Veralto (VLTO) Q2 2026 earnings call transcript

Good morning, everyone. Thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer, and Samir Al-Han, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. A replay of the webcast will be available in the Investor section of our website later today under the heading Events and Presentations. A replay of this call will be available until August 7th.

Yesterday, we issued our second quarter 2026 earnings news release, earnings presentation, prepared remarks, and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. These materials are also available in the investor section of our website, www. veralto. com, under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of the webcast slides.

Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties. Including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements except as required by law. And with that, I'll turn the call over to Jennifer.

Thanks, Ryan. I want to start by thanking our 17,000 associates for their efforts in delivering an excellent service. In Q2, total sales grew 7.6% year-over-year, adjusted EPS increased 19.4%, and we generated robust free cash flow of $328 million. We delivered 4.2% core sales growth led by water quality at 5.7% and PQI at 2%. As expected, core sales growth in both segments accelerated sequentially from Q1 to Q2.

We expect year-over-year core sales growth to continue accelerating in the second half to approximately 5 to 6 percent. Based on our Q2 performance and momentum across the portfolio, we raised our full-year adjusted EPS guidance to $4.35 to $4.43 per share, representing 12% to 14% growth year over year. We continue to advance long-term value creation through strategic bolt-on acquisitions, including last week's acquisition of Alpha UV and India-based leader in UV water treatment solutions.

I'm excited to welcome our new associates from Alpha UV to Veralto. And we also continue to opportunistically repurchase our shares. So far this year, we have repurchased over 5 million shares for approximately $480 million, or just over 2% of the company.

Overall, I'm proud of our team for their outstanding execution through the first half of the year and focus on our critical few, accelerating growth, optimizing cost, and executing disciplined capital allocation.

Looking ahead, with a strong balance sheet and robust cash generation, we remain focused on compounding long-term shareholder value through high-quality growth, VES-driven execution, and disciplined capital allocation. That concludes my prepared remarks, and at this time, we're happy to take your questions.

Good morning, Dean. Hey, we continue to really like this highly efficient release of your prepared remarks and, you know, really crazy busy earnings season. It's just such a great innovation. So thank you for doing that again, and hopefully it's a best practice as far as we're concerned. So my first question, can we start with the core revenue guidance that's implied? And you referenced it here this morning, the impressive 5% to 6% for the second half.

Maybe unpack the drivers and your degree of confidence in this acceleration. Thanks. Yeah, thanks for the question, Dean. And it's great to have you leading off today. But before answering your question, I just want to say that we are grateful for your decades of thoughtful analysis within both water and industrial markets. I think all the way back to when Danaher acquired Hawk and VideoJet, where I was working at Hawk at the time when we had our investor conference out there. I think you were one of the first analysts that I met. So we wish you all the best in your next chapter.

Yes, yes. We're getting to your question right now. So, you know, obviously we saw some sequential acceleration between Q1 and Q2. We feel really good about the momentum coming out of the first half of the year and the durability of the growth drivers here in the second half. I'll just cite two key drivers in each segment. I think in water, our industrial market demand continues to be strong, and this is really on the back of the data center demand and the associated ecosystem there, including power, mining, and semiconductor.

Secondly, for water, we've got ongoing scarcity clearly exacerbated by climate change, which is propelling water recycling and reuse, giving us good opportunity to sell solutions into that space. For PQI, we continue to see strong demand for digital workflow solutions as CPG brands look to improve product compliance, traceability, and time to market. And we see ongoing steady demand for our marketing and coding solutions, clearly supported as well by easier comps in the fourth quarter. So based on where the funnels were at the end of Q2, we feel really good about the momentum and confident in the second-half guide for poor sales growth. And maybe, Dean, I'll just add one more point. As you look at the second half co-growth of 5% to 6%, we expect it to be led by volume, with pricing moderating slightly, but still be at or slightly above the high end of the range.

So this will be a volume story in the second half of the year.

Thanks, Steve, for that question. And, yeah, as you kind of look at the capital allocation kind of a framework, Dean, there's really no change. Our first bias is, of course, towards M&A to create long-term value, and we will be opportunistic on the buyback side. And if the valuation state, there's a disconnect between the free cash flow generation of the company and the public market value, we will be out in the market from a share buyback perspective. But otherwise, from M&A's side, the funnels are pretty good, Dean, on both sides of the house. So we're in active cultivations and pretty actively looking at things. But as you know, Hamline is episodic, so we'll stay patient and disciplined.

Thank you, Dean.

Good morning, Scott. I guess with Dean leaving, I'm going to have to actually learn what the water business is, finally. I used to just call him if I needed help. So maybe he'll be kind enough to give me his home number, and I'll just call him in future quarters. So anyways, he will be missed by us as well. He was a great colleague and friend.

Hey, Scott, as you're going to look at overall, it's, you know, the demand and the revenue that we're giving from the data centers and the associated ecosystem, it's still a small number on the high-tech side, but overall, it's, you know, from a Chemtreat perspective, it's becoming pretty interesting as we're going to move forward. But at the Veralto level, it's still a little small number at this point, so we're not public with that number yet. I mean you can think of Chemtreat solutions in there to be strong double growth right That team has been firing on all cylinders It is still a smaller part of our overall business but continues to be a really really good grower along with some other sort of industrial reshoring and nearshoring activities So we seeing lifts kind of across the board Okay.

Yeah, the program is on track, Scott. So, we are well on our way on – we've started executing some things. The impact as far as the savings are concerned in this year, we're going to see a very small lift, maybe in Q4. That's baked into the guide. It's a very small number. We're talking a few millions at this point. The biggest benefit we'll see is in 27. But overall, there's no change as far as if you're referring to any lift in the business and is that impacting the cost optimization program. Absolutely not. We're fully committed and progressing well.

Thanks, Scott.

Thanks, Scott.

It's a combination of both. Jeff, on the water side, it's going to be pretty balanced across both sides, but PQI side is pretty interesting. If you look at the PQI side, really, there are three building blocks. The first one is going to be driven by the digital workflow solutions. Over there, as you know, we book, and based on the ACVs of the contracts that we have been booking, we have pretty good solid visibility into the second half recovery in the digital workflow solutions. Marking and coding continues to be very strong.

So the year-over-year comp is going to look very good, as you're going to look at the Q4 impact last year. And then on the color validation and certification instrumentation side, we started seeing the funnels improving and the velocity improving over there as well. So we should start seeing an uplift in the second half of the year. So when you look at both on the PQI side and the water quality side, it's pretty broad-based. It's not tied to any product line.

And then when you look at your price capture, you know, actually it's very solid, in my opinion, for a business that's not metals intensive and I don't think had a lot of sort of pair-related pressure. Is that, you know, primarily reflective of price capture in consumables, or how are you doing on the equipment side in terms of getting some incremental price?

Yeah, I mean, our philosophy is, you know, every product has to earn the right to be in the portfolio. So we take a balanced approach, and we've been surgical about where and how and how much we increase price. Obviously, we look to cover inflationary impact, impact of tariffs, et cetera. But you see balanced price read-through on both consumables and equipment. It's a little bit higher on consumables, given the captive nature of those products.

Thanks, Jeff.

Morning, Mike.

Yeah, Mike, as you're going to look at the margin side, we will see a sequential improvement on the margin, right? In the guidance, we kind of laid that out, but we should expect roughly 25 bits of margin expansion in Q3, and for the whole year, it's going to be 25 to 50. So Q4, we're going to see a nice margin uplift, especially in the PQI side, because that's where we saw some of the impact from the fixed cost absorption side And the line moves and duplicate production lines that we had on the marketing coding side. So think about margin expansions, roughly 25 bps in Q3, and for the full year 25 to 50 basis points of Q4 will be north of 50, as you can think.

Q4 will be largely led by PQI, but on the water side, it's going to be steady on what we have seen so far.

Yeah, so we've got a decent ramp in NPQI here in the second half. It's really driven by three things. The first is we're seeing strong demand and bookings of our digital workflow solutions with the integration of ESCO, TraceGains, and now Global Vision. And we also see steady demand in marketing and coding. It's bolstered by an easier comp in Q4. And we do see recovery in our packaging and color equipment. We exited Q2 with better funnels and stronger service growth. And so we've got good confidence in kind of the second half acceleration of core growth there. We also have a number of new product launches that have come to market here for PQI as a function of our increased investment at the time of spin.

So flywheel of innovation is accelerating. We've got a number of good innovations coming to market.

Thanks, Mike.

Yeah, thanks, John, for that question. First of all, I think on the pricing, we expected it pretty strong, right? You know, even in the second half, we should expect the pricing to be slightly above the high end of the range. So overall, from an absolute basis, you know, we still expect it to be pretty good. As far as the moderation point that I said earlier from a Q2 to Q3 and Q4, really, John, that is a comp. It's a lapping up. As you know, we introduced price increases last year when the tariffs started happening, and then we had our regular annual price increases in as well. So in the first half of the year, we have seen impact of both.

And as we're going to get into Q3, we'll get back to our normal price increases.

Yeah, great question, John. Yeah, we continue to engage in partnerships across the enterprise. We're excited about our partnership with Dow to help serve liquid cooling applications and data centers. But this is a normal course of business for us as we look to extend our value into these high-growth areas. You know, relative to other applications and so on, you know, look, we can't talk about anything specifically that's in the funnel, but we like how we're positioned here. And as far as M&A and partnerships are concerned, we're going to look to our power alley of serving the operating environment of the customer's workflow where there's a good, sticky, razor-razor-blade kind of relationship.

And we are the right custodian to deliver the kind of value that those customers want. So I think we're well positioned here. We're looking at lots of things, and you'll know when we know as far as any assets that come into the portfolio as a function of that.

Thanks, John.

Good bet.

Good morning, Nathan.

Yeah, so, you know, obviously we continue to stitch together assets here that deliver more value to the consumer products, goods, digital workflow. And you know everything from sort of package design integrity through compliance regulatory compliance ingredient traceability checking for accuracy of the print that actually rendered on the package You know, all of those things are critical workflows for brand owners. And to the extent that they can be seamlessly integrated is where the real volume or the real value is derived.

In fact, we've, at our most recent trade show, ESCO World, was able to demonstrate, you know, packaging design changes that normally span months into weeks and, in some cases, down to a few days. So there's real value in that workflow just in terms of sticking those things together. Bear in mind that Global Vision has been a longstanding partner of ESCO, and so the integration of those solutions is pretty straightforward.

But TraceGames is also providing real value to this workflow in terms of ingredient traceability, We're going to see regulatory changes and making sure that products are fit for purpose and meet all the regulatory fairs and compliance requirements.

So, yes, we are seeing good value there. We see good brand uptake of those solutions, and we see that accelerating here in the back half of the year. Relative to your question in the environmental workflows, yes, we are speaking to the combination of in-situ and our OTT products, And as we had mentioned previously, the two of those really fit together like Legos. One is strong in analytical quantity. One is strong in analytical quality. So quantity and quantity are both covered in those environmental workflows, and they provide important intelligence here for the integrity of water as it comes into the influence into water treatment plants. So knowing what is coming, how much is coming, whether it's clean or dirty, are all critical factors, particularly as you get more environmental aberrations, severe weather events, and so on.

So integration is progressing well there, and we're liking what we see.

And just one thing on the environmental side, Nathan, I'll add is, as you can look at the synergy numbers that we talked about on the commercial side when we announced the deal, in the early days, the team is executing phenomenally well, and the Veral head on the commercial synergy side, numbers-wise.

Yeah, thanks, Nathan, for that question. As you look at the refund side, effectively we got roughly $16 million, 10-ish was in PQI, $6 million in water quality. Overall impact of the tariff refunds on the margin expansion on the adjusted OP was 110 basis points. So excluding that, the margin effectively came in pretty much in line with the guidance, Nathan, overall as a company and for each segment as well. So really no surprises on the margin side. And as far as the future goes in the second half of the year, you're actually right. We have not included any further benefit from tariff refunds in the second half.

But based on, you know, the filings that we have done, look, we can have another $0.02 per share of an impact benefit. But, you know, the timing is highly uncertain, so we have not added that to our guidance for the second half.

Thanks, Nathan.

Good morning, Andy.

Yeah, we're really pleased with our industrial growth. And if you look at our overall water business, about 50% of our water revenue comes from industrial applications. So it's really quite significant. Most of that industrial revenue comes from North America, and so we're really seeing the benefits not only of these discrete vertical markets like data centers and the feeder industries there, but also in the nearshoring and the reshoring efforts. So, you know, we see, you know, growth being catalyzed here by strength in those industrial markets. That said, we've got, you know, plenty of analytical instrumentation and, you know, products and services that go into that space. But the municipal markets are also holding up well, right?

As a reminder, 60% of our revenue is recurring revenue. We sit in the operating side of the customer's plant where they're looking to make sure that they insulate themselves from any points of failure along their value chain there. So being integral to the operating environment, making sure that we help customers avoid critical points of failure, allows us to continue to see really sticky business there on the municipal side. And the other 40% really is revenue associated with, you know, continuing to upgrade, you know, equipment and deploy new technologies and so on. And so I think it's really balanced across the portfolio. Certainly, there's a higher driver of growth coming from our industrial markets, but muni's holding up really well as well.

Yeah, I mean, the way to think about this is the budgets for operating a water plant are not elective, right? Water plants have to continue to operate, treat their water, because communities and industry is relying on that water. So we don't see real aberrations or fluctuations in federal funding. Obviously, utilities, municipalities are going to be judicious with their spend, but we absolutely believe that we can continue to grow and grow at mid-single digits or better in this space. Bear in mind, with new technologies, more efficient ways of running plants, more software deployed to get intelligence out of how well that system is running, those are all opportunities for continued growth.

Yeah, Andy, as you're going to think about our muni business, right, definitely on the analytics side is where you see the consumable side. But let's not forget on the Trojan side, we have pretty nice exposure on the muni to our Trojan business. And the bid activity that you see in the wastewater side, especially at the muni, is pretty, pretty solid.

So overall demand, as you're going to think, in the growth of our muni business, you should look at both angles, Both one from the analytics side, from the heart side, at the same time from a Trojan business as well, which has been growing pretty nicely.

Thanks, Eddie.

Yeah, Ryan, it's going to be the Chemtree side. You're absolutely right. Look, in Kentrate, we've been working very closely with the customers, given some of the chemical inputs, to see how we kind of make sure we can preserve the margins and get the right value for the solution that we deliver to the customers. Overall, as you kind of think about in that business, the dynamic, yes, some of the pass-through can move with the pricing. But at this point, frankly, we have not seen any sort of a change as yet. But our goal is to make sure when the input side is so volatile, we're preserving the dollar margin. So that's one of the biggest focus for us as we can think about.

And the discussions with customers that the ChemTreat is having is pretty real-time. I mean, we've got phenomenal digital solutions to make sure our sales teams are fully armed to have those discussions.

Yeah. Great question. The answer is absolutely And while cyclospora is the latest public health risk you know any kind of bacterial or parasitic outbreak is not actually uncommon You can go back to E coli and peanut butter botulism and infant formula right These kinds of episodes happen. And our PQI franchise is ideally positioned with ESCO, Trace Gains, and Global Vision providing integrative workflows to help with regulatory compliance, ingredient traceability, and packaging While our coding and marking businesses aid in the date, lot code, and distribution traceability. So it's an end-to-end solution really for brand owners to ensure that they have product that is safe for public consumption. So, you know, together our portfolio of solutions really provides that source to shelf intelligence to make sure that brand owners can protect public health.

Thanks, Ryan.

No, thanks, Andrew. Great question. Our exposure in the electronics scene really comes to our instruments where we, you know, do use memory, we do use boards. These costs overall, when you kind of step back, Andrew, a pretty small fraction of the cause. We're definitely seeing high prices, just like everybody else in the industry and, frankly, broader economy. But the impact at the Veralto level at this point is not material.

And from our perspective, look, the procurement teams are working pretty actively. I wouldn't say that at this point we have had any issues of sourcing. It's a matter of pricing, but it's a small number that we are able to pass through. At the same time, look, this is where from the R&D team's perspective, they're looking at things as well as to how we can design and optimize things in a higher memory or higher semiconductor price environment as well. So those actions are helping mitigate the impact as well. So it's not a material impact of the Veralto level is a punchline.

Yeah, we're really happy to welcome Alpha UV into the portfolio. This is a highly synergistic addition to our Trojan business, which continues to expand our footprint globally. Alpha itself has a strong portfolio of competitive fit-for-purpose solutions, along with an established commercial presence in India. And you can think about this as being a similar type of transaction relative to Aquafetus, which is the UV business we acquired in Europe, and part and parcel to the geographic expansion that Trojan is doing. I think Alpha also gives us an opportunity to expand in other high-growth markets with their portfolio.

So, you know, Trojan, Aquafetus, and Alpha all sort of fit together nicely to cover a variety of UV treatment applications, you know, high flow, low flow, different kinds of water matrices and so on. And so, again, small business in India, but a double-digit grower, and we do believe that that's sustainable going forward.

Thanks, Andrew.

Thanks, Andrew.

Good morning, Andrew.

Yeah, you've seen that. Look, as Andrew, as you know, as part of the global vision, we laid out a little bit of that as well, right? So in our digital workflow solutions more so, we are definitely seeing that. We are offering the AI application, again, kind of a layer kind of an applications on top of the solution that we provide to the customers. So you're definitely seeing more on the digital workflow solution side of the PQI. I mean, it's going to be expanding more and more and making the investments even organically and from our talent perspective on that side as well. So we're already offering products on that side to the customers.

Yeah, and Global Vision is squarely in that space, right? Right. You know, what Global Vision brings to the table is a deterministic inspection engine, right? And it's designed to produce the same answer every time because in regulated workflows, you know, brand owners can't tolerate any room for error. So these are reliable, repeatable processes with proprietary data sets that will render the accurate answer every time, right? And the ESCO trace gains and global vision teams are effectively all working together to employ AI throughout that workflow because it will allow more mistake proofing and faster time to market while meeting regulatory requirements and traceability criteria.

You're not.

Yeah, so high growth markets were relatively flat. We see a little bit of a tale of two cities here between PQI and water.

You know, for our China business, we've got strong growth in PQI, and we've got a little bit of shrink on the water side. I would say Latin America as well continues to see good order rates, but sales are a little bit down year over year, and they're improving sequentially. I think we see underlying demand that remains strong, but we do see some timing delays in projects that are there. So, again, you know, we continue to watch and, you know, focus on execution between these different markets around the world.

And, you know, we're pleased with what we see in recovery in China for PQI, still waiting for water to, you know, recover there in terms of traction. And then we're watching Latin America closely.

Appreciate the caller.

Thanks, Brian.

This is Ryan Taylor. We appreciate everybody that was able to engage with us on the call. At this time, we have hit our time limit, our 45 minutes for the call, so we're going to have to cut it off here. As usual, I'll be available for follow-ups throughout today and over the course of the next several days.

We thank everybody for joining us, and we'll talk to you next time.