Veralto Corporation ($VLTO)

Good morning, everyone. My name is Bo and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's First Quarter 2026 Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Ryan Taylor, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer; and Sameer Ralhan, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. And A replay of the webcast will be available on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will be available until May 29. Yesterday, we issued our first quarter 2026 news release, earnings presentation, prepared remarks and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. We hope you had the opportunity to review them last night. These materials are available in the Investors section of our website www.veralto.com under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of the webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties and including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'll turn the call over to Jennifer, who will share a few brief comments before we open the floor to Q&A.

Thanks, Ryan. We are off to a strong start in 2026, reflecting the effectiveness of the Veralto Enterprise system, the essential role of our products and services and customers' operations, and the resilience of our end markets. In the first quarter, we delivered approximately 7% total sales growth and 13% adjusted earnings per share growth, while continuing to invest and commercial execution, productivity and innovation. Looking ahead, we expect core sales growth to accelerate as the year progresses. Reflecting this momentum and our strong first quarter, we raised our full year adjusted earnings per share guidance to a range of $4.20 to $4.28 per share. Thus far this year, we have invested approximately $1 billion across 2 strategic acquisitions: In-Situ in our Water Quality segment and GlobalVision in our PQI segment, and also made opportunistic share repurchases. I'm excited to welcome our new associates from these outstanding organizations to Veralto. Additionally, we initiated a new cost optimization program designed to streamline our business and enhance operating efficiency. These actions underscore the strength of our free cash flow profile and our ability to create shareholder value through multiple disciplined levers. Going forward, our balance sheet remains strong, providing flexibility to pursue additional acquisitions and share repurchases. We I'm proud of our team for a strong start to the year and for the actions we've taken to drive growth and continuous improvement as this year progresses and into next year. That concludes my opening remarks. And at this time, we are happy to take your questions.

[Operator Instructions] We'll go first this morning to Deane Dray with RBC Capital Markets.

Thank you. Good morning, everyone, and I really appreciate that innovation to release your prepared remarks after the close makes things a lot easier to digest and go through the slides very thoughtfully. So what I'd like to do is start on water quality. And can we talk about the upside in core sales, certainly better than your peers this quarter. How much do you attribute this upside to Veralto's higher bias or higher mix in OpEx versus CapEx? And then just on the CapEx side, you give us an update on Trojan and UV.

Thanks for the question, Deane. Yes, we see strong and stable demand across both our [ muni ] and industrial markets. To your point, the Veralto products and services really fit within customer operations where the cost of failure is high for them, right? And using our equipment is part and parcel to ensuring public safety, public health and so on. So from a municipal standpoint, we see this really as a mid-single-digit grower with incrementally stronger growth in muni wastewater due to recycle reclaim and reuse secular drivers. So we are seeing great uptake there. I would say on the industrial side, we see mid- to high single-digit growth there with strength in the common cast of characters around data centers. So that would include semiconductor, power and mining. And PMI trends have been positive here, right? So we feel really good about our water businesses, both across municipal markets and industrial markets. And that's, again, really on the back of being integral to that customer operating environment. Relative to your question around Trojan and UV activity here in terms of quoting and bidding remains strong. This business has some nice bolt-on acquisitions that we've done here is -- and -- but I think it's important to remember, there's a little bit longer cycle business, right? So the bookings that we would see now would be shipping largely in Q4 '25. But a great order book activity there on the back of the secular drivers I discussed.

Great. And just a quick follow-up. With reference to the muni outlook for '26, were you assuming for kind of the spending growth? And if you can separate what that CapEx growth would be versus OpEx, larger equipment projects, that would be great.

Hey Deane, thanks for the question. With respect to the muni view that we have baked into the guidance, think of pretty steady from the analytics perspective. On the CapEx side, really, it's all driven by -- predominantly for us from a Trojan perspective. As you know, we are not in -- the majority in the CapEx cycle, we've tied to the OpEx cycle. So it's really pretty steady on both sides. Deane, as you want to think about this, steady in muni business going into analytics side, Trojan side really strong as Jennifer just laid out.

We go next now to Jeff Sprague with Vertical Research.

And Jennifer, I was wondering if you could just elaborate a little bit more on kind of the cost program, sort of the catalyst behind it, maybe some things here that you weren't able to do pre-separation, et cetera. Just -- and maybe a little more color on some of the levers you're looking to pull there.

Thanks for the question, Jeff. Our cost optimization program here is just part and parcel to our continuous improvement mindset. We are always looking to drive continuous improvement, and this is really a natural evolution to make our cost structure more competitive in our journey to enhance EPS growth. This will really allow us to leverage kind of certain functional attributes across the enterprise that improve both our efficiency but also maintain our accountability within our decentralized operating model. So we will stay true to that decentralized operating model with the operating companies, retaining accountability and quick decision-making and service to their customers. But it's been a 3-year journey here, right? The first part of of getting the business stood up was to reinvigorate the innovation and R&D engine, get the right commercial architecture going in our operating companies, which basically provide the operating room to do everything else. Secondly, we really focus on accelerating our capital allocation flywheel and have that going now with some strong strategic bolt-ons, creating significant long-term value and also with our share repurchase activity. So cost optimization was a natural next step, right? And we're really focused on simplifying our business processes to improve operating efficiency and further strengthen the competitive position. So some of these things you can't fully account for when you're part of a $30 billion enterprise. But from a timing perspective, this is really the right time for us look at this sort of structural allocation of costs and make sure that we're rightsized for the size business that we are today and what will be scalable in the future.

And you didn't mention any benefits in 2026. We should expect it's gearing up in '26 for things to flow in '27 and '28?

Yes, Jeff. Most of the actions that we have laid out in this pretty detailed plan are oriented towards end of this year. So in Q4, you're going to see one of the actions. So we haven't made any benefit from the program in 2026 on the guidance. You should expect roughly 50% of the run rate savings in '27 and 4 run rate in 2028. That's how you can model the savings.

We'll go next now to Andy Kaplowitz at Citi.

Jennifer, I think in your prepared remarks, you mentioned packaging and color within PQI, down high single digits as a nonrecurring impact in Q1. Maybe just give a little more color around that? What are CVG companies telling you? Are they worried at all about inflation? Or is just really lumpiness? And that's really the explanation, and I do think you're still forecasting good growth for the rest of the year?

Yes. So yes, it's a little bit tailored to cities here relative to the PQI story. At a high level, we see continued strong demand across our CPG customer base. And it remains steady in terms of our quoting and sales activity relative to coding and marking, and we've seen that for several quarters. Complementing that really is our digital packaging and ingredient solutions brought in here with the combination of ESCO and TraceGains, which continues also to be strong, and we would expect that to continue with the addition of GlobalVision. GlobalVision obviously strengthens the value proposition here in terms of building a comprehensive workflow. When you look at here relative to packaging and color, as you noted, we do see sales down high single digits here, primarily due to the nonrecurring revenue, including sales of color testing and packaging inspection equipment. But this was really focused in a few discrete industrial end market automotive, textiles, building materials, driven by housing market and so on. So that's where we're seeing some of the demand weakness. But certainly, going forward, we feel strong about incremental recovery here. And certainly, we don't see any changes relative to CPG demand, which would indicate our confidence in the marketing and coating business continuing to be strong and, in fact, accelerate throughout the year.

And then maybe the same kind of question on PQI margins. I mean, obviously, they've been at a high level for the last few years. but they've been a bit lumpy. I know mix matters, which I think you said is going to impact your Q2 PQ margin. But structurally, do you see CPQI margin having the same opportunity that you have in sort of water quality consistent with the long-term incremental margin framework you have?

Absolutely, Andy. As you can look at PQI, right, on a sequential basis, we had a very nice improvement in the margins. mix help, but at the same time, some of the rollover from the tariff actions that we do talked about is going to roll off as well. So overall, if you're going to look at the opportunity in the second half of this year and moving forward into '27, absolutely, we see same level of opportunity.

We'll go next now to John McNulty with BMO Capital Markets.

Maybe just one on the waterfront. I mean, in particular, some of your competitors in the ChemTreat arena have put through some really chunky price hikes and/or surcharges at 10 to 14 for one, 8 to 14 for the other. I guess, can you speak to your thoughts on pricing and if you see a need for it at this point, just given what's going on from a raw material perspective around the Iran conflict?

Yes. Thanks for the question, John. We take a disciplined approach to pricing within sort of all of our operating companies, but I think particularly you're referring here to ChemTreat. We, by virtue of our 75% sales direct to customers, we've got a lot of customer intimacy and insight as to how to support their operations through this dynamic macro environment. And so we partner with them to achieve pricing that is going to offset the headwinds from rising costs, but we do this sort of very surgically. We feel that this approach has been disciplined in the way we execute it. It served us well to achieve that mid- to high single-digit core sales growth and we would expect this approach to continue.

And then maybe just a little bit of color. Given the challenging environment with inflation and at least in some cases, there may be a little bit of demand destruction. Are you seeing any interesting assets that maybe weren't available to you in the market now coming to the market? Or is it really just too early for that given what's been going on?

Yes. John, maybe I'll take this one. If you look at from the asset perspective, market conditions change, but we're always going to stay true to our market company valuation algorithm as we're going to look at all the strategic opportunities. Again, things do open up in these kind of market conditions, but it's too early to say at this point. But overall, pipelines look pretty active and pretty excited about the opportunities that are here in the near term for us.

We'll go next now to William Grippin with Barclays.

Just wanted to come back to the cost optimization plan that you've laid out here, I just want to make sure we're thinking about that correctly. Is that -- should we view that as sort of upside to your long-term margin expansion algorithm? Or does this sort of just keep you on track with that algorithm?

Yes. Will, thanks for the question. The short answer is yes, right? If you look at our value creation algorithm, it's unchanged mid-single-digit core sales growth with 30% to 35% fall-through. So from a modeling perspective, as we can start thinking about '27, '28, it is logical to assume that we will use the 30% to 35% fall-through on the core sales growth and then add the savings from the cost optimization program on top of that. So think of it as a step change in '27 and '28. As far as particular -- the exact details for '27, of course, we'll talk when we give that guidance.

Perfect. I appreciate that. And then I wanted to touch on capital allocation here and just how you're thinking about the mix of that going forward. I think you've clearly executed on M&A recently as well as significantly ramped up the repurchase activity, and I think spent a pretty good majority of -- or a good chunk of the $750 million authorization. How do you think about that sort of going forward over the balance of the year, maybe into '27? And could we potentially see an increase in the authorization or maybe what would be a trigger point for that?

Yes. Thanks for the question, Will. I think it's safe to say that we're going to continue to be disciplined here. We do have a bias for M&A relative to capital allocation. And I think you've seen that bias read through here with our $1 billion of capital deployed thus far in the year. the M&A engine is running well. And to Sameer's point, we've got active funnels on both sides of the house and engaged in several cultivation activities. So our bias will remain M&A. We think that's going to create the best long-term value creation over time. but we reserve the right, as you've seen, to utilize that capital when we see market dislocations relative to the business performance, and we plan to continue to take advantage of that. as far as whether that would be increased, that's going to be a Board decision. And in due course, we will take that on at whatever time is appropriate.

We'll go next now to Mike Halloran with Baird.

Clarification on the early, how does the cost out program layer between the 2 segments?

Yes. If you look at the cost optimization program, our market is pretty broad-based across both the businesses as well as corporate functions. Overall, I would say there's a little bit of more bias to a speaker, but it's pretty balanced across the company think [indiscernible]

Got it. And then just from a guidance perspective, maybe help me understand what you're embedding in terms of seasonality, end market improvement versus end market stability here. Is there any expectation for an acceleration in end markets as we sit here today? Or is it relatively normal seasonality as it plays out? And if you are assuming any acceleration, any areas that we should be thinking about specifically?

Yes. So overall, as I kind of think about the end market dynamics, Mike, that we've built into the guidance. From a CPG perspective, pretty steady. Frankly, it tends to be less seasonal. Same for the global food and beverage markets. These are pretty nondiscretionary demand. So we expect the market and the demand to be pretty steady over here. Similarly on the water side, I would say, is the mini side, as Jennifer said earlier, it's pretty steady that what we are seeing, given where we operate, we operate in the OpEx side for our customers. So the risk of failure is very high. So it will be pretty well embedded in the high-value part of the workflows. So overall demand pretty steady. But in the second half, as you know, especially as we get into Q4, the comps get a little easier as well. So that kind of helps as you kind of think about the quarter also sequentially, we should see core growth kind of moving up as we go through the year.

We'll go next now to Andrew Buscaglia with BNP Paribas.

Just wanted to check on the water quality just a number of drivers, including data centers. I'm just wondering if you could how influential that data center contribution was to growth. I don't know how you want to do it, but maybe just talk a little more about that, please.

Yes. I mean our water team had a fantastic quarter just in terms of execution, driving hard across the enterprise. You know, relative to sort of which markets are faster growers, we do see strong growth in data centers. But as a reminder, data center revenue is still overall a very small portion of our total sales in water quality. And so we don't we don't spell out sort of market sizes, growth rate separately here publicly, but we will say that we're getting great traction here lot of uptake in demand, and that's benefiting essentially all of our water businesses.

And then M&A wise, it certainly sounds like you're still you're sitting and moving forward with capital allocation towards that. I'm wondering, [indiscernible] here on the treatment side, move into the data center space a little bit more aggressively. Does that market interest you in terms of increasing -- maybe increasing in terms of the hierarchy of where your interest lie?

Yes. I mean, I think you'll see us stay true to our algorithm of market company in valuation. We like businesses that look like us, right? We like razor, razor blade businesses. We like being in the operating cycle of the customers' operations. And we find that this gives us long-term durability and good confidence in sort of the steady state that we've been able to create here. So I wouldn't say we're taking anything off the table here, but I do think there are profiles of companies that we like, and we will stay true to relative to those that create long-term advantage and allow us to apply the ES to make them better.

We'll go next now to Jacob Levinson with Melius Research.

Good morning, everyone. I don't think we've touched on China yet. And I know some of your peers have had some challenges there on sort of the water infrastructure side of things. And I know there are different business mixes with your portfolio, but maybe you can just give us some color on how you'd characterize that market today and for any puts and takes around specific verticals?

Yes. China continues to behave like a more mature market. Our China sales here in the first quarter were up low single digits. Generally in line with the past couple of quarters, not really any material change to what we're seeing there. PQI did lead that growth with double-digit growth here. Now we've lapped some comps here, which make it a little bit easier to post some growth. Water quality was down just slightly here, low single digits in China, and that is reflective of kind of the funding environment for municipalities with money still not flowing from the government to prop up that particular industry. So we continue to have opportunistic sales into industrial segments, still waiting for water funding to break loose here on the muni side in China but have strong opportunities that continue within PQI.

Okay. That's good color. And just a quick follow-up for Sameer. I think your tax rate has gone down a little bit over the last couple of years and just be helpful to understand how much of that maybe just related to geographic mix or whether there's some planning activity you've been able to do over the last few years since the spin.

Yes. Thanks, Jake, for that. If you look at the tax rate is definitely we have made a pretty nice move from where we started from 24.5-ish percent when you're kind of spun off now in the 20s. I would say, Jake, it's a balance, but I would say majority is skewed towards sort of the really great work by the tax team and from a planning perspective to get us to the right place.

We'll go next now to Brian Lee with Goldman Sachs. Hearing no response, we'll circle back to Brian. We'll go next to Andrew Krill with Deutsche Bank.

Could give us an update on tariffs there have been a variety of updates for the Supreme Court ruling, the changes in Section 232 rules and then also general cost inflation from higher oil? Can you give us an update how you're viewing the tariff headwinds and cost inflation headwinds this year and if that's changed at all for last quarter?

Yes. Thanks, for that. If you got to look at on the tariff side, the 3 layers, right? The stuff that happened last year, effectively, you've taken the pricing actions, all the line moves have happened, those things should start rolling [indiscernible] impact of those should start rolling over as you're going to get into the second half. So we are pretty well positioned on that front. As far as the new Section 232 kind of stuff, we baked the impact of that on -- in the guidance that we provided. But overall impact as you can think about for us is actually much smaller. This is not like last year. It's because [indiscernible] start thinking about the steel or aluminum kind of components into a product, it's pretty small. So those are -- the impact of those is pretty small for us. As far as the Middle East and the current conflict and the impact that we're seeing in the commodities on the oil side, again, baked into the guidance, at least based on the work we see right now. But as you can imagine, some really active discussions with the customers on the pricing side, Jennifer [indiscernible] on the Centre side earlier, the impact that you're seeing on the chemicals and packaging side that's kind of baked in. But overall, we're pretty well positioned as you kind of think about the rest of the year. It's pricing and there's lower productivity stuff as well, part of it.

Great. That's very helpful. And on a related note, just with price is still fair, we should be thinking about the company realizing about 2% price or so. And I think PQI was trending a bit higher than water quality? Is that a reasonable approach still?

Yes, that's a pretty reasonable approach just kind to take on the pricing 100 to 200 basis points. But frankly, with the price increases that we did last year, we're still lapping those up and then we had further price increases as part of this year's cycle. So you should expect this year in aggregate to be at the high end of the range with PQI even exceeding that a little bit.

We'll go next now to Brian Lee with Goldman Sachs.

Sorry about that. This is Tyler Bisset on for Brian. Just wanted to go back to the high-growth markets. You discussed how acquisitions of GlobalVision and then since you should help support growth here, but it was actually a little weak for both Water Quality and PQI during the quarter. So any reason for the weakness in the quarter how do you expect growth to trend going forward? And then just, I guess, looking to 2Q, are you expecting any like material impact from the war in Iran?

Yes. Thanks for the question, Tyler. I just want to make sure I get the question right. high-growth market versus GlobalVision, right, let's bifurcate those to your vision does not have any sort of a meaningful impact as we're going to think about the growth in the high-growth market side. High-growth market side, effectively, we grew in the low single digits but on the, sorry, a slight decline this year, but water quality was down low single digits, really more on the impact that we saw in China. But overall, PQI is in a number of low single-digit decline as well. So nothing material. The majority of the impact that you're seeing is more of a timing, timing driven, especially in Latin America, that's kind of driving that impact. But otherwise, we're pretty well placed.

I would say as well, we've got a pretty big prior year comp in India, right? We had Q1 in India, it was about 20% last year. And we do see some impact here in Middle East, small portion of our overall revenue, but the sales there were down about 10%.

We'll go next now to Josh Spector with UBS.

I wanted to ask just about -- similar on some of the regional impacts here in PQI, I mean there's a pretty decent diversion between Europe and North America. I don't know if Europe was more impacted by some of the one-timer larger equipment sales? Or if it was something else? And if you could help what that looks like in 2Q, if any of that reverses at all?

Yes. So relative to Western Europe, PQI had a really tough comp in 2025. They were up 10.3% last year. So and this is on the back of our recurring revenue model where 3 extra days matters a lot in the first quarter of 2025. So very, very high comps relative to prior year. I would say here in Q1, our marketing and coating businesses grew core sales low single digits, right? And that's on the back of a pretty healthy sizable comp prior year. We did see an offset here by delays in shipments of certain hardware lines in our packaging and color businesses, which we referred to earlier. But relative to sort of broad-based global CPG demand, we see it stable. We see it stable in Europe. We see it stable in North America, a little bit of a mixed bag in some of the high-growth markets largely because of a little bit of impact from, obviously, China, India. We've got some timing issues and then certainly the impact of Middle East and Africa.

Okay. That's helpful. And I guess if I kind of flip that the other way. If I look later this year, you have 6% to 9% comps in North America in 3Q and 4Q. And are those going to be characterized as tough comps to go against? Or should we expect you guys to be able to grow on that level later this year?

Yes, as you kind of get into the second half, you're going to see the growth despite the comps. In fact, I would say from a PQI perspective, the comps get a little easier as we get into Q4. Overall, since the demand -- given the demand dynamic that Jennifer just talked about on the marketing and coating side from the CPG side, we feel pretty good about the second half of the year, and that's kind of baked into the guidance. So nothing sort of material deviation that you're going to see.

And we'll go next now to Joseph Giordano with TD Cowen.

This is Chris on for Joe. The EPS guide moved higher, even though the operational framework looks -- appears to be largely consistent. Could you walk us through the specific bridge items that are driving the revision? And how much of that is operational versus capital structure below the line?

Yes. Thanks, Chris, for that question. Overall, if you kind of think about the increase in the EPS guide. It's predominantly raised because of the operating stuff, the share buyback that we've done so far has already kind of baked in. Overall, what's kind of driving this thing is a few things. The strength of Q1 and the way we are coming out in terms of the order books and are out of the quarter and into April. Second one is you're going to talk about the pricing, pricing at the higher end. So that's kind of giving us the confidence as we kind of think about the full year EPS. And third, I would say is, really the execution that we are seeing across the board in both the [indiscernible] businesses and across the region. So those are kind of really the things that are kind of driving. Otherwise, the demand patterns are pretty steady at this point. And given where we are now with almost 4 months behind, gives us more confidence on that front.

Thanks for the question. This is Ryan. That concludes our question queue for the call. We appreciate everybody's time and engagement this morning in preparation with the earlier materials. As usual, I'll be available for any kind of follow-ups that might be necessary. Thank you so much for joining us. We'll talk to you next time.

Thank you. Again, ladies and gentlemen, this will conclude today's Veralto Corporation's First Quarter 2026 Earnings Call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.