Q3 2023 Veralto Corp Earnings Call
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
Unknown Executive: Holtz, Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers are marked, there will be a question and answer session.
Unknown Executive: If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two on your telephone keypad.
I would like to withdraw your question. Please press Star then the number two on your telephone keypad I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor You May begin your conference.
Ryan Taylor: I will now turn the call over to Ryan Taylor, vice president of investor relations. Mr. Taylor, you may begin your conference. Good morning, everyone. Thanks for joining us on the call. With me today, our Jennifer Honeycutt, our president and chief executive officer and Sameer Ralhan, our senior vice president and chief financial officer. Today's call is simultaneously being webcast. A replay of the webcast will be available on the investor section of our website later today.
Good morning, everyone. Thanks for joining us on the call.
With me today are Jennifer Hanukkah, our president and Chief Executive Officer.
Amir <unk>, our senior Vice President and Chief Financial Officer.
Today's call is simultaneously being webcast a replay of the webcast will be available on the investors section of our web site later today.
Under the heading events and presentations and will.
Will remain available until our next quarterly call.
Ryan Taylor: Under the heading events and presentations and will remain available until our next quarterly call. A replay of this call will be available until November 10, 2023. Before we begin, I'd like to point out that yesterday we issued our third quarter news release earnings presentation and supplemental materials, including information required by SEC regulation G relating to any adjusted or non-gap financial measures. These materials are available in the investor section of our website, www.veralto.com under the heading quarterly earnings.
A replay of this call will be available until November 10th 2023.
Before we begin I'd like to point out that yesterday, we issued our third quarter news release earnings presentation and supplemental materials include.
Including information required by SEC regulation G relating to any adjusted or non-GAAP financial measures.
These materials are available in the investors section of our website www dot <unk> dot com.
Under the adding quarterly earnings.
As it relates to non-GAAP measures.
To highlight that we are presenting adjusted operating profit and adjusted EBITDA on a standalone basis, including incremental standalone costs as estimated by management for all periods.
Ryan Taylor: As it relates to non-gap measures, I want to highlight that we are presenting adjusted operating profit and adjusted EBITDA on a standalone basis, including incremental standalone costs as estimated by management for all periods. We are also presenting adjusted deluded earnings per share, including incremental standalone costs and interest expense related to our new capital structure. Reconciliation of adjusted figures and all non-gap measures are provided in the appendix of the webcast slides. And thus otherwise noted, all financial metrics relate to the third quarter of 2023.
We are also presenting adjusted diluted earnings per share, including incremental standalone cost and interest expense related to our new capital structure.
Reconciliations of adjusted figures and all non-GAAP measures are provided in the appendix of the webcast slides.
Unless otherwise noted.
All financial metrics relate to the third quarter of 2023.
And all references to variances are on a year over year basis.
Ryan Taylor: And all references to variances are on a year over year basis. During the call, we will make board 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 four looking statements are subject to a number of risks and uncertainties, including those set forth in our most recent SEC filings. Actual results made differ materially from any four looking statements that we make today. These four looking statements speak only as of the date that they are made and we do not assume any obligation to update any four looking statements except as required by law.
During the call we will make forward looking statements within the meaning of the federal Securities laws.
Clothing 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 most recent SEC filings.
Actual results may differ materially from any forward looking statements that we make today.
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.
With that I'll turn the call over to Jennifer.
Jennifer Honeycutt: And with that, I'll turn the call over to Jennifer. Thank you, Ryan, and good morning, everyone.
Yeah.
Thank you Ryan and good morning, everyone when.
We appreciate you joining us.
First earnings call as an independent publicly traded company.
Jennifer Honeycutt: We appreciate you joining us for our all to its first earnings call as an independent publicly traded company. The third quarter, 2023, marks a significant milestone for Veralto as we successfully completed our separation from data her. We accomplished this in just over 12 months from the time of announcement, a truly remarkable achievement. During the third quarter, we filed our firm 10 issued our 2022 Sustainability Report and hosted our first investor event.
The third quarter 2023 marks a significant milestone for alto as we successfully completed our separation from Danaher.
The accomplishments in just over 12 months from the time of announcement a truly remarkable achievement.
During the third corner, we filed our form 10 ish.
Our 2022 sustainability report.
And hosted our first investor event.
At that event, we describe key attributes that differentiate our alto along with our framework to create long term shareholder value and our disciplined approach to strategic capital allocation.
Jennifer Honeycutt: At that event, we described key attributes that differentiate Geralto, along with our framework to create long-term shareholder value and our disciplined approach to strategic capital allocation. I'm proud of our team where their extraordinary effort related to the separation while also driving solid operating execution in support of our customers. Through the first nine months of this year, we delivered core sales growth of 3% expanded adjusted operating profit margin by 50 base points and converted 105% of that income into free cash flow.
I'm proud of our team or their extraordinary effort related to the separation, while also driving solid operating execution in support of our customers.
Through the first nine months of this year, we delivered core sales growth of 3%.
Spanned at adjusted operating profit margin by 50 basis points and converted 105% of net income into free cash flow.
We ended the third quarter in a strong financial position with over $425 million of cash on hand, and net leverage below two times.
Jennifer Honeycutt: We ended the third quarter in a strong financial position with over 425 million dollars of cash on hand and net leverage below two times. Given our financial position and strong free cash flow profile, I'm pleased to share with you that we expect to announce a quarterly dividend of 9 cents per share in Q4 2023. We are off to a great start as a public company and there's positive energy throughout Geralto. Our team is tremendously excited about the significant opportunities in front of us to create value for shareholders.
Given our financial position and strong free cash flow profile I'm pleased to share with you that we expect to announce a quarterly dividend of nine cents per share in Q4 2023.
We are off to a great start as a public company and there is positive energy throughout Geraldo.
Our team is tremendously excited about the significant opportunities in front of us to create value for shareholders.
Before we dive into the results of the corner I'll open with a brief overview of <unk> for those who may be new to our story.
Jennifer Honeycutt: Before we dive into the results of the quarter, I'll open with a brief overview of Geralto for those who may be new to our story. Geralto is a global leader in water and product quality, essential technology solutions and a proven track record of solving some of the most complex challenges we face as a society. Our annual sales are approximately $5 billion and we are organized in two reporting segments, water quality and product quality and innovation or PQI for short.
We're also is a global leader in water and product quality essential technology solutions and a proven track record of solving some of the most complex challenges we face as a society.
Our annual sales are approximately $5 billion and we are organized in two reporting segments.
Water quality and product quality and innovation, our PQ I for sure.
Our water quality segment represents about 60% of total sales and is positioned at the high end of the value continuum with leading brands and water analytics at a water treatment.
Jennifer Honeycutt: Our water quality segment represents about 60% of total sales at its position at the high end of the value continuum with leading brands and water analytics and water treatment. Our PQI segment represents about 40% of sales and is a leader in marketing and coding technology as well as packaging design and color solutions. Across both segments, our key brands are leaders in their respective industries with long track records of innovation, commercial excellence and continuous improvement.
Our PQ I segment represents about 40% of sales and as a leader and marking and coding technology as well as packaging design and color solutions.
Across both segments are key brands are leaders in their respective industries with long track records of innovation.
Marshall Excellence and continuous improvement.
Our global team has more than 16000 strong and we serve over 225000 customers by leveraging our scientific expertise and innovative technologies to help our customers solve complex challenges.
Jennifer Honeycutt: Our global team is more than 16,000 strong and we serve over 225,000 customers by leveraging our scientific expertise and innovative technologies to help our customers solve complex challenges. Our technologies and services play an integral role in our customers' operations and are typically used to production environments where the cost of failure is high. Approximately 85% of our sales are tied to water, food and medicine. We help our customers ensure drinking water is pure, foods and beverages are authentic and medicine is safe to consume.
Our technologies and services play an integral role in our customers' operations and are typically used in production environments, where the cost of failure is high.
Approximately 85% of our sales are tied to water.
Food and medicine.
We help our customers ensure drinking water is pure <unk>.
And beverages are authentic and medicine, it's safe to itself.
Turning now to Q3, our team delivered a solid quarter and a dynamic macro environment as we continue to face headwinds from broad weakness in China.
Jennifer Honeycutt: Turning now to Q3, our team delivered a solid quarter in a dynamic macro environment as we continued to face headwinds from broad weakness in China and lower demand for consumer packaged goods. Pricing remained favorable but continued to moderate towards historical levels both sequentially and year over year as supply chains normalize and inflation slows. Additionally, we are proactively improving the efficiency of our cost structure while maintaining a healthy cadence of R&D and growth investments.
Lower demand for consumer packaged goods.
Pricing remained favorable AR continues to moderate towards historical levels, both sequentially and year over year as supply chains normalize and inflation flows.
Additionally, we are proactively improving the efficiency of our cost structure, while maintaining a healthy cadence of R&D and growth investments.
In the third quarter of this year, we delivered $125 billion in sales of which 59% were recurring.
Jennifer Honeycutt: In the third quarter of this year, we delivered $1.25 billion in sales of which 59% were recurring. Core sales growth was 1% following 11% core growth in Q3, 2020, bringing our two-year core growth stack to 6% in line with our historical mid-single-digit growth rate. Adjusted operating profit margin including incremental stand-alone cost was 22.4% at adjusted EPS with 75 cents per share. Adjusted EBITDA was $290 million or 23.1% of sales and we generated over $230 million of free cash flow or 113% of debt income.
Our sales growth was 1% following 11% our growth in Q3 2022.
Bringing our two year core growth stack to 6%.
In line with our historical mid single digit growth rate.
Adjusted operating profit margin, including incremental Standalone costs was 22, 4% and adjusted EPS was <unk> 75 cents per share.
Adjusted EBITDA was $290 million or 23, 1% of sales.
And we generated over $230 million of free cash flow or 113% of net income.
This performance reflects our ability to navigate a dynamic macro environment and is a testament to delivering results with the Geraldo enterprise system.
Jennifer Honeycutt: This performance reflects our ability to navigate a dynamic macro environment and is a testament to delivering results with the Veraldo Enterprise System. Looking now at core sales by Geography, on a combined basis core sales growth 3.5% in North America and 2.5% in Western Europe. And high-growth regions core sales declined 5% due predominantly to weakness in China where our core sales declined in the high teens. In North America, our growth was led by water quality and highlighted by strong growth across our water treatment businesses with modest growth and water analytics.
Looking now at core sales by geography.
On a combined basis core sales grew three 5% in North America, and two 5% in Western Europe.
And high growth regions core sales declined 5% due predominantly to weakness in China, where our core sales declined in the high teens.
In North America, our growth was led by water quality and highlighted by strong growth across our water treatment businesses with modest growth in water analytics.
And water treatment sales volumes at both chemistry, and Trojan increased year over year.
Jennifer Honeycutt: In water treatment, sales volumes at both ChemTree and Trojan increased year-over-year. ChemTree saw steady growth across industrial end markets and continued to win new customers through technical expertise and strong commercial execution. At Trojan, we saw good penetration of our UV systems at municipalities along with strong growth from our mobile rental program at Arya Filtra, the former Paul Water Brand. For PQI, Poor Sales in North America declined 2.5% as modest growth in marketing and coding was more than offset by a decrease in sales of packaging hardware and color equipment.
Ken treat saw steady growth across industrial end markets and continued to win new customers through technical expertise and strong commercial execution.
At Trojan, we saw good penetration of our UV systems that municipalities along with strong growth from our mobile rental program at ARIA fell trust the former Pall water brand.
For <unk>.
Core sales in North America declined two 5% as modest growth in marking and coding was more than offset by a decrease in sales of packaging hardware and color equipment.
In Western Europe.
Alrighty delivered five 5% core sales growth with <unk> flat.
Jennifer Honeycutt: In Western Europe, quality delivered 5.5% poor sales growth with PQI flat. In water, poor sales growth was led by hawks and allowable instruments and consumables with Germany and France contributing the highest growth. At PQI, marketing and coding sales were flat and modest growth in packaging design software was offset by lower sales of color equipment. When we look at high growth markets, modest growth in Latin America, India and Eastern Europe was more than offset by the sharp decline of sales into China. In China, poor sales for water quality were down high teens with PQI poor sales count more than 20% year over year. These declines reflect broad weakness in China's economy.
And water core sales growth was led by <unk> analytical instruments, and consumables with Germany, and France contributing the highest growth.
At PQ, I, marking and coding sales were flat and modest growth in packaging design software was offset by lower sales of color equipment.
When we look at high growth markets modest growth in Latin America, India, and Eastern Europe was more than offset by the sharp decline of sales into China.
In China car sales for water quality, we're down high teens with PQ I core sales down more than 20% year over year.
These declines reflect broad weakness in China's economy.
Looking ahead, we anticipate ongoing weakness in China, and lower year over year volumes and global consumer packaged goods to persist.
Jennifer Honeycutt: Looking ahead, we anticipate ongoing weakness in China and lower year over year volumes and global consumer package goods to persist. Despite these near-term headwinds, we remain confident in the attractive secular growth drivers for both water quality and PQI and our ability to grow core sales in the mid-single digits over the long term.
Despite these near term headwinds, we remain confident in the attractive secular growth drivers for both water quality and PQ I <unk>.
And our ability to grow core sales in the mid single digits over the long term.
At this point I'll turn the call over to Samir for a detailed review of our third quarter financial performance.
Sameer Ralhan: At this point, I'll turn the call over to Samir for a detailed review of our third quarter financial performance. Thanks Jennifer and good morning everyone. I'll begin with our consolidated results on flight aid. Third quarter net sales grew 3% on year over year basis to $1.25 billion. Our core sales were up 1%, currency contributed 1.5% and acquisitions contributed half a point to overall sales growth. We continue to execute well and pricing to mitigate inflationary pressures.
Thanks, Jennifer and good morning, everyone.
I'll begin with our consolidated results on slide eight.
Third quarter net sales grew 3% on year over year basis, the one point to $5 billion.
Our core sales were up 1%.
Currency contributed one 5% and acquisitions contributed half a point to overall sales growth.
We continue to execute well in pricing to mitigate inflationary pressures.
Pricing contributed 5% of sales growth in the third.
Sameer Ralhan: Pricing contributed 3.5% to sales growth in the third quarter over the prior year period. You can see this benefit in our growth profit which increased 4% on a year over year basis to $723 million. Growth margin was 57.6%. Up 70 basis points from the prior year third quarter. Adjusted operating profit was flat year over year. Note that on an adjusted basis, both quarters presented here include incremental stand-alone costs. Adjusted operating profit margin was 22.4%. Now 60 basis points hit over year, primarily due to higher SNA related to growth investments and labor cost inflation. We generated $232 million of pre-cashable, representing 113% conversion of gap at earnings.
Third quarter over the prior year period.
You can see this benefit in our gross profit.
Which increased 4% on a year over year basis to $723 million.
Gross margin was 57, 6%.
Up 70 basis points from the prior year third quarter.
But just in operating profit was flat year over year.
Note that on an adjusted basis.
Fourth quarter is presented here include incremental standalone costs.
Our adjusted operating profit margin was 22, 4%.
60 basis points year over year.
Italy due to higher SG&A related to growth investments and labor cost inflation.
We generated $232 million of free cash flow.
Representing 113% conversion of GAAP net earnings.
Moving to the next chart.
Ill cover the business segment highlights starting with water quality.
Sameer Ralhan: Moving to the next chart, I'll cover the business segment highlights, Starting with Water Quality. Our Water Quality segment delivered $772 million of sales, up 4% on a year-over-year basis. Farency was a 1% benefit.
A waterfall if you segment delivered $772 million of sales.
Sameer Ralhan: 4 sales grew 3% year-over-year as compared to 16.5% growth in the prior period, bringing the 2-year core growth stack of Water Quality to about 10%. Pricing contributed 5% to 4 sales growth in the period, offsetting the impact of lower overall volume. On a positive note, we drove increased volume and water treatment across chem-treat and Trojan businesses, which was more than offset by lower sales volume in water and analytics businesses. Weekness in China across both municipal and industrial customers, representing the biggest impact.
Up 4% on a year over year basis.
Currency was a 1% benefit.
Core sales grew 3% year over year as.
As compared to 16, 5% growth in the prior year period.
Bringing the two year core growth stack, but water quality to about 10%.
Pricing contributed 5% to core sales growth in the period offsetting the impact of lower overall volume.
On a positive note, we drove increased volume in water treatment across country to Trojan businesses.
Which was more than offset by lower sales volume in water analytics businesses.
Weakness in China across both municipal and industrial customers, representing the biggest impact.
But just in operating profit increased 3% year over year with margins down modestly due to an increase in growth investments and higher labor costs.
Sameer Ralhan: I just did operate profit increased 3% year-to-year, with margins down modestly due to an increase in growth investments and higher labor costs. Note that adjusted operating profit for both periods presented here includes an allocation of incremental stand-alone costs.
Note that adjusted operating profit for both periods presented here includes an allocation of incremental standalone costs.
Through the first nine months of the year core sales in water quality or up 6% with adjusted operating profit margin up 60 basis points, a strong nine month performance.
Sameer Ralhan: Through the first 9 months of the year, core sales in Water Quality are up 6% with adjusted operating profit margin up 60 basis points, a strong 9 month performance.
Moving to the next page.
Our <unk> segment delivered sales of four.
Sameer Ralhan: Moving to the next page, our PQI segment delivered sales of $480-$3 million at a third quarter. Up 1% versus the prior period, currency was a 2.5% benefit and acquisitions contributed 1% to the year-to-year growth. Core sales decreased 2.5% reflecting the impact of lower demand for consumer-packaged goods and weakness in China. Pricing was a 2% benefit in the water, partially offsetting the impact of volume declines across the product portfolio in the PQI segment.
$482 million for the third quarter.
Up 1% versus the prior year period.
Currency was a two 5% benefit.
Acquisitions contributed 1% to the year over year growth.
Core sales decreased two 5% reflecting.
Reflecting the impact of lower demand for consumer packaged goods and weakness in China.
Pricing was a 2% benefit in the quarter.
Actually offsetting the impact of volume declines across the product portfolio in the <unk> segment.
From a product perspective core sales, marking and coding solutions were flat.
Sameer Ralhan: From a product perspective, core sales or marking and coding solutions were flat, whereas core sales of packaging and color solutions were down 7% on a year-to-year basis. Again, on a positive note, recurring sales for a marking and coding business were up about 5% year-to-year and 1% sequentially. Based on the customer insights, we believe the stocking of consumables has largely run its course and the beginning to see signs of stabilization sequentially in the market of a marking and coding business. That said, we expect lower demand in broader consumer-packaged goods markets and China to persist through the balance of the year.
Whereas core sales of packaging and color solutions were down 7% on a year over year basis.
Again on a positive note recurring sales for our marking and coding business were up about 5% year over year and 1% sequentially.
Based on the customer insights, we believe destocking of consumables has largely run its course.
Beginning to see signs of stabilization sequentially in some of the end market of our marking and coding business.
That said.
We expect lower demand in broader consumer packaged goods markets in China to persist through the balance of the year.
Over time, we.
We are confident that we will.
We returned to our historical low to mid single digit growth rate for <unk>.
Sameer Ralhan: Over time, we are confident that we will return to our historical, low-to-mid-single-to-dit growth rate for PQI. PQI is a just-or-doubring profit that includes incremental standalone costs for the third quarter was $110 million, and adjusted operating profit margin was 22.8% down 80 basis points on year-to-year basis. Improved pricing and benefits from cost optimization actions were offset by lower core sales volume and higher SNA-related primarily to growth investments and labor costs. And this way, the valuation of the Argentine peso during the quarter head is unfavorable impact on PQI's adjusted operating profit and margin.
<unk> adjusted operating profit that includes incremental standalone costs for the third quarter was $110 million.
And adjusted operating profit margin was 22, 8%.
Down 80 basis points on a year over year basis.
Improved pricing and benefits from cost optimization actions were offset by lower core sales volume and higher SG&A related primarily to growth investments and labor costs.
Additionally, devaluation of the Argentine peso during the quarter had an unfavorable impact on adjusted operating profit and margin.
Excluding this discrete currency impact PQ is adjusted operating profit margin would have modestly improved year over year.
Sameer Ralhan: Excluding this discrete currency impact, PQI's adjusted operating profit margin would have modestly improved year-to-year. Through the first nine months of the year, core sales and PQI were down 1.5% with adjusted operating profit margin up 60 basis points.
For the first nine months of the year core sales in <unk> were down one 5% with adjusted operating profit margin up 60 basis points.
Turning now to our financial position on the next page.
Sameer Ralhan: Turning now to our financial position on the next page. During the quarter, we generated $243 million of cash from operations and we invested $11 million in capital expenditures. As a result, free cash was $232 million in the quarter, our 113% conversion of cabinet earnings. This quarter again demonstrates the strong free cash for generation capabilities of our businesses. Note that we did not have any cash payments related to interest costs in Q3.
During the quarter, we generated $243 million of cash from operations.
And we invested $11 million and capital expenditures.
As a result free cash flow was $232 million in the quarter.
113% conversion of GAAP net earnings.
This quarter again demonstrates the strong free cash flow generation capabilities of our businesses.
Note that we did not have any cash payments related to interest costs in Q3.
Going forward, we'll have semi annual interest payments in the first and third quarter over here.
Sameer Ralhan: Going forward, we'll have semi-anual interest payments in the first and third quarter of a year. As of September 29, growth debt was $2.6 billion and cash on hand was $426 million. That debt was just under $2.2 billion resulting in net leverage of 1.8 times.
As of September 29th gross debt was $2 6 billion.
And cash on hand was $426 million.
Net debt was just under $2 $2 billion, resulting in net leverage of one eight times.
In summary, we strengthened our financial position during the quarter and up.
Sameer Ralhan: In summary, we strengthened our financial position during the quarter and have ample liquidity. This gives us flexibility in how we deploy capital to create long-term shareholder value.
Liquidity.
This gives us flexibility in how we deploy capital to create long term shareholder value.
At our Investor day.
We discussed our financial policy and capital allocation framework.
Sameer Ralhan: At our investment day, we discussed our financial policy and capital allocation framework. Conceptually, our framework is grounded in driving compounded earnings growth while maintaining an investment-grade value. Our bias is to drive compounding growth in earnings and cash flow through investments in high ROIC organic growth opportunities aligned with secular growth drivers in both of our businesses and strategic acquisitions that drive long-term value creation. Within our framework, we also maintain flexibility to return capital to shareholders.
Conceptually our framework is grounded in driving compounded earnings growth, while maintaining an investment grade balance sheet.
Our bias is to drive compounded growth in earnings and cash flow through investments and otherwise the organic growth opportunities aligned with secular growth drivers in both of our businesses.
And strategic acquisitions that drive long term value creation.
Within that framework, we also maintain flexibility to return capital to shareholders.
In line with this capital allocation framework, we intend to initiate a quarterly cash dividend of <unk> <unk> per share starting with the fourth quarter of this year.
Sameer Ralhan: In line with this capital allocation framework, we intend to initiate a quarterly cash dividend of 9 cents per share starting with the fourth quarter of this year, subject to approval by the board of directors with respect to each such dividend.
Two approvals by the board of directors with respect to each such dividend.
Turning now to our guidance for the fourth quarter and full year.
Sameer Ralhan: Turning now to our guidance for the fourth quarter at full year, for the fourth quarter, on a consolidated basis, we expect core sales to be flat to down those single digits year over year. This assumes an ongoing weakness in China across both segments. In a water quality segment, we expect core sales to be flat year over year with another tough calm given 10% growth in Q4 loss, here. In a PQI segment, we expect core sales to be down low to mid-single digits.
For the fourth quarter on a consolidated basis, we expect core sales to be flat to down low single digits year over year.
This assumes an ongoing weakness in China across both segments.
Water quality segment, we expect core sales to be flat year over year with another tough comp given 10% growth in Q4 last year.
In our <unk> segment.
We expect core sales to be down low to mid single digits.
This decline was expected due to the ongoing weakness in consumer package goods end markets on a year over year basis.
Sameer Ralhan: This decline is expected due to the on-going weakness and consumer package goods and markets on a year-to-year basis. We anticipate a tested operating profit margin in the range of 22.5% to 24.5%. That's about 100 to 200 basis points, better on a sequential basis. Our guidance for the adjusted deluded earnings per share is in the range of 79 to 84 cents. Note that adjusted earnings per share excludes averageization expense, assumes Q4 tax rate of approximately 25% and reflects the deluded shares outstanding of approximately 250 million.
We anticipate adjusted operating profit margin in the range of 23, 5% to 24, 5%.
That's about 100 to 200 basis points better on a sequential basis.
Our guidance for the adjusted diluted earnings per share is in the range of 79 to 84 cents.
No debt.
Earnings per share.
Excludes amortization expense.
Assumes Q4 tax rate of approximately 25%.
And reflects diluted shares outstanding of approximately $250 million.
For the full year, we expect core sales to grow low single digits on a year over year basis.
Sameer Ralhan: For the full year, we expect core sales to grow low single digits on a year-to-year basis. This assumes mid-single digit growth at water quality and low single digit decline at PQI. And our adjusted EPS guidance for the full year 2023 is in the range of $3.11 to $3.16 per share, assuming an effective tax rate around 25% and the deluded shares outstanding of approximately 247 million. Our adjusted EPS guidance excludes averageization expense and includes incremental stand-alone costs and annual pre-tax interest expense of approximately 140 million. Despite the dynamic macro-environment that Jennifer outlined earlier on the call, our teams remain focused on controlling what we can control to drive core growth and deliver or not targets for the fourth quarter.
This assumes.
Mid single digit growth in water quality and low single digit decline at <unk>.
And our adjusted EPS guidance for the full year 2023 is in the range of $3 11.
The $3 16 per share.
Assuming an effective tax rate around 25%.
And diluted shares outstanding of approximately $247 million.
Our adjusted EPS guidance excludes amortization expense and includes incremental standalone costs and annual pretax interest expense of approximately $140 million.
Despite the dynamic macro environment that Jennifer outlined earlier on the call. Our teams remain focused on controlling what we can control to drive core growth and delivered on our targets for the fourth quarter.
With that I will turn the call back to Jennifer.
Jennifer Honeycutt: With that, I'll turn the call back to Jennifer. Thanks, Samir.
Thanks, Sameer and.
In summary, we successfully executed our spinoff from Danaher and are off to a good start as a public company.
Jennifer Honeycutt: In summary, we successfully executed our spin-off from Dan and her and are off to a good start at the public company. For nine months this year, we have delivered three percent for sales growth, 50 points of adjusted operating profit margin expansion, and a 105 percent free cash flow conversion, solid operating results of a dynamic macro backdrop. And yesterday, we announced our expectation to pay a quarterly dividend of nine cents per share. Going forward, we are focused on delivering our commitments, driving continuous improvement, and executing disciplined strategic capital allocation that creates sustainable long-term value for shareholders.
For nine months. This year, we have delivered 3% core sales growth 50 points of adjusted operating profit margin expansion and 105% free cash flow conversion.
Solid operating results amid a dynamic macro backdrop.
And yesterday, we announced our expectation to pay accordingly dividend up nine cents per share.
Going forward, we are focused on delivering our commitments.
Driving continuous improvement and executing disciplined strategic capital allocation that create sustainable long term value for shareholders.
In closing I want to reiterate our long term value creation framework.
Jennifer Honeycutt: In closing, I want to reiterate our long-term value creation framework. Over the long term, we expect to deliver mid-single-digit core sales growth with incremental margin fall through in the 30 to 35 percent range, and we expect a hundred percent free cash flow conversion annually. We intend to complement core growth with disciplined strategic acquisitions. We are confident that the durability of our business, the essential need for our technology solutions and the strong, secular growth drivers of our end-market will provide steady growth consistent with our historical track record. The combination of our leading brands, proven value creation, playbook powered by the Veralto Enterprise System, and the strength of our balance sheet, different sheets, Veralto, and positions us to deliver sustainable long-term shareholder value.
Over the long term, we expect to deliver mid single digit core sales growth with incremental margin fall through in the 30% to 35% range and.
And we expect 100% free cash flow conversion annually.
We intend to complement core growth with disciplined strategic acquisitions.
We are confident that the durability of our business the essential need for our technology solutions and the strong secular growth drivers of our end markets will provide steady growth consistent with our historical track record.
The combination of our leading brands proven value creation playbook powered by the <unk> enterprise system and the strength of our balance sheet differentiates for alto and positions us to deliver sustainable long term shareholder value.
And as we look to build our future we are unified and inspired by our shared purpose.
Jennifer Honeycutt: And as we look to build our future, we are unified and inspired by our shared purpose, safeguarding the world's most vital resources. Our talented diverse team is excited about the bright future ahead and the opportunities to drive value creation for shareholders. By helping customers solve some of the world's biggest challenges while having a positive and during impact on our environment.
Safeguarding the world's most vital resources.
Our talented and diverse team is excited about the bright future ahead, and the opportunities to drive value creation for shareholders by helping customers solve some of the world's biggest challenges, while having a positive enduring impact on our environment.
That concludes our prepared remarks I want to thank you again for joining our call and at this time, we're happy to take your questions.
Jennifer Honeycutt: That concludes our prepared remarks. I want to thank you again for joining our call.
Unknown Executive: And at this time, we're happy to take your questions. At this time, if you would like to ask a question, please press the star in one on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star in one to ask a question. We will pause for a moment to allow questions to queue.
At this time I'd like to ask a question. Please press the star and one on your tax Tenson you may remove yourself from the queue at any time by pressing star to once again that is star and one to ask a question, we'll pause for a moment to allow questions.
For Q.
And well take our first question from Mike Halloran with Baird. Your line is open.
Mike Halloran: And let's take our first question from Mike Halloran with Baird. Your line is open. Good morning, everyone, and congrats on the first quarter of the public company. So let's start on the, yeah, thanks. Let's start on the margin side here. Maybe give us some context on why the healthy sequential uptick from the third quarter to the fourth quarter on the margin line. Any help you could give us by a second would be great. And then is this the right jumping off point, you know, adjusting for seasonality and revenue levels and all that. But is this the right jumping off point, as we think about 2024?
Hey, good morning, everyone and congrats on.
So a good first quarter as a public company.
So.
Let's start on them.
So let's start on the margin side here.
Can you give some context on why.
The healthy sequential uptick from the third quarter to the fourth quarter on the margin line.
Any help you could give us by segment would be great and then is this the right jumping off point.
Adjusting for seasonality and revenue levels and all that but is this the right jumping off point as we think about 2024.
Yes, Mike. This is me at all all jumping on that one.
Is it going to look at the sequential margin improvement, that's primarily driven by some of the cost optimization.
Sameer Ralhan: I'll jump it up, don't you know, because look at the sequential larger improvement that's primarily driven by some of the cost optimization things that we've been done, especially in TQI. And also the impact of the Argentine pace of evaluation in Q3, and we have not assumed that in Q4 is a lot of vitamin Q3. So majority of the update that you see in the sequential basis going from Q3 to Q4 will be in the Q2.
I think that they've been done in especially in <unk> and also the impact of the Argentine peso devaluation in Q3.
I would assume that in Q4 as the one off item in Q3 so.
Majority of the uptick that you see sequential basis going from Q3 to Q4 will.
We'll be in a particular segment.
Got it and then but is that the right thought process then for next year.
Sameer Ralhan: Got it. And then is that the right thought process then for next year? I mean, is the fourth quarter a more representative run rate? As you think about things relative to the third quarter? Yeah, it's going to look at, you know, some of the costs things like, you know, standalone costs, you know, we are ramping through Q3. They're going to be on a more run rate base than Q4, so they will start replacing.
The fourth quarter more representative run rate and if you think about things relative to the third quarter.
Yes. It is going to look as you know some of the costs things like Standalone costs. You know, we're ramping through Q2 Q3, they're going to be on a run rate basis in Q4, so they will start reflecting but overall.
Feedback from the demand of sales because it will be pretty close to the margin as well, we'll get that guy view as we'd like it to go early next year.
Sameer Ralhan: But overall, you know, in fact, from the demand of sales, they're ultimately close to the margin as well. We'll give that guy view as we're going to get the guy in early next year of 2024. You make sense.
Sure.
Makes sense and then on the <unk> side.
You had some comments about certain softness in China, I think that's a surprise to anybody but you.
Mike Halloran: And then on the PQI side, some comments about certainly softness in China. I don't think that surprised anybody. But you also come in on the destacking side of things on the considerable side.
You also commented on the Destocking side of things on the consumable side. So couple of things one could you just give some thoughts on how you think this demand picture plays out as people can afford basis, but also in the fourth quarter or is the thought process that Sallie Mae so probably a little bit more balanced from a portfolio perspective.
Sameer Ralhan: So a couple things. One, could you just give some thoughts on how you think this demand picture plays out as we look on a forward basis. Or is there a little bit more to come? Yeah, thanks for the question, Mike. You know, relative to PQI, I think what we're seeing is signs of sequential stabilization. And again, the prepared comments was really focused on sort of improving consumable sales. We believe it's as attributed to customer destocking being largely complete and resuming, you know, order rates more in line with run rate ordering albeit at lower overall volume.
Or is there a little bit more to come.
Yes, thanks for the question Mike.
Relative to PQ I think what we're seeing is some.
Kind of sequential stabilization.
And again in the prepared comments. This is really focused on sort of the improving consumable sales.
We believe this is attributed to customer destocking being largely complete and resuming.
Order rates more in line with run rate ordering, albeit at lower overall volume so.
That said as we think about the fourth quarter consumer packaged goods volumes, we still expect to be net negative on a year over year basis changes in consumer behavior.
Sameer Ralhan: So, you know, that said, as we think about the fourth quarter consumer package to its volumes, we still expect to be net negative on a year over your basis, changes in consumer behavior, you know, relative to inflationary pricing means that these folks, you know, on the customer side are going to be doing fewer production runs and smaller batches. And that said, you know, we still have a pretty variable and highly uncertain environment in China as well. You know, that makes sense.
You know relative to inflationary pricing means that these folks are on the customer side are going to be doing fewer production runs in smaller batches.
And that said, we still have a pretty variable and highly uncertain environment in China as well.
No that makes sense and last one for me on the water quality side of things.
Sameer Ralhan: And last one, if a man on a water quality side of things, it certainly seems like if you exclude the China part of the business where there's just broader based weakness, that there's a lot of stability across the portfolio here. Let me just talk about how you think about the economic sensitivity of that segment, excluding the China piece, you know, it seems like that's built to be a little bit more resilient here.
It certainly seems like exclude the China part of the business or is this just broad based weakness that there's a lot of stability across the portfolio here, maybe just talk about how you think about the economic sensitivity of that.
Segment, excluding the China piece.
It seems like that's built to be a little bit more.
Yeah, I mean, certainly our biggest downdraft in volume and water was attributed to our China business.
Sameer Ralhan: Yeah, I mean, certainly our biggest down draft in volume in water was attributed to our China business. I think, you know, what we see here is see some relatively good growth on the treatment side, certainly Trojan benefiting from the chip facts. We've got chemistry that's seeing good positive momentum in sectors such as energy, agriculture and metals. You know, on the muni demand side for municipality is a little bit softer. China's equalities are really focused on making sure that they are focused on regulatory compliance.
I think you know what.
What we see here is key.
Relatively good growth on the treatment side.
Certainly Trojan benefiting from the chip Saks, we've got chemistry, that's seeing good positive momentum in sectors, such as energy agriculture and metals.
You know on the Muni demand side for municipalities are a little bit little bit softer.
Hmm.
<unk>.
Are really focused on making sure that they are.
<unk>.
<unk> focus on regulatory compliance.
So their order patterns are consistent with that but they're still holding off a little bit in terms of plant upgrades and investments related to optimization. So process optimization, so a little bit lackluster, but you.
Sameer Ralhan: And so their order patterns are consistent with that. But they're still holding on up a little bit in terms of plant upgrades and investments related to optimization. So process optimization still a little bit lackluster, but, you know, solid demand still in the municipal regulatory compliance side.
You know solid demand still in the municipal regulatory compliance side.
Great really appreciate all the color. Thank you.
Thanks, Mike.
Mike Halloran: Great, really appreciate all the comments. Thank you. Thanks, Mike. And once again, if you'd like to ask the question, please press star and one on your telephone keypad.
And once again, if you'd like to ask a question. Please press star and one on your telephone keypad will take our next question from Andy Kaplowitz with Citigroup. Your line is open.
Andy Capilitz: We'll take our next question from Andy Capilitz with city group. Your line is open. Good morning, everyone. Got some a launch. Thank you, Penny.
Good morning, everyone. Congrats on the launch.
Panic, Jennifer Samir, maybe just a little more color on Q1 margin in Q3 and really the trend over the last several quarters I know you mentioned the currency issue in the quarter you also talked that thinking.
Sameer Ralhan: Jennifer, you're maybe just a little more color on QI margin in Q3 and really the trend over the last several quarters. You know, I know you mentioned the concierge in the quarter. You also taught that they can press in the presentation around growth investments, labor inflation. But is there just inefficiency in a region such as China that's holding you back? Or, you know, would you expect to see margin recovery as China gets better maybe next year?
And in the presentation around growth investments labor inflation, but is there just inefficiency in our regions such as China. That's holding you back or would you expect to see margin recovery as time it gets better maybe next year.
Yes. Thanks for the question look I think it would also the video side overall, yes in general the volumes as long as you're going to see some impact on the absorption side.
Sameer Ralhan: Yeah, thanks for your question. Look, I think overall for the PQI side overall, yes, in general, you know, with the volume of the floor, you're going to see some impact on the absorption side. But overall, the biggest impact actually was the currency one, so that's why I didn't like the period remarks. You know, just to just frame that and for you, essentially, the impact, if the Argentina peso, the evaluation impact you remove, actually PQI would have been up while the 60 basis points.
But overall the biggest impact actually was a currency gone so that's why it didn't.
Third remarks.
Just to frame that.
For you essentially the impact of the Argentina peso.
In fact, if you remove actually <unk> would have been up by almost 60 basis points. So that gives you just a sense of how big the impact was.
You know going from 22, 8% to almost 34, 2%. So that was one of the biggest impact and that of course is one off and we don't expect that to occur in 'twenty in Q4, but also we did some cost optimization actions as you'd hope you don't take those costs out or just a small cell so the benefit of that and you'll start seeing it.
Sameer Ralhan: So that gives you just a sense of how big the impact was, you know, going from 20 to 80 percent to almost 24.2 percent. So that is one of the biggest impact. And that, of course, is one off. And we don't expect that to occur in 24. And also we did some cost optimization actions. As you know, we don't take those costs out or just those costs out. So the benefit of that is you're going to start seeing in Q4 itself. That's why earlier I said that you're going to start seeing the sequential improvement in Q4 in PQI. And that's driving BigChomp on the overall company sequential improvement, especially after the guidance. That's great, Samar.
Q what itself.
Why did I hear you said that you're going to start seeing a sequential improvement in Q4.
<unk> and that's driving a big chunk of the overall company sequential improvement that we laid out.
Under the guidance.
That's great and then Jennifer just I wanted to follow up on your comments on municipalities sort of pulling back I guess it seems.
Jennifer Honeycutt: And Jennifer, just I want to follow up on your comments on municipality, sort of holding back, I guess at Hock. Seems like, you know, that's happening in North America. We know you have tough comps versus last year. But sort of what gets them to sort of accelerate, you know, to get back to, I would assume that you still think Hock could grow mid single digits across the cycle. So what do you need to see to sort of get that to happen?
It seems like that's happening in North America, We know you have tough comps versus last year, but sort of what gets them to sort of accelerate to get back to I would assume that you still think could grow mid single digits across the cycle. So what do you need to see sort of get that to happen.
Yeah, I mean, I think some of these.
Supply and demand nuances will start to level out.
Jennifer Honeycutt: Yeah, I mean, I think some of these, you know, supply and demand nuances will start to level out. You know, there is good funding available with the infrastructure bill here in North America, for seeing robust growth here for municipal business in Europe. So it's really, you know, more of a matter I think of sort of the global economic environment and sort of a steady recovery of industrial markets. But, you know, we hold to the mid single digit performance for water quality going forward. These are essential solutions for people around the world. So we think the underlying macro is a little bit choppy right now, but the secular drivers remain strong. Got it.
You know there is.
Couldn't funding available.
Andy Capilitz: One more question.
But the infrastructure Bill here in North America, we're seeing.
Robust growth.
Growth year for municipal business in Europe.
So it's really.
More of a matter I think of sort of the global economic environment and sort of a steady recovery.
Of industrial markets.
But yeah.
<unk> holds to the mid single digit performance for water quality going forward. These are essential solutions for people.
People around the world. So we think the underlying macro is is a is a little bit choppy right now, but the secular drivers remain strong.
Got it and one more question if I could like how are you thinking about the M&A pipeline and the potential timeline.
Jennifer Honeycutt: I could like, how are you thinking about the M&A pipeline, the potential timeline of, you know, your first deal as a public company? Do you need a bit of transition time to execute as a public company before you consummate a beer deal, or could we expect M&A to ramp up soon versus later? And maybe there are any particular areas of interest as you sort of come out on M&A.
First deal as a public company do you need a bit of transition time to execute as a public company before you contemplate a bigger deal or can we expect M&A to ramp up sooner versus later and maybe is there any particular areas of interest as you sort of come out on M&A.
Yes, thanks for the question Andy.
Our pipeline across both water quality and PQ lie is strong for M&A and we've got a number of opportunities that are currently being considered.
Jennifer Honeycutt: Yeah, thanks for the question, Andy. You know, our pipeline across both water quality and PQI is strong for M&A and we've got a number of opportunities that are currently being considered. We do not anticipate that we will require a lengthy ramp time as a public company. We have executed the spend with a remarkable level of discipline and focus on the back of the learning that Daniger had from its two prior spends.
We do not anticipate that we will require a lengthy ramp time as a public company.
Have.
Executed the spin with a remarkable full of discipline and focus on the back of the learnings that danaher had from its two prior spend and.
And we feel pretty good about where we are positioned.
Jennifer Honeycutt: And we feel pretty good about where we are positioned. That said, we are going to take a very disciplined approach to M&A just as we would expect from our heritage of Daniger. We're going to make sure that it's a market that we like with companies that have similar breeding models or ability and financial profiles, where VES can drive growth and margin expansion. And we've got to be able to get into the right valuation.
That said, we are going to take a very disciplined approach to M&A just as we would expect from our heritage of Danaher and we're going to make sure that it's a market that we like with.
With companies that have similar operating model durability and financial profiles Rvs can drive growth and margin expansion and we've got to be able to get at the right valuation. So.
We believe obviously this is going to be an important catalyst for value creation over time, but we will maintain a similar rigor and disciplined as we've seen amongst these businesses as part of Danaher in the past. So timing is always difficult to predict M&A is is that prosodic, but we are in the market and are working a number.
Jennifer Honeycutt: So we believe obviously this is going to be an important catalyst for value creation over time, but we will maintain similar rigor and discipline as we've seen amongst these businesses as part of Daniger in the past. So timing is always difficult to predict. M&A is episodic, but we are in the market and working a number of opportunities. I appreciate the time.
There are opportunities.
I appreciate the time.
And once again that is star one to ask.
Unknown Executive: And once again, that is Star in One, to ask a question.
Ask a question.
We'll take our next question from Joe Giordano with TD Cowen Your line is open.
Joe Giordano: We'll take our next question from Joe Giordano with TD Kellen. Your line is open.
Good morning, everyone. This is Michael on for Joe.
Sameer Ralhan: Good morning, everyone. This is just curious as you look towards the fourth quarter. You know, what customers might be telling you around the potential for a budget flush? You know, what is the guidance kind of assume versus historical patterns? Yeah, I think that remains variable based on what industries markets were talking about. We do see some of our customer segments that are use it or lose it kinds of budgets. And we would expect that we will see some of that here in the fourth quarter, albeit and probably lower rates than we have seen sort of historically in the pre-pandemic era.
Michael wondering Michael.
Yes.
Curious as you look towards the fourth quarter.
What customers might be telling you around the potential for a budget flush.
What is the guidance kind of assume versus.
Historical patterns.
Yeah, I think that.
It remains variable based on what industries markets, where we're talking about we do see some.
Some of our customer segments that are use it or lose it and kind of Oh budgets.
And we would expect that we will see some of that here in the fourth quarter, albeit at probably lower rates than we have seen sort of historically in the pre pandemic era.
And Joe maybe if I can add a little bit as we go.
Talk to you at Investor day, right be it a lot more tied to the operating budget to the of our customers rather than capital assigned to that kind of helps us as well as we can.
Sameer Ralhan: And Joe, maybe if I can add a little bit, as we're going to talk to the investor, they might be in a lot more tight to the operating budget to our customers rather than the capital side to that kind of helps us as well as you can move forward.
Move forward.
Alright, thank you.
Joe Giordano: Great.
Unknown Executive: Thank you.
And it appears that we have no further questions. At this time I will now turn the program back over to Ryan Taylor for any additional or closing remarks.
Unknown Executive: And it appears that we have no further questions at this time.
Ryan Taylor: And when I'll turn the program back over to Ryan Taylor for any additional or closing remarks. Thanks, Shelby.
Thanks Shelby. This concludes our third quarter earnings call. We thank you very much for joining us.
Ryan Taylor: This concludes our third quarter earnings call. We thank you very much for joining us. I'll be available over the next several days for follow-ups. I should have any additional questions. Thank you once again.
I'll be available over the next several days for follow ups should you have any additional questions.
Thank you once again and that concludes our call.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
Unknown Executive: And next, lose our call.
Unknown Executive: That concludes today's teleconference. Thank you for your participation. You may now disconnect.