My name is Angela, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralta Corporation's second quarter 2025 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number 2 on your telephone keypad. I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor, you may begin your conference.

Good morning, everyone. Thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer, and Samir Rauhan, 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 Investor section of our website later today under the heading Events and Presentations. A replay of this call will be available until August 7th. Yesterday, we issued our second quarter 2025 news release, earnings presentation, and supplemental materials including information required by the SEC relating to adjusted or non-GAAP financial measures. These materials are available in the investor 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, 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 second quarter earnings call today. At Viralto, our focus on creating shareholder value includes delivering steady predictable growth quarter over quarter year after year the ability to drive consistent predictable growth is a hallmark of the viralto operating companies and demonstrates the durability of our business model catalyzed by rigorous application of the viralto enterprise system as part of this approach we focus on the critical few and utilize visual daily management to drive consistent, efficient execution. This helps ensure we are supporting our customers' growth and operating objectives while enabling more efficient workflows in their daily operations. It also helps us meet our financial commitments and achieve both our short- and long-term objectives. The second quarter of 2025 marks our fourth consecutive quarter of mid-single-digit core sales growth. Over that time, we increased adjusted earnings per share by nearly 13%. I want to take a moment and commend our team of 17,000 associates around the world for delivering a strong performance over the past year, particularly considering the dynamic macro environment, geopolitical landscape, and fluid trade policies. This includes standout performance by our procurement and supply chain teams, factory operations, as well as outstanding execution by our commercial teams. Our commercial teams have spearheaded our growth by leveraging deep domain expertise and applying VES growth tools such as funnel management, lead generation, and sales productivity. We are benefiting from investments made last year to improve our commercial architecture, innovation, and sales and marketing efforts. Through the first half of 2025, we have met or exceeded our financial commitments and delivered mid-single-digit core sales growth, expanded adjusted operating profit margins, and double-digit adjusted earnings per share growth. This level of performance is a testament to the focused efforts of our global team, our durable business model, and secular growth drivers across our end markets. Based on our first half performance, stable demand across our end markets, and our current assessment of macroeconomic conditions, we raised our full-year adjusted earnings per share guidance range to $3.72 to $3.80. per share. Additionally, our first half free cash flow generation further strengthened our financial position, giving us increased flexibility as we evaluate capital allocation opportunities to fuel long-term shareholder value. As we have previously stated, our capital allocation bias is towards acquisitions, including investments that augment our R&D and innovation efforts. Our pipeline of opportunities is comprised of a mosaic of Target, and we continue to make progress even as we remain highly disciplined in our execution. Last week, we announced a 20 million euro commitment to invest in Emerald Technology Ventures Global Water Fund 2 to support investments in emerging technology-oriented businesses. Emerald's global presence and deep sector expertise is expected to provide our water quality team with early insights into emerging water-focused ventures, making it a strong strategic partner to augment our innovation and technology development efforts. This move strengthens our ability to identify and scale solutions that align closely with our customers needs in addressing critical water challenges worldwide as for the quarter itself we delivered a strong second quarter led by outstanding commercial execution and steady broad-based customer demand looking at our second quarter results in detail and building off our strong start to the year we delivered 4.8 percent core sales growth and just under 10 percent adjusted EPS growth. As I mentioned, this marks our fourth consecutive quarter of mid-single-digit core sales growth consistent with our long-term growth algorithm. Our commercial teams continue to drive outstanding execution to deliver growth through new customer wins and increased market penetration, while also capitalizing on steady demand across our key markets. Our core sales growth was broad-based across both segments, with water quality delivering 5% core sales growth and PQI 4.6% core sales growth. In PQI, ongoing 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 in packaging and color. In our marking and coding business, Q2 marked our fifth consecutive quarter with year-over-year growth in both consumables and equipment. In water quality, we saw robust mid-single-digit growth across both water treatment solutions and water analytics. Moving on to margin performance, adjusted operating profit margin came in at 23.7% in line with our underlying guidance assumption. Adjusted earnings per share grew 9.4% year-over-year to $0.93, $0.05 above the high end of our guidance, primarily due to better-than-expected sales volumes. Looking at core sales growth by geography and end markets, growth was broad-based across key verticals and regions with mid-single-digit growth across North America, Western Europe, and high-growth markets. Core sales growth in Western Europe was 6.3 percent, led by continued double-digit growth in water quality. In North America, core sales grew 5.6%, with both segments generating core sales growth above 5%. And sales into high-growth markets were up just over 6% year-over-year, with high single-digit growth in PQI and mid-single-digit growth in water quality. taking a closer look in western europe water quality grew 11.4 percent this growth was once again led by our water analytics team in western europe and reflects the changes we made to our commercial architecture and sales leadership in europe last year these changes have contributed to rigorous lead generation, funnel management, and VES-catalyzed commercial execution. And in PQI, sales into Western Europe were up 2.1 percent, led by growth in consumables and continuous inkjet marking and coating systems. Moving to North America, core sales growth was led by water quality with 5.7 percent growth. We continued to capitalize on solid demand for our chemical treatment solutions, where core sales grew mid-single digits year over year. Our chemical treatment growth was broad-based across several industries, with the strongest growth in chemical processing and data centers. We continue to see ongoing traction with new customers at existing data centers and are well positioned to capitalize on the build-out of new data centers, the majority of which will consume large quantities of water. Taking a broader view, the infrastructure being built to support growth in technology and artificial intelligence will further strain water capacity. We believe our portfolio of water analytics and water treatment solutions is well-positioned to support this trend and serve customers as new data centers, semiconductor fabs, and power generation facilities come online. In Trojan's UV systems business, we continue to see growth in North America driven by good momentum within municipalities primarily related to water reuse. In Q2, Trojan secured a significant order for a large-scale UV treatment system that will be part of a water reclamation project on Chicago's North Shore. This award will be supported by the manufacturing expansion we completed in Michigan earlier this year and demonstrates our ability to deliver large-scale UV systems that meet U.S. Build America, Buy America criteria. It also highlights Trojan's differentiated, revolutionary UV Cigna technology, which eliminates the risk of bacteria and pathogens in wastewater while also reducing energy consumption and simplifying operations for our customers. Both the public health and economic benefits of water conservation, reclamation, and reuse continue to provide opportunities for us to expand our business and support our customers' objectives to conserve water and efficiently manage its usage. We also continued to benefit from positive market trends across PQI in North America during the second quarter, with core sales growth above 5% year over year. This was primarily driven by high single-digit growth in consumables and double-digit growth in software. Demand from CPG customers continues to support steady growth for our marking and coding products and services and our packaging and color software. We also continue to drive growth in PQI through strategic initiatives and commercial excellence. In high growth markets, core sales grew 6.1 percent, highlighted by strong growth in Latin America and India. Overall, we delivered another strong quarter of growth, with every one of our operating companies contributing to our Q2 results. At this time, I'll turn the call over to Samir for a detailed review of our financial results and an update on our guidance.

Samir Manning Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the second quarter. Total sales grew 6.4% on a year-over-year basis to $1.37 billion. Currency was 150 basis points, or about $20 million tailwind year-over-year. Acquisitions netted vestiges contributed 10 basis points of growth, primarily from trace gains. Core sales grew 4.8%, led by broad-based volume gains across both segments. Price contributed 1.7% growth in the quarter, in line with our expectations. Our recurring revenue grew mid-single digits year-over-year and comprised 61% of our total sales. Gross profit increased 6% year-over-year to $822 million. dollars. Gross profit margin was 60 percent. Adjusted operating profit increased 5 percent year-over-year with adjusted operating profit margin coming in at 23.7 percent. Versus the prior year period, strong margin expansion in a water quality segment was offset by near-term margin pressure at PQI and corporate expense. Looking at EPS for second quarter, adjusted earnings per share grew 9.4% year-over-year to $0.93 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 second quarter, we generated $323 million of free cash flow, an increase of $83 million year-over-year. I'll cover the segment results, starting with water quality on the next page. Our water quality segment delivered $825 million in sales, up 6.2 percent on a year-over-year basis. Currency was 110 basis points tailwind, and the acquisition of Aquafetus contributed 10 basis points of sales growth. Core sales grew 5 percent year-over-year. Increased volume drove 360 basis points of growth, with pricing contributing 140 basis points of growth. Water quality's volume growth was driven by a strong demand for water analytics at municipalities, water treatment solutions in our industrial end markets, and UV treatment installations. Water quality's equipment sales grew about 10 percent, with recurring sales growth steady at about 4 percent year-over-year. Adjusted operating profit increased 11.5 percent over the prior year period to $214 million, and adjusted operating profit margin was 25.9 percent, up 120 basis points versus the prior year. Overall, it was a very strong quarter for water quality. We expect to see steady growth over the balance of this year, given our products are critical to a customer's ongoing operations and generate a high level of recurring sales. Moving to a PQI segment on the next page. Sales in a PQI segment grew 6.8 percent year-over-year to $546 million in the second quarter. Currency was a 220 basis points tailwind. Contribution to sales from the acquisition of trace gains was offset by the impact of the ABT divestiture which was completed in Q1 2025. Core sales grew 4.6 percent. Volume growth was 2.4 percent but price increases contributing 2.2 percent 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 sales were up just over three percent with steady growth across marking coding and packaging and color solutions in the packaging and color businesses we continue to see strong double-digit sales growth in esco's software solutions additionally core sales growth for trace gains continues to exceed 20 percent year-over-year and the integration is on track we continue to invest in trace gains to scale the business and further penetrate the market the secular growth drivers for trace gains ingredient supply network are strong and we continue to be encouraged by its future potential pqis adjusted operating profit was 150 million dollars in the second quarter about flat to the prior year period, resulting in adjusted operating profit margin of 25.6%. The year-over-year change in PQS profitability reflects the impact from our acquisition investments and the tariff-related costs incurred in advance of targeted price increases. This includes costs related to product line shifts that are improving our ability to serve customers in all the regions. Additionally, we continue to invest in our sales and marketing efforts to drive market penetration and fuel future growth. Turning now to our balance sheet and cash flow. In the second quarter, we generated $339 million of cash from operations. We invested $16 million in capital expenditures. As a result, free cash flow was $323 million in the quarter. At the end of the second quarter, gross debt was $2.7 billion, and cash on hand was over $1.5 billion. Net debt was $1.1 billion, resulting in net leverage just under one times. Our financial position is very strong and provides us with the flexibility to be opportunistic in how we deploy capital to create long-term shareholder value. Having said that, we will remain prudent and disciplined in our approach to capital allocation as we navigate this current economic environment. Over the long term, our goal is to continue to create shareholder value with a bias towards M&A. As Jennifer mentioned, we have an attractive pipeline of opportunities in both water quality and PQI. Turning now to our guidance. Yesterday, we raised our 2025 full-year adjusted EPS guidance to $3.72 per share to $3.80 per share, up from our prior guidance of $3.60 per share to $3.70 per share. Our underlying assumptions have been updated to reflect steady demand driven by secular growth drivers in our end markets, our most recent assessment of trade policies, and current and the current state of tariffs, we expect a neutral net impact from tariffs on our 2025 earnings per share. Our core sales growth of 2025 is now expected to be mid-single digits, up from our prior target of low to mid-single digits. Furthermore, we now expect currency translation to be about a 1 percent tailwind to a full-year sales growth. Acquisition growth is expected to be modestly positive, as sales contributions from Crayskins and Aquafides are offset by the impact of ABD divestiture. Our full-year target for adjusted operating profit margin expansion remains flat to up 50 basis points year-over-year, or approximately 25 basis points expansion at the midpoint. We continue to believe this is prudent given the dynamic macroeconomic landscape and we maintained our guidance for free cash flow conversion in the range of 90 to 100 percent of gap net income looking now at our third quarter guidance we expect core sales to grow in the mid single digit range and our q3 2025 guidance for adjusted dps is 91 cents per share to 95 cents per share that concludes my prepared remarks at this point i'll turn the call over to jennifer for closing the marks.

Thanks, Samir. In summary, we had a strong first half of 2025 and are navigating a dynamic macroeconomic environment with confidence. Given the essential need for our technology solutions, our durable business model, and the secular growth drivers across our end markets, we maintain a favorable outlook for our financial performance this year. We will continue to leverage the power of the Veralta enterprise system to drive continuous improvement and bolster our agility. Our financial position strengthened in the quarter, 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 Veralto, its associates, and the opportunities in front of us 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.

Thanks, Jennifer. This is Ryan Taylor. Before we jump into Q&A, for transparency, I just want to point out that our geographic core sales growth on slide five excludes the impact from acquisitions, divestitures, and management estimates for currency translation. It is not adjusted, however, for intercompany sales, returns, or allowances. At this time, we'll go right into our normal portion of Q&A.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We'll take our first question from Dean Dre with RBC Capital Markets. Your line is open. Please go ahead. And Mr. Dean Dre, your line is open. Please go ahead with your question. And once more, Mr. Dre, your line is open. Please go ahead with your question. And hearing no response from this line, we will move on. We'll go next to Andy Kapowitz with Citigroup. Your line is open. please go ahead.

Good morning, everyone.

Morning, Andy. Good morning.

Jennifer, can you give us more color regarding the environment you're seeing in core water quality growth, maybe by region? It doesn't really seem like you're feeling any changes from the U.S. fiscal environment. I mean, Europe continues to outperform with a lot of your own self-help as you talked about. How long can that continue? And maybe China, you know, still seems weak, but offset by other high-growth markets. I think McCullough would be helpful.

Yeah, thanks for the question, Andy. I mean, I think in the main, our businesses are fairly resilient on the water quality side to fluctuations in government funding. And that's largely because we sit on the high end of the value chain here where our products and services are integral to the operating environment of the customer. So, some of the, you know, secular drivers that we see right now are really focused, as we mentioned in the prepared remarks, around water reuse. We see that both in municipal and industrial sectors, really driven by water scarcity, regulatory pressure, and sustainability goals. So, on the industrial side, you know, they're going to be motivated here by rising water costs, which are pushing water-intensive industries to adopt reuse solutions. And on the muni side, you see secular trends of urbanization and climate resiliency, which are driving providers to pursue more wastewater treatment, including more progressive solutions such as potable reuse. So for water quality, you know, we've reflected this in our year-to-date results. Strong growth both in analytics and UV treatment solutions in muni applications and growing subsectors such as data centers and power generation within industrial markets. So, again, pretty robust performance there by our water team, really based on those secular drivers.

Can you guys still hear me? Because I'm getting a little bit of interference.

Sorry, Andy. We had a little bit of a breakup here. Can you ask the question again?

Yeah, no, I think it's clear now. So just on PQI, obviously margins down in Q2 a bit, despite core revenue growth. Can you walk us through how much of the compression was due to sort of tariffs and, you know, pricing will catch up? Does that happen in Q3? How much was acquisition-related cost pressure? Like, how to think about margins and PQI moving forward.

Hey, Andy, this is Meir. Yeah, if you look at the margin side, it's roughly 200 basis points on a year-over-year basis. Impact is really driven by three factors. Impact is roughly one-third each. The first one is from the acquisitions and divestitures activity, and that's primarily driven by trace gains. Trace gains continues to grow at 20%. We want to make sure we fuel the growth of this high margin business. As you know, this is 80% gross margin. So we continue to invest in that. So roughly one third of the impact is driven by that. The second one is the timing difference, as you just talked about, between the impact of pricing actions and the tariff headwinds. And the last one I would say is the investments net of productivity. As you know, in PQI, it was a little more heavier lift as you kind of think about the supply chain moves and the manufacturing line changes you're doing. Whenever you do that, there's always a little bit of a duplication of the cost, and there are some growth investments in there as well. So that's one-third. So it's really one-third, one-third, one-third. The impact of these as you move through the second half of the year should gradually phase out. You know, a chunk of it should phase out in Q3 and then in Q4.

Appreciate the color, guys.

Thanks, Andy.

We'll take our next question from John McNulty with BMO Capital Markets. Your line is open. Please go ahead.

Yeah, thanks for taking my question. I guess just the first one, in terms of volumes, I think in the first quarter there was some concern. There was a little bit of pre-buying. It looks like that really didn't play out the way we thought. It's actually just solid core growth. I guess is that a fair characterization? Do you see any risks around the timing of tariffs as we look in the second half and how are you thinking about kind of general core growth in the second half?

Thanks for the question, John. Yeah, we've done a deep dive here to sleuth whether we've got any pre-buying here in our customer base, and we really just don't see much of that. We do see read-through on demand, and as you know, 75% of our sales are direct to end users, So we've got great visibility in terms of reading through to the end customer there. I would say, you know, core volume remains strong really around the secular growth drivers as they continue to drive our end markets. Q3 orders are after a good start. There's really nothing unusual about the order patterns that we've seen thus far in the quarter. And, you know, again, we really operate in that critical to operation segment where 80% of the revenue is really tied to food, water, and essential goods.

And, John, just one thing to add, as you kind of think about the volume from a guide perspective, our guide, as you know, we upped the core sales growth guide. That does reflect the confidence that we have as we look at the growth from the volume side as well.

You know, definitely pricing is an element, but the volume confidence on the growth side is reflected in the upping of the guide as well. got it okay no fair enough and then maybe just a follow-up on free cash flow you know looking at the first half so not even just the strong quarter and you're up 36 percent year over year it looks like you're pulling pretty hard on some of these working capital levers and free cash drivers how should we be thinking about that going forward are there more levers to pull and then in terms of that flexibility i know you're you're pretty anxious or or excited about potential opportunities with regard to m a i guess can you give us an update on the m a markets

yeah i'll i'll start with the free cash flow and jennifer can jump in from the m a side i'll look on the free cash flow side really um strong operating earnings andy uh sorry john that's kind of really driving it and then the working capital management has been pretty prudent um some of the stuff is driven by uh some of the capex and the investments uh their timing as well from an overall year perspective as you know in q1 and q3 we do have interest payments so cash interest payments so that it does impact the free cash flow q2 and q4 tend to be heavier on the free cash flow side uh year to date um john we're doing a little over 100 at this point from a conversion perspective but if you look at the full year at this point we still feel very good about

90 to 100 percent but that's going to year q3 develops more up more of an update but at this point this model is from 90 to 100 conversion site yeah john and just respect to your kind of m a pipeline question um pipelines for both pqi and water quality are active full and uh you know have a mosaic of targets within them we remain disciplined in our approach in terms of making sure that we uh identify attractive markets uh top tier companies within those markets and that we can get them at a uh a fair and reasonable valuation uh we continue like targets with a similar operating model to ours and the durability of secular drivers that i spoke about previously where ves can really drive growth and margin expansion for us so um current market valuations in the main, I think, remain a little bit elevated, but we continue to actively monitor opportunities, and our objective is to maintain an investment-grade balance sheet here, right?

Got it. Thanks very much for the caller.

You bet. We'll go next to Mike Holleran with Baird. Your line is open. Please go ahead.

Hey, morning, everyone. Morning, Mike. So just a couple things here. Could you help? I know Samir touched on a little bit with PQI and Andy's question, but maybe just help with the timing of the pricing, when that started being implemented, what pricing looks like in the back half of the year versus the front half of the year. And I suppose, you know, you talked about a third, a third, a third, that 60 basis points that seems to be more the tear of timing. Is that re-caught in the back half of the year functionally to see kind of a sequential improvement in the back half of the year? It doesn't seem like it's embedded in guidance, but it seems like the remarks that you're making imply that there should be some sort of uptick in the back half or it's too cute because of the timing of all those things.

So maybe if you can just wrap that all together for me, that we appreciate it uh thanks mike i'll start off on that you know on the pricing side the pricing was one of the elements on the contra measures right as you know we are making supply chains uh supply chain changes and line changes as well as part of this whole process to mitigate the terrace and mitigate any impact for 2025 uh pricing actions um might have been as you said earlier we've been very selective very targeted working very closely with the customers to make sure you know we are helping them in their operation side and position well for the growth side as well uh so the impact that you see in this in the second quarter is limited it's almost like a month kind of an impact so you saw pricing up take a little bit to 1.7 percent um you know we didn't um reprice the backlogs we worked very collaboratively with the customers so we went for price increases which are more sort of structure in place uh structure in nature expect them to continue into the second half so we're going to start seeing the run rate impact in the in the Q3 and Q4. There should be a little bit of an uplift from that. You're right, Mike, as you kind of move into Q3 and even more in Q4. I would say by segment by segment, you're seeing it faster in water quality. And in PQI, just given how the contractual nature of the transactions work, it's going to come more in the second half of Q3 and Q4. But for the full year, we fully expect to have offset the impact.

Okay. And so just then to the margin piece, sequentially, there should be an uptick into the back half of the year as the pricing timing comes in and given kind of the moving pieces around the cost side associated with all that, or does the cost piece of it come through and kind of mitigate the benefit sequentially such that it's pretty stable?

Yeah. From a dollar basis, yes, you're going to start picking up right on percent basis uh mike q3 is going to be like q2 maybe a little bit but really like more like a q2 and then q4 of course you're going to start seeing the full full run rate impact so that should be uh meaningfully better than q3 okay great thank you appreciate it thanks mike we'll go next to dean dre with rbc capital markets your line is open please go ahead thank you good morning everyone.

You guys hear me okay this time?

Yeah, good morning, Dean.

I promise you it wasn't user error on my part, but either way, here we are.

Hey, I was interested that you made a reference that you had made some investments in TraceGames. So, you know, are you adding salespeople? Just, you know, what kind of investments and what kind of returns you're expecting? time?

Yeah, thanks for the question, Dean. Tracing's continues to be a great performer for us, continuing to clock well over 20 percent growth in that business. And the investments we're making really are mostly commercially oriented headcount. So sales feed on the street, going to reach to more regions, particularly as we work with the synergy between both Trace Gains and ESCO, where ESCO's got a strong position in enterprise accounts and can pull Trace Gains up to those accounts. And Trace Gains has got a strong position in sort of mid-market accounts, pulling ESCO into those opportunities as well. So some R&D investment to accelerate new product development as well as sales investment and it's an investment that we feel strong about just based on making sure that they have a fast start and we expect them to continue to be good contributors to our growth and into 2026 contributing to profitability as well that's all good to hear and then just a question on the data center opportunity You know, it is truly the fastest-growing vertical for the industrials.

I'm not surprised, given the water use, how critically important it is to have the water quality at the right standards. Can you just talk about your go-to-market approach? Is there an opportunity to have a modular offering, or is it more of a type of, you know, one-off testing? Just very interested in your approach here in this market.

Yeah, thank you. You broke up a little bit, Dean. Am I coming through clearly? Yes? Okay, great. I think I got the gist of your question really around data centers and how we're approaching data centers to capture that fast-growing market. You know, data centers for us is really a strong play for Chemtree. So data centers in the main use incredibly large volumes of water and certainly require an incredible amount of energy. The water usage there is, in fact, you know, basically flows through or over heat exchangers to basically cool for the power generation cycle. Right. And so those assets are subject to corrosion. They're subject to biological fouling and so on. And so Chemtreat's got a big play here, growing very strong with respect to being able to provide solutions to protect those assets with their chemical offering. And as you know, Chemtreat is entirely a direct-to-end-user sales approach. and given the deep domain expertise, they're really able to capture that opportunity in terms of their ability to sort of understand the applications, the pain points of the customer, and innovate solutions that help solve for some of those problems.

Thank you.

You're welcome.

We'll go next to Jacob Levinson with Nelius Research. Your line is open. Please go ahead.

Hi. Good morning, everyone.

Good morning, Jay.

When you talk to your CPG customers and looking at their CapEx spending plans this year, has there been any real shift or change as a result of all these tariffs and the trade uncertainty? And even if that means they're reallocating their budgets within different geographies to localized capacity or whatever the case might be, it doesn't seem like there's been any change in trajectory around equipment. themselves and product quality, but just curious what your conversations with them are like these days.

Yeah, thanks for the question, Jake. We really see the CPG demand sort of stable and steady as she goes, and that's, you know, kind of irrespective of region. I think they are navigating, you know, the environment with care relative to their price increases. You know, I think they're dealing with an environment that's pretty consumer sensitive, particularly given sort of the post-pandemic inflationary environment. And so they're being cautious. We see really solid demand, stable demand for both equipment and consumables, right? This means, you know, over five quarters of continued growth here that, you know, our customers continue to retool their lines, to upgrade their lines, make sure that they're running efficiently. We don't yet see sort of new lines being built or greenfield facilities being built. But, you know, certainly as the tariff environment motivates, you know, regionalization or reshoring activity, we're poised to be able to capitalize on that.

Okay. And that's all for color. And just switching gears to China, I think it's been a market that seems to have had challenges from pretty much the day that you folks became an independent public company. Is there any, I mean, is that a market in water, I guess, specifically, that's just bouncing along the bottom at this point? And really, it's just going to take time for the structural issues with funding in the municipalities to work itself out before you can get a real recovery there?

I think that's largely the right way to think about it, Jake. You know, our China sales in the first half were flat to last year, a little bit tail of two cities where PQI is showing increasing strength and strong sales, particularly on the coating and marking side and selectively within packaging and color. Water quality sales, you know, have been lower there. One of the things we're dealing with here is a comp year-over-year relative to UV installations from Trojan, which were strong in Q2 of 2024. Those were shipped to support chip processing. So water, you know, in the main is bouncing along the bottom. Teams doing a great job of executing there where they can find opportunity. But, you know, China in the main has become a more mature market, and we're navigating that accordingly. So we're really not building any recovery further in China into our second-half guidance. But, you know, we believe the team is executing well within the opportunities available there.

Great. Thank you, Jennifer. I'll pass it on. Good luck.

Thank you. We'll go next to Nathan Jones with Stiefel. Your line is open. Please go ahead. Good morning, everyone. Good morning, Ethan.

Jennifer, last quarter I asked you about the disruption that was coming on from trade policy, and you were pretty excited about the opportunity from a competitive standpoint that could present themselves to Veralta. So maybe with a quarter under your belt and at least a little bit more clarity on what that trade policy outlook might be, Can you update us on your thoughts around where you believe Veralta is competitively advantaged and how you're going about taking advantage of that to gain market share?

Yeah, I think, you know, one of the things we see here is really the strong execution of the teams relative to applying the Veralta enterprise system, right? We've invested a fair amount relative to our commercial execution, funnel management, lead generation, product launch excellence, growth rooms, and commercial architecture. So we're really positioned well, I think, with respect to sort of anything that comes through on trade policy. um fluctuations in in uh in in trade largely don't have a significant impact on us apart from sort of the tariff adjustments that we've been making relative to uh line uh shifting line manufacturing and the like um but uh you know if we think about trade relative to some of the like Maha and things to that effect, we think that's, you know, going to provide incrementally a tailwind for us as ingredients change and the like. So, not a huge impact from trade changes, but we're using VES to really sort of position ourselves well to respond dynamically in the markets that we're in.

And Nathan, maybe we can just add one more thing is, as you kind of think about how we position to take advantage is really by having the you know region for region kind of manufacturing and a great uh great proof point is is what jennifer mentioned earlier in the prepared remarks is uh the project in chicago right by making the investment in michigan being able to provide products which is more compliant with you know build america buy america those kind of things really help us position well from a competitive perspective so to think about things uh things like um that that can really help us position to take advantage of the trade policies i guess my A follow-up question, then.

I'm going to ask you about the U.K. specifically. There's obviously been a lot of news about the water utility picture in the U.K. recently. Can you talk about how you view that as an opportunity for increased spending by water utilities in the U.K. and your ability to take advantage of that?

Yeah, I think we're well-positioned whenever we see these kinds of episodes, regardless of geography. Again, 75% of our sales are direct-to-customer. And so, you know, we're able to sort of not only identify those opportunities, but capitalize on them locally. So we're well positioned to take advantage of that, and we will do so.

Okay, thanks for taking my questions.

We'll go next to Andrew Piscaglia with B&P Paribas. Your line is open. Please go ahead.

Hey, good morning, everyone.

Good morning.

I just want to ask on the recycle reuse opportunity with data centers. First off, are you selling directly to these hyperscalers? Are you selling to customers that sell to the hyperscalers? And then I'm wondering why the spending there has been going on for some time. Why do you think you're just sort of starting to see that now?

Great question. And so there's two ways to think about this. One is sales of product and services into existing data centers, right? And so we see good growth there, both into accounts that we currently are in, as well as new accounts, or rather existing accounts that perhaps we're not in. And that's on the back of really solid execution on behalf of the Chemtreat team. I think relative to your second question, you know, data centers for us in terms of the business is still a relatively small portion of our overall business, but certainly rapidly growing. And so as that continues to grow, it becomes a bigger lens for us to focus on and think about. So that's how we would see it.

Okay, and then are you able to quantify what portion of your growth this quarter came from that or any way to, like, kind of quantify, you know, a percentage of sales that this could be longer term for you?

No, I think, Andrew, at this point, it's still a small number, as Jennifer said, as a total part of the business, so we don't disclose that. But as it continues to grow, of course, more details will come. Okay, thank you.

Thanks, Andrew. we'll go next to brian lee with goldman sachs your line is open please go ahead hey good morning everyone uh thanks for taking the question uh most of my hi good morning um most of mine have been covered but i wanted to ask maybe two quick um sort of modeling oriented questions uh one you know samir going back to the um kind of the margin view for the for the rest of the year the you know it sounded like pricing tailwinds are going to hit a bit more on 4Q then you have the better sales growth view for the year so I mean it would imply maybe more of a margin uplift into year end versus what you're you know what you're forecasting so maybe

some of the puts and takes in the year end for margins are you expecting increased investment into 4Q like last year or is there anything else just you know maybe offsetting potentially higher margin expansion potential into the year end yeah Brian thanks for the question as you kind of look at the margin side right that approach is very similar on the guidance front that we had in q2 overall given all the moving pieces still on the tariff side and things are getting to a better place by the way every day now but the things are still fluid so we just wanted to be a little conservative and maintain a full year uh margin guide from zero flat to 50 basis points effectively 20 bits of the middle uh the midpoint so you're right um look at this point we're going to see a bigger uh improvement in q4 uh in that uh we have uh built in some assumptions as we kind of laid out uh last year right that look q4 is a time and we look at once you're done with the strategy once we're done with the budget so we have the resources that are lined up along with the strategy to execute in 2026. so yeah to the extent that we end up taking some actions we build some of that into the guidance process all right fair enough and then i know um you guys called out china kind of spoke to sort of the headwind you continue to see there I think across most geos you saw strength but in western Europe PQI I thought that was maybe a bit weaker than anticipated can you kind of speak

to what what you saw in the quarter is anything going on in that particular end market and geo and any views on kind of what what the trend line could look like there for the rest of the year thank you yeah thanks for the question uh brian um you know western europe certainly we continue to see steady growth in consumables and uh continuous inkjet marketing and coding systems uh you know q2 uh for pqi uh down sequentially from q1 mostly related to timing of new equipment sales. Looking at the data, there's really nothing concerning here. I will say that year-to-date growth for PQI in Europe is up 6%, and certainly with our direct sales force, we're going to continue to monitor and adjust accordingly.

All right. Thanks a lot.

You bet. We'll go next to Andrew Krill with Deutsche Bank. Your line is open. Please go ahead.

Hi, thanks. Good morning, everyone. I want to ask another question on Western Europe, actually. I mean, on a more positive side, just water quality at 11% gross in Europe, two quarters in a row is impressive. So, maybe just to give us some more a sense of the opportunity there. You know, I think you said the investments are paying off, but, like, are you taking share? And maybe, like, how long could this type of growth persist? or do you think, you know, we could add a little bit of moderation in the back half of this year?

Yeah, thanks for the question. You know, certainly our water business continues to have really great growth there in Europe. And I think what we see as a demarcation relative to the U.S., for instance, is that Europe tends to have a stronger focus on water reuse and investing there. So we see, you know, good, strong municipal growth there as they think about water reuse and reclaim and so on. You know, and we mentioned before that on the back of some of the structural changes we made in the sales team relative to commercial architecture and really getting back to basics in terms of commercial execution through using VES, i think we're just seeing the team execute really well there um both with focus and rigor in using the the tool set um you know we'll see how how things continue to progress here um we uh we've got a positive outlook in terms of ongoing demand and uh have built that into the guide accordingly and andrew one thing you see okay and look at it kind of ties back to the comment that

Nathan is well-made, right, on the U.K. side. So, overall, as you can think of, the investments are happening, so they'll put some secular growth drivers, and we're making investments as well. As you noticed, we bought Aquafidis over there, added to the portfolio, so we continue to make the right investments in Europe so that we can sustain the growth.

Okay, great. Thank you. That was very helpful. And then, just on July, you mentioned that orders are going well, kind of consistent with what you would expect. And I wanted to ask, you know, with, it seems like, trade deals across the globe or, you know, being, you know, the handshakes are happening. Just any sign that that is, like, helping with customer confidence as we go into the back half of the year?

I think it's largely reducing confusion, right? And I think, you know, customers, you know, they're not necessarily changing their demand patterns over that, right? We remain sort of essential to the daily operations of all of our customers, you know, just in terms of being critical to, you know, demonstrating clean water, safe food, and trusted essential goods. That's going to continue. But I do think there's less, you know, agitation or concern relative to making sure and having things settle down a little bit, which will read through, I think, in confidence. But for our businesses, it's really steady as she goes.

Thank you.

This is Ryan again. Thanks, Andrew. And thanks for everybody that joined the call. we appreciate the interest and engagement at this time we do need to end the call we know we have some analysts in the queue that didn't get a chance to ask questions we'll circle back with you next time around and as always i'll be available throughout the day and in the next few days to answer any follow-up questions thanks again for joining our 2-2 call and we'll talk to you next time this does conclude today's program thank you for your participation you may disconnect at any time.