ULS - NYSE

Good morning, and welcome to the UL Solutions Fourth Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mitchell Ji, Senior Vice President of Corporate Finance. Please go ahead.

Thank you, and welcome, everyone, to our fourth quarter and full year 2024 earnings call. 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 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 annual report on Form 10-K for the year ended December 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. This time last year, we were gearing up for our IPO in a roadshow to highlight what makes UL Solutions unique and worth your time and investment. As we met with potential investors, we talked about how we are a global safety science leader and a mission-driven growth company in the fragmented and consolidating testing, inspection and certification industry. Hallmarks of our business include longstanding, deep customer relationships and recurring revenue streams, global scale and operating leverage, a healthy balance sheet and a disciplined capital allocation strategy aligned with the mega trends propelling growth. Against this backdrop, I'm delighted to report that UL Solutions has concluded an extraordinary year with another quarter of outstanding performance. In our first year as a public company, we've delivered strong organic growth, enhanced profitability and generated robust cash flows while maintaining an investment-grade balance sheet. What's particularly gratifying is the balanced strength we've seen across all segments, service offerings and geographic regions. The key megatrends we've identified, including the global energy transition, the electrification of everything and digitalization, continued to drive strong demand for our industry-leading services. I'll cover three areas before turning the call over to Ryan. First, our full year performance highlights. Second, notable achievements and activities across 2024. And third, our financial position and capital allocation strategy for 2025. 2024 marked a pivotal year in UL's 130-year history. Our successful transition to a public company, while maintaining focus on delivering superior results, demonstrates the exceptional execution capabilities of our team. I want to express my deep appreciation to our employees; whose dedication to safety, scientific excellence and customer service defines our culture and drives our success. Ryan will dive into the fourth quarter numbers in a minute. So let me hit the high notes of our full year 2024 results. We built strong momentum across the course of the year, delivering revenues of $2.9 billion, up 7.2% versus 2023 and up 8.7% on an organic basis. Our Industrial segment led the way with 9.4% full year growth, including 11.9% on an organic basis, while our Consumer segment grew 5.6%, including a 6.9% on an organic basis. Our Software & Advisory segment completed the year with 5% top line growth, including 4.4% on an organic basis. Our results reflected growth across all geographic regions. Adjusted EBITDA for the full year grew 16.5%, and adjusted EBITDA margin expanded by 190 basis points. We generated an 18.8% increase in adjusted net income, and $287 million of free cash flow for the full year. Next, let me highlight our major accomplishments this year, as well as a few achievements and drivers of performance this quarter and subsequent to its end. After a long and proud history private company, we completed our successful initial public offering in April, as well as a follow-on offering of shares from our largest shareholder in September. We made two acquisitions in our Industrial segment related to the global energy transition, battery testing company, testing company, BatterieIngenieure; and hydrogen TesTneT. Our recent accelerated pace of capital spending resulted in the opening of our state-of-the-art battery testing lab in Auburn Hills, Michigan. We also expanded capacity at our Mexico lab to meet growing product demand in Latin America, and announced plans to construct an advanced automotive and battery testing center in Korea. Finally, let me comment on our disciplined approach to capital allocation activities during the year. Our strong revenue growth and resilient business model, along with an investment-grade balance sheet, allowed us to generate robust cash flow. Key actions in addition to the two acquisitions I just mentioned this year included reinvesting organically $237 million in capital expenditures to drive growth, paying down $166 million of borrowings from our credit facility and paying $100 million in dividends. We believe that we enter 2025 in an even stronger position, than when we began our public company journey. Our management team remains focused on maintaining our investment-grade rating and conservative leverage, while actively pursuing strategic M&A opportunities and returning excess capital to shareholders. Now I'll turn the call over to Ryan, for a detailed review of our fourth quarter results and 2025 outlook.

Thank you, Jenny, and hello, everyone. I also want to thank all of our team members for delivering another strong quarter and full year 2024. Jenny did an excellent job of summarizing our outstanding financial results for the full year, and I'll focus my comments on the fourth quarter and segment results, before closing with some comments on our initial 2025 full year outlook. We are proud to report in our fourth 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 in all of our geographies. Now let me dive into the details of the quarter. Consolidated revenue of $739 million was up 8.0% over the prior year quarter, including organic growth of 9.5%. The increase reflected particular strength in the industrial segment, which delivered robust 13.9% organic growth. Cost of revenue for the quarter increased by 6.0% as compared to the prior year period due to increased depreciation related to capacity expansion, services and materials costs related to high volumes, and lab start-up and employee compensation. SG&A expenses as a percentage of revenue decreased 200 basis points, 33.8% in the year ago quarter to 31.8% in Q4 of 2024. Adjusted EBITDA for the quarter was $169 million, an improvement of 27.1% year-over-year. Adjusted EBITDA margin was 22.9%, up 350 basis points from the same period a year ago, on particular strength in both the industrial and consumer segments. Our effective tax rate for the full year was 16.9%. And in the fourth quarter, we benefited from a reduction in uncertain tax positions as a result of the expiration of a statute limitations. Adjusted net income for the fourth quarter was $102 million, up 64.5%, from $62 million in the fourth quarter of 2023. Adjusted diluted earnings per share was $0.49, up from $0.29 in the fourth quarter of 2023. Now, let me turn to our performance by segment, starting with industrial. The mega trends of global energy transition, the electrification of everything and digitalization are driving tremendous innovation and demand for our services in the industrial segment, helping it once again deliver the highest revenue growth of the three segments for the quarter. Revenues in industrial rose 11.6% to $328 million or 13.9% on an organic basis as compared to the fourth quarter of 2023. This marked seven consecutive quarters of double-digit organic revenue growth. Those impressive gains were driven by growth in all of our service lines. In the quarter, we believe ongoing certification services growth benefited from increased activity from manufacturers ahead of potential tariffs. Certification testing growth was led by energy and automation, and we expect a normalization of demand in ongoing certification services in 2025. Adjusted EBITDA for the industrial segment increased 32.9% to $105 million in the quarter, while adjusted EBITDA margin improved 510 basis points to 32.0%. The higher organic revenue was partially offset by increases in services and materials. Now turning to consumer segment. Revenues in consumer were $309 million, up 5.5% from the 2023 quarter or 6.5% on an organic basis. The improvement was driven by demand across non-certification testing and other services, certification testing as well as ongoing certification services. We saw particularly strong demand across retail and consumer technology. Adjusted EBITDA for the quarter in consumer was $49 million, an increase of 25.0% versus the fourth quarter last year. Adjusted EBITDA margin for the quarter was 14.6%, an increase of 230 basis points year-over-year driven by higher revenues. Solid organic revenue growth was partially offset by increases in employee compensation. Expense actions taken in 2023 reduced the impact of the cost increases and contributed to margin improvement. We mentioned last quarter how we're adding capacity at various consumer facilities increasing our footprint and improving how we connect with customers in order to meet increasing testing demand, and that work continues. Our third segment is Software and Advisory. Revenues for that segment were $102 million, an increase of 5.2% year-over-year on both a total and organic basis. The improvement was driven by strong demand for software, including retail product compliance and sustainability solutions. Adjusted EBITDA for the quarter for Software and Advisory was $19 million, up -- a 5.6% increase as compared to the fourth quarter of last year. Adjusted EBITDA margin for the quarter was 18.6%, flat year-over-year, as higher revenues were offset by increases in services and materials. Turning to our cash generation. For the full year 2024, we generated $524 million of cash from operating activities, that compares to $467 million in prior year. The improvement was driven by business performance and lower cash incentive payments. Capital expenditures for the full year 2024 were $237 million compared to $215 million in 2023. We continue to make important investments in global energy transition opportunities throughout 2024, which remains a focus area for UL Solutions. Free cash flow for the full year was $287 million compared to $252 million in 2023 despite higher level of growth investments. We finished the year with $298 million of cash and cash equivalents. 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 intended to produce best-in-class shareholder returns. As Jenny said, in 2024, we opened new labs, we broke ground on others and completed two acquisitions to better align our business with the mega trends driving demand for our services. In addition, we paid down $166 million on our credit facilities and returned $100 million to our shareholders through quarterly dividends. Now turning to our initial 2025 full year outlook. As a reminder, organic growth is constant currency and excludes acquisitions and divestitures. We expect 2025 consolidated organic revenue growth to be in the mid-single digits range as compared to our full year 2024 results. It's a testament to the strength and diversity of our offerings and the outstanding execution by our team, that we believe we're in a position to deliver mid-single-digit revenue growth following 8.7% organic revenue growth in 2024. We expect to drive further adjusted EBITDA margin expansion improvement to approximately 24% for the full year 2025, which I'm pleased to say is in line with our longer-term targets communicated last April at the time of the IPO. As a reminder, we have a number of ways to drive margin expansion for the company. They include operating leverage from top line growth, a mix benefit as industrial growth outpaces the other segments, and a continued focus on productivity gains. Additionally, we look at M&A opportunities in our strategic end markets that present a path to margin and earnings accretion, while also evaluating portfolio realignment. We expect capital expenditures to be approximately 7% to 8% of revenue in 2025 with investments in new labs and customer-facing software continuing as we seek to match continued strong customer demand in all three segments. This is down modestly from our rate of spend in 2024 as a percentage of revenue, but roughly flat sequentially and still above our longer-term historical average. We estimate our effective tax rate in 2025 to be approximately 26% and -- this compares to an effective rate of 16.9% in 2024 with the anticipated change due primarily to additional implementation of the OECD Pillar 2 provisions, which affects how multinational corporations are taxed. We also experienced a benefit in 2024 from a significant release of tax reserves that is not expected to recur in 2025. While our guidance is for the full year 2025, let me provide you with some additional color with regard to seasonality. As a reminder, Q1 is typically our lowest revenue quarter in terms of dollars given the Lunar New Year holiday impact on our customer operations and fewer UL workdays as compared to the other quarters. This results in slightly less operating leverage and, therefore, profitability in Q1 compared to the other quarters. In addition, we faced increasingly challenging comps in the second half of 2025. We entered 2025 with strong momentum, growing faster than the market while improving profitability and cash generation. Our investment-grade balance sheet provides flexibility for strategic capital deployment as we work to deliver superior shareholder value. Now let me turn the call back to Jenny for her closing remarks.

Thanks, Ryan. 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. In late December, we announced that the U.S. Federal Communications Commission named UL Solutions as lead administrator of the new U.S. Cyber Trust Mark program, which will help equip qualifying smart products, such as voice-activated speakers or kitchen appliances, with the cybersecurity safety label. We were honored to receive this designation as UL Solutions will support the FCC and other stakeholders in establishing the technical requirements and other details that will help launch and grow the program. The voluntary Cyber Trust Mark program is designed to help consumers make informed decisions about the products they bring into their homes, differentiate trustworthy products in the marketplace and create incentives for manufacturers to meet cybersecurity standards. Congratulations to our team for all of their hard work on this program. To wrap up, our exceptional 2024 performance builds on our successful IPO and should position us strongly for 2025 and beyond. While we've just achieved remarkable results in our long history, in many ways, we're just getting started. We stand on the shoulders of generations of safety scientists who have made the world a better place, and we carry that legacy forward with pride. We believe the megatrends driving our markets, from the global energy transition to sustainability, align well with our capabilities and market position. With our strong balance sheet, robust cash flow and clear strategic direction, we believe that we're well positioned to deliver exceptional long-term value to all stakeholders. Let's open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Stephanie Yee from JPMorgan. Please go ahead.

Hi. Good morning. I was wondering if you can comment on your 2025 outlook by each of your three segments.

Sure. Well, we're pleased to continue the path of growth after a strong year in 2024, and we see opportunity in each of the three segments. The primary trends within the Industrial segment continue. Our progress in Consumer, including adding some new capacity and improving those operations continue. And we're pleased with progress in the last quarter with Software and Advisory, particularly on the Software side of the business. So I said, our outlook for revenue growth is on a consolidated basis, but we see each of the segments contributing to that.

And I guess could you comment on comparison versus 2024, in particular with Industrial, whether you expect the strength to continue? I noticed you mentioned that ongoing certification, maybe there is a pull forward into the fourth quarter, so maybe that piece is going to moderate or normalize in 2025, but any other comparison in 2024 in the Industrial side that you could provide?

Great question, Stephanie. And I'll start just by saying, we are really proud of the fact that our Industrial team has seven consecutive quarters of double-digit growth, and what we saw in 2024 is every end market, every region. And so, it comes down to those megatrends that we talk about. The global energy transition is real, and we see it in power and controls. We see it in the uptick in data centers, particularly to serve the AI market, which those data centers need about twice as much power as a normal data center. And that ticks into that digitalization trend and the ways in which you have to change out hardware or storage systems to better use power to be more efficient, and then surround that with cooling and HVAC systems and energy storage systems and then extend it to the grid. So, these trends in Industrial are real, and we're excited about working with our customers on both new certification testing and non-certification testing. And then, we also understand that there's a balance of all 4 of our service lines across each of our segments. And so, we have to look at the way that that those services balance across all of demand.

And Stephanie, just to build on your question about ongoing certification services. And as you know, the majority of our revenue streams are not affected by production volumes. They're based on the number of models in the market and the pace of new product innovation. However, some of our services within ongoing certification services are affected by manufacturer activity. And it's difficult to precisely attribute increases in ongoing certification, which we experienced in Q4, directly to tariff anticipation. However, we did see a material pickup revenue. And so as an example, for the first three quarters of 2024, ongoing certification grew about 8%. In Q4, it grew about 12%. And the increase in growth on a consolidated basis contributed about 1% to our consolidated revenue growth. And it's possible that pulling forward some of that demand may result in slightly lower growth in 2025 and an upward comparison in Q4 in particular.

Okay. I appreciate that. If I can just ask one question on certification testing across the portfolio. It seems like it had been growing very strongly through the third quarter. And the fourth quarter, it decelerated a little bit to 6%. Can you kind of comment on what's driving the trend there? Is there any potential risk to certification testing in a more regulatory environment under the current administration?

Yes. We don't believe that there is a threat to certification testing. Some of this is timing. Some of it is what demand our customers, end customers have. And as you know, we had talked in the third quarter that Consumer was particularly strong in the third quarter. And it's no reflection on the fourth quarter, we just had a really strong third quarter in Consumer. So I think across the board, we're very confident and focused on both our certification testing and our non-certification testing and the demands around that, because you can't have innovation without safety.

Okay. Appreciate it. Thank you.

The next question comes from George Tong from Goldman Sachs. Please go ahead.

Hi. Thanks. Good morning.

Good morning.

Hi. You talked about megatrends around energy transition, electrification of everything, digitization, all driving demand in Industrial. Since these trends are very much long standing, should the Industrial segment be able to sustain the double-digit growth that you've seen over the past seven quarters into the foreseeable future?

Yes. Appreciate the question. Our revenue guidance is on a consolidated basis, but we do see opportunity in each of the segments. I would say the fundamental things that have been driving Industrial, we don't see material changes in those tailwinds. We'll continue to invest against those opportunities. Our comparisons are getting steeper and we want to set realistic expectations that we expect to achieve.

Understood. And then you touched on this a little bit earlier, but can you elaborate on how you expect higher tariffs to impact the business, either positively or negatively across business?

Yes, George. Historically, tariffs have not had a material impact on our business. And as you know, our revenue is largely not dependent on volumes, but dependent on the product innovation, new product development life cycles. Now what we've seen, and we've seen this since 2017, 2018, when tariffs were first introduced on Chinese goods, appliances and other items, what we've seen was that -- actually in the early days, our revenue increased in 2018 and across 2019. So -- and the majority of that was organic. And where that comes from is as a manufacturer when you're facing tariffs, you’re thinking about how do you balance out your costs and your situation. So you may start to shift your supply chain, change where you're manufacturing products, you may change out raw materials and you're most likely value-engineering your products to swap out components or just change the overall design. In many cases, each of those require retesting. So for us, regardless of tariffs, we follow our customers as they make the good business decisions that they make about their product cost, their manufacturing locations, their end market mix.

Very helpful. Thank you.

The next question comes from Andrew Nicholas from William Blair. Please go ahead.

Hi. Good morning. This is Tom Ross on for Andy Nicholas. Thank you for taking my question.

Hi, Tom.

I want to touch on the margin guide for 2025, so you plan reach a 24% long-term margin target. I was wondering if you kind of provide thoughts on how you think about that as a jumping off into 2026 and beyond? And kind of the -- what structural margin expansion going from there and how high can those levels can go? Thank you.

Yes. We appreciate the question, Tom. And you're right. At the time of the IPO, we were coming off 2023, where we recorded 21.0% adjusted EBITDA margin. And we had said that we had longer-term targets of greater than 24%. So that would be a 300 basis point increase. We're pleased to increase 190 basis points in 2024, and we're comfortable guiding towards approximately 24%, which would be another 110 basis points improvement this year. So moving towards those longer-term objectives in our second year as a public company. We're not going to stop there. We do see opportunity in all three segments to grow from there. We're not a position to update that longer-term guidance more precisely at this point, but we're pleased with the progress that our teams are making.

Thank you. And then on the certification and electrification testing in the quarter, I was wondering if you can provide some detail on balance between volume and pricing driving growth there. And then if possible, also at the segment level between Industrial and consumer? Thank you.

On a consolidated basis, those two revenue streams in the quarter comprise about 57% of our consolidated revenue, and they lend themselves better to price volume comparisons because we are paid to complete that test, there's a measurable unit of activity. And those revenue categories grew roughly 8% in the quarter. And it was a pretty even mix between price and volume. And we're pleased with that. We're continuing to show the ability to gradually increase in compound price over time, as well as getting increased demand and volume from our customers.

The next question comes from Andy Wittmann from Baird. Please go ahead.

Yes. Great. Thanks. I just -- I guess I just wanted to talk about the margins in a little bit different way. I mean, obviously, the quarter had very good adjusted EBITDA margin expansion. And so I was just wondering, maybe for you, Ryan, if you could just talk about, was there a comp issue that made the EBITDA expansion so strong here? I'm just trying to think $350 million in the quarter, obviously more than last quarter and more than what you're guiding for the year ahead. So I just want to understand if there's something in there. I think it might have to do with the prior year CSAR expense that didn’t repeat. But if there was anything else besides that, maybe you could just talk about the buildup to this year's margin performance.

Yes. Thank you for the question. I'd say the primary thing is operating leverage. When we grow on an organic basis, 9.5%, we get disproportionate flow through. So I think if you look at the relationship of organic revenue growth to organic expense growth, top line is the primary explainer. We did have some CSAR expense in the fourth quarter of last year. And that reduced operating income and adjusted EBITDA. This year, we're adding back stock-based compensation. But that's not the story. The dollar amounts are similar. And if you look at operating income margin, which removes that noise of stock-based compensation in CSARs, there's about 300 basis points of expansion. So I would say, overall, we had good expense management. And when you grow businesses at this pace, you get higher flow through.

Okay. That makes sense. Appreciate that. And then I guess, two other ones quickly here. Just as it relates to the potential pull forward on the ongoing SERC [ph] test, I understand that it's always hard to totally deduce. I thought your data that you provided earlier here about the fourth quarter being up 12% was helpful. But tariffs haven't been in effect yet, I would imagine it takes more than a few months to kind of stockpile, I guess, for lack of a better term. Are you seeing so far in the quarter that there's a downtick on the ongoing SERCs? Or maybe you could describe why maybe you don't think that's going to at least benefit the first quarter here, if not the second when we've got a little bit of a reprieve -- a little longer reprieve than many expected even a couple of months ago on there?

Yes. We're not in a position to talk about first quarter activity yet. And you're right, it's difficult to know the exact drivers. We can objectively say that we had an increase in activity and help quantify that. And following clarity on the election and the likely impact on tariffs that likely did have an impact. But it's very difficult to isolate that as a single factor.

And Andy, I would add customers have been facing tariffs since 2017. So when I'm out talking to them, like I was just in Mexico recently, they've made a lot of decisions. They make decisions around their product mix. They make decisions around how they're value engineering. They make decisions around where they're putting factories. And in many cases, those decisions they've made them, and now they're figuring out the right positioning for where they put their inventory or how they're going to manage their pricing. So this all plays out over a long period of time. And so we may have seen a little bit of a reactionary shift in the fourth quarter as customers were positioning themselves for 2025, but we're not expecting -- we're expecting it to all balance out over time as it always has.

Yeah. Okay. And then just a quick punch list one here, Ryan. What's the -- if FX rates were to stay where they are now, just first, to all calibrate our models here, what is the FX headwind either in dollar terms or percentage terms as you affect -- as you look at the 2025 revenue versus the 2024 revenue?

Yeah. There have been some movements in the currency markets are -- in local markets, typically, we do business in the currency of our customers. So the euro and they yen, RMB. Based on current -- what the market is predicting as forward rates, that would have just under a 1% headwind on a reported basis for full year 2025. And it certainly will be different than that number, but that's what is the wisdom of the market right now. As a reminder, our expenses in those markets, we pay our people in those currencies. So the majority of those items -- the majority of the revenue headwind is offset by an expense change. And so as -- just to put it in context, we had revenue -- we have a currency headwind in 2024, that was about $24 million in revenue. But on an EBITDA basis, it had a $5 million impact. So $19 million was offset with the translation of expense reduction.

Super helpful. Thank you so much. Have a good day.

Thank you.

The next question comes from Josh Chan from UBS. Please go ahead.

Hi. Good morning, Jenny and Ryan. Thanks for taking my questions. Maybe a bigger picture margin question. Now that you have visibility into doing 24% EBITDA margins. That level is obviously solidly above what the company did pre-IPO, obviously, ahead of 2023 and 2024. And so I guess, as you take a step back, what is enabling you to achieve 24% margins versus maybe high teens to low 20s several years ago?

I think the best place to start on that, Josh, is really fundamentally -- I'm in my sixth year here, Ryan in his eighth year here, we each came from industries that have a strong focus on continuous improvement. We've put a number of changes, both in single global instances of technology, then have second and third order effects in business processes, productivity and overall improvements on behalf of our customers and customer service. We continue down a path of location consolidation that gives us better -- just better overall usage of our management and our overhead. We've extended our positions with global and strategic accounts and really focused on their innovation needs and then down their supply chains. And so it's not one singular thing, I think it's an overall attitude of continuous improvement that our entire executive team and leadership team has as a philosophy.

Great. Thanks for that, Jenny and congrats on that. And then for your 2025 guidance of mid single-digit organic growth, I was wondering if you could give us some color in terms of the drivers behind volume versus price versus lab capacity increases, kind of how much all of those pieces are adding to the total organic growth? Thank you.

Yes. Thanks for question. I would say we expect continuation of what we experienced in 2024. So, we're still making progress on our pricing processes. We're still expanding capacity. We're still improving our go-to-market processes and acquiring new customers and growing our share of wallet. So, I would say we don't anticipate a material change in the mix of what's driving revenue growth.

Thanks Ryan. And thank you all for your time.

The next question comes from Stephanie Moore from Jefferies. Please go ahead.

Good morning. This is Harold Antor on for Stephanie Moore. So, I guess I just wanted to touch on the M&A front. When you guys have done a few tuck-in acquisitions in 2024, just wanted to know how you're thinking about 2025 on the M&A front? Would you be -- is the company interested in looking at doing any platform or larger deals or just continuing to focus on tuck-in deals? Any specific segments the company is looking to target? Anything around M&A policy would be great.

Thanks Harold. And we're very active in every one of our segments in being in conversations all over the world for any size, scale that makes sense with our strategy. And our strategy is around product strategy is around product safety. Our safety being propelled by those mega trends. And what we find time and time again in these conversations is, because we're in business for 130 years and we're recognized as an attractive permanent home for many founders across safety, security, and sustainability in product tick, the way we see it is M&A timing reflects opportunities as they're presented to us. And as we go through that analysis around strategic fit, the interface with the megatrends and overall supporting our mission. So, that's how we think about it.

Great. Thank you. And I guess, you guys have -- it looks as though you have several megatrends that you're focusing on. But in the global HVAC, it seems as though that's been a really megatrend the company is leaned in. So, if you could talk, discuss, the demand trends you're seeing there? And any other increased investments with respect to your leverage that you would be trying to make in 2025? And I guess just to piggyback off the last question, I'm sorry if I missed this. But could you provide your -- would you expect pricing to run in 2025 on what's internal inflation running in the company and a year on those price increases, any pushback you're getting? Thank you.

I'll start with the megatrends, and then I'll let Ryan answer the pricing. Our continued focus on that global energy transition, it's real. So, we've completed last year our Auburn Hills, Michigan battery lab, our Korea battery lab. We've announced extensions into our Mexico labs that also reflect the needs that are tied to these underlying trends in the global energy transition and the electrification of everything. We also announced just last week our, The Global Fire Science Center of Excellence investments that we're making. And where that really fits in, again, on this energy transition on these megatrends is testing the building and the fire safety. One of biggest challenges in battery safety is thermal runaway, and so testing connectors, enclosures and other building and fire safety products is essential. And this is needed all over the world. And we're also excited about investing in greater degrees of applied R&D in those areas. So we're continuing down our trajectory of CapEx and to support these -- what we view as exciting developments in all parts of the world. And they are connected. As I said earlier, when you look at digitalization and you talk about the way that that's changing both consumer technology, it's also changing the power energy needs in data centers, and that is contributing to the increased growth in power generation, changing the needs around transmission, changing the needs around storage, changing the needs around usage. So it all fits together with both our Industrial and our Consumer business, we love these megatrends.

And then in regard to internal inflation, we've definitely seen a moderation in the last two years in wage inflation compared to a few years ago. It's still a competitive market for talent. People costs are our largest expense. But I would say it's a slower pace of growth. We're pleased that we offset that last year with our pricing initiatives. So at this point, we're not anticipating material headwinds in wage and other cost inflation.

Thank you.

The next question comes from Arthur Truslove from Citi. Please go ahead.

Hi Jenny. Hi Ryan. Thanks very much for taking my questions. A few if I can. First question for me, obviously, there could be a reasonably substantial FX headwind in 2025. Can you -- which obviously, you touched on. Can you just talk about the impact on margins arising from FX? Because clearly, your peers talk about this quite a lot, and I was just wondering whether you could sort of say whether there is a margin headwind or a tailwind arising from FX. Second question, you talked about the potential pull forward of revenues within ongoing certification. Are you able to say whether that was within the Industrial division or whether it was in the Consumer division? Or was it indeed a bit of both? Just to sort of understand a little bit about that. And then I guess the third question really on the Consumer side. So obviously, margins are a little bit below what consensus had in mind, but obviously still up. I was just wondering if you could talk about how significant the contribution of staff incentives, were to any margin headwind. I just wanted to confirm that it was right to think that any sort of staff bonuses awarded the Q4 or accrued in Q4 would relate to the full year 2024, so not just Q4 performance. Thank you.

Yeah. I'll start by going a little bit deeper into foreign exchange and the impact of our -- on business model. And the current forward rates would imply roughly a 1% headwind. I would say to see the impact on our business; we do break out historically the impact of FX on a constant currency basis in revenue and on operating income. So you can infer the impact on expenses, and we do that also by each segment. So there's a fair amount of detail on the historic relationship. We are a profitable company. So when there is a reduction in revenue, that's more impactful than the reduction in expenses. So it does -- we're not immune to it, but it's offset -- it's mostly offset by reduction in the translated cost of expenses. I would say -- and what you will see in that by segment is that our consumer segment is more susceptible to FX changes. It is a very global business. All of our businesses are global, but that business, in particular, has had a bit more FX volatility. And then ongoing certification services, in my comments, we talked about it in the context of industrial. So it's reasonable it had a larger impact on industrial than consumer. But ongoing certification services are an important revenue stream for both our consumer and industrial segment. We don't break out that revenue -- those revenue streams by segment, but it is reasonable to think that, that was a bigger impact in industrial.

Incentives on consumers.

Yeah. So we recognize incentives in our expenses over the period in which were earned -- they're earned. So there weren't material changes in the fourth quarter related to incentives compared to last year. There were in the geography in which they're reported and what those incentives were, from cash settled incentives to stock-based compensations, but the dollar amount in the Q4 of last year and Q4 this year was very similar.

The next question comes from Shlomo Rosenbaum from Stifel. Please go ahead.

Hi. Thank you for taking my questions. Jenny, you touched on this a little, but maybe you could take -- just go back and give us a little more detail on what's going on in the demand for the battery labs. And are you thinking of building new ones? Can you discuss any plans you might have over the next several years in that area? And you mentioned, I think, beforehand, a lot of what you're building, you have a lot of kind of, I don't know if you call it pre-leasing, but a lot of demand to fill it up. Can you discuss how this is trending? And is this going in the way that you thought? Better, worse? Just start on that, and then I have a couple of follow-ups.

Great. Our battery testing business is going very well. And when you step back and look at the progression, we opened Changzhou, China in 2021. We opened -- we then announced the Korea battery lab. We announced the building of the North American battery lab. And last year, we did the acquisition of Batterieingenieure in Germany that serves as a hub for a European battery lab in perspective. So we've got global coverage and we continue to see this growth in battery testing needs, not just in vehicles, but in vehicles, you need not just autos, buses, commercial vehicles, construction equipment, agricultural, kind of electrification of everything is occurring across all vehicles. But even more broadly than that, the energy storage systems that are required, as there's a shift in energy sources, before you sit to renewables, the more opportunity or requirements or needs that there are to store energy that's created for use in times that [indiscernible] the wind is not blowing. So the rapid growth in the AI data centers is also contributing to the types of industrial scale batteries, as well as just the overall industrial environment, they're shifting their source of fuel and adding their needs for energy. So, we are very pleased with what's going on in our battery labs, and we continue to believe that this global energy transition will propel that business.

Okay. Thank you. And then, Ryan, on Slide 11 in the presentation, you have a comment on the margin, the revenue growth, partially offset by increases in services and materials. What does this mean exactly? Is that wage inflation? Like what are the materials? What are the services? Do you have consultants in there?

Yes. So sometimes when volume grows, we subcontract a portion of our testing services to other parties. Sometimes a test is very complicated and we're accredited for every part of the test that needs to do -- that need to be done. In other times, we choose to work with partners for portions of it. So the comment there was just with 13.9% organic revenue are expenses related to -- are volume related expenses related to -- we put it in a category, services and materials, broad category. But it's mostly outsourced labs and professional services.

And let me add, Shlomo. I think for our CapEx, philosophy is that we want to understand what the demand is in the marketplace in advance of us committing capital. And so what you also see sometimes in services and materials is that, we're out there working with customers to service their demand. But we haven't completed our capacity yet, and therefore, we need to supplement that with outside professional services.

Is that what was going on this quarter? Or was primarily there so much volume that it was mainly subcontracting to handle the volume?

I would say it was both. I would say it's both. We're evaluating some new service lines and a mix of that is third-party services and that may change over time. If we see sustained demand that fits with our customers' needs and ways that provide attractive returns, we may bring that capability in-house over time.

Great. Thank you.

Great. Thank you, very much.

The next question comes from Jason Haas from Wells Fargo. Please go ahead.

Hey good morning and thanks for taking my questions. I'm curious if you could talk about the drivers of acceleration in the software business, which was nice to see. I remember last quarter you announced the one of a large beauty retailer. So I was curious if that helped drive that acceleration? Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Jenny Scanlon for any closing remarks.

Thank you, everyone, for joining us today. As always, we appreciate your support. And we look forward to updating you on our progress in the next quarter.