Release Date: October 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Veralto Corp (VLTO, Financial) reported a strong third quarter with 4.6% core sales growth, driven by both volume and pricing increases.
- The company achieved a 170 basis point expansion in adjusted operating margin, reaching 24%.
- Adjusted earnings per share grew by 19% year-over-year to $0.89, showcasing robust financial performance.
- The acquisition of TraceGains is expected to enhance Veralto's PQI segment, offering synergies with Esko's global customer base and expanding market presence.
- Veralto Corp (VLTO) has a strong financial position with a net leverage of 1.1 times, providing flexibility for future strategic investments.
Negative Points
- The company faces a modest 3% decline in sales in China, impacting overall growth in high-growth markets.
- Q4 guidance indicates a slightly lower core growth and adjusted operating margin compared to Q3, partly due to the TraceGains acquisition impact.
- Water Quality segment margins were slightly below expectations, influenced by mix and strategic exits.
- The recovery in the CPG market is described as slow and steady, lacking significant inflection points.
- Veralto Corp (VLTO) anticipates TraceGains to be modestly dilutive to earnings in 2025 due to ongoing investments to drive growth.
Q & A Highlights
Q: Sameer, why is the Q4 guidance for core growth and adjusted operating margin lower than Q3, despite PQI's recovery?
A: Sameer Ralhan, CFO: The Q4 margin is impacted by TraceGains' operating impact and transaction costs, accounting for about 30 basis points. Additionally, higher corporate costs related to first-year public company activities add another 50 basis points. Equipment sales mix, particularly printer sales, also affects margins. These factors contribute to the 24% margin guidance for Q4.
Q: Jennifer, how will TraceGains drive growth through revenue synergies in PQI, and will it enhance market share with food and beverage customers?
A: Jennifer Honeycutt, CEO: TraceGains provides cloud-based solutions connecting brands with ingredient manufacturers, addressing compliance regulations. Synergies with Esko will integrate packaging and product development workflows, improving data integrity and reducing time to market. TraceGains has shown strong growth, and we expect this to continue, enhancing our core growth in the food and beverage sector.
Q: Can you elaborate on the gradual improvement in CPG trends and the confidence in 2025?
A: Jennifer Honeycutt, CEO: We see a slow and steady recovery in CPG, with five consecutive quarters of mid- to high single-digit growth in recurring revenue at PQI. Equipment sales growth in recent quarters suggests brand owners are upgrading technology. While recovery is gradual, we are confident in robust market recovery, supported by recent product launches and innovations.
Q: How does Veralto handle traceability in the food chain during contamination events?
A: Jennifer Honeycutt, CEO: Veralto is well-prepared for traceability in the food chain. TraceGains enhances ingredient traceability, while our coding and marking business provides date and lot codes for product identification. This allows us to effectively manage and quarantine affected products, ensuring comprehensive traceability.
Q: What are the hurdles for acquisitions, and how does Veralto evaluate M&A opportunities?
A: Sameer Ralhan, CFO: Our M&A criteria focus on market, company, and valuation. Financial metrics like ROIC, growth, margin, and cash flow accretion are crucial. For small bolt-ons, we aim for cost of capital by year three, while larger or technology acquisitions like TraceGains target ROIC close to cost of capital by year five or six.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
