Q4 2023 Veralto Corp Earnings Call

Operator: Kaplowitz, Michael Halloran, Veralto Kaplowitz, Ryan Taylor, Michael Halloran, Veralto Kaplowitz, To all parties on hold, we appreciate your patience and ask that you continue to stand by. Your conference will begin in two minutes. Many thanks to Jim Smaller, Cheryl Langford, Emily Southern, New Zealand Tam O'Neill, and Matthew Baker Productions, AHHHHHHHHHH, BRUCE LEESON and Frank Egge, and Claude Rosenthal. MARTYRDVOS,?And you haven't found any where to find the weapon?

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Shelby: My name is Shelby, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's fourth quarter and full year 2023 earnings results conference call. All lines have been placed on mute to prevent any background noise.

Please standby your program is about to begin if you need assistance during your conference today. Please press Star zero.

Ryan Taylor: After the speaker's 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. If you 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. Good morning, everyone.

Shelby: My name is Shelby and I will be your conference. Operator. This morning at this time I would like to welcome everyone to for Alto corporations fourth quarter and full year 2023 earnings results Conference call.

Shelby: 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.

Ryan Taylor: Thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer, and Samir Rahan, 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 under the heading Events and Presentations. A replay of the call will be available until February 21, 2024.

Shelby: If you would like to withdraw your question. Please press Star then the number two on your telephone keypad.

I'll now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor you May begin your conference.

Ryan Taylor: Good morning, everyone. Thanks for joining us on the call.

Ryan Taylor: With me today are Jennifer <unk>, our president and Chief Executive Officer, Amir Longhorn, our senior Vice President and Chief Financial Officer.

Ryan Taylor: Before we begin, I'd like to point out that yesterday we issued our fourth quarter news release and Earnings Presentation and Supplemental Materials, including information required by the SEC under Regulation G relating to any adjusted or non-GAAP financial measures. These materials are available in the Investor section of our website, www.veralto.com, under the heading Quarterly Earnings. Reconciliations of adjusted figures and all non-GAAP measures are provided in the appendix of the webcast slide. Unless otherwise noted, all references to variances are on a year-over-year basis.

Ryan Taylor: Today's call is simultaneously being webcast a replay of the webcast will be available on the investors section of our website later today.

Ryan Taylor: Under the heading events and presentations.

Ryan Taylor: A replay of the call will be available until February 21, two.

Ryan Taylor: 2024.

Ryan Taylor: Before we begin I'd like to point out that yesterday, we issued our fourth quarter news release.

Ryan Taylor: Our earnings presentation and supplemental materials.

Ryan Taylor: Including information required by SEC regulation G.

Ryan Taylor: Ladies to any adjusted or non-GAAP financial measures.

Jennifer: 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 most recent SEC filing. 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. And with that, I'll turn the call over to Jennifer.

Ryan Taylor: These materials are available in the investors section of our website www dot two dot com under the heading quarterly earnings.

Ryan Taylor: Reconciliations of adjusted figures and all non-GAAP measures are provided in the appendix of the webcast slides.

Ryan Taylor: Unless otherwise noted all references to variances are on a year over year basis.

Ryan Taylor: 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 well or may occur in the future.

Ryan Taylor: These forward looking statements are subject to a number of risks and uncertainties.

Ryan Taylor: Leading those set forth in our most recent SEC filings.

Ryan Taylor: Actual results may differ materially from any forward looking statements that we make today.

Jennifer: Thank you, Ryan. Good morning, everyone. And thank you for joining us on our call today. 2023 was a historic year for Veralto as we successfully executed our separation from Danaher and delivered a record level of sales, high single-digit earnings growth, and strong free cash flow in a dynamic macro environment. From a segment perspective, our teams in water quality achieved a record level of sales and operating profit despite headwinds in China, and in product quality and innovation, our teams held sales and profitability flat year-over-year despite headwinds from consumer packaged goods demand and the Argentine peso. I'm proud of our team for their resilient effort to grow and improve our business while supporting our customers and helping to ensure the safety of water, food, and medicine supply chains across the world.

Ryan Taylor: These forward looking statements speak only as of the date that they are made and we do.

Ryan Taylor: Do not assume any obligation to update any forward looking statements, except as required by law.

Ryan Taylor: And with that I'll turn the call over to Jennifer.

Jennifer: Thank you Ryan good morning, everyone and thank you for joining our call today.

Jennifer: 2023 was a historic year for Morocco, as we successfully executed our separation from Danaher and delivered a record level of sales high single digit earnings growth and strong free cash flow in a dynamic macro environment.

Jennifer: From a segment perspective, our teams in water quality achieved a record level of sales and operating profit despite headwinds in China.

Jennifer: And in product quality and innovation, our teams helped sales and profitability flat year over year, despite headwinds from consumer packaged goods demand.

Jennifer: We finished 2023 with a strong fourth quarter, delivering core sales growth in both segments, solid operating margin expansion, and robust free cash flow generation. From a segment perspective, we saw continued growth across industrial markets for water quality and early signs of stabilization in consumer packaged goods markets and product quality and innovation. As we begin 2024, we are in a strong financial position and are cautiously optimistic about the near-term trends in our end market. Over the long term, we remain focused on compounding earnings and cash flow through steady core sales growth, continuous operating improvement, and value-accretive acquisitions that yield attractive returns. Our team is tremendously excited about the significant opportunities to create future value for shareholders while also having an enduring positive impact on our world through our unifying purpose of safeguarding the world's most vital resources. We are unwavering in these commitments and confident in our ability to achieve them collectively.

Jennifer: Argentine peso.

Jennifer: I'm proud of our team for their resilience effort to grow and improve our business, while supporting our customers and helping to ensure the safety of water food and medicine supply chains across the world.

Jennifer: We finished 2023 with a strong fourth quarter delivering core sales growth in both segments solid operating margin expansion.

Jennifer: First free cash flow generation.

Jennifer: From a segment perspective, we saw continued growth across industrial markets and water quality and early signs of stabilization in consumer packaged goods markets and product quality and innovation.

Jennifer: As we begin 2024, we are in a strong financial position and are cautiously optimistic about the near term trends in our end markets.

Jennifer: Over the long term, we remain focused on college housing earnings and cash flow through steady core sales growth.

Jennifer: <unk> operating improvement and value accretive acquisitions that yield attractive returns.

Jennifer: Looking at our full year 2023 results, sales grew 3.1% year-over-year to more than $5 billion, an all-time high. Core sales grew 2.6% following two consecutive years of 8% core growth, and we delivered 50 basis points of adjusted operating margin expansion. Adjusted EPS grew 7% year-over-year, and free cash flow generation remains strong with free cash flow conversion at 109%. We ended the year in a strong financial position with more than $760 million of cash on hand and net leverage of 1.5 times.

Our team is tremendously excited about the significant opportunities to create future value for shareholders. While also having an enduring positive impact on our world through our unifying purpose of safeguarding the world's most vital resources.

Jennifer: Yeah.

Jennifer: We are unwavering in these commitments and confident in our ability to achieve them collectively.

Jennifer: Looking at our full year 2023 results.

Jennifer: Sales grew three 1% year over year to more than $5 billion, an all time high.

Jennifer: Core sales grew two 6% following two consecutive years of 8% core growth and we delivered 50 basis points of adjusted operating margin expansion.

Jennifer: Overall, I'm pleased with the steady growth and improvement we delivered in 2023 despite headwinds from lower volumes in consumer packaged goods markets, a slower economy in China, and the devaluation of the Argentine peso. In addition to delivering solid financial performance, during 2023, we bolstered our leadership talent, realigned our commercial teams, and continued to optimize our portfolio and launch several new technology solutions. Over the past year, we increased the rigor around our innovation process and have started to see early benefits. A great example to highlight is VideoJet, our marketing and coding business, which launched seven new products in 2023 to fortify and expand its leading technology position. These launches included differentiated technology in both our continuous inkjet and laser offerings. For inkjet, VideoJet launched the new 1580C, which prints pigmented color codes without increased maintenance, enabling superior uptime while delivering crisp, high-quality contrast codes.

Jennifer: Adjusted EPS grew 7% year over year and free cash flow generation remains strong with free cash flow conversion at 109%.

Jennifer: We ended the year at a strong financial position with more than $760 million of cash on hand, and net leverage of one five times.

Jennifer: Overall, I'm pleased with the steady growth and improvement we delivered in 2023, despite headwinds from lower volumes in consumer package goods markets.

Jennifer: Slower economy in China, and the devaluation of the Argentine peso.

Jennifer: In addition to delivering solid financial performance during 2023, we bolstered our leadership talent realigned our commercial teams and continued to optimize our portfolio and launched several new technology solutions.

Jennifer: Over the past year, we increased the rigor around our innovation process and have started to see early benefits.

Jennifer: A great example to highlight is video jet, our marking and coding business, which launched seven new products in 2023 to fortify and expand its leading technology position.

Jennifer: And in the laser printer market, VideoJet launched its 3350, which features our new smart focus technology, allowing increased flexibility for seamless product changeovers with no manual intervention. These new products demonstrate our innovation focus on solving customer problems, and we are excited about their growth potential. Turning now to our financial results for Q4. We delivered 1.7% core sales growth year over year with 50 points of adjusted operating margin expansion and 9% adjusted EPS growth. This growth of 1.7% exceeded the top end of our guidance due to strong execution by our teams in both segments and better than anticipated demand, particularly in food and beverage consumer packaged goods markets, where volume started to turn positive. We are encouraged by the signs of stabilization we saw in the latter part of 2023. However, it's important to recognize that we are still in the early stages of recovery here.

Jennifer: These launches included differentiated technology in both our continuous inkjet and laser offerings in.

Jennifer: In a jet video jet launch, the new 15, ADC, which Chris pigmented color codes without increased maintenance, enabling superior uptime, while delivering crisp high quality contrast coach.

Jennifer: And in laser.

Jennifer: Video jet launched its 33, 50, which features our new smart focused technology, allowing increased flexibility for seamless product changeovers with no manual intervention.

Jennifer: These new products demonstrate our innovation focus on solving customer problems and we are excited about their growth potential.

Speaker Change: Turning now to our financial results for Q4.

Speaker Change: We delivered one 7% core sales growth year over year with 50 points of adjusted operating margin expansion and 9% adjusted EPS growth.

Speaker Change: Core growth of one 7% exceeded the top end of our guidance due to strong execution by our teams in both segments.

Jennifer: We are cautiously optimistic about the CPG markets at the outset of 2024 and remain prudent in our expectation of steady sequential improvement in demand as this year progresses. Q4 sales into China were also better than anticipated, down only 3% year over year and up 7% sequentially. A nice recovery from Q3 to Q4. Compared with the prior year period, both segments delivered core sales growth through continued strong price execution and, to a lesser extent, volume growth in our water treatment solutions, particularly for industrial applications. Adjusted operating profit grew 5%, and margins expanded 50 basis points to 23.8%. We delivered strong underlying margin expansion through price execution, cost optimization, and improved operating performance driven by the Veralto Enterprise System. Adjusted EPS was $0.87 per share in the fourth quarter, $0.03 above the high end of our guidance range, adjusted EBITDA was $316 million for 24.5% of sales, and we generated $241 million of free cash flow at just over 120% conversion.

Speaker Change: And better than anticipated demand, particularly in food and beverage consumer package, good markets, where volumes started to turn positive.

Speaker Change: We are encouraged by the signs of stabilization we saw in the latter part of 2023.

Speaker Change: It's important to recognize that we are still in the early stages of recovery here.

Speaker Change: We are cautiously optimistic about the CPG markets at the outset of 'twenty 'twenty four and remain prudent in our expectation of steady sequential improvement in demand as this year progresses.

Speaker Change: Q4 sales into China were also better than paid it down only 3% year over year and up 7% sequentially, a nice recovery from Q3 to Q4.

Speaker Change: Versus the prior year period, both segments delivered core sales growth through continued strong price execution and to a lesser extent volume growth in our water treatment solutions, particularly for industrial applications.

Speaker Change: Adjusted operating profit grew 5% and margins expanded 50 basis points to 23, 8%.

Jennifer: Our Q4 financial performance reflects our ability to navigate a dynamic macro environment and is a testament to delivering results and meeting our commitments through the Veralto enterprise system. Looking now at core sales growth by geography for the fourth quarter, we grew about 5% year-over-year in North America and over 2% in high-growth markets, more than offsetting a 2% decline in Western Europe. In North America, we continue to see strong growth in water quality, highlighted by our water treatment businesses. Chemtree grew sales in the high single digits with broad-based growth across industrial end markets and continued new customer wins. And at Trojan, we continue to see growth in North America driven primarily by demand from municipal customers for our UV systems focused on wastewater discharge regulations and contaminant destruction in drinking water. Trojan also continues to see steady growth in its Aria Filtra product line, serving industrial customers in North America.

Speaker Change: We delivered strong underlying margin expansion through price execution cost optimization and improved operating performance driven by the virtuoso enterprise system.

Speaker Change: Adjusted EPS was <unk> 87 cents per share in the fourth quarter three cents above the high end of our guidance range.

Speaker Change: Adjusted EBITDA was $316 million or 24, 5% of sales.

Speaker Change: And we generated $241 million of free cash flow at just over 120% conversion.

Speaker Change: Our Q4 financial performance reflects our ability to navigate a dynamic macro environment and is a testament to delivering results and meeting our commitments through the we're also enterprise system.

Speaker Change: Looking now at core sales growth by geography for the fourth quarter, we grew about 5% year over year in North America and over 2% in high growth markets more than offsetting a 2% decline in western Europe.

Jennifer: This is a great example of renewed strategy and strong execution driving value-accretive growth. In PQI, core sales in North America were flat as modest growth in marking and coding was offset by a decrease in sales of packaging and color hardware equipment. In Western Europe, we also saw moderate declines in sales of packaging and color hardware equipment.

Speaker Change: In North America, we continued to see strong growth in water quality highlighted by our water treatment businesses.

Ken treat grew sales in the high single digits with broad based growth across industrial end markets and continued new customer wins.

Speaker Change: And at Trojan, We continued to see growth in North America, driven primarily by demand from municipal customers for our UV systems focused on wastewater discharge regulations, and contaminant destruction and drinking water.

Samir: Demand for water analytics and treatment was steady in Western Europe across both municipal and industrial customers. Fourth quarter sales into high growth markets were up 2% year over year as low single-digit growth in Latin America and strong double-digit growth in the Middle East and India offset a 3% decline in China. For the full year, we delivered growth across the three regions, led by 4% growth in North America and 2.5% growth in Western Europe. These two regions represent more than two-thirds of our total sales. Sales into high-growth markets were up 1% in 2023, with strong growth in Latin America, the Middle East, and India more than offsetting a high single-digit decline in core sales year-over-year in China. That concludes my opening remarks, and at this time, I'll turn the call over to Samir for a detailed review of our fourth quarter financial performance. Thanks, Jennifer, and good morning, everyone.

Speaker Change: Trojan also continued to see steady growth and it's RF filter product line, serving industrial customers in North America.

Speaker Change: This is a great example of renewed strategy and strong execution driving value accretive growth.

Speaker Change: <unk> core sales in North America were flat as modest growth in marking and coding was offset by a decrease in sales of packaging and color hardware equipment.

Speaker Change: In Western Europe, we also saw moderate declines in sales of packaging and color hardware equipment.

Demand for water analytics and treatment with steady in western Europe across both municipal and industrial customers.

Fourth quarter sales into high growth markets were up 2% year over year as low single digit growth in Latin America, and strong double digit growth in the middle East and India, offset a 3% decline in China.

Samir: I'll begin with our consolidated results for the fourth quarter on slide eight. Fourth quarter net sales grew 3.3% on a year-over-year basis to $1.29 billion, our core sales were up 1.7 percent, and Currency Contributed 1.6%. We continue to execute well on pricing, which contributed 3% to sales growth in the fourth quarter over the prior year period. You can see this benefit in gross profit, which increased 5% on a year-over-year basis. $746 million.

Speaker Change: For the full year, we delivered growth across the three regions led by 4% growth in North America, and two 5% growth in Western Europe.

Speaker Change: These two regions represent more than two thirds of our total sales.

Speaker Change: Sales into high growth markets were up 1% in 2023 with strong growth in Latin America, the middle Eastern India more than offsetting a high single digit decline in core sales year over year in China.

Samir: Gross margin was 57.9%, up 90 basis points from the prior year fourth quarter; adjusted operating profit increased 5% year-over-year, and Adjusted Operating Profit Margin expanded 50 basis points to 23.8%. As Jennifer mentioned, further devaluation of the Argentine peso was a significant headwind that we offset in Q4. Late in the fourth quarter, the Argentine peso declined by more than 50% relative to the U.S

Speaker Change: That concludes my opening remarks and at this time I'll turn the call over to Samir for a detailed review of our fourth quarter financial performance.

Samir: Thanks, Jennifer and good morning, everyone.

Samir: I'll begin with our consolidated results for the fourth quarter on slide eight.

Samir: Fourth quarter net sales grew three 3% on year over year basis to $1 9 billion.

Samir: Our core sales were up one 7%.

Samir: And currency contributed one 6%.

Samir: This reduced the value of our cash on hand in the region and led to a significant decline in the order in the PQI segment, on a year-over-year basis. The impact to the fourth quarter was $17 million, which is 130 basis points to our total adjusted operating profit margin, and for the full year, it was a $29 million headwind, or 55 basis points headwind to the adjusted operating profit margin. We ended 2023 with approximately $15 million of cash and $5 million of accounts receivable in Argentina. We continue to evaluate options to mitigate the impact of further devaluation while serving the needs of our customers in the country. The net EPS impact from the Argentine peso devaluation was approximately three cents in the fourth quarter.

Samir: We continued to execute well on pricing, which contributed 3% to sales growth in the fourth quarter over the prior year period.

Samir: You can see this benefit in our gross profit.

Samir: Increased 5% on a year over year basis to $746 million.

Samir: Gross margin was 57, 9%.

Samir: 90 basis points from the prior year fourth quarter.

Samir: Adjusted operating profit increased 5% year over year.

Samir: And adjusted operating profit margin expanded 50 basis points to 23, 8%.

Samir: As Jennifer mentioned further devaluation of the Argentine peso was a significant headwind that would be offset in Q4.

Samir: Late in the fourth quarter, the Argentine peso declined by more than 50% relative to the U S. Dollar.

Samir: This reduced the value of our cash on hand in the region and led to a significant chunk quarter in the <unk> segment.

Samir: Despite this headwind, we delivered adjusted earnings per share of 87 cents in the fourth quarter, up 9% year over year and 3 cents above the high end of our adjusted EPS guidance range. We also delivered strong cash conversion in the quarter. We generated $241 million of free cash flow, representing free cash flow conversion of 121 percent. Moving to the next chart, we cover the segment highlights, starting with water quality.

Samir: On a year over year basis.

Samir: The impact of the fourth quarter was $17 million.

Samir: 130 basis points to our total adjusted operating profit margin.

Samir: And for the full year, it was $29 million headwind.

Samir: Our 55 basis points headwind to the adjusted operating profit margin.

Samir: We ended 2023 with approximately $15 million of cash and $5 million of accounts receivable in Argentina.

Samir: Our water quality segment delivered $782 million in sales, up 3.4 percent on a year-over-year basis. Currency was a 1.3% benefit, and core sales grew just over 2% year-over-year as compared to 9.5% core growth in the prior year period, bringing the two-year core growth stack for water quality to about six percent. Pricing contributed 4.2% to core sales growth in Q4 2023. We continue to see strong demand for our water treatment solutions with steady growth across industrial markets at Chemtree and high demand for Trojan's UV systems in both municipal markets and in the semiconductor industry, where the manufacturing of chips requires ultra-pure water, and in water analytics. As expected, we experienced lower year-over-year demand in China, where municipal budgets continue to be impacted by reductions in government funding.

Samir: We continue to evaluate options to mitigate the impact of further devaluation, while serving the needs of our customers in the country.

Samir: The net EPS impact from the Argentine peso devaluation was approximately three <unk> in the fourth quarter.

Samir: Despite this headwind we delivered adjusted earnings per share of <unk> 87 in the fourth quarter.

Samir: Up 9% year over year, and <unk> <unk> above the high end of our adjusted EPS guidance range.

Samir: We also delivered strong cash conversion in the quarter.

Samir: We generated $241 billion of free cash flow.

Samir: Representing a free cash flow conversion of 121%.

Samir: Moving to the next chart.

Speaker Change: I'll cover the segment highlights.

Speaker Change: With water quality.

Speaker Change: Our water quality segment delivered $782 million of sales.

Speaker Change: Three 4% on a year over year basis.

Speaker Change: Currency was a one 3% benefit.

Speaker Change: Core sales grew just over 2% year over year as compared to 95% core growth in the prior year period.

Samir: On a positive note, sequential sales for water analytics in China have been consistent now for three consecutive quarters. Adjusted operating profit increased 9% year-over-year, and margins were up 150 basis points to 26%. The increase in profitability was across all key businesses in the water quality segment and primarily reflects strong pricing execution and improved operating productivity. For the full year, Water Quality delivered steady, profitable growth, with core sales of 5% and an adjusted operating profit margin of 80 basis points to 24.5%. As Jennifer mentioned, 2023 marked a record year for water quality, with sales exceeding $3 billion and adjusted operating profit of $746 million, both all-time high levels on an annual basis. Moving to the next page.

Speaker Change: Bringing the two year core growth stack for water quality to about 6%.

Speaker Change: Pricing contributed four 2% to core sales growth in Q4 2023.

Speaker Change: We continue to see strong demand for our water treatment solutions with steady growth across industrial markets that country and high demand or Trojans UV systems in both municipal markets.

Speaker Change: And in the semiconductor industry.

We are manufacturing of chips requires ultra pure water.

Speaker Change: And in water analytics as expected, we experienced lower year over year demand in China we.

Speaker Change: We had municipal budgets continue to be impacted by reductions in government funding.

Speaker Change: On a positive note sequential sales for water analytics in China have been consistent now for three consecutive quarters.

Speaker Change: Adjusted operating profit increased 9% year over year with margins up 150 basis points to 26%.

Samir: Our PQI segment delivered sales of $506 million in the fourth quarter, up 2.9% versus the prior year period. Currency was a 1.8% benefit, for sales grew 1.1%, as a 1.8% benefit from pricing more than offset modest volume declines from the prior year quarter, primarily related to the CPG market. While still down year over year, demand from CPG customers steadily improved during the quarter and came in better than our guidance assumption. Additionally, sales-hindered China came in better than anticipated, up 1% over the prior year quarter. From a product perspective, core sales in both marketing and coding solutions and packaging and color solutions grew in line with the segment at about 1% year-over-year. TQI's recurring sales grew mid-single digits year-over-year, with growth across every major product line, and Encouraging Science, we continue to see signs of sequential stabilization across PQIs and markets, led by increased demand from our food and beverage customers. That's it.

Speaker Change: The increase in profitability was across all key businesses in the water quality segment.

And primarily reflects strong pricing execution and improved operating productivity.

Speaker Change: For the full year water quality delivered steady profitable growth.

With core sales up 5% and adjusted operating profit margin up 80 basis points to 24, 5%.

Speaker Change: As Dennis mentioned 2023 marked a record year for water quality with sales over $3 billion and.

Speaker Change: <unk> operating profit of $746 million.

Speaker Change: Both all time high levels on an annual basis.

Speaker Change: Moving to the next page.

Speaker Change: Our <unk> segment delivered sales of $506 million in the fourth quarter.

Up two 9% versus the prior year period.

Speaker Change: Currency was a one 8% benefit.

Speaker Change: Core sales grew one 1%.

Speaker Change: As one 8% benefit from pricing more than offset modest volume declines from the prior year quarter.

Speaker Change: Similarly related to CPG markets.

Speaker Change: While still down year over year demand from CPG customers steadily improved during the quarter.

Speaker Change: And came in better than our guidance assumptions.

Speaker Change: Additionally, sales into China came in better than anticipated.

Samir: We are still in the early stages of recovery here and are cautiously optimistic about CPG volumes as we begin 2024. PQI's adjusted operating profit was $123 million in the fourth quarter, resulting in an adjusted operating profit margin of 24.3 percent. These results include the unfavorable impact of the devaluation of the Argentine peso.

Speaker Change: Up 1% over the prior year quarter.

Speaker Change: From a product perspective.

Speaker Change: Core sales in book, marking and coding solutions and packaging and color solutions grew in line with the segment at about 1% year over year.

Speaker Change: <unk> recurring sales grew mid single digits year over year.

Speaker Change: With growth across every major product line.

Speaker Change: Encouraging sign.

Speaker Change: We continue to see signs of sequential stabilization across <unk> end markets.

Samir: That impact resulted in 330 basis points of headwind to adjusted operating profit margin on a year-over-year basis for the fourth quarter, and 145 basis points had been for the full year, excluding the impact from the Argentine case of devaluation. For the fourth quarter, TQI's underlying operating profit grew low double digits year over year, and Adjusted Operating Profit Margin expanded to about 28%. And for the full year, PQI's underlying profit grew in the high single digits on flat sales, and adjusted operating profit margin expanded to about 27%. Strong pricing execution and benefits from cost optimization actions were the primary drivers of improved underlying profit and margin performance. For the full year, PQI's sales and profitability were essentially flat year over year.

Speaker Change: By increased demand from our food and beverage customers.

Speaker Change: That said.

Speaker Change: We are still in the early stages of recovery here.

Speaker Change: And are cautiously optimistic about CPG volumes as we begin 2024.

Speaker Change: <unk> adjusted operating profit was $123 million in the fourth quarter.

Speaker Change: Resulting in a.

Speaker Change: Adjusted operating profit margin.

Speaker Change: 24, 3%.

Speaker Change: These results include the unfavorable impact from the devaluation of the Argentine peso.

Speaker Change: That impact resulted in 330 basis points of headwind to adjusted operating profit margin on a year over year basis for the fourth quarter.

Speaker Change: And a 145 basis points headwind to the full year.

Speaker Change: Excluding the impact from the Argentine peso devaluation.

Speaker Change: For the fourth quarter <unk> underlying operating profit grew low double digits year over year.

Samir: A great result considering the significant headwinds from de-stocking at lower volumes at consumer packaged goods customers, a challenging economy in China, and the currency devaluation in Argentina. The teams within the PQI segment were able to withstand these headwinds to turn in a great result for 2023, with positive momentum building as we enter 2024. Turning now to our balance sheet and cash flow. During the quarter, we generated $263 million of cash from operations and invested $22 million in capital expenditures.

Speaker Change: And adjusted operating profit margin expanded to 28%.

Speaker Change: And for the full year <unk> underlying profit grew in the high single digits on flat sales.

Speaker Change: And adjusted operating profit margin expanded to about 27%.

Speaker Change: <unk> pricing execution and benefits from cost optimization actions.

Speaker Change: Primary drivers of improved underlying profit and margin performance.

Speaker Change: For the full year <unk> sales.

Speaker Change: Sales and profitability were essentially flat year over year.

Speaker Change: Great result, considering the significant headwinds from.

Speaker Change: Destocking and lower volumes at consumer packaged goods customers.

Samir: Pre-Cash for Awards $241 million in the quarter, resulting in free cash flow conversion of 121%; this quarter again demonstrates the strong free cash flow generation capabilities of a business. Note that we did not have any cash payments related to interest costs in Q4 2023. Beginning in 2024, we will have interest payments in the first and third quarters. At year-end, gross debt was $2.6 billion, and cash on hand was $762 million.

Speaker Change: Challenging economy in China and.

Speaker Change: And the currency devaluation in Argentina.

Speaker Change: The teams within the <unk> segment, we are able to withstand these headwinds to turned in a great result for 2023, but positive momentum building as we enter 2024.

Speaker Change: Turning now to our balance sheet and cash flow.

Speaker Change: During the quarter, we generated $263 million of cash from operations and invested $22 million and capital expenditures.

Speaker Change: Free cash flow was.

$241 billion into quarter.

Speaker Change: Resulting in free cash flow conversion of 121%.

Samir: Net debt was $1.9 billion, resulting in net leverage of one and a half times. In summary, we further 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. Our bias, as you know, is to drive compounding growth in earnings and cash flow through investment 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. In line with the capital allocation framework, we declared a cash dividend of $0.09 per share for the fourth quarter. Turning now to our guidance for 2024, beginning with their expectations for the full year. We expect core sales to grow at a low single digit rate on a year-over-year basis.

Speaker Change: This quarter again demonstrates the strong free cash flow generation capabilities of our businesses.

Speaker Change: Note that we did not have any cash payments related to interest costs in Q4 2023.

Speaker Change: Beginning in 2024, we will have interest payments in the first and third quarter.

Speaker Change: At year end gross debt was $2 6 billion and cash on hand was $762 million.

Speaker Change: Net debt was $1 9 billion, resulting in net leverage of one five times.

Speaker Change: In summary, we further strengthened our financial position during the quarter and have ample liquidity.

Speaker Change: This gives us flexibility in how we deploy capital to create long term shareholder value.

Speaker Change: Our bias as you know is to drive compounding growth in earnings and cash flow.

Speaker Change: Through investment and higher ROIC, the organic growth opportunities.

Samir: This assumes low single-digit growth across both of our sectors. We're targeting 100 to 200 basis points of price, consistent with historical pre-pandemic levels. Our guidance assumes corporate and other expenses of about $100 million, reflecting the full annual run rate of San Juan cars, looking at Adjusted Operating Profit Margin. We are targeting 50 to 75 basis points of improvement this year.

Speaker Change: Lined with secular growth drivers in both of our businesses and strategic acquisitions that drive long term value creation.

Speaker Change: Within our framework we are.

Speaker Change: Also maintain flexibility to return capital to shareholders.

Speaker Change: In line with our capital allocation framework.

Speaker Change: Declared a cash dividend.

Speaker Change: Nine cents per share for the fourth quarter.

Speaker Change: Turning now to our guidance for 2024.

Speaker Change: Beginning with our expectations for the full year.

Speaker Change: We expect core sales to grow low single digit on a year over year basis.

Speaker Change: This assumes.

Samir: 65 to 90 basis points of operating profit margin improvement across the businesses and approximately 25 basis points benefit from lower exposure to the Argentine peso. These benefits more than offset a 40-point headwind from the full run rate level of corporate and standalone company expenses. Adjusted EPS guidance for the full year 2024 is in the range of $3.20 per share to $3.30 per share, and this assumes an effective tax rate around 25 percent.

Speaker Change: Low single digit growth across both of our segments.

Speaker Change: We are targeting 100 to 200 basis points of price.

Speaker Change: Consistent with historical pre pandemic levels.

Speaker Change: Our guidance assumes corporate and other expense of about $100 million.

Speaker Change: The full annual run rate of stand alone costs.

Speaker Change: Looking at adjusted operating profit margin.

Speaker Change: We are targeting 50 to 75 basis points of improvement this year.

Speaker Change: This assumes.

Speaker Change: 65% to 90 basis points of operating profit margin improvement across the businesses and.

Samir: From a sequential perspective, our guidance assumes that year-over-year core sales growth steadily improves quarter-to-quarter through 2024, with core sales growth in the first half of the year relatively flat, and core sales growth in the second half, up low to mid-single digit. Looking now at Q1 2024, we expect core sales to be approximately flat year over year, at segment level.

And approximately 25 basis points benefit from lower exposure to the Argentine peso.

Speaker Change: These benefits more than offset a 40 point headwind from the full run rate level of corporate and Standalone company expenses.

Speaker Change: Alright, adjusted EPS guidance for the full year 2024 is in the range of $3 20 per share to $3 30 per share.

Samir: We expect core sales and water quality to be flat to modestly positive, and Corsailton PQI to be flat to modestly negative. As a reminder, water quality core sales growth was 11% in Q1, 2023, resulting in a tough year-over-year comparison. Additionally, pruning of the portfolio, which resulted in the shutdown of small product lines and water quality, represents 60 basis points of headwind to core sales growth for the segment in the quarter. We anticipate adjusted operating profit margin in the range of 23 to 23.5 percent, and our Q1 2024 guidance for adjusted EPS is $0.73 to $0.78 per share. That concludes my prepared remarks. At this time, I'll turn the call back to Jennifer for closing remarks before we open up the call for questions. Thanks, Amir.

Speaker Change: This assumes an effective tax rate around 25%.

Speaker Change: From a sequential perspective, our guidance assumes that year over year core sales growth steadily improved quarter to quarter through 2024.

Speaker Change: With core sales growth in the first half of the year relatively flat.

Speaker Change: And core sales growth in the second half.

Speaker Change: Low to mid single digits.

Speaker Change: Looking now at Q1 2024.

Speaker Change: We expect core sales to be approximately flat year over year.

Speaker Change: At segment level.

Speaker Change: We expect core sales in water quality to be flat to modestly positive.

Speaker Change: And core sales in <unk>.

Speaker Change: To be flat to modestly negative.

Speaker Change: As a reminder.

Speaker Change: Water quality core sales growth was 11% in Q1 2023.

Speaker Change: The resulting in a tough year over year comparison.

Speaker Change: Additionally, pruning of the portfolio, which have resulted in the shutdown of small product lines and water quality.

Jennifer: In summary, we successfully executed our spinoff from Danaher and are off to a great start as a public company. In 2023, we delivered 2.6% core sales growth. 50 points of adjusted operating profit margin expansion and 109% free cash flow conversion. Solid operating results amid a dynamic macro backdrop and against a tough comparison relative to 2022. Going forward, we are focused on delivering our commitments, driving continuous improvement, and executing disciplined strategic capital allocation that creates long-term value for shareholders. As an independent company, we are benefiting from increased operational focus, with 100% of our capital available for strategic growth and value creation. We are confident that the durability of our businesses, 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, the proven value creation playbook powered by VES, and the strength of our balance sheet differentiates Veralto and positions us to deliver sustainable, long-term shareholder value.

Speaker Change: Representing 60 basis points headwind to core sales growth for the segment in the quarter.

Speaker Change: We anticipate adjusted operating profit margin in the range of 23 to 23, 5%.

Speaker Change: And our Q1 2024 guidance for adjusted EPS is <unk> 73 to <unk> 78 per share.

Speaker Change: That concludes my prepared remarks and.

Speaker Change: At this time.

Speaker Change: Turn the call back to Jennifer for <unk>.

Jennifer: Closing remarks, before we open up the call for questions.

Speaker Change: Yes.

Jennifer: Zamir in summary, we successfully executed our spinoff from Danaher and are off to a great start as a public company.

Jennifer: In 2023, we delivered two 6% core sales growth.

<unk> 50 points of adjusted operating profit margin expansion and 109% free cash flow conversion solid operating results amid a dynamic macro backdrop and against a tough comparison relative to 2022.

Jennifer: Going forward, we are focused on delivering our commitments driving continuous improvement and executing disciplined strategic capital allocation that creates long term value for shareholders.

Jennifer: As an independent company, we are benefiting from increased operational focus with a 100% of our capital available for strategic growth and value creation.

Jennifer: We are confident that the durability of our businesses 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.

Operator: 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, 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 are happy to take your questions. At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2.

Jennifer: The combination of our leading brands.

Jennifer: Proven value creation playbook powered by Ges and the strength of our balance sheet differentiates for alto and positions us to deliver sustainable long term shareholder value.

Jennifer: And as we look to build our future we are unified and inspired by our shared purpose safeguarding the world's most vital resources.

Jennifer: 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 enduring impact our environment.

Scott Reed Davis: Once again, that is the star and one to ask a question. We will pause for a moment to allow questions to queue, and we'll take our first question from Scott Davis with Mellius Research. Your line is open. Hey, good morning, everyone.

Speaker Change: That concludes our prepared remarks I want to thank you again for joining our call and at this time, we are happy to take your questions.

Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing star two.

Jennifer: Morning, Scott. Thank you. Looks like China is still a little bit sloppy for you guys. It has been for everybody else, too, so not a big surprise. But any color on what your folks there are telling you?

Speaker Change: Once again that is star one to ask a question, we will pause for a moment to allow questions to queue.

Speaker Change: And we'll take our first question from Scott Davis with Melius Research. Your line is open.

Jennifer: sense of if we're closing in on a bottom here or what you think the next couple quarters on a sequential ramp? Yeah, I mean, I think in the fourth quarter, China came in a little bit better than we were anticipating. We saw some nice growth in our Trojan UV systems, really related to semiconductor chip manufacturing. We did anticipate municipal markets to be down, and as expected, they were year over year, but we have now seen three quarters of consecutive stability in that market. I think going forward in 2024, you know, I think we're pretty much near the bottom, and we anticipate steady sequential performance improvement stability for the second half of 2024. So, a little bit more of the same.

Scott Davis: Hey, good morning, everyone.

Scott Davis: Good morning, Scott.

Scott Davis:

Scott Davis: It looks like China is still a little bit sloppy for you guys. It has been for everybody else too so not a big surprise, but any any color what's your folks they're telling you any.

Scott Davis: Sense of if we're closing in on a bottom here or what you think in the next couple of quarters on a sequential ramp.

Scott Davis: Yeah, I mean I think.

Scott Davis: In the fourth quarter, China came in a little bit better than how we were anticipating we saw some nice growth in our Trojan Ub systems really related to semiconductor chip manufacturing.

Scott Davis: Did anticipate municipal markets to be down and as expected they were a year over year, but we have seen now three quarters.

Scott Davis: Second is.

Scott Davis: Stability in that market I think going forward in 2024.

Scott Davis: <unk>.

Scott Davis: I think where we're pretty much near the bottom and we anticipate steady sequential performance improvements stability for the second half of 2024, so a little bit more of the same.

Jennifer: We'll see year-on-year sales decline during the first half, which we expect to improve throughout the balance of the year. Yeah, Scott, maybe I can just add from the guide perspective, the Bayview model in China is effectively, as Jennifer said, you know, sequential improvement, but for the first half of the year, it's going to be a little bit of a headwind for us. And in the second half, it's going to start stabilizing and be a little positive. So, that's how we're going to think about China in terms of a guide. Okay, that was helpful.

Scott Davis: We will see year on year sales decline during the first half, which we expect to improve throughout the day.

Speaker Change: The balance of the year, Yes, Scott maybe I can just add from the guide perspective, the baby model China has effectively.

Scott Davis: As Jennifer said sequential improvement, but for the first half of the units going to be a little bit of headwind for us.

Scott Davis: And in the second half was kind of start stabilizing ambulant positive. So that's how we kind of think about China in terms of our guidance.

Samir: And then just changing gears, I know, I don't want to overread this, but Samir, in your prepared remarks, you just mentioned something about the potential for returning capital. Still, I would imagine the focus is around M&A. So, perhaps just an update on what you're thinking about the M&A pipeline and the likelihood or potential of transactions in 2024 and how you guys are feeling about that part of the equation. Thanks.

Speaker Change: Okay helpful. And then just changing gears I know I don't want to over read this that Sameer in your prepared remarks, you just mentioned something about returning potential for returning capital.

Speaker Change: Still I would imagine that focuses on around M&A. So.

Perhaps just an update on what youre thinking on an M&A pipeline and likelihood or potential transactions in 2024, and how you guys are feeling about that part of the.

Speaker Change: That part of the equation. Thanks.

Samir: Yeah, I think the return of capital to shareholders, you know, obviously we have an ongoing continued bias towards M&A. We did announce in the fourth quarter a nine cent dividend, but our pipeline for M&A and both water quality and PQI remains strong with the number of opportunities being considered. So we're going to maintain, as we said before, a disciplined approach that we've inherited from Danaher in terms of it's got to be the right market, the right company, at the right price. In terms of valuation, we do have a whole variety of different kinds of assets that we're looking at, but we do like targets that have a similar operating profile in terms of the durability of the business model.

Sameer: Yeah, I think the return to two of capital to shareholders. You know obviously, we have an ongoing continued bias towards M&A, we did announce in the fourth quarter, a 9% dividend.

Sameer: But our pipeline for M&A and both water quality PQ I remained strong with a number of opportunities being considered so we're going to maintain as we said before a disciplined approach that we've inherited from danaher in terms of it's got to be the right market. The right company at the right price in terms of valuation.

Sameer: Do have a whole variety of different kinds of assets that we're looking at but we do like targets that have similar operating profile in terms of the durability of the business model.

Operator: And we like businesses that we can improve in terms of margin expansion through the use of DVES. So yeah, we are fully committed to long-term shareholder value through capital deployment, will Freudian slip. Best of luck in 24 and congrats on the start.

And we like businesses that we can improve in terms of margin expansion through the use of DBS sorry, yes.

Sameer: So yeah. We are we are fully committed to.

Long term shareholder value through capital deployment.

Speaker Change: Freudian slip best of luck in 'twenty, four and congrats on the start see al. Thank you.

Scott Reed Davis: See y'all. Thank you. That's 23 years of Danaher coming through, Scott.

Speaker Change: That's 23 years at Danaher commentary Scott. Thank you.

Operator: And we'll take our next question from Dean Dre with RBC Capital Markets. Your line is open. Thank you. Good morning, everyone. Good morning, Dan.

Speaker Change: And we'll take our next question from Deane Dray with RBC capital markets. Your line is open.

Deane Dray: Thank you and good morning, everyone.

Deane Michael Dray: Hey, maybe we'll start with more of a housekeeping question just in terms of Veralto still being a new company. Can you characterize and frame some of the frictional costs that might still be running through the P&L, like transitional services, and I know you did some portfolio line shutdowns of that European filtration separation business? It really was an outlier in the portfolio, but it just kind of frames for us what might be those frictional costs that are there now and what the timing might be. Yeah, Dean, let me just start on the frictional cost stuff.

Deane Dray: Good morning, Dan.

Hey, maybe we start with more of a housekeeping question just in terms of we're also still being a new company.

Deane Dray: Can you characterize and frame some of the frictional cost that might still be running through the P&L like transitional services and I know you did some.

Deane Dray: Portfolio lines shut down of that European filtration separation business. It really wasn't an outlier in the portfolio but.

Deane Dray: Just kind of frame for us what might be those frictional costs that are there now and what the timing might be.

Speaker Change: Yes, Deane, let me just start with the frictional cost stuff like I think as we kind of say to the guide start in Q1, we should pretty much start seeing that run rate.

Samir: Like I think, as we kind of said in the guide, starting Q1, we should pretty much start seeing the run rate cost on the standalone company basis as well as the corporate function. So 100 million in the corporate and other that you have in the guide kind of really represents the run rate. So beyond that, there's no sort of major frictional cost. All the one-time costs are pretty much done as well. On the TSS side, Dean, as you said earlier, this was a pretty clean separation from a TSA perspective.

Speaker Change: Cost from the Standalone company basis Purcell as a corporate function. So 100 million in the corporate and other that you have in the guide kind of really represents the run rates all beyond that there's no sort of a major frictional costs on the one time costs are pretty much done as well on the TSA side Deane as you said earlier this was a pretty clean.

Speaker Change: <unk> separation.

Samir: So there's very minimal in terms of dollars, like surrounding errors. So I wouldn't think about any kind of remaining frictional cost per se. That's on the portfolio side, you know, and on the portfolio side, it's roughly 60 basis points impact, as we said, on the water quality side. So, again, you can do the math. It comes down to, you know, 15, 20 million kind of a headwind kind of actions that we took really cleaning up some of the product lines as we inherited some of the filtration assets from Danaher. As a good steward of capital, just sitting back and saying, hey, every product line has to earn its place in the portfolio, and some of the product lines and geography combinations just did not meet that hurdle. So we took some actions, but I know there's a continuous review, but are most of those cleanups done at this point?

Speaker Change: TSA perspective, so there's very minimal in terms of dollars slate.

Speaker Change: It's a rounding error, so I wouldn't think about any kind of any remaining frictional cost per se.

Speaker Change: That's part of your site.

Speaker Change: And on the portfolio side, its up a 60 basis points impact as we said on the on the water quality side. So again, you can do the math it comes down to 15 to 20 million kind of a headwind kind of actions that we took really cleaning of the some of the product lines as we inherited some of the filtration assets from Danaher.

Speaker Change: As a good stewards of capital just sitting back, saying, Hey every product line has to earn its place in the portfolio.

Speaker Change: And some of the product lines and geography combinations just.

Speaker Change: Did not meet the hurdles that we took some actions but that was minor.

Speaker Change: Regular portfolio cleanup frankly.

Speaker Change: I know there is a continuous review.

Speaker Change: But most of those cleanups Don at this point.

Jennifer: Yeah, I mean, the two minor strategic actions we took amounted to about $20 million in annual revenue. We look at the portfolio on an ongoing basis, and I would say that there's nothing material that needs to be done from a transformation standpoint, but we will continue to sort of prune and invest as appropriate where we see the growth opportunities and the required return on investment. And then just a second question, but a bit related, you mentioned filtration. I'd be interested in hearing a bit about Aria Filtra.

Speaker Change: Yeah, I mean, the two minor strategic actions, we took amounted to about $20 million in annual revenue.

Speaker Change: We look at the portfolio on an ongoing basis and I would say that there's nothing material.

Speaker Change: That needs to be done from a transformation standpoint, but we will continue to sort of prune and invest as appropriate where we see the growth opportunities and the required return on investment.

Speaker Change: Great and then just second question.

Speaker Change: A bit related you mentioned filtration I'd be interested in hearing a bit about RF filter I mean, this was a fabulous brand within Dan of her as Pall water one of the leaders and membrane filtration, just give us a sense of where and how are you positioning this business and for Ralph.

Jennifer: I mean, this was a fabulous brand within Danaher, as Paul Water, one of the leaders in membrane filtration. Just give us a sense of where and how you are positioning this business in Veralto, either strategically in terms of what end markets and what opportunities for growth do you have? Yeah, you bet. Well, as you cited there, the ARIA filter business is the rebranded Paul Water business, and we've actually shifted how we're investing in this business.

Speaker Change: Either strategically kind of what end markets and what opportunities for growth do you have.

Speaker Change: Yeah, you bet, whereas you cited there the the RF filter business is the rebranded Pall water business and we've actually.

Speaker Change: Pivoted, how we're investing in this business.

Jennifer: We're seeing very strong demand, particularly in critical applications for drinking water and potable reuse. So, when it comes to recycling reclaim, it's an essential technology, and certainly in the macro, that's becoming a more important part of water conservation. But we have repositioned this product line to allocate resources to the highest return opportunities with more focus on North America and additional investments in mobile water treatment. Great, thank you. You bet. And we'll take our next question from Andy Kaplowitz with Citigroup. Your line is open. Good morning, everyone. Good morning, Andy.

Speaker Change: We're seeing very strong demand, particularly in critical applications for drinking water in potable reuse.

Speaker Change: So when it comes to recycle reclaim its an essential technology and certainly in the macro that's become a more important part of water conservation.

Speaker Change: But we have repositioned this product line to allocate resources to highest return opportunities with more focus in North America and additional investments in mobile water treatment.

Speaker Change: Great. Thank you.

Speaker Change: You bet.

Speaker Change: And we'll take our next question from Andy Kaplowitz with Citigroup. Your line is open.

Andrew Alec Kaplowitz: Good morning, everyone.

Andrew Alec Kaplowitz: Good morning, Andy.

Andrew Alec Kaplowitz: Jennifer, and Samir, can you give us more color on what you're seeing in product quality focus markets? I think you had gotten to downloading mid-single digits in Q4, yet, as you said, you came in over 1% core growth, and core growth accelerated relatively significantly versus Q3. We know comparisons are a bit easier, but you did mention early signs of recovery, particularly with food and beverage packaging customers. So could you elaborate on what you're seeing?

Andrew Alec Kaplowitz: Jennifer Samir can you give us some more color into what youre seeing in product quality focus markets. I think you had guided to downloading mid single digits in Q4, yet as you said you came in over 1% core growth in corporates accelerated relatively significantly versus Q3, we know comparisons are a bit easier, but you did mentioned the early signs of recovery, particularly in food and beverage.

Andrew Alec Kaplowitz: <unk> customers. So could you elaborate on what you are seeing have you seen continued recovery as we started Q1 here and I know you suggested low single digit growth for this segment at 24 is it just a tough comparison that is leading you to guide to flat to down for Q1.

Jennifer: Have you seen continued recovery as we started Q1 here? And I know you suggested low single-digit growth for the segment 24. Is it just a tough comparison that is leading you to guide to flat to down for Q3? Yeah, so thank you for the question. You know, I think what we said here as we came out of Q3 was that customer destocking had largely been completed. We are 75% direct to customers, a short cycle business, so we don't have a lot of inventory sitting in a lot of intermediary depots.

Speaker Change: Yeah. So thank you for the question I.

Speaker Change: I think what we said here as we came out of Q3 that customer Destocking has largely been completed.

Speaker Change: We are 75% direct your customers short cycle business. So we don't have a lot of inventory sitting on a lot of intermediary depots.

Jennifer: But what we did see in Q4 was the sales of PQI consumables by way of ink, solvents, and spare parts growing mid-single digits year over year, and we're also hearing from customers in the market that some of the leading indicators have turned positive. Now, this is predominantly in certain sectors of the food and beverage markets, but as price and volume in consumer packaged goods and groceries and the like start to rebalance, those lines are coming back online, and we're starting to see some of that volume start to increase as that equation rebalances. So we do think that, you know, we'll continue to see a steady sequential recovery over the course of the year, but I think we're being prudent and modestly optimistic about how to think about that. And Andy, if I can add this, make a couple of comments as it relates to the guide.

But what we did see in Q4 as the sales of PQ I consumables by way of ink solve it will spare parts growing mid single digits year over year.

Speaker Change: And we're also hearing from customers in the market that the lead some of the leading indicators have turned positive. This is predominantly in certain sectors of the food and beverage markets.

Speaker Change: But as price and volume and consumer packaged goods groceries in the like start to rebalance.

Those lines are coming back online and we're starting to see some of that volume.

Speaker Change: Start to increase.

Speaker Change: Has that equation rebalancing so we.

Speaker Change: We do think that we'll continue to see a steady.

Speaker Change: Sequential recovery over the course of the year, but I think we're being prudent and modest modestly optimistic about how to think about that.

Speaker Change: If I can I'd just add a couple of comments as it relates to the guide.

Samir: We expect steady recovery in the CPG market sequentially, but overall, we are being cautious as we look at the commentary from the CPG customers and also what we are seeing in the channel. So from an overall year perspective, we are modeling in low single-digit core growth for the business. But volume is going to be a tale of two halves.

Speaker Change: We expect steady recovery in the CPG market sequentially, but overall being.

Speaker Change: Our cautious as we kind of look at the commentary from the CPG customers and also what youre seeing in the in the channels. So from a overall year perspective, we are modeling in low single digit core growth for the business.

Speaker Change: And but the volume is going to be a tale of two halves effectively at this point from a guide perspective, you're modeling and low single digit kind of a decline in the volume side and that's going to that essentially means accelerating into positive low single digits in the second half on gradual market recovery. So that's how we kind of modeling it to the guide.

Samir: Effectively, at this point, from a guide perspective, we're modeling in a low single-digit kind of decline in the volume side, and that essentially means accelerating into positive low single digits in the second half on gradual market recovery. So that's how we're kind of modeling it in the guide. Okay, very helpful.

Jennifer: And then maybe a similar question on the water quality side. It was also better than you got in Q4, but it still has been slowing a bit year over year. You know, comps are getting a little easier. So are you still seeing some reticence on the part of U.S. municipal customers? You know, I guess it's more focused on HAWQ there, but is it really China just slowing you down for HAWQ? Or, you know, what's going on in the U.S.

Speaker Change: Okay very helpful. And then maybe a similar question on the water quality side. It was also better than your guide in Q4, but still have been slowing a bit year over year.

Speaker Change: Comps are getting a little easier. So are you still seeing some reticence on the part of U S municipal customers I guess, it's more focused on hot there, but is it really China, just slowing you down for acre.

Speaker Change: What's going on in the U S and do you have visibility toward water quality getting back overall mid single digit levels of growth at some point in 'twenty four.

Jennifer: And do you have visibility toward water quality getting back overall to mid-single-digit levels of growth at some point in 2024? Yeah, I mean, you cited the comp challenge, right? I think the first quarter here is the last of our really tough comps on a year over year comparative basis. But in North America, you know, we saw nice growth and continue to see nice growth for demand for our UV Trojan systems. And this is particularly related to reuse treatment for potable water.

Speaker Change: Yeah, I mean, you cited the.

Speaker Change: Comp challenge right I think in first first quarter here is the last of our really tough comps on a year over year comparative basis, but in North America.

Speaker Change: We saw a nice growth and continue to see nice growth for demand of our UV Trojan systems.

Speaker Change: And this is particularly related to reuse treatment for potable water.

Jennifer: We see demand for analytics steady on a year over year basis, and it's, you know, saw some increase sequentially from Q3 to Q4. Europe, we see steady demand there coming out of Q4. I do think China is still a little bit suppressed in terms of its demand, although we're seeing sequentially stable demand throughout the third quarter here.

Speaker Change: We see demand for analytics.

Speaker Change: Steady on a year over year basis, and ex SaaS or increase sequentially.

Speaker Change: Sequentially from Q3 to Q4 Europe, you know, we see steady demands there coming out of Q4, I do think China is still a little bit suppressed in terms of its demand.

Speaker Change: Although we are seeing a sequentially stable.

Speaker Change: Demand.

Speaker Change: Throughout the third quarter here year over year demand was down in China, just stood at lower government funding relative to 2022, but we're cautiously optimistic about the sequential improvement over the course of the coming quarters.

Samir: Year-over-year demand was down in China just due to lower government funding relative to 2022, but we're cautiously optimistic about the sequential improvement over the course of the coming quarters in China. We don't think it's going to get any worse, and we had a positive start here in January right out of the gate. So it's a little bit variable across the geographies, but we see good demand for where investments are happening. Yeah, and Andy, just one quick point I would add to that is, as you think about water quality in Q1, it's a very tough comp, as Jennifer just mentioned. And also, you know, most of our portfolio does not have any seasonality, but water quality is one where we do see a little bit.

In China, we don't think it's going to get any worse and we've had a positive start here in January right out of the gate. So.

Speaker Change: It's a little bit variable costs across the geographies, but we.

Speaker Change: We see we see good demand for where investments are happening yeah.

Speaker Change: And Andy just sell one.

Andrew Alec Kaplowitz: One quick.

Point I would add to that is as you kind of think about water quality into Q1 is it a very tough comp as Jennifer just mentioned and also.

Andrew Alec Kaplowitz: Most of our portfolio does not have any seasonality, but water quality is one where we do see a little bit Q4 tends to be strong.

Samir: Q4 tends to be strong as the budgets, you know, are finishing up, and the municipalities and similar institutions kind of make decisions. Q1, at the beginning of the year, people are a little reticent to how they kind of think about spending on the budget. So there's a little bit of a seasonal element to water quality, not a whole lot, but that's something to keep in mind as well.

Andrew Alec Kaplowitz: As the budgets.

Andrew Alec Kaplowitz: Sure.

Andrew Alec Kaplowitz: The municipalities and similar institutions, making decisions Q.

Andrew Alec Kaplowitz: Q1.

Andrew Alec Kaplowitz: At the beginning of the year people are a little reticent to how would you kind of think about spending on the budget. So there's a little bit of seasonal seasonal element into water quality is not a whole lot, but that's something to keep in mind as well and thats kind of baked into the Q1 guide.

Michael Patrick Halloran: And that's kind of baked into the Q1 guide. Appreciate the detail. And we'll take our next question from Mike Halloran with Baird. Your line is open. Good morning, everyone.

Speaker Change: I appreciate the detail.

Speaker Change: And we'll take our next question from Mike Halloran with Baird. Your line is open.

Michael Patrick Halloran: Hey, good morning, everyone.

Michael Patrick Halloran: Good morning, Mike.

Samir: Maybe we could have a similar conversation about how you're thinking about the margins, you know, given the separation and moving pieces around everything. How do you think about the jump-off point into 24 from a margin level? Is the fourth quarter, if you adjust for the deval, the right way to think about the two segments? And then how do you think about cadencing through the year in 2024 to just kind of follow that revenue pattern you were talking about? Is there another pattern to think about?

Michael Patrick Halloran: Maybe we could have a similar conversation and how you're thinking about the margins.

Michael Patrick Halloran: Given the separation and moving pieces around everything how do you think about the jump off point into 'twenty four from a margin level as the fourth quarter. If you adjust for the <unk> the right way to think about the two segments.

Michael Patrick Halloran: And then how do you think about cadence through the year in 2024. So just kind of follow that revenue pattern. You were talking to was there a different pattern to think about.

Samir: Yeah, Michael, I'll take that one. As you go to look at the margin profile, you know, we had a pretty strong finish to Q4, but as you move from Q4 into 2024, for the full year, we expect to deliver 50 to 75 basis points, but it's going to be a sort of sequential improvement through the year. In Q1, as you can imagine, we're probably going to probably see the biggest impact of the run rate of the stand-up and corporate costs. So that's going to have a tough comparison in Q1 on a year-over-year basis.

Speaker Change: Yeah, Mike I'll take that one is it going to look at the margin profile.

Speaker Change: A pretty strong finish to Q4, but as we kind of move from Q4 into inventory 24 for the full year, we expect to deliver $50 to 75 basis points, but it's going to be a sort of a sequential improvement through the year in Q1 as you can imagine we're going to probably see the biggest impact on our staff.

Speaker Change: The run rate of the standup and our corporate costs. So that's going to have a tough compare.

Speaker Change: In Q1 on a year over year basis, you're also making some select investments in both water quality side and <unk> side more oriented towards growth in the sales and marketing kind of initiatives, which are going to impact Q1, but overall as you kind of think about for the full year, we expect to deliver 50 to 75 basis points.

Samir: We're also making some select investments in both the water quality side and the PQI side, more oriented towards growth in the sales and marketing kind of initiatives, which are going to impact Q1. But overall, as you're going to think about for the full year, we expect to deliver 50 to 75 basis points of margin expansion, and that includes, you know, roughly $40 million in headwinds that are going to come from run rate corporate expenses and stand-up company costs. So, you know, 50 to 75 with a margin of error of roughly 40 basis points is how we're going to think about it. Okay, I might have missed this, and I appreciate that. What's the interest expense expected to be this year? Yeah, interest expense, you should think of, Mike, roughly $140 million on a run rate basis for us. That includes a little bit of a benefit from interest income, but overall, $140 is a good assumption for modeling purposes.

Speaker Change: Margin expansion and that includes roughly $40 million headwinds thats going to come from run rate corporate expenses and the standup company costs. So.

Speaker Change: 50 to 75 of the market with a fall through of roughly 40 basis points is how we think about it.

Speaker Change: Okay, and I might have missed this and I appreciate that.

Speaker Change: What's the interest expense is expected to be this year.

Speaker Change: Yes interest expense you should think of Mike roughly $140 million on a run rate basis for us that includes a little bit of a benefit from the interest income, but overall 140 is a good assumption for modeling purposes.

Samir: Great. I appreciate it. Thank you, everyone.

Speaker Change: Alright, great I appreciate it thank you everyone.

Nathan Hardie Jones: Thanks, bye. And we'll take our next question from Nathan Jones-Whitstiefel. Your line is open. Good morning, everyone.

Speaker Change: Thanks, Mike.

Speaker Change: And we'll take our next question from Nathan Jones with Stifel. Your line is open.

Nathan Jones: Good morning, everyone.

Nathan Jones: Good morning question question first on <unk> I think it makes sense that you would say the recovery in consumables.

Jennifer: Question first on PQI. I think it makes sense that you would see the recovery in consumables first. Can you talk a little bit about what would be a typical lag time before you start to see improvement on the equipment side from that improvement in consumables? Yeah, I think it's typically a couple of quarters. It certainly depends upon the individual company and customer, but generally, I would say that it's around two quarters.

Nathan Jones: Can you talk a little bit about what would be a typical lag time before you start to see improvement.

Nathan Jones: On the equipment side from that improvement in consumables.

Speaker Change: Yes, I think it's typically a couple of quarters.

Speaker Change: Certainly depends upon.

Speaker Change: The individual.

Speaker Change: Company and customer, but generally I would say that it's around two quarters.

Jennifer: Okay, and then I wanted to follow up on Dean's question about aria filtration. A couple of the comments that you made there sort of lead me to questions about the strategy there. Are we looking at some kind of outsourced water model, water as a service model, where you're kind of able to leverage the footprint you have in testing?

Speaker Change: Okay, and then I wanted to follow up on Dan's question about your filtration.

Speaker Change: A couple of the comments that you made there.

Speaker Change: It made me two questions about.

Speaker Change: The strategy there we're looking at some kind of outsourced water model water as a service model, where you're kind of able to leverage the footprint you have a testing.

Jennifer: to build that kind of a business. Is that the kind of thing that we're talking about with the change in strategy at that? No, I mean, certainly every business will take a look at its portfolio and position it to fully meet the needs of the customers and certainly aligned with where the opportunities are. That is not currently in our purview, but it remains to be something that could conceivably be considered in the course of sort of moving the strategy along. Yeah, the strategy point, Nathan, is more around really focusing on geography and product combination. So this is not a complete wholesale change in strategy; just want to highlight that. And just the last one on price-cost, you said 100 to 200 basis points in 2024. Are you assuming that that's neutral to margins or slightly accretive to margins? No, I think overall, maybe slightly positive, Nathan.

Speaker Change:

Speaker Change: To build that kind of a business is up is that the kind of thing that we're talking about with the changing strategy at that business.

Speaker Change: Yeah, I mean, certainly every.

Speaker Change: Business will take a look at its portfolio and position it.

Speaker Change: To be.

Speaker Change: To fully meet the needs of the customers and certainly aligned with where the opportunities are.

Speaker Change:

Speaker Change: That is not currently in our per view.

Speaker Change: But.

Speaker Change: Remains to be something that could conceivably be considered in the courses of sort of moving the strategy along yes the strategy point.

Speaker Change: Nathan it's more around really focusing around geography product combination. So this is not the <unk>.

Speaker Change: <unk> wholesale change in strategy just want to highlight that.

Speaker Change: And just a last one on price cost you said 100 to 200 basis points.

Speaker Change: In 2024.

Speaker Change: Are you assuming that that is neutral to margins or slightly accretive to margins.

Speaker Change: No I think overall, maybe slightly positive Nathan I think when you look at overall contribution to the margin I think it's helpful to just have a look at holistic basis on a holistic basis it'll be 50 to 75 basis improvement in the margin is going to come through a combination of price and volume and.

Samir: I think when you look at overall contribution to the margin, I think it's helpful to just have a look at it on a holistic basis. On a holistic basis, it'll be a 50 to 75 basis improvement in the margin. It's going to come through a combination of price and volume, and frankly, some of the cost optimization initiatives, just as part of continuous improvement, are going to bake into that as well. So that'll result in a pretty healthy fall of 40%.

Speaker Change: Frankly, some of the call.

Speaker Change: Optimization initiatives, just as part of continuous improvement all kind of.

Speaker Change: Baked into that as well so that will result in a pretty healthy flow through of 40, 40%.

Samir: Awesome. Thanks very much for taking my question. Thank you. You bet.

Speaker Change: Awesome, Thanks, very much for taking my questions.

Thank you you bet.

Andrew Alec Kaplowitz: And once again, if you would like to ask a question, please press star and one on your telephone keypad. We'll take our next question from Andrew Krill with Deutsche Bank. Your line is open. Hey, thanks. Good morning, everyone.

Speaker Change: And once again, if you would like to ask a question. Please press star and one on your telephone keypad.

Speaker Change: We will take our next question from Andrew Krill with Deutsche Bank. Your line is open.

Andrew Alec Kaplowitz: Hey, Thanks, Good morning, everyone I wanted to go back to the one Q margin guide 23 to 23, 5%.

Samir: I wanted to go back to the 1Q margin guide of 23 to 23.5%. And just, you know, this seems like a pretty big step down sequentially versus the, you know, around 25% in 4Q if we add back the Argentina number. And I know, you know, I mentioned this isn't a very seasonal business, and there's a little bit more corporate costs, but just anything else going on sequentially and maybe any help by segment on margins? Yeah, Andrew, maybe I'll take that one. As you're going to look at the sequential margin, you know, specific to Q1, there are really three things at play. The first one is the ramp-up of the standalone company costs and corporate costs.

Andrew Alec Kaplowitz: And just just seems like a pretty big step down sequentially versus the around 25% in <unk>. If we add back the Argentina number and I know you had mentioned this isn't a very seasonal business and there's a little bit more corporate costs, but just anything else going on sequentially and maybe any help like by segment on margins.

Andrew Krill: Thanks.

Speaker Change: Yeah, Andrew maybe I'll I'll take that one as you're going to look at the sequential margin specific to Q1, there are really three things at play.

Speaker Change: First one is the ramp up of the Standalone Standalone company costs in the corporate cost as you know it is going to have the toughest.

Speaker Change: You're comparing in Q1 for us that's going to be an impact.

Speaker Change: And even.

Andrew Alec Kaplowitz: Even in Q4 being pretty judicious in how we are going to bring in some of the costs related to Standalone company costs. So Q1 is maybe going to start seeing the full run rate.

Samir: As you know, it's going to be the toughest year where you're comparing Q1 for us, and that's going to have an impact. You know, even in Q4, we were pretty judicious in how we were going to bring in some of the costs related to the stand-alone company costs. So Q1 is where we're going to start seeing the full run rate, and as I said earlier, the second one is going to be on the select investments that we are making. I think as we kind of look at the opportunity landscape in both water quality and PQI, there's some select growth investments we want to make that will impact Q1, and the benefit of those investments should start flowing through the P&L in the second half of the year. And lastly, I would say just at the beginning of the year, water is, as I said, a little slower to start given the Q4 is much stronger, and that's always going So a combination of those three things is really kind of driving it. There's nothing major materials otherwise impacting the margin.

Andrew Alec Kaplowitz: And as I said earlier the second one is going to be on the select investments that we're making I think as we kind of look at the opportunity landscape in both water quality and <unk>, yes, some select growth investments, we want to make that will impact Q1.

Andrew Alec Kaplowitz: And the benefit of those investments should start flowing through the P&L in the second half of the year.

Andrew Alec Kaplowitz: And lastly, I would say is just the beginning of the year one as I said, it's low.

Slower to stock and given the Q4 is much stronger and Thats always going to have a margin decrement right. So combination of those three things is really kind of driving it there's nothing major in materials.

Andrew Alec Kaplowitz: Otherwise impacting the margin.

Andrew Alec Kaplowitz: And overall it becomes again step back and look at the full year, we expect to deliver 50 to 75 basis points and we feel pretty good about delivering that so I think in our margin sometimes quarter to quarter. There can be some variance, but it's good to just step back and look at the full year.

Speaker Change: Great and then just a quick follow up on I know in the intro comments on I think there is a lot of discussion on the innovation new products for this year just any way you can quantify how much of a benefit that might be in 2024 and is it more focused on one segment versus the other thanks.

Jennifer: And, you know, overall, if you kind of, again, step back and look at the full year, we expect to deliver 50 to 75 basis points, and we feel pretty good about delivering that. So I think, on the margin, sometimes quarter to quarter, there can be some variance, but it's good to just step back and look at the full year. Great. And then just a quick follow-up. I know in the intro comments, I think there's a lot of discussion about innovation and new products for this year. But any way you can quantify how much of a benefit that might be in 2024?

Speaker Change: Yes, I think across the board, we generally see about 4% to 5% of sales spent on R&D and innovation.

Speaker Change: That has been the case throughout history, and we're carrying that forward as part of the model as well.

Speaker Change: We think we have as an independent Standalone company, a more acute focus on where those dollars go in terms of really driving to.

Speaker Change: Investments that are high.

Speaker Change: High return.

Speaker Change: And strategically compelling from the standpoint of solving customer problems.

Speaker Change: So.

Speaker Change: You can think about that average is being spread pretty evenly across both water quality and PQ lie.

Jennifer: And is it more focused on one segment versus the other? Thanks. Yeah, I think across the board, you know, we generally see about 4% to 5% of sales spent on R&D and innovation. That has been the case throughout history.

Speaker Change: Thank you.

Speaker Change: And once again, if you would like to ask a question. Please press star and one on your telephone keypad.

Speaker Change: And it appears that we have no further questions. At this time I will now turn the program back over to our presenters for any additional or closing remarks.

Jennifer: And we're carrying that forward as part of the model as well. I do think what we have as an independent standalone company is a more acute focus on where those dollars go in terms of really driving to investments that are high return and strategically compelling from the standpoint of solving customer problems. So, you can think about that average as being spread pretty evenly across both water quality and PQI.

Speaker Change: Thanks Savi. This is Ryan Taylor just wanted to thank everybody for joining us on our fourth quarter and full year earnings call today.

Ryan Taylor: We appreciate your engagement and your support and we look forward to talking to you next time. Thank you.

Speaker Change: That concludes today's teleconference. Thank you for your participation you may now disconnect.

Andrew Alec Kaplowitz: Thank you. And once again, if you would like to ask a question, please press star and one on your telephone keypad. And it appears that we have no further questions at this time.

Speaker Change: Okay.

Speaker Change: Hello.

Speaker Change: [music].

Speaker Change: Uh-huh.

Speaker Change: [music].

Operator: I will now turn the program back over to our presenters for any additional or closing remarks. Thanks, Shelby. This is Ryan Taylor.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Hum.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Hum.

Ryan Taylor: I just want to thank everybody for joining us on our fourth quarter and full year earnings call today. We appreciate your engagement and your support, and we look forward to talking to you next time. Thank you. That concludes today's teleconference. Thank you for your participation. You may now disconnect.

Speaker Change: [music].

Speaker Change: Uh-huh.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Hum.

Speaker Change: Hmm.

Speaker Change: Oh.

Speaker Change: Uh-huh.

Speaker Change: [music].

Operator: Thanks for watching. I'm Drew Halloran and welcome back to DMP! and Kay Reeves. Hmm, Hey! BSC Suggestions, BF-WATCH TV 2021 LUNCH BREAK uncomprehended by each versus the other day. I hope you guys will grab one of these cars.

Oh.

Speaker Change: Uh-huh.

Speaker Change: [music].

Speaker Change: Hum.

Speaker Change: Yeah.

Speaker Change: Okay.

Operator: Hope to see you in the next one. Bye, and David Willcox, and many more. Thank you for watching. I'm Michael Halloran and Michael Kemp. Thank you. Thank you. Thank you. Thank you. EASTER EGG! I'm Michael Halloran. And I'm Veralto.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Uh-huh.

Speaker Change: Hum.