Q1 2025 Veralto Corp Earnings Call
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Margaret: My name is Margaret and I'll be your conference operator. This morning at this time I'd like to welcome everyone to for all post Corporation's first quarter 2025 conference call. All lines have been placed on mute to prevent any background noise.
Margaret: After the Speakers' remarks, there will be a question answer session. If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.
Margaret: If you would like to withdraw your question. Please press the Star then the number two on your telephone keypad.
Speaker Change: I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor you may begin your program.
Ryan Taylor: Good morning, everyone. Thanks for joining us on the call.
Ryan Taylor: With me today are Jennifer Honey cut our president and Chief Executive Officer, and Samir Wall Horn, our senior Vice President and Chief Financial Officer.
Ryan Taylor: Today's call is simultaneously being webcast.
Ryan Taylor: A replay of the webcast will be available on the investors section of our website later today under the heading events and presentations.
Ryan Taylor: A replay of this call will be available until may nine.
Ryan Taylor: Yesterday, we issued our first quarter 2025 news release.
Ryan Taylor: Earnings presentation, and supplemental materials, including information required by the SEC.
Ryan Taylor: Relating to adjusted or non-GAAP financial measures.
Ryan Taylor: In addition, we have reaffirmed our full year 2025 earnings per share guidance.
Ryan Taylor: Which now includes our current assessment of the macro economic environment.
Ryan Taylor: Including tariffs and related countermeasures.
Ryan Taylor: These materials are available in the investors section of our website for Altra Dot com under the heading quarterly earnings.
Ryan Taylor: Reconciliations of all non-GAAP measures are also provided in the appendix of our webcast slides.
Ryan Taylor: Unless otherwise noted all references to variances are on a year over year basis.
Ryan Taylor: On that note I'd like to point out that year over year sales growth in the first quarter of 2025.
Ryan Taylor: Benefited from three additional shipping days as compared to the first quarter of 2024.
Ryan Taylor: During the call we will make forward looking statements within the meaning of the federal Securities laws.
Ryan Taylor: Including statements regarding events or developments that we believe or anticipate well or may occur in the future.
Ryan Taylor: Yeah.
Ryan Taylor: These forward looking statements are subject to a number of risks and uncertainties.
Ryan Taylor: Including those set forth in our SEC filings.
Ryan Taylor: Actual results may differ materially from our forward looking statements.
Ryan Taylor: These forward looking statements speak only as of the date that they are made.
Ryan Taylor: We did not assume any obligation to update any forward looking statements, except as required by law.
Jennifer Honeycut: And with that I'll turn the call over to Jennifer.
Thank you Ryan and thank you all for joining our call today.
Jennifer Honeycut: For discussing our first quarter results I'd like to take a moment to recognize our 17000 associates across the world for their commitment to serving customers driving continuous improvement and safeguarding the world's most vital resources.
Jennifer Honeycut: As stewards of some of the world's most essential resources, we help ensure billions of people have access to clean water safe food and trusted essential goods each and every day.
Jennifer Honeycut: Dynamic business environment, such as the one we are currently experiencing provide.
Jennifer Honeycut: Provide us with the opportunity to demonstrate the essential nature of our products the durability of our business model and the power of the world So enterprise system.
Jennifer Honeycut: Our team embraces challenges as opportunities to drive differentiated winning outcomes for our customers associates and shareholders.
Jennifer Honeycut: That mindset has propelled us to a strong start in 2025 and prepared us to navigate this dynamic macroeconomic environment, we are facing in the near term.
Jennifer Honeycut: In the first quarter, we delivered excellent results across the enterprise driven by disciplined execution in both segments.
Jennifer Honeycut: And we are actively deploying several countermeasures to mitigate changes in the global trade and tariff landscape and enhance our operational flexibility.
Jennifer Honeycut: I'm proud of our team and our collective performance thus far in 2025.
Jennifer Honeycut: Looking at the first quarter results in detail building off the operating momentum generated last year, we delivered 7.8% core sales growth 50 basis points of adjusted operating margin expansion and double digit adjusted EPS growth.
Jennifer Honeycut: Our commercial teams executed on strategic initiatives to gain new customer wins and increased market penetration, while also capitalizing unfavorable demand across our key end markets and geographies.
Jennifer Honeycut: Our core sales growth was driven primarily by volume and was broad based across both segments with PQ I, delivering eight 3% core sales growth and water quality, 7.4% core sales growth.
Speaker Change: And Pete you I positive trends in consumer packaged goods markets supported growth across all key product categories in our marking and coding business and across our digital workflow solutions and packaging and color.
Speaker Change: Notably in our marking and coding business Q1 marked our fourth consecutive quarter with year over year growth in both consumables and equipment.
Speaker Change: And water quality, we continued to drive robust growth of our water treatment solutions in North America complemented by steady growth in water analytics sales globally, including double digit growth in Europe.
Speaker Change: Adjusted operating profit margin expanded 50 basis points year over year to 25% and all time high.
Speaker Change: We expanded operating margin in both segments with incremental margins in line with our long term framework.
Speaker Change: Driven by high quality sales growth and efficient operating leverage adjusted earnings per share grew 13% year over year to 95 cents.
Speaker Change: This exceeded our guidance, primarily due to better than expected sales volumes.
Speaker Change: I'm proud of our team's disciplined execution to deliver a high quality performance in the first quarter in service to our customers.
Speaker Change: In addition to our strong organic growth performance, we continue to make great progress on our recent acquisition.
Speaker Change: The integration of trace gains is on track.
Speaker Change: Sales are growing in line with our expectations and we continue to invest in future growth.
And in February we signed a definitive agreement to acquire Aqua fetus, and Austria based provider of ultraviolet water treatment for $20 million.
Speaker Change: Aqua feed as treatment systems are used in drinking water wastewater and a variety of industrial applications that require high purity water, including food and beverage and pharmaceuticals.
Speaker Change: This is a fantastic addition to our Trojan business it expands our ability to serve European customers with local engineering support and service, while also expanding our UV treatment portfolio with high quality efficient fit for purpose solutions.
Speaker Change: We look forward to welcoming the Aqua fetus change overall tow and unlocking new growth opportunities together.
Speaker Change: Looking at core sales growth by geography, and end market growth was broad based across key verticals and regions.
Speaker Change: Our commercial teams executed well leveraging V S tools and capitalizing on the investments made last year to expand our sales marketing and innovation efforts.
Speaker Change: Sales growth in Western Europe was robust at nearly 11% with double digit growth in both segments.
Speaker Change: In North America sales grew approximately 8% with high single digit growth in both segments.
Speaker Change: And sales in high growth markets were up 6% year over year with PQ I sales up high single digits and water quality up low single digits.
Speaker Change: Taking a closer look in western Europe water quality grew 11, 3%.
Speaker Change: Our water analytics team in Western Europe continued to deliver exceptional growth through rigorous lead generation funnel management and E. S catalyzed commercial execution.
Speaker Change: And then PQ I sales into Western Europe grew 10, 3% driven by double digit growth in packaging and color and high single digit growth and marking and coding.
Speaker Change: In packaging and color, we saw strong software growth across most packaging applications, including increased mid market penetration.
Speaker Change: This reflects increased focus on account management and fit for purpose solutions to accelerate software growth.
Speaker Change: And in marking and coding growth was driven across equipment.
Speaker Change: Similar bowls and spares.
Speaker Change: Moving to North America core sales growth was led by water quality with eight 3% growth.
Speaker Change: We continued to capitalize on increasing demand for our chemical water treatment solutions, which grew double digits in North America.
Speaker Change: Our chemical treatment growth was broad based across several industries with the strongest growth in power generation food and beverage and chemical processing.
Speaker Change: And we continue to see growth from new data centers as they become operational.
Speaker Change: Also sales of Trojans UV systems to municipalities, primarily related to water reuse contributed to our growth in North America.
Speaker Change: The economic benefits of water conservation reclamation, and reuse continue to provide opportunities for us to expand our business and support our customers' objectives to efficiently manage their water usage.
Speaker Change: Over the long term continued north American growth in water quality is supported by attractive secular trends such as water scarcity.
Speaker Change: Water reuse more frequent severe weather events and increasing demand from heavy water consumption applications, such as data centers and power generation.
Speaker Change: We also continued to benefit from positive market trends across peaks you I in North America during the first quarter with core sales up six 9% year over year.
Speaker Change: This was primarily driven by double digit growth in recurring revenue, specifically consumables and software.
Speaker Change: This reflects a combination of improved end market demand from CPG customers V S driven commercial excellence and market penetration from our strategic initiatives.
Speaker Change: And high growth markets core sales grew six 1% highlighted by strong growth in Latin America, India, and the Middle East.
Speaker Change: In China sales grew low single digits with strong growth in PQ I, partially offset by a decline in water quality sales related to timing of ultra violet treatments installations, which were strong in Q1 2024.
Speaker Change: Overall, we delivered strong broad based growth in the first quarter across all of our operating companies.
Speaker Change: Yeah.
We believe the essential nature of our products, our durable business model and the secular growth drivers across our end markets position us to create value for our stakeholders over both the short and long term.
Speaker Change: We remain confident that the <unk> enterprise system will enable us to navigate ongoing changes in the macroeconomic environment with agility and discipline.
Speaker Change: In addition to delivering a strong first quarter, we implemented several countermeasures to help mitigate the impact of recent tariff hikes and enhance our operational flexibility.
Speaker Change: This includes strategic pricing roadmaps.
Speaker Change: Target is sourcing and supply chain initiatives and shifts and manufacturing footprint, including the addition of Trojans first U S factory in Grand Rapids, Michigan.
Speaker Change: This factory opened in February and is designed to support consumable and light assembly for our domestic you'd be water treatment customers.
Speaker Change: This expansion creates greater manufacturing and supply chain flexibility for Trojan to support its U S customer base.
Speaker Change: We leveraged <unk> tools to prioritize and accelerate the opening of this facility by about four months ahead of schedule to help offset potential tariff headwinds.
Speaker Change: With greater flexibility and the exemption of product imports covered by the U S. M. C. A our current exposure to Canadian tariffs has been reduced significantly.
Speaker Change: This is a great example of how well equipped our team is to navigate the current macro environment with focus agility and speed.
Speaker Change: And we have several levers to pull to mitigate risk, while supporting our customers and maintaining business continuity.
Speaker Change: Our decentralized operating model empowers our business leaders, who are closest to our customers to make decisions quickly.
Speaker Change: Our diverse global footprint and flexible supply chain give us agility and optionality to maneuver quickly.
Speaker Change: And our leading market positions direct sales force and the essential nature of our products give us the ability to be thoughtful with strategic pricing actions.
Speaker Change: Confidence in our ability to deliver on our commitments is in large part grounded in the morale to enterprise system, our proven system for driving growth operational improvements and leadership development.
Speaker Change: A core tenant of V S is continuous improvement or kaizen.
Speaker Change: As we do annually in the first quarter each year, we completed for Roto second CEO Kaizen week in February.
Speaker Change: CEO Kaizen week is a long standing tradition of our enterprise system and personally one of my favorite weeks of the year.
Speaker Change: This event is culturally important as it helps us stay close to the businesses and understand both their struggles and opportunities helping to catalyze decision, making and prioritize allocation of capital and resources.
Speaker Change: For one week, we immersed 20 cross functional teams at Gamba, where the real work happens at 10 locations across the world to address our biggest impact opportunities with the participation of roto executives.
Speaker Change: Building off our success last year. This year's CEO Kaizen week was designed to help us accelerate growth and reinforce that at <unk>. We are all practitioners of continuous improvement.
Speaker Change: Among other opportunities a few of them this year as most strategic and impactful events focused on.
Speaker Change: Increasing adoption of packaging and color software within mid market CPG customers.
Speaker Change: Accelerating capture of design input requirements for new product development in water analytics.
Speaker Change: And reducing lead time for consumables and one of our marking and coding product lines. The.
Speaker Change: The benefits of any kaizen week include immediate solutions that are rapidly implemented and yield real time results.
Speaker Change: Success is proven by sustaining these results, which we track following the kaizen events.
Speaker Change: That concludes my opening remarks, and at this time I'll turn the call over to Samir.
Samir: Thanks, Jennifer and good morning, everyone.
Samir: I'll begin with our consolidated results for the first quarter.
Samir: Total sales grew six 9% on a year over year basis over $1.3 billion.
Samir: Currency was a 130 basis points are $16 million headwind year over year.
Samir: And acquisitions contributed 40 basis points of growth primarily from Chris gains.
Samir: Core sales grew seven 8% led by broad based volume gains across both segments.
Samir: Price contributed one 3% growth in the quarter and.
Samir: In line with historical levels.
Samir: Our recurring revenue grew high single digits year over year and comprised 61% of our total sales.
Samir: As Ryan mentioned, the first quarter of 2025 had three more shipping days as compared to the first quarter of 2024.
Samir: If you exclude the estimated benefit of those extra days core sales growth in Q1 was still above 5% solidly in the mid single digits and our highest core sales growth quarter since becoming a public company.
Samir: Gross profit increased 8% year over year to $805 million.
Samir: Gross profit margin improved 40 basis points year over year to 64%, primarily driven by volume leverage and to a lesser extent pricing.
Samir: Adjusted operating profit increased 9% year over year, and adjusted operating profit margin expanded 50 basis points to 25% an all time high.
Samir: Yeah.
Samir: Looking at EPS for Q1 adjusted earnings per share grew 13% year over year to <unk> 95 per share.
Samir: As compared to our guidance our adjusted EPS came in stronger primarily due to higher sales volumes at both segments.
Samir: Looking at cash flow in the first quarter, we generated $142 million of free cash flow, an increase of $40 million year over year.
Samir: This increase was primarily driven by the growth in earnings.
Samir: I will now cover the segment results starting with water quality on the next page.
Samir: Our water quality segment delivered $794 million of sales up 6% on a year over year basis.
Samir: Currency was a 130 basis points headwind.
Samir: And divestitures resulted in a modest 10 basis points reduction in sales versus the prior year period.
Samir: Core sales grew seven 4% year over year, including a 100 basis points from price and 640 basis points from volume.
Samir: Water quality is volume growth was driven by strong demand for water treatment solutions, and our industrial end market and UV treatment systems and municipal end markets.
Samir: We also saw good volume growth in sales of analytical instruments reagents and chemistries to municipalities.
Samir: Water quality is recurring sales grew high single digits year over year and equipment growth was up mid single digits.
Samir: Adjusted operating profit increased seven 5% year over year to $200 million and adjusted operating profit margin was 25, 2% up 40 basis points versus the prior year.
Samir: Overall, it was a strong quarter for water quality.
Samir: We expect to see steady growth over the balance of this year given our products are critical to our customers' ongoing operations and generate high level of recurring sales.
Samir: Moving on to our <unk> segment on the next page.
Samir: Sales in our <unk> segment grew eight 3% year over year to $538 million in the first quarter.
Samir: Currency was a 130 basis points headwind.
Samir: The currency headwinds were offset by 130 basis points of growth from acquisitions, primarily trace games.
Samir: Core sales grew eight 3%.
Samir: Led by volume growth of six 7% and price increases contributing 1.6% to core sales growth.
Samir: <unk> core sales growth was driven by both recurring revenue and equipment shipments.
Samir: Recurring revenue grew high single digits year over year led by consumables and software.
Samir: Equipment growth also grew high single digits led by marking and coding equipment.
Samir: <unk> adjusted operating profit was $153 million in the first quarter.
Samir: Up $14 million over the prior year period.
Samir: Results in adjusted operating profit margin of 28, 4%, an increase of 40 basis points year over year.
Samir: The increased profitability was primarily driven by strong operating leverage on volume growth and to a lesser extent pricing.
Samir: Turning now to our balance sheet and cash flow in the first quarter, we generated $157 million of cash from operations.
Samir: We invested $15 million and capital expenditures.
Samir: As a result free cash flow was $142 million in the quarter up 39% over the prior year.
Samir: Similarly, driven by the increase in earnings.
Samir: At the end of the first quarter gross debt was $2 $6 billion.
Samir: And cash on hand was over $1.2 billion.
Samir: Net debt was $1 $4 billion, resulting in net leverage of one one times.
Samir: Our financial position is very strong and provides us the flexibility to be opportunistic in how we deploy capital to create long term shareholder value.
Samir: Having said that we plan to be prudent and disciplined as we navigate this current economic environment.
Samir: For the long term our goal is to continue to create shareholder value with a bias towards M&A.
Samir: And we have an attractive pipeline of opportunities in both water quality and PQ I.
Samir: Turning now to our guidance.
Samir: Yesterday, we reaffirmed our 2025 full year adjusted EPS guidance of $3 60 per share to $3 70 per share.
Samir: Our underlying assumptions have been updated to reflect currency rates and current assessment of tariffs and trade policies.
Samir: Our full year guidance now assumes an estimated gross impact from the announced tariff increases of approximately three 5% of full year sales on an annualized basis.
Samir: And we expect our countermeasures to largely offset tariff impacts.
For the full year 2025, our year over year core sales growth target remains low to mid single digits consistent with our prior guidance.
Samir: Furthermore, we expect neutral impact to the full year sales growth from both currency translation and acquisitions net of divestitures.
Samir: We expect sales contributions from trace gains and Aqua feed these to be largely offset by the <unk> divestiture.
Samir: We are now assuming corporate expense at about $100 million as we control discretionary spending in light of the macroeconomic environment.
Samir: Given the impact and timing of tariff increases and related countermeasures, we expanded our target range of adjusted operating profit margin.
Samir: We are now targeting full year adjusted operating profit margin to be flat to up 50 basis points on approximately 25 basis point expansion at the midpoint.
Samir: We believe this is prudent given the dynamic macroeconomic landscape.
Samir: And we are targeting free cash flow conversion between 90% to 100% of GAAP net income in line with prior guidance.
Samir: Looking now at our second quarter guidance, we expect core sales to grow in the low to mid single digit range year over year across both segments.
Samir: And our second quarter 2025 guidance for adjusted EPS is <unk> 84 to 88 cents per share.
Samir: That concludes my prepared remarks.
Samir: At this point I'll turn the call over to Jennifer for closing remarks.
Jennifer Honeycut: Thanks Amir in summary, we're off to a strong start in 2025, we are confident in our ability to navigate and more dynamic macroeconomic environment in the near term and are prepared to do so.
Jennifer Honeycut: We believe that the essential need for our technology solutions, our durable business model and the secular growth drivers across our end markets will support our financial performance this year.
Jennifer Honeycut: We continue to leverage the power of the vault to enterprise system to drive continuous improvement and bolster our agility.
Jennifer Honeycut: Our financial position remains strong.
Jennifer Honeycut: And we continue to evaluate opportunities to create shareholder value within our disciplined capital allocation framework.
Jennifer Honeycut: We are excited about the bright future ahead for <unk> and the opportunities in front of us to help customers solve some of the world's biggest challenges and delivering clean water safe food and trusted essential goods.
Jennifer Honeycut: That concludes our prepared remarks and at this time, we are happy to take your questions.
Speaker Change: Thank you and at this time, if you would like to ask a question. Please press the star one on your telephone keypad you may remove yourself at any time by pressing to start to again, we will go first to Scott Davis with Melius Research. Please go ahead.
Scott Davis: Hey, good morning, Jennifer Sameer and Ryan Congrats on the start of the year.
Scott Davis: Good morning, Scott.
Speaker Change: I I hate to do it but I have to ask on tariffs because it's just so much of earn Cummings and.
Scott Davis: And you guys seem pretty confident in your ability to mitigate but perhaps maybe.
Speaker Change: Provide a little bit more color on the sequencing.
Speaker Change: I imagine you can't mitigate overnight, there's just going to take some time.
Speaker Change: But.
Speaker Change: I'll keep that as kind of an open ended question that just help us understand how.
Speaker Change: The mechanics behind mitigation and kind of the timing and when you would expect to be fully offsetting the tariffs.
Speaker Change: Thanks for the question Scott Yeah, I think we feel very confident here our gross exposure to tariffs is about three 5% of our sales and bear in mind that in terms of running brawl tow and using but yes, we are constantly looking for opportunities to optimize the business.
Speaker Change: That operational footprint pricing.
Speaker Change: Hi.
Speaker Change: Supply chain and strategic sourcing kinds of kinds of opportunities.
Speaker Change: And so in effect, we we always have this going on we've accelerated some of the actions just purely around derisking, what we see today, but I would reiterate as I said in the comments, we're well positioned here so pricing actions have been and will continue to be.
Speaker Change: <unk> undertaken a we additionally, derisk our trop.
Speaker Change: Trojan manufacturing facility based in Canada by pulling forward.
Speaker Change: Some redundant manufacturing capability into their new manufacturing facility and distribution center in Grand Rapids, Michigan.
Speaker Change: And we continually work to align our supply chain and our sourcing strategies relative to derisking, our tariff situations. So bear in mind too that we're effectively at an asset light.
Speaker Change: Light manufacturing operation.
Speaker Change: Most of our business here is is sub assemblies, and kitting circuit boards plastic enclosures optics, and so on and so theres no additional.
Speaker Change: Additional capital needed to create redundant lines or in fact move manufacturing lines and we do that regularly in the normal course of business on.
Speaker Change: On average you know we can move a line within a six month timeframe some take longer but we feel like we're really well positioned here.
Speaker Change: Okay.
Speaker Change: Helpful. And then if you just think about second derivative demand impacts I would I would think video jet would be a pretty good real time demand indicator for it.
Speaker Change: Really just you know.
Speaker Change: Customer confidence and such.
Speaker Change: What what have you seen anything in video chat in April that would lead you to be a little bit concerned about the.
Speaker Change: Customer confidence and folks plans on spending money in.
Speaker Change: <unk> and beyond here in 'twenty five.
Scott Davis: We really Havent Scott demand remains strong for our PQ I business in and particularly coding and marking as well. So we don't see any demand change in the in the order patterns.
Scott Davis: You know we have just completed four consecutive quarters of growth for both equipment and consumables, which follows a good trajectory of <unk>.
Scott Davis: Consumer confidence and recovery in the CPG markets.
Scott Davis: The trends between different types of consumer product goods or variable right beverages are up salty snacks are down.
Scott Davis: And we stay close to the data. This is a volume game for US right and so we look at our volume on a on a regular basis in terms of number of codes printed.
Speaker Change: And you know, we'll continue to watch the market closely but at this point, we don't have any indication of that softening and Scott if I may add as you're going to look at the April the order patterns are still pretty normal at this point.
Speaker Change: Interesting okay helpful. I'll pass it on thank you and best of luck this year.
Speaker Change: Great. Thanks, Scott.
Speaker Change: Our next question comes from Deane Dray with RBC capital markets. Please go ahead.
Speaker Change: Okay.
Speaker Change: Love to get started here on the tariffs follow up to Scott's questions and just can you talk about the price elasticity I mean, it's really you've got there is high switching cost for your customers.
Speaker Change: Especially on the water quality side can you just talk about the difference between consumables.
Speaker Change: The Alaska city versus equipment, and where would be the most risks that you have in increasing prices. Just if you think about your product line.
Dean: Well thanks for the question Dean.
Dean: This is a dynamic situation that we continue to operate and we're relatively surgical in our approach to pricing. So it's going to depend based on the products that customers in the regions that we're operating in and so theres really not a one size fits all approach.
Dean: We'll say as you know that 80% of our sales goes into food water and essential goods and our products are essential to customer operations, where the risk of failure is high and the overall spend relative to their operating budget is low so it's well worth the investment here and I would say that.
Dean: With 60% of our revenue tied to the consumables business, it's a pretty sticky relationship as you know.
Dean: So we've got the razor razorblade relationship here.
Dean: But as you know our decentralized operating model empowers our business leaders to effectively take pricing actions are where are they best see fit.
Dean: And that's going to vary by operating company and product line.
Speaker Change: Great just can you clarify if you're using surcharges in addition to pricing.
Speaker Change: Like I said Deane it it's going to it's going to vary in some cases, we're using the surcharges. Some cases its pricing it it just depends upon the business the product line in the region in which we're operating but but I can say, we remain confident in our ability to have a you know our pricing actions be though.
Speaker Change: Surcharges or or permanent increases to stick and we believe we're well covered in terms of addressing any tariff impact going forward.
Speaker Change: Great and then just a follow up and this is away from tariffs do you have any high level observations on the EPA announcement. This week regarding P. Foss now there was a lot of handwringing.
Speaker Change: Worried that there might be some pull back from.
Speaker Change: The enforcement here, especially the four parts per trillion, but it looks like it was a full endorsement of.
Speaker Change: And of the enforcement of.
Speaker Change: Of P Foss and.
Speaker Change: Just any commercial implications for you all and.
Speaker Change: And we'd love to hear again, just high level thoughts.
Speaker Change: Yeah. Thanks for the question as you know, we we remain excited about our P. Fast in terms of both our analysis and treatment, particularly in the areas destruction.
Speaker Change: We remain active with our minority investment in X gene technologies, which is a a destruction technology for P fast.
Speaker Change: Our teams are constantly canvassing the market looking for opportunities to innovate and particularly democratize test so that they can be fit for purpose for utilities and municipalities. So we think we're well positioned here and as a reminder, there's there's nothing in our forecast.
Speaker Change: Going forward that has any component of pizza sales either treatment or destruction in it.
Speaker Change: I think it's it remains early days here in terms of how to go solve for this problem, but there's effectively no impact if the EPA decides to.
Speaker Change: You know pull their four parts per trillion or increase it to some other minimum contamination level. We remain committed to this space and we think theres going to be a need to solve for this in the future.
Speaker Change: Great I appreciate all that color. Thank you.
Speaker Change: Our next question comes from Mike Halloran with Baird. Please go ahead.
Mike Halloran: Hey, good morning, everyone.
Speaker Change: Good morning, Mike.
Speaker Change: So I just want to make sure I understand how you guys are thinking about the year in how everything cadence is out first the selling days.
Speaker Change: Does that come out of the second quarter or when does it where does that balance out over the course of the year and then how are you thinking about the seasonality.
Speaker Change: Embedded in guidance all else equal relatively normal any change more of a top line question Theres been a bottom line question.
Speaker Change: Hey, Mike. Thanks for the question as you kind of think about the three extra days, it's really the impact is going to be in the Q4. So for the full year. There is not a not a not any impact for second quarter and third quarter on a year over year basis, they should not be any change on the number of days.
Speaker Change: So that's how you should think about that despite that Q1 was really strong. So we feel really good about the execution of our team and you know greater than 5% of the core growth, even if we pro forma as if on average basis for the extra three days, so really solid quarter.
Speaker Change: From a seasonality perspective, as you know our business really does not have a whole lot of seasonality you may see a little bit of movement in the Q4 based on the budgets that would be in a minute municipalities may have things like that but really from a seasonality perspective our businesses.
Speaker Change: Pretty steady.
Speaker Change: Thanks for that and then.
Speaker Change: Probably this is almost two questions squeezing the one which I admit it ahead of time.
Speaker Change: But can you help us bridge between <unk> and <unk>, you know relative to the strength of <unk>, even excluding the sale of the number of selling days and the benefits to a really good quarter.
Speaker Change: It seems like a little bit of a change going into second quarter is that the timing of how the tariffs roll through and then the second question embedded in that is.
Speaker Change: How does the tariff mitigation work through years of heaviest in <unk> and in pretty light if at all in the fourth quarter. So if you could just kind of square those two dynamics for me.
Speaker Change: Yeah, Mike, let yes, you know the two definitely two questions. So, let's let's let's parse them out I think first let's look at from a growth perspective on the guidance.
Speaker Change: Look I think Q1 was really strong again, well go to the 5% core growth even if you even if you pro forma on average for three days the extra shipping days.
Speaker Change: You know the order patterns in April seem normal, but having said that there's just lot of geographical into uncertainty from the trade policies. So what have you done. It is look look look look a lot of scenarios I just got to try to rebalance between price and volume.
Speaker Change: Where we are as you feel pretty good about the low single digits mid single digits kind of overall core growth as you know, we don't guide between the price and volume.
Speaker Change: So that's how you kind of think about the core growth side at this point I think it makes sense for us to be stay a little judicious.
Speaker Change: From a growth perspective on the margin side, and that's where your tariff question comes in and how the impact of those roll in.
Speaker Change: We modeled in a little bit of a timing difference between the tariff increases and the related countermeasures.
Speaker Change: So that's kind of a you know.
Speaker Change: Kind of driving to and why we have expanded the margin range a little bit also in the near term, but we have seen is looked lucky one was really good on the equipment sales and of course that sows the seeds for the future growth. So that's really create outcome in Q1, our remodeled and equipment sales.
Speaker Change: Growing in Q2 as well so that's impacting load on the margin side in the second quarter and lastly.
Speaker Change: Mike is really math right and the quantum of the numbers that we're looking at from a cost and then the price to offset that is going on we are trying to protect the op dollars right. That's why the EPS, we feel pretty good about <unk> 60 to <unk> 70, but when you try to protect the LP dollars, you're going to have a little bit of an impact just on a percent of the mountain side.
So that's kind of like really playing into the guide as well, but overall, we feel really good about at this point on the countermeasures and how are you looking at the demand at least sitting here today.
Speaker Change: Great really appreciate it thanks for the detail.
Speaker Change: Thanks, Mike Thanks, Mike. Our next question comes from John Mcnulty with BMO capital markets. Please go ahead.
John Mcnulty: Yeah. Good morning, Thanks for taking my question. So morning, John We're obviously.
John Mcnulty: Good morning, once you lock stronger I think than even you all expected or at least guided too.
John Mcnulty: At the same time it doesn't sound like there was any pull forward or anything like that or around the tariffs side. So I guess first can you help us to understand.
John Mcnulty: Where would that strength surprised you I mean, your business is normally pretty predictable and yet it really came in a lot better than expected. So I guess where were the were the big surprises would you say.
John Mcnulty: Thanks for the question John.
John Mcnulty:
John Mcnulty: You know we are post spin and then we've been out of the starting blocks out 18 months or so.
John Mcnulty: Really had the benefit of of Reinvigorating V S and doubling down on commercial execution, and new product development and making sure that we are operating out of the strongest positions for each of our businesses and I think what you see coming out of the fourth quarter here.
John Mcnulty: Sustained momentum right.
John Mcnulty: We made a number of investments in our commercial execution. We did some re architect ing of our commercial teams and some of the businesses with.
John Mcnulty: We doubled down really in terms of driving new product development and delivering fit for purpose products and solutions into the space and I think what you see there is is the ongoing momentum in <unk> and disciplined in driving V S and ensuring that we're blocking and tackling each and every day.
John Mcnulty: Hey.
John Mcnulty: I don't know that we were.
John Mcnulty: Not necessarily surprised by anything in particular, I think probably Europe came in a little bit stronger, particularly on the on the water side.
John Mcnulty: That that are that we benefited from but again that's on the back of really solid leadership commercial execution of blocking and tackling every day.
John Mcnulty: Got it okay.
John Mcnulty: That's helpful and I guess, maybe somewhat related to that.
John Mcnulty: So the margins overall for the first quarter were pretty much at a record level and I think that was despite what you thought was going to be some pretty heavy equipment slightly lower margin type business coming in and you have the trace gains kind of weight of some of the investments there. So I guess, how should we be thinking about the margin level that we're at right now and how that progresses through.
John Mcnulty: The year I get there may be some puts and takes around.
John Mcnulty: Around the tariff timing, but but maybe you can help us to think about some of those levers that you're pulling there.
Speaker Change: Yeah, John is it going to look at the Q1 margin you know absolutely really great execution, driving the 25% adjusted op margins, So I feel really great about that.
Speaker Change: Some of the things in the Q1 that you're going to look at from a margin perspective is really the fall through from the volume side, you'll see the volume leverage.
Speaker Change: That was a big role played a big role in driving the operating margin uplift I would say as you kind of move on and look at the rest of the year. We've been a little like you know we want to make sure that would be building a lag for any timing differences between the tariff increases in the countermeasures that has kind of played in equipment sales as I said earlier kind of rolled into that as well and rest is Matt.
Speaker Change: So those are some of the reasons at this point given there's so many moving pieces frankly, a lot of the stuff happening real time as you know.
Speaker Change: On daily basis, but things changing so we just wanted to be judicious and cautious at this point as we kind of think about him onto the site.
Speaker Change: Got it great. Thanks, very much and congratulations on a great quarter.
Speaker Change: Thanks, John John.
Speaker Change: We'll next go to Nathan Jones with Stifel. Please go ahead.
Nathan Jones: Good morning, everyone.
Speaker Change: Good morning Nathan.
Speaker Change: I guess my tariff question is going to be around the competitive advantage or disadvantage that you might see from that.
Speaker Change: Obviously, you guys you saw competitors, maybe in marking and coding where youre pretty similarly positioned maybe some other businesses, where you have some competitive advantages or disadvantages.
Speaker Change: Just based on where supply chain is positioned where your manufacturing is positioned et cetera.
Speaker Change: I'd imagine being the big dog on the block and most of those businesses that it's more advantaged or disadvantaged.
Speaker Change: Are there places where you see this as an opportunity to.
Speaker Change: Are you able to use that better positioned to gain market share or to use that.
Speaker Change: Better positioned supply chain to to look for price or any areas like that.
Nathan Jones: I Love the question Nathan.
Nathan Jones: We actually look forward to market dislocation. This is an area, where I think we can perform really really well and that's on the back of just our multi decade heritage around the volatile enterprise system.
Nathan Jones: As I mentioned, we are an asset light.
Nathan Jones: Manufacturing business and in most cases and that gives us really a lot of great optionality as to where we manufacture for the benefit of both our customers and to defray.
Certain market impacts like tariffs.
Nathan Jones: So we feel very good about our position and being advantaged at this time.
Nathan Jones: We feel like we've got great.
Nathan Jones: Direct to customer sales strength with our 75% direct sales model. It gives us great insight as to what our customers are thinking and doing the problems that they're facing how we can help solve those problems with them and likewise, we're always working supply chain, that's just part and parcel to running a global bid.
Nathan Jones: And we got a lot of reps here right. This is reflects a memory for us. So we're we're we're blocking and tackling we're using V. Yes, we're remaining nimble and then when we say opportunities, we seize them with speed and agility.
Speaker Change: And Nathan if I can just add or the speed and agility is really demonstrated by how have you been able to settle the Trojan facility in Grand Rapids, Michigan right. So that's a great proof point of what Jennifer does that.
Speaker Change: I guess a follow up then is you said three 5% of sales across the portfolio.
Speaker Change: But your business is like half U S are a little bit under half U S does that imply that you need 7% price in the U S are you deferring that across all of the other parts of the business and then is it relatively homogenous or their parts that need significantly more than that significantly less than that and do you believe.
Speaker Change: You could mitigate a significant.
Speaker Change: A significant portion of what's that that three 5% total today and what could you get it down to.
Speaker Change: Yeah, Nathan as you kind of look at a three five percentage, Australia sort of a gross estimate and when you look at that number if it effectively it reflects the export as well as the imports right in imports into China and majority of this is tied to China as we go into that.
Speaker Change: <unk> talked about that overall, we say, we should be able to defray or pretty much all of it.
Speaker Change: And it's really three things you know the sourcing strategy supply chain stuff that Dennis talked about second days, although manufacturing footprint given our light light manufacturing, we can move things around very fast all of those things are happening to make sure. We are in a geographic location, where we can serve our customers maintain a bit cocos continuity of our survey the customers at the same.
Speaker Change: Time, you know.
Speaker Change: We can do it very fast and then lastly, I would say the pricing. So it's a combination of all three is how you should be thinking about be framed as three 5% that we laid out like a gross.
Speaker Change: Conservative view this shouldn't this is not all pricing.
Speaker Change: Got it thanks very much for taking my questions.
Speaker Change: We will go next to Jeff Sprague with vertical research. Please go ahead.
Hey, Thank you good morning, everyone.
Speaker Change: On a bit late but good morning Catherine.
Catherine: Good morning, so on a bit late I think my team's updated me on what you've said, so far but pardon any duplication here, but first just on the <unk>.
Speaker Change: Asset light comment, though Jennifer.
Speaker Change: A lot of that derives right from not being vertically integrated in sourcing and the like do you see you know for example, kind of electronic sources of supply where you can defer.
Speaker Change: <unk> out of China to other places to kind of quickly deal with.
Speaker Change: Input costs on that side of the equation.
Speaker Change: Yeah, Let me clarify just because we say asset light doesn't mean, we're not leveraging collective spend for certain commodities. Okay. What we mean when we say asset light is that we don't have any big heavy monuments for manufacturing equipment that has to be duplicated or rooftops that need to be.
Speaker Change: <unk> in order for us to be able to move supply chains are we have a very capable strategic sourcing team centralized our within our corporate organization that works directly with our sourcing teams within the operating companies to create that shared leverage.
Speaker Change: So that shared leverage shows up in collective circuit board purchases and chemicals commodities in plastics injection molded parts.
Speaker Change: Optics et cetera. So.
Speaker Change: We think we're well advantaged here in terms of being able to leverage the collective spend but also being nimble and swift when we want to.
Speaker Change: Diversify our manufacturing footprint.
Speaker Change: And Jeff one more point I would add is is it going to take from the suppliers' perspective, right. There's a lot more flexibility on the supply footprint as well right now versus the quote unquote. The first round of tariffs six eight years back right. So it's a little different situation as well. So you know all of us have been working on building.
Speaker Change: Building resiliency into our supplier base as well that is a driver in our ability to move fast as well right now.
Speaker Change: And thinking about what you can do versus what you will do it I mean is there a like a real list of sort of no regrets footprint changes that you make here.
Speaker Change: Or you know.
Speaker Change: Or are we still kind of tactical tactically, maybe leaning more on price at the beginning to see if some of this stuff goes away just interested in how you are kind of playing that potential arbitrage there.
Speaker Change: Yeah, if you take it from the supply chain and the manufacturing footprint perspective, Jeff. These are no regret moves for us I think electrodes and.
Speaker Change: One is a great example, because of the Baba we were already working towards and had a strategy to move have a footprint here in the U S. The tariff situation just helps to kind of accelerate that so a number of these things are that we have in play and we're working on pretty close to getting done.
Speaker Change: You know a big part of our overall strategy for the longer term as well from a physical footprint perspective, so yeah.
Speaker Change: I'd say these are no regret moves Jeff.
Speaker Change: And then maybe just finally on the days I think.
Speaker Change: You addressed it in your opening comments.
Speaker Change: Could you just elaborate if again or if you didn't on.
Speaker Change: The impact on the total enterprise consumables business versus maybe sort of product and projects I assume there are some notable differences there.
Speaker Change: Yeah, Jeff it's extra three days right, even if you pro forma for that at the core sales growth should be solid about 5%. The impact as you can imagine primarily comes through consumables, that's where you would see it not in the equipment side.
Speaker Change: And frankly, if you boil it down all the way to the E. P. S. Based on average margins are going to stop it sort of your teeth three cents per share impact. So net net if you look at that I think you know sitting here. If he were delivering high single digit growth in Nike plus EPS I think they'll all be feeling pretty good so it's pretty solid execution.
Speaker Change: Thank you.
Andrew Buscaglia: Thanks, Joe next to Andrew Buscaglia with BNP Paribas. Please go ahead.
Andrew Buscaglia: Hey, good morning, everyone.
Speaker Change: Good morning, Andrew.
Andrew Buscaglia: I wanted to check it out.
Andrew Buscaglia: On the M&A front. It seems like you guys are are you got another deal over the finish line a small one but.
Andrew Buscaglia: I'm curious if tariffs are impacting things either positively or negatively in terms of your discussions.
Andrew Buscaglia: Yeah, they really aren't Andrew we remain.
Andrew Buscaglia: Excited about the opportunities that we have an M&A both of our funnels for both sides of the house in terms of the two segments are full and actively being works where.
Andrew Buscaglia: We continue to look at a number of strategic investment areas and.
Andrew Buscaglia: You know we will stay disciplined in our approach we absolutely will stay close to ensuring that it's a it's a market that we like with the most attractive.
Andrew Buscaglia: Company assets that they play in that space and to ensure that we get them at the right valuation so.
Andrew Buscaglia: We are undeterred in our approach to M&A and we still have that as a bias for our capital deployment.
Andrew Buscaglia: Okay. Okay.
Andrew Buscaglia: Okay and.
Speaker Change: Tariff side can you just clarify are you a net exporter out of China to the U S.
Speaker Change: It's kind of a balance look when you take all of this stuff as well and thats kind of reflected in the three 5% number.
Speaker Change: So I wouldn't call it like Oh, it's a one way or the other.
Speaker Change: Okay. Thank you.
Speaker Change: We'll next go to Andrew Kaplowitz with Citigroup. Please go ahead.
Andrew Kaplowitz: Hey, good morning.
Speaker Change: Good morning, Andrew.
Speaker Change: Hi, This is on behalf of handicap with installing maybe this first question.
Speaker Change: Maybe first question just focusing on the volume component. So Q1 benefited from six 5% volume growth, but how do you think about volume normalization in the second quarter and second half, particularly in light of like macro such tariff uncertainties, I mean inventory normalization in your channels.
Speaker Change: Yeah. Thanks Italia look I think as you know be a majority direct right almost 70% direct to our customers. So we generally have a pretty good feel from the inventory perspective, there's not a whole lot of distribution channels in between all the buffers in between so generally we have pretty good line of sight and doesn't feel like there's any inventory built at this point.
Speaker Change: Also not reflected in the order patents. So inventory is a less of an issue as we kind of think about the second quarter or the rest of the year.
Speaker Change: From a volume perspective look at you know as you know we don't provide any specific guide for volume and price.
Speaker Change: As we drive the price does it could be some impact on the volume, yes, we run all of the different kind of scenarios. Our goal is always to rebalance to make sure. We are optimizing the core growth. So from a core growth perspective, low single digit to mid single digit for the second quarter and the rest of the year.
Speaker Change: As we have we feel really good about at this point.
Speaker Change: Got it that's helpful. And then he noted sourcing optimization and standard work improvements Inc's CEO Kaizen week I'm. Just curious can you quantify any expected annualized run rate savings from these initiatives and how and when do you think you'll be able to reinvest ancestral or these initiatives photo at the bottom line.
Speaker Change: Yeah look I mean, do you think that first of all the fundamental of any kaizen event is right. We want to see the impact now right. So these are the kind of things that we do execute would you start seeing the results.
Speaker Change: You know look as part of the budgeting process every operating company has an operating margin expansions over the fully expect to conduct and continuous improvement kaizen events to actually deliver on the commitments that are in the budget. That's in the forecast. So these are all kind of part of the.
Speaker Change: The the guidance I could give you 50, you guys and they can tell but it's all kind of reflected in that.
Speaker Change: You know overall from a supply chain perspective, again Italia I would say you know.
Speaker Change: You know if we do this thing FHA right you know I can tell you there was a number of supply chain initiatives as well just around the sourcing side on the procurement side, but those benefits you know we are reflected in the guidance and reflecting in the internal budgets, we have with each operating company. So.
Speaker Change: There's nothing.
Speaker Change: Additional to that.
Speaker Change: Okay. That's helpful. Thanks for the clarification and thank you so much.
Speaker Change: Thanks, and thanks Andrea.
Speaker Change: We'll take our last question from Brian Lee from Goldman Sachs. Please go ahead.
Brian Lee: Hey, everyone. Good morning, Thanks for squeezing me in nowhere near the end of the call here. So maybe I'll just.
Speaker Change: Combined my two questions into one to be efficient.
Speaker Change: As he said.
Speaker Change: Multiple times, Chuck I know you guys don't like to break out volume and price outlook perspective.
Speaker Change: But when we look at Q1, maybe a little bit lighter.
Speaker Change: One per cent for water quality, one six for PQ I see.
Seems like at least Directionally, that's going to go higher given the tariff impacts moving through the year. So just curious if you can without giving us the numbers give us some sense of the cadence as you layer that in over the course of the next few quarters and into year end.
Speaker Change: And then I guess related to that.
Speaker Change: You mentioned no pull forward in Q1, but are you seeing any signs of any slowdown real time with all the macro uncertainty and tariff impacts and sort of what what are you budgeting for.
Speaker Change: The expectations around demand elasticity as you see some price increases moving through the year is that you see.
Speaker Change: Pac real time from customers around.
Speaker Change: And whether that might.
Speaker Change: Limit some volume upside.
Speaker Change: Let's see here. Thank you.
Brian Lee: Thanks, Brian I'll start with the second question from a pull forward perspective, no we haven't seen anything.
Brian Lee: Of notice of note rather I should say Brian. This is you know overall the demand has been pretty good and I would say as we kind of look at the order patterns and in April as I've said at the beginning of the call. There's still seem normal at this point. So we haven't seen any change in the order patterns yet and.
Brian Lee: And pull more pull forward inventory perspective, as I said earlier, you know we sell mostly direct so.
Brian Lee: Pretty good line of sight into the inventories at the call. It the end users.
Brian Lee: Take things seems to be at normal at this point, we all see what's happening in the macro and be prepared for that and we run different scenarios as we going to think about how we move as they increase the pricing how it may impact volume and all of that is reflected in other core growth in the low single digits to mid single digits, depending on the scenario prices.
Brian Lee: Volume is going to have a little bit of philosophy, but within the.
Brian Lee: Within the range of low single digit mid single digit core growth.
Brian Lee: So overall pricing when you look at Brian are you know historically, we have delivered 100 to 200 basis points. So net net on average we had one three in Q1, you're absolutely right as we are pushing the pricing well.
Brian Lee: It moved towards the higher end of the range, absolutely that will happen, but that's b, we are being very surgical right at the end of the day. The goal is to optimum position the business for success over the longer term help customers maintain business continuity as well.
Brian Lee: So we were being very surgical very methodical in how they kind of pushing and you know pricing is you're going to think of it lastly, I would say is one of the levers as we kind of think about offsetting that.
Brian Lee: Part of the counter measures to offset the tariff impact we have a lot of things in our control right as you kind of think about the program.
Brian Lee: Manufacturing footprint changes, but it's kind of a very meaningful impact on on the tariff countermeasures do you think about the supply chain side those things are in our control. So we're executing on all of those things as well so think of pricing as one of the three elements here. The other two elements are within our control and good executing on those.
Brian Lee: Awesome I appreciate all the color. Thank you.
Brian Lee: Thanks, Brian.
Speaker Change: Thanks, Brian and thanks for everybody that joined us on the call today, we appreciate the questions and the engagement.
Ryan Taylor: As usual this is Ryan I'll be available for follow ups today and over the next several days. Thanks again for joining US and this concludes the end of our Q1 earnings call.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes today's program. Thank you for your participation you may disconnect at any time.
Speaker Change:
Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Mhm.