice. We've been in business 130 years. So many of these entrepreneurs and founders know us. Some of them even started as UL employees and then launched their own business. And it's a great opportunity for them to return. So our M&A philosophy is where we can gain intellectual property that we otherwise don't have or where we can gain access to a set of customers or a set of capabilities that would be harder for us to build organically. We pursue it.
spk11: We prioritize each of our businesses and we seek to establish and maintain leadership in all of our businesses. And sometimes we have portfolio components that don't fit those objectives. And in the last roughly year we've divested two businesses.
spk04: So it goes both ways. Thank you. Thank you. Our next question comes in the line of Stephanie Moore with Jeffries. Please proceed with your question. Hi. Good morning.
spk09: Thank you.
spk06: Good morning, Stephanie.
spk09: I wanted to take up maybe a high-level question here. Obviously it's an election year and there's potential we could see a new president who might take a harder stance on tariffs versus the current administration and what we've seen the last couple of years. So with this potential change, I'd love to get your thoughts on what your customers are saying in terms of contingency plans, preparation, potentially maybe moving manufacturing to different locations, how this could potentially impact you guys if you think it's neutral, positive, or negative implications. So any color there. Thanks.
spk06: It's a great question and it's something we monitor closely because our field engineers all over the world are typically visiting our customers' manufacturing locations roughly four times a year. And we track how those site visits, what the trajectory of increases, decreases by country is. China is a third of the world's manufacturing. That number of site visits continues to trend upward off a very high base but at a low slope. What we're seeing is increases Vietnam, Mexico, India at a much higher slope but off a much lower base. So what this means is when you really think about customer supply chains, many of them have components coming from China and then they can decide where they put the assembly and that assembly can be moved all over the world. That's, I would say, in some cases what we're seeing. But China continues to grow as do these second locations. For us, it just continues to demonstrate the value that we offer our customers to be close to where they are and ready to expand labs like we did in Vietnam two years ago and Mexico to serve their needs.
spk09: Great. No, that's helpful. I appreciate it. And then just as a follow-up, touching on the consumer segment, you talked about or re-highlighted investments that you've made in HVAC and particularly next-gen refrigerants and a new site that is up and running in Plano, Texas that you're seeing good growth from. I'd love to hear thoughts first. Are there opportunities for further expansions, maybe additional testing sites in HVAC over the course of the next maybe 12 months or so? And then secondly, I'd love for you to maybe give us a little bit of color on maybe other areas within consumer similar to HVAC where you view could be a really nice next growth avenue within that segment. Thanks so much.
spk11: I would say particularly in HVAC, it's a global concern about refrigerants and changing energy efficiency. So in Europe, they're changing regulatory demands. There's been discussion in the U.S. about the role of natural gas cooking that leads to product innovation. So we're not prepared to announce any additional specific capacity changes, but I would say there's overall growth in innovation which leads to business growth for us over time. I'd say other things that are in the earlier days, we have a large business in consumer technology for things like high-tech equipment, laptops and other things. The design of those products as being influenced by AI chips is leading to different performance and testing requirements, but those are relatively early days at
spk06: this point. Yeah, I'll add to that. You know, we are seeing, as I mentioned, a return in confidence in consumer innovation and R&D, and that was reflected in some strength that we're seeing in that type of consumer tech testing across Japan and Korea in particular. We're also, as Ryan mentioned, you know, AI, there's a broader AI ecosystem, and there's consumer products that we need. We have AI data centers that need a tremendous amount of energy. I just read recently, you know, up to 100 kilowatts for a single AI data center, and that affects also our industrial side in both, you know, our wiring and cabling type of businesses as well as back to our energy and industrial automation and the power that's needed. So all these pieces fit together in a great way, but we are seeing some really great trends that are anchored in the consumer side.
spk04: Thank you so much. Thank you.
spk03: Our next question comes from the line of Shlomo Rosenbaum with Stiefel. Please proceed with your question.
spk10: Hi, good morning. Thank you for taking my questions. I want to focus a little bit on the industrial first, just, you know, really strong organic growth, and there was a call out earlier, it was mentioned beforehand about some of the value-based pricing initiatives. Is there a way you can parse for us, if not, you know, quantitatively but maybe qualitatively, how much of the growth do you think might be coming from just really good demand for volumes and how much is, you know, coming from those initiatives that you're talking about?
spk11: Yeah, so within industrial, that business is disproportionately our service lines around certification testing, ongoing certification services, and we saw good growth, roughly 8% growth across both those service lines, and I would say it was fairly evenly balanced between price and volume. We don't break out with more specific metrics by segment, but as Jenny mentioned, the general trends we're seeing in relation with pricing don't give us concern about particular resistance to the value-based pricing initiatives we've taken.
spk10: Okay, great. That's great. And then, Jenny, maybe this is a bigger picture question. There's been very solid growth for the last five quarters. You're looking at .5% or higher. There tends to be ebbs and flows in the industry. If you look back at the company's historic growth, it seems to – you know, companies seem to always eke out growth even in bad times, but it goes up and down. Would you have some perspective in terms of like when you're in an upswing like what it seems like now? What's a typical cycle that we would look at for, you know, really strong growth, you know, followed by, you know, more of a normalization?
spk06: Thanks, Shloma. What's great about UL is we serve over 35 industries, so a cycle in any particular industry doesn't have a disproportionate effect on us. So I think when you look back at that compounded annual growth rate of almost 7% that we've seen for over a decade, that feels like, you know, kind of the normal, you know, there might be a mild fine wave up and down that upward slope, but that's the way we think about it. And again, you know, we've got good visibility in particular to the trends in industrial because so many of those projects last for multiple quarters, you know, even can cross years. And that then linked to the 42% of our revenue that's the ongoing certification services and recurring software revenue really launts the effect of any cyclicality in any industry.
spk10: Great. And can I sneak in just one housekeeping thing? What was the $21 million in other income that got excluded? Maybe, Ron, you could just tell us what that was.
spk11: Yeah, that was a gain on sale related to our payments testing business which closed May 1st. So we announced that and then next gain was about $25 million and then it was offset with a few other things. We also had some small investment gains, smaller investment gains in the second quarter of last year. So you can see it's up in both periods. It was just that was the big driver in the second quarter this year.
spk04: Got it. Thank you. Thank you. Our next question comes from the line of Jason Haas
spk03: with Wells Fargo. Please proceed with your question.
spk05: Hey, good morning and thanks for taking my questions. In response to an earlier question, I heard you say that software and advisory had strong growth across both software and advisory. But when we look at this standalone software category, it looks like it was flat. Is the implication there that the software that's recorded in the other segments was down? And if so, could you just talk through what drove that and what could drive further growth in software from here?
spk11: Yeah, Jason, good question. I would say the primary driver was we sold a payments testing business that had software revenue streams. That table of revenue by service line is on a total basis and we don't break out the acquisition or FX or organic components of that. But that was the big thing that offset the software
spk05: revenue. That's really helpful. That makes sense. And then I was curious if you had put any thought to what the recent Chevron ruling could mean for the certification industry that could potentially change any regulations that could potentially be a positive or negative for the industry overall.
spk06: The Chevron ruling is an interesting one that we're paying close attention to. But truly, the regulations that drive our business are global and they're across every level of, I'm going to say, both industry and government types of regulations. You could be local, state, federal, around the world. So we continue to see safety, security, and sustainability as being important market drivers and manufacturers appreciate regulation around those because it helps them have the confidence and the types of capital investments that they need to make to have their products reflect their ability to access a global market. So the way we see it is Chevron's interesting. It may have some effects on society, but we don't see it having any effects on us.
spk04: Got it. Thank you. Thank you. Our next question comes from the line of Arthur Truslove with Citi. Please proceed with your question.
spk01: Good morning, everyone. Thank you very much for taking my question. The first question I had was just around the margin bridges in both consumer and the industrial divisions. So within the consumer division, you mentioned, I think, there was four million of CSAR adjustments that were slightly offset by other employee expenses. And I guess if you could just say what the margin increase was stripping out the impact of these one IPO related points. Second question is kind of the same, but for the industrial division, I mean, clearly margin there fell from 31.2 to 30.9. I just wondered if you could help me to understand what actually happened there on an underlying basis once you strip out the impacts of these ad hoc staff cost related matters. And then third question, are you able to, you mentioned that you expect the German subsidiaries to deliver about 10 million of revenue in the full year. Is it right, therefore, to think that the annual revenue run rate is about 20 million for those? Thank you.
spk11: Yeah, thank you very much for the questions, Arthur, and I'll take those in reverse order. So yes, in regard to the acquisitions, roughly $20 million on a full year run rate is a reasonable estimate. In regard to the industrial margin, this applies for both operating income margin, and I'll make some comments on adjusted EBITDA margin, but you're right. The strong revenue growth did offset core operating expense growth. And when you adjust for items in particular, we saw margin improvement, which we expect to continue. So the primary drivers of the decline of 30 basis points on adjusted EBITDA margin were $4 million related to the share of the CSAR expense, $5 million related to acquisition impact, and we break that out on the table, the majority of which was non-recurring transaction expenses. Industrial has recently completed two acquisitions and one divestiture all within the last several months to better position the portfolio for energy transition. And if you exclude the CSAR incremental impact, which is now fixed, and the acquisition impact, and we isolate those in the earnings release, operating income would have been $9 million higher, and that would have been an increase of roughly 80 basis points on a comparable basis. Now at the adjusted EBITDA level, there's also another adjustment. Now that we are a public company, we are adding back stock-based compensation. So if you adjust for those things that I said, but also back out the adjustment for stock-based compensation, do not give credit for that. Also, it's about 80 basis points, but the measures are slightly different. And then in regard to consumer, the primary drivers were leveraging salaries, occupancy, and IT costs that more than offset those incentive increases. So consumer also bore $4 million of that $9 million CSAR expense on an adjusted EBITDA basis that was mostly offset by an add back of the $3 million of stock-based compensation. Both of those segments, I should mention, also had $2 million of FX headwinds to operating income in adjusted EBITDA, and the 80 basis points that I mentioned doesn't include that FX impact.
spk01: So essentially, the key takeaway would be that on underlying basis, the industrial adjusted EBITDA margin would be about 80 bips if you strip out the issues with the expenses. That's the key conclusion, and that's driven by leverage and pricing and all the rest of it.
spk11: That's correct. That's correct. And the two primary items are the share of the CSAR expense and the $5 million of acquisition impact.
spk04: Thank you very much. Thanks, Arthur. Thank you. Our next
spk03: question comes from the line of Josh Han with UBS. Please proceed with your question.
spk15: Hi, good morning, Jenny and Ryan. Congrats on a strong quarter. Thank you. Hi, yes. Some of the labs that you're building now are larger than prior, and is there any reason to think that once they're fully utilized that the larger labs could potentially be more profitable than your other labs?
spk11: Yeah, I would say some of the large lab investments, we do have high economic flow through. Some of this is the large battery technology. As I mentioned, those are relatively new. So we're seeing good capacity utilization over time. The pricing dynamics in that market will contribute to the total economic flow through. But we think there's the opportunity for that. They're definitely more capital investment intensive than some of our businesses, but we seek to be rewarded for that capital in the way that we underwrite the investments.
spk14: Okay, that makes sense. Thank you. And then for
spk15: my follow-up, sticking with margins. So your margins were up nicely in the first half of the year, and you're guiding to margin improvement in the full year. I guess, is there any way to quantify that margin improvement? Because there could be a wide range of
spk14: outcomes that still fits that characterization in the second half. Just wanted to see if there's any way to ballpark the expectation for the second half. Thank you.
spk11: Yeah, I appreciate the comment. Yes, at this point through six months, we're up 150 basis points year over year on adjusted EBITDA margins. We're not in a position to provide more specific guidance. We do expect adjusted EBITDA improvement on a full year basis, but not in a position to provide more guidance by segment or in total.
spk06: And Josh, as we've commented in the past, we don't expect that there's any singular event that has a dramatic step change in margin, but we are very focused on ongoing continuous improvements, lean Six Sigma, getting value from technology implementations that we've completed in recent years. So I would continue to just expect a steady trend of margin expansion in every business as these various initiatives come to fruition.
spk04: Perfect.
spk14: Thank you for that color
spk04: and congrats again. Thanks. Thank you. Thank you. And
spk03: we have reached the end of the question and answer session. And I'll now turn the call over to Jamie Scanlon for closing remarks.
spk06: Well, thank you everyone for joining us today. We really appreciate your support and we look forward to updating you on our progress next quarter.
spk04: Thank you all. And this concludes today's conference and you may disconnect at this time. Thank you for your participation.
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