UL Solutions (ULS) 5 Nov 242024 Q3 Earnings call transcript

Hello, and welcome to the UL Solutions Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, [ Mr. Kevin Arns ], Associate General Counsel at UL Solutions. Thank you.

You may begin, [ Mr. Arns ].

Thank you. Welcome, everyone, to our third quarter 2024 earnings call. I am filling in for Mitchell Ji this quarter, who is on family leave.

Joining me today are Jenny Scanlon, our Chief Executive Officer; and Ryan Robinson, our Chief Financial Officer.

During our discussion today, we will be referring to our earnings presentation, which is available on the Investor Relations section of our website at ul.com.

Our earnings release is also available on the 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 Securities 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 Form 10-Q for the quarter ended 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 would now like to turn the call over to Jenny.

Good morning, everyone, and thanks for joining us. I'm very pleased to say that our strong performance in the first half of 2024 extended into Q3 with robust growth, including higher revenue, improved adjusted EBITDA margins and solid cash flow. These results showcase ongoing strength in our core business and our strategic focus on key megatrends that we anticipate will drive long-term demand for our industry-leading services. I'll cover 3 main topics before turning it over to Ryan.

First, I'll highlight our strong Q3 performance.

Second, notable growth achievements and customer activities. And finally, our financial position and capital allocation strategies.

Our strong third quarter results are due to overall healthy demand for our services and focused execution by our entire team. I'm deeply appreciative of our employees whose dedication has been crucial to our success. Their unwavering commitment to safety, scientific excellence and a customer-centric approach, not only defines our culture, but also propels our business. Q3 revenue reached $731 million, reflecting 8.1% overall growth with organic growth of 9.3%.

Our Industrial and Consumer segment showed notable strength, growing by 11.7% and 9.2%, respectively, on an organic basis while our Software & Advisory segment underperformed our expectations.

Our results reflected growth across all geographic regions. Adjusted EBITDA for the third quarter grew 12.3% and adjusted EBITDA margin expanded by 90 basis points.

Our hard work resulted in a 6.1% increase in adjusted net income. And we generated $215 million of free cash flow year-to-date.

Next, let me highlight a few key achievements and drivers of performance this quarter and subsequent to its end. In August, we opened our cutting-edge large-scale battery testing lab in Auburn Hills, Michigan. This facility, our largest laboratory investment to date is one of the most comprehensive electric and hybrid vehicle and industrial battery testing centers in the country. It began operations with a strong backlog of industrial battery testing projects.

As I mentioned on our last earnings call, battery testing for UL Solutions covers a wide array of energy storage systems that goes well beyond EV and hybrid automotive batteries. The energy transition covers a multitude of energy transfer and storage needs from small consumers to large-scale industrial batteries used to power heavy equipment. We recently hosted a customer event in Auburn Hills and also had a large presence at the battery show, generating overwhelming interest from automotive and industrial customers. The battery show is the largest North American trade show and conference focused on advanced battery technology and electric and hybrid vehicle drivetrains. Activity at the state-of-the-art lab continues to increase and we anticipate it will contribute to our growth from 2025 onwards. In our Consumer space, we continue to be pleased with the ways our mission comes to life.

Our mission matters. We've done a lot of work around lithium and ion battery safety in the past couple of years and have demonstrated progress.

For example, the City of New York has banned the sale and rental of e-mobility devices that have not been certified for safety, which, of course, is what we do. Recent published reports about New York City indicate there has been a significant reduction in both deaths and injuries due to lithium ion battery fires as compared to the same period in 2023.

In fact, the city's fire commissioner said that while lithium battery fires remain a threat, he saw progress in fighting that threat and working towards 0 deaths.

Our work in safety-based solutions are key to this effort, and we are proud of our impact.

Now let me comment on our capital allocation activities.

Our hard work and resilient business model backed by an investment-grade balance sheet allow us to generate robust cash flow.

We continue to take a disciplined approach to capital allocation. Key actions this quarter included completing the acquisition of TesTneT, an anchor of our future hydrogen strategy and returning value to shareholders through our regular quarterly dividend of $0.125 per share paid in September.

Additionally, we successfully completed a follow-on offering of 23 million shares, including a fully exercised [ greenshoe ] on behalf of UL standards and engagement, significantly increasing our public float.

We are committed to maintaining a strong balance sheet with conservative leverage and investment-grade ratings, and we expect to continue to return excess capital to shareholders over time.

Now let me turn the call over to Ryan, who will provide greater detail on our results and our outlook.

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 we'll discuss our segment performance before closing with some comments on our full year outlook.

We are proud to report in our third quarter on a consolidated basis, a continuation of strong growth, adjusted EBITDA margin expansion and solid cash generation.

As Jenny mentioned, it's encouraging to see that revenue growth once again occurred across all of our segments and all of our geographies.

Now let me dive into the details of the quarter. Consolidated revenues of $731 million were up 8.1% over the prior year quarter, including organic growth of 9.3%. The increase reflected particular strength in the Industrial segment, which delivered 11.7% organic growth in the consumer segment, which delivered 9.2% organic growth. Gross margin was essentially stable as compared to the prior year, with higher revenue offset by increased compensation expense on flat headcount including the company's annual cash bonus plan and some salary increases. SG&A expenses increased 10.7% compared to the prior year period. Over half of the increase was related to stock-based compensation, specifically our cash settled appreciation rights, or CSAR which were part of our pre-IPO long-term incentive plan. Last year, in the third quarter, we reduced our estimates of future performance which resulted in a benefit to our expenses, while this year, our stronger performance resulted in some catch-up expense recognition across all of our segments. Adjusted EBITDA for the quarter was $183 million, an improvement of 12.3% year-over-year. Adjusted EBITDA margin was 25.0%, up 90 basis points from the same period a year ago on particular strength in both industrial and consumer segments, which more than offset a modest decline in software and advisory. Adjusted net income for the third quarter was $104 million, up 6.1% from $98 million in the third quarter of 2023. Adjusted diluted earnings per share was $0.49 per share, up from $0.47 in the third quarter of 2023.

Now let me turn to our performance by segment, starting with Industrial. The mega trends of energy transition, the electrification of everything and industrial automation are driving tremendous innovation and demand for our services. These factors helped the industrial segment deliver the strongest revenue growth of the 3 segments for the quarter. Revenues in industrial rose 9.3% to $317 million or 11.7% on an organic basis as compared to the third quarter of 2023. Those impressive gains were driven by robust demand for our ongoing certification services across most industries and also associated price increases. Industrial and EV battery certification demand remains robust, robust and recent capacity contributions are contributing as expected. And as Jenny mentioned, we recently had an exciting customer event at our recently opened Auburn Hills, Michigan lab. Adjusted EBITDA for the Industrial segment increased 10.4% to $106 million in the quarter, while adjusted EBITDA margin improved 30 basis points to 33.4%. The higher organic revenue was partially offset by increases in performance-based compensation, including the comparison to last year's CSAR expense.

Now turning to the consumer segment. Revenues in Consumer were $321 million, up 8.8% from the 2023 quarter or 9.2% on an organic basis. The improvement was driven by strong demand across all 4 of our service lines. Demand for higher electromagnetic compatibility or EMC testing, for automotive and consumer electronics, where we are a market leader remains strong.

We also benefited from capacity additions we have made in the last year in the areas of consumer technology HVAC and retail. Revenue in the quarter also benefited from a surge in demand for some technology product testing. Adjusted EBITDA for the quarter in Consumer was $62 million, an increase of 24.0% versus the third quarter of last year. Adjusted EBITDA margin for the quarter was 19.3%, an increase of 240 basis points year-over-year, driven by higher revenues. Strong organic revenue growth was partially offset by performance-based compensation and the prior year's CSAR benefits.

We are adding capacity at various consumer facilities, increasing our footprint and improving how we connect with our customers in order to meet increased sustainability-related testing demand.

Our third segment is Software and Advisory. Revenues for that segment were $93 million, an increase of 2.2% year-over-year on both a total and organic basis. The improvement was driven by reduced churn and higher demand for software, particularly for retail product compliance and sustainability solutions, which was more than offset by a modest decline in advisory.

As Jenny mentioned earlier, these results in software and advisory were below our expectations. Adjusted EBITDA for the -- in the quarter for Software and Advisory was $15 million, a $2 million or 11.8% decrease as compared to the third quarter last year. Adjusted EBITDA margin for the quarter was 16.1%, a decrease of 260 basis points year-over-year as higher revenues were more than offset by increases in both direct and company-wide performance-based compensation.

Turning to our cash generation. In the first 9 months of 2024, we generated $394 million of cash from operating activities compared to $341 million in the same period last year. The improvement was driven by business performance and lower cash incentive payments. Capital expenditures for the first 9 months of 2024 were $179 million compared to $156 million in the year-ago period.

We continue to make important investments in energy transition opportunities, a focused growth area for UL Solutions. Free cash flow for the first 9 months of 2024 was $215 million compared to $185 million in the same period of 2023. We finished the quarter with $327 million of cash and total debt of $802 million. The strength of our balance sheet is reflected in our investment-grade credit ratings.

Our 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. This year, you have seen examples of this in new labs, we have opened like Auburn Hills and the Arkansas Retail Center of Excellence as well as acquisitions like TesTneT and Betterieingenieure.

Now turning to the full year outlook.

Given our strong year-to-date results and visibility into our business and end markets, we now expect full year constant currency organic revenue growth to be in the mid- to high single-digit range. Demand remains robust from our key megatrends, particularly the electrification of everything, energy transition, digitalization and sustainability.

We expect to drive adjusted EBITDA margin improvement for the full year 2024 and beyond through a combination of key focus areas for the company.

First is delivering top line organic growth.

Second is the expected mix benefit driven by our industrial segment, which is both our fastest-growing and our highest margin segment.

Third is increasing productivity; and fourth, is strategic accretive M&A. Based on our full year outlook, we're excited for a setup for a strong finish to our year-end. I'll provide some additional context on the fourth quarter.

We expect Q4 constant currency organic revenue growth in the mid- to high single-digit range, in line with our full year outlook.

Importantly, this growth moderates from the Q3 pace primarily attributable to 2 factors.

First, as I said earlier, in Q3 of this year, consumers saw a surge in demand that may see a deceleration in Q4. Furthermore, in 2023, Q4 was our strongest quarter of growth and presents tougher comparisons. Year-to-date, we have expanded adjusted EBITDA margins by 130 basis points year-over-year. In the fourth quarter, we expect adjusted EBITDA margin to expand at an even faster pace compared to the fourth quarter of 2023.

We expect this improvement in margin to be driven by higher revenue and to be largely offset by elevated expenses to support growth, namely in the categories of outsourced fulfillment costs and professional services. Performance-based compensation will also affect the degree of profit flow-through on incremental revenue in the final quarter of annual and multiple year plans. We now expect capital expenditures to be approximately 8% to 8.5% of revenue in '24 and based on our outlays of spending year-to-date and investments in new labs as we seek to match strong customer demand in both our Industrial and Consumer segments. In summary, I'm proud of the outstanding results we delivered in the third quarter and year-to-date 2024.

We are growing our business faster than the market gaining share, improving profitability and enhancing our already strong cash-generating profile, all with an investment-grade rating as a foundation. This allows us to be active yet selective in deployment of our capital.

Our aspiration is to be our customers' most trusted science-based safety, security and sustainability partner as we look to create and deliver outsized shareholder value.

Now let me turn the call back to Jenny for her closing remarks.

Thanks, Ryan.

Our team's outstanding performance in Q3 built on the momentum of our April IPO, delivering robust revenue growth and improved margins. This positions us for strong full year results in our debut as a public company and lays the foundation for future success.

As I mentioned last quarter, occasionally, we will highlight for you some important and high-profile work we do as a leading expert in safety science.

As you know, UL Solutions has decades of experience testing batteries, including lithium-ion batteries that are a large part of the energy transition.

As this transition accelerates, engineers and scientists from UL solutions regularly work with local, state and federal governments to help them understand issues related to the increased market penetration of lithium-ion batteries and large-scale energy storage.

Over the past year, this engagement has increased to include several prominent organizations in Asia. In a series of workshops, often in partnership with UL standards and engagement, the R&D team from UL Solutions has conducted training and presented the results of battery safety testing and research to standards organizations, government organizations and first responders in a variety of countries including Taiwan, Vietnam, Philippines and Singapore. This year, UL Solutions battery R&D team has worked with the Republic of Singapore Air Force USAID and the Taiwan National Fire Agency to conduct technical training, including failure analysis case studies, demonstrations of different battery safety tests and classroom instruction on advances in battery technology and safety features.

So with that, I will conclude by underscoring that as an industry leader, we focus on product markets that are driven by long-term mega trends aligned with our unique offerings.

Our strategic execution and targeted acquisitions are helping us gain market share in the growing safety, compliance and sustainability sectors. With our investment-grade balance sheet and strong cash flow, we're well positioned to deliver exceptional long-term value to all stakeholders. UL Solutions is poised to capitalize on our strong market entry, and we're enthusiastic about the opportunities that lie ahead. Operator, let's please open the call for questions.

[Operator Instructions] Our first question comes from Andrew Nicholas with William Blair.

I wanted to start by maybe digging in a little bit more to consumer business. a really, really strong growth quarter.

So I guess a 2-part question.

First, if you could maybe just spend a little bit more time talking about general sentiment amongst kind of customers there, what you're seeing in terms of product velocity, and then also, if there's any way to dive a little bit more into the surge in demand that you saw for technology product testing, it sounds like that's something that could potentially decelerate in the fourth quarter. I don't know if there's a way to quantify that or at least just explain exactly what it was that happened in the third quarter, but both of those would be helpful to understand.

Yes.

So we -- thank you for mentioning that, Andrew. We're pleased with the performance across consumer increases both in revenue and in adjusted EBITDA margin performance.

As you know, that segment has a few business lines and we're pleased to see growth in consumer technology testing in appliances, HVAC and retail and consumer product testing.

So it was in several different areas. We did see a pickup as we mentioned in the fourth quarter, as you mean in the third quarter, related to a surge of business related to new product offerings. Often we work with customers to help make sure their products are ready to go to market, and we saw an increased level of activity in the third quarter.

So while we're overall confident in the fourth quarter, and increased our guidance to mid- to high single digits on a consolidated basis, we do see that having the potential taper off a bit in consumer in the fourth quarter.

And one thing I would add, Andrew, is we continue to see strength in customers seeking a sustainability testing.

So the tailwinds from the GWP refrigerant regulations, strong safety demand there. And also that extends into other sustainability areas such as chemicals testing and indoor air quality for products. And we're seeing that strength in North America as well as Asia.

Very helpful. And then maybe for my follow-up, switching gears a little bit to margins.

Another good kind of metric to point to in terms of margin expansion year-over-year. Is there any way -- maybe bigger picture, I don't know that you could quantify it or you'd be willing to, but to kind of rank order the different pieces of that margin expansion, how much of that is a consequence of really strong demand and utilization versus internal process improvement and operating efficiencies or even price? Just trying to get a sense for how much of this margin expansion trend is attributable to above-average top line growth versus things that you're doing internally?

Yes. Good question. I'll make a couple of comments that are more thematic over time rather than specific third quarter items. We've talked about margin expansion over time, and those comments we made were largely in rank order.

So we talk about organic revenue growth and creating operating leverage in our business. growing our revenue, including some price improvements at a faster pace than our expenses.

Our core expenses, including headcount-related expenses, we think we've managed well and we expect to continue to do that.

Second is we have a very good growth driver that's benefiting consolidated margins by the growth and mix in industrial. And then third, we have a number of horizontal initiatives across the company, managing our footprint as a total company portfolio, managing and improving our digitalization of work processes, including our IT costs, and then finally, for adjusted EBITDA margin, it's a geographic item, but it's an impact as we transition from private company cash-based incentives to public company more fairly standard public company structures that stock-based compensation will be an add back. It shows up in operating income, but for adjusted EBITDA margin, it's a factor.

The next question comes from George Tong with Goldman Sachs.

The consumer business is continuing to see robust EBITDA margin expansion on a year-over-year basis, 200 bps plus this quarter. Can you talk about how much room there is left for consumer EBITDA margins to expand? And whether you think the low-hanging fruit has been addressed or whether you're still in the very early innings of driving efficiency gains in this segment?

Thanks, George. And we are pleased with the results that we saw in consumer this quarter, and we do feel like their margin is trending towards what I would call a new normal in addition to some of the pieces that Ryan just mentioned on the organic operating leverage and our focus on the value proposition for our customers through both pricing as well as breadth of services that we're offering.

I think some other important pieces in consumer have been some of that investments in new lab capabilities. And as Ryan alluded to, some of that footprint optimization, we consolidated, as we announced earlier this year, our retail Center of Excellence in Arkansas and housing greater capacity under a single roof is certainly helpful to the longer-term margin. We've also been pleased with the investments that we made on the GWP refrigerant lab capabilities. and continue to look at what the customer demand could be under that roof. And then extending back on our EMC wireless side and the chambers that we have there, we had added some capacity under again, an existing location last year, and that capacity is flowing through into full utilization or greater utilization and that continues to extend our margins.

So we're pleased with consumer and feel like we're at a new normal.

Very helpful. And then secondly, you mentioned the Software and Advisory business underperformed expectations a bit. Can you elaborate on some of the trends you're seeing in the segment that could have contributed to the moderation in growth and when you would expect to see a reacceleration in organic growth.

Yes.

Software and Advisory, it is the combination of software and advisory and each piece has different elements that can contribute to its growth. the overall premise of our software and advisory business, as I said, it is a reinforcing element of the value proposition that we offer to our tech customers. And I always like to remind everybody that 2/3 of our top customers purchase from both software and advisory and tick.

So as we look to performance in each side of software and advisory, what I'm looking for in software and the green shoots that we see is that churn is down, as Ryan had mentioned, contract terms are extending in duration that leads to longer-term ARR and a stronger recurring SaaS revenue. we look for the pipeline that turns into revenue, and we look for that pipeline specifically out of our existing tech customers. and in particular, in the areas of the supply chain and sustainability. And then I also look at Net Promoter Score, which we do in every business and continues to improve.

So there's some green shoots there in Software and Advisory. And I was pleased that this quarter the largest U.S.-based beauty retailer did select Work Smart, which is part of our Ultra platform as their software to aid their ability to evaluate the chemical properties of the products that are on their shelves. And the great thing about that ULTRUS platform is now that introduces ULTRUS to their whole supply chain and positions us to cross-sell and address potentially a new set of customers that we haven't had before.

So there are some green shoots here, but certainly, we expect better performance out of Software and Advisory.

We expect the sales transformation that they're going through. to get better legs in 2025.

The next question comes from Andy Wittman with Robert W. Baird.

Great. I just had a couple of questions here. I guess, first, kind of a bigger picture question, and then maybe I'll follow up with a couple of things to clarify with Ryan. But Jenny, I'm just curious as to -- if you could comment on your exposure to the AI value chain, what types of things are you offering today. And what types of things could you be offering in the future? And what are the trends you're seeing in that business in particular?

Yes. Thanks, Andy, and this is a really great question and a fun topic to think about. In the near term, there are some ways that AI is affecting our business positively, both in the products that we're offering particularly through ULTRUS and also in some of our key both Industrial and Consumer products.

So within ULTRUS, we've already incorporated AI. We're in the process of incorporating it into 4 different key areas. The ways that we help our customers classify their products. the ways that we help our customers with that chemical analysis that I just talked about with the large beauty retailer. The ways that we're modeling wind forecasts for our renewables advisory business and the ways in which we're helping our customers generate content.

So AR is affecting just our software product offerings in a positive way.

On the tech side, where we see is in early stages of like AI data centers, the ways in which cables need to be replaced, the ways in which the electrification, the amount of electricity needed for those data centers is pretty significant. And then we're also seeing an extension in our ongoing certification services in our labels business because those components that go into those data centers typically contain UL labels representing that they've been certified.

So we're seeing some great trends there. We did announce a benchmark program for benchmarking AI that's embedded in PCs. It's early stages. We don't expect that benchmark offering to significantly sway our revenue trajectory next year, but we certainly see it as a way that we continue to help our customers address the ways in which they're considering AI safety in their products.

So we're going to continue to incubate offerings that respond to our customers' needs in the ways in which they intend to use AI.

Got it. That's helpful. And then I just wanted to make sure that I correctly understood what you're trying to say on the fourth quarter margin performance, Ryan.

You said -- you mentioned obviously the third quarter margins were up 130 basis points.

You said they were going to be stronger. But then after that, you mentioned a couple of things that were negatives like compensation costs.

I think you said something about fulfillment costs.

So are you saying that margins will be sequentially -- the growth rate in margins will be sequentially higher in the fourth quarter than the 130 or that's underlying, but ex those items that you called out, they might not be as strong as the 130. I know it's a nuance point, but I think one important that we all get on the same page.

Yes, Andy, no, good question.

So year-to-date, our adjusted EBITDA margins been up 130 basis points. And in the fourth quarter, we expect to report an acceleration of that in the fourth quarter being a higher increase than that.

However, how hot we'll be tempered by those additional fulfillment costs that I mentioned, the higher demand comes with some outsourced lab fulfillment, some professional services -- and in the fourth quarter, it's the final period of some full year and multiple year incentive programs that final expenses need to be recorded in the quarter.

So it's just the degree of flow through on incremental revenue will be tempered by those factors.

The next question comes from Stephanie Yee with JPMorgan.

Ryan, if I could just follow up on the last question. Can we -- could you provide a rule of thumb for how to think about typically the incremental margin flow-through if let's say we weren't in the fourth quarter and you all was growing mid- to high single digits in any particular quarter?

Yes. The -- we're in a period of increased performance.

So our revenue is increasing at a pace in the second half.

And so we just have a shorter period of time to recognize any compensation and fulfillment costs associated with that.

So the flow-through is skewed by those temporary items. And at this point, we're not in a position to go into more detail and break out the components of that. But the primary outcome is it's a consequence of increased demand from our customers and accelerating revenue growth.

Okay. And when looking at the Industrial segment, it's posted double-digit revenue growth, organic constant currency for the last several quarters starting in 2023. Do you view that level of revenue growth as sustainable as we look into 2025, just given kind of the multiyear tailwinds that you've been talking about.

Yes. The thing about industrial, Stephanie, thanks for the question.

We are really proud of that double-digit growth that we're seeing. These projects do tend to be longer in duration. And when you look at the power and automation side of the business, which really reflects the energy transition and sustainability.

You look at the fact that we've added capacity both in large-scale battery labs all over the world a couple of years ago in Changzhou, China, Auburn Hills this August, Korea that we completed earlier this year and the newly announced an extension there. It's certainly reflective of the fact that, that mega trend of the electrification of everything we continue to see strength and durability in the industrials business. And then on a more macro level, we look forward to commenting more about 2025 and beyond after we complete the end of the year. But at this point, we're not going to give more specific guidance for next year.

The next question comes from Shlomo Rosenbaum with Stifel.

Ryan, maybe you could comment a little bit about the drivers of revenue growth between volume and price. European competitors have talked about pricing coming in as inflation has come down, but you're seeing your organic growth accelerate at the same time. Is it fair to assume that the volume is picking up at the same time, so it's overcoming that inflationary impact coming down. And are you able to quantify that for us in some way, shape or form? And then I have 1 follow-up.

Yes. Thank you very much for the question, Shlomo. And as you know, we report revenue in 4 primary service categories, 2 of those certification testing and non-certification testing and other services lend themselves more to price and volume. We provide a defined service testing a product and issuing a report or a certification.

So for those, we are pleased with the revenue growth. Those 2 categories grew 9.5% in the third quarter in both price increases and volume contribute to that. In the third quarter, it was slightly more volume than price. But overall, we were pleased with progress in price as well.

Okay.

So volume is accelerating. That's the bottom line on that one?

That's correct. That's correct.

Our overall revenue growth is driven by both price and volume. But actually, our volume is growing. Yes.

Got it. And this one is for you, Jenny.

Just in terms of -- we're thinking about the impact of various administrations on the business. And if we end up with a more tariff focused administration. Is that helpful to your business on the one hand because of the sourcing and software and advisory? And then on the other side, maybe we'd have to think about some headwinds on the China side. And maybe you could walk us through some of that, how much of your business is products from China specifically going to the U.S.? And just how should we think about this?

Yes.

First of all, product safety is kind of universal and enduring and products coming into the United States or Europe need to have safety and innovation is only successful and you have safety.

So when you look at administrative policies, no matter who's in office, we've seen consistency in demand, if you look back from -- at our growth rate from 2011 through a Democratic administration to today through a Republican administration through a Democratic administration. It's been pretty consistent.

So specifically, as you think about an answer to your question about tariffs, we saw this in 2018, and we've continued to see the ways in which our customers react.

So from China, the majority of our business is export markets, a significant majority. And what we continue to see is customers making decisions about where they want to house their manufacturing to launch those products into North America or Europe.

So we continue to see growth, low single digits in the sites that our field teams visit in China.

We continue to see higher growth in the sites that our field teams visit in areas where we've invested in new labs, such as Vietnam, India and Mexico. And we'll continue to be by our customer size as they make decisions about where they want to house their manufacturing and distribution locations.

Will that help the ULTRUS business in terms of supply chain node. That's part of what I was thinking about.

The ULTRUS business on supply chain is really focused on traceability of the materials within products.

And so certainly, as numbers of suppliers in a customer supply chain change or increase, it can affect those software licenses. But I think the bigger impact is in helping our customers if they decide that they need to move their manufacturing facilities to other locations. We see it more on the tick side to recertify products or recertified the raw materials or components that are going into those products.

So it's a bigger impact on the [indiscernible] side.

Our next question comes from Jason Haas with Wells Fargo.

It's been at least a couple of quarters now where you've called out value-based pricing as a tailwind.

So I was curious if you're doing anything to get a little bit more surgical on pricing? And if that's part of the strategy.

Just curious where we are in the process and there's more opportunities going forward.

Thanks, Jason. That's one of my favorite topics, so I appreciate you asking it. We implemented Oracle configure price quote in addition to having implemented a single global instance of sales force over the last few years. That has all been completed and our teams are now really focused on training the 1,000 or so sales team members that we have on really how to unleash the power of the analysis that they have at their fingertips.

And so we continue to extend the use cases and the training around those pretty powerful engines. And our ultimate goal is to make sure that we get paid for the value that we provide our customers.

That's great. And then as a follow-up, I'm curious if you could talk about your expectations for CapEx going forward, recognizing that you made this conscious decision to make more investments in the business, they seem to be paying off well.

So as you look at the [ 8% to 8.5% ] expectation, is that sort of the right framework to think about as we go forward?

Yes. Historically, our CapEx as a percentage of revenue has been a bit lower than that. But we see opportunities in a number of themes around -- particularly around energy transition that have led us to invest against those opportunities. We take a pretty prudent approach to underwriting each lab investment, understanding the underlying customer demand and seek to respond to the needs of our customers and have high visibility to revenue to support those investments.

We are in a period of elevated CapEx, and we've been achieving good returns on that CapEx. There are some new technologies like large batteries that we're investing in.

So we will see -- we'll continue to monitor how our more recent large investments are performing and use that as a basis to judge whether we continue this elevated level to invest against those opportunities. But we're in the long 130-year history of UL we're in relatively early innings of these themes of energy transition. And what I also always think is important to point out is that our maintenance CapEx is fairly low.

And so the amount that we put toward CapEx is pretty discretionary based on what opportunities we see ahead of us.

The next question comes from [ Harold Ante ] with Jefferies.

This is [ Harold Ante ] on for Stephanie Moore. I know you called out that you recently completed acquisition of TesTneT.

As you think about other acquisitions going forward, I guess what segments of the business would you think about acquiring? And now if you could just give us a sense of the framework you use to think about acquisitions and the multiple [indiscernible] market right now.

Yes. Thanks for the question. And philosophically, where we're the market leader, and we have the opportunity to invest CapEx to strengthen our position that's always our #1 priority. And that's why you see these investments in the new large-scale battery labs or the new retail Center of Excellence, places where we can extend our footprint and deepen our impact. But where we have opportunities to pick up a different type of intellectual property or leading research or thought leadership in an area like we saw in test net where they had some really strong interesting capabilities in hydrogen that we didn't have. That's absolutely the perfect example of how we think about attractive M&A. It's accretive. It gives us something that we couldn't otherwise easily get on our own and launches us now into a space where we can grow by applying CapEx into those types of technologies if we choose to do so.

So that's how we think about it. We look at M&A across all 3 of our segments. We've got relationships all over the world. And we continue to seek opportunities that fit the timing and the profile of what we need to grow our business.

And then I guess just on -- you brought on a facility in Korea being brought on the Auburn Hills.

So if you could just give us a sense for -- there was some backlog you had before these came online. Are these running ahead of expectations? Are they on that line of expectations. Can you just give us some color on how these investments have been going so far?

Yes, we have an underlying philosophy of not investing CapEx until we've got clear understanding of market demand and potential commitments from our existing customer base.

So the Korea lab that came online actually came because a customer asked us to invest in capacity to help them with their growth and innovation. And we're pleased with the pace that it is fulfilling its business case. Similarly, in Auburn Hills, we had a set of commitments or understandings with customers, both in the EV battery space and the industrial battery space. And what we're seeing is that, that backlog is fulfilling our expectations and are looking forward to ramping up the utilization and the capacity of that lab.

So it matches our philosophy that we don't invest capital until we believe that the backlog exists. And we tend to perform to our expectations. All right. Well, thank you, everyone, for joining us today. We appreciate your support and look forward to updating you on our progress next quarter.

Thank you. This does conclude today's teleconference.

You may disconnect your lines at this time. Thank you for your participation, and have a great day.