Veralto Corp Q1 FY2025 Earnings Call

My name is Marco, and I'll be your conference operator this morning. At this time, I'd like to welcome everyone to Veralto's Corporation's First Quarter 2025 Conference Call. I will now turn the call over to Ryan Taylor, Vice President, Investor Relations. Mr. Taylor, you may begin your program.

Good morning, everyone. 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. 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 9. Yesterday, we issued our first quarter 2025 news release, earnings presentation, and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. In addition, we reaffirmed our full year 2025 earnings per share guidance, which now includes our current assessment of the macroeconomic environment, including tariffs and related countermeasures. These materials are available in the Investors section of our website under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of our webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. On that note, I'd like to point out that year-over-year sales growth in the first quarter of 2025 benefited from three additional shipping days compared to the first quarter of 2024. 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, 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. And with that, I'll turn the call over to Jennifer.

Thank you, Ryan, and thank you all for joining our call today. Before discussing our first quarter results, I'd like to take a moment to recognize our 17,000 associates across the world for their commitment to serving customers, driving continuous improvement, and safeguarding the world's most vital resources. As stewards of some of the world's most essential resources, we help ensure billions of people have access to clean water, safe food, and trusted essential goods each and every day. Dynamic business environments, such as the one we are currently experiencing, provide us with the opportunity to demonstrate the essential nature of our products, the durability of our business model, and the power of the Varalto Enterprise system. Our team embraces challenges as opportunities to drive differentiated winning outcomes for our customers, associates, and shareholders. That mindset has propelled us to a strong start in 2025 and prepared us to navigate this dynamic macroeconomic environment we are facing in the near term. In the first quarter, we delivered excellent results across the enterprise, driven by disciplined execution in both segments. We are actively deploying several countermeasures to mitigate changes in the global trade and tariff landscape and enhance our operational flexibility. I'm proud of our team and our collective performance thus far in 2025. Looking at the first quarter results in detail, building off the operating momentum generated last year, we delivered 7.8% core sales growth, with 50 basis points of adjusted operating margin expansion and double-digit adjusted EPS growth. Our commercial teams executed on strategic initiatives to gain new customer wins and increased market penetration, while also capitalizing on favorable demand across our key end markets and geographies. Our core sales growth was driven primarily by volume and was broad-based across both segments with PQI delivering 8.3% core sales growth and water quality delivering 4% core sales growth. In PQI, positive trends in consumer packaged goods markets supported growth across all key product categories in our marking and coding business and across our digital workflow solutions and packaging and color. Notably, in our marking and coding business, Q1 marked our fourth consecutive quarter with year-over-year growth in both consumables and equipment. In water quality, we continue to drive robust growth of our water treatment solutions in North America, complemented by steady growth in water analytics sales globally, including double-digit growth in Europe. Adjusted operating profit margin expanded 50 basis points year-over-year to 25%, an all-time high. We expanded operating margin in Bodman with incremental margins in line with our long-term framework driven by high-quality sales growth and efficient operating leverage. Adjusted earnings per share grew 13% year-over-year to $0.95. This exceeded our guidance, primarily due to better-than-expected sales volumes. I'm proud of our team's disciplined execution to deliver a high-quality performance in the first quarter in service to our customers. In addition to our strong organic growth performance, we continue to make great progress on recent acquisitions. The integration of TraceGains is on track. Sales are growing in line with our expectations, and we continue to invest in future growth. In February, we signed a definitive agreement to acquire AQUAFIDES, an Austria-based provider of ultraviolet water treatment for $20 million. AQUAFIDES treatment systems are used in drinking water, wastewater, and a variety of industrial applications that require high-purity water, including food and beverage and pharmaceuticals. This is a fantastic addition to our Trojan business. It expands our ability to serve European customers with local engineering support and service, while also expanding our UV treatment portfolio with high-quality, efficient fit-for-purpose solutions. We look forward to welcoming the AQUAFIDES team to Varalto and unlocking new growth opportunities together. Looking at core sales growth by geography and end market, growth was broad-based across key verticals and regions. Our commercial teams executed well, leveraging VES tools and capitalizing on the investments made last year to expand our sales, marketing, and innovation efforts. Sales growth in Western Europe was robust at nearly 11% with double-digit growth in both segments. In North America, sales grew approximately 8% with high single-digit growth in both segments. Sales in high-growth markets were up 6% year-over-year with PQI sales up high single digits and water quality up low single digits. Taking a closer look. In Western Europe, water quality grew 11.3%. Our water analytics team in Western Europe continued to deliver exceptional growth through rigorous lead generation, funnel management, and VES-catalyzed commercial execution. In PQI, sales into Western Europe grew 10.3%, driven by double-digit growth in packaging and color and high single-digit growth in Marketing & Coating. In packaging and color, we saw strong software growth across most packaging applications, including increased mid-market penetration. This reflects increased focus on account management and fit-for-purpose solutions to accelerate software growth. And in Marketing & Coating, growth was driven across equipment, consumables, and spares. Moving to North America. Core sales growth was led by water quality with 8.3% growth. We continue to capitalize on increasing demand for our chemical water treatment solutions, which grew double digits in North America. Our chemical treatment growth was broad-based across several industries with the strongest growth in power generation, food and beverage, and chemical processing. We also continue to see growth from new data centers as they become operational. Also, sales of Trojan UV systems to municipalities, primarily related to water reuse, contributed to our growth in North America. The economic benefits of water conservation, reclamation, and reuse continue to provide opportunities for us to expand our business and support our customers' objectives to efficiently manage their water usage. Over the long term, continued North American growth in water quality is supported by attractive secular trends such as water scarcity, more frequent severe weather events, and increasing demand from heavy water consumption applications such as data centers and power generation. We also continue to benefit from positive market trends across PQI in North America during the first quarter, with core sales up 6.9% year-over-year. This was primarily driven by double-digit growth in recurring revenue, specifically consumables and software. This reflects a combination of improved end market demand from CPG customers, VES-driven commercial excellence, and market penetration from our strategic initiatives. In high-growth markets, core sales grew 6.1%, highlighted by strong growth in Latin America, India, and the Middle East. In China, sales grew low single digits, with strong growth in PQI, partially offset by a decline in water quality sales related to the timing of ultraviolet treatment installations, which were strong in Q1 2024. Overall, we delivered strong broad-based growth in the first quarter across all of our operating companies. We believe the essential nature of our products, our durable business model, and the secular growth drivers across our end markets position us to create value for our stakeholders over both the short and long term. We remain confident that the Varalto Enterprise system will enable us to navigate ongoing changes in the macroeconomic environment with agility and discipline. In addition to delivering a strong first quarter, we implemented several countermeasures to help mitigate the impact of recent tariff hikes and enhance our operational flexibility. This includes strategic pricing road maps, targeted sourcing and supply chain initiatives, and shifts in manufacturing footprint, including the addition of Trojan's first U.S. factory in Grand Rapids, Michigan. This factory opened in February and is designed to support consumables and light assembly for our domestic UV water treatment customers. This expansion creates greater manufacturing and supply chain flexibility for Trojan to support its U.S. customer base. We leveraged the ES tools to prioritize and accelerate the opening of this facility by about four months ahead of schedule to help offset potential tariff headwinds. With greater flexibility and the exemption of product imports covered by the U.S. MCA, our current exposure to Canadian tariffs has been reduced significantly. This is a great example of how well equipped our team is to navigate the current macro environment with focus, agility, and speed. We have several levers to pull to mitigate risk while supporting our customers and maintaining business continuity. Our decentralized operating model empowers our business leaders who are closest to our customers to make decisions quickly. Our diverse global footprint and flexible supply chain give us agility and optionality to maneuver quickly. Our leading market positions, direct sales force, and the essential nature of our products give us the ability to be thoughtful with strategic pricing actions. Confidence in our ability to deliver on our commitments is, in large part, grounded in the Varalto Enterprise system, our proven system for driving growth, operational improvements, and leadership development. A core tenet of VES is continuous improvement or Kaizen. As we do annually in the first quarter each year, we completed Varalto's second CEO Kaizen week in February. CEO Kaizen Week is a long-standing tradition of our enterprise system and personally one of my favorite weeks of the year. This event is culturally important as it helps us stay close to the businesses and understand both their struggles and opportunities, helping to catalyze decision-making and prioritize allocation of capital and resources. For one week, we immersed 20 cross-functional teams at Gemba where the real work happens at 10 locations across the world to address our biggest impact operations with the participation of Varalto executives. Building off our success last year, this year's CEO Kaizen Week was designed to help us accelerate growth and reinforce that at Varalto, we are all practitioners of continuous improvement. A few of this year's most strategic and impactful events focused on increasing adoption of packaging and color software within mid-market CPG customers, accelerating capture of design input requirements for new product development in water analytics, and reducing lead time for consumables in one of our marking and coding product lines. The benefits of any Kaizen week include immediate solutions that are rapidly implemented and yield real-time results. Success is proven by sustaining these results, which we track following the Kaizen events. That concludes my opening remarks. And at this time, I'll turn the call over to Sameer.

Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the first quarter. Total sales grew 6.9% on a year-over-year basis to over $1.3 billion. Currency was a 130 basis points or $16 million headwind year-over-year and acquisitions contributed 40 basis points of growth, primarily from TraceGains. Core sales grew 7.8%, led by broad-based volume gains across both segments. Price contributed 1.3% growth in the quarter, in line with historical levels. Our recurring revenue grew high single digits year-over-year and comprised 61% of our total sales. As Ryan mentioned, the first quarter of 2025 had three more shipping days compared to the first quarter of 2024. If we exclude the estimated benefit of those extra days, core sales growth in Q1 was still above 5%, solidly in the mid-single digits and our highest core sales growth quarter since becoming a public company. Gross profit increased 8% year-over-year to $805 million. Gross profit margin improved 40 basis points year-over-year to 60.4%, primarily driven by volume leverage and to a lesser extent, pricing. Adjusted operating profit increased 9% year-over-year and adjusted operating profit margin expanded 50 basis points to 25%, an all-time high. Looking at EPS for Q1, adjusted earnings per share grew 13% year-over-year to $0.95 per share. As compared to our guidance, adjusted EPS came in stronger, primarily due to higher sales volumes at both segments. Looking at cash flow in the first quarter, we generated $142 million of free cash flow, an increase of $40 million year-over-year. This increase was primarily driven by the growth in earnings. I'll now cover the segment results, starting with water quality on the next page. Our Water Quality segment delivered $794 million of sales, up 6% on a year-over-year basis. Currency was a 130 basis point headwind and divestitures resulted in a modest 10 basis points reduction in sales versus the prior period. Core sales grew 7.4% year-over-year, including 100 basis points from price and 640 basis points from volume. Water Quality's volume growth was driven by strong demand for water treatment solutions in our industrial end markets and UV treatment systems in municipal end markets. We also saw good volume growth in sales of analytical instruments, reagents, and chemistries to municipalities. Water Quality's recurring sales grew high single digits year-over-year, and equipment growth was up mid-single digits. Adjusted operating profit increased 7.5% year-over-year to $200 million, and adjusted operating profit margin was 25.2%, up 40 basis points versus the prior year. Overall, it was a strong quarter for water quality. We expect steady growth over the balance of this year, given our products are critical to our customers' ongoing operations and generate high levels of recurring sales. Moving on to our PQI segment. Sales in our PQI segment grew 8.3% year-over-year to $538 million in the first quarter. Currency was a 130 basis point headwind. The currency headwinds were offset by 130 basis points of growth from acquisitions, primarily TraceGains. Core sales grew 8.3%, led by volume growth of 6.7% and price increases contributing 1.6% to core sales growth. PQI's core sales growth was driven by both recurring revenue and equipment shipments. Recurring revenue grew high single digits year-over-year, led by consumables and software. Equipment growth also grew high single digits, led by marking and coating equipment. PQI's adjusted operating profit was $153 million in the first quarter, up $14 million over the prior year period, resulting in adjusted operating profit margin of 28.4%, an increase of 40 basis points year-over-year. The increased profitability was primarily driven by strong operating leverage on volume growth and, to a lesser extent, pricing. Turning now to our balance sheet and cash flow. In the first quarter, we generated $157 million of cash from operations. We invested $15 million in capital expenditures. As a result, free cash flow was $142 million in the quarter, up 59% over the prior year, primarily driven by the increase in earnings. At the end of the first quarter, gross debt was $2.6 billion, and cash on hand was over $1.2 billion. Net debt was $1.4 billion, resulting in net leverage of 1.1x. Our financial position is very strong and provides us the flexibility to be opportunistic in how we deploy capital to create long-term shareholder value. Having said that, we plan to be prudent and disciplined as we navigate this current economic environment. Over the long term, our goal is to continue to create shareholder value with a bias toward M&A. We have an attractive pipeline of opportunities in both water quality and PQI. Turning now to our guidance. We reaffirmed our 2025 full year adjusted EPS guidance of $3.60 per share to $3.70 per share. Our underlying assumptions have been updated to reflect currency rates and current assessment of tariffs and trade policies. Our full year guidance now assumes an estimated gross impact from the announced tariff increases of approximately 3.5% of full year sales on an annualized basis, and we expect our countermeasures to largely offset tariff impacts. For the full year 2025, our year-over-year core sales growth target remains below to mid-single digits consistent with our prior guidance. Furthermore, we expect neutral impact to full year sales growth from both currency translation and acquisitions net of divestitures. We expect sales contributions from TraceGains and AQUAFIDES to be largely offset by the AVT divestiture. We are now assuming corporate expenses at about $100 million as we control discretionary spending in light of the macroeconomic environment. Given the impact and timing of tariff increases and related countermeasures, we expanded our target range of adjusted operating profit margin. We are now targeting full year adjusted operating profit margin to be flat to up 50 basis points, or approximately 25 basis points expansion at the midpoint. We believe this is prudent given the dynamic macroeconomic landscape. We are targeting free cash flow conversion between 90% to 100% of GAAP net income, in line with prior guidance. Looking now at our second quarter guidance, we expect core sales to grow in the low to mid-single-digit range year-over-year across both segments. Our second quarter 2025 guidance for adjusted EPS is $0.84 to $0.88 per share. That concludes my prepared remarks. At this point, I'll turn the call over to Jennifer for closing remarks.

Thanks, Sameer. In summary, we're off to a strong start in 2025, and we are confident in our ability to navigate a more dynamic macroeconomic environment in the near term and are prepared to do so. We believe that the essential need for our solutions, our durable business model, and the secular growth drivers across our end markets will support our financial performance this year. We continue to leverage the power of the Varalto Enterprise System to drive continuous improvement and bolster our agility. Our financial position remains strong, and we continue to evaluate opportunities to create shareholder value within our disciplined capital allocation framework. We are excited about the bright future ahead for Varalto and the opportunities to help customers solve some of the world's biggest challenges in delivering clean water, safe food, and trusted essential goods. That concludes our prepared remarks. And at this time, we are happy to take your questions.

We'll go first to Scott Davis with Emilios Research.

Congrats on the start of the year. I hate to do it, but I have to ask about tariffs because that's just so much of our income, and you guys seem pretty confident in your ability to mitigate. But perhaps maybe provide a little bit more color on the sequencing. I imagine you can't mitigate overnight. This is going to take some time. But I'll put that as kind of an open-ended question that just helps us understand the mechanics behind mitigation and the timing and when you would expect to be fully offsetting the tariffs.

Thanks for the question, Scott. Yes, I think we feel very confident here. Our gross exposure to tariffs is about 3.5% of our sales. In terms of running Varalto and using VES, we are constantly looking for opportunities to optimize the business, be that operational footprint, pricing, supply chain, and strategic sourcing. We always have this going on. We've accelerated some of the actions purely around derisking what we see today. But I would reiterate, as I said in the comments, we're well positioned here. Pricing actions have been and will continue to be undertaken. We additionally derisk our Trojan manufacturing facility based in Canada by pulling forward some redundant manufacturing capability into their new manufacturing facility and distribution center in Grand Rapids, Michigan. We continually work to align our supply chain and our sourcing strategies relative to derisking our tariff situation. We are effectively an asset-light manufacturing operation. Most of our business here is subassemblies and kitting, circuit boards, plastic enclosures, optics, and so on. There's no additional capital needed to create redundant lines or move manufacturing lines. On average, we can move a line within a six-month time frame. Some take longer, but we feel like we're really well positioned here.

Okay. No, that's helpful. If you just think about second derivative demand impacts, I would think Videojet would be a pretty good real-time demand indicator for customer confidence and such. Have you seen anything in Videojet in April that would lead you to be a little concerned about customer confidence and folks' plans on spending money in 2Q and beyond here in '25?

We really haven't, Scott. Demand remains strong for our PQI business and particularly coding and marking as well. We don't see any demand change in the order patterns. We have just completed four consecutive quarters of growth for both equipment and consumables, which follows a good trajectory of consumer confidence and recovery in the CPG markets. The trends between different types of consumer product goods are variable; beverages are up, salty snacks are down. We stay close to the data. This is a volume game for us. We look at volume on a regular basis in terms of the number of codes printed. We'll continue to watch the market closely. But at this point, we don't have any indication of that softening.

Scott, if I may. As we're looking at April, the old patterns are still pretty normal at this point.

Love to get started here on the tariffs, follow-up to Scott's questions. Can you talk about the price elasticity, especially on the water quality side? Can you just talk about the difference between consumables and equipment? And where would be the most risk that you have in increasing prices? Just if you think about your product line?

Thanks for the question, Dean. This is a dynamic situation that we continue to operate in, and we're relatively surgical in our approach to pricing. It's going to depend based on the products, the customers, and the regions that we're operating in. There's really not a one-size-fits-all approach. I will say that 80% of our sales go into food, water, and essential goods, and our products are essential to customer operations where the risk of failure is high, and the overall spend relative to their operating budget is low. This means it's well worth the investment here. With 60% of our revenue tied to the consumables business, it's a pretty good relationship. We've got the razor-razorblade relationship here. Our decentralized operating model empowers our business leaders to effectively take pricing actions where they best see fit, and that's going to vary by operating company and product line.

Great. Just to clarify if you're using surcharges in addition to pricing?

In some cases, we're using surcharges. In some cases, it's pricing. It just depends upon the business, the product line, and the region in which we're operating. We remain confident that our pricing actions, whether they're surcharges or permanent increases, will stick, and we believe we're well covered in addressing any tariff impact going forward.

Great. Just a follow-up, and this is away from tariffs. Do you have any high-level observations on the EPA announcement this week regarding PFOS? There was a lot of hand-wringing worrying that there might be some pullback from the enforcement here, especially the 4 parts per trillion, but it looks like it was a full endorsement of the enforcement of PFOS and just any commercial implications for you all? And would love to hear, again, just high-level thoughts.

Yes. Thanks for the question. We remain excited about PFOS in terms of both analysis and treatments, particularly in the area of destruction. We remain active with our minority investment in Axione Technologies, which is a destruction technology for PFOS. Our teams are constantly canvassing the market looking for opportunities to innovate, particularly to democratize tests, so they can be fit for purpose for utilities and municipalities. We think we're well positioned here. There's nothing in our forecast going forward that has any component of PFAS sales, either treatment or destruction in it. I think it remains early days in terms of how to go solve for this problem, but there's effectively no impact if the EPA decides to pull their 4 parts per trillion or increase it to some other minimum contamination level. We remain committed to this space, and we think there's going to be a need to solve for this in the future.

I just want to make sure I understand how you guys are thinking about the year and however we can cadence this out. First, does the selling days impact come out in the second quarter? Or where does that bounce out over the course of the year? And how are you thinking about the seasonality embedded in guidance?

Mike, thanks for the question. As you think about the three extra shipping days' impact, it's really going to be in Q4. There shouldn't be any change in the number of days for the second quarter and third quarter on a year-over-year basis. Despite that, our Q1 was really strong. We feel good about the execution of our team and greater than 5% core growth, even with the potential extra days. Our business does not have a whole lot of seasonality. You may see some movement based on the budgets that the municipalities have, but really, from a seasonality perspective, our business is pretty steady.

Can you help us bridge between Q1 and Q2? Relative to the strength of Q1, even excluding the number of selling days and the benefit, it seems like there's a little bit of a change going into the second quarter. Is that due to the timing of how the tariffs roll through? And how does the tariff mitigation work through the years?

Yes, Mike. There are definitely two questions here. First, let's look at growth on guidance. Q1 was really strong, with over 5% core growth, even with extra shipping days. Order patterns in April seem normal, but there's geographical uncertainty from trade policies. We've modeled in a timing difference between tariff increases and the related countermeasures, which is why we've expanded the margin range a little. Equipment sales have been strong, which sets a good foundation for future growth. We remain cautious when considering the margin side because there are many moving pieces.

Obviously, Q1 was a lot stronger than even expected or guided to. At the same time, there wasn't any pull-forward around the tariff side. So can you help us understand where that strength surprised you? What were the big surprises?

Thanks for the question, John. Post-spin, we've reinvigorated VES, doubling down on commercial execution, new product development, and ensuring we operate from strong positions for each of our businesses. What you see coming out of the fourth quarter is sustained momentum. We made a number of investments in commercial execution and rearchitected our commercial teams in some businesses, which contributed to strong growth. While we did see stronger performance in Europe, we were overall disciplined in driving VES and ensuring we tackle challenges every day.

John, looking at Q1 margins, it’s great execution that drove the 25% adjusted operating profit margins. A lot of factors played a role in driving operating margin uplift. As we move forward, we want to build in a lag for timing differences between tariff increases and the countermeasures, particularly with equipment sales. There are many moving pieces happening in real-time, and we want to be cautious as we think about margins.

My tariff question is about the competitive advantages or disadvantages you might see from this. There are certain competitors in marketing and coding where you're similarly positioned, but are there areas where you see this as an opportunity to gain market share due to your strong position?

We actually look forward to market dislocations. This is an area where we can perform exceptionally well. Our multi-decade heritage around the Varalto Enterprise system creates great optionality for manufacturing to benefit our customers and mitigate tariffs. We're well-positioned, with a direct customer sales strength giving us valuable insights. Our experience helps us navigate these changes efficiently by leveraging both VES and our committed teams.

The speed and agility demonstrate our ability to set up the Trojan facility in Grand Rapids, Michigan, which is a great proof point of what Jennifer just mentioned.

If you're anticipating a 3.5% price effect across your portfolio, does that imply you need to grab 7% price in the U.S.? Is it relatively homogeneous across the product lines? What do you believe you can mitigate from the 3.5% total today?

The 3.5% reflects growth estimates that consider both exports and imports. Much of this is tied to China. Overall, we should be able to mitigate most, if not all of it through sourcing strategy, supply chain enhancements, and effective pricing. It's a combination of opportunities we’re aiming to leverage.

I’m interested in the asset-light comment; does that derive from not being vertically integrated? Do you see an opportunity to divert electronic sources of supply from China?

When we say asset-light, it doesn't mean we're not leveraging our collective spend for certain commodities. We have a capable strategic sourcing team that helps align our sourcing strategies and leverage our buying power. This allows us to remain nimble and quick when we want to diversify our manufacturing footprint.

There is more flexibility in the supply footprint with suppliers now versus previous rounds of tariffs, which is contributing to our ability to move quickly.

Are there no-regret moves you’ll make in your footprint changes? Or are you still leaning on pricing initially to see if the situation with tariffs evolves?

If you consider supply chain and manufacturing footprint, these are moves we see as no regrets. The Trojan facility was already part of our strategy to move our footprint into the U.S. The tariff situation merely accelerated our plans. We have multiple long-term strategies that we are actively advancing.

Can you elaborate on the impact of the extra three days? Does this affect the total enterprise consumables business in comparison to product and projects?

The extra three days mainly impact consumables, not equipment, and if you factor in that, core sales growth should still be solid, over 5%. The $0.03 per share impact on EPS is relatively small. Overall, if we achieve high single-digit growth with strong EPS, everyone should feel positive.

Regarding M&A, it seems you got another deal over the finish line. Are tariffs affecting your discussions?

Tariffs aren't impacting our M&A activities. We remain enthusiastic and disciplined regarding strategic investments across both segments, looking for attractive market opportunities and ensuring proper valuation.

Are you a net exporter out of China to the U.S.?

This is Dalibor on behalf of Andy Kaplowitz. Regarding volume, how do you think about volume normalization in the second quarter and second half, particularly given macro uncertainties?

As you know, we are mostly direct, so we have a good feel for inventory. There doesn't seem to be any significant build currently. From a volume perspective, we don’t guide specifically. Our core growth target remains in the range of low to mid-single digits for the second quarter and the rest of the year.

Can you quantify any expected annualized run-rate savings from the initiatives you have underway and when you’ll be able to see those flow to the bottom line?

Kaizen events are designed to show an immediate impact, and we want those results to be seen now. This continuous improvement is part of our budget. We aim to see operational margin expansion, and those initiatives will be reflected in our internal budgets and guidance.

Can you help us understand the cadence as you layer in expectations around core sales growth?

We haven’t seen any notable change in demand or pull-forward. Orders seem normal, and we’re prepared for any macro impacts. We anticipate some elasticity in pricing moving forward, but we believe core growth will remain in the low to mid-single-digit range.

Thanks, Brian, and everyone who joined us on the call today. We appreciate the questions and engagement.

Thank you.

That does conclude today's program. Thank you for your participation. You may disconnect at any time.