Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Veralto Corp (VLTO, Financial) delivered strong core sales growth of 3.8% year-over-year, exceeding guidance expectations.
- The company expanded its adjusted operating profit margin by 70 basis points to 24%, reflecting strong operational leverage and cost optimization.
- Recurring revenue grew mid-single digits year-over-year, comprising 62% of total sales, indicating a stable revenue stream.
- Veralto Corp (VLTO) raised its full-year adjusted EPS guidance, showcasing confidence in its market outlook and execution capabilities.
- The company is capitalizing on secular growth drivers in water quality and industrial markets, with strong demand for water treatment solutions and UV systems.
Negative Points
- Currency fluctuations posed an 80 basis points headwind to sales growth, impacting overall revenue performance.
- The divestiture of Salsnes and strategic exits in the water quality segment created headwinds to core growth.
- Free cash flow was down from the prior year due to standalone public company costs and cash tax payments.
- Sales in Western Europe were flat year-over-year, indicating challenges in achieving growth in this region.
- The company anticipates no meaningful recovery in the Chinese market this year, with funding constraints in state-owned municipalities.
Q & A Highlights
Q: Jennifer, Sameer and Ryan. I got to ask about gross margins just because they've been so incredibly strong. Is 60% the new normal? Or is that just more of a shorter-term impact? And are you finding there's just more pricing power in your markets maybe than you thought you had before and that's driving that 60% gross margin?
A: Sameer Ralhan - Veralto Corp - SVP & CFO: It's really been the increased rigor on VES driving execution. We're benefiting from recurring revenue, particularly in consumables and software, which is impacting margins. We expect gross margins to stabilize in the high 50% range over time. Jennifer Honeycutt - Veralto Corp - President & CEO: Our ability to hold the value of our products through commercial excellence related to VES has helped maintain pricing power, normalizing to historical levels of 100 to 200 bps.
Q: I feel obligated to ask about M&A. Any update on your pipeline or enthusiasm about the assets that are out there?
A: Jennifer Honeycutt - Veralto Corp - President & CEO: We remain committed to our M&A approach with robust funnels for both PQI and water quality. We're actively engaged in market activity, focusing on businesses with similar operating models and where VES can add value. We're excited about the space and working hard on both sides.
Q: For both businesses, what was the sense of demand in China and the outlook? Will you feel any of the ongoing pressures in the economy over the next couple of quarters?
A: Jennifer Honeycutt - Veralto Corp - President & CEO: Our view of China hasn't materially changed. We believe China has stabilized, but we don't expect meaningful recovery this year. Funding for state-owned municipalities is tight. Long term, China is expected to improve due to its large population needing clean water and safe food. Sameer Ralhan - Veralto Corp - SVP & CFO: From a guide perspective, assume China will be sequentially flat.
Q: You raised your revenue guidance by $100 million for '24. What markets are better than you expected? Is it more that water treatment is driving continued strong momentum?
A: Jennifer Honeycutt - Veralto Corp - President & CEO: We see strength across the board, benefiting from essential nature of our products and VES deployment. Water and municipalities in the U.S. and Europe continue to execute on project backlog. Water treatment businesses see tailwinds from CHIPS Act and data centers, benefiting ChemTreat and Trojan businesses.
Q: Can you talk about what you think the growth rates will be in kind of investment in commercial resources, investment sales, and investment in R&D over the next several years?
A: Sameer Ralhan - Veralto Corp - SVP & CFO: Long-term investments should support mid-single-digit growth framework of 4% to 6%. These investments in sales, marketing, and R&D are key for long-term sustainable value creation, aligned with our technology-heavy business model.
Q: Can you update us on any findings since the spin on margin improvement opportunities? Is there more opportunity in one segment versus the other?
A: Sameer Ralhan - Veralto Corp - SVP & CFO: Margin expansion is driven by procurement and factory optimization efforts, reflecting the Kaizen culture. This execution gives us confidence to raise full-year margin expansion guidance to 75 basis points, aiming for a 24% operating earnings margin.
Q: Any update on the PFAS regulation opportunity and your discussions with customers?
A: Jennifer Honeycutt - Veralto Corp - President & CEO: We continue to invest in PFAS solutions, leveraging our history in test and analytics and treatment solutions. Real-time destruction of PFAS remains a difficult problem, but we're focused on creating fit-for-purpose solutions for our customers.
Q: The industrial growth commentary is interesting. What's driving that growth?
A: Jennifer Honeycutt - Veralto Corp - President & CEO: We differentiate from other industrials by playing in markets with non-optional secular growth drivers like food, water, and pharma. Our durable business model, with 60% recurring revenue, supports essential customer operations, reducing the risk of failure.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
