Q3 2024 Earnings Summary
- 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.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Core Sales Growth | Q3 2024 | Low to mid-single digits | 4.7% (calculated using 1,314Vs 1,255) | Met |
Adjusted Operating Profit Margin | Q3 2024 | ~23.5% | 23.5% (308/ 1,314) | Met |
Adjusted EPS | Q3 2024 | $0.82 - $0.86 | $0.88 | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
PQI Segment Recovery | Cited progress in Q2 and Q1 along with gradual recovery observed in Q4 2023. | **Five consecutive quarters of mid-/high-single-digit recurring revenue growth, with steady equipment sales rebound. ** | Consistent; sentiment steadily improving |
China Market Challenges | Stability but no meaningful recovery; tight municipal funding mentioned in Q2, Q1, and Q4 2023. | **Sales down 3% YoY, “bouncing along the bottom”; no near-term improvement expected. ** | Consistent mention; ongoing cautious outlook |
Latin America Growth (Brazil Water) | Brief references to Latin America growth in Q2, minimal in Q1 and Q4. | **10% sales increase, driven by water analytics and water treatment, boosted by Brazil’s utility privatization. ** | Reemerged with more detail in Q3 |
TraceGains Acquisition | Not mentioned in Q2, Q1, or Q4 2023 [n/a]. | **Acquired for $350M with 95% recurring sales; expected to fuel PQI growth but be modestly dilutive near-term. ** | New topic in Q3 |
Gross Margin (58%-60%) | 60% in Q2, guided at 58%-60% in Q1, was 57.9% in Q4 2023. | **Reached 59.6% but no specific commentary on the target range. ** | Recurring mention; stable range |
High SG&A and Corporate Costs | Q2 and Q1 cited corporate cost ramp; Q4 mentioned $100M as a stand-alone cost run rate. | **One-time public company costs (50 bps) plus TraceGains transaction expenses impacting margins. ** | Ongoing theme with near-term margin headwinds |
ESG-Driven Water Reuse | Q2: recycle/reclaim emphasis; Q1: customer water reduction goals; Q4: pivot to Aria Filtra for reuse. | **Continued focus on water reclamation and reuse, part of broader industrial water treatment growth. ** | Consistent focus; stable positive sentiment |
Industrial Demand in Water Quality | Q2, Q1, Q4 also noted robust demand across multiple industries. | **Strong industrial end-market sales, including food & beverage and chemical processing; data centers mentioned. ** | Recurring bullish outlook |
Reshoring & CHIPS Act | Q2 and Q1 emphasized CHIPS Act tailwinds tied to semiconductor fabs; not discussed in Q4. | **Benefit from onshoring in data centers, though no direct CHIPS Act detail this quarter. ** | Ongoing but less emphasis in Q3 |
Trojan UV for Semiconductors | Q2, Q1, Q4 highlighted robust growth for ultra-pure water in chip fabs. | **Order decline YoY after strong 2H 2023; U.S. demand remains healthy. ** | Recurring with slight near-term slowdown |
Essential End Markets & Recurring Rev. | Discussed durable essential markets in Q2, Q1; limited detail in Q4. | **85% of sales in essential markets; 61% recurring revenue, up mid-single digits YoY. ** | Continuing emphasis on steady, durable demand |
Potential Margin Dilution (Acquis.) | Previously addressed disciplined M&A approach in Q2 and Q1; not noted in Q4. | **TraceGains likely modestly dilutive in 2025, offset by expected double-digit ROIC by year 6. ** | New focus tied to recent acquisition |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.
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