Veralto Corp Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Over 1 year since becoming an independent public company, with 16,000 associates and the Veralto Enterprise System (VES) driving operations.
• Third quarter performance: 4.6% core sales growth, 170 basis points adjusted operating margin expansion, $0.89 adjusted EPS, and $215 million free cash flow.
• Completed acquisition of TraceGains, a leading software solutions provider for food and beverage safety and traceability, expected to accelerate growth, expand market presence, and improve efficiency.
• Geographic sales: North America core sales grew 5.5%, Western Europe core sales grew ~4%, Latin America (10% of total sales) growing well, while China had a modest headwind.

Segment Performance

• Water Quality: Delivered $801 million in sales, up 3.6% year-over-year. Core sales grew 4%, with pricing contributing 2.1% and volume growth 1.9%. Recurring sales grew high single digits. Adjusted operating profit was $199 million, with an adjusted operating profit margin of 24.8%.
• PQI: Delivered $513 million in sales, up 6.3% year-over-year. Core sales grew 5.7%, with volume contributing 4.3% and price increases 1.4%. Recurring sales grew high single digits, comprising 64% of PQI sales mix. Adjusted operating profit was $142 million, with an adjusted operating profit margin of 27.7%.

Guidance

• Fourth Quarter: Target core sales growth in low to mid-single digits, with acquisitions contributing ~60 basis points to sales growth. Expected adjusted operating margin of approximately 24% and adjusted EPS of $0.86 to $0.90 per share.
• Full Year: Raised adjusted EPS guidance to a range of $3.44 to $3.48 per share, with the midpoint at $3.46, up $0.05 from prior guidance and an 8% year-over-year growth.

Risks

• Regulatory and Market: Changes in regulations (e.g., lead/copper in drinking water) could impact business, though already positioned with existing technologies.
• Economic and Geopolitical: Economic cycles and geopolitical issues affecting regions like China.
• Integration: Potential challenges with integrating acquisitions like TraceGains and realizing synergies.

Question and Answer

Q: Q4 guidance on core growth and margin A: TraceGains impact, corporate costs, and equipment sales mix contribute to the guidance. On margin, TraceGains, corporate costs, and equipment sales mix are factors.

Q: CPG trends A: Slow and steady recovery, with continued mid- to high single-digit growth in recurring revenue at PQI and two consecutive quarters of year-over-year growth in equipment sales.

Q: TraceGains revenue synergies A: Cloud-based solution connects brands with ingredient manufacturers, integrates with Esko to improve data integrity and reduce time to market for customers.

Q: Acquisition criteria A: Disciplined approach based on market, company, and valuation, with ROIC targets for different types of acquisitions.

Q: China market A: Bouncing along the bottom, with mixed trends in PQI and Water Quality segments; modest headwind year-over-year.

Q: Latin America growth A: Growth due to reshoring/onshoring activity and privatization of water utilities in Brazil; margin similar to company average.

Q: Water Quality product exits A: Approximately 70 basis points headwind in Q3, annualized and not impacting Q4 results.

Q: Lead/copper regulations A: Already well-positioned with existing technologies, and any impact is expected to be marginal.

Q: M&A pipeline A: No set limits, focused on meeting stringent criteria with a broad pipeline of opportunities in both segments.