Veralto Corp Q1 FY2026 Earnings Call

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

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

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

Operator instructions were provided. We'll go first this morning to Deane Dray with RBC Capital Markets.

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

Thanks for the question, Deane. Yes, we see strong and stable demand across both our municipal and industrial markets. To your point, Veralto products and services really sit within customer operations where the cost of failure is high for them, and using our equipment is part and parcel to ensuring public safety, public health and so on. From a municipal standpoint, we see this really as a mid-single-digit grower with incrementally stronger growth in municipal wastewater due to recycle, reclaim and reuse secular drivers. We are seeing great uptake there. On the industrial side, we see mid- to high-single-digit growth with strength in the common cast of characters around data centers. That includes semiconductor, power and mining. PMI trends have been positive here, so we feel really good about our water businesses, both across municipal and industrial markets. This is again on the back of being integral to customer operating environments. Relative to your question around Trojan and UV, activity in terms of quoting and bidding remains strong. This business has some nice bolt-on acquisitions we've done here with AQUAFIDES. It is important to remember there is a little bit longer cycle business, so the bookings we are seeing now would largely ship in Q4 2027. But great order book activity there on the back of the secular drivers I discussed.

Great. And just a quick follow-up. With reference to the municipal outlook for 2026, what are you assuming for kind of the spending growth? And if you can separate what that CapEx growth would be versus OpEx, larger equipment projects, that would be great.

Deane, thanks for the question. With respect to the municipal view we've baked into the guidance, think of it as pretty steady from the analytics perspective. On the CapEx side, it's predominantly driven by Trojan. As you know, we are not in the majority in the CapEx cycle; we've had an OpEx cycle. So it's really pretty steady on both sides as you think about it.

We go next now to Jeff Sprague with Vertical Research.

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

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

And you didn't mention any benefits in 2026. We should expect this gearing up in 2026 for things to flow in 2027 and 2028?

Yes, Jeff. Most of the actions in this detailed plan are oriented toward the end of this year. So in Q4, you'll begin to see part of the actions. We haven't baked any benefit from the program into 2026 guidance. You should expect roughly 50% of the run-rate savings in 2027 and full run-rate in 2028. That's how you can model the savings.

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

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

Yes. It's a bit of a tale of two cities relative to the PQI story. At a high level, we see continued strong demand across our CPG customer base. It remains steady in terms of our quoting and sales activity relative to coding and marking, and we've seen that for several quarters. Complementing that is our digital packaging and ingredient solutions brought together with Esko and TraceGains, which continues to be strong, and we expect that to continue with the addition of GlobalVision. GlobalVision strengthens the value proposition in terms of building a comprehensive workflow. When you look at Q1 relative to packaging and color, as you noted, we saw sales down high single digits, primarily due to nonrecurring revenue, including sales of color testing and packaging inspection equipment. But this was focused in a few discrete industrial end markets: automotive, textiles, building materials, driven by housing market weakness. That's where we're seeing some demand weakness. Going forward, we feel strong about incremental recovery and we don't see any changes relative to CPG demand, which supports our confidence in the marking and coding business continuing to be strong and, in fact, accelerate throughout the year.

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

Absolutely, Andy. On a sequential basis, we had a very nice improvement in margins. Mix helps, and at the same time, some of the rollover from the tariff actions that we talked about is going to roll off as well. Overall, looking at the opportunity in the second half of this year and moving into 2027, absolutely, we see the same level of opportunity.

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

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

Thanks for the question, John. We take a disciplined approach to pricing across our operating companies, and particularly in ChemTreat. Because roughly 75% of our sales are direct to customers, we have a lot of customer intimacy and insight on how to support their operations through this dynamic macro environment. We partner with customers to achieve pricing that offsets headwinds from rising costs, but we do this surgically. This disciplined approach has served us well to achieve mid- to high-single-digit core sales growth, and we've executed it since the spin. We expect to continue with this approach.

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

John, maybe I'll take this one. Market conditions change, but we'll stay true to our market-company-valuation algorithm as we look at strategic opportunities. Things do open up in these market conditions, but it's too early to say at this point. Overall, pipelines look pretty active and we're excited about near-term opportunities.

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

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

Will, thanks for the question. The short answer is yes. If you look at our value creation algorithm, it's unchanged: mid-single-digit core sales growth with 30% to 35% fall-through. From a modeling perspective, as you think about 2027 and 2028, it's logical to assume you use the 30% to 35% fall-through on core sales growth and then add the savings from the cost optimization program on top of that. Think of it as a step change in 2027 and 2028. We'll provide more details when we give guidance for those years.

Perfect. I appreciate that. And then I wanted to touch on capital allocation here and just how you're thinking about the mix of that going forward. I think you've clearly executed on M&A recently as well as significantly ramped up the repurchase activity, and I think spent a pretty good majority of the $750 million authorization. How do you think about that sort of going forward over the balance of the year, maybe into 2027? And could we potentially see an increase in the authorization? Or maybe what would be a trigger point for that?

Thanks for the question, Will. We'll continue to be disciplined. We have a bias for M&A in capital allocation, and you've seen that with our $1 billion of capital deployed thus far this year. The M&A engine is running well; we have active funnels and several cultivation activities. Our bias remains M&A because we think that creates the best long-term value, but we reserve the right to utilize capital for share repurchases when appropriate, particularly if market dislocations present opportunities. Any increase in authorization would be a Board decision, and we'll take that up when appropriate.

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

A clarification on the cost optimization program—how does the program layer between the two segments?

If you look at the cost optimization program, Mike, it's pretty broad-based across both businesses as well as corporate functions. There's a little bit more bias toward PQI, but it's fairly balanced across the company.

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

Overall, as you think about the end market dynamics built into the guidance, from a CPG perspective it's pretty steady—less seasonal; global food and beverage are also quite nondiscretionary, so demand should be steady. On the water side, municipal is pretty steady given where we operate; we operate in the OpEx side of our customers and thus are embedded in high-value parts of workflows. Overall demand is pretty steady, but in the second half, especially Q4, comps get a little easier which helps core growth. So sequentially, expect core growth to move up as the year progresses.

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

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

Yes. Our water team had a fantastic quarter in terms of execution. Relative to which markets are faster growers, we do see strong growth in data centers. As a reminder, data center revenue is still a very small portion of our total sales in Water Quality, and we don't disclose market sizes or growth rates separately, but we're getting great traction and uptake in demand, which benefits our water businesses broadly.

And then M&A-wise, it sounds like you're still focused on capital allocation toward that. We saw a move on the treatment side into the data center space a little more aggressively. Does that market interest you in terms of increasing priority among acquisition targets?

You'll see us stay true to our algorithm of market, company and valuation. We like businesses that look like us—razor-and-razorblade businesses embedded in customer operations. We won't take anything off the table, but we prefer profiles that create long-term advantage and allow us to apply the Veralto Enterprise System to improve them.

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

I don't think we've touched on China yet. Some of your peers have had challenges there on the water infrastructure side. Maybe you can give some color on how you'd characterize that market today, any puts and takes around specific verticals?

China continues to behave like a more mature market. Our China sales in Q1 were up low single digits, generally in line with the past couple of quarters. PQI led that growth with double-digit growth, though we've lapped easier comps which makes it easier to post growth. Water Quality was down slightly, low single digits, reflecting the funding environment for municipalities where money is not yet flowing to prop up that industry. We continue to have opportunistic sales into industrial segments and are waiting for water funding to break loose on the municipal side in China, but PQI opportunities remain strong.

That's good color. And just a quick follow-up for Sameer. Your tax rate has been going down a little bit over the last couple of years—helpful to understand how much of that is related to geographic mix versus planning activity since the spin.

Thanks, Jake. The tax rate has moved from roughly 24.5% at the spin to now in the low 20s. It's a balance, but the majority of the improvement is due to strong tax planning and execution by the tax team.

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

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

Thanks, Andrew. On the tariff side there are three layers. The actions from last year—we've taken pricing actions and those line moves have happened, and those impacts should start rolling over in the second half. For the new Section 232 changes, we've baked the impact into guidance, but the effect is smaller than last year because steel and aluminum content in our products is relatively small. Regarding the Middle East conflict and oil-driven commodity impacts, we have also baked expected impacts into guidance based on current visibility. We're having active pricing discussions with customers, and pricing plus productivity will mitigate several headwinds.

Great. That's helpful. On pricing, is it still fair to think the company should realize about 2% price or so? And I think PQI was trending a bit higher than Water Quality—reasonable to model that?

Yes, that's a reasonable approach—think of pricing in the 100 to 200 basis points range. With the price increases last year and additional increases this year, you should expect pricing this year in aggregate to be at the high end of that range, with PQI even a little higher.

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

Sorry about that. This is Tyler Bisset on for Brian. Just wanted to go back to the high-growth markets. You discussed how acquisitions of GlobalVision and In-Situ should help support growth here, but it was actually a little weak for both Water Quality and PQI during the quarter. Any reason for the weakness in the quarter? How do you expect growth to trend going forward? And then, looking to Q2, are you expecting any material impact from the war in Iran?

Thanks, Tyler. To clarify, GlobalVision does not meaningfully impact high-growth-market growth in the near term. High-growth markets were slightly down this quarter—Water Quality down low single digits mainly due to China, and PQI also down low single digits. The impacts are largely timing-driven, particularly in Latin America. Overall, nothing material; pipelines remain active.

I'll add that we had a big prior-year comp in India—Q1 last year was about 20%—so comps are a factor. We also saw some impact in the Middle East, which is a small portion of overall revenue, where sales were down about 10%.

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

I wanted to ask about regional impacts in PQI—there's a pretty decent divergence between Europe and North America. Was Europe more impacted by some one-time larger equipment sales? Or was it something else? And can you help what that looks like in Q2, if any of that reverses?

Relative to Western Europe, PQI had a very tough comp in 2025—they were up 10.3% last year. Given our recurring revenue model, a few extra selling days in Q1 2025 mattered a lot. In Q1, our marking and coding businesses grew core sales low single digits, despite tough comps. We did see delays in shipments of certain hardware lines in packaging and color, which I referenced earlier. Broad-based global CPG demand appears stable in Europe and North America. There's a mixed picture in some high-growth markets because of China, India timing issues and impacts in the Middle East and Africa.

If I look later this year, you have 6% and 9% comps in North America in Q3 and Q4. Are those going to be tough comps to go against? Or should we expect you to be able to grow at that level later this year?

As you get into the second half, you'll see growth despite the comps. From the PQI perspective, comps actually ease a bit in Q4. Given the demand dynamics Jennifer described in marking and coding from the CPG side, we feel pretty good about the second half, and that's baked into our guidance.

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

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

Thanks, Chris. The increase in the EPS guide is predominantly driven by operating performance. We've already baked in the share buyback activity done so far. What's driving the revision is a few things: the strength of Q1 and order book momentum into April; pricing at the higher end of the range; and strong execution across both businesses and regions. Demand patterns are steady, and with almost four months of performance behind us, we have more confidence in the full-year outcome.

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

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