Veralto Corp (VLTO)

• Veralto's simplification and enhancement of the Veralto Enterprise System (VES) have fortified execution, driving discipline and focus, enabling the company to better capitalize on durable growth trends across both segments. -
• The acquisition of TraceGains strengthens Veralto's position in food safety and traceability, enhancing capabilities to provide ingredient traceability and leveraging their coding and marking business to identify and quarantine contaminated products, addressing the growing demand for food safety solutions. - -
• Veralto is experiencing strong growth in Latin America, now representing 10% of total sales, propelled by investments in high-growth opportunities, benefits from reshoring/onshoring trends as customers diversify supply chains, and privatization of water utilities in Brazil, contributing to sustainable growth going forward. -

• Limited Capabilities in Food-Borne Contamination Detection: Veralto admits they are less equipped to handle acute outbreaks of food-borne issues compared to water-borne outbreaks, stating "we don't play as heavily there." -
• Margin Pressure in Water Quality Segment Due to Product Mix and Investments: The company acknowledges that the analytics business, which has higher margins, is being outpaced by growth in lower-margin industrial and chemical treatment businesses, impacting overall margins. -
• Potential Risks Associated with M&A Strategy and Valuation: When questioned about entry multiples in M&A, the CFO emphasizes value creation over valuation discipline, which could imply risks in overpaying for acquisitions. -

1. Q4 Margin Guidance
   Q: Why is Q4 margin expected to be down versus Q3?
   A: Margins in Q4 are projected to be lower due to a 30 basis point impact from TraceGains' operating impact and transaction costs - , an additional 50 basis point impact from higher corporate costs related to first-year public company expenses - , and a mix shift towards equipment sales as printer volumes recover. - Combined, these factors contribute to an 80 basis point margin impact. -

2. Growth Outlook
   Q: Any changes in growth trends for Q4 and into 2025?
   A: Growth patterns are expected to be similar to Q3 - , with steady recovery in the consumer packaged goods (CPG) sector. - - Demand remains consistent, and the company is encouraged by ongoing improvements in PQI. - - China is anticipated to be sequentially flat, but a strong Q4 last year may impact year-over-year comparisons. -

3. TraceGains Acquisition Impact
   Q: How will TraceGains drive growth and affect earnings?
   A: TraceGains provides cloud-based solutions connecting brands with ingredient manufacturers, enhancing compliance and traceability in food and beverage safety. - - It's expected to continue delivering double-digit sales growth. - - However, due to ongoing investments to fuel this growth, TraceGains is projected to be modestly dilutive to earnings in 2025. -

4. CPG Market Recovery
   Q: What are the signs of recovery in the CPG market?
   A: The company observes a fifth consecutive quarter of mid- to high single-digit growth in recurring revenue at PQI - , indicating that production lines are coming back online and being refurbished. - Additionally, there have been two consecutive quarters of year-over-year growth in equipment sales, suggesting brand owners are upgrading and replacing aging printers. -

5. China Sales Outlook
   Q: What is the outlook for China sales?
   A: China sales are expected to remain sequentially flat. - - There is modest recovery in PQI within CPG and industrial markets - , but challenges persist in Water Quality due to funding issues at municipal customer sites and tough comparisons from strong semiconductor project sales last year. -

6. Latin America Growth
   Q: Why has Latin America growth accelerated, and is it sustainable?
   A: Growth in Latin America has accelerated due to commercial investments and focusing on high-growth opportunities. - Benefits are seen from reshoring/onshoring activities as customers diversify risk from China. - Also, privatization of water utilities in Brazil is providing new opportunities. - Latin America now represents 10% of total sales, and the company believes this growth is sustainable. -

7. CapEx Requirements
   Q: What are the long-term CapEx needs?
   A: The business operates on an asset-light model, with CapEx typically at 1% to 2% of sales. - Investments focus on R&D and commercial activities rather than capital expenditures. -

8. M&A Strategy and ROIC Targets
   Q: What are the acquisition criteria and ROIC expectations?
   A: The company focuses on market, company, and valuation alignment for acquisitions. - - For small bolt-on acquisitions, they aim to achieve cost of capital by year 3. - For larger, technology-focused acquisitions like TraceGains, they target achieving ROIC close to cost of capital by year 5 or 6. - -

9. Water Quality Margins
   Q: What's affecting margins in the Water Quality segment?
   A: Margins are influenced by a mix shift towards higher growth in industrial and chemical treatment businesses, which have slightly lower margins than analytics. - - Additionally, investments in sales and marketing are being made to capture future growth opportunities. - -

10. Traceability Solutions
    Q: How is the company positioned in food traceability?
    A: The company's coding and marking business provides date codes and lot codes, enabling traceability to identify and quarantine affected products in the event of contamination. - The integration of TraceGains enhances the ability to trace ingredient information, crucial for brand manufacturers. - -

Quarterly guidance for Q4 2024:

• Core Sales Growth: Low to mid-single-digit range - (no prior guidance)
• Acquisitions Contribution: About 60 basis points - (no prior guidance)
• Adjusted Operating Profit Margin: ~24% - (no prior guidance)
• Adjusted EPS: $0.86 to $0.90 - (no prior guidance)

Annual guidance for FY 2024:

• Adjusted EPS: $3.44 to $3.48 - (raised from $3.37 to $3.45 - )