Q1 2024 Veralto Corp Earnings Call

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Shelby: Please stand by; your program is about to begin. If you need assistance during your conference today, please press star zero. 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 first quarter 2024 conference call. All lines have been placed on mute to prevent any background noise.

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Shelby: 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 2 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.

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My name is Shelby and I will be your conference operator this morning.

Shelby: At this time I would like to welcome everyone to for Alto Corporation's first quarter 'twenty 'twenty four conference 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.

Ryan Taylor: Good morning, everyone. Thanks for joining us on the call. With me today are 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 under the heading Events and Presentations. A replay of this call will be available until May 8th, 2024.

Shelby: I would like to ask a question during that time simply press Star then the number one on your telephone keypad.

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

Shelby: I will now I'll 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, and Samir, Ron Our senior Vice President and Chief Financial Officer.

Ryan Taylor: Before we begin, I'd like to point out that yesterday we issued our first quarter news release, earnings presentation, and supplemental materials, including information required by the SEC 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 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.

Speaker Change: A replay of the webcast will be available on the investors section of our website later today under the heading events and presentations.

Speaker Change: A replay of this call will be available until May eight 2024.

Speaker Change: Before we begin I'd like to point out that yesterday, we issued our first quarter news release earnings presentation, and supplemental materials, including information required by the SEC relating to any adjusted or non-GAAP financial measures.

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 will or may occur in the future. Such forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our 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.

Speaker Change: These materials are available in the investors section of our website www dot <unk> dot com under the heading quarterly earnings.

Speaker Change: Reconciliations of all non-GAAP measures are provided in the appendix of the webcast slides.

Speaker Change: Unless otherwise noted all references to variances are on a year over year basis.

Speaker Change: 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.

Speaker Change: Well or may occur in the future.

Speaker Change: These forward looking statements are subject to a number of risks and uncertainties.

Speaker Change: He knows set forth in our SEC filings.

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

Jennifer L. Honeycutt: Ryan, and thank you all for joining our call today. The first quarter of 2024 marks our second consecutive quarter of solid operating execution as a standalone company. We are driving steady, profitable growth and continuous improvement through greater focus and accountability using VES fundamentals. Basic Blocking and Tackling.

Speaker Change: These forward looking statements speak only as of the date. They are made and we do not assume any obligation to update any forward looking statements, except as required by law.

Speaker Change: And with that I'll turn the call over to Jennifer.

Jennifer: Thank you Ryan and thank you all for joining our call today.

Jennifer: The first quarter of 2024 marks our second consecutive quarter of solid operating execution as a standalone company.

Jennifer L. Honeycutt: For Q1, we delivered 8% adjusted earnings growth year over year, driven by 2% core sales growth and 90 basis points of adjusted operating profit margin expansion. Additionally, we exceeded our guidance across the board. Our financial performance reflects our culture of continuous improvement and demonstrates our ability to deliver on commitment. From an end market perspective, we are seeing healthy trends across our key verticals. In our water quality segment, we continue to see positive secular growth drivers across industrial markets, particularly in North America, along with steady demand from municipalities.

Jennifer: We are driving steady profitable growth and continuous improvement through greater focus and accountability using <unk> fundamentals.

Jennifer: Like blocking and tackling.

Jennifer: For Q1, we delivered 8% adjusted earnings growth year over year, driven by 2% core sales growth and 90 basis points of adjusted operating profit margin expansion.

Jennifer: And we exceeded our guidance across the board.

Jennifer: Our financial performance reflects our culture of continuous improvement and demonstrates our ability to deliver on commitments.

Jennifer L. Honeycutt: And in our product quality and innovation segment, we are seeing modest signs of recovery in consumer packaged goods markets. Most notably... PQI's recurring revenue grew mid-single digits year-over-year for the third consecutive quarter, and equipment bookings for marking and coding started to show signs of recovery late in the first quarter.

Jennifer: From an end market perspective, we are seeing healthy trends across our key verticals.

Jennifer: And our water quality segment, we continue to see positive secular growth drivers across industrial markets, particularly in North America, along with steady demand at municipalities.

Jennifer: And then our product quality and innovation segment, we are seeing modest signs of recovery in consumer packaged goods markets.

Jennifer L. Honeycutt: And we continue to see encouraging trends at some of our large CPG customers, led by food and beverage. Based on our first quarter results and improving market trends, we continue to expect our core sales growth rate to modestly improve sequentially throughout the year. Looking at our full-year guidance, we are on pace to deliver low single-digit core sales growth and are trending toward the high end of our adjusted operating margin range of 50 to 75 basis points of improvement over 2023. As a result, we have modestly increased our full-year adjusted EPS and free cash flow conversion guidance. Sameer will cover that in more detail a bit later in the call.

Jennifer: Notably.

Jennifer: <unk> recurring revenue grew mid single digits year over year for the third consecutive quarter.

Jennifer: Equipment bookings for marking and coding started to show signs of recovery late in the first quarter.

Jennifer: And we continue to see encouraging trends at some of our large CPG customers led by food and beverage.

Jennifer: Based on our first quarter results and improving market trends, we continue to expect our core sales growth rate to modestly improve sequentially throughout the year.

Jennifer: Looking at our full year guidance, we are on pace to deliver low single digit core sales growth.

Jennifer L. Honeycutt: Confidence in our ability to deliver on commitments is, in large part, grounded in the Veralto Enterprise System, proven systems for driving growth, operational improvements, and leadership development. A core tenet of the EES is continuous improvement or Kaizen. During March, we completed our first CEO Kaizen Week as a standalone company.

Jennifer: And are trending toward the high end of our adjusted operating margin range of 50 to 75 basis points of improvement over 2023.

Jennifer: As a result.

Jennifer: We have modestly increased our full year, adjusted EPS and free cash flow conversion guidance.

Jennifer: Samir will cover that in more detail a bit later in the call.

Jennifer: Confidence in our ability to deliver our commitments is in large part grounded in the world to enterprise system.

Jennifer L. Honeycutt: CEO Kaizen Week is a longstanding tradition of our enterprise system and personally one of my favorite weeks of the year. The purpose of this year's CEO Kaizen Week was to drive value-accretive growth. For one week, we immersed 12 cross-functional teams at GEMBA where the real work happens, across six businesses in five countries. The Veralto executive team worked alongside associates in our operating companies to solve some of the most complex challenges and yield high-impact results.

Jennifer: Our proven system for driving growth.

Jennifer: Operational improvements and leadership development.

Jennifer: A core tenet of EES is continuous improvement or kaizen.

Jennifer: During March we completed for all dose first CEO Kaizen week as a Standalone company.

Jennifer: Did you know kaizen week is a long standing tradition of our enterprise system and personally one of my favorite weeks of the year.

Jennifer L. Honeycutt: For example, this year's events included increasing customer engagement in North America and EMEA to drive incremental sales growth of Hox consumables; improving the customer buying experience at VideoJet to accelerate key growth initiatives; and using lean conversion tools for make-to-stock products at a Hawk Distribution Facility in North America to optimize efficiency, improve on-time delivery, and meet increasing customer demand. The benefits of any Tizen Week include immediate solutions that are rapidly implemented and yield real-time results.

Jennifer: The purpose of this year's CEO Kaizen week was to drive value accretive growth.

Jennifer: For one week, we immersed 12 cross functional teams at Gamba, where the real work happens.

Jennifer: Across six businesses in five countries.

Jennifer: The royalty executive team worked alongside associates in our operating companies to solve some of the most complex challenges and yield high impact results.

Jennifer: For example, this year's events included.

Jennifer: Increasing customer engagement in North America, and EMEA to drive incremental sales growth of Hawks consumables.

Jennifer L. Honeycutt: Success is proven by sustaining these results, which we track following the Kaizen event. From a big picture perspective, this year's CEO Kaizen Week fortified our ability to deliver on our commitments to key stakeholders and reinforced that at Veralto, we are all practitioners of continuous improvement. Turning now to our financial results for the quarter, sales grew 1.8% year over year, led by price increases across both segments and modest volume growth in our water quality segment, led by our industrial water treatment businesses.

Jennifer: Improving the customer buying experience at video jet to accelerate key growth initiatives.

Jennifer: And using lean conversion tools for make to stock products at a hot distribution facility in North America to optimize efficiency improve on time delivery and meet increasing customer demand.

Jennifer: The benefits of any size that week, including immediate solutions that are rapidly implemented and Yale real time results.

Jennifer: <unk> proven by sustaining these results, which we track following the kaizen events.

Jennifer L. Honeycutt: Notably, both segments delivered recurring sales growth in the mid-single digits year over year, increasing our percentage of recurring sales to 61% of total sales in the quarter. Additionally, as compared to our guidance, we exceeded core sales growth expectations due to strong commercial execution and better than expected volume at both segments, particularly within consumables. On the margin front, we delivered 90 basis points of adjusted operating profit margin expansion, primarily through price execution, Productivity Improvements, and Cost Optimization. Adjusted EPS was $0.84 per share, up 8% year-over-year, and $0.06 above the high end of our guidance rate. And we generated over $100 million of free cash flow, further strengthening our financial position.

Jennifer: From a big picture perspective, this year's CEO Kaizen week fortifying, our ability to deliver on our commitments to key stakeholders and reinforce that at four also.

Jennifer: We are all practitioners of continuous improvement.

Speaker Change: Turning now to our financial results for the quarter.

Speaker Change: Core sales grew one 8% year over year led by price increases across both segments and modest volume growth in our water quality segment led by our industrial water treatment businesses.

Speaker Change: Notably both segments delivered recurring sales growth in the mid single digits year over year, increasing our percentage of recurring sales to 61% of total sales in the quarter.

Speaker Change: As compared to our guidance, we exceeded core sales growth expectations due to strong commercial execution and better than expected volume at both segments, particularly within consumables.

Jennifer L. Honeycutt: Now looking at core sales growth by geography for the first quarter, sales in North America grew over 3% year-over-year, with sales in high-growth markets flat and sales in Western Europe down about 1%. In North America, we continue to see strong growth in our water treatment businesses across industrial verticals, including food and beverage, chemical processing, mining, and power generation. We also continue to see strong demand from municipal customers for UV treatment systems.

Speaker Change: On the margin front, we delivered 90 basis points of adjusted operating profit margin expansion, primarily through price execution.

Productivity improvements and cost optimization.

Speaker Change: Adjusted EPS was <unk> 84 per share up 8% year over year and six cents above the high end of our guidance range.

Speaker Change: And we generated over $100 million of free cash flow further strengthening our financial position.

Speaker Change: Looking now at core sales growth by geography for the first quarter.

Jennifer L. Honeycutt: In Western Europe, core sales were down modestly year over year, primarily due to the timing of UB system projects and the strategic portfolio actions in our water quality segment that we mentioned in our Q4 earnings call. Apart from these two items, core sales in Western Europe were steady year-over-year in both segments. In high-growth markets, core sales were essentially flat year over year as growth in Latin America and India was offset by a low single-digit decline in China, as anticipated.

Speaker Change: Sales in North America grew over 3% year over year with sales in high growth markets flat.

Speaker Change: And sales in Western Europe down about 1%.

Speaker Change: In north.

Speaker Change: Merica, we continued to see strong growth in our water treatment businesses.

Speaker Change: Ross industrial verticals, including food and beverage chemical processing mining and power generation.

Speaker Change: We also continued to see strong demand from municipal customers for UV treatment systems.

Speaker Change: In Western Europe.

Jennifer L. Honeycutt: Despite the year-over-year headwind in Q1, we believe our end market environment in China has stabilized. That concludes my opening remarks. And at this time, I'll turn the call over to Sameer for a detailed review of our first quarter financial performance.

Speaker Change: Core sales were down modestly year over year, primarily due to timing of you'd be system projects and the strategic portfolio actions in our water quality segment that we mentioned in our Q4 earnings call.

Speaker Change: Apart from these two items core sales in Western Europe were steady year over year in both segments.

Speaker Change: And high growth markets core.

Sameer Ralhan: Thanks, Jennifer, and good morning, everyone. I will begin with our consolidated results for the first quarter on slide seven. First quarter net sales grew 1.8% on a year-over-year basis to about $1.25 billion. Currency was a modest benefit offset by the divestiture of Saltzner's product line. Saltness was a small commodity filter product line in a water quality segment that was divested in January.

Speaker Change: Our sales were essentially flat year over year as growth in Latin America, and India was offset by low single digit decline in China as anticipated.

Speaker Change: Despite the year over year headwind in Q1, we believe our end market environment in China has stabilized.

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

Samir: Thanks, Jennifer and good morning, everyone.

Sameer Ralhan: Core sales growth in Q1 was 1.8%. Price contributed approximately 2% of growth in this quarter, in line with expectations. This aggregate price increase is also in line with historical levels. Volume was down a modest 40 basis points here over here.

Samir: I will begin with our consolidated results for the first quarter on slide seven.

Samir: First quarter net sales grew one 8% on year over year basis to about 1.25 billion.

Samir: Currency was a modest benefit offset by the divestiture of softness product line.

Softness was a small commodity filter product line water quality segment that was divested in January.

Sameer Ralhan: This was better than we expected, primarily due to higher sales volumes of consumables at both segments during the quarter. Gross profit increased 6% year-over-year to $747 million. Gross profit margin increased 220 basis points year-over-year to 60%, reflecting the benefits of pricing, as well as improved productivity and reduced material costs. Adjusted operating profit increased 5% year-over-year, and adjusted operating profit margin expanded 90 basis points to 24.5%. We delivered strong margin expansion while investing in our sales and marketing efforts to drive future growth.

Samir: Core sales growth in Q1 was one 8%.

Samir: Price contributed approximately 2% growth in this quarter in line with expectations.

Samir: This aggregate price increase is also in line with historical levels.

Samir: Volume was down a modest 40 basis points year over year.

This was better than we expected.

Samir: Italy due to higher sales volumes of consumables in both segments during the quarter.

Samir: Gross profit increased 6% year over year to $747 million.

Samir: Gross profit margin increased.

Samir: 220 basis points year over year to 60%.

Samir: Reflecting the benefits of pricing.

Samir: It has improved productivity and reduced material costs.

Sameer Ralhan: We also increased our R&D investment to 4.8% of sales, up 20 basis points over the prior year period. These investments are aligned with our strategic growth plans, and we expect to continue to fund ongoing growth investments.

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

Samir: And adjusted operating profit margin expanded 90 basis points to 24, 5%.

Samir: We delivered strong margin expansion, while investing in our sales and marketing efforts to drive future growth.

Sameer Ralhan: Looking at EPS for Q1, adjusted earnings per share grew 8% year-on-year to 84%, and free cash flow was $102 million, down from the prior year. This decline is primarily due to cash interest payments that we did not incur last year prior to our spin-off. Moving on, I will cover the segment highlights starting with water quality on slide 9.

Samir: We also increased our R&D investment to four 8% of sales up 20 basis points over the prior year period.

Samir: These investments are aligned with our strategic growth plans and we expect to continue to fund ongoing growth investments.

Samir: Looking at EPS for Q1.

Samir: Earnings per share grew 8% year on year to <unk> 84 cents.

Sameer Ralhan: Our water quality segment delivered $749 million in sales, up 2.7% on a year-over-year basis. Currency was neutral, and the divestiture of saltness had a 10 basis point impact on sales this quarter versus the prior year period. In addition to this divestiture, we strategically exited small product lines in our water quality segment in the fourth quarter of 2023.

Samir: And free cash flow was $102 million down from the prior year.

Samir: This decline is primarily due to cash interest payments that we did not incurred last year prior to our spinoff.

Speaker Change: Moving on I will cover the segment highlights starting with water quality on slide nine.

Speaker Change: Our water quality segment delivered $749 million of sales up two 7% on a year over year basis.

Speaker Change: Currency was neutral and the divestiture of softness at 10 basis point impact on sales this quarter versus the prior year period.

Sameer Ralhan: As we previously mentioned on the earnings call in February, exiting these product lines resulted in approximately 60 basis points of headwind to core growth for the segment in this quarter. Despite this headwind, core sales grew 2.8% year-over-year as compared to 11% core sales growth in the prior year period, bringing the two-year core sales growth stack for the water quality segment to about 7%. Pricing contributed 2.6% to core sales growth, and volume was up 30 paces point zero a year. This was the first quarter of volume growth for water quality since Q1 2023.

Speaker Change: In addition to this divestiture.

Speaker Change: We strategically exited small product lines and on water quality segment in the fourth quarter of 2023.

Speaker Change: As we previously mentioned on the earnings call in February exiting these product lines resulted in approximately 60 basis points headwind to core growth for the segment in this quarter.

Speaker Change: Despite this headwind core sales grew two 8% year over year as compared to 11% core sales growth in the prior year period.

Speaker Change: Bringing the two year core sales growth stack for water quality segment to about 7%.

Pricing contributed two six percentage of core sales growth and volume was up 30 basis points year over year.

Sameer Ralhan: Our volume growth in this year's first quarter was driven by strong demand for our water treatment solutions in industrial end markets and UV treatment systems in municipal end markets. Recurring sales across the segment grew mid-single digits, highlighted by increased sales of reagents and chemistries used in our analytical instruments at municipalities in North America. Adjusted operating profit increased 9%, or $16 million, year-over-year to $186 million. Adjusted operating profit margin increased 150 basis points to 24.8%. The increase in profitability reflects solid pricing execution and improved productivity. Moving to the next page.

Speaker Change: This is the first quarter of volume growth for water quality since Q1 2023.

Speaker Change: Our volume growth in this year's first quarter was driven by strong demand for our water treatment solutions and industrial end markets and UV treatment systems in municipal end markets.

Recurring sales across the segment grew mid single digits highlighted by increased sales of reagents and chemistries used in our analytical instruments at municipalities in North America.

Speaker Change: Adjusted operating profit increased 9% or $16 million year over year to $186 million.

Speaker Change: Adjusted operating profit margin increased 150 basis points to 24, 8%.

Sameer Ralhan: Our PQI segment delivered sales of $497 million in the first quarter, up modestly versus a prior year period. However, core sales were essentially flat on a year-over-year basis as price increases of 1.5% were largely offset by 1.3% declines in volume. Recurring sales grew mid-single digits with growth across the portfolio, increasing the mix of recurring sales for PQI to 63% in Q1, and packaging and color sales were up low single digits year over year, highlighted by growth in recurring software and subscription revenue. In contrast, marketing and coding sales declined modestly, reflecting lower demand from CPG customers as compared to Q1 2023. This decline, however, was less than what we had anticipated.

Speaker Change: The increase in profitability reflects solid pricing execution and improved productivity.

Speaker Change: Moving to the next page our PQ ice segment delivered sales of $497 million in the first quarter.

Speaker Change: Modestly versus the prior year period.

Speaker Change: Core sales were essentially flat on a year over year basis as price increases of one 5% was largely offset by one 3% declines in volumes.

Speaker Change: Recurring sales grew mid single digits with growth across the portfolio.

Speaker Change: That makes a recurring sales from <unk> to 63% in Q1.

Speaker Change: And packaging and color sales were up low single digits year over year.

Speaker Change: Highlighted by growth in recurring software and subscription revenue.

Speaker Change: In contrast <unk>.

Marking and coding sales declined modestly, reflecting lower demand from CPG customers as compared to Q1 2023.

Speaker Change: This decline however was less than what we had anticipated in that guidance.

Sameer Ralhan: As Jennifer mentioned, we continue to see modest signs of recovery in the CPC market, with consumable sales of mid-single digits year-over-year for the third consecutive quarter, and equipment bookings showing pockets of improvement. We remain cautiously optimistic that CPG volumes will improve sequentially as the year progresses. BQI's adjusted operating profit was $139 million in the first quarter, resulting in an adjusted operating profit margin of 28 percent. This was a strong margin performance for PQI and demonstrates the earnings power of these businesses.

Speaker Change: As Jennifer mentioned, we continued to see modest signs of recovery in CPG markets with consumable sales up mid single digits year over year.

Third consecutive quarter.

Speaker Change: And equipment bookings showing pockets of improvement.

Speaker Change: We remain cautiously optimistic that CPG volumes will improve sequentially as the year progresses.

Speaker Change: <unk> adjusted operating profit was $139 million in the first quarter, resulting in adjusted operating profit margin of 28%.

Speaker Change: This was a strong margin performance for <unk> and.

Speaker Change: And demonstrates the earnings power of these businesses.

Sameer Ralhan: Turning now to our balance sheet and cash flow. In Q1, we generated $115 million of cash from operations and invested $13 million in capital expenditures. Pre-cash flow was $102 million in the quarter. Note, this included about $57 million of cash interest payments, which we did not incur in Q1 2023 prior to our spinoff. At the end of the quarter, gross debt was $2.6 billion, and Cash on Hand was $827 million. Net debt was 1.8 billion dollars, resulting in net leverage of 1.5 times.

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

Speaker Change: In Q1, we generated $115 million of cash from operations and invested $13 million and capital expenditures.

Speaker Change: Free cash flow was $102 million in the quarter.

Speaker Change: Note. This included about $57 million of cash interest payments, which we did not incur in Q1 2023 prior to our spinoff.

Speaker Change: At the end of the quarter gross debt was $2 6 billion and cash on hand was $827 million.

Speaker Change: Net debt was $1 $8 billion.

Speaker Change: <unk> and net leverage of one five times.

Sameer Ralhan: 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 with a bias towards M&A. Turning now to our guidance for 2024, beginning with our updated expectations for the full year. As Jennifer mentioned, we are on track to deliver our target of low single-digit core sales growth at the enterprise level and in both sectors.

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 with a bias towards M&A.

Speaker Change: Turning now to our guidance for 2024.

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

Speaker Change: As Jennifer mentioned, we are on track to deliver our target of low single digit core sales growth at the enterprise level and in both segments.

Sameer Ralhan: We're targeting 100 to 200 basis points of price consistent with the historical pre-pandemic level. From a sequential perspective, our guidance assumes that year-over-year core sales growth increases modestly quarter-to-quarter through 2024. Looking at adjusted operating profit margin, our target remains 50 to 75 basis points of improvement this year. Based on our Q1 performance, we are trending towards the high end of this range. Given our Q1 results and current view on margin improvement for the year, we have increased our full-year adjusted EPS guidance to a range of $3.25 to $3.34 per share, up from a prior guidance range of $3.20 to $3.30 per share.

Speaker Change: We're targeting 100 to 200 basis points of price consistent with historical pre pandemic levels.

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

Speaker Change: Looking at adjusted operating profit margin.

Speaker Change: Target remains 50 to 75 basis points of improvement this year.

Speaker Change: Based on our Q1 performance, we are trending towards the high end of this range.

Speaker Change: Given our Q1 results and current view on margin improvement for the year, we have increased our full year adjusted EPS guidance to a range of $3 25 to $3 34 per share up from our prior guidance range of $3 20.

To $3 30 per share.

Sameer Ralhan: In addition, we increased our free cash flow conversion guidance to a range of 100 to 110 percent. Looking at our guidance for Q2, we are targeting core sales growth of low single digits on a year-on-year basis with an adjusted operating margin of approximately 23%. And our Q2 2024 guidance for adjusted EPS is $0.75 to $0.80 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.

In addition, we increased our free cash flow conversion guidance to a range of 100% to 110%.

Speaker Change: Looking at our guidance for Q2 were targeting core sales growth in low single digits on a year over year basis with adjusted operating margin of approximately 23%.

Speaker Change: And our Q2 2024 guidance, but adjusted EPS is 75 to 80 cents per share.

Speaker Change: 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.

Jennifer: Thanks Samir.

Jennifer L. Honeycutt: In summary, as a standalone company, we have increased focus, discipline, and accountability across all levels of the enterprise, which has elevated our level of execution. We are driving continuous improvement and investing in future growth as our end market environment gradually improves. We are off to a positive start in 2024 with solid growth and strong margin expansion in the first quarter. Our financial position remains strong, and we can continue to take a disciplined approach to capital deployment with our primary focus on strategic acquisitions with attractive returns.

Jennifer: In summary, as a Standalone company, we have increased focus discipline and accountability across all levels of the enterprise, which has elevated our level of execution.

Jennifer: We are driving continuous improvement and investing in future growth as our end market environment gradually improves.

Jennifer: We are off to a positive start in 2024 with solid growth and strong margin expansion in the first quarter.

Jennifer: Our financial position remains strong and we.

Jennifer: We'll continue to take a disciplined approach to capital deployment with our primary focus on strategic acquisitions with attractive returns.

Jennifer L. Honeycutt: Looking ahead, we remain focused on driving commercial excellence, continuous improvement, and disciplined capital allocation to create shareholder value while safeguarding the world's most vital resources. That concludes our prepared remarks. I want to thank you all again for joining our call. And at this time, we're happy to take your questions.

Jennifer: Looking ahead, we remain focused on driving commercial excellence continuous improvement and disciplined capital allocation to create shareholder value, while safeguarding the world's most vital resources.

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

Shelby: At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. Please limit yourself to one question and one follow-up.

Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad. Please limit yourself to one question and one follow up.

Shelby: You may remove yourself from the queue at any time by pressing star 2. Once again, that is 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.

Speaker Change: You may remove yourself from the queue at any time by pressing star to 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 will take our first question from Scott Davis with Melius Research. Your line is open.

Scott Reed Davis: Good morning, Jennifer. Ryan, good morning. The 60% gross margin is a pretty incredible number when you really think about the mix of businesses you have, but should we think about this as kind of a high watermark, or would you think about it as more of a step up into a new level of entitlement? How do you guys think about it?

Scott Reed Davis: Hey, good morning, Scott Jennifer.

Scott Reed Davis: Ryan Good morning.

Scott Reed Davis: The 60% gross margin is a pretty incredible number.

Scott Reed Davis: When you really think about the mix of businesses you have but should we think about this as kind of a high watermark or.

Speaker Change: Or would you think about it as more of a step up into a new level of entitlement. How do you guys think about it.

Sameer Ralhan: Yeah, maybe I'll take that one, Scott, overall, as you're going to look at our margin perspective. You know, some of it comes down to a little bit of a mix.

Speaker Change: Yeah, maybe I'll take that one Scott overall as you got to look at our.

Speaker Change: On a margin perspective.

Some of it comes down deliberate mix I think it's still going to be in the 58% to 60% Zip code.

Sameer Ralhan: I think it's still going to be in the 58 to 60% kind of zip code. As Jennifer mentioned on the call earlier, you know, we saw a good sort of rebound in the consumables on both sides. That really helps us on the margin side, both in the water quality and PQI side. But as equipment kind of starts coming back in the rest of the year, the second half of the year, we should be in that 58 to 60% kind of zip code.

Speaker Change: As Jennifer mentioned on the call earlier, we saw a good sort of a rebound in the consumables in both site that really helps us on the margin side.

Speaker Change: And the water quality of the <unk> side, but that's kind of a quick.

Speaker Change: <unk> connect starts coming back.

Speaker Change: Rest of the year in the second half of the year, we should be in that 50% to 60% Zip code.

Speaker Change: Okay fair enough.

Jennifer L. Honeycutt: Okay, fair enough. And just following on a little bit from the comment you made, Jennifer, on increasing accountability. You know, the understanding has always been that the Danard business system always drove a pretty high level of accountability. How have you tweaked it to even raise that to a different level? And what kind of changes have you made when you think about just tightening things up for the assets that you have here?

Speaker Change: And just following on a little bit too.

Speaker Change: Comment you made Jennifer on increasing accountability.

Speaker Change: Understanding has always been that the danaher business system always drove a pretty high level of accountability, how have you tweaked it to even raise that to add to a different level and what kind of changes have you made.

Speaker Change: When you think about just.

Speaker Change: Tightening things up for the assets that you have here.

Jennifer L. Honeycutt: Yeah, I mean, I think it's always challenging to provide an equal level of focus across a very, very large enterprise like Danaher. I think a smaller, more nimble $5 billion business obviously allows us to focus exclusively on these businesses, whereas there were many more factors sort of previously with the life sciences and diagnostics side in Baneher. And so some of the things that we've done here are, you know, we've raised the level of not only expectation but visibility to how we're operating, the tools that we're using by way of VES, and we're really focusing on the critical few.

Speaker Change: Yeah, I mean, I think it's always challenge challenging to provide an equal level of focus across a very very large enterprise like danaher has.

Speaker Change: I think a smaller more nimble 5 billion dollar business, obviously allows us to focus exclusively on these businesses.

Speaker Change: Whereas there were many more factors sort of previously with the life Sciences, and diagnostics and Danaher and so some of the things that we've done here is we've just we've raised the level of.

Speaker Change: Not only expectation but visibility.

Speaker Change: Two how we're operating the tools that we're using by way of EES and we're really focusing on the critical few.

Jennifer L. Honeycutt: Every business is a little bit different. Their evolutionary maturity is a little bit different. And as a result, we focus on using fit-for-purpose tools in our VES toolbox to make sure that we're elevating the level of performance of each of those businesses.

Speaker Change: Every business has a little bit different there evolutionary maturity and a little bit different and as a result, we focus on using fit for purpose tools in our ves toolbox to make sure that we're elevating the level of performance of each of those businesses.

Scott Reed Davis: Okay, fair enough. Congratulations on the quarter. Good luck this year. Thank you.

Speaker Change: Okay fair enough congrats on the quarter. Good luck. This year. Thank you. Thank you. Thanks Scott.

Shelby: Thank you. Thanks, Scott, and we'll take our next question.

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

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

Andrew Alec Kaplowitz: Jennifer, Sameer, how are you feeling about the PQI recovery at this point? I know you mentioned North America and Western Europe, and you continue to see signs of recovery. You talked about equipment demand coming back late in the quarter. Maybe you could elaborate on that equipment trend. Have you seen follow-through on that food and beverage recovery that started, I think, in Q4, and how are you factoring in China-related growth in that segment for the rest of the year?

Andrew Alec Kaplowitz: Good morning, everyone.

Andrew Alec Kaplowitz: Good morning, Andy.

Andrew Alec Kaplowitz: How are you feeling about the PQ I recovery at this point I know you mentioned North America, and Western Europe, you continue to see signs of recovery.

Andrew Alec Kaplowitz: It's about equipment demand coming back late in the quarter, maybe you could elaborate on that equipment trend have you seen follow through in that food and beverage recovery that started I think in Q4 and how are you factoring in China related growth in that segment through the rest of the year.

Jennifer L. Honeycutt: Yeah, we're really encouraged by the PQI performance here in Q1, particularly around our consumable revenue stream or recurring revenue. This is the third consecutive quarter that we've seen mid-single-digit growth there. And with regard to sort of how those markets, particularly in food and beverage, recover from a downturn, we will always see the consumable revenue stream ramp up first, and that's as a result of CPG customers coming back on lines that were previously mothballed.

Speaker Change: Yeah, we're really encouraged by the PQ I performance here in Q1, particularly around.

Speaker Change: Our consumable revenue stream of recurring revenue. This is the third sequential quarter that we've seen mid single digit growth there.

Speaker Change: And with regard to sort of how those how those markets, particularly in food and beverage recover from a downturn, we will always see the consumable revenue stream ramp first.

Speaker Change: And that's as a result of of CPG customers coming back online that were previously mothballed.

Jennifer L. Honeycutt: They're, you know, getting those lines running, they're refurbishing equipment, and so we always see that leading our equipment growth. Now on the equipment side, we did see some nice pockets of growth relative to orders late in the first quarter, and so this is sequentially encouraging and very closely maps to the pattern of what we would have seen with consumables recovery first followed by equipment recovery.

Speaker Change: There.

Speaker Change: Getting those lines running their refurbishing equipment and.

Speaker Change: So we always see that leading our equipment.

Speaker Change: Our equipment growth now on the equipment side, we did see some nice pockets of growth relative to orders late in the first quarter.

Speaker Change: And so this is a this is sequentially encouraging and very closely matched to the pattern of what we would've seen with consumables recovery first followed by equipment recovery.

Sameer Ralhan: Yeah, Annie, the only other thing I would add from a guide perspective is that we're building equipment recovery more in the second half, while the owners, as Jennifer mentioned, in March were very encouraging, good discussions with the customers that the business teams were having, but we're still cautious, and we are building anything on the equipment side more in the second half than in the second quarter.

Speaker Change: Yes, and the only other thing I would add from a guide perspective, we are building equipment recovery mode in the second half.

Speaker Change: While the orders as Jennifer mentioned in the March or maybe encouraging.

Speaker Change: Good discussions with the customers of those business teams are having but.

Speaker Change: We are still cautious and we are building into anything on the equipment cycle in the second half.

Jennifer L. Honeycutt: Very helpful. And then maybe a similar question on the water quality side, you know, obviously you've talked about strengthening industrial businesses for a while now. Maybe talk about the resilience of that. Are you seeing North American municipalities on the HAWQ side spending any more? Is there, do you see any risk of higher rates, you know, maybe impacting that side of the country?

Speaker Change: Second quarter at this point.

Speaker Change: Very helpful. And then maybe a similar question on the water quality side.

Speaker Change: Obviously, you've talked about strength in the industrial business for a while now maybe talk about the resilience of that are you seeing north American municipalities on the Hog side spend anymore is there do you see any risk of higher rates, maybe impacting that side of the spend.

Jennifer L. Honeycutt: Yeah, so the nice thing about our business, Andy, is it's largely an OPEX-focused set of businesses. So interest rates, CAPEX approval cycles, we are minimally impacted by.

Speaker Change: Yes, so the nice thing about our business and he is it's largely an opex focused set of businesses. So interest rates capex approval cycles we.

Speaker Change: We are minimally impacted by and because we operate at the high end of the value continuum in terms of.

Jennifer L. Honeycutt: And because we operate at the high end of the value continuum in terms of being integral to operating municipal water plants, we see steady spending there. And, you know, following the pandemic, when municipalities were kind of in lockdown relative to their levels of investment, they are starting to execute on their project backlog. And that means that as they execute on that activity, there will be more, you know, analytics and testing required for refurbishing plants and getting going on those improvements.

Speaker Change: Integral to two operating municipal water plants.

Speaker Change: See we see steady spend there.

And.

Speaker Change: Following the pandemic when.

Speaker Change: Municipalities, where kind of lockdown relative to their levels of investment they are starting to execute on their project backlog and that means that as they execute.

Speaker Change: On that activity there will be more.

Speaker Change: Analytics and testing.

Speaker Change: Required for for refurbishing the plant and getting going on those improve.

Jennifer L. Honeycutt: So we continue to see good demand here that's continuing to recover from municipalities. And we also have a variety of opportunities here in water reuse and recycling reclaim activities as well. So we're encouraged by the muni markets that are starting to recover and look forward to continued execution there.

Speaker Change: Improvement. So we continue to see good demand here, that's continuing to recover and municipalities.

Speaker Change: And we.

Speaker Change: We also have a variety of opportunities here in water reuse.

Speaker Change: And recycling reclaim activities as well so.

Speaker Change: We're encouraged by the.

Speaker Change: The Muni markets that are that are starting to recover and look forward to continued execution there.

Jeffrey Todd Sprague: Thank you, and we'll take our next question from Jeff Sprock with Vertical Research Partners. Your line is open.

Speaker Change: Thank you and we'll take our next question from Jeff Sprague with vertical research partners. Your line is open.

Jeffrey Todd Sprague: Thank you, and good morning everyone. Hey Jennifer, just first on just kind of the M&A side of the equation, obviously a couple quarters out of the box here, probably kind of a solid year or so to think about it given the timeline of the spin, just wonder how you know the pipeline is coming together, do you see things that are actionable, and you know, do they lean you know towards one segment or the other?

Jeff Sprague: Thank you good morning, everyone.

Jeff Sprague: Hey, Jennifer just just first on just kind of the M&A side of the equation, obviously couple of quarters out of the box here, probably kind of a solid year or so to think about it given the timeline of the spin just wonder how.

Jennifer: The pipeline is coming together do you see things that are actionable.

Jennifer: And do they lean towards one segment or the other.

Jennifer L. Honeycutt: Thanks for the question, Jeff. Yeah, this is everyone's favorite topic.

Jennifer: Thanks for the question Jeff.

Jennifer: Yeah. This is everyone's favorite topic I think we are 207 days post spin I think today.

Jennifer L. Honeycutt: I think we are 207 days post spin, I think, today. So it's still early days here. But I have to say, we have a very, very robust process and a strong pipeline of activity, both on the water quality side and on the PQI side, with a number of opportunities that we're considering. We are going to stay disciplined here, consistent with our heritage, and focus on making sure that we're going after the right markets, strong companies within those markets, and making sure that they come at the right valuation.

Jennifer: So it's still early days here, but I have to say, we have a very very robust process and a strong pipeline of activity. Both in the water quality side, the PQ I side with a number of opportunities that we're considering.

Jennifer: We are going to stay disciplined here consistent with our heritage and focus on making sure that we're going after the right markets.

Strong companies within those markets and making sure that they come at the right valuation.

Jennifer L. Honeycutt: We continue to like businesses that have similar operating model durability and financial profile to those that we have in the portfolio today. Businesses that can drive VES or that can utilize VES for continued improvements in growth and margin. And certainly, you know, our bias toward M&A is an important catalyst here going forward, but we will continue to maintain the rigor and the discipline that we have inherited from our history. And, as always, M&A is a little bit episodic. We do see more opportunities opening up relative to actionability as the year progresses, and so we are encouraged by that.

Jennifer: We continue to like businesses that have similar operating model durability and financial profile to those that we have in the portfolio today.

Jennifer: Businesses that can drive yes.

Jennifer: Or if they can utilize ves for continued improvements in gross margin.

Jennifer: And certainly our bias towards M&A as an important catalyst here going forward, but we will continue to maintain the rigor and the discipline that we have inherited from my from our history.

Jennifer: And as always M&A is a little bit episodic, we do see more opportunities opening up relative to action ability as the year progresses.

Jennifer: And so we are encouraged by that.

Jeffrey Todd Sprague: And then maybe unrelated, and for Sameer, you know, given that maybe kind of the consumables versus equipment mix doesn't really shift a whole lot until we get into the second half of the year, why is it that margins would be down sequentially, Q1 to Q2, on sequentially higher revenues?

Speaker Change: Great and then maybe unrelated and for Samir.

Speaker Change: Given that maybe it's kind of the consumable roles versus equipment mix doesn't really shifts the whole lot until we get into the second half of the year why is it that margins would be down sequentially Q1 to Q2 was sequentially higher revenues.

Sameer Ralhan: Yeah, thanks, Jeff, for that. As we go from Q1 to Q2, Jeff, this really ends up, the first thing is the second quarter ends up being a seasonally heavier trade show activity quarter for us. So the operating expenses do go up seasonally just for us in Q2 and Q1. And that's kind of, I would say, applies to both segments.

Samir: Yes, thanks, Jeff for that.

Samir: As we go from Q1 to Q2, Jeff. This is daily and the first thing is the second quarter ended up being a seasonally heavier trade show activity quarter for us So the operating.

Speaker Change: Expenses do go up seasonally just for us in Q2 and Q1.

Speaker Change: And that's.

Speaker Change: I would say it applies to both the segments. The other fact that is just some of the corporate spending as we said at the beginning of the year in February right. We just wanted to be very cautious and judicious as you bring in the corporate expenses.

Sameer Ralhan: The other factor is just some of the corporate spending. As we said at the beginning of the year in February, we just want to be very cautious and judicious as you bring in the corporate expenses from a standalone company perspective. So some of that is just how we're kind of pacing in and slowly in the second quarter; some of that is going to ramp up. And lastly, I would say, as Jennifer mentioned, we are investing on the SC&A side.

Speaker Change: From a Standalone company perspective, so some of that is just how we kind of pacing in and slowly and in second quarter. Some of that is going to ramp up and lastly, I would say as Jennifer mentioned, we are investing on the SG&A side.

Sameer Ralhan: And in Q1, we did make investments. We're going to start seeing more run rate impact as we move into the second quarter. So it's really a combination of those three things that's driving the sequential decline.

Speaker Change: And in Q1, we did make investments are we going to start seeing more run rate impact that's going to move into the second quarter. So it's really a combination of those three things that's driving the sequential decline.

Sameer Ralhan: Does it bias towards one segment or the other?

Speaker Change: Does that bias towards one segment or the other.

Sameer Ralhan: No, it's pretty universal across the board.

Speaker Change: No, it's pretty universal across the book.

Michael Patrick Halloran: We'll take our next question from Mike Halloran from Baird. Your line is open.

Speaker Change: Thank you.

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

Michael Patrick Halloran: Hey, good morning, everyone.

Michael Patrick Halloran: So following up on Jennifer's question, as you became a stand-alone company, did you have to change processes? mean, in any way from an organizational perspective with incremental resources, whatever, to essentially build the muscle on the M&A side, obviously a little bit less prioritized at Dan or her. So is there anything that you've had to do to kind of build that up more than what you did, than what you had when you came in here and centralization of resources? And then I guess the second part is how integrated is that with your R&D functionality as we sit here today?

Michael Patrick Halloran: Good morning, Mike following up.

Michael Patrick Halloran: So following up on Jeff's first question.

Michael Patrick Halloran: He became a Standalone company did you have to change processes lean any in any way from a from an organizational perspective with incremental resources whatever too.

Michael Patrick Halloran: Essentially build the muscle on the M&A side, obviously, a little bit less prioritized at Danaher. So is there anything that you've had to do to kind of build that up more than what you've done here than what you have when you came in here in.

Michael Patrick Halloran: Centralization of resources, and then I guess the second part is how integrated is that with your R&D functionality as you sit here today.

Michael Patrick Halloran: So.

Jennifer L. Honeycutt: So, you know, clearly standing up a standalone company does require a, you know, a corporate organization to support it. Previously, tax and treasury, and all of those functions were taken care of for us.

Michael Patrick Halloran: Clearly standing up a stand alone company does does require it.

Michael Patrick Halloran: A corporate organization to support it.

Michael Patrick Halloran: Previously tax and Treasury and all of those functions for care for us.

Jennifer L. Honeycutt: But with respect to sort of the M&A trajectory, we were very deliberate in bringing in top talent in our sustainability, our strategy, and sustainability function, and our corporate development function. Both of those individuals that sit on my staff have longstanding histories within Danaher of building strategies and executing on M&A. Insofar as the muscle building within the operating companies themselves, we have upskilled the capability of our leadership within the operating companies to be able to perform strong due diligence, look at effective ways of integrating, and so on. So, we spent quite a bit of time here in both the ramp up to the spin and following the spin itself.

Michael Patrick Halloran: But with respect to sort of the M&A trajectory, we were very deliberate in bringing in top talent in our sustainability our strategy in sustainability function in our corporate development function both of those individuals' that sit on my staff.

Michael Patrick Halloran: We have long standing histories within Danaher building strategy and executing on M&A insofar as the muscle building within the operating companies themselves, we have upskill the capability for our leadership within the operating.

Companies to be able to.

Michael Patrick Halloran: Perform strong due diligence.

Michael Patrick Halloran: Look at our effective ways of integrating and so on so we spent actually quite a bit of time here in both the ramp up to the spin and following the spin itself.

Michael Patrick Halloran: And then thanks for that. And the second one is just kind of putting the commentary together on the water quality and the PQI side as far as starting to see some green shoots in specific areas or recovery in specific areas. How much of that is embedded from here from a guidance perspective? Are we talking relatively normal sequentials, or is there an assumption for an improved backdrop as we get through the year?

Speaker Change: And then thanks for that and the second one is.

Speaker Change: Just kind of putting the commentary together on water quality and the <unk> side as far as starting to see some green shoots in specific areas of recovery in specific areas. How much of that is embedded from here from a guidance perspective are we talking relatively normal sequential.

Speaker Change: Or is there an assumption for an improved backdrop as we get through the year just add some context.

Sameer Ralhan: Just add some comments. Okay, Mike, you have

Speaker Change: Hey, Mike.

Sameer Ralhan: Hey, Mike. Yeah, this is Sameer. I'll take this one.

Sameer Ralhan: Essentially, it's pretty kind of a gradual, sequentially improving quarter by quarter that you just kind of built into the guide at this point. As I said earlier, really what we're building at this point for the near term is really more on the consumable side, still that trend slowly kind of building. On the equipment side, it's really more in the second half of the year. So there's a little bit of a macro backdrop kind of helping us some of the equipment side coming back, but it's going to be pretty moderate sequentially kind of going up. But on a year over year basis, as you can imagine from Q3, Q4, it'll be better.

Michael Patrick Halloran: Maybe I'll take this one essentially it's been kind.

Michael Patrick Halloran: Kind of a gradual sequentially improving quarter by quarter that you could kind of built into the guide at this point.

Speaker Change: As I said earlier really what we are building at this point or in the near term is really more on the consumable side still that trend slowly going to building equipment side, its really more in the second half of the year. So there's a little broken macro backdrop and are helping us some of the equipment side coming back, but it's going to be pretty moderate sequentially kind of growing.

Speaker Change: But on a year over year basis as you can imagine from the Q3 Q4.

Speaker Change: <unk> better.

Speaker Change: That's how the math works.

Deane Michael Dray: We'll take our next question from Deane Dray with RBC Capital Markets. Your line is open. Thank you.

Speaker Change: Thank you.

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

Deane Michael Dray: Thank you. Good morning, everyone. Good morning, Deane.

Deane Michael Dray: Good morning, everyone.

Deane Michael Dray: Good morning, David Hey, I appreciate all the color and specifics in the slides in your prepared remarks, I'd like to get a very specific question and water quality, if I could so the new EPA regulations on.

Jennifer L. Honeycutt: Hey, I appreciate all the color and specifics in the slides and your prepared remarks. I'd like to ask a very specific question on water quality, if I could. So the new EPA regulations on PFAS, the four parts per trillion, really pushes the testing technology limits. And right now, it's still, you have to use a prohibitively expensive mass spec. No utility really can afford that. So is the industry any closer? Are you all any closer to what might be a more economical test? Because all this is going to be seeing incredible demand over the next, yep, as of now, as of two weeks ago.

Deane Michael Dray: P. Foster four parts per trillion is really is it.

Deane Michael Dray: Pushes the testing technology limits and right now it's still.

Deane Michael Dray: You have to use a prohibitively expensive mass back no utility really can afford that so is the industry any closer or are you all any closer to what might be a more economical test.

Deane Michael Dray: Because all of this is going to be seeing incredible demand over yep.

Deane Michael Dray: As of now as of two weeks ago.

Jennifer L. Honeycutt: Yeah, great question, Deane. You know, we knew that the EPA was headed towards a four parts per trillion limit of detection here, so that's not fundamentally new news for us. What is new news is the timeline for compliance with NELSIS in 2027. But you are right that this is a phenomenally difficult and complex problem to solve in a fit-for-purpose way. Right now, the way to solve for this is water samples sent to a centralized lab, run through GC Mass Spec, and answers come back a couple weeks later.

Speaker Change: Yeah, Great question Deane.

Speaker Change: We knew that the EPA was headed towards a four parts per trillion limit of detection here. So that's not fundamentally new news for us.

Speaker Change: What is new news there is the timeline for compliance with sales sets in 2027.

Speaker Change: But you are right that this is.

Speaker Change: A phenomenally difficult and complex problem to solve in a fit for purpose way right now the way to solve for this is a water sample sent to a centralized lab run through GC mass spec answers come back.

Speaker Change: A couple of weeks later in the meantime, the municipality has discharge tens if not hundreds of thousands of gallons of water.

Jennifer L. Honeycutt: In the meantime, the municipality has discharged tens, if not hundreds of thousands, of gallons of water. We are investing in this area, and we do believe we have a right to play here.

Speaker Change: <unk>.

Speaker Change: We are investing in this area. We do believe we have a right to play here.

Jennifer L. Honeycutt: HAWQ in and of itself has over a 70-year history of innovating in the analytics space. We've got a broad portfolio there, and certainly on the water treatment side, particularly in UV applications, we've got great expertise there as well. But I would say this is a long game here with solutions that are not imminent. We're probably still a couple years out here in terms of identifying and developing fit-for-purpose technology that addresses both detection and destruction. We think that winning is going to require both.

Speaker Change: Hock in and of itself has over 70 year history.

Speaker Change: Innovating in the analytics space, we've got a broad portfolio, there and certainly on the water treatment side, particularly in UV applications. We've got great expertise is there are there as well.

Speaker Change: But I would say this is this is a a long game here with solutions that are not imminent.

Speaker Change: But we're probably still a couple of years out here in terms of identifying and developing fit for purpose technology that addresses both detection and destruction. We think that winning is going to require bose and right now the analytical test.

Deane Michael Dray: And right now, the analytical test options, as you say, are not fit for purpose in terms of being at the plant, and frankly, destruction technology is not readily available either. There are products out there, granular activated carbon being one of them, that can capture PFAS, but what happens when you refresh those resin beds? You're just moving the PFAS to some other place like a landfill. So it's going to be a long journey here, but we are investing in a number of organic activities and are open to inorganic options as well.

Speaker Change: Options as you say are not fit for purpose in terms of being at plant and frankly.

Speaker Change: Destruction technology is not readily available either there are products out there granular activated carbon being one of them that can capture P fast.

Speaker Change: But what happens when you are.

Speaker Change: <unk> those resin beds, you're just moving the <unk> to some other place like a landfill.

Speaker Change: So it's.

Speaker Change: It's going to be a long journey here, but we are investing in a number of.

Speaker Change: Organic activities and are open to inorganic options as well.

Jennifer L. Honeycutt: All right, that's really helpful, and I fully appreciate that timeline that you've suggested. That's everything that we've heard as well. You know, there's a question between wanting something and there being a demand, industry demand versus the practicality given the complexity of the molecules. But I really appreciate the color, and I'm so glad to hear you mention destruction as well because that's an opportunity.

Speaker Change: Alright, Thats really helpful and I fully appreciate that timeline that you've.

Speaker Change: Suggested that's everything that we've heard as well.

Speaker Change: There's a question between wanting something and there is a demand industry demand versus the practicality given the complexities of molecules, but I really appreciate the color on that and I'm. So glad to hear you mentioned destruction as well because that's an opportunity.

Deane Michael Dray: All right, and then just for a follow-up question, and I'll echo Scott's comments about that 60% threshold on gross margin and how big a deal that is, and I remember when Danaher hit that level as well. And just one of the ways that you might be able to boost that further; I know your business model is direct-to-customer on the overall, and especially on the hot consumables, where you just would think there'd be more of a distribution angle to this, which would lower that cost of getting the reagents to the customers.

Speaker Change: Alright, and then just for a follow up question and I'll Echo Scott's comments about that 60% threshold on gross margin and how big a deal that is and I remember when danaher hit that level as well and just one of the ways that you might be able to boost that further I know your business model is it.

Speaker Change: Direct to customer on the.

Speaker Change: Overall, and especially on the Hawk consumables, where you just would think there'd be more of a disc.

Speaker Change: Distribution angle to this which would lower that cost of getting the reagents to the customers.

Deane Michael Dray: Just where does that stand? Is that a non-starter, or is that something you've explored? I know in some countries you will use distributors just because it's not practical to have them directly, but just where does that stand?

Speaker Change: Where does that stand is that a is that a nonstarter or is that something you've explored I know in some countries. You will use distributors would just because it's not practical to have direct but just where does that stand.

Jennifer L. Honeycutt: Yeah, I mean...

Speaker Change: Yeah, I mean, I think I think you're right Deane we do.

Jennifer L. Honeycutt: Yeah, I mean, I think you're right, Deane. We do and will use distribution for our analytics businesses in certain countries. They tend to be areas where we don't have critical mass in terms of staffing up the full capability of selling direct. But we think it's actually a good thing to sell direct, and it's part of what I would consider to be the secret sauce because we have that long-standing technological applications knowledge. And it's that customer intimacy and the insight into their processes, their process control, their analytics needs, their unmet, you know, the problems that have yet to be solved that give us great insight and create the flywheel of a feedback loop from our sales and service organization to our new product development organization that helps us continue to innovate and evolve the product portfolio to solve unmet customer needs.

Speaker Change: We'll use distribution.

Speaker Change: For our analytics business is in certain countries they tend to be areas, where we don't have critical mass.

In terms of staffing up the full capability of selling direct.

Speaker Change: We think it's actually a good thing to sell direct.

Speaker Change: And as part of what I would consider to be the secret sauce, because we have that long standing technological applications knowledge and customer intimacy and the insight to their processes their process control their analytics needs their unmet.

Speaker Change: The problems that have yet to be solved that give us great insight and creates the flywheel of feedback loop from our sales and service organization to our new product development organizations that help us continue to innovate and evolve the product portfolio to solve unmet customer needs.

Jennifer L. Honeycutt: So we are not inclined to sort of steer away, if you will, from our direct sales model just from a margin benefit standpoint. We think there's lots of opportunity by virtue of applying VES and, you know, working on the mix. The teams are doing a great job here in delivering margin as a result of just good operating execution, right, where the factories are running better, procurement teams are, you know, pushing back on inflationary pressures, and we're doing far fewer spot buys. So we have a number of other levers that we can pull relative to margin without compromising the secret sauce of customer intimacy.

Speaker Change: So we are not inclined to.

Sort of steer away if you will from our direct sales model just from a margin benefit standpoint, we think there's lots of opportunity by virtue of applying P. S.

Speaker Change: And working on mix. The teams are doing a great job here in delivering margin as a result of just good operating execution right, where the factories are running better.

Speaker Change: Procurement teams are.

Speaker Change: Pushing back on on.

Speaker Change: Inflationary pressures and we're doing far fewer spot buys. So we had a number of other levers that we can pull relative to margin without compromising the secret sauce of customer intimacy.

Andrew Alec Kaplowitz: We'll take our next question from Andrew Krill with Deutsche Bank. Your line is open.

Speaker Change: Thank you.

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

Andrew Alec Kaplowitz: Hi, thanks. Good morning, everyone.

Andrew Alec Kaplowitz: Hi, Thanks, Good morning, everyone I wanted to ask on go back to price and price cost more specifically just can you give us an update on what you're assuming there I think we've heard from several companies like transportation labor certain Roz I'll continue to be pretty inflationary so as the guy.

Andrew Alec Kaplowitz: I wanted to go back to price and price costs more specifically. Just can you give us an update on what you're assuming there? I think we've heard from several companies, you know, like transportation, labor, certain ROAS all continue to be pretty inflationary. So, you know, the guy assuming you can stay price cost positive, like on a margin basis or just dollars, and anything there would be really helpful. And if there's any big difference at all, by the time.

Andrew Alec Kaplowitz: Assuming you can stay price cost positive like on a margin basis or just dollars anything there would be really helpful. And then if theres any big differences by segment. Thanks.

Sameer Ralhan: Hey, Andrew. I'll take that one.

Speaker Change: Hey, Andrew I'll take that one essentially from a price from a guide perspective in the future look perspective.

Sameer Ralhan: Essentially, from a price, from a guide perspective, and from the future look perspective, we're modeling prices in line with historical norms. So it's 100, 200 basis points. This quarter, of course, as we kind of, things are rolling off, you know, we came in a little bit towards the high end of that range. But I think from an outlook perspective and a guide perspective, 100, 200 basis points is a good way to model.

Andrew Alec Kaplowitz: Modeling in price in line with historical norm sites, 100, 200 basis points on.

Andrew Alec Kaplowitz: This quarter of course, as we kind of things that are rolling off we came in a little bit towards the high end of that range, but I think from a.

Andrew Alec Kaplowitz: Our outlook perspective on the guide perspective, 100, 200 basis points is a good way to model on.

Sameer Ralhan: On the raw material and the material side, look, I think it's a pretty broad mix of the kinds of things that we buy, all the way from semiconductors, some circuit boards, down to stuff in plastics. I would say operating discipline and the WES really helping us kind of manage that, I think has been a big differentiator, and that's kind of really reflected in Q1 and the questions that Scott and Deane had as well on the gross margin side.

Andrew Alec Kaplowitz: On the raw materials and the material side.

Andrew Alec Kaplowitz: Look I think it's a pretty broad mix kind of things that would be buying more all the way from semiconductor circuit board stumped with stuff in plastics.

Andrew Alec Kaplowitz: Ah things of those nature of that kind of tied to commodities.

Speaker Change: I'd say.

Speaker Change: The operating discipline and the <unk> is really helping us kind of manage that I think has been a big differentiator and that's going to really be reflected in the key in Q1 and the question that Scott and being that is all in the gross margin side, we saw a big uplift from that side as well I think really going forward, having the operating discipline and making sure we are doing less of the spot buy.

Sameer Ralhan: We saw a big uplift from that side as well. I think really going forward, having the operating discipline, making sure we are doing less of a spot buy. I would say inflationary pressures are there, we are managing them really well, but it's also about the operating discipline to make sure we are minimizing any kind of spot buys, which can really have a big impact on the margin side. So I would say it's pricing; we're doing value-in-use pricing, and it's showing up on the margin side, but on the price side, there's a lot of discipline that starts all the way from operating discipline.

Speaker Change: I would say inflationary pressures out there we are managing managing that really well, but it's also above the operating discipline to make sure we are minimizing any going to spot buys.

Speaker Change: Which can really have a big impact on the market side. So I would say its pricing we were doing the value and use pricing and it's.

Speaker Change: Showing up in the margin side, but the bright side, there's a lot of discipline that starts all the way from operating discipline.

Andrew Alec Kaplowitz: Okay, great. Very helpful. And then for a follow-up on free cash flow conversion, I think it's nice to see the conversion boosted for the year from 100% to 110%. Any more insight into, like, what changed, you know, to give you context? One quarter and you know, looking ahead, should we be maybe thinking of like 100% conversion as kind of a floor, and you know this, you know, the legacy standard was very consistently over 100. Yeah.

Speaker Change: Okay, Great very helpful. And then for a follow up on free cash flow conversion is nice to see the conversion boosted for the year from 100 to 100% to 110% just any more insight into like what changed to give you confidence.

Sure one quarter, yes.

Speaker Change: <unk> ahead should we be maybe thinking of like 100% conversion is kind of a floor.

Speaker Change: Legacy Danaher was very consistently over 100.

Sameer Ralhan: Yeah, Andrew, if you look at a free cash flow conversion, right, just as a reminder, we do give the conversion on the basis of the gap metrics, right, not on any kind of adjusted metrics. So essentially, when you look at that, you know, just add the amortization and the share compensation or the stock-based compensation, I think based on all that stuff, we should be a little bit on the 100, a little over 100%, but really going towards the 100 to 110% range this quarter for the full year.

Speaker Change: Yes.

Speaker Change: Yeah, Andrew if you look at our free cash flow conversion rate just as a reminder, we do.

Speaker Change: The conversion on the based on the GAAP metrics right not on any kind of adjusted metrics. So essentially when you look at that just add the amortization and.

Speaker Change: The share compensation with the stock based compensation I think based on all of that stuff, we should be a little bit on the on the 100, a little over 100%, but really going towards 100% to 110% range this quarter.

Sameer Ralhan: For us, that guidance is really driven by getting more conviction on the margin side. As Jennifer mentioned, our margin will be towards the high end of the 50 to 75 basis points, and that kind of flows down. That gave us a little more conviction. And also, there's a non-cash charge in there as well, right, this quarter that's flowing to the gap net income, which is tied to the self-service divestiture. So that's kind of, just from a math perspective, kind of adds up onto the cash flow conversion as well. Overall, I agree with them on better operating performance. Thank you.

Speaker Change: For the full year for us in that guidance is really driven by getting more conviction on the margin side as Jennifer mentioned, our margin will be towards the high end on the 50 to 75 basis points that kind of flows down.

Speaker Change: That gave us a lot more conviction and also there is a.

Speaker Change: Noncash charge and Dennis about right. This one this quarter that's linked to the gap.

Speaker Change: GAAP net income, which is tied to the cell solstice divestiture, so thats kind of just from a.

Speaker Change: Math perspective adds up onto the cash flow conversion as well.

Speaker Change: But overall the great.

Speaker Change: Better operating performance.

Nathan Hardie Jones: Thank you. And we'll take our next question from Nathan Jones. Let's be full. Your line is open.

Speaker Change: Thank you.

Thank you and we'll take our next question from Nathan Jones with Stifel. Your line is open.

Jennifer L. Honeycutt: Good morning, Nathan. I'm going to follow up on Deane's question on distribution, but I'm going to come at it from the PQI side, because I would have thought there might actually be some more opportunities to leverage a distribution model and maybe reduce the costs to serve on the PQI side than on the water side, potentially maybe in lasers where there's not the same kind of consumable revenue or some of the smaller customers that maybe don't need that kind So if there's any commentary you could make on maybe the potential from that side of the business to leverage distribution a bit?

Nathan Hardie Jones: Good morning, everyone.

Nathan Hardie Jones: Good morning Nathan.

Nathan Hardie Jones: I'm going to follow up on Jamie's question on distribution, but I'm going to come at it from the <unk> side, because I would've thought there.

Nathan Hardie Jones: And that might actually be some more opportunities to leverage your distribution model and maybe reduce the costs on the <unk> side than on the water side.

Nathan Hardie Jones: Potentially maybe lasers, where there's not the.

Nathan Hardie Jones: St John to consumable revenue or some of the smaller customers that maybe don't need that kind of super high level of.

Nathan Hardie Jones: Of service from you guys. So if there is any commentary you could make on maybe the potential from that side of the business to leverage distribution at the mall.

Nathan Hardie Jones: Yeah, I mean, I think it's probably the same answer as for water. We do have distribution, and we do consider using distribution depending upon where we're selling in the world and what types of products are in the portfolio. This is something that we always consider in terms of when we decide to make investments and which product lines actually require a more significant level of applications, knowledge, and insight, but I will tell you that, like in water, there are pretty significant insights to be gained from understanding customer problems in a direct way for any kind of customer who's on the packaging and color side or on the marketing and coding side.

Yeah, I mean, I think it's probably the same answer as for water I mean, we do have distribution and we do consider use of distribution, depending upon where we are selling in the world and what types of products are in the portfolio.

Nathan Hardie Jones:

Nathan Hardie Jones: This is something that we always consider in terms of when we when we decide to make investments and which product lines actually require that's more significant level of applications knowledge and insight but.

But I will tell you that.

Nathan Hardie Jones: Like in water there are pretty significant insights to be gained from understanding customer problems in a direct way.

Nathan Hardie Jones: Or any kind of of a customer who's on the packaging of color side or on the marking and coding Si and it actually spurs a great deal of our innovation.

Nathan Hardie Jones: And it actually spurs a great deal of our innovation. You will recall from our fourth-quarter call that VideoJet launched seven new products last year. They additionally launched another two in the first quarter, and these are on the back of innovations for direct customer feedback. So I continue to be a little bit biased here towards our direct model because I do think it creates the customer intimacy required to have those untapped insights relative to some of the problems that they face. But we do use distribution, and we selectively consider that in the course of every strategic planning cycle.

Nathan Hardie Jones: You are you will recall from our fourth quarter call that video jet launched seven new products last year. They Additionally, launched another two in the first quarter and these are on the back of innovations for direct customer feedback so.

Nathan Hardie Jones: I continue to be a little bit biased here towards our direct model because I do think it.

Nathan Hardie Jones: The customer intimacy you're required to have those untapped insights rare.

Nathan Hardie Jones: Relative to some of the problems that they face, but we do use distribution and we selectively consider that in the course of every strategic planning cycle.

Jennifer L. Honeycutt: Thanks. I want to ask a follow-up question on recycling and reuse in industrial markets, which is a market I think has significant growth potential over, you know, the next 5, 10, 20 years and would certainly be a market that's right in the bullseye for a lot of your water quality business. So maybe some commentary on trends in industrial recycling and reuse markets, what you're seeing going on there, and what the opportunities are for Veralto to play in those markets.

Speaker Change: Thanks, I wanted to ask a follow up on recycling and reuse in industrial market.

Speaker Change: Which is a market I think has significant.

Speaker Change: The significant growth potential.

Next 510, 20 years and would certainly be a market that's right in the bull's eye for for a lot of your board of quality business.

Speaker Change: Maybe some commentary on trends in industrial recycling and reuse markets, what youre seeing going on there and what the opportunities are for growth have to play in those markets.

Nathan Hardie Jones: Yeah, this is a great question, and absolutely, we see a great deal of activity, interest, and growth potential in both recycling and reuse. And it's one that is pan-operating company-wide, I would say, across our water quality businesses. So the intersection of Chemtree, Trojan, and Hawk can all play in that space and, in fact, do have conversations amongst themselves and amongst the sales folks in the field relative to solving those kinds of applications.

Speaker Change: Yes. This is a great question and absolutely we see a great deal of activity interest and growth potential in both recycle.

Speaker Change: And reuse and it's one that is.

Speaker Change: Pan operating company I would say across our water quality businesses. So the intersection of Chem treat Trojan and Hawk.

Speaker Change: Can can all play in that space and in fact do have.

Speaker Change: Conversations amongst themselves and amongst our sales folks in the field relative to solving those kinds of applications, but increasingly by virtue of the importance of ESG amongst our customers, we do have them coming to us saying.

Nathan Hardie Jones: But increasingly, by virtue of the importance of ESG amongst our customers, we do have them coming to us saying, you know, look, my company has just said I've got to use, you know, 25% less water, and of the water that's not used in the process, I've got to recycle 50% of it, right? So can you help me with both reduction and recycling?

Speaker Change: Look my company has just said Ive got to use 25% less water and the water that's.

You know not used in the process I have got a recycle 50% of it right. So can you help me with both reduction and recycling.

Jennifer L. Honeycutt: And those are great; those are sweet spots for us. We've got a great product portfolio that can be deployed in these applications. And so we continue to be excited about the space.

Speaker Change: And those are those are great. Those are sweet spots for us we've got a great product portfolio that that can be deployed to these applications and.

Speaker Change: And so we continue to be excited about the space.

Nathan Hardie Jones: Sounds like a good opportunity to me. Thanks very much for taking my questions. You bet. Thank you.

Speaker Change: It sounds like a good opportunity to me thanks, very much for taking my questions.

Speaker Change: You bet.

Andrew Edouard Buscaglia: Thank you. And we'll take our next question from Andrew Vescalia of BNP Paribas. Your line is open.

Speaker Change: Thank you and we'll take our next question from Andrew <unk> with BNP Paribas. Your line is open.

Andrew Alec Kaplowitz: Hey, good morning, everyone.

Andrew Edouard Buscaglia: So I just wanted to check on the water quality side. You're talking about really strong industrial demand, and you did much better than your guidance. I'm wondering what changed, I'd say, from December and January to what transpired throughout the quarter, and then just the sustainability around that. What's driving that, really?

Andrew Alec Kaplowitz: Good morning, Andrew.

Andrew Alec Kaplowitz: Yes.

Andrew Alec Kaplowitz: So I just wanted to check on the water quality side Youre talking about.

Andrew Alec Kaplowitz: Really strong industrial demand in your guidance you did much better than your guidance I'm wondering what changed.

Andrew Alec Kaplowitz: From December January to what transpires throughout the quarter and then just the sustainability around that.

Jennifer L. Honeycutt: Yeah, I mean, I think we still see pretty strong industrial output here, particularly in North America. I think, you know, as we mentioned in our prepared remarks, we do see food and beverage coming back, which across the portfolio is the largest contiguous industrial segment that we play in. But likewise, chemical processing, mining, and power generation all continue to be strong. You know, we do see opportunities around reshoring activity as well, as the world becomes a little bit more fractured relative to its trade relationships.

Andrew Alec Kaplowitz: What's driving that really.

Speaker Change: Yes, I mean, I think we still see.

Speaker Change: Pretty strong industrial output here, particularly in North America, I think you know as we mentioned in our prepared remarks, we do see food and beverage coming back which across the portfolio is the largest contiguous industrial segment that we plan, but likewise chemical processing mining and power Gen.

Speaker Change: <unk> all continue to be.

Speaker Change: Strong.

Speaker Change: We do see opportunities around the re shoring activity as well as as the world becomes a little bit more fractured relative to its trade relationships and.

Jennifer L. Honeycutt: And so that's, you know, providing, you know, great opportunities, particularly with respect to microelectronics and, you know, the CHIPS Act and so on. So we do see a good macro environment here, particularly in North America, for our industrial sector.

Speaker Change: And so that's providing a.

Speaker Change: Great opportunity, particularly with respect to our microelectronics and.

Speaker Change: Chips Act and so on so we do see a good macro environment here, particularly in North America for industrial.

Jennifer L. Honeycutt: Yeah, it's a lot of little things, it sounds like. Yeah, yeah.

Speaker Change: Sector.

Speaker Change: Yeah.

Speaker Change: Little things it sounds like.

Andrew Edouard Buscaglia: And, and, you know, you got a lot of questions on M&A. Yeah, so that's where a lot of interest lies. I'm wondering if you can comment on that.

Speaker Change: Yes.

Speaker Change: You got a lot of questions on M&A.

Speaker Change: Yes, obviously, thats, where a lot of interest wise I'm wondering if you can comment on.

Andrew Edouard Buscaglia: You know, your margins, especially in water quality, are quite high. You know, how are you thinking about margins as you add M&A to your portfolio? Is there enough out there where you could see some accretion or, generally, long-term? Is this not really a... Should we not expect those margins to stay where they are if you're adding deals?

Speaker Change: Your margins, especially in water quality are quite high.

Speaker Change: How are you thinking about margins as you add M&A to your portfolio is there enough out there where you could see some accretion.

Speaker Change: Or generally long term it does not really.

Speaker Change: Should we not expect those margins to stay where they are if you are adding deals.

Sameer Ralhan: Yeah, Andrew, as you've kind of stated in the past, and when it comes down to M&A, we really follow a very disciplined and rigorous approach around markets, companies, and valuation. With respect to the financial metrics, it really is a combination of multiple factors, right? We look at ROIC, we look at margin. What are the things that we can add to the portfolio that can drive overall core growth and create synergies?

Yes, Andrew this is.

Speaker Change: As <unk> stated in the past when it comes down to M&A and Julie we follow a very disciplined and rigorous approach our own markets companies in valuation.

Speaker Change: With respect to the financial metrics. It really is a combination of multiple factors right and you look at our ROIC. When you look at margin what's the.

Speaker Change: One of the things that we can add to the portfolio that can drive overall core growth and create synergies.

How do we apply ves into the acquired businesses to really create that differentiated value. So it really comes down to the value.

Speaker Change: Creation potential and it comes on and ultimately that's based on a combination of all these different financial factors that we kind of look at as part of a rigorous process. So I wouldn't really focus on one metric versus the other it really comes down to the combination of pause to see how they will create long term value.

Sameer Ralhan: How do we apply VES to the acquired businesses to really create that differentiated value? So it really comes down to the value creation potential, and ultimately that's based on a combination of all these different financial factors that we kind of look at as part of our rigorous process. So I wouldn't really focus on one metric versus the other. It really comes down to the combination of all them to see how they'll create long-term value.

Speaker Change: Okay.

Speaker Change: Great. Thank you everyone.

Speaker Change: Thank you we'll take our next question from Brian Lee with Goldman Sachs. Your line is open.

Brian Lee: Hey, good morning, everyone. Thanks for taking the questions.

Brian Lee: Lots been covered on the call. So maybe just hey, good morning.

Brian Lee: Just a few follow ups I guess on PQ I can you remind us how far out.

Andrew Edouard Buscaglia: Okay. Thank you, everyone.

Brian K. Lee: Thank you. We'll take our next question from Brian Lee with Goldman Sachs. Your line is open.

Brian Lee: Does your visibility extend on the equipment backlog and then the recent strength youre seeing in bookings and then also maybe remind us what what are the mix implications you kind of alluded to them, but mix implications for margins in <unk> as you move through the year.

Brian K. Lee: Hey, good morning everyone. Thanks for taking the questions. You know, lots have been covered on the call, so maybe just good morning.

Brian Lee: And it does sound like equipment will grow.

Brian K. Lee: Just a few follow-ups, I guess, on PQI. Can you remind us how far out your visibility extends on the equipment backlog and then the recent strength you're seeing in bookings? And then also maybe remind us what the mixed implications are? You kind of alluded to them, but mixed implications for margins in PQI as you move through the year, and it does sound, you know, like equipment will grow relative to consumables. How should we think about that in the context of margins?

Brian Lee: Relative to consumables, how should we think about that in the context of Martin's.

Speaker Change: Yeah, I mean, I think what we see here is visibility for equipment in the 60 to 90 day timeframe right. This is a short cycle business.

Speaker Change: So.

Speaker Change: A lot of our confidence around.

Speaker Change: Equipment.

Speaker Change: Equipment here in the second half is is a product of history right when we see cycles of.

Speaker Change: Food and beverage and consumer packaged goods sort of decline in recovery.

Jennifer L. Honeycutt: Yeah, I mean, I think what we see here is, you know, visibility for equipment in the 60 to 90 day time frame, right? This is a short cycle business.

Speaker Change: We see typical patterns, which is pretty intuitive.

Speaker Change: The inks and solvent spare parts consumables recovering first as these lines are brought back online and then equipment following win.

Jennifer L. Honeycutt: So a lot of our confidence around, you know, equipment here in the second half is a product of history, right? When we see cycles of food and beverage and consumer packaged goods sort of decline and recovery, we see typical patterns, which are pretty intuitive of, you know, the inks and solvents, spare parts, and consumables recovering first as these lines are brought back online. And then equipment following when funds are available to do line expansions, you know, equipment upgrades, and so on and so forth. So, you know, you do see in the guide that we've projected a rebalancing of consumables and equipment here in the back half of the year. And so we've accounted for that.

Speaker Change: Funds are available to do line expansions.

Speaker Change: Equipment upgrades and so on and so forth so.

Speaker Change: You do see in the guide that we've projected a rebalancing is kind of consumables and equipment here in the back half of the year and so we've accounted for that.

Speaker Change: Okay, Great that's helpful.

Speaker Change: And then just one on water quality E O I think a couple of questions ago, you were talking Jennifer about.

Speaker Change: The demand in water reuse water recycling somewhat from an ESG footprint.

Speaker Change: From growing subset of your customers I think there's also growing subset of customers and industries here Levered to.

Power Gen growth, we're seeing load growth on the grid in the U S, especially.

Speaker Change: First time in a while really really seeing some positive inflections. So can you kind of give us a sense of from your vantage point the different technologies product sets you have into the micro electronics sector, how much of the mix. It is and then it seems like there is just incremental volume growth.

Jennifer L. Honeycutt: Okay, great, that's helpful. And then, you know, just one on water quality. I think a couple questions ago, you were talking, Jennifer, about the demand for water reuse, water recycling, somewhat from an ESG footprint, from a growing subset of your customers. I think there's also, you know, a growing subset of customers and industries here levered to, you know, power generation growth. We're seeing low growth on the grid in the US, especially.

Speaker Change: <unk> there maybe if you could just speak to that a little bit. Thank you.

Speaker Change: Yeah.

Speaker Change: So the.

Speaker Change: The business that is benefits most from.

Speaker Change: The Chimps Act and microelectronics.

Speaker Change: Is trojan self UV treatment systems and for high purity Ultra high purity water.

Jennifer L. Honeycutt: For the first time in a while, really, really seeing some positive inflection. So, can you kind of give us a sense of, from your vantage point, the different technologies and products that you have in the microelectronics sector, how much of, you know, the mix they are, and then it seems like there's just incremental volume growth opportunities there. Maybe if you could just speak to that a little bit. Thank you.

Speaker Change: That water has to be exceedingly pure given the manufacturing.

Speaker Change: Requirements for semiconductor wafer fab.

Speaker Change: But there are.

Speaker Change: Pockets of other equipment and.

Speaker Change: Analytics and so on that gets sold into that space, but.

Speaker Change: We've really seen some nice growth in our UV treatment business as a result of.

Speaker Change: And sort of see the onshoring.

Speaker Change: Onshoring of re shoring of Fabs here in North America, as well as the ones that continue to be built in China.

Sameer Ralhan: So, the, uh... The business that benefits most from the CHIPS Act and microelectronics is Trojan, which sells UV treatment systems for high-purity, ultra-high-purity water. That water has to be exceedingly pure, given the manufacturing requirements for semiconductor wafer fabs. But there are, you know, pockets of other equipment and, you know, analytics and so on that get sold into that space. But, you know, we've really seen some nice growth in our UV treatment business as a result of sort of the on-shoring or re-shoring of fabs here in North America, as well as the ones that continue to be built in China.

Speaker Change: Yes, Brian the only other thing I would add to that is is it going to look at the bid activity that our teams are seeing if you're seeing a pretty frequently bid activity that is kind of tied to the reuse.

Speaker Change: Point.

Speaker Change: Early in the Internet as well on the municipal side and then on the semi side.

Speaker Change: On the.

Speaker Change: Therefore, the UV treatment system. So the bid activity is actually pretty good on both sides.

Speaker Change: Try and tie back into the towards the business.

Speaker Change: Thank you and it appears that we have no further questions. At this time I will now turn the call back over to Ryan Taylor for any additional or closing remarks.

Ryan Taylor: Thanks, Jody and thanks, everybody for joining us today, we really appreciate your time and engagement.

Brian K. Lee: Yeah, and Brian, the only other thing I would add to that is that we're going to look at the bid activity that our teams are seeing. You know, we're seeing pretty, pretty healthy bid activity that's kind of tied to the reuse point that Nathan had earlier as well, on the municipal side, and then on the semi-side on the for the UV treatment system. So the bid activity is actually pretty good on both sides, and that kind of tries to tie back into the Georgian business.

As normal I'll be available for follow ups today and throughout the next coming days and weeks should you want to talk please reach out to me.

Speaker Change: And at this time, we will conclude our call. Thank.

Thank you so much again and we'll join you next time.

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

Speaker Change: Yeah.

Ryan Taylor: Thank you. And it appears that we have no further questions at this time. I will now turn the call back over to Ryan Taylor for any additional or closing remarks.

Speaker Change: Okay.

Speaker Change: Uh-huh.

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Speaker Change: Mhm.

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Operator: Thanks, Shelby, and thanks, everybody, for joining us today. We really appreciate your time and engagement. As normal, I'll be available for follow-ups today and throughout the next coming days and weeks, should you want to talk, please reach out to me. And at this time, we'll conclude our call. Thank you so much again, and we'll join you next time.

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Speaker Change: Hmm.

Speaker Change: [music].

Speaker Change: Okay.

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Speaker Change: Okay.

Speaker Change: [music].

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

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