Q1 2024 Earnings Summary
- ULS is experiencing strong growth in the Industrial segment, driven by the "Electrification of Everything" megatrend, with robust demand for testing and certification services related to electrical products, industrial batteries, and EV solutions. The company is capitalizing on opportunities in energy generation, storage, and sustainable energy across all regions.
- ULS is investing in capacity and capabilities to meet increasing customer demand, including the development of new laboratories such as the Michigan battery lab expected to come online by the end of the year, and the North American Retail Center of Excellence in Arkansas, which consolidates facilities to improve utilization and customer experience. These investments are generating good returns and positioning the company for sustained growth.
- ULS has strong recurring revenue streams with the ability to implement annual price increases, particularly in their Ongoing Certification Services and Software Services, which comprise 45% of revenue. Annual contracts and extended software agreements allow for appropriate pricing moves, contributing to revenue growth and improved margins.
- ULS's growth is expected to slow down in the remainder of the year due to tougher year-over-year comparisons. Despite achieving 7.5% organic growth in Q1, management guides for mid-single-digit growth for the full year, indicating a potential deceleration.
- The Industrial segment's margins declined in Q1 due to increased compensation costs and professional fees rising faster than revenue. While management expects margins to improve over the year, higher expenses could continue to pressure profitability.
- Higher than anticipated health care costs in Q1 impacted profitability and are difficult to forecast. Management noted that employee benefit expenses were higher than expected, which may continue to be a headwind.
-
Margin Improvement Expectations
Q: How much will margins improve in 2024?
A: Management targets a long-term EBITDA margin over 24% but hasn't specified annual steps. They plan to expand margins through footprint optimization, adding lab capacity in the U.S. and Mexico, improving go-to-market strategies, and enhancing productivity across labs. -
Organic Growth Guidance
Q: What does "mid-single-digit" organic growth mean?
A: "Mid-single-digit" includes growth like 7.5%, which is on the edge of that range. Management anticipates tougher comparisons later in the year but remains confident in achieving mid-single-digit growth for 2024. -
Industrial Segment Growth Outlook
Q: Will Industrial's 10% growth continue?
A: While Q1 saw 10.0% organic growth in Industrial, management expects some moderation due to stronger prior-year comparisons but continues to see strong demand, especially from electrification trends. -
M&A Pipeline
Q: Any updates on M&A opportunities?
A: The company is actively pursuing acquisitions, focusing on energy transition areas within Industrial. Valuations remain stable, and they are also considering opportunities to enhance advisory and software businesses supporting product TIC customers. -
Divestiture Impact
Q: Why did you divest the payments testing business?
A: The payments testing business was non-core. The divested business had annual revenue of $40 million with modest margins. They prefer to focus on product TIC, aligning with their strengths in science-based leadership. No further divestitures are planned. -
Price Increases
Q: Can you raise prices in recurring revenue streams?
A: Yes. Ongoing Certification Services contracts are renewed annually, allowing for price adjustments typically in Q4. Software services contracts offer pricing opportunities during renewals or new sales. -
Healthcare Cost Impact
Q: How are rising healthcare costs affecting you?
A: Employee benefit costs increased by $9 million year-over-year, mainly due to higher healthcare expenses. This was higher than anticipated and affects the cost structure, especially in the U.S. -
Software Business Growth
Q: When will Software growth accelerate?
A: The Software and Advisory segment saw slight growth. The launch of Ultrus in January is expected to boost growth by offering integrated software solutions. Management aims to improve margins in this segment. -
Electrification Trends
Q: Are electrification and renewables sustaining growth?
A: Yes. Strong demand continues from the "Electrification of Everything," including testing and certification for batteries and EV solutions. Investments in labs globally support customer needs in energy transition. -
CSAR and IPO Costs
Q: What's the impact of CSAR and IPO costs?
A: CSAR expenses shifted from a $10 million expense in Q1 last year to a $1 million benefit this year, a difference of $11 million. IPO-related transaction costs were $2 million in Q1 2024, not added back in adjusted EBITDA.
Research analysts covering UL Solutions.