Veralto Corp Q1 FY2026 earnings call

• Started 2026 strongly with 7% total sales growth and 13% adjusted earnings per share growth, while investing in commercial execution, productivity, and innovation. - Raised full year adjusted earnings per share guidance to $4.20 to $4.28 per share. - Invested $1 billion in two strategic acquisitions: in situ in water quality segment and global vision in pqi segment, and made opportunistic share repurchases. - Initiated a new cost optimization program to streamline business and enhance operating efficiency. - Balance sheet remains strong, providing flexibility for additional acquisitions and share repurchases. - Water quality segment products are integral to customer operations ensuring public safety and health. - PQI segment's digital packaging and ingredient solutions with esco and trace games are strong, and global vision strengthens the value proposition. - Cost optimization program is a natural evolution for continuous improvement, with actions oriented towards end of 2026, expecting 50% of run rate savings in 2027 and full run rate in 2028. - Disciplined approach to pricing in water quality segment to offset cost headwinds. - M&A engine running well with active funnels and cultivation activities.

In the first quarter, total sales grew approximately 7%. Water quality segment saw strong and stable demand across muni and industrial markets. Muni has mid-single-digit growth with stronger growth in muni wastewater due to secular drivers. Industrial has mid to high single-digit growth with strengths in data centers like semiconductor, power, and mining. PQI segment had packaging and color down high single digits in Q1 due to non-recurring revenue in discrete industrial end markets, but CPG customer base demand remains strong. PQI margins have potential for improvement with rollover of tariff actions and sequential margin improvement.

• Raised full year adjusted earnings per share guidance to a range of $4.20 to $4.28 per share. - Core sales growth expected to accelerate as the year progresses. - Cost optimization program actions oriented towards end of 2026, with 50% of run rate savings expected in 2027 and full run rate in 2028. - Bias towards M&A for capital allocation, with active funnels and cultivation activities. - Baked in impact of tariffs, Section 232 rules, and Middle East conflict in guidance.

• Forward-looking statements subject to risks and uncertainties including those in SEC filings. - Impact of market conditions on assets and potential demand destruction. - Geopolitical and macroeconomic factors like the Iran conflict and inflation can impact pricing, demand, and cost optimization. - Regional variations and timing issues in different markets can affect segment performance.

Q: Talk about the upside in core sales in water quality and attribute to Veralto's higher bias or higher mix in OpEx versus CapEx, and update on Trojan and quote activity.

A: Dean Dre asked about water quality core sales upside and CapEx. Jennifer Honeycutt and Samir Rohan responded that water quality has strong and stable demand in muni and industrial markets, Peralta products are integral to customer operations, muni has mid-single-digit growth with stronger growth in muni wastewater, industrial has mid to high single-digit growth with strengths in data centers, quoting and bidding for Trojan and UV remains strong with bolt-on acquisitions but longer cycle.

Q: What are assuming for spending growth in Muni Outlook for 2026 and separate CapEx growth versus OpEx?

A: Dean Dre asked about Muni spending growth. Jennifer Honeycutt responded that Muni view is steady from analytics perspective, CAPEX driven predominantly by Trojan, steady on both CAPEX and OPEX sides.

Q: Elaborate on cost program, catalyst behind it, levers to pull.

A: Jeff Sprague asked about cost program. Jennifer Honeycutt responded that cost optimization program is part of continuous improvement mindset, natural evolution to make cost structure more competitive, focuses on simplifying business processes, actions oriented towards end of 2026, with 50% of run rate savings in 2027 and full run rate in 2028.

Q: Give more color on packaging and color within PQI down high single digits in Q1, CPG companies' situation, and PQI margins.

A: Andy Kaplowitz asked about PQI. Jennifer Honeycutt responded that PQI has strong demand in CPG customer base, digital packaging and ingredient solutions are strong, Q1 packaging and color down high single digits due to non-recurring revenue in discrete industrial end markets, but CPG demand is strong, PQI margins have sequential improvement and same opportunity for growth moving forward.

Q: Thoughts on pricing in water quality given competitors' price hikes and raw material issues, and assets in market.

A: John McNulty asked about water quality pricing and assets. Jennifer Honeycutt and Samir Rohan responded that Veralto takes disciplined approach to pricing, partners with customers to offset cost headwinds, and is always looking at assets but stays true to market company valuation algorithm.

Q: View on cost optimization plan layer between segments, guidance seasonality and market improvement.

A: Mike Halloran asked about cost optimization layer between segments and guidance seasonality. Jennifer Honeycutt responded that cost optimization program is broad-based across both businesses and corporate functions with slight bias towards PQI, end market dynamics are steady in CPG and water quality, with comps getting easier in second half.

Q: Influence of data center contribution to water quality growth, and M&A interest in data center space.

A: Andrew Buscaglia asked about water quality data center contribution and M&A in data center space. Jennifer Honeycutt responded that data center revenue is small portion of water quality sales but getting great traction, Veralto stays true to market company and valuation algorithm, likes businesses that fit their model.

Q: Color on China market for water quality and PQI, and tax rate.

A: Jacob Levinson asked about China market and tax rate. Jennifer Honeycutt and Samir Rohan responded that China sales were up low single digits in first quarter, PQI led growth, tax rate has improved due to planning and tax team work.

Q: Update on tariffs, cost inflation, and pricing approach.

A: Andrew Krill asked about tariffs, cost inflation, and pricing. Jennifer Honeycutt and Samir Rohan responded that tariff impact should stop rolling over in second half, new Section 232 impact is small, Middle East conflict impact baked into guidance, pricing approach is to take 100 - 200 basis point pricing with PQI exceeding that.

Q: Reason for weakness in high growth markets for water quality and PQI in quarter, and impact of Iran war on 2Q.

A: Tyler Bissett on behalf of Brian Lee asked about high growth markets weakness and Iran war impact. Jennifer Honeycutt responded that majority of impact is timing driven, especially in Latin America and India, small portion of revenue impacted in Middle East.

Q: Regional impacts in PQI, like Europe and North America, and 2Q outlook.

A: Josh Spector asked about PQI regional impacts and 2Q outlook. Jennifer Honeycutt responded that PQI had tough comp in Western Europe in 2025, Q1 marketing and coding grew low single digits, stable demand in CPG in Europe and North America, comps easier in second half.

Q: Walk through specific bridge items driving EPS guide revision and operational versus capital structure.

A: Chris on behalf of Joseph Giordano asked about EPS guide revision. Jennifer Honeycutt responded that EPS guide raised predominantly due to operating stuff like strength of Q1, pricing at higher end, and execution across businesses and regions.