Veralto Corp (VLTO) Q1 2026 Earnings Call Transcript

Good morning, everyone. My name is Beau, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralta Corporation's first quarter 2026 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. If you would like to withdraw your question, please press star two. I would now like to turn to 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 Samir Rahan, 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 events and presentations. A replay of this call will be available until May 29th. 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 have the opportunity to review them last night. 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. 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 global vision 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 strengths 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.

Thank you, Ms. Honeycutt. Ladies and gentlemen, at this time, if you do have any questions, again, please press star 1 at this time, and you can remove yourself from the queue by pressing star 2. We'll go first this morning to Dean Dray with RBC Capital Markets.

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

Good morning, and thanks for the question, Dean. Yeah, we see strong and stable demand across both our muni and industrial markets. To your point, the Peralta products and services really sit within customer operations where the cost of failure is high for them, right? and using our equipment is part and parcel to ensuring public safety, public health, and so on. So from a municipal standpoint, you know, we see this really as a mid-single-digit grower with incrementally stronger growth in muni wastewater due to recycle, reclaim, and reuse secular drivers. So we are seeing great uptake there. And I would say on the industrial side, you know, we see mid to high single-digit growth there with strengths in the common cast of characters around data centers. So that would include semiconductor power and mining. And PMI trends have been positive here, right? So we feel really good about our water businesses, both across municipal markets and industrial markets. And that's, again, really on the back of being integral to that customer operating environment. Relative to your question around Trojan and UV, you know, activity here in terms of quoting and bidding remains strong. This business has, you know, some nice bolt-on acquisitions that we've done here with Aquafetus. But I think it is important to remember there's a little bit longer cycle business, right? So the bookings that we would see now would be, you know, shipping largely in Q4, 2027. But great, great order book activity there on the back of the secular drivers I discussed.

Great. And just a quick follow-up. um with reference to the muni outlook for 26 what are you assuming for kind of uh the spending growth and if you can separate you know what that capex growth would be versus opex larger equipment projects um that would be great thanks hey dean thanks for the question with respect to the muni view that we baked into the guidance think of pretty steady uh from the analytics perspective On the CapEx side, really, it's all driven by predominantly for us from a Trojan perspective.

As you know, we are not in the majority in the CapEx cycle. We're tied to the OPEX cycle. So, it's really pretty steady on both sides, Dean, if you've got to think about this. Steady in muni, this is going into analytic side. Trojan side, really strong, as Jennifer just laid out.

Great to hear.

Thanks, Dean. We'll go next now to Jeff Sprague with Vertical Research.

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

Yeah, thanks for the question, Jeff. You know, our cost optimization program here is just part and parcel to our continuous improvement mindset. We are always looking to drive continuous improvement, and this is really a natural evolution to make our cost structure more competitive in our journey to enhance EPS growth. This will really allow us to leverage kind of certain functional attributes across the enterprise that improve both our efficiency but also maintain our accountability within our decentralized operating model. So we will stay true to that decentralized operating model with the operating companies retaining accountability and quick decision-making and service to their customers. But, you know, it's been a three-year journey here, right? 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 basically provide the operating room to do everything else. Secondly, we really focus on accelerating our capital allocation flywheel and have that going now with some strong strategic bolt-ons, creating significant long-term value and also with our share repurchase activity. So cost optimization was a natural next step, right? And we're really focused on simplifying our business processes to improve operating efficiency and further strengthen the competitive position. So some of these things, you know, you can't fully account for when you're part of a $30 billion enterprise. But, you know, from a timing perspective, this is really the right time for us to look at this sort of structural allocation of costs and make sure that we're right-sized for the size business that we are today and what will be scalable in the future. and you didn't mention didn't mention any benefits in 2026 we should expect um just gearing up in 26 for things to flow in 27 and 28. yeah jeff most of the actions that we have laid out in this pretty detailed plan are oriented towards uh uh end of this year so that in q4 you're going to see one

of the actions so we haven't baked any benefit from the program in 2026 and the guidance you should expect roughly 50 percent of the run rate savings in 27 and 400 in 2028 that's how we can uh you can model the savings okay great i'll leave it there thank you thanks jeff thanks jeff we'll go next now to andy kaplowitz at city hey good morning everyone good morning andy jennifer i think in your prepare remarks you mentioned packaging in color within pqi down high single digits as a non-recurring impact in Q1.

Maybe just give a little more color around that. You know, what are CPG companies telling you? Are they worried at all about inflation? Or is this 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.

Yeah. So, yeah, it's a little bit tale of two cities here relative to the PQI story. You know, at a high level, we see continued strong demand across our CPG customer base. And it remains steady in terms of our quoting and sales activity relative to coding and marking. And we've seen that for several quarters. Complementing that really is our digital packaging and ingredient solutions brought in here with a combination of ESCO and trace gains, which continues also to be strong. and we would expect that to continue with the addition of global vision. Global vision obviously strengthens the value proposition here in terms of building a comprehensive workflow. You know, when you look at Q1 here relative to packaging and color, as you noted, we do see sales down high single digits here primarily due to the non-recurring revenue, including sales of color testing and packaging inspection equipment. But this was really focused in a few discrete industrial end markets, so automotive, textiles, building materials, driven by housing market, and so on. So that's where we're seeing some of the demand weakness, but certainly, you know, going forward, we feel strong about, you know, incremental recovery here, And certainly, we don't see any changes relative to CPG demand, which would indicate, you know, our confidence in the marketing and coding business continuing to be strong and, in fact, accelerate throughout the year.

Thanks for that, Jennifer. 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, you know, 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? Yeah, absolutely, Andy.

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

Good to hear it. Thanks, guys.

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

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

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

Got it. Okay, thanks. And then maybe just a little bit of color you know given the challenging environment with inflation and you know at least in some cases there may be a little bit of demand destruction are you seeing any interesting assets that maybe weren't available to you in the market now coming to the market or is it really just too early for that um given what's been going on yeah uh john maybe i'll take this one if you look at from the assets perspective uh you know market conditions change but we're always going to stay true to our, you know, market company valuation algorithm as we're going to look at all the strategic opportunities.

Again, things do open up in these kind of market conditions, but it's too early to do, say, at this point. But overall, pipelines look pretty active and pretty excited about the opportunities that are here in the near term for us. Great. Thanks very much for the caller. Thanks, John.

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

Great.

Thank you for the time. just wanted to come back to the the cost optimization plan that you've laid out here just want to uh make sure we're thinking about that correctly is that uh should we view that as sort of upside to your long-term margin expansion algorithm or does this sort of just keep you on track uh with that algorithm yeah well thanks for the question the short answer is yes right if you look at our value creation algorithm it's unchanged mid-single digit core sales growth with 30 to 35 percent fall through so from a modeling perspective as you can start thinking about 27 28 it is logical to assume that we will use the 30 to 35 percent fall through on the core sales growth and then add the savings from the cost optimization program on top of that so think of it as a step change in 27 and 28 as far as particular for the exact details for 27 of course we'll talk when we give that guidance Perfect.

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 or good chunk of the $750 million authorization. How do you think about that sort of going forward over the balance of the year, maybe into 27, and could we potentially see an increase in the authorization, or maybe what would be a trigger point for that?

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

Appreciate the color. Thanks very much.

Thanks, Will.

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

Morning, everyone. Morning, Mike. A clarification on the early, how does the cost-op program layer between the two segments?

Yeah, if you look at the cost optimization program, Mike, it's pretty broad-based across both the businesses as well as corporate functions.

Overall, I would say there's a little bit more bias source pq but it's pretty balanced across the company if you don't look think of it got it and then um just from a guidance perspective maybe help me understand what what you're embedding in terms of seasonality um end market improvement versus end market stability here is there any expectation for an acceleration in markets as we sit here today or is it relatively normal seasonality um as it plays out and if you are assuming any acceleration in the areas that we should be thinking about specifically yeah overall let's kind of think about the end market dynamics uh mike that we built into the guidance

um from a cpg perspective pretty steady uh frankly it tends to be less seasonal um uh same for the global food and beverage markets uh these are very pretty non-discretionary demands so we expect uh the the market and the demand to be pretty steady over here similarly on the water side i would say is the mini side as Jennifer said earlier it's pretty steady that what we are seeing given where we operate we operate in the OPEX side of our customers so the risk of failure is very high it's a pretty pretty well embedded in the in the high value part of the workflows so overall demand pretty steady but in the second half as you know especially as you're going to Q4 the comps get a little easier as well so that kind of helps as you're going to think about the core growth so

sequentially we should see uh core growth kind of moving up as we go through the year appreciate it thank you thanks mike we'll go next now to andrew buscoglia with bnp paribas hey good morning everyone morning andrew um just wanted to check on on the water quality just a number of drivers including data centers i'm just wondering if you could start how influential that data center contribution was to growth. I don't know how you want to do this, but maybe just talk a little more about that, please.

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

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

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

All right, thank you.

We'll go next now to Jacob Levinson with Melius Research. Good morning, everyone.

Morning, Jake.

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

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

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

Yeah, thanks, Jake, for that. But if you look at the tax rate, definitely we've made a pretty nice move from where we started from 24.5 percent when we kind of spun off now in the 20s. I would say, Jake, it's a balance, but I would say the majority is skewed towards all the really great work with the tax team from a planning perspective to get us to the right place.

Okay. Appreciate it. I'll pass it on.

Thanks, Jake.

We'll go next now to Brian Lee with Goldman Sachs. And, Mr. Lee, your line is open. You might be on mute. Hearing no response, we'll circle back to Brian. We'll go next now to Andrew Krill with Deutsche Bank.

Thanks. Good morning, everyone. It's open. You could give us an update on tariffs. There have been a variety of updates for the Supreme Court ruling, the changes in Section 232 rules, and then also general cost inflation from higher oil. Can you give us an update, you know, how you're viewing the tariff headwinds and cost inflation headwinds this year, and if that's changed at all for the last quarter?

Yeah, thanks. Thanks, Andrew, for that. If you're going to look at, on the tariff side, the three layers, right, the stuff that happened last year, effectively we've taken the pricing actions. All the line moves have happened. Those things should start rolling over. Impact of those should start rolling over as you're going to get into the second half. So we're pretty well positioned on that front. And as far as the new Section 232 kind of stuff, we've baked the impact of that in the guidance that we provided. But overall impact, as you can think about for us, is actually much smaller. This is not like last year. If you can actually start thinking about the steel or aluminum kind of components into a product, it's pretty small. So the impact of those is pretty small for us. As far as the Middle East and the current conflict and the impact that we're seeing on the commodities on the oil side, again, baked into the guidance. at least based on what we see right now but as you can imagine some really active discussions with the customers on the pricing side uh jennifer touched on the chemtree side uh earlier uh you know the impact that we're seeing on the chemicals and back packaging side that's kind of you know baked in um but overall be pretty well positioned uh uh as you're going to think about the rest of the year uh this pricing and there's a lot of productivity stuff as well it's part of it great that's very helpful um and on a related you know just with crisis still fair we should be thinking about the company realizing about two percent price or so and i think pqi was trending a bit higher than water quality is that is that a reasonable approach still yeah that's a pretty pretty reasonable approach just kind of think of the pricing 100 200 basis point but frankly with the price increases that we did last year we're still laughing those up and then we had uh for the price increases as part of this year's cycle so you should expect this year uh in aggregate to be at the high end of the range but pq i even exceeding that a little bit thanks so much thank you thank you we'll go next now to brian lee with goldman sachs hey guys sorry about that

this is tyler visit on for brian uh thanks for taking my question um just wanted to go back to the high growth markets um you discussed how acquisitions of global vision and institute you should help support growth here but was actually a little weak for both water quality and PQI during the quarter so any reason for the weakness in the quarter you know how do you expect growth to trend going forward and then just I guess looking to 2Q are you expecting any like material impact from the war in Iran yeah thanks for the question Tyler if you just want to make sure I get the question right in a high growth market versus global vision right let's bifurcate those two global vision does not have a any sort of a meaningful impact as you're going to think

about the growth in the high growth market side high growth market side effectively you know we grew um uh you know the low single digits if but uh or rather sorry a slight decline this year um but water quality was uh down low single digits really um more on on the impact that we saw in in China. But overall, PQI is in a, you know, low, single-digit decline as well. So nothing material. The majority of the impact that you're seeing is more sort of timing driven, especially in Latin America. That's kind of driving that impact. But otherwise, we're pretty well placed.

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

Super helpful.

I'll turn it over. Thanks. Thank you. We'll go next now to Josh Spector with UBS.

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

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

Okay. Now that's helpful.

And I guess if I kind of flip that the other way, if I look later this year, you have six and 9% comps in North America in 3Q and 4q are those going to be characterized as tough comps to go against or should we expect you guys to be able to grow on that level later this year yeah as you're going to get in the second half uh you're going to see the call the growth despite the uh the comps uh in fact i would say from the pqi perspective the comps is going a little easier uh as we get into q4 overall since the demand given the demand dynamic that jennifer just talked about from the on the the marking and coding side from the CPG side, we feel pretty good about the second half of the year, and that's kind of baked into the guidance. So, nothing about the deviation that you want to see.

All right. Thank you.

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

Hi. Good morning. This is Chris on for Joe.

The EPS guys move higher, even though the operational framework looks to be appears to be largely consistent could you walk us through this the specific bridge items that are driving the revision and how much of that is operational versus capital structure below the line thank you yeah no thanks Chris for that question overall it's going to think about the increase in the EPS guide it's predominantly raised because of the operating stuff on the share buyback that we've done so far it's already kind of baked in uh overall what's kind of driving this thing is is actually a few things um the strength of q1 and the way we're coming out in terms of the order books um in for uh out of the quarter and into april uh second one is we're going to talk about the pricing pricing at the higher end so that's kind of giving us the confidence as we're going to think about the full year uh eps and third i would say is really the execution that we uh we are seeing across the board uh in both of all the both the businesses and across the region so those are kind of really the things that are driving otherwise the demand patterns are pretty pretty pretty steady at this point and given where we are now but almost four months behind gives us more confidence on that front thank you very much thanks for the questions this is ryan that concludes our question to you

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 kind of follow-ups that might be necessary. Thank you so much for joining us. We'll talk to you next time.

Thank you again, ladies and gentlemen. This will conclude today's Veralta Corporation's first quarter 2026 earnings call. Again, thanks so much for joining us, everyone. We wish you all a great day.