UL Solutions Inc. Q3 FY2026 earnings call

• Strong Q3 Performance: Organic revenue growth accelerated to 7%, the highest in six quarters. Adjusted EBITDA margin reached a quarterly record of 28.6%, driven by productivity improvements and pricing initiatives.
• AI and Data Center Growth: Demand is robust for certification services related to AI data centers, power distribution, liquid cooling, and advanced HVAC technologies. Certification testing revenue grew nearly 11%.
• Strategic Portfolio Actions: Completed acquisition of Eurofin’s electrical and electronics (E&E) business to expand consumer segment capabilities. Sold employee health and safety software business and stake in DQS ($117 million proceeds) to focus on core strengths.
• Operational Efficiency: Industrial and Consumer segments reported record adjusted EBITDA margins. Operating leverage improved due to higher employee productivity and favorable mix.
• Capital Allocation: Maintained disciplined capital allocation with strong free cash flow generation ($481 million trailing 12 months). Investment-grade balance sheet supports strategic acquisitions and dividends.

Industrial: Revenue of $410 million (up 8.2% total, 8.4% organic); Adjusted EBITDA of $148 million (margin expanded 150 bps to record 36.1%). Consumer: Revenue of $360 million (up 5.9% organic); Adjusted EBITDA of $77 million (margin expanded 170 bps to record 21.4%). Risk and Compliance Software: Revenue of $53 million (down 17.2% YoY due to divestiture; 4.7% organic growth excluding divestiture); Adjusted EBITDA of $10 million (margin declined to 18.9% from 29.7% prior year).

• Full-Year 2026 Organic Revenue Growth: Strengthened outlook to approximately 6.5% constant currency organic growth.
• Margin Impact: Outlook includes ~70 basis points of revenue headwinds partially offset by ~90 basis points of incremental transaction costs.
• Transaction Costs: Expected full-year 2026 transaction and integration costs of $37–$40 million (~120 basis points impact), higher than 2025 levels.
• Tax Rate: Expected full-year effective tax rate of approximately 26%.
• Capital Expenditures: Expected full-year capex of approximately 8.5% of revenue, focused on high-return growth investments.
• E&E Contribution: Includes expected ~$50 million of Q4 revenue from the acquired Eurofin E&E business, with margin performance in line with expectations.

• Integration Risks: Back-office integration of the Eurofin E&E acquisition is expected to complete in 2027, with go-to-market synergies largely realized by end of 2028. Unexpected delays or costs could impact financial results.
• Regulatory Changes: FCC prohibition on Chinese labs testing devices for US market authorization may require shifting testing volumes globally, though management expects minimal material impact due to global lab network.
• Macroeconomic Volatility: Dynamic macro environment could affect demand resilience, although current visibility remains strong.
• Divestiture Impacts: Reduced revenue base in Risk and Compliance Software segment due to EHS divestiture negatively impacted short-term margins and operating leverage.

Q: Analyst asked about the split between price and volume contributions to revenue growth and the potential impact of FCC rules prohibiting Chinese labs from testing electronic devices for the US market. / A: CFO noted that volume contributed slightly more than price in Q3, particularly in double-digit growing certification testing. CEO stated no material impact from FCC rules is expected, as UL can reroute testing through its global accredited lab network to minimize disruption to customers while complying with evolving regulations.

Q: Analyst inquired about the sustainability of momentum in the data center industry for safety testing into next year and how lab capacity investments align with base business. / A: CEO confirmed strong momentum continues, citing 11% growth in certification testing driven by innovations in power, cooling, and architectures. She explained that organic lab investments are targeted at areas with durable customer demand, such as expanding commercial-grade cooling capabilities in Texas, leveraging existing infrastructure to fuel growth.

Q: Analyst asked about the profitability assumptions for the E&E acquisition in Q4 and the path to realizing synergies. / A: CFO clarified that E&E’s contribution is part of the overall 200 basis points of underlying margin expansion expected for the year. CEO outlined that back-office integration will be substantially complete by end of 2027, with go-to-market and lab efficiency synergies largely realized by end of 2028, expecting some integration costs in 2027 factored into annual performance.

Q: Analyst sought clarity on the biggest drivers for the next leg of margin improvement beyond 2026, including the role of AI, productivity, and portfolio refinements. / A: CEO emphasized that ongoing productivity improvements via AI application (both off-the-shelf and internal systems) are job one. She highlighted continued pricing initiatives and portfolio optimization, noting that recent divestitures in lower-margin businesses like EHS software allow for further margin expansion in the remaining stronger portfolio.

Q: Analyst asked whether the E&E deal represents a cost/margin improvement story or a revenue opportunity, and requested details on industrial growth acceleration drivers and revenue visibility. / A: CEO described E&E as both, offering geographic expansion and cross-selling opportunities to connect technologies customers. Regarding industrial growth, she attributed acceleration to megatrends like electrification and energy transition driving certification testing in power, automation, and fire safety. She noted longer visibility in certification testing compared to non-certification testing, supported by recurring contractually obligated services.