Good morning, and welcome to the UL Solutions Fourth Quarter 2024 Earnings Call. 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 and 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 megatrends 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 as a 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, 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, from 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 megatrends 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 the 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, and 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, a 5.6% increase as compared to the fourth quarter of last year. Adjusted EBITDA margin for the quarter for Software and Advisory 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 levels 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 several 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 megatrends 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 several 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. 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 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 in 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.

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 significantly affected our business. Our revenue mainly relies on product innovation and the development of new products rather than on sales volumes. Since tariffs were introduced on Chinese goods in 2017 and 2018, we actually saw an increase in revenue during 2018 and into 2019, primarily due to organic growth. As a manufacturer facing tariffs, we often reassess how to manage costs and improve our situation, which may involve adjusting our supply chain, changing manufacturing locations, or altering raw materials. This often leads to value engineering where we replace components or modify designs, each of which typically requires retesting. Therefore, regardless of tariffs, we adapt alongside our customers who are making strategic decisions about product costs, manufacturing sites, and market mix.

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 discuss the margin guidance for 2025, with the goal of achieving a 24% long-term margin target. Could you share your thoughts on how this will influence 2026 and beyond? Also, what are the prospects for structural margin expansion from that point, and what levels can we realistically expect? 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 in 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.

I just wanted to discuss the margins from a different perspective. The quarter saw a significant expansion in adjusted EBITDA margin. Ryan, could you elaborate on whether there were any comparison issues that contributed to this strong EBITDA expansion? We achieved $350 million this quarter, which is notably more than last quarter and exceeds your guidance for the upcoming year. I'm trying to identify if there’s anything specific behind this figure. I believe it might relate to last year's CSAR expense that didn’t occur again. However, if there are other factors at play, it would be helpful to understand how we reached 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. I appreciate that. Now, I have a couple of quick questions. Regarding the potential pull forward on the ongoing SERC test, I realize it's always difficult to determine. I found your earlier data about the fourth quarter being up 12% to be helpful. However, I assume it takes more than just a few months to accumulate inventory in light of the upcoming tariffs, which have not yet been implemented. Are you noticing any decline in the ongoing SERCs this quarter? Could you explain why you believe there won't be any benefit in the first quarter, or at least in the second quarter, especially since we have a longer reprieve than many anticipated just a couple of months ago?

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.

Customers have been dealing with tariffs since 2017. When I speak with them, like during my recent visit to Mexico, they've made significant decisions regarding their product mix, value engineering, and factory locations. In many instances, they've already made these choices and are now determining the best way to position their inventory and manage pricing. This process unfolds over an extended period. We may have observed a slight reactive shift in the fourth quarter as customers prepared for 2025, but we anticipate that everything will balance out over time, as it always has.

Sure. Just a quick question, Ryan. If foreign exchange rates remain at their current levels, what is the foreign exchange impact either in dollar amounts or as a percentage when comparing 2025 revenue to 2024 revenue?

There have been some changes in the currency markets. We generally conduct business in the currency of our customers, such as the euro, yen, and RMB. Based on current market predictions regarding forward rates, this would create just under a 1% headwind on a reported basis for the full year 2025. While this number may vary, it reflects current market sentiment. It's worth noting that our expenses in those markets are paid in the same currencies, which means that most of the revenue headwind is counterbalanced by changes in expenses. For context, we experienced a currency headwind in 2024 that affected revenue by about $24 million, but on an EBITDA basis, the impact was $5 million, meaning $19 million was offset by reduced expenses.

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 way to approach that, Josh, is to emphasize that I'm in my sixth year here, and Ryan is in his eighth year. We both came from industries that prioritize continuous improvement. We have implemented several changes, both in global technology instances and in business processes, which have enhanced productivity and overall customer service. We are also continuing our efforts in location consolidation, which allows for better management and overhead usage. We have strengthened our relationships with global and strategic accounts, focusing on their innovation needs and supply chains. Therefore, it’s not just one specific factor; it's a general mindset of continuous improvement shared by our entire executive and leadership teams.

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 the 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.

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

Good morning. This is Harold Antor substituting for Stephanie Moore. I wanted to discuss the M&A front. After a few tuck-in acquisitions in 2024, how are you thinking about M&A in 2025? Is the company considering any platform or larger deals, or will you continue focusing on tuck-in deals? Are there specific segments you are looking to target? Any insights on M&A policy would be appreciated.

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 megatrends. 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.

Thank you. It appears that you have several key trends you are focusing on. In the global HVAC sector, it seems that this has been a major trend that the company is prioritizing. Could you discuss the demand trends you are experiencing in that area? Additionally, are there any increased investments related to your leverage that you are planning for 2025? Also, to follow up on the previous question, could you share your expectations for pricing in 2025 considering the internal inflation within the company and any anticipated price increases? Are you encountering any resistance to these adjustments? Thank you.

I will begin by discussing the major trends and then allow Ryan to address pricing. Our ongoing commitment to the global energy transition is significant. Last year, we completed our battery labs in Auburn Hills, Michigan, and Korea, and we announced expansions to our facilities in Mexico, which are aligned with the demands of these global trends and the shift toward electrification. Just last week, we initiated investments in our Global Fire Science Center of Excellence. This facility is critical to ensuring safety during the energy transition, particularly in testing building materials and fire safety, as one of the key issues in battery safety is thermal runaway. Therefore, testing connectors, enclosures, and other safety products is vital and necessary worldwide. We are also looking to invest more in applied research and development in these fields. Our capital expenditures will continue to support what we see as promising developments globally, which are interconnected. As I mentioned earlier, digitalization is transforming consumer technology and is also affecting power energy requirements in data centers, leading to increased demand for power generation, improvements in transmission, and changes in storage and usage needs. This is all linked to both our industrial and consumer sectors, and we are enthusiastic about these major trends.

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.

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

Hi Jenny. Hi Ryan. Thank you for answering my questions. I have a few. First, there seems to be a considerable foreign exchange headwind expected in 2025. Can you discuss the impact on margins due to FX? Your peers have mentioned this frequently, and I’m curious if you can describe whether FX will result in a margin headwind or tailwind. Second, you mentioned the potential advancement of revenues within ongoing certification. Can you clarify if this was in the Industrial division, the Consumer division, or possibly both? I want to get a better understanding of that. Finally, regarding the Consumer side, while margins are slightly below consensus expectations, they have still improved. Can you discuss how much staff incentives contributed to any margin headwind? I would like to confirm that any bonuses awarded or accrued in Q4 would apply to the full year 2024, not just to Q4 performance. Thank you.

I'll begin by discussing foreign exchange and its impact on our business model. The current forward rates suggest we might face roughly a 1% headwind. To understand how this affects our business, we typically analyze the impact of foreign exchange on a constant currency basis for both revenue and operating income historically. This allows us to infer the impact on expenses, which we also break down by segment. We provide a significant amount of detail regarding the historical relationship. As a profitable company, a decline in revenue has a greater effect than a decrease in expenses. While we are not immune to these changes, they are primarily offset by reductions in the translated cost of expenses. Notably, our consumer segment is more vulnerable to fluctuations in foreign exchange. While all our businesses operate globally, this particular segment has experienced more volatility. Additionally, I mentioned ongoing certification services in relation to our industrial segment. Thus, it's understandable that there might be a more considerable impact on industrial compared to consumer. Ongoing certification services are a vital revenue source for both consumer and industrial segments. Although we don’t disclose these revenue streams by segment, it’s reasonable to assume that the impact was more pronounced in industrial.

Incentives on consumers.

We recognize incentives in our expenses during the period they were earned. There were no significant changes in the fourth quarter regarding incentives compared to last year. However, there were differences in how these were reported and the types of incentives, such as cash settled incentives versus stock-based compensations. The dollar amount in the fourth quarter of last year and this year was quite 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 could you provide more detail on the demand for the battery labs? Are you considering building new ones? Can you discuss any plans you might have for the next several years in that area? You mentioned earlier that there's significant demand for what you're building. Can you talk about how this is trending? Is it progressing as you expected? Better or worse? Please start with that, and then I have a couple of follow-ups.

Our battery testing business is performing exceptionally well. Since we opened the facility in Changzhou, China in 2021, we have made significant strides, including the announcement of the battery lab in Korea and plans for a North American battery lab. Additionally, last year we acquired Batterieingenieure in Germany, which will support our European battery lab. We now have a global presence and are witnessing increased demand for battery testing across various types of vehicles, including automobiles, buses, commercial vehicles, and construction equipment, as well as in agricultural applications. This electrification trend is evident across all vehicle segments. Furthermore, the need for energy storage systems is growing as the shift towards renewable energy sources accelerates, necessitating solutions for energy storage for periods when renewable sources like wind aren't available. The rapid growth of AI data centers is also driving demand for industrial-scale batteries, as industries shift their fuel sources and energy requirements. We are very satisfied with the developments in our battery labs and firmly believe that the global energy transition will continue to drive this business forward.

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. When our volume increases, we sometimes subcontract a part of our testing services to other companies. Certain tests can be quite complex, and we hold accreditation for all the components involved. In other instances, we opt to collaborate with partners for specific sections. The mention of 13.9% organic revenue pertains to the expenses linked to our volume, which we categorize under services and materials. This primarily includes outsourced laboratories 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.

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.

I'm so glad you asked because I love talking about the prospects of our software business, and in particular, the way that ULTRUS platform is helping contribute to growth there. And we saw software growth really in all of our businesses in all of our regions. I do want to give a little shout out to our Japan team, they are out there doing a great job with software. But we are seeing, to your point, particular strength in the retail product compliance. So as we indicated last quarter, a large beauty retailer coming on to our works platform which extends to their supply chain we also strength in ESG, data and reporting, as well as the benchmarks offering that we have that really helps compare and contrast the strength of processors in systems. So I would say our sales transformation is taking root, the things I've been looking for are renewal churn down, is average contract renewal times up, are we seeing improvements in annual recurring revenue, are we seeing increases in bookings. And all of these things contributed to our fourth quarter organic growth in software.

That's great to hear. And just to touch on some of the other questions. And I wanted to follow up on the expectation for CapEx being 7% to 8% of revenue. You're clearly getting really good ROI on your CapEx. So I'm curious what sort of conversations you had when deciding that number for this year. Is it a function of you still have plenty of capacity in existing facilities you've built? Are you waiting to see how supply change shifts? Just any insight on how you think about that would be helpful. Thank you.

I'll start. Our teams have no shortage of good ideas. They are out there talking to customers every single day, from our field engineers who are making hundreds of thousands of visits in a year to customers' factory locations, to our engineers and our safety scientists who are getting insight into new product development pipelines, to our global and strategic account managers who are out there talking with our largest customers, those global customers all over the world. So no shortage of ideas that come in. And then our process is to really evaluate where do we believe those services, those needs are durable and then what is the best way for us to be providing them. And we continue to really fundamentally be very pleased with the outcomes of our CapEx, our return on capital there, and we'll continue to invest where there are great returns.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.