Veralto Corporation (VLTO) Earnings Call Transcript & Summary

We will move next with Nathan Jones with Stifel.

I guess I'll start in the packaging and color side of the business. You talked about Esko, TraceGains and Global and the impact that they're having together. Can you maybe talk a little bit about how you're leveraging H1 in order to generate better sales and how that factors into the outlook in the second half? And then you mentioned in your scripts environmental monitoring workflows, which I think plays into In-Situ and OTT and maybe how they fit together to drive additional sales as well. So maybe just sales synergies around the acquisitions, I guess as John was asking.

Yes. So Obviously, we continue to stitch together assets here that deliver more value to the consumer products goods digital workflow. And everything from sort of package design, integrity through compliance, regulatory, compliance, ingredient traceability, checking for accuracy of the print that's actually rendered on the package. All of those things are critical workflows for brand owners. And to the extent that they can be seamlessly integrated is where the real volume or the real value is derived. In fact, we've, at our most recent trade show, Esko World was able to demonstrate packaging design changes that normally span months in 2 weeks and in some cases, down to a few days. So there's real value in that workflow just in terms of stitching those things together. Bear in mind that GlobalVision is the long-standing partner of Esko. And so the integration of those solutions is pretty straightforward. But TraceGains is also providing real value to this workflow in terms of ingredient traceability, regulatory changes and making sure that products are fit for purpose and meet all the regulatory affairs and compliance requirements. So yes, we are seeing good value there. We see good brand uptake of those solutions, and we see that accelerating here in the back half of the year. Relative to your question in the environmental workflows, yes, we are speaking to the combination of In-Situ in our odd products. And as we had mentioned previously, the two of those really fit together like LEGOs, One is strong in analytical quantity, one is strong in analytical quality. So quantity and quantity are both covered in those environmental workflows, and they provide important intelligence here for the integrity of Water as it comes into the influence into water treatment plants. So knowing what is coming, how much is coming, whether it's clean or dirty, are all critical factors, particularly as you get more environmental elaboration, severe weather events and so on. So integration is progressing well there, and we're liking what we're seeing.

And maybe just one thing on the environmental side, Nathan, I'll add is, as you're going to look at the synergy numbers that you kind of talked about on the commercial side when we announced the deal. The team is early days, but the team is executing phenomenally well and that we are well ahead on the commercial synergy side numbers wise.

I guess the follow-up question, just a housekeeping one, I guess, around margins. You had the tariff refunds in each segment. Can you talk about what the margin expansion was [indiscernible] per refunds? And I think the guidance contains the refunds in it. Any chances that there will be more coming ahead?

Yes. Thanks, Nathan, for that question. As you look at the refund side, effectively, we got roughly $15 million, 10-ish ores in PQI, $6 million in Water Quality. Overall impact of the tariff refunds on the margin expansion on the adjusted OP was 110 basis points. So excluding that, margins effectively came in pretty much in line with the guidance Nathan, overall as a company and for each segment as well. So really no surprises on the margin side. And as the future goes in the second half of the year, you're absolutely right, we haven't included any further benefit from tariff refunds in the second half. But based on the filings that we have done, look, we can have another $0.02 per share curve and impact benefit, but the timing is highly uncertain. So we've not added that to our guidance for the second half.

We will move next with Andy Kaplowitz with Citigroup.

Jennifer, can you give us a little more color on how to think about the mix of Water Quality moving forward? For instance, how big is your overall industrial exposure at this point is getting as large as your municipal exposure? And looks like you're saying that industrial drove leased in the high single digits. It seems like it's more broad-based growth outside data centers. So can you talk about the durability of that growth moving forward?

Yes. We're really pleased with our Industrial growth. And if you look at our overall Water business, about 50% of our Water revenue comes from industrial applications. So it's really quite significant. Most of that industrial revenue comes from North America. And so we're really seeing the benefits not only of these discrete vertical markets like data centers and the feeder industries there, but also in the near shoring and the reshoring efforts. So we see growth being catalyzed here by strength in those industrial markets. That said, we've got plenty of analytical instrumentation and products and services that go into that space. But the municipal markets are also holding up well, right? As a reminder, 60% of our revenue is recurring revenue. We said in the operating side of the customer's plant where they're looking to make sure that they insulate themselves for many points of failure along their value chain there. So being integral to the operating environment, making sure that we help customers avoid critical points of failure allows us to continue to see really sticky business there on the municipal side. And the other 40% really is revenue associated with continuing to upgrade equipment and deploy new technologies and so on. So I think it's really balanced across the portfolio. Certainly, there's a higher driver of growth coming from our industrial markets, but muni is holding up really well as well.

Jennifer, maybe I could double click on the muni markets because obviously, we get and I'm sure you get asked the question a lot. I think you've called it steady. You reminded us the recurring growth. Can you continue to grow in that business, you think, over the next several quarters, years? I do hear like municipalities worried about tight budgets. Can you do that? Can you continue to grow in a more tight budgeting environment?

Yes. I mean the way to think about this is the budgets for operating a water plants are not elective, right? Water plants have to continue to operate, treat their water because communities and industry is relying on that water. So we don't see real aberrations or fluctuations in federal funding. Obviously utilities, municipalities are going to be judicious with their spend, but we absolutely believe that we can continue to grow and grow at mid-single digits or better in this space. Bear in mind with new technologies, more efficient ways of running plants more software deployed to get intelligence out of how well that system is running. Those are all opportunities for continued growth.

And as you're going to think about our muni business, right? Definitely on the analytics side is where you see the consumables side. But let's not forget the -- on the Trojan side, we have pretty nice exposure on the muni through our Trojan business and the bid activity that you see in the wastewater side, especially on the munis is pretty, pretty solid. So overall demand, as you kind of think about the growth of our muni business, you should look at both angles, both from -- one from the analytics side, from the Hach side at the same time from a Trojan business as well, which has been growing pretty nicely.

We will move next with Ryan Connors with Northcoast Research.

Wanted to talk about ChemTreat a little bit. You've talked about pricing various points in the call, but it looked like we were going to get some relief there in terms of input cost headwinds, oil prices had come down seems like that volatility has picked back up. Can you just talk in more detail about the specific price/cost dynamics in ChemTreat? I know you mentioned the team is firing on all cylinders from a top line perspective. But when you talk about price cost and margins, with the volatile raw materials here in ChemTreat?

Yes, Ryan, if you going to think about the ChemTreat side, you're absolutely right. Look, in the ChemTreat, we've been working very closely with the customers given some of the chemical inputs to see how we kind of make sure we can improve the margins and get the right value for the solution that we deliver to the customers. overall, as you kind of think about in that business or dynamic, yes, some of the pass-through can move with the pricing. But at this point, frankly, we have not seen any sort of a change as yet. Our goal is to make sure we price -- when the input side is so volatile by preserving the dollar margin. So that's one of the biggest focus for us as we're going to think about. And the discussions with customers that the ChemTreat is having is pretty real time. I mean we have got a phenomenal digital solutions to make sure our sales teams are fully on to have those discussions.

Got it. And then one more on the PQI side, just curious whether we've had this really high profile recall situation with the Cyclospora infections with the latest outbreak. Just curious whether for your teams there, whether that type of situation creates an uptick in kind of interest and selling opportunity for people to get just get -- when something like that is front page news like that, whether that's kind of an opportunity for a bit of an uptick in interest and opportunity?

Yes. Great question. The answer is absolutely. And while Cyclospora is the latest public health risk, any kind of bacterial or parasitic outbreak is not actually uncommon. You can go back to E.coli and peanut butter, botulism and infant formula, right? These kinds of episodes happen. And our PQI franchise is ideally positioned with Esko, TraceGains and GlobalVision providing integrated workflows to help with regulatory compliance, ingredient traceability and packaging accuracy, while our coding and marketing businesses aid in the date lot code and distribution traceability. So it's an end-to-end solution really for brand owners to ensure that they have product that is safe for public consumption. So together, our portfolio of solutions really provides that source to shelf intelligence to make sure that brand owners can protect public health.

Our next question comes from Andrew Krill with Deutsche Bank.

Could you give us an update on what you're seeing on electronics inflation, including memory with all the demand on those products from data centers? Is there anything very usual from a cost perspective or availability perspective? And can you remind us which products are most exposed to those in [indiscernible]?

No. Thanks, Andrew. Great question. Our exposure in the electronics can really comes to our instruments where we do use memory, we do use boards. These costs overall, when you kind of step back, Andrew, a pretty small fraction of the COGS. We are definitely seeing higher prices, just like everybody else in the industry and, frankly, broader economy, but the impact of the Veralto level at this point is not material. And from our perspective, look, the procurement teams are pretty -- working pretty actively. I wouldn't say that at this point, we've had any issues of sourcing. It's a matter of pricing, but it's a small number that you are able to pass through. But at the same time, look, this is where from the R&D team's perspective, they are looking at things as well as to how we can design and optimize things in a higher memory or higher semiconductor price environment as well. So those actions are helping mitigate the impact as well. So it's not a material impact to the Veralto level is a punchline.

Okay. Great. Very helpful. And then switching gears, the alpha UV deal, I think didn't get a ton of air time. Maybe can you just give us some more on like the growth rates, I believe the prepared remarks said double-digit growth this year. Is that sustainable? And maybe any help on margins now and where they could go as you use VES and integrate the company?

Yes. We're really happy to welcome Alfaa UV into the portfolio. This is a highly synergistic addition to our Trojan business, which continues to expand our globally. Alphaa itself has a strong portfolio of competitive fit-for-purpose solutions along with an established commercial presence in India. And you can think about this as being a similar type of transaction relative to AQUAFIDES, which is the UV business we acquired in Europe. And part and parcel to the geographic expansion that Trojan is doing, I think Alphaa also gives us an opportunity to expand in other high-growth markets with their portfolio. So Trojan, AQUAFIDES and Alphaa, all sort of fit together nicely to cover a variety of UV treatment applications, high-flow, low-flow different kind water matrices and so on. So again, small business in India, but a double-digit grower, and we do believe that, that's sustainable going forward.

We will move next with Andrew Buscaglia with BNP Paribas.

So you guys sound rather positive, I think, on the past acquisitions you made. I know that you paid some rich multiples for them and people are looking for signs of synergies coming through. So would you say that they are tracking ahead of your expectation in terms of either growth or synergies? And can you just give us a little more color on that, please?

Yes. We've been really pleased with the deals that we brought in to Veralto since spin. And I think what you see is we've accelerated in terms of deal volume both in number and overall relative size. It's been balanced between PQI and Water. We really like the spaces that we're in with both of those segments. And I would say the vast majority of these deals have provided near-term synergies around sales acceleration and combining product portfolios going to market with joint sales and the like. So we certainly, at least to date, have really focused on accelerating our overall growth profile, and these deals are doing exactly that. There is opportunity clearly for ongoing cost optimization and getting more margin out of these different assets. And that's all baked into integration plans and transition going forward, but we're really pleased with what we've seen in the top line growth acceleration.

And you're seeing that in the guidance, right, and the confidence that we have in the second half and then as we're going to move forward, part of that is driven by the growth profile of the transactions that we've done.

Yes, exactly. That's fair enough. Yes. I know everything is kind of picked over at this point. So I wanted to ask a little more of a higher level question. I get questions on your data center exposure in Water. But I think there could be an interesting angle and PQI. I'm wondering if you see AI changing demand for things like inspection and marketing and coding, we're seeing this in some other adjacent industries I cover as well. But what's your take at this point on AI influencing PQI?

Yes, you're seeing that. Look, Andrew, as you know, we are part of the GlobalVision we laid out a little about that as well, right? So in our digital workflow solutions more so, we are definitely seeing that. We are offering the AI application. It can take kind of a layer kind of an application on top of the solution, that we provide to the customers. So you're definitely seeing more on the digital workflow solutions side of the PQI. I mean it's going to be expanding more and more and we're making the investments even organically and from our talent perspective on that side as well. So we're all offering products on that side to the customers.

Yes. And GlobalVision is squarely in that space, right? What global vision brings to the table is a deterministic inspection engine, right? And it's designed to produce the same answer every time because in regulated workflows, brand owners don't can't tolerate any room for error. So these are reliable, repeatable processes with proprietary data sets that will render the accurate answer every time, right? So -- and the Esko, TraceGains and GlobalVision teams are effectively all working together to employ AI throughout that workflow because it will allow more mistake proofing and faster time to market while meeting regulatory requirements and traceability criteria?

We will move next with Brian Lee with Goldman Sachs.

I know a lot has been covered. So maybe a quick one for me. and I'll take these offline. Just on high-growth markets, maybe some comments around the outlook there, potential for further reacceleration in growth? I know that North America and Western Europe, you have been really on throughout the year on a relative basis. So if you could maybe touch upon kind of what you're seeing out there and the forward outlook for the high growth markets.

Yes. So high-growth markets were relatively flat. We see a little bit of a tale of two cities here between PQI and Water. For our China business, we've got strong growth in PQI and we've got a little bit of shrink on the Water side would say, Latin America as well continues to see good order rates, but sales are a little bit down year-over-year sequential -- and they're improving sequentially. I think we see underlying demand that remains strong, but we do see some timing delays in projects that are there. So again, we continue to watch and focus on execution between these different markets around the world. And we're pleased with what we see in recovery in China for PQI, still waiting for Water to recover there in terms of traction. And then we're watching Latin America closely.

Thanks, Brian. This is Ryan Taylor. We appreciate everybody that was able to engage with us on the call. At this time, we have hit our time limit of 45 minutes for the call. So we're going to have to cut it off here. As usual, I'll be available for follow-ups throughout today and over the course of the next several days. We thank everybody for joining us, and we'll talk to you next time.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.