Andrew Krill

Andrew Krill asked for segment-level color on Q4 margin expectations, perhaps sequentially, and core growth for Q4 by segment. He also inquired about what contributed to the impressive Q3 cash conversion and whether Veralto could maintain consistent conversion going forward, or if Q1/Q3 would still typically fall below 100% due to interest payments.

Answer

Sameer Ralhan (SVP and CFO) expects aggregate Q4 margins to expand by approximately 30 basis points year-over-year, with both segments contributing. Core growth is projected at low single digits, but mid-single digits when adjusted for fewer shipping days. Regarding cash conversion, he emphasized looking at it annually due to the structural impact of heavy interest payments and variable compensation in Q1 and Q3, noting that underlying cash flow generation remains consistent and strong.

Andrew Krill from Deutsche Bank requested segment-level color on Q4 margin expectations, both sequentially and year-over-year, and any significant differences in core growth for Q4 by segment, given the full-year expectation of around 5% for both. Krill also asked for more detail on the drivers of the impressive cash conversion in Q3 and whether Veralto expects to maintain more consistent cash conversion above 100% in Q1 and Q3 going forward, or if the historical pattern of below 100% due to interest payments will persist.

Answer

Sameer Ralhan, SVP and CFO, projected approximately 30 basis points of aggregate margin expansion year-over-year for Q4, with both segments contributing. Water Quality's expansion is driven by disciplined execution, while PQI benefits from reduced tariff-related costs and operating efficiencies. For core growth, both segments are expected to contribute to the low single-digit guidance, which would be solid mid-single digits when adjusted for three fewer shipping days. Regarding cash conversion, Ralhan emphasized looking at it annually due to the architectural impact of heavy interest payments and variable compensation payouts in Q1 and Q3, confirming consistent, strong underlying cash flow generation.

Andrew Krill asked about the sustainability of the strong Water Quality growth in Europe and whether improving trade relations were boosting customer confidence.

Answer

President and CEO Jennifer Honeycutt credited the European growth to a focus on water reuse and strong commercial execution via VES. She noted that while clearer trade policy reduces confusion, it doesn't fundamentally alter demand for Veralto's essential products. SVP and CFO Sameer Ralhan also cited strategic acquisitions as a growth driver.

Andrew Krill asked why the 2025 free cash flow guidance is below the medium-term target and inquired about Veralto's sourcing exposure to China, Mexico, and Canada amid potential tariff risks.

Answer

SVP and CFO Sameer Ralhan cited two reasons for the 90-100% FCF conversion guide: higher CapEx (1-1.5% of sales) for growth investments and a conservative working capital assumption. President and CEO Jennifer Honeycutt addressed tariffs by highlighting a diversified supply chain and proactive measures, such as localizing Trojan parts in the U.S. She noted Trojan's U.S. sales are less than 5% of total company sales and confirmed a significant 'in China for China' presence.

Andrew Krill asked for details on the drivers behind the strong growth in Latin America and its sustainability, and also inquired about the company's capacity for M&A, asking if there is a theoretical limit to the number of deals it can handle.

Answer

President and CEO Jennifer Honeycutt attributed the 10% growth in Latin America to commercial investments, reshoring activity, and water utility privatization in Brazil. SVP and CFO Sameer Ralhan added that margins in the region are similar to the company average. On M&A, Honeycutt stated that activity is episodic and the company sets no limits on the number or size of deals, feeling well-prepared to execute on its full pipeline for both segments.

Andrew Krill inquired about capital allocation, specifically if there's been any change in thinking regarding potential share buybacks given the company's current multiple and net cash position, especially if M&A deals don't materialize.

Answer

Ken Bockhorst, Chairman, President and CEO, reaffirmed the company's capital allocation priorities: investing in organic growth (R&D leadership), increasing dividends (33rd consecutive year), and M&A. He stated he wouldn't rule anything out but is content with the current path that has served customers and shareholders well.

Andrew Krill asked for initial views on 2026 and the potential to deliver on the high single-digit through-the-cycle growth target, noting it should be the easiest year-over-year comparison since COVID.

Answer

CFO Bob Wrocklage reiterated that they don't provide guidance but expressed confidence in the high single-digit forward look over the cycle, acknowledging unevenness. CEO Ken Bockhorst added that predicting specific years/quarters is difficult with 50,000 utilities, but overall confidence remains solid. Andrew Krill also inquired about capital allocation, specifically the potential for buybacks given the company's multiple and net cash position if M&A opportunities don't materialize. CEO Ken Bockhorst reaffirmed capital allocation priorities: organic growth (R&D leader), increasing dividends (33rd consecutive year), and M&A, stating he is happy with the current path and believes the current strategy works well.

Andrew Krill from Deutsche Bank asked about the timing of new AMI projects, questioning if their start dates were deferred or if the cadence was part of the normal course of business. He also requested a general comment on municipal activity and a clarification on whether the guided Q3 sequential sales decline was for total or core sales.

Answer

Chairman, President & CEO Kenneth Bockhorst explained that the project timing reflects the naturally uneven, quarter-to-quarter nature of the business and is not a long-term concern, as the project funnel remains robust. SVP & CFO Robert Wrocklage clarified that the comment about a sequential sales decline in Q3 referred to core sales, excluding the SmartCover acquisition.

Andrew Krill from Deutsche Bank asked for more color on the timing of new AMI projects, questioning if they were being deferred or if the timing was normal course of business. He also inquired about general municipal activity and sought clarification on whether the guided Q3 sequential sales decline was for total or core sales.

Answer

Chairman, President & CEO Kenneth Bockhorst explained that project timing can be uneven quarter-to-quarter and the comment was for transparency, not a signal of a long-term demand issue. He affirmed the project funnel remains robust and customer demand is strong. SVP & CFO Robert Wrocklage clarified that the comment about a sequential sales decline in Q3 was for core sales, excluding the SmartCover acquisition.

Andrew Krill inquired about the specific factors behind the 'especially favorable' product and customer mix that drove record gross margins and asked whether margins would fully revert to the 38-40% range in Q2.

Answer

CEO Kenneth Bockhorst emphasized confidence in the 'floor' of the company's margins due to durable positive structural mix. CFO Robert Wrocklage added that while many favorable elements converged in Q1, some are episodic. He noted that without the current tariff uncertainty, the company would likely be raising its normalized margin guidance.

Andrew Krill of RBC Capital Markets inquired about Badger Meter's exposure to potential tariffs, particularly from its Mexico manufacturing operations, and its contingency plans. He also asked about the company's confidence in achieving high single-digit growth in 2025.

Answer

Chairman, President and CEO Kenneth Bockhorst addressed the tariff uncertainty by highlighting the company's limited sourcing from China and its operational flexibility with facilities in the U.S. and Mexico. He emphasized Badger Meter's proven ability to manage external challenges. Regarding the 2025 outlook, Bockhorst affirmed that his confidence in achieving high single-digit growth remains as strong as it was in the prior quarter, supported by a healthy order rate and a robust project pipeline.

Andrew Krill from Deutsche Bank probed further on the 2025 sales outlook, asking if a down year would be surprising, and sought to quantify the potential impact of recent hurricanes on the business in the Southeast.

Answer

Chairman, President and CEO Kenneth Bockhorst stated that a down sales year would be surprising, citing the company's historical resilience and strong underlying market drivers. Regarding the hurricane impact, he declined to provide a specific size but noted it could cause near-term project delays and unevenness, though any delayed projects would not be cancellations.

Andrew Krill asked about the new elevated CIO role for Heather, the shift towards digital focus, the current percentage of sales considered digital or digital-enabled, and future views on this. He also inquired about inventory levels across different segments, asking if anything appeared out of balance.

Answer

CEO John Stauch explained that the digital focus aims to leverage AI, enterprise product technology, digitize factories, and provide elite customer experiences through software, enabling demand generation and optimized dealer routes. He highlighted progress in Pool and industrial solutions. CFO Bob Fishman added that the CIO role on the executive team will enable faster and better decision-making for distributors and dealers. Bob Fishman stated that inventory levels across all industries are at historical levels and not out of balance.

Andrew Krill asked about the new elevated CIO role for Heather and the shift towards a greater focus on digital. He sought clarification on the current percentage of sales considered digital or digital-enabled and where this could evolve over time. Additionally, he inquired about inventory levels across different segments, asking if anything appeared out of balance.

Answer

CEO John Stauch explained that the digital focus, while not quantified as a percentage of sales, involves leveraging AI, enterprise product technology, digitizing factories, and creating elite customer experiences through user-friendly software. He noted that Pool already utilizes intelligent offerings and highlighted progress in industrial solutions and ICE, emphasizing the need for accelerated IT implementation to support end-to-end digital strategies. CFO Bob Fishman confirmed that inventory levels across all segments are at historical levels and not out of balance.

Andrew Krill from Deutsche Bank AG asked about any evidence of pre-buying activity ahead of tariffs and whether that could create a demand 'air pocket' in Q3. He also inquired about the expected cadence of transformation savings for the remainder of the year.

Answer

President and CEO John L. Stauch indicated that pre-buying was more of a Q1 event and has since slowed, so he does not anticipate a Q3 air pocket. He guided for the remaining $36 million in 2025 transformation savings to be split roughly evenly between Q3 and Q4, with the Flow and Water Solutions segments being the primary beneficiaries, net of ongoing technology investments.

Andrew Krill questioned Pentair's confidence in achieving its 2026 margin target of 26% in light of potential economic headwinds and asked for commentary on business trends in April.

Answer

CFO Bob Fishman reiterated the company's confidence in reaching its 26% return on sales target in 2026, viewing it as a continuation of the transformation-led path from ~25% in 2025. CEO John Stauch noted that the Q2 and full-year guidance already incorporate their expectations for April and the rest of the quarter, acknowledging that order patterns may be volatile due to tariff impacts.

Andrew Krill asked about the underlying sales growth assumption needed to achieve the new 26% ROS target by 2026. He also sought to quantify the revenue headwind from 80/20 initiatives, asking if it was approximately a two-point impact.

Answer

CFO Bob Fishman explained that the updated 26% ROS target by 2026 now assumes lower sales growth, similar to the flat-to-up-2% guided for 2025, with profitability being driven by the Transformation program. President and CEO John Stauch clarified that the total headwind from 80/20 'Quad 4' exits is expected to be no more than one percentage point for the total company in 2025 and is already embedded in the guidance.

Andrew Krill of Deutsche Bank asked for clarification on the drivers of the implied sequential margin decline in Q4 and the segmental allocation of the remaining transformation savings for the quarter.

Answer

President and CEO John Stauch explained that a sequential margin drop from Q3 to Q4 is typical due to lower revenue from seasonality and holidays. CFO Bob Fishman added that year-over-year ROS is expected to be up significantly in Q4, with all three segments contributing to the expansion and transformation savings.

Andrew Krill of Deutsche Bank questioned the reasons for the steep sequential decline implied by the Q3 margin guidance and asked about the underlying assumptions for end-market demand in the second half of the year.

Answer

CFO Shashank Patel attributed the sequential margin decline to three factors: a one-time $6 million price-cost benefit in Q2 (~100 bps), normal Q2-to-Q3 seasonality (~170 bps), and volume deleverage. CEO Robert Pagano noted continued market uncertainty, particularly for Q4, with residential markets slightly weaker but offset by strength in data centers.

Andrew Krill asked about the utilization of U.S. manufacturing facilities and the capacity to ramp up production to shift away from China, including any related CapEx plans. He also questioned the reason for the significant sequential step-down implied in the European margin guidance for Q2.

Answer

CEO Robert Pagano stated that North American manufacturing facilities are not fully utilized and have capacity to expand by adding second and third shifts without requiring significant new capital expenditures. CFO Shashank Patel explained the European margin outlook reflects difficult year-over-year comparisons, as heat pump destocking began in Q2 of the prior year and is expected to continue, impacting volume.

Andrew Krill of Stifel inquired about the company's new 80/20 product rationalization actions, asking about the margin profile of the exited businesses and whether this initiative would extend beyond 2025. He also asked for the specific value of sales that were pulled forward into the fourth quarter.

Answer

CEO Robert Pagano clarified that 80/20 has been a core part of the 'One Watts' system for over a decade and was highlighted due to the size of the Bradley acquisition. He stated the exited products are breakeven, and another $5-6 million from Bradley may be rationalized next year. CFO Shashank Patel added that approximately $4 million in sales were pulled into Q4, primarily impacting the Americas commercial boiler business.

Andrew Krill from Deutsche Bank asked for an updated outlook on end markets and inquired about the growth trajectory and sales targets for the new LK filtration offering.

Answer

CFO Dave Pauli stated that the outlook for institutional, commercial, and waterworks markets remains unchanged, though the residential market is slightly softer. President, CEO & Chairman Todd Adams added that the previous $100 million sales target for filtration will be raised as the installed base grows, noting the product line's growth rate is 'clearly double digits' and sustainable.

Andrew Krill asked if there has been any slowing in the education vertical and questioned the company's confidence in affirming its full-year guide if tariffs on non-China 'rest of world' sourcing were to increase significantly.

Answer

Todd Adams, Chairman and CEO, confirmed they have not seen any slowing in the education vertical. Regarding hypothetical tariff hikes, Adams expressed confidence in their ability to manage any scenario due to their competitively advantaged supply chain. David Pauli, CFO, added that they have numerous levers to react, including accelerating supply chain moves, managing inventory, and shifting production between dual sources.

Andrew Krill questioned if there were any signs of increased project pauses or customer hesitancy and asked about the company's confidence in achieving 1-2% net pricing in 2025.

Answer

CEO Todd Adams responded that the company is not seeing any pronounced project delays or pushouts from their vantage point. He also expressed high confidence in achieving a couple of points of price realization in 2025, based on current market activity and preliminary communications, barring unforeseen events like new tariffs.