Veralto - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was a clean beat: sales $1.33B (+6.9% y/y; core +7.8%) and adjusted EPS $0.95 vs S&P Global consensus ~$0.87*, driven by broad-based volume strength, pricing, and three extra shipping days; adjusted operating margin reached a record 25.0% vs guidance of 24.0–24.5%. Consensus revenue ~$1.28B* vs actual $1.33B.
• Guidance: FY25 EPS reaffirmed at $3.60–$3.70 with FCF conversion 90–100%; margin range widened to flat to +50 bps (from +25 to +50 bps) to reflect tariff timing; Q2 EPS guided to $0.84–$0.88 with core growth low-to-mid-single digits.
• Management sees gross tariff exposure of ~3.5% of sales but expects pricing, sourcing, and footprint shifts (incl. a new Trojan U.S. facility) to largely offset; pricing actions will be surgical and stick where needed.
• Capital and cash were solid (FCF $142M; net leverage 1.1x), supporting continued M&A bias (TraceGains integration on track; signed AQUAFIDES for ~$20M) and a $0.11 dividend declared post-quarter.

Note: Consensus values marked with an asterisk (*) are retrieved from S&P Global.

What Went Well and What Went Wrong

• What Went Well

  • Record profitability and broad-based growth: adjusted operating margin hit 25.0% (+50 bps y/y) on stronger-than-expected volume; adjusted EPS +13% y/y to $0.95, above guide.
  • Segment strength: Water Quality sales $794M (+6% y/y; core +7.4%; adj. op margin 25.2%) and PQI $538M (+8.3% y/y core; adj. op margin 28.4%), with high single-digit recurring revenue growth across both.
  • Execution/tariff agility: Opened Trojan’s Grand Rapids, MI facility four months early; pricing and sourcing roadmaps in place. “We are well positioned here... our gross exposure to tariffs is about 3.5% of our sales” (CEO).

• What Went Wrong

  • Tariff-driven uncertainty and margin range widened: full-year adjusted operating margin range expanded to flat to +50 bps (vs +25 to +50 bps prior) to reflect timing between tariff increases and countermeasures.
  • Europe/China mixed puts and takes: while Europe growth was robust (double-digit in parts of Water Analytics), China Water Quality faced timing headwinds on UV installs; management does not expect China to grow in 2025.
  • Shipping days complicate run-rate: Q1 had three extra shipping days; even so, normalized core growth was “above 5%,” and consumables saw most of the day-count benefit (~$0.03 EPS).

Transcript

Operator (participant)

Please stand by, your program is about to begin. If you need audio assistance during today's program, please press star zero. My name is Margot, and I'll be your conference operator this morning. At this time, I'd like to welcome everyone to Veralto Corporation's first quarter 2025 conference call. All lines have been placed on mute to prevent any background noise. 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 the star", then the number two on your telephone keypad. I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor, you may begin your program.

Ryan Taylor (VP of Investor Relations)

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 9. Yesterday, we issued our first quarter 2025 news release, earnings presentation, and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. In addition, we reaffirmed our full year 2025 earnings per share guidance, which now includes our current assessment of the macroeconomic environment, including tariffs and related countermeasures. These materials are available in the Investor section of our website, veralto.com, under the heading Quarterly Earnings.

Reconciliations of all non-GAAP measures are also provided in the appendix of our webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. On that note, I'd like to point out that year-over-year sales growth in the first quarter of 2025 benefited from three additional shipping days as compared to the first quarter of 2024. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements.

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. With that, I'll turn the call over to Jennifer.

Jennifer L Honeycutt (President and CEO)

Thank you, Ryan, and thank you all for joining our call today. Before discussing our first quarter results, I'd like to take a moment to recognize our 17,000 associates across the world for their commitment to serving customers, driving continuous improvement, and safeguarding the world's most vital resources. 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. Dynamic business environments, such as the one we are currently experiencing, provide us with the opportunity to demonstrate the essential nature of our products, the durability of our business model, and the power of the Veralto Enterprise System. Our team embraces challenges as opportunities to drive differentiated, winning outcomes for our customers, associates, and shareholders.

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. In the first quarter, we delivered excellent results across the enterprise, driven by disciplined execution in both segments. We are actively deploying several countermeasures to mitigate changes in the global trade and tariff landscape and enhance our operational flexibility. I'm proud of our team and our collective performance thus far in 2025. 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. Our commercial teams executed on strategic initiatives to gain new customer wins and increase market penetration while also capitalizing on favorable demand across our key end markets and geographies.

Our core sales growth was driven primarily by volume and was broad-based across both segments, with PQI delivering 8.3% core sales growth Water Quality 7.4% core sales growth. In PQI, 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 in Packaging and Color. Notably, in our Marking and Coding business, Q1 marked our fourth consecutive quarter with year-over-year growth in both consumables and equipment. Water Quality, we continue 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. Adjusted operating profit margin expanded 50 basis points year-over-year to 25%, an all-time high. We expanded operating margin in both segments with incremental margins in line with our long-term framework.

Driven by high-quality sales growth and efficient operating leverage, adjusted earnings per share grew 13% year-over-year to $0.95. This exceeded our guidance primarily due to better-than-expected sales volumes. I'm proud of our team's disciplined execution to deliver a high-quality performance in the first quarter in service to our customers. In addition to our strong organic growth performance, we continue to make great progress on recent acquisitions. The integration of TraceGains is on track. Sales are growing in line with our expectations, and we continue to invest in future growth. In February, we signed a definitive agreement to acquire Aquafides, an Austria-based provider of ultraviolet water treatment, for $20 million. Aquafides 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. 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. We look forward to welcoming the Aquafides team to Veralto and unlocking new growth opportunities together. Looking at core sales growth by geography and end market, growth was broad-based across key verticals and regions. Our commercial teams executed well, leveraging VES tools and capitalizing on the investments made last year to expand our sales, marketing, and innovation efforts. Sales growth in Western Europe was robust at nearly 11%, with double-digit growth in both segments. In North America, sales grew approximately 8%, with high single-digit growth in both segments. Sales in high-growth markets were up 6% year-over-year, with PQI sales up high single digits Water Quality up low single digits. Taking a closer look, in Western Water Quality grew 11.3%.

Our water analytics team in Western Europe continued to deliver exceptional growth through rigorous lead generation, funnel management, and VES-catalyzed commercial execution. In PQI, sales into Western Europe grew 10.3%, driven by double-digit growth in Packaging and Color and high single-digit growth in Marking and Coding. In Packaging and Color, we saw strong software growth across most packaging applications, including increased mid-market penetration. This reflects increased focus on account management and fit-for-purpose solutions to accelerate software growth. In Marking and Coding, growth was driven across equipment, consumables, and spares. Moving to North America, core sales growth was led Water Quality with 8.3% growth. We continued to capitalize on increasing demand for our chemical water treatment solutions, which grew double digits in North America. Our chemical treatment growth was broad-based across several industries with the strongest growth in power generation, food and beverage, and chemical processing.

We continue to see growth from new data centers as they become operational. Also, sales of Trojan's UV systems to municipalities, primarily related to water reuse, contributed to our growth in North America. 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. Over the long term, continued North American growth Water Quality is supported by attractive secular trends such as water scarcity, water reuse, more frequent severe weather events, and increasing demand from heavy water consumption applications such as data centers and power generation. We also continue to benefit from positive market trends across PQI in North America during the first quarter, with core sales up 6.9% year-over-year. This was primarily driven by double-digit growth in recurring revenue, specifically consumables and software.

This reflects a combination of improved end market demand from CPG customers, VES-driven commercial excellence, and market penetration from our strategic initiatives. In high-growth markets, core sales grew 6.1%, highlighted by strong growth in Latin America, India, and the Middle East. In China, sales grew low single digits, with strong growth in PQI partially offset by a decline Water Quality sales related to timing of ultraviolet treatment installations, which were strong in Q1 2024. Overall, we delivered strong broad-based growth in the first quarter across all of our operating companies. 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. We remain confident that the Veralto Enterprise System will enable us to navigate ongoing changes in the macroeconomic environment with agility and discipline.

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. This includes strategic pricing roadmaps, targeted sourcing and supply chain initiatives, and shifts in manufacturing footprint, including the addition of Trojan's first U.S. factory in Grand Rapids, Michigan. This factory opened in February and is designed to support consumables and light assembly for our domestic UV water treatment customers. This expansion creates greater manufacturing and supply chain flexibility for Trojan to support its U.S. customer base. We leveraged VES tools to prioritize and accelerate the opening of this facility by about four months ahead of schedule to help offset potential tariff headwinds. With greater flexibility and the exemption of product imports covered by the U.S. MCA, our current exposure to Canadian tariffs has been reduced significantly.

This is a great example of how well-equipped our team is to navigate the current macro environment with focus, agility, and speed. We have several levers to pull to mitigate risk while supporting our customers and maintaining business continuity. Our decentralized operating model empowers our business leaders who are closest to our customers to make decisions quickly. Our diverse global footprint and flexible supply chain give us agility and optionality to maneuver quickly. 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. Confidence in our ability to deliver on our commitments is, in large part, grounded in the Veralto Enterprise System, our proven system for driving growth, operational improvements, and leadership development. A core tenet of VES is continuous improvement, or Kaizen.

As we do annually in the first quarter each year, we completed Veralto's second CEO Kaizen Week in February. CEO Kaizen Week is a long-standing tradition of our enterprise system and personally one of my favorite weeks of the year. 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. For one week, we immersed 20 cross-functional teams at Gemba, where the real work happens, at 10 locations across the world to address our biggest impact opportunities with the participation of Veralto executives. Building off our success last year, this year's CEO Kaizen Week was designed to help us accelerate growth and reinforce that at Veralto, we are all practitioners of continuous improvement.

Among other opportunities, a few of this year's most strategic and impactful events focused on increasing adoption of Packaging and Color software within mid-market CPG customers, accelerating capture of design input requirements for new product development and water analytics, and reducing lead time for consumables in one of our Marking and Coding product lines. The benefits of any Kaizen Week include immediate solutions that are rapidly implemented and yield real-time results. Success is proven by sustaining these results, which we track following the Kaizen events. That concludes my opening remarks, and at this time, I'll turn the call over to Sameer.

Sameer Ralhan (SVP and CFO)

Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the first quarter. Total sales grew 6.9% on a year-over-year basis to over $1.3 billion. Currency was a 130 basis points, or $16 million headwind year-over-year. Acquisitions contributed 40 basis points of growth, primarily from TraceGains. Core sales grew 7.8%, led by broad-based volume gains across both segments. Contributed 1.3% growth in the quarter, in line with historical levels. Our recurring revenue grew high single digits year-over-year and comprised 61% of our total sales. As Ryan mentioned, the first quarter of 2025 had three more shipping days as compared to the first quarter of 2024. If we 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.

Gross profit increased 8% year-over-year to $805 million. Gross profit margin improved 40 basis points year-over-year to 60.4%, primarily driven by volume leverage and, to a lesser extent, pricing. Adjusted operating profit increased 9% year-over-year, and adjusted operating profit margin expanded 50 basis points to 25%, an all-time high. Looking at EPS for Q1, adjusted earnings per share grew 13% year-over-year to $0.95 per share. As compared to our guidance, adjusted EPS came in stronger, primarily due to higher sales volumes at both segments. Looking at cash flow in the first quarter, we generated $142 million of free cash flow, an increase of $40 million year-over-year. This increase was primarily driven by the growth in earnings. I'll now cover the segment results, starting Water Quality on the next page. Water Quality segment delivered $794 million of sales, up 6% on a year-over-year basis.

Currency was a 130 basis points headwind, and divestitures resulted in a modest 10 basis points reduction in sales versus the prior period. Core sales grew 7.4% year-over-year, including 100 basis points from price and 640 basis points from Water Quality's volume growth was driven by strong demand for water treatment solutions in our industrial end markets and UV treatment systems in municipal end markets. We also saw good volume growth in sales of analytical instruments, reagents, and chemistries to Water Quality's recurring sales grew high single digits year-over-year, and equipment growth was up mid-single digits. Adjusted operating profit increased 7.5% year-over-year to $200 million, and adjusted operating profit margin was 25.2%, up 40 basis points versus the prior year. Overall, it was a strong quarter for Water Quality.

We expect to see steady growth over the balance of this year, given our products are critical to our customers' ongoing operations and generate a high level of recurring sales. Moving on to our PQI segment on the next page. Sales in our PQI segment grew 8.3% year-over-year to $538 million in the first quarter. Currency was a 130 basis point headwind. The currency headwinds were offset by 130 basis points of growth from acquisitions, primarily TraceGains. Core sales grew 8.3%, led by volume growth of 6.7% and price increases contributing 1.6% to core sales growth. PQI's core sales growth was driven by both recurring revenue and equipment shipments. Recurring revenue grew high single digits year-over-year, led by consumables and software. Equipment growth also grew high single digits, led by Marking and Coding equipment.

PQI's adjusted operating profit was $153 million in the first quarter, up $14 million over the prior year period, resulting in adjusted operating profit margin of 28.4%, an increase of 40 basis points year-over-year. The increased profitability was primarily driven by strong operating leverage on volume growth and, to a lesser extent, pricing. Turning now to our balance sheet and cash flow. In the first quarter, we generated $157 million of cash from operations. We invested $15 million in capital expenditures. As a result, free cash flow was $142 million in the quarter, up 39% over the prior year, primarily driven by the increase in earnings. At the end of the first quarter, gross debt was $2.6 billion, and cash on hand was over $1.2 billion. Net debt was $1.4 billion, resulting in net leverage of 1.1 times.

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. Having said that, we plan to be prudent and disciplined as we navigate this current economic environment. Over the long term, our goal is to continue to create shareholder value with a bias towards M&A. We have an attractive pipeline of opportunities in Water Quality and PQI. Turning now to our guidance. Yesterday, we reaffirmed our 2025 full-year adjusted EPS guidance of $3.60 per share-$3.70 per share. Our underlying assumptions have been updated to reflect currency rates and current assessment of tariffs and trade policies. Our full-year guidance now assumes an estimated growth impact from the announced tariff increases of approximately 3.5% of full-year sales on an annualized basis. 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. Furthermore, we expect neutral impact to the full-year sales growth from both currency translation and acquisitions net of divestitures. We expect sales contributions from TraceGains and Aquafides to be largely offset by the AVT divestiture. We are now assuming corporate expense at about $100 million as we control discretionary spending in light of the macroeconomic environment. Given the impact and timing of tariff increases and related countermeasures, we expanded our target range of adjusted operating profit margin. We are now targeting full-year adjusted operating profit margin to be flat to up 50 basis points, or approximately 25 basis points expansion at the midpoint. We believe this is prudent given the dynamic macroeconomic landscape.

We are targeting free cash flow conversion between 90%-100% of GAAP net income, in line with prior guidance. 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. Our second quarter 2025 guidance for adjusted EPS is $0.84-$0.88 per share. That concludes my prepared remarks. At this point, I'll turn the call over to Jennifer for closing remarks.

Jennifer L Honeycutt (President and CEO)

Thanks, Sameer. In summary, we're off to a strong start in 2025. We are confident in our ability to navigate a more dynamic macroeconomic environment in the near term and are prepared to do so. We believe that the essential needs for our technology solutions, our durable business model, and the secular growth drivers across our end markets will support our financial performance this year. We continue to leverage the power of the Veralto Enterprise System to drive continuous improvement and bolster our agility. Our financial position remains strong, and we continue to evaluate opportunities to create shareholder value within our disciplined capital allocation framework. We are excited about the bright future ahead for Veralto and the opportunities in front of us to help customers solve some of the world's biggest challenges in delivering clean water, safe food, and trusted essential goods.

That concludes our prepared remarks, and at this time, we are happy to take your questions.

Operator (participant)

Thank you. 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 star two. Again, we'll go first to Scott Davis with Melius Research. Please go ahead.

Scott Davis (Chairman and CEO)

Hey, good morning, Jennifer, Sameer, and Ryan. Congrats on the start of the year.

Jennifer L Honeycutt (President and CEO)

Good morning, Scott.

Scott Davis (Chairman and CEO)

I hate to do it, but I have to ask on tariffs because that's just so much of our incomings. You guys seem pretty confident in your ability to mitigate, but perhaps maybe provide a little bit more color on the sequencing. I imagine you can't mitigate overnight. This is going to take some time. I will keep that as kind of an open-ended question that just helps us understand how the mechanics behind mitigation and kind of the timing and when you would expect to be fully offsetting the tariffs.

Jennifer L Honeycutt (President and CEO)

Thanks for the question, Scott. Yeah, I think we feel very confident here. Our growth exposure to tariffs is about 3.5% of our sales. Bear in mind that in terms of running Veralto and using VES, we are constantly looking for opportunities to optimize the business, be that operational footprint, pricing, supply chain, and strategic sourcing kinds of opportunities. In effect, we always have this going on. We've accelerated some of the actions just purely around de-risking what we see today. I would reiterate, as I said in the comments, we're well positioned here. Pricing actions have been and will continue to be undertaken. We additionally de-risk our Trojan manufacturing facility based in Canada by pulling forward some redundant manufacturing capability into their new manufacturing facility and distribution center in Grand Rapids, Michigan.

We continually work to align our supply chain and our sourcing strategies relative to de-risking our tariff situation. Bear in mind, too, that we're effectively an asset-light manufacturing operation. Most of our business here is subassemblies and kitting, circuit boards, plastic enclosures, optics, and so on. There's no additional capital needed to create redundant lines or, in fact, move manufacturing lines. We do that regularly in the normal course of business. On average, we can move a line within a six-month time frame. Some take longer, but we feel like we're really well positioned here.

Scott Davis (Chairman and CEO)

Okay. No, that's helpful. If you just think about second derivative demand impacts, I would think Videojet would be a pretty good real-time demand indicator for really just customer confidence and such. Have you seen anything in Videojet in April that would lead you to be a little bit concerned about the customer confidence and folks' plans on spending money in 2Q and beyond here in 2025?

Jennifer L Honeycutt (President and CEO)

We really haven't, Scott. Demand remains strong for our PQI business, and particularly coding and marking as well. We don't see any demand change in the order patterns. We have just completed four consecutive quarters of growth for both equipment and consumables, which follows a good trajectory of consumer confidence and recovery in the CPG markets. The trends between different types of consumer product goods are variable, right? Beverages are up, healthy snacks are down. We stay close to the data. This is a volume game for us, right? We look at volume on a regular basis in terms of number of codes printed. We will continue to watch the market closely. At this point, we don't have any indication of that softening.

Sameer Ralhan (SVP and CFO)

Scott, if I may add, as you're going to look at the April, the order patterns are still pretty normal at this point.

Scott Davis (Chairman and CEO)

Interesting. Okay. Helpful. I'll pass it on. Thank you and best of luck this year.

Sameer Ralhan (SVP and CFO)

Thanks.

Jennifer L Honeycutt (President and CEO)

Thanks, Scott.

Operator (participant)

Our next question comes from Deane Dray with RBC Capital Markets. Please go ahead.

Deane Dray (Managing Director)

Hey, love to get started here on the tariffs follow-up to Scott's questions. I mean, can you talk about the price elasticity? I mean, really, you've got there's high switching costs for your customers, especially on Water Quality side. Can you just talk about the difference between consumables elasticity versus equipment? Where would be the most risk that you have in increasing prices, just if you think about your product line?

Jennifer L Honeycutt (President and CEO)

Thanks for the question, Dean. You know this is a dynamic situation that we continue to operate in. We're relatively surgical in our approach to pricing. It's going to depend based on the products, the customers, and the regions that we're operating in. There's really not a one-size-fits-all approach. I will say, as you know, that 80% of our sales goes into food, water, and essential goods. 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. It's well worth the investment here. I would say that with 60% of our revenue tied to the consumables business, it's a pretty sticky relationship, as you know. We've got the razor-razor blade relationship here.

As you know, our decentralized operating model empowers our business leaders to effectively take pricing actions where they best see fit. That is going to vary by operating company and product line.

Deane Dray (Managing Director)

Great. Just can you clarify if you're using surcharges in addition to pricing?

Jennifer L Honeycutt (President and CEO)

Like I said, Dean, it's going to vary. In some cases, we're using surcharges. In some cases, it's pricing. It just depends upon the business, the product line, and the region in which we're operating. I can say we remain confident in our ability to have our pricing actions, be those surcharges or permanent increases, to stick. We believe we're well covered in terms of addressing any tariff impact going forward.

Deane Dray (Managing Director)

Great. This is the follow-up, and this is away from tariffs. Do you have any high-level observations on the EPA announcement this week regarding PFAS? There was a lot of hand-wringing, worrying that there might be some pullback from the enforcement here, especially the four parts per trillion. It looks like it was a full endorsement of the enforcement of PFAS. Just any commercial implications for you all? Would love to hear, again, just high-level thoughts.

Jennifer L Honeycutt (President and CEO)

Yeah, thanks for the question. As you know, we remain excited about PFAS in terms of both analysis and treatment, particularly in the area of destruction. We remain active with our minority investment in Axene Technologies, which is a destruction technology for PFAS. Our teams are constantly canvassing the market, looking for opportunities to innovate and particularly democratize tests so that they can be fit for purpose for utilities and municipalities. We think we're well positioned here. As a reminder, there's nothing in our forecast going forward that has any component of PFAS sales, either treatment or destruction in it. I think it remains early days here in terms of how to go solve for this problem. There's effectively no impact if the EPA decides to pull their four parts per trillion or increase it to some other minimum contamination level.

We remain committed to this space, and we think there's going to be a need to solve for this in the future.

Deane Dray (Managing Director)

Great. I appreciate all that, Caller. Thank you.

Operator (participant)

Our next question comes from Mike Halloran with Baird. Please go ahead.

Michael Halloran (Associate Director of Research and Senior Analys)

Hey, good morning, everyone.

Jennifer L Honeycutt (President and CEO)

Good morning, Mike.

Michael Halloran (Associate Director of Research and Senior Analys)

I just want to make sure I understand how you guys are thinking about the year and how everything cadences out. First, the selling days, does that come out of the second quarter, or where does that balance out over the course of the year? And then how are you thinking about the seasonality embedded in guidance? All else equal, relatively normal? Any change? More of a top-line question than a bottom-line question.

Sameer Ralhan (SVP and CFO)

Hey, Mike, thanks for the question. As you kind of think about the three exit days, it's really the impact that's going to be in the Q4. For the full year, there is not any impact. For second quarter and third quarter on a year-over-year basis, there should not be any change on the number of days. That's how you should think about that. Despite that, our Q1 was really strong. We feel really good about the execution of our team and greater than 5% of the core growth, even if we perform on an average basis for the extra three days. Really solid quarter. 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 the municipalities may have, things like that. Really, from a seasonality perspective, our business is pretty steady.

Michael Halloran (Associate Director of Research and Senior Analys)

Thanks for that. Probably this is almost two questions squeezed into one, which I admit ahead of time. Can you help us to bridge between 1Q and 2Q? Relative to the strength of 1Q, even excluding the number of selling days and the benefits, it is still really the quarter. Seems like a little bit of a change going into second quarter. Is that the timing of how the tariffs roll through? The second question embedded in that is, how does the tariff mitigation work through the year? Is it heaviest in 2Q and pretty light, if at all, in the fourth quarter? If you could just kind of square those two dynamics for me.

Sameer Ralhan (SVP and CFO)

Yeah, Mike, let's, yeah, definitely two questions. Let's parse them out. I think first, let's look at it from a growth perspective on the guidance. Look, I think Q1 was really strong. Again, greater than 5% core growth, even if you perform on average for three days, three extra shipping days. The order patterns in April seem normal. Having said that, there's just a lot of geographical uncertainty from the trade policies. What we've done is look at a lot of scenarios as you kind of try to rebalance between price and volume. Where we are is we feel pretty good about the low single digit to mid single digit kind of overall core growth. As you know, we don't guide between the price and volume. That's how we kind of think about the core growth side at this point.

I think it makes sense for us to be stable, judicious from a growth perspective. On the margin side, that's where your tariff question comes in and how the impact will roll in. Look, we modeled in a little bit of a timing difference between the tariff increases and the related countermeasures. That's kind of driving and why we've expanded the margin range a little bit. Also, in the near term, what we have seen is Q1 was really good on equipment sales. Of course, that sows a seed for the future growth. That's a really great outcome in Q1. We modeled in the equipment sales growing in Q2 as well. That's impacting a little bit of the margin side in second quarter. Lastly, Mike, it's really math, right?

The quantum of the numbers that we're looking at from a cost and then the price to offset that is going to be trying to protect the OP dollars, right? That's where the EPS, we feel pretty good about $3.60 to $3.70. When you try to protect the OP dollars, you're going to have a little bit of an impact just on a % of the margin side. That is kind of like really playing into the guide as well. Overall, we feel really good about at this point on the countermeasures and how we are looking at the demand, at least sitting here today.

Michael Halloran (Associate Director of Research and Senior Analys)

Great. Really appreciate it. Thanks for the details.

Sameer Ralhan (SVP and CFO)

Thanks, Mike.

Jennifer L Honeycutt (President and CEO)

Thanks, Mike.

Operator (participant)

Our next question comes from John McNulty with BMO Capital Markets. Please go ahead.

John McNulty (Managing Director and Chemicals Analyst)

Yeah, good morning. Thanks for taking my question.

Jennifer L Honeycutt (President and CEO)

Morning, John.

John McNulty (Managing Director and Chemicals Analyst)

Good morning. Once you lot stronger, I think, than even you all expected or at least guided to. At the same time, it doesn't sound like there was any pull forward or anything like that around the tariff side. I guess first, can you help us to understand where that strength surprised you? I mean, your business is normally pretty predictable, and yet it really came in a lot better than expected. I guess where were the big surprises, would you say?

Jennifer L Honeycutt (President and CEO)

Thanks for the question, John. You know we post-spin, and we've been out of the starting blocks now, 18 months or so, really had the benefit of reinvigorating VES and doubling down on commercial execution, new product development, and making sure that we are operating out of the strongest positions for each of our businesses. I think what you see coming out of the fourth quarter here is just sustained momentum, right? We made a number of investments in commercial execution. We did some re-architecting of our commercial teams in some of the businesses. We doubled down really in terms of driving new product development and delivering fit-for-purpose products and solutions into the space. I think what you see there is the ongoing momentum in just being disciplined in driving VES and ensuring that we're blocking and tackling each and every day.

I do not know that we were necessarily surprised by anything in particular. I think probably Europe came in a little bit stronger, particularly on the water side that we benefited from. Again, that is on the back of really solid leadership, commercial execution of blocking and tackling every day.

John McNulty (Managing Director and Chemicals Analyst)

Got it. Okay. No, that's helpful. I guess maybe somewhat related to that, the margins overall for the first quarter were pretty much at a record level. 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 had the TraceGains kind of weight of some of the investments there. I guess how should we be thinking about the margin level that we're at right now and how that progresses through the year? I guess there are maybe some puts and takes around the tariff timing, but maybe you can help us to think about some of those levers that you're pulling there.

Sameer Ralhan (SVP and CFO)

Yeah, John, as you're going to look at the Q1 margin, absolutely. Really great execution driving the 25% adjusted OP margins. So I feel really great about that. You know some of the things in the Q1 that you're going to look at from a margin perspective, it's really the fall through from the volume side. You know it's the volume leverage that 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 we want to make sure that we build in the lag for any timing differences between the tariff increases and the countermeasures. That's kind of played in equipment sales, as I said earlier, kind of a role into that as well. The rest is math.

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, on daily basis with things changing. We just wanted to be judicious and cautious at this point as we're going to think about the margin side.

John McNulty (Managing Director and Chemicals Analyst)

Got it. Great. Thanks very much. Congratulations on a great quarter.

Sameer Ralhan (SVP and CFO)

Thanks, John.

Operator (participant)

Thanks, John. Next, go to Nathan Jones with Stifel. Please go ahead.

Nathan Jones (Managing Director and Senior Equity Analyst)

Good morning, everyone.

Jennifer L Honeycutt (President and CEO)

Good morning, Nathan.

Nathan Jones (Managing Director and Senior Equity Analyst)

I guess my tariff question is going to be around the competitive advantage or disadvantage that you might see from this. Obviously, there are certain competitors maybe in Marking and Coding where you're pretty similarly positioned, but maybe some other businesses where you have some competitive advantages or disadvantages. Just based on where supply chain's positioned, where your manufacturing's positioned, etc., I would imagine being the big dog on the block in most of these businesses, that it's more advantage than disadvantage. Are there places where you see this as an opportunity to either use that better positioning to gain market share or to use that better positioned supply chain to look for price or any areas like that? Thanks.

Jennifer L Honeycutt (President and CEO)

I love the question, Nathan. We actually look forward to market dislocations. This is an area where I think we can perform really, really well. That is on the back of just our multi-decade heritage around the Veralto Enterprise System. As I mentioned, we are an asset-light manufacturing business in most cases. 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. We feel very good about our position and being advantaged at this time. We feel like we have great direct-to-customer sales strength with our 75% direct-to-sales model. It gives us great insight as to what our customers are thinking and doing, the problems that they are facing, how we can help solve those problems with them. Likewise, we are always working supply chain.

That's just part and parcel to running a global business. We've got a lot of reps here, right? This is reflexive memory for U.S. We're blocking and tackling. We're using VES. We're remaining nimble. When we see opportunities, we seize them with speed and agility.

Sameer Ralhan (SVP and CFO)

Nathan, if I can just add, the speed and agility is really demonstrated by how we've been able to set up the Trojan facility in Grand Rapids, Michigan, right? That is a great proof point of what Jennifer just said.

Nathan Jones (Managing Director and Senior Equity Analyst)

I guess follow-up then is you said 3.5% of sales across the portfolio, but your business is like half U.S. or a little bit under half U.S. Does that imply that you need 7% price in the U.S., or are you defraying that across other parts of the business? Is it relatively homogenous, or are there parts that need significantly more than that, significantly less than that? Do you believe you can mitigate a significant portion of what's that 3.5% total today, and what could you get it down to?

Sameer Ralhan (SVP and CFO)

Yeah, Nathan, if you're going to look at the 3.5%, it's really sort of a gross estimate. When you look at that number, effectively, it reflects the export as well as the imports, right, and imports into China. The majority of this is tied to China, as we talked about that. Overall, we say we should be able to defray pretty much all of it, Nathan. It's really three things. The sourcing strategy, supply chain stuff that Jennifer talked about. Second is all the manufacturing footprint. Given our light manufacturing, we can move things around very fast. All those things are happening to make sure we are in a geographic location where we can serve our customers, maintain the continuity of our service to customers. At the same time, we can do it very fast. Lastly, I would say the pricing.

It is a combination of all three is how you should be thinking about defraying this 3.5% that we laid out, like a gross conservative view. This is not all pricing.

Nathan Jones (Managing Director and Senior Equity Analyst)

Got it. Thanks very much for taking my questions.

Operator (participant)

We'll go next to Jeff Sprague with Vertical Research. Please go ahead.

Jeffrey T Sprague (Founder and Managing Partner)

Hey, thank you. Good morning, everyone. On a bit late, but I think my team's.

Operator (participant)

Good morning, Jeff.

Jeffrey T Sprague (Founder and Managing Partner)

Good morning. It's on a bit late. I think my team's updated me on what you said so far, but pardon any duplication here. First, just on the asset-light comment, though, Jennifer, a lot of that derives right from not being vertically integrated and sourcing and the like. Do you see, for example, kind of electronic sources of supply where you can divert out of China to other places to kind of quickly deal with the input costs on that side of the equation?

Jennifer L Honeycutt (President and CEO)

Yeah, let me clarify. Just because we say asset-light does not mean we are not leveraging collective spend for certain commodities. Okay? What we mean when we say asset-light is that we do not have any big, heavy monuments for manufacturing equipment that have to be duplicated or rooftops that need to be built in order for us to be able to move supply chains. We have a very capable strategic sourcing team centralized within our corporate organization that works directly with our sourcing teams within the operating companies to create that shared leverage. That shared leverage shows up in collective circuit board purchases, in chemicals, commodities, in plastics, injection molded parts, optics, etc. We think we are well advantaged here in terms of being able to leverage the collective spend, but also being nimble and swift when we want to diversify our manufacturing footprint.

Sameer Ralhan (SVP and CFO)

Jeff, one more point I would add is, as you're going to think from the supplier's perspective, right, there's a lot more flexibility on the supply footprint as well right now versus the quote-unquote "first round of tariffs" six, eight years back, right? It is a little different situation as well. All of us have been working in building that resiliency into a supplier base as well. That is a driver in our ability to move fast as well right now.

Jeffrey T Sprague (Founder and Managing Partner)

Thinking about what you can do versus what you will do, I mean, is there a real list of sort of no regrets footprint changes that you make here? Are we still kind of tactically maybe leaning more on price at the beginning to see if some of this stuff goes away? Just interested in how you're kind of playing that potential arbitrage there.

Sameer Ralhan (SVP and CFO)

Yeah, if you think it from the supply chain and the manufacturing footprint perspective, Jeff, these are no regret moves for U.S. I think Trojan is a great example because of the BABA that we were already working towards and had a strategy to have a footprint here in the U.S. The tariff situation just helped kind of accelerate that. A number of these things that we have in play and we are working on are pretty close to getting done. They were a big part of our overall strategy for the longer term as well from a physical footprint perspective. I would say these are no regret moves, Jeff.

Jeffrey T Sprague (Founder and Managing Partner)

Maybe just finally on the days, I think you addressed it in your opening comments. Could you just elaborate if, again, or if you did not, on the impact on the total enterprise, consumables business versus maybe sort of product and projects? I assume there are some notable differences there.

Sameer Ralhan (SVP and CFO)

Yeah, Jeff, it's extra three days, right? Even if you perform off of that, 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 on the equipment side. Frankly, if you boil it down all the way to the EPS based on average margins and all that kind of stuff, it's really 3 cents per share impact. Net net, if you look at that, I think sitting here, if you were delivering high single-digit growth and 90-plus EPS, I think we'll all be feeling pretty good. It's pretty solid execution.

Jeffrey T Sprague (Founder and Managing Partner)

Thank you.

Sameer Ralhan (SVP and CFO)

Thanks, Jeff.

Operator (participant)

Also next to Andrew Buscaglia with BNP Paribas. Please go ahead.

Andrew Buscaglia (Senior Analyst of Us Industrial Technology)

Hey, good morning, everyone.

Jennifer L Honeycutt (President and CEO)

Good morning, Andrew.

Andrew Buscaglia (Senior Analyst of Us Industrial Technology)

I wanted to check in on the M&A front. It seems like you guys got another deal over the finish line, a small one. I’m curious if tariffs are impacting things either positively or negatively in terms of your discussions.

Jennifer L Honeycutt (President and CEO)

Yeah, they really aren't, Andrew. We remain excited about the opportunities that we have in M&A. Both of our funnels for both sides of the house in terms of the two segments are full and actively being worked. We continue to look at a number of strategic investment areas. We will stay disciplined in our approach. We absolutely will stay close to ensuring that it's a market that we like with the most attractive company assets that play in that space and to ensure that we get them at the right valuation. We are undeterred in our approach to M&A, and we still have that as a bias for our capital deployment.

Andrew Buscaglia (Senior Analyst of Us Industrial Technology)

Okay. Okay. On the tariff side, can you just clarify, are you a net exporter out of China to the U.S.?

Sameer Ralhan (SVP and CFO)

It's kind of a balance. Look, we take a lot of stuff as well, and that's kind of reflected in the 3.5% number. I wouldn't call it like it's a one way or the other.

Andrew Buscaglia (Senior Analyst of Us Industrial Technology)

Okay. Thank you.

Operator (participant)

We'll next go to Andrew Kaplowitz with Citigroup. Please go ahead.

Hey, good morning.

Jennifer L Honeycutt (President and CEO)

Good morning, Andrew.

This is Natalie Bau on behalf of Andrew Kaplowitz.

Sameer Ralhan (SVP and CFO)

Hey, Natalie.

Maybe first question, just focusing on the volume component. Q1 benefited from 6.5% volume growth. How do you think about volume normalization in the second quarter and second half, particularly in light of macro/term uncertainties and any inventory normalization in your channels?

Yeah, thanks, Natalie. Look, I think, as you know, we are majority direct, right? Almost 70% direct to our customers. We generally have a pretty good feel from the inventory perspective. There are not a whole lot of distribution channels in between or the buffers in between. We generally have a pretty good line of sight and do not feel like there is any inventory built at this point. It is also not reflected in the order patterns. Inventory is less of an issue as we kind of think about the second quarter and the rest of the year. From a volume perspective, as you know, we do not provide any specific guide for volume and price. As we drive the price, there could be some impact on the volume. Yes, we run all the different kind of scenarios.

Our goal is always to rebalance to make sure we are optimizing the core growth. From a core growth perspective, low single digits to mid-single digit for the second quarter and the rest of the year is where we feel really good about at this point.

Got it. That's helpful. You noted sourcing optimization and standard work improvements during 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 and assess where these initiatives float at the bottom line?

Yeah, look, I mean, these things, first of all, the fundamental of any Kaizen event is, right, we want to see the impact now, right? These are the kind of things that we do execute. We start seeing the results. Look, as part of the budgeting process, every operating company has an operating margin expansion. We 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. These are all kind of part of the guidance that we give to you guys and the internal budgets are all kind of reflected in that. Overall, from a supply chain perspective, again, Natalia, I would say we do this thing every day, right? I can tell you there were a number of supply chain initiatives as well just around the sourcing side and the procurement side.

Those benefits are reflected in the guidance and reflected in the internal budgets we have with each operating company. There is nothing additional up to that.

That's helpful. Thanks for your clarification. Thank you so much.

Jennifer L Honeycutt (President and CEO)

Thanks, Natalia.

Sameer Ralhan (SVP and CFO)

Thanks, Jeff.

Operator (participant)

We'll take our last question from Brian Lee from Goldman Sachs. Please go ahead.

Brian K Lee (VP and Clean Technology Analyst)

Hey, everyone. Good morning. Thanks for squeezing me in. I know we're nearing the end of the call here, so maybe I'll just combine my two questions into one to be efficient. As you said multiple times, Jeff, I know you guys don't like to break out volume and price from an outlook perspective. When we look at Q1, maybe it's a little bit lighter, 1% Water Quality, 1.6% for PQI. Seems like, at least directionally, that's going to go higher given the tariff impacts moving through the year. Just curious if you can, without giving us the numbers, give us some sense of the cadence as we layer that in over the course of the next few quarters and into year end.

I guess related to that, 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? What are you budgeting for the expectations around demand elasticity as you see some price increases moving through the year? Is there any feedback real-time from customers around whether that might limit some volume upside as we move through the rest of the year? Thank you.

Sameer Ralhan (SVP and CFO)

Thanks, Brian. I'll start with the second question. From a pull forward perspective, no, we haven't seen anything of note, rather, I should say, Brian. This is overall, the demand has been pretty good. I would say, as you kind of look at the order patterns in April, as I said at the beginning of the call, they still seem normal at this point. We haven't seen any change in the order patterns yet. From a more pull forward inventory perspective, as I said earlier, we sell mostly direct. We have a pretty good line of sight in the inventories at the end users. I think things seem to be normal at this point.

Now, we all see what's happening in the macro, and we prepare for that, and we run different scenarios as we kind of think about how we move, as we increase the pricing, how it may impact volume, and all that is reflected in the core growth in the low single digits to mid-single digits, depending on the scenario. Price and volume is going to have a little bit of elasticity, but within the range of low single digits to more mid-single digit core growth. Overall pricing, when you look at, Brian, historically, we've delivered 100 to 200 basis points. So on net net, on average, we are 1.3 in Q1. You're absolutely right. As we're pushing the pricing, will it move towards the higher end of the range? Absolutely. That will happen. But we're being very surgical, right?

At the end of the day, the goal is to position the business for success for the longer term and help customers maintain business continuity as well. We are being very surgical, very methodical in how we are kind of pushing. Pricing, as you kind of think of it, lastly, I would say is one of the levers as you kind of think about offsetting as part of the countermeasures to offset the tariff impacts. We have a lot of things in our own control, right? As you kind of think about the manufacturing footprint changes, which can have a very meaningful impact on the tariff countermeasures. You think about the supply chain side. Those things are in our control. We are executing on all those things as well. Think of pricing as one of the three elements here.

The other two elements are within our control, and we are executing on those.

Brian K Lee (VP and Clean Technology Analyst)

Awesome. Appreciate all the color. Thank you.

Sameer Ralhan (SVP and CFO)

Thanks, Brian.

Ryan Taylor (VP of Investor Relations)

Thanks, Brian. Thanks for everybody that joined us on the call today. We appreciate the questions and the engagement. 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.

Sameer Ralhan (SVP and CFO)

Thank you.