Danaher Corporation (DHR) Earnings Call Transcript & Summary

Ladies and gentlemen, please welcome to the stage, Ryan Taylor.

Hello, and welcome to Veralto's inaugural Investor Event. Thank you to those who have joined us here in Wood Dale, Home of Videojet, our world-class marking and coding business, and thank you to those joining on the webcast. My name is Ryan Taylor, and I am humbled and honored to lead Investor Relations for Veralto. Before we begin, please let me -- please note the disclaimer. Certain statements that we make today will be forward-looking and subject to the safe harbor provisions. Actual results may differ materially from these statements. Please also note our most recent SEC filings for our most updated risk factors. Today, we'll use non-GAAP and adjusted figures. You can find reconciliations to those figures in the appendix of the presentation. During our presentation, you'll hear our speakers refer to the term gemba. Gemba is a Japanese term that means actual place, and it is commonly adopted by lean practitioners referring to a place where value-creating work actually happens. For those of you in person today, we will take you to gemba for product demonstrations. Our goal today is to introduce you to Veralto, our leaders, our technology and our culture. And when you walk away, we hope that you have a firm understanding of our business model, our proven track record and playbook for creating future value. We have a stellar lineup of speakers for you today, beginning with Jennifer Honeycutt, President and Chief Executive Officer of Veralto. Jennifer will lead off today with an introduction of the business. Following that, Melissa Aquino and Matthias Bystrom, our segment presidents, will discuss our leading Water and Product Quality businesses. Melissa will describe how we help customers analyze, treat and protect water and Matthias will describe how we help top consumer and pharma brands bring you safe, authentic products every day. Sameer [ Ralhan ], our CFO, rounds out our speakers. He will provide a detailed review of our financial profile, our capital allocation approach and our long-term modeling framework. Following our prepared remarks, we'll bring our speakers back up on the stage and invite you to engage in Q&A with our leaders. You can learn more about our speakers and their stellar careers by reading their biographies in the appendix. I'll briefly mention that Jennifer, Melissa and Mattias are long-tenured Danaher veterans, and Samir complements our team with strong strategy, finance and spin-off background. Now without further ado, it's my great pleasure to introduce to you Veralto's President and Chief Executive Officer; Jennifer Honeycutt.

Well, thank you, Ryan, for that warm introduction, and welcome to all of you who have joined us here in person today. It's great to have you. I'd like to extend a warm welcome to those of you who have dialed in to the live stream webcast as well. It is indeed an exciting day for us as we embark on our inaugural Investor Day. And we look forward to sharing both our history as well as what makes Veralto great going forward. Veralto is a premier technology leader in water and product quality. There are 3 key themes that describe how we think of ourselves. We play in large attractive end markets as a leader in water and product quality with 80% of our business in the food, water and pharmaceutical markets. These markets are characterized by strong secular growth drivers, and we offer leading technology and high-value water analytics and treatment solutions, along with a strong leadership position in digital workflows. Secondly, we operate with a premier financial profile with 57% roughly of our recurring revenue, margins in the high 50s, reflecting the value of our technology and our workflow solutions, leading to EBITDA margins in the mid-20s. As this is not a set of capitally-intensive businesses, we're able to convert 100% of net income to free cash flow consistently. And finally, we have a proven value creation playbook. With a strong Danaher heritage, we bring with us Danaher Business System that is the engine that drives continuous improvement. We have a highly diverse and experienced team and an approach to capital allocation that is disciplined, a disciplined approach with a bias towards M&A to compound growth in earnings, ultimately increasing the value of the enterprise. All of our businesses within Veralto are united by a common purpose. And that purpose is safeguarding the world's most vital resources. Veralto today is a purpose-driven leader in water and product quality, with nearly $5 billion in revenue. The 2 segments that comprise Veralto include Water Quality, which is 60% of our business, focus on water, our most vital resource in our natural resources -- and within Water is comprised of 2 primary categories: water analytics and water treatment focused on quality, regulations, compliance, conservation and reuse. 40% of our business sits within Product Quality and Innovation or PQI for short, with 2 categories, including marking and coding and packaging and color. These businesses focus on product compliance, authenticity and traceability for food and pharma producers. The key brands that you see on this page are top-tier brands in their markets. The 2 prominent brands of Hach and Videojet, our flagship businesses for water quality and PID or product quality and innovation, respectively, are flagships for the anchor businesses that we have in these 2 categories, long-standing businesses that have been around for decades. Our team is comprised of 16,000 associates with operations in over 45 countries and over 2,500 patents serving over 225,000 customers worldwide with a continuous improvement mindset and innovation to solve their toughest challenges. In front of you, you have a package of water. It looks like this. This is, in fact, the intersection of all of Veralto's businesses. The water that's contained within this package had to be treated, had to be treated to be free from contaminants, whether those are chemical contaminants or microbiological contaminants and had to be verified through analytical testing to make sure that there were no contaminants in that water. The water then needed a vessel. That vessel had to be designed. And it came together in this package, wherein color was chosen, font was chosen, the regulatory standards on the side were chosen, ultimately coming through that production cycle with a code, with a best before born-on date or product expiration date. This is the full cycle of every single one of our businesses, touching a single product in the market today. At Veralto, we play a profound role in safeguarding the world's most vital resources. And when we think about resources, we think about those resources broadly. We think about, obviously, natural resources, water, air, environment, earth. But we also think about food, medicines, time, money and people, all critical resources. And these examples illustrate Veralto's impact on everyday life. We are, in fact, everywhere you look. Our water analytics and treatment solutions help ensure clean drinking water for roughly 40% of the world's population. We can serve 80 billion gallons of water annually and treat and recycle over 12 trillion gallons of water each year. Our product quality innovation solutions print over 10 million codes daily to help top food and pharmaceutical brands authenticate their products for safety and traceability. PQI solutions are used by roughly 80% of the food and pharma brands that you see in the market today, and we are increasingly helping customers advance their sustainability initiatives. For example, our package design and pallet optimization software helped a single customer eliminate over 500,000 trucking miles annually, equating to over 2 million pounds of carbon dioxide reduction. Our impact on humanity and the evolving risk to human health and safety not only give us purpose in our work, but they also create favorable tailwinds for our continued growth. We see strong secular drivers across both of our segments in water quality and product identification with water providing life to everything, one of the world's most vital resources, if not the most vital resource. Both water availability and cleanliness are significant issues across the globe as population growth and warming climate continue to pressure our global water supplies. This dynamic makes our water business highly resilient through economic cycles. In fact, since Danaher has owned Hach and the water businesses, our water businesses have never had a down year. In PQI, we see increasing regulations and consumer pressure on the brands to ensure product safety, quality, traceability and authenticity. We also benefit from increased demand of global brand consistency and the demand for agile shorter time to market new product development cycles. And finally, we benefit from a growing focus on minimizing environmental impact of packaging as customers convert to recyclable mono materials and biodegradable substrates. We are strategically positioned in attractive end markets with low cyclicality and durable business models. 80% of our business, as I mentioned, goes into food, water and pharma end markets and basic needs remain steady throughout economic cycles. People still need to drink water, have waste treated and they need to get well. Our technologies and solutions are mission critical to customer operations. We tend to be a low percentage of their overall spend and as an essential part of their workflow. This is an OpEx set of businesses as opposed to CapEx set of businesses, which may rely on CapEx spending cycles. And with the razor/razorblade business model, we have a large installed base that drives recurring sales of consumables and services. The combination of attractive end markets, plus mission-critical solutions and high consumables and service annuity leads to term sales growth. Our 2022 financial performance demonstrates the quality of our business and the value we bring to customers. Last year, we grew core sales by 8%, with gross margins improving to 57%, yielding EBITDA margins of 24%. As you can see, we also delivered strong cash generation, and these results demonstrate our differentiated position in attractive end markets, our business model and the power of the Danaher Business System. This unique combination has driven superior financial performance and sets us up for sustained long-term profitable growth. While part of Danaher, DBS was a key driver of consistent sales growth and margin expansion for the Veralto businesses. At Veralto, we'll draw on that heritage, leveraging its strength and flywheel of continuous improvement. The principles of DBS differentiate performance by driving continuous improvement in commercial execution, product innovation, operational improvements and talent acquisition and management. We believe this focus on operational excellence and outstanding customer needs -- and understanding customer needs has underpinned our long-term track record of top line growth, margin expansion and high-retention customer relationships. Veralto represents the longest vestige of Danaher Industrial businesses today. And over the past 2 decades, Veralto businesses have been foundational in the leadership and development of the Danaher Business System tool set. Personally, I've been a Danaher Business System practitioner for over 20 years and have had an opportunity to architect and evolve these tools as have several leaders on the Veralto leadership team. We benefit from our Danaher heritage and we'll bring the best of DBS with us going forward. As we begin the next era as a stand-alone company, we are transitioning to the Veralto enterprise system. VES is underpinned by principles of DBS and grounded in Veralto's values. Core values define our culture, who we are and how we serve our stakeholders. Fueled by 4 sets of disciplines, VES is focused on the fundamentals, operational excellence, growth and leadership. With VES at the center of everything we do, we drive a virtuous flywheel of value creation. It starts with seizing market opportunities. Most of our businesses at Veralto were born in periods of new or emerging regulations. Our customer intimacy fostered an opportunity to innovate around their workflows and solve specific problems that then allowed us to scale and differentiate with new products, operational improvements using the Danaher Business System and increasing our commercial reach. We then are able to fortify leadership in terms of our high-value annuities through consumables, customer service and software subscriptions allowing us to create the cash flow to curate the portfolio over time. This allows us to go after strategic acquisitions, partnerships, innovation and R&D and the cycle repeats. This gives us new opportunities to identify other emerging trends, other unmet customer needs and seize those opportunities through innovation, customer intimacy and commercial reach. This playbook is underpinned by our philosophy of long-term value creation. This is going to be how we operate at Danaher -- sorry, at Veralto, taking what we've learned from Danaher and how we deliver value to our shareholders. I've been at Danaher for a really long time, so I'm learning. It starts by running the businesses more efficiently, right? We run the VES playbook going forward, leveraging scale to increase our gross margin, while reducing noncustomer-facing expense in terms of decreasing G&A, allowing us to take those savings, reinvesting them in R&D and sales and marketing, giving us disproportionate opportunities for share gain and competitive advantage, ultimately driving higher gains in core growth and operating margin expansion. It is the core growth, margin expansion and working capital improvement that drives strong free cash flow, that then allows us to deploy that into strategic acquisitions that help drive double-digit earnings per share growth and compounding returns over time. This is how we've created value for the businesses in the past as part of Danaher, and we fully expect this is how we will deliver value in the future going forward. M&A has been and will continue to be a part of the Veralto playbook to drive shareholder value. And Veralto's approach to M&A will be similar to that of Danaher. As a stand-alone company, free cash flow generation will be invested in value-accretive opportunities with a bias towards M&A to drive compounding returns. And we'll follow the same disciplined approach to M&A that Danaher has followed, namely, focusing on great markets, markets that are durable, that have strong secular growth drivers and have opportunities for differentiating value proposition. We'll look to ensure that we have a strong target in the company that we look at, right? A company that has strong brand recognition, channel advantage, competitive market position and a bias towards recurring revenue sales. And then finally, we've got to secure those assets at the right price. The valuation in terms of focusing on ROIC, fortified with improvements using VES will allow us to deliver on those synergistic opportunities and deliver compounding returns over time. And here's the proof point. Looking at the past 20 years of Veralto, Veralto was built into a world-class enterprise with the highest quality vintage of Danaher industrial businesses. Our beginnings date back to the late '90s and the early 2000s when Danaher acquired Hach and Videojet, as I mentioned, the flagship businesses for water quality and PQI, respectively. We took the Danaher Business System at that time and strengthened operating margins, commercial execution and improved the speed of new product development to fortify these businesses. In combination, we executed approximately 80 acquisitions over that period across both of our segments to expand scope, enhance the portfolio and add digital capabilities to support our customers. Over this time, core sales growth rate of the business improved from low single digits to mid-single digits and operating margins expanded into the mid-20s. The result really is a compound annual growth rate of 9.5% on the top line and a CAGR of more than 11% on operating profit, ultimately allowing us to achieve over 20% ROIC. Going forward, we would expect to utilize the same formula, the same discipline and the same playbook. As you can tell, I'm extremely proud of our portfolio, our past performance and our future potential. But I'm thrilled to be surrounded by the leadership team that will help deliver on the future. With the proven playbook and a best-in-class business system, it's only fitting to assemble a world-class team to lead Veralto. And this is the team who will do it. I've taken a very deliberate approach over the last 9 months to build this team, carefully architecting and curating a team of highly experienced professionals that represent the best of Danaher, complemented by external hires with a proven track record and public company experience. 60% of our team comes from Danaher, many of whom I worked closely with. Collectively, these Danaher veterans have over 100 years of Danaher experience, playing key roles as operating presidents and group executives, leading strategy and sustainability, cultivating talent and executing M&A. The other 40% are external hires from similar industries who bring critical public company experience as functional leaders in finance, legal and technology. I'm thrilled about this team and its potential. Together, we represent a diverse, experienced and high-performing team, a team that is 70% diverse with 50% women and 40% people of color. I'm incredibly excited for you to hear from a few of our leaders today. Melissa and Mattias will share an overview of their businesses and how they win in the market, and Sameer will follow with a financial overview. And what you're going to hear today is that we have premier businesses with market-leading technologies and strong secular growth drivers. We are strategically positioned in very attractive markets and have durable razor/razorblade business model. And finally, we have a proven value creation playbook powered by the Veralto enterprise system. And with that, let me go ahead and introduce Melissa Aquino, our Senior Vice President for Water Quality.

Thank you, Jennifer. Good afternoon, all. I am very happy to be here and share more about our water business with you. Like Jennifer, I have over 20 years of experience with Danaher, including leading 3 of our operating companies as well as the Danaher Business System office, and I'm passionate about leading water going forward for Veralto. Because as we all know, water is vital to life, and it's essential for many industrial applications. And so I think about the critical role that we play coming alongside our customers to ensure that water is safe to consume, it's clean, it's not contaminated and that it's conserved for reuse. And so it's easy to wake up every day and feel the opportunity to be a steward of water going forward and protect this vital resource. So with that, I'm going to give you an overview of our water business here at a high level. Nearly $3 billion, as Jennifer mentioned. And if you look to the right, you can see the composition of our sales today. We have a very nice split by application with 70% of our sales supporting municipal/industrial and the other 30% going into the commercial environmental markets. Next, you can see from a market perspective that geographically, we have 75% in developed markets and the other 25% in our high-growth markets. The core sales here, mid-single digits as you would go up to the top left there, mid-single digits, and we have a durable business model of a recurring pull-through. The recurring sales are in the 50s for us. So if you go to the middle of the page there, you can see 3 of our key companies here. These are our bigger operating companies. Hach is on the water analytics side, is a global leader in water analytics with deep expertise in applied chemistry and biology. And on the right-hand side, we have ChemTreat and Trojan. ChemTreat is a leader in industrial water treatment in North America, and we have Trojan there that is a global leader in UV disinfection and membrane filtration. So essentially, we're aiming to solve some of the most complex water challenges, and I'm going to give you a feel for that as we go through the presentation. Here's another view of where we play. If you think about the water value chain from left to right, everywhere from the environmental space, lakes, river, streams going into the core of municipal with drinking water, industrial applications, and then on the right, discharging water back to the environment. We play across this cycle with a broad portfolio of parameters that we test for. And you can see with the analytics side of Hach that we cover the entire spectrum. So starting on the left there with the lakes and streams through municipal and all the way out to discharge. And then in the treatment business, you'll see in the middle there, Trojan and ChemTreat are just well positioned in the middle of the core municipal and industrial spaces. So we like our portfolio and where we're sitting across this value chain. Next, I want to give you another lens here that we think is pretty important, is that our technology solutions play at the high end of the value continuum for our customers. And as Jennifer mentioned in her presentation, we're a pretty small part of the budget for these customers, but we are mission-critical. And what that means is that they are going to come to us, relying on us with that expertise in their regulatory needs, their sustainability needs, conserving reuse and on the -- in the treatment side of the equation, any downtime that these industries might experience can represent 10x the cost of what one of our treatment plans might cost. So 1 hour of downtime could cost them 10x. So the other thing to note here that I want to point out is that we are not susceptible to those CapEx cycles in general, going up and down because we're key in those operational budgets. This also, because we're playing at the high end of the value continuum, gives us an opportunity to develop deep customer relationships and intimacy which creates some stickiness. Again, they rely on us for those mission-critical applications. And so that stickiness and that intimacy, we get rewarded for that. And we can also leverage that into how we commercialize, we can leverage into how we innovate. So let's go into water analytics a little bit deeper here. We play across, as I mentioned, on the value chain, these customer types and in a wide variety of application environments. You'll get a little bit of a feel for this on the gemba walk, where you may see our Hach instruments out there, these little portable guys on the left out there by a stream. You will find us in the middle here in laboratories, hung on a wall in industrial applications where they're continuously monitoring the process to keep it up and running 24/7. So down on the left here, I'm highlighting our colorimeters and our photometers and spectrophotometers. We have over 75 years, a tremendous installed base out there of these instruments, nearly 3x to 4x the next leading competitor. So with that, we get rewarded with the consumable pull-through, as I mentioned. They're testing for a wide array of parameters and our chemistries and our solutions come together with that deep application expertise. One of the things I'm going to highlight, you're going to see it on the gemba walk is the Chemkey Reagents, which was a proprietary consumable we have innovated and developed to make this testing easier for our customers. And we've been doing this, like I said, for a long time over the 75 years. And over the last decade, we've complemented this with our digital solutions. You can see on the right there, 1 of our acquisitions we made is Aquatic Informatics. And with that software, the United States geological survey relies on it every day to monitor 16,500 sites, and they're looking for how to efficiently manage groundwater, what's happening with rivers. And over time, they've collected 58 billion data points using our software. I want to talk about innovation, in particular. And what you're seeing here is our Pikes Peak innovation center. It was established in 2018. It's 90,000 square feet. And what we've been able to do with our innovation center is make sure that we're state-of-the-art, and we have the space and the opportunity to take the best of the DBS tools, bring them to life as we work with our customers. Some of the key features of Pikes Peak is -- you're going to see a video of this as well, is visual project management, product line development. So we will simultaneously be working in R&D, while we're developing a production site that can go out into manufacturing as well as on-site compliance testing. And since the inception of Pikes Peak, we have driven digital -- our digital solutions by 5x the adoption with our customers, and we've accelerated the pace of product development by about 50%. So just again, I want to talk about our technology leadership here. We have a track record of this, and just going back to 10 years we have -- with Pikes Peak and using the DBS tools, we have been able to innovate our instruments and those consumables, leveraging our deep application expertise. And over the last 10 years as well, we've continued to build out our digital portfolio. This is with -- through organic development, ourselves, you can see some of the Hach products there as well as with tuck-in acquisitions that we've done with Aquatic Informatics, for example. So our VES growth tools going forward will allow us to approach innovation with a rigorous process, where this process includes identifying those unmet high-value needs and feeding that into insights and a road map designing, testing and commercializing against it. Speaking of commercialization, again, our VES growth tools help us run the spectrum from when is that idea all the way through how we commercialize. Here's an example on the Hach side. This is one of our key meters. We launched this in 2021. And we were one of the early adopters using digital sales tools, knowing that the pandemic was creating particular challenges in commercialization. So we leveraged some first sneak peeks, virtual showcase sales tools, and we were able to exceed our original targets on this particular meter by double digits, not letting the pandemic slow us down. All right. I want to take us over to water treatment now with our ChemTreat and Trojan businesses. So with ChemTreat, we deliver tailored reagents. And on the Trojan side, we have sophisticated UV systems. So I want to talk about ChemTreat, which is a pretty special business, is focused on those industrial processes including boiler and cooling systems. And again, we are mission-critical to these customers. We have a direct sales force. And these folks develop deep trust with the customers. And they will be on site 365 days a year, if necessary, to make sure that we keep our industrial customers up and running, can be millions of dollars of impact to an industry if it goes down for 1 hour. And our products ensure that we keep our customers up and running. So on the Trojan side, we are a leader in UV disinfection and filtration. You will find our Trojan systems in a number of places. You will see us in municipal plants right there in the drinking water side. And again, you'll see an example out there today on the walk. You will find us in bottling plants. And you will find us underneath residential sinks and garages because we have a residential business that goes after UV disinfection right there in the home before it hits the tap. So the other place Trojan plays, industrial is in those ultra-pure applications. So we do have some installations in ultra-pure water, such as pharmaceutical and life science. So now I let in to a couple of important customer examples on the treatment side. And as Jennifer mentioned, we will benefit from the continued threat of emerging contaminants in our world in water. And the example that I want to highlight here is New York City, where we have 56 Trojan UV systems installed. And the Trojan application is capable of removing or destroying some of the most hazardous chemicals. So New York City chose us. And we meet the rigorous standards of the Department of Environmental Protection. And these installs are serving 2 billion gallons of water per day and protecting New York City. Here's another example on the ChemTreat side, where we came along, one of our key partners in the brewery industry to help them hit their sustainability goals. And they came to us because we are a trusted water quality expert, and they knew that we could help them identify solutions to drive water efficiency, save the water operational performance as well. So in this particular case, we helped them achieve their sustainability goals ahead of their 2025 goal. We helped save 15 million gallons in 2021 and 500 million gallons across 9 years. So this was a 22% water reduction. And again, it's because we are that long-time integral partner in helping customers advance their sustainability goals. And we expect this to continue. We think that there's going to be more and more demand from our industrial partners, in particular, saying, my permits are changing, help me hit my sustainability targets. Here's an example that I think is -- again, it's a ChemTreat one, and it not only shows our application expertise by how we will leverage the DBS tools and future VES tools going forward. So in this case, it was on the innovation side, we brought in one of our tools, which we call problem-to-portfolio, which is P2P. And the whole premise of P2P is to ensure that we can get that insight from the customers in a valuable segment and define a winning road map. So we went out and looked in our space and found this a pretty prevalent customer problem where they were having to shut down their cooling systems more frequently than they might like due to microbiological growth. And so we went in there and identified that we really needed a solution that did not contain the zinc and the phosphorus and brought this to market. So you can see the ChemTreat FlexPro product we've launched. This had a 30% CAGR over the past 3 years. It reduces corrosion, protects the uptime, helps conserve water. And we've been able to take this not only with this 1 customer but leverage it into 1,000 others. And again, it's on the back of understanding that application, leveraging the VES tools to make sure we can deliver the road map. Jennifer mentioned this, and I want to explore it here as well, the secular growth drivers and how those are going to underpin our long-term growth. The quantity of water on this planet really hasn't been sufficient to support what we've done to it over the last 50 years. So we're going to continue to see the increasing regulation around contaminants, and we are well positioned to innovate and participate there. Additionally, water scarcity, right? Some regions of the world are highly stressed and they're needing solutions there as well. The climate change, extreme weather events are creating stresses on water. And again, because we play across that value chain, we feel we are well positioned to participate there as well. So how we will win. We're going to bring our application expertise, as I've been talking about here. Our commercial excellence and technology and innovation together to make sure we can unlock and take advantage of these tailwinds. So again, just another highlight on the 3 key elements of our business model and why we are well positioned for growth. We have a high value of recurring sales from the pull-through of our consumables, starting on the left there with low cyclicality. And once we place those instruments, we're going to get that 2x to 4x pull-through on consumables to follow on. We are mission critical to our customers. And while we're a small percentage of their overall operating budget, we are mission-critical. And again, downtime can cost them tremendously. So they're going to stick with us for our application expertise and ensure that our solutions enable them to stay up and running. And then finally, the regulatory environment, our customers come to us, making sure that we're an essential partner with them as they navigate the future space. So we think these 3 key pieces are -- they've given us steady growth. They're going to continue to give us growth no matter what the economic cycles are doing, and it lands us in that mid-single-digit grower over the long term for water quality. And we've been doing this -- we've got a compounder over time. So over the past 20 years, we have grown from a $500 million business, all the way up to nearly $3 billion. And you can see that we've accomplished this through those strategic disciplined acquisitions, starting off with our platform acquisitions, Hach, Trojan and ChemTreat, and then having a very thoughtful and, again, disciplined approach to the bolt-ons as I mentioned, for example, Aquatic Informatics on the digital front. So this has given us 10% compound annual growth and a 20% return on invested capital. So under Danaher's ownership, I mean this is a remarkable performance. And we are confident that with Veralto, we can take this to the next level and continue to grow in the future. So in summary, we believe our Water Quality business is world-class. We're a global leader in water analytics, treating and solutions. We play in the high end of that value continuum in terms of technology and the customer needs. And we aim to solve the world's most complex water challenges. And we're united by purpose, as Jennifer said, safeguarding the world's most vital resource. We're proud stewards of water. And I want to leave you with 1 quote, and this is a quote from Kathryn Kitty Hach, one of the founders at Hach, and we have this printed on our wall in the building in Loveland, Colorado. And she said, "The water on this earth is all we have, we need to take care of it". So with that, I'm going to turn it over to Mattias, who will share more about our PQI business.

So thank you, Melissa. Good afternoon, everyone. It's my pleasure to be with you here today and to welcome you to Videojet. This is a great facility and the cornerstone of PQI. Now I've been with Danaher for a little bit over 12 years and in a number of different roles. And I'm truly excited to be part of Veralto's journey ahead here. There are so many opportunities. I think Jennifer and Melissa mentioned some. I'll talk about some more here today. And I'd say, I love the PQI businesses. From my passion for color and design to the engineering me who's truly amazed at the technology we have across the businesses. And the simple fact that we touch almost everything that we use in our everyday lives. Now we are the leading global players in marking and coding, in packaging design solutions and in color. And taking a look at the image here, I think you recognize it, it's a supermarket. And it's easy for me to come to work every day, just as Melissa mentioned, because knowing that we touch almost everything you see there. We estimate 9 out of 10 of the products you see in the supermarket are touched by PQI business. And we help ensure that they protect the health and safety, but also the experience that we as consumers have come to expect. So let's take a little closer look at our businesses here. As Jennifer mentioned, we're about $2 billion in sales and about 60% of this is recurring business. And with recurring, we mean the consumables connected to our printers, the service contracts and also our software businesses. 70% of our sales are related to our marking and coding businesses. And here, we're the global leader in marking and coding with our Videojet and Linx brands. And the remaining of 30% are in packaging and color. This includes Esko, the global leader in packaging software as well as Pantone and X-Rite, 2 companies who are really focused on color, color specification, color measurements. And Pantone is probably our best-known brand. It's known as the universal language of color. We estimate there are over 3 million designers that use Pantone's color system every day. Now 50%, a little bit over half of our business is into consumer packaged goods, including food, beverage, pharmaceuticals, and then the remainder are into different industrial processes. You can think of use cases such as electronics or cable, such as paint or plastics to name a few. And geographically, I mean, we're pretty well spread out across the globe, 1/3 each in North America, in Europe and in the high-growth regions. And across the globe, we're partnering with our customers. And I dare say we have some of the best customers around. We are the choice of industry leaders. We have 85% of the top CPG companies, 75% of the top life science and pharma companies and 6 out of the top 10 chemical companies. And the products and solutions we provide help safeguard the integrity of food, beverage and pharmaceuticals, but also brands and brand equity. Now we work directly to ensure the quality and compliance of packaged goods. And we work indirectly to help our customers accelerate and ensure the fidelity of the innovation process, their innovation processes. And this is through the entire go-to-market process ensuring minimal waste in time, in production scrap and the highest efficiency here. In the end, leading to better consumer satisfaction. And what sets us apart a bit is that we provide deep domain experience. We not only sell products but we provide this deep domain experience that our customers typically don't have internally. And we are the leaders in each of our respective niches. So taking a look at how our businesses are positioned here across the value chain. We talk about the packaging value chain. This is a good way to visualize our business. Now starting from the left here, we have Esko and Pantone with packaging strategy and design. This is where Esko's packaging software and Pantone's color system comes into play. And we're helping typically brand owners, designers, marketing agencies upfront with a physical 2D and 3D design of the package, but also the specification around the package, what goes on the package, ingredients, et cetera, and how is that to be formatted. Then comes to manufacturing of the packaging material itself, which we don't do, by the way, we just provide the software and the solutions to help our customers do this. Esko's digital tools help manufacturers of packaging materials get the job done quickly, efficiently and with the highest quality. And X-Rite provides both the hardware and the software to verify that the color as specified by the designer early in the process is actually within the tolerances. And then at the end, to the very right here of the packaging value chain, at the end of the packaging line, our marking and coding businesses, Videojet and Linx are printing probably the most critical information on the package, a variety of information including lot codes, best before dates and serial numbers. So let's break down our businesses a little bit more, and we'll start here from the left with our packaging and color businesses. In this part of the value chain, we're serving a variety of customers, most commonly brand owners and packaging designers as well as consumer goods manufacturers. Most of our offerings in this part of the business are software or digital solutions. In many respects, Esko is seen as the backbone of the packaging industry. Some call it the ERP of packaging. Our solutions include planning software, packaging workflow software, 3D packaging, CAD software, visualization software, palletization software. I could go on all day. It's a very broad portfolio. We are helping our customers ensure brand trust and workflow automation. So they can accelerate their time to market and meet all the regulatory compliance needs within their industries. But what does this mean? So you can visualize our impact here on this slide, all the various stakeholders here considered when designing a product. Now this is our [ faith brand the we get settled ]. Brand owners are trying to get this product to the market quickly, safely and compliantly. And you would think that's not a very difficult process, but it is. Product managers are seeing a need. They're trying to -- a consumer trend, they're trying to drive revenue. There is enlisting designers and marketing teams to make a product concept. Legal gets involved to ensure it's compliant. Operations, of course, can we actually make this product? Can we make it at the right cost, at the right quality? Can we do it while meeting our sustainability goals? Okay. But it's not a linear process. There are multiple do-loops here. So this is rather complex for 1 SKU. But now imagine you're a global brand that you have 100,000 SKUs or hundreds of thousands of SKUs spread across the globe in a complex supply chain. Now that is a complex problem. Our brand owners typically lack the tools to drive this. And with the increasing regulatory complexity, the complexity is only getting worse. So our solutions help customers solve this problem. We help them quickly create designs, integrating the marketing goals, the regulatory standards, the sustainability information, the bar codes, all the stuff that goes on the package. And we can do this in a validated and audited workflow, if that's needed. And all this information is critically important for the consumers who are increasingly seeking information about what's in this product, where was it made? How was it made? Is this safe for me to drink? And that makes it incredibly important for the brand owners as well. So let's take a look here at a typical packaging workflow. This is a real case of Esko's value to customers, looking at the workflow from design creation through packaging production. In this example, using a small yogurt container here. Now here, we partnered with Alpro using Esko's web center cloud-based software solution to transform Alpro's go-to-market process. So we sell a piece of software, but it's also around our domain-specific knowledge and the use of DBS here with the customer, helping this customer accelerate their design process, speed up their review, approval and production process. And the results can be seen here on the screen, right? We've reduced the customer workflow time by over half. We've reduced the labor cost by 50%. And we were able to help this not only reduce labor costs, but do this process with fewer people. So this is a proof point, you can say, how we're helping customers also navigate the labor shortages that many of our customers are seeing today. So perhaps the most critical information on the package is printed by our marking and coding solutions. Videojet, the building you're in here today. Now this part of the business is where we play a critical role in the health and safety of consumers. For example, what if Listeria was found at packaged greens, looking back at that supermarket example I started with. And there is no way to determine what shipments were impacted. Now the reality is that with marking and coding solutions like ours, we can help businesses track, understand and act to ensure public health and safety. Our marking and coding businesses represent $1.4 billion of the $2 billion in sales. And Videojet here is the global leader of all the types of printers that go into the production line. We provide printers and marking systems that put the unique codes on basically everything from the food you eat, to the electronics you have in your pockets. And with increasing regulatory complexity that we're seeing, increased consumer demand for transparency, it drives the need for more advanced marking and coding solutions as well. So this picture that you see here on the left illustrates a variety of both packaging substrates and different product types that customers need to mark and code on. Some substrates that benefit from laser markings. Well, many need the flexibility of continuous inkjet printers. We within PQI, within Videojet have the broadest set of marking systems from continuous inkjet to laser and everything in-between, able to mark on anything and everything from eggs to airplanes. And just like with the Esko example, it's not just about the product here. It's the product combined with our unique domain knowledge that allows us to partner with our customers, to figure out just the right solution for their problem. Our marking and coding technology is used across the manufacturing line, in the primary, secondary and tertiary packaging such as pallets. And you can see on the right here on the slide the importance of this information, both to our customers and to the consumers. Well, ranging from consumer safety, like the product recall example here to the ability to authenticate products for brand protection, to ensuring that our customers are meeting all their regulatory and compliance standards within the industry. And one of the reasons the customer come to us and stay with us. Yes, we have this application knowledge. We have the broad product portfolio, but we also have innovation, quite a lot of innovation. We are an innovation leader. In this year, we've launched several new key products. Here, we have our new laser marking system, the 3350 that was launched here just a couple of months ago. And I pick this example because it's a great example here of innovation, when we go to gemba, really listening to a customer, understanding their problem and creating a solution to address their needs. Now in this case, we know manufacturers are facing new and ever-changing production environments. Production runs are getting shorter. There are more and more changeovers. They need the high-performance lasers, but lasers are quite good, but they are complex to set up, and they wreak havoc on the changeovers. So this innovation is a cutting-edge automatic focusing system and dynamic marking laser here that allows for easy product changeover with minimal operator touches, can be done -- it shortens that time significantly. And this laser can print pretty much anything you throw at it, from text to graphics to barcodes at the highest line speeds. Now Videojet designed these born-digital lasers with built-in connectivity to provide simple, secure ways for users to communicate and gather data from their printers. Or they can have the option to connect back to us, to Videojet's remote service. With Videojet Connect here, we augment our field-based service capabilities. And with this connectivity, we're able to monitor printer health and able to support the customer remotely. And in the end, it's all about delivering the superior uptime that our customers are needing. Basically, this means that a printer will call home when it has a problem, and we can then help, diagnose and solve most problems remotely using the operator or the on-site factory engineers. And should it be something that we can't do remotely, we can immediately dispatch our field service team with the right spare parts here to be on site quickly. Now this is important because lineup time and the ability to fix -- quickly fix any issues is critical for the CPG companies, pharma companies to be able to manufacture efficiently. You can say uptime peace of mind is what it's all about. And to that extent, aside from -- in addition to the connected printers, we also have the largest field service footprint. We have one of the broadest offering of service level agreements that we support our customers with. And that domain-specific knowledge that I talked about, it's packaged in hundreds of application engineers around the company that can help partner with our customers to solve problems and with the round-the-clock support as well. So some really -- a really great set of businesses here. But what does this look like going forward? Well, we're well positioned for growth. We have some really fundamental and strong secular drivers and a winning playbook, the winning playbook that Jennifer alluded to here. So there is increasing regulation, and consumer pressure on brands to ensure product safety, quality and authenticity. And these increasing regulations are driving complexity. Think about my packaging example in the beginning here. The transparency into the supply chain and more important as consumers, they look to authenticate the fidelity of their products. Now this has become more prominent post-COVID as consumers focus more on the health -- their own health and safety. And it's also being driven by more, how do you say, pressure from counterfeits and knockoff products. Now another driver that's accelerated during COVID is the demand for products to be delivered more quickly. Who of us didn't order consumer packaged goods online during the pandemic? We all used e-commerce. And now all of a sudden, CPG customers, our customers, CPG companies have to have both their brick-and-mortar delivery but also the digital shelf that they have to cater to. And then consumers and manufacturers both are striving to improve the environmental impact of packaging, which is essential for our way of life, but as we know, usually ends up as waste, resulting in a significant effort across the industry here to really reduce the impact of packaging with more sustainable packaging materials. So these strong secular tailwinds provide growth opportunities for PQI for years ahead. And we're taking advantage of these tailwinds by focusing our efforts on innovation, with a particular emphasis there on digital capabilities and software. So just like Melissa and Water Quality here, the growth drivers we looked at are great for driving the growth here, but we also have a very stable and durable business model, which is driven with the 3 parameters you see here across the slide. With a high level of recurring sales that we have from the pull-through of our consumables such as ink, our services, but also our SaaS software. The mission critical aspect of what we do, by and large, we are in OpEx to our customers and a small part of their OpEx budget overall. Yet the third key driver here is the durability of our business model, is the essential value we bring as our customers try to navigate the regulatory environment and strive to achieve their sustainability goals. It's a complex mission-critical problem that we're solving for them. Now the growth drivers, the high recurring revenue and the durability of our business model has contributed to mid-single-digit growth over the long haul for PQI. And looking at the long-term value creation within PQI, you heard it already from Jennifer and from Melissa. The concept is pretty simple. And I think most of you in this room probably understand it very well. Identify an emerging trend, buy a great business, improve the performance organically with DBS up till now and VES into the future and then redeploy that resulting cash flow back into the business. When we purchased Videojet here, it was a flat to low single-digit grower with mediocre margins, which we have now improved significantly with DBS. We added bolt-on acquisitions to sustain mid-single-digit growth at much higher operating margins. And now collectively, this business are growing sustainably at a much higher rate at margins significantly higher. And this, of course, compounds returns over time, which is driving near 20% return on invested capital. So in summary, PQI is the -- where we are the leading global players in packaging software, in color and in marking and coding. We provide products and solutions and software here, that safeguard the integrity of foods, beverages and pharmaceuticals. But we also safeguard time and brand equity as we have tens of thousands of customers drive more efficient workflows from our suite of digital solutions. We work directly to ensure the quality and compliance of packaged goods, and we work indirectly to accelerate and ensure the fidelity of the innovation processes at our customers. Thank you. Now that concludes my portion I'll hand over to Sameer.

Thanks, Mattias. Good afternoon, everyone. It's a pleasure to be with you today. I joined Veralto earlier this year. And what drew me to this opportunity was to be part of an organization that is purpose-driven and is solving some of the toughest challenges in, as Jennifer mentioned, safeguarding the world's most vital resources. Our businesses have a tremendous track record of financial performance under Danaher's ownership. And yet, there are a number of opportunities to make these businesses even better and create tremendous value. And that sets me up for what I want to present today. As you just heard from Melissa and Mattias, we have 2 great businesses. They deliver mid-single-digit core sales growth over long term, growth that is durable through economic cycles. They have a high-margin profile and generate robust free cash flow. As a stand-alone company, we have an opportunity to focus the free cash flow of Veralto back into these 2 strong businesses, both of which have a long track record of compounding revenue, earnings and free cash flow. On the next few slides, I'll do a double-click on some of the key financial attributes of Veralto, the attributes that really help differentiate our value proposition. Let me start with the growth profile. Our sales growth has consistently outperformed the GDP over the long term. Here, you can see our historical performance over 2, 5, 10 and 20 years. We have consistently outperformed GDP. Our steady growth is driven by the long secular tailwinds in our end markets that Melissa and Mattias just touched on. Increasing global demand for water, heightened regulations and requirements for drinking water supply and wastewater discharge, and increasing regulations and consumer pressure on brands to help ensure product safety and transparency. In addition, we apply the VES growth tools to expand commercial opportunities and bring innovative new products to market with speed to meet the emerging needs of our customers. All these actions drive the core revenue growth. I also want to highlight the resiliency and the sustainability of our business model. Even in the depth of the global financial crisis, when housing markets collapsed, our business was down only low single digits on top line. In fact, water was flat through the crisis, demonstrating the resiliency of our businesses. As you heard from Jennifer earlier, water has not had a down year under Danaher ownership. The durability of the business model reflect the strategy of building out a portfolio with common traits, as you heard earlier; products and services that are driven by regulatory and compliance requirements, dependence on customers' OpEx versus CapEx with products that are integral to their everyday operations versus being exposed to capital investment cycles. And with the recurring revenue, greater than 55% across both the businesses. As you look at the financial profile more broadly on the next page, you'll see the strong top line growth that I just talked about is supported by strong margin profile. You can see that we are focused on driving high-quality sales growth, which we efficiently convert into profitability and cash. Our attractive gross margin reflects the quality and critical nature of the products and services we provide to our customers. They support premium pricing. Additionally, activities driven by the [ DBS ] tool [ sets ] really helped drive down COGS and SG&A to support our margin profile. We have an asset-light business model with very modest CapEx requirements. And we make investments in innovation, primarily through R&D to maintain our technology advantage and drive differentiation. As a result, we generate very attractive free cash flow with free cash flow conversion approximately 100% of net income. These attributes are really highlighted as we kind of look at the financial performance of the business over the last 3 years on this page. As you can see, the business held up really well and in fact, grew through a dynamic macro environment over the last 3 years. Starting with the global pandemic in 2020, followed by supply chain disruptions in 2021, and then inflationary pressures in 2022. Teams across the board really leveraged the DBS tools to take supply chain actions to serve the needs of our customers and to take pricing actions to help offset inflation, resulting in the great financial results that you see on this page. Core growth was approximately 5% on average across this time period. Water Quality growth was positive even in 2020. Adjusted operating profit margin was in 22% to 23% range and free cash flow conversion was well above 100% in this time frame. Note that the adjusted profit margin on this page reflects an estimate of incremental standalone company costs for Veralto. Let me just take a minute to go through some of the key financial considerations related to our separation from Danaher including the incremental cost here. Our incremental standalone company costs are expected to be approximately $70 million, resulting in 140 basis points impact on the operating profit margin at the overall company level. At the segment level, we expect the impact on operating profit margin to be approximately 70 basis points for each segment. Second, on the balance sheet side, we will have a strong investment-grade capital structure as a stand-alone company with gross leverage of approximately 2.2 turns. We anticipate having roughly $250 million of cash on hand and a $1.5 billion revolving line of credit at separation. This solid balance sheet at the beginning along with a strong free cash flow generation provide ample liquidity for operational and strategic flexibility. Moving on to capital allocation. Jennifer earlier talked about our plans to leverage capital allocation to benefit our shareholders. Let me just expand on that a little bit because our -- because we believe our capital allocation optionality is a key lever for us to create long-term value. Our capital allocation framework is conceptually grounded in compounding earnings growth while maintaining investment-grade balance sheet. Our bias is to compound the earnings through high ROIC organic growth opportunities aligned with the great secular trends that you just heard. And then strategic acquisitions that drive long-term value accretion. Within our framework, we'll also maintain some flexibility to return cash to shareholders, potentially will be a modest dividend and having an ability to flex on share buybacks. Any capital returned to shareholders, as you know, those decisions are subject to Board approvals and Board decisions. Our long-term value creation framework is aligned with the value creation algorithm that Jennifer just discussed, leveraging VES and organic investments to drive core revenue growth, expand our margins, generate strong free cash flow and invest in acquisitions to compound EPS growth and returns. On the right-hand side, you can see how our long-term modeling framework is aligned with this value creation algorithm. We expect to grow the core sales at mid-single digits consistent with our historical performance, reflecting the strong recurring sales and durability of our business model. We expect that growth to drive operating margin expansion with incremental margin fall-through in 30% to 35% range. And we anticipate free cash flow conversion of approximately 100% of net income on an annual basis. We intend to complement our core growth with value-accretive M&A. Our formula to compound growth and returns is very similar to what you're used to seeing from Danaher. In summary, we have 2 great businesses with solid operational and financial fundamentals. There's a long track record of performance. We have delivered core growth and margin expansion in both of our businesses, resulting in double-digit operating profit CAGR over a long period of time. Growth in these businesses will continue to be driven by the secular growth trends and by our people, technology, innovation and VES driven processes. Our formula to drive long-term value creation is to compound revenue, earnings and free cash flow across both of our businesses over and over and over again. With that, I'll hand it back to Jennifer for closing remarks. Thank you.

Well, there you have it. Veralto's history, promise of the future and what makes these businesses great. Hopefully, you walk away from this really appreciating sort of the 3 things that underpin what makes Veralto and its businesses unique. Being a premier leader in water and product quality, defined by the attributes that you see here, strong secular drivers underpinning those vital resources that we've personally and professionally committed to safeguarding. Terrific operating model that's durable through business cycles, through economic cycles. Those secular drivers give us great opportunity to retain and enhance our razor/razorblade business model, giving us opportunity to innovate on behalf of customers who still have critical problems to solve throughout their applications. And then finally, the value that we inherit from the Danaher Business System and coming from Danaher. We will deploy that business model, take the best of what DBS has brought us. We'll redeploy that as the Veralto Enterprise system and working with a diverse and highly experienced team with both extensive history with Danaher businesses as well as critical outside public company experience is what's going to bring it all together for us. So thank you very much for your time here, and we will turn it over to Ryan, who will help us facilitate some Q&A. Ryan?

All right. Thank you. We are moving into the Q&A portion of our program. We're going to rearrange the stage and bring the speakers up on seats in more of a panel format. I'll go over some housekeeping items, pretty normal setup that we have. If you'd like to ask a question, please raise your hand. Steve and Travis are going to be bringing the mics around. [Operator Instructions] We're thankful that you're here. We're happy to engage and excited to know what's on your mind and answer your questions. So with that, I will turn it over to our first question. Travis, why don't we start here at the front with Mr. Scott Davis, and then Steve, if you can go over to Deane Dray right behind him. We'll start there.

All right. Thanks all for doing this. Appreciate it. Jennifer, do you envision kind of Veralto being a 2-segment company, just say, the next 5 years? Or is there a role for another leg?

Yes, I think we really like the business portfolio that we have. We find that there's a lot of synergy in terms of how we serve the safeguarding of the world's most vital resources. We think there's a lot of M&A runway in the space. We've got active funnels on both sides of the house. But I think we're pretty happy with the portfolio that we have, and we'll continue to build that over time.

Okay. And then for Melissa. How big of an opportunity is PFAS when you think about -- is that a game changer from a growth rate perspective or just a nice kind of incremental tailwind?

We like our position and our opportunity to play in PFAS for sure. And we have a long history of -- you're going to see it, some today, of detecting and destroying contaminants. It's going to take some innovation from us and others to get after that. But yes, we like where we're sitting.

Yes. It's Deane Dray with RBC. And the question -- first question relates to M&A. And both Water Quality and Product Quality have a long history of successful acquisitions. You had a terrific slide that showed you the legacy. But there really has not -- that pace of dealmaking has fallen off dramatically in the past 6 years. And you will not be the first company to be spun out that is -- was not at the front of the table for capital allocation by the parent company. So I suspect you have a long list of deals that you have had your eye on. And maybe you can just talk about what the deal funnel is like? And just to clarify, in the Form 10, I know there's a 2-year restriction on major portfolio moves, but it also said restriction on acquisitions. If you could just clarify what the reference on that on the restriction, but M&A funnel and over the near term.

Yes. Thanks for the question, Deane. Obviously, we have been less acquisitive in recent years. I think the thing that gets us most excited is that the working capital that we generate now goes to building and fortifying the Veralto enterprises. We've got, as I had mentioned, really robust funnel in both segments, right? We see good runway in our water businesses. There's a number of emerging needs that we talked about out there in the world. There's also secular drivers in PQI that make conversion to recyclable materials, model materials, biodegradables, shortened cycle times for various different digitization workflows and so on. So we like the space that we're in with the portfolio that we've got. We have very active funnels, and we're looking forward to deploying capital to that end. As far as the Form 10 question, maybe Sameer can answer that one.

Yes, Deane, thanks for that. Any restrictions that you see are just to preserve the tax-free status of the spin-off. So there's nothing out of the normal that you would see in a typical spin-off like this. So it's all tied to any ownership change -- shareholder change that you will see.

All right. That's really helpful. And then just a second question relates to are there software applications, SaaS businesses that can be developed? Is there a water test as a service opportunity, especially as you get more complex in terms of the contaminants? You'll find municipalities, just don't want to do it themselves. Where and how might that be developed?

Go ahead and take that one.

I'll go ahead and jump in there. As you saw in my presentation, we have a 10-year track record of building out our digital solutions. And we've been doing that both organically. You can see the hot Claros in the middle there where we continue to add sensors and systems to that, along with Aquatic Informatics that I mentioned and a strategic tuck-in there that gives us some software capability. But we continue to stay tied to our customers, make sure we understand what those up-and-coming needs are and then innovate against them. And that's everything from the preventative side all the way to predictive. And so we are playing across the spectrum there.

Thanks. Just another question on M&A. So the 10% ROI is sort of the gold standard, has been with Danaher [ border, et cetera ]. So is that the criteria we're going for here, 10% ROI year 3, year 5? And what sort of leverage capability do you have? You're obviously came out the gate to 2x. Where would you be prepared to go for the right deal?

Yes. Maybe I'll start and then turn it over to Sameer. I mean, I think as far as leverage is concerned, we're committed to keeping our investment-grade rating. That is first and foremost for us. I would say with regard to the metrics by which we would transact on a deal, I think it's going to be variable. We're going to look at a host of financial variables. There will be some that really drive core growth versus margin versus earnings. And I think we are going to basically be looking at the combination of those factors, ultimately committed to delivering long-term shareholder value. Do you want to add anything else to that?

I think you said that very well. And maybe I'll just add 1 more point on the leverage side, right? If we were to exceed our -- any acquisition that we will do, we'll have a very critical path to get back to investment grade within 12 month. So that's how we'll approach the situation.

Okay. Follow-on question on incremental margins. You said 30% to 35% is the framework for margins. For coming with your gross margin structure, that implies a lot of reinvestment. So just wondering what kind of reinvestments you're kind of -- where the focus areas are? R&D at 5%, is that still the right level of R&D? What sort of focus areas around NPI, vitality? Anything on investment would be helpful.

Yes. I mean I think the 30% to 35% read-through gives us some flexibility. We're always going to seek to drive our continuous improvement philosophy. But we do see some unique opportunities to further differentiate and create additional competitive advantage. And we'll look to do that both organically and inorganically. So I think that range gives us the flexibility to do exactly that.

Mike [ Heller ] with Baird. So a couple of questions. First, just following up on that one. These have been in the Danaher portfolio for an extended period of time. I mean how do you think about the internal improvement opportunities as we sit here, maybe in addition to that 30%, 35%? Or is the opportunity more as you bring in portfolio companies, you can leverage the synergies and everything on that side on a more broad basis?

I didn't actually hear the entirety of the question there. Can you repeat it, please?

Yes. No, absolutely. So following up on that last question. Just talk to you how long this has been in the Danaher portfolio, maybe not as much internal improvement opportunity. But I would be curious to hear you talk about the internal improvement opportunity set, how much of it is possible now that you have a little bit more flexibility with where your capital dollars go versus the driving margins just to normal incrementals plus bringing in other portfolio companies?

I mean I think one thing about the Danaher Business System is it's trained us all to be extraordinarily nimble. And you saw us respond very quickly throughout the pandemic relative to everything from securing supply chain to acting swiftly on pricing. I think those are endemic to who we are, and we exercise continuous improvement opportunities every single day. We haven't waited to become Veralto to do that, and we will not wait after becoming Veralto to start on any of those continuous improvement activities. So there's always opportunity here in driving the business and no one knows that better than Mattias and Melissa, relative to driving improved margin, increased leverage, better commercial scale and so on. So that's just part and parcel to who we are and how we do what we do.

So the simple question, then. From the sounds of the presentation it feels like what's changing and what's different is just basically the entitlement of where the capital goes. Is there anything else that you can point to that's going to change under your ownership? Obviously, you're going to bring a lot of the Danaher model with you. But is there anything else that you feel like you're now more entitled to beyond just we can allocate our capital more simply to our own businesses?

Yes. That's a great question. Thank you. I think that Veralto will feel very familiar to associates, customers and shareholders comparatively speaking to the heritage that we had at Danaher. I do think the opportunity to deploy our own capital to catalyze shareholder value will be different. And certainly, that's the point that you focused on. I think as well in bringing over the Danaher Business System tool set. There's an opportunity to curate those tools to be perhaps a little bit more simple or scaled rather to a $5 billion enterprise as opposed to a $30 billion enterprise. And certainly, we're looking at comparative tools relative to scale because we ought to be able to operate at $5 billion with a little bit more nimbleness and responsiveness and quick action. So those are some of the things that I would say might be different to folks going forward. But I would say the heritage is strong. You saw me still identify as a Danaher associate here in my pitch. And those threads run deep. We come from an outstanding Danaher pedigree, and we'll continue to carry the best of that forward while evolving the culture, the focus of our purpose and mission. Danaher is certainly very health care focused in life sciences and diagnostics. Our sustainability focus pivots a little bit more to the environment, right? So we have an opportunity really to go after being stewards of the world's vital resources. And so that will be different, and that will feel different to folks.

This is [ Evie Kosloski ] I work under Matt Sykes at Goldman Sachs. My first question is what is your ability to drive growth and margin expansion through pricing look like? With only being a small amount of customer expenses, my thought would be that it could be a material impact to your overall growth.

Yes, it's a great question. Thank you. One of the things that you saw and it shows up in the comps is a fast start with the use of DBS tools last year to get ahead on pricing as well as securing supply chain challenges. We were able to work quickly on both to continue to serve customers well and protect our margins from a financial perspective. So I think we've got a very robust playbook to be able to flex according to sort of fluctuations in pricing and commodities and what have you. And I think what the data would show is that we've done that successfully here.

Great. That's super helpful. And then I know 1 question was asked on it. But can you talk to your involvement with PFAS testing? I understand much of that is done on mass spec, but how is Veralto able to capture growth? And maybe talk about which products are positioned towards that growth area?

All right. I'll take that one.

She's the water expert.

Yes. Well, you hit it there, which is -- today, it is used on GC and mass spec. And one of the -- that's not at the point where the testing needs to happen ultimately. I think over the long term, it needs to be much closer to where that water is getting discharged is our premise. And I will say that with our big installed base and our history of democratizing testing, your going to see this in the gemba walk. Out to -- anybody that can read can run a test. That's what we're after and we think that's where the future will go. So we very much want to get after that in a thoughtful way and innovate against it.

Tom [ Stephens ], TD Cowen. I work on the Dan Brennan. So just one on Product ID. You've given that kind of long term trend, clearly, a lot tougher comps coming into this year. How do you see the next 12 months evolving, specifically on the Product ID segment? And then maybe how does that inform your 24-month outlook going forward?

Yes. Well, clearly, we've been on the fast track to stand this company up. We actually will be doing this 14% faster next nearest business that Danaher was able to spin. So I think we're really focused on making sure we get out of the gate strong and that we uphold our commitments, and that is commitments to shareholders, customers and associates alike. I think we're very focused on making sure that we finish this year with no hiccups. We have no reason to believe that we have any real challenges ahead. We have a history of working with the team at Danaher who's done 2 other spin-offs and things are going sort of phenomenally well. So we're ready. We'll be in great shape by the time we go public. Thereafter, it's really focusing on continuing to serve customers, shareholders and associates. And as far as 2024 guide is concerned, we'll take a look at that with our fourth quarter earnings when we get to the new year.

Justin Bowers from Deutsche Bank. Can you talk about the competitive advantages or the moats of the Water Quality and PQI businesses? And then the part two would be just around pricing and how that plays into the growth algorithm over a cycle?

Yes. Well, I'll turn it over to the experts here to talk about Water Quality and PQI.

So maybe I'll go first. I mean, I think I touched on it during my presentation here. It's a combination of our strong innovation and product portfolio, combined with the deep domain experience we have in the different segments we play and a large installed base. Those 3 sort of make up the sort of the foundation for a very intimate customer relationship that's not transactional, it's over long periods of time. Melissa, do you want to add?

I would say that that's true with Water as well, those same elements. I just want to point to the fact that we play at the high end of that value continuum, which we believe is a differentiator where we have that tight relationship with customers and those mission-critical applications with a tremendous installed base and those sticky relationships. So that's really where we're going to differentiate.

I think it's safe to say that the cost of failure for the customers is high. And that's what we provide, is a safeguard against a process failure, right? That, combined with the broadest product portfolio. In the case of Water, it's 3x to 4x the next nearest competitor. We've got the broadest coding and marking solutions in the PQI arena. That breadth combined with the more than 7 decades of being in these businesses, 2 of those decades being under Danaher and fortifying relationships that are customer-centric giving that deep domain expertise, the breadth of the product portfolio and that customer stickiness of the relationship, I think, really makes these businesses unique and defensible.

Joe Hodes from Baird. When you talk about 60% recurring revenue for each of the segments, can you talk about maybe the breakdown between consumables versus services agreements or analytics or software as part of that 60% for each unit?

Do you want to light off?

Yes. So we're not going to break down the individual components here. But I mean, when we talk about PQI, a large part of our recurring revenue is the inks and fluids connected to the largest business, Videojet, the marking and coding, which is $1.4 billion of the $2 billion, if you remember from my presentation. The other components are the recurring software and the services, which are continuing to grow at a healthy clip. Melissa, do you want to add something?

Just same thing, we're represented in all 3. Yes.

And then I'll try one more on price basically. As you think about coming out of this inflationary period and looking forward, given that the cost of failure is so high, how do you think about your pricing strategy moving forward and what that should constitute of total growth for each of the segments?

Yes. I had mentioned that we got a fast start on pricing as inflation started to really ramp across commodity classes and supplies for products that we manufacture. I would say as inflation starts to abate and as destocking throughout sort of the customer value chain has normalized that we effectively will see kind of more nominal pricing going forward, more in line with historical averages. There have been a lot of pretty impressive price capture on behalf of lots of businesses, but largely on the back of just incredible inflation that we just haven't seen in recent history. So I think as things start to normalize, we'll start to see pricing normalize again to historical averages.

A couple of follow-ups. It's Deane Dray with RBC. For Sameer. Can you give us some color on the transition service agreements, just broadly, which functions, and how long do you think those will be extended? And do you expect to report on cash EPS? Most of your peers do, but I just wanted to know whether you're willing to commit to that today.

Yes. Sure, Deane. Let me just address, those are piecemeal like from the TSA side, it's pretty simple. There's very limited transition services agreement in here. Again, this is a third large spin-off from Danaher. So there's a lot of experience in getting these things done, so we're in a pretty good place. We'll have a little bit on the technology side, but nothing material. I think on the EPS and the forecast of those kind of things, I think there's more to come as we give our guide for 2024. But we'll look at the acquisition amortization, nothing beyond that at this point. But more to come as we came our full guide in '24.

And then just a quick one for Melissa. It's come up a couple of different times on the PFAS testing. There will -- is there a revenue-sharing arrangement with Danaher? I know you're not going to go into the mass spec manufacturing business. But for SCIEX, how will you all deal with that as a -- is it a shared revenue opportunity for those sales?

We're not connected there currently. I mean, we're -- like SCIEX will end up being like any other partner, frankly, that we have in this space. We'll be looking at a number of open innovation partners out there across the spectrum for PFAS. So there's nothing special or unique there.

I would love to hear some more detail. Jennifer, you talked about kind of descaling DBS into a $5 billion business from $30 billion. What does that really mean in kind of practical terms?

Yes. I mean I think it's largely getting back to the fundamentals by function, right? So there are a core set of fundamental tools. When I joined Danaher, having come from Hach in the year 2000, I think at that time Danaher was $3.2 billion in revenue. We had 60-odd companies and we ran every single company with 7 tools. And I think there is beauty and efficiency and efficacy that goes with simplification. There are some extraordinarily advanced tools that are best-in-class that Danaher has, some that are specific to innovation, some that are specific to commercial excellence. And we will bring those tools with us. But it's -- I think we want to make sure that those tools get used by the most capable, right, and the most advanced practitioners within the companies. And I think we have an opportunity to sort of go back to the fundamentals and make sure that the evolutionary maturity of the operating company is matched to the suitable tool set that's going to really give them leverage. And I think that's -- I'm keen to have that opportunity realize because it, again, it gets us sort of back to core levels of discipline, particularly on the shop floor. And I think the way these businesses are going to run in terms of the economics relative to sort of the macro that you see in life sciences and diagnostics, it's a little bit different, right? These businesses came into the fold in the late '90s and the 2000s. And the playbook that we ran then really served to fortify these businesses really well. As the Danaher portfolio has changed and grown over time into the health care segments, Life Sciences and Diagnostics, there's been a bit of a pivot in terms of which tools to lean into. And so we're just looking to sort of rebalance that tool set a little bit to be more endemic to the time period when these companies really became great. And that was really in that ramp in the 2000s, right? So I think that hopefully gives you a little bit of context for how to think about that.

That's super helpful. And just a little bit of a nitty bitty question here. But when you talk about 3 million users every day in Pantone, what -- are they all paying licensing fees? Like how do you monetize the 3 million users?

Pantone is -- the Pantone matching system is the way to specify color, right? And we monetize that by, I would say, selling fan decks and different types of tools that the designers then use communicate that. And it's really around the ability to how do you say, match a color at the beginning of the process and ensure that can be manufactured then later on, right? So you can have that consistency. There's also a growing digital piece of the Pantone portfolio, but the base business is around the artifacts here that help the designers actually create their work.

What would the licensing be?

You can actually go out on the website and look at how to buy a fan deck here. It's a consumable. I mean it depends on -- it's a wide spectrum, right, from a simple fan deck for a couple of hundred dollars and upwards, right? So -- but it's all available there on pantone.com.

All of the years coming up as well.

Yes. See the magenta you have on your desks, here. This was the color of the year in this year here and launched in December last year. So we're coming up on the next one.

Thank you. I know we have some more questions, but we're -- we need to move on to the next parts of our program. So I want to thank our speakers again, one more round of applause. And we'll bring you guys down now. If I could -- the team here, we're going to say thank you to the webcast participants. We appreciate you tuning in and joining us. But at this time, we will conclude our webcast portion.