Veralto Corporation (VLTO) Earnings

Management highlights

- Overall Q2 2026 Financial Results * Total sales grew 7.6% year-over-year, adjusted EPS increased 19.4% year-over-year * Generated $328 million in free cash flow * 60% of the company's total revenue is recurring revenue, focused on customer operating environments to avoid critical points of failure - Strategic and Operational Activity * Completed the bolt-on acquisition of Alpha UV, an India-based leader in UV water treatment solutions, which is a synergistic addition to the firm's Trojan UV business and growing at double-digit rates * So far in 2026, the company has repurchased over 5 million shares for approximately $480 million, equal to just over 2% of outstanding shares * The ongoing company-wide cost optimization program is on track; small savings (a few million dollars) will be realized in Q4 2026, with the majority of benefits coming in 2027 * Recent acquisitions in PQI (ESCO, TraceGains, Global Vision) are being integrated to deliver end-to-end digital workflow solutions for consumer packaged goods (CPG) brand owners, with early synergy targets tracking ahead of plan * The Water Quality segment's Chemtree Solutions business is delivering strong double-digit growth, catalyzed by reshoring/nearshoring activity and demand from high-growth verticals - Market Trends * Water Quality: Strong industrial demand driven by data center development and associated ecosystems (power, mining, semiconductors), plus growing demand for water recycling/reuse driven by water scarcity and climate change; municipal water demand remains steady, even with tight budgets, as water plant operation is non-discretionary * PQI: Strong demand for integrated digital workflow solutions to improve product compliance, traceability, and time-to-market for CPG brands; steady demand for coding and marketing solutions, with improving demand for packaging and color equipment

Guidance

- Full-year 2026 adjusted EPS guidance was raised to $4.35 to $4.43 per share, representing 12% to 14% year-over-year adjusted EPS growth - Second half 2026 core sales growth is expected to accelerate to 5% to 6% year-over-year, with growth led by volume rather than additional price increases; pricing will moderate slightly from Q2 levels but will remain at or slightly above the high end of the company's historical target range - Full-year 2026 adjusted operating margin expansion is guided to 25 to 50 basis points year-over-year, with 25 basis points of sequential expansion expected in Q3, and over 50 basis points of expansion expected in Q4, with Q4 expansion led by the PQI segment - No additional IEPA tariff refunds have been included in second half guidance, though an additional potential benefit of ~$0.02 per share is possible depending on timing of regulatory actions, which remains highly uncertain - The second half 2026 volume growth acceleration is expected to be broad-based, with balanced growth across equipment and consumables for both segments

Segment performance

The firm operates two core product segments: Water Quality and PQI (Print, Quality and Identification). In Q2 2026, total company sales grew 7.6% year-over-year, with overall core sales growth of 4.2%. Water Quality delivered 5.7% core sales growth, and accounts for approximately 50% of the company's total water revenue (which makes up roughly half of the firm's total consolidated revenue, with PQI accounting for the other half). PQI delivered 2% core sales growth. The Water Quality segment currently has 50% of its revenue from industrial applications (half of total water revenue, ~25% of consolidated revenue) and 50% from municipal applications. The firm received IEPA tariff refunds in Q2: $16 million to PQI and $6 million to Water Quality, which contributed 110 basis points to adjusted operating margin expansion for the full company. Both segments saw core sales growth accelerate sequentially from Q1 2026 to Q2 2026.

Risks & headwinds

- Actual results may differ materially from forward-looking statements due to general market and regulatory uncertainties, as outlined in the company's SEC filings - Volatility in raw material prices (including chemical inputs for Chemtree Solutions, and electronics/memory for analytical instruments) creates margin pressure, though the company is actively managing this through real-time pricing adjustments with customers and product design optimization - Timing of project execution in emerging high-growth markets (including Latin America and China's water segment) can be delayed, creating near-term revenue volatility - Higher than expected memory and semiconductor pricing from data center-driven demand could create input cost increases, though the company notes exposure is small and impacts are currently non-material - Integrating acquired businesses carries execution risk, though the company reports most recent acquisitions are tracking ahead of synergy targets

Analyst Q&A

• Q: What drivers underpin the expected 5% to 6% second half core sales acceleration, and what is the capital allocation pipeline for M&A and buybacks? /

  A: Management cited two key growth drivers per segment: for Water Quality, strong industrial demand from data centers and related verticals plus growing demand for water recycling driven by scarcity. For PQI, strong demand for digital traceability/compliance solutions and easier year-over-year comparables in Q4 support growth. Growth will be led by volume with slightly moderated pricing. For capital allocation, the priority remains disciplined bolt-on M&A to drive long-term growth, with a robust active deal pipeline across both segments. Share repurchases will remain opportunistic when the company's market valuation disconnects from its underlying free cash flow generation. (652 characters)

• Q: How large is the data center/industrial high-tech water opportunity, and what is the outlook for cost optimization? /

  A: Management noted that revenue from data center and associated industrial ecosystems is still a small single-digit portion of total consolidated revenue at this stage, though the ChemTreet business serving this end market is growing strongly at double-digit rates. The company-wide cost optimization program remains fully on track, with no changes to timing or targets. Only a small savings impact (a few million dollars) will hit the 2026 bottom line (mostly in Q4, already baked into guidance), with the vast majority of cost savings expected to flow through in 2027. (583 characters)

• Q: What is the current split between industrial and municipal Water Quality revenue, and can municipal growth hold up amid tight municipal budgets? /

  A: Currently, 50% of total Water Quality segment revenue comes from industrial applications, and 50% comes from municipal applications, so industrial is now equally as large as municipal. Industrial is the faster growing segment, driven by data centers and reshoring/nearshoring activity, while municipal growth remains steady at mid-single digits. Operating budgets for municipal water plants are non-discretionary, as communities rely on continuous operation, so even with tighter capital budgets, demand for the company's recurring, efficiency-focused solutions remains stable. Bid activity for wastewater projects also remains solid. (541 characters)

• Q: Are recent bolt-on acquisitions tracking to expectations, and how will AI impact PQI demand? /

  A: Management reports that the vast majority of recent acquisitions are tracking ahead of plan, delivering faster top-line growth acceleration through cross-selling and product integration than initially expected. Cost synergies are on track per integration plans. For PQI, AI is already being integrated into digital workflow solutions, particularly at Global Vision. AI enables faster mistake-proofing, shorter time-to-market for new products, and more reliable regulatory compliance and traceability, which are high-value priorities for CPG brand owners, creating growing demand for these integrated solutions. (487 characters)