Veralto Corporation

Please stand by, your meeting is about to begin. Hello, my name is Nikki, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's fourth 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 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 conference.

Good morning, everyone. Thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer, and Samir Rohan, 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 February 18th. Yesterday, we issued our fourth quarter and full year 2025 earnings news release, earnings presentation, and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. In addition, we also issued our 2026 first quarter and full year guidance. These materials are available in the investor section of our website, beralta.com, under the heading quarterly earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of the webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. 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 the date that they are being 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.

Thank you, Ryan, and thank you all for joining our call today. Our team finished 2025 with a strong fourth quarter capping off an outstanding year for Veralto. I want to recognize our 17,000 associates worldwide for their rigorous VES driven execution that helped us serve customers, improve operating efficiency and meet our financial commitments in 2025. Our success last year was underpinned by exceptional contributions and tireless efforts by our procurement, supply chain and factory operations teams. During the year, we replicated and regionalized more than a dozen production lines into existing locations to drive flexibility across our footprint and improve our ability to serve customers more efficiently. These moves in combination with targeted supply chain and strategic pricing actions enabled us to successfully navigate last year's dynamic macro environment while providing strong support to our customers. In 2025, we delivered mid-single digit core sales growth, double digit adjusted earnings per share growth, and over $1 billion of free cash flow. As we closed out 2025, we established a $750 million share repurchase program and announced an 18% increase in our dividend. And at the outset of 2026, we completed the acquisition of In-Situ, expanding our world-class water analytics portfolio into fast-growing environmental water and hydrology markets. Going forward, we remain excited about numerous opportunities to create value for shareholders through strategic growth and disciplined capital allocation. Entering 2026, we are confident that the enduring need to safeguard the global supply of clean water and safe food will continue to underpin steady demand for our products and services across our key industrial, municipal, and consumer packaged goods and markets. Combined with our durable business model and rigorous deployment of VES, we expect to deliver yet another year of core sales growth and continued margin expansion with mid to high single-digit adjusted earnings per share growth. Now turning to our 2025 full-year financial results in detail. Total sales grew 6% year-over-year to $5.5 billion, an all-time high. We delivered 4.7% core sales growth, with both segments growing near the company average. Incremental margins were within our long-term framework at about 30%, despite headwinds from tariffs and growth investments in trace gains. Adjusted operating profit margin expanded by 20 basis points year over year. and adjusted earnings per share was $3.90, up 10% year-over-year, marking our second consecutive year of double-digit EPS growth. And we generated over $1 billion of free cash flow, further strengthening our financial position. Overall, I'm very pleased with the growth, margin expansion, and robust free cash flow we delivered in 2025. Looking at core sales growth by geography and market for the full year, growth throughout the enterprise was broad-based across key verticals and regions as our commercial teams executed well, leveraging our VES growth tools and strategic investments. In North America and Western Europe, which comprise about 70% of our total revenue, core sales grew 5.3% and 3.8% respectively in 2025. And core sales at the high growth markets grew 5.1% year over year. Taking a closer look, in North America, core sales growth exceeded 5% in both segments. In water quality, we continued to capitalize on broad-based demand for our chemical water treatment solutions, which delivered mid-single-digit core sales growth during 2025. From an industrial and market perspective, we saw the highest growth in chemical processing, power generation, mining, and data centers. Our growth in these verticals was a function of solid demand, strong commercial execution, and strategic new customer wins. North American sales of UV water treatment grew just under 10% last year, driven largely in support of our municipal customers' water reuse efforts. both our water treatment and analytics businesses continue to benefit from increased industrial activity in North America. In PQI, core sales in North America grew 5.8% year over year in 2025 with mid single digit growth across both packaging and color and marking and coding. In marking and coding, core sales of consumables and equipment both through mid single digits year over year with equipment sales growth from both our inkjet and laser product lines this reflects a combination of steady end market demand differentiated new product launches and strategic market penetration across an ever increasing number of substrates in western europe Core sales grew 3.8% year over year with water quality up 4% and PQI up 3.6%. Core sales growth and water quality was led by our water analytics team in Europe and reflects traction from our growth initiatives as well as improvements made to our commercial architecture in 2024. These changes contributed to rigorous lead generation, funnel management, and VES-catalyzed commercial execution. Notably, water quality's growth in Western Europe last year was across both municipal and industrial customers. And in PQI, core sales growth in Western Europe was across both marketing and coding and packaging and color. Growth in marketing and coding was led by consumables and continuous inkjet printers. And in packaging and color, our core growth in Europe was highlighted by strategic growth within mid-tier consumer packaged goods customers. In high-growth markets, core sales increased 5.1% year-over-year in 2025, led by Latin America, India, and the Middle East. In China, four-year core sales grew modestly over the prior year, led by PQI. Overall, we delivered solid growth across all key regions while continuing to invest in our businesses for future value creation. Since the inception of Veralto, our core sales growth has accelerated approximately 200 basis points, and our adjusted operating margins have expanded by an average of 50 basis points per year. Over this two-year period, we have grown adjusted EPS by approximately 11% annually, with free cash flow conversion above 100%. This financial performance highlights our durable growth and capital-like business model, fortified by the Veralto Enterprise System. The acceleration in our core growth rate reflects strong commercial execution and traction from strategic initiatives, including targeted geographic growth, enhanced service offerings, and new product innovation. From a geographic perspective, we invested in people and resources to capitalize on secular growth drivers in Latin America, India, and the Middle East. Secular drivers in these markets, such as a growing middle class, Increased scarcity of freshwater, rapid urbanization, and expanding industrialization create a strong need for our products and services across both segments to test and treat water and ensure packaged foods are safe to consume. We see the investment in these markets across both the public and private sectors. in 2025 latin america india and the middle east were our three fastest growing regions and as it relates to enhancing our service offerings we focused on expanding support across our global installed base increasing the attachment rate of service contracts on new equipment sales and expanding our consulting services to new project design, particularly with respect to water treatment systems for data centers. This focus drives strong service growth across both segments in 2025. As it relates to innovation, our increased investment in R&D combined with a focus on new product opportunities that have the highest growth and most attractive returns have reinvigorated our innovation flywheel. Combined with our extensive direct-to-customer business model, these efforts have accelerated our development of fit-for-purpose solutions to enhance product quality, resolve critical pain points, and drive greater efficiency throughout customer operations. Over the past 12 to 18 months, we have begun to see the fruits of our R&D efforts across Veralso with several new product launches. A few notable new products that contributed to growth in 2025 include a new ammonia analyzer launched in water quality that simplifies operations, improves efficiency, and reduces maintenance for customers. This product is used at various stages of the water cycle to monitor ammonia levels, maintain water quality, and protect the health of aquatic environments. Additionally, we continue to expand the number of parameters customers can test using our most advanced and easiest-to-use testing technology, our single-use ChemKeys, which grew double digits year over year in 2025. In our PQI segment, our new UV laser marking and coding system met strong customer demand in 2025. This new technology is helping customers transition to more sustainable, flexible film packaging solutions. And in our packaging and color software offering, we launched a new AI-enabled solution to help streamline and error-proof packaging print during the design phase. This helps brands accelerate go-to-market and reduce costly reprints and product recalls. Looking at 2026, we believe that the durability of the secular drivers across our key end markets will continue to underpin steady demand for our products and services. About 80% of our sales are tied to water, food, and essential goods, and about 60% of our revenue is recurring. Of our recurring revenue, the majority is comprised of consumables that are critical to the daily operations of our customers where the cost of failure is high. In addition, our large global installed base of instrumentation and equipment drives a reoccurring need for replacement and upgrades each year, further fortifying our sales durability. Given these attributes and continued focus on our strategic growth initiatives, we guided to another year of steady core sales growth in 2026 and our third consecutive year of adjusted operating margin expansion with adjusted EPS growth in the mid to high single digits. In conjunction with reigniting our innovation engine, we are improving the quality of our portfolio with a focus on accelerating our core sales growth rate and creating long-term value. At the outset of 2025, we divested AVT, a slower growth instrumentation product line within PQI, Meanwhile, our acquisition of TraceGains grew sales by more than 20% in our first full year of ownership. The combination of ESCO and TraceGains is helping our CPG customers accelerate time to market for new products and connect digital workflows to drive efficiency. In our water quality segment, we acquired Aquafetus in the second quarter of last year. Aquafetus complements our Trojan UV business by providing low-flow UV water treatment solutions through an expanded footprint in Europe. And just a few weeks ago, we completed the acquisition of In-Situ, expanding our world-class water analytics portfolio into fast-growing environmental water and hydrology markets. Based in Colorado, In-Situ is a global leader in water measurement and monitoring, offering easy-to-use sensors, SONs, and data management solutions. Its differentiated technologies strengthen our position across the environmental water ecosystem and complements our AUT HydroNet portfolio. Over the past three years, In-Situ has averaged roughly 8% core sales growth. And in 2025, In-Situ delivered approximately $80 million in sales with gross margins around 50% and EBITDA margins in the mid-teens. The addition of In-Situ expands our presence in fast-growing environmental water and hydrology markets and enhances our ability to help address freshwater challenges related to increasing water scarcity, severe weather events, and water contamination. Greater visibility to the quantity and the quality of surface and groundwater enables municipalities, government agencies, and industries to mitigate economic risk and ensure public safety. These customers are increasingly faced with a variety of issues, including not enough water, too much water, water in the wrong places, and changing water composition, which requires different treatment solutions. The combination of in situ and ought products, along with support from our broader water analytics capabilities, creates a significant opportunity to help customers efficiently monitor and analyze the quantity and quality of their freshwater sources. We now have a premier environmental water analytics portfolio with significant opportunities to accelerate growth through complementary channels, improve efficiency across our global footprint, and deliver greater value for customers and shareholders. This addition to our portfolio is squarely aligned to our purpose of safeguarding the world's most vital resources, and we are excited to publicly welcome the in situ team to Viralto. Going forward, we remain excited about numerous opportunities to create value for shareholders through strategic growth and disciplined capital allocation. Our pipeline of acquisition opportunities remains strong for both water quality and PQI. That concludes my opening remarks, and at this time, I'll turn the call over to Samir to provide details on our fourth quarter results and 2026 guidance.