Veralto Corporation (VLTO) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary indicates strong financial metrics with raised guidance for earnings per share and free cash flow, along with strategic focus on acquisitions. Despite some macroeconomic uncertainties, the company shows resilience with steady demand across key markets and recurring revenue. The Q&A section highlights positive sentiment from analysts, with no major concerns raised. The guidance raise and strategic plans suggest a positive stock price movement, likely in the 2% to 8% range over the next two weeks.
Key Financial Performance
Total Sales (2025) $5.5 billion, up 6% year-over-year. Growth driven by 4.7% core sales growth, with both segments growing near the company average.
Adjusted Operating Profit Margin (2025) Expanded by 20 basis points year-over-year. Incremental margins were within the long-term framework at about 30%, despite headwinds from tariffs and growth investments in TraceGains.
Adjusted Earnings Per Share (2025) $3.90, up 10% year-over-year, marking the second consecutive year of double-digit EPS growth.
Free Cash Flow (2025) Over $1 billion, further strengthening the financial position.
Core Sales Growth by Geography (2025) North America: 5.3%, Western Europe: 3.8%, High-growth markets: 5.1%. Growth driven by strong commercial execution and strategic investments.
Water Quality Segment (2025) Core sales growth of 4.7%, driven largely by volume. Adjusted operating profit grew 9.4% to $858 million, with 80 basis points of margin improvement.
PQI Segment (2025) Core sales growth of 4.8%. Adjusted operating profit margin of 26.5%, reflecting investments in TraceGains and regional production diversification.
Recurring Revenue (Q4 2025) Grew mid-single digits year-over-year, comprising 59% of total sales.
Gross Profit Margin (Q4 2025) 59.3%, with adjusted operating profit margin improving by 80 basis points to 24.6%.
Adjusted Earnings Per Share (Q4 2025) $1.04, up 9% year-over-year.
Free Cash Flow (Q4 2025) $291 million, or 115% conversion of GAAP net income.
Water Quality Segment (Q4 2025) Total sales of $846 million, up 4.3% year-over-year. Adjusted operating profit margin was 25.9%, up 40 basis points year-over-year.
PQI Segment (Q4 2025) Total sales of $550 million, up 3% year-over-year. Adjusted operating profit margin was 26.5%, up 160 basis points year-over-year.
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Operating Highlights
New ammonia analyzer: Launched in water quality, simplifies operations, improves efficiency, and reduces maintenance for customers. Used to monitor ammonia levels, maintain water quality, and protect aquatic environments.
Chemkeys testing technology: Expanded parameters for testing, grew double digits year-over-year in 2025.
UV laser marking and coding system: Met strong customer demand, aiding transition to sustainable, flexible film packaging solutions.
AI-enabled packaging software: Streamlines and error-proofs packaging print during design phase, accelerates go-to-market, and reduces costly reprints and recalls.
Geographic expansion: Invested in Latin America, India, and the Middle East, which were the fastest-growing regions in 2025. Focused on secular drivers like growing middle class, water scarcity, urbanization, and industrialization.
In-Situ acquisition: Expanded water analytics portfolio into environmental water and hydrology markets, addressing challenges like water scarcity and contamination.
Production line regionalization: Replicated and regionalized over a dozen production lines to improve flexibility and efficiency.
Service offerings expansion: Increased service contract attachment rates and consulting services for water treatment systems, driving strong service growth.
Portfolio optimization: Divested slower growth AVT product line and acquired TraceGains, AQUAFIDES, and In-Situ to enhance growth and portfolio quality.
Capital allocation: Established $750 million share repurchase program and increased dividend by 18%.
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Risk or Challenges
Tariffs and Growth Investments: Incremental margins were impacted by tariffs and growth investments in TraceGains, which could pose financial challenges.
Volume Decline: Volumes were down modestly in Q4 2025 due to fewer shipping days, which could affect revenue generation.
Regional Production Diversification: Investments in diversifying regional production for PQI impacted margins, indicating potential operational challenges.
Acquisition Integration: The integration of acquisitions like In-Situ and AQUAFIDES may dilute margins and require significant resources.
Economic and Market Conditions: Dynamic macroeconomic conditions and secular drivers in high-growth markets could pose risks to demand stability.
Currency Fluctuations: Currency was a tailwind in 2025, but fluctuations could adversely impact financial performance in the future.
Supply Chain and Procurement: While improvements were made, ongoing supply chain and procurement challenges could disrupt operations.
Regulatory and Environmental Challenges: Expanding into environmental water and hydrology markets may expose the company to regulatory and environmental risks.
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Guidance & Outlook
Core Sales Growth: Targeting low to mid-single-digit range year-over-year for 2026. Total sales growth, including acquisitions and FX, projected in the mid- to high single-digit range.
Adjusted Operating Profit Margin: Expecting approximately 25 basis points of year-over-year improvement in 2026, with 50 basis points of margin expansion in core business offset by 25 basis points dilution from the In-Situ acquisition.
Adjusted EPS: Guidance for 2026 is in the range of $4.10 to $4.20 per share, representing mid- to high single-digit growth over the prior year.
Free Cash Flow Conversion: Targeting approximately 100% of GAAP net income for 2026.
Capital Expenditures: Expected to be in the range of 1% to 1.5% of sales for 2026.
Q1 2026 Core Sales Growth: Targeting flat to low single digits year-over-year, with total sales growth in the mid- to high single-digit range.
Q1 2026 Adjusted Operating Profit Margin: Targeting approximately 24.5%.
Q1 2026 Adjusted EPS: Guidance in the range of $0.97 to $1.01 per share.
Market Trends and Drivers: Secular drivers such as water scarcity, urbanization, and industrialization expected to sustain demand for products and services. Approximately 80% of sales tied to water, food, and essential goods, with 60% of revenue being recurring.
Acquisition Impact: In-Situ acquisition expected to contribute 150 basis points to total sales growth in 2026, with core sales growth averaging 8% over the past three years.
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Shareholder Return Plan
Dividend Increase: An 18% increase in the quarterly dividend was approved by the Board of Directors in the fourth quarter of 2025.
Share Repurchase Program: A $750 million share repurchase program was established in the fourth quarter of 2025.
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Key Q&A
Q:What are the expectations for municipal CapEx and demand trends from municipal versus industrial customers?
A:The water quality markets show steady demand across both municipal and industrial markets. The company is relatively insulated from CapEx funding cycle fluctuations due to its high recurring revenue (60%) and integral role in customer operations. Industrial markets, particularly data centers, semiconductor, mining, and power, show strong growth. On the municipal side, government funding continues to flow, supporting demand.
Q:Are there any supply or pricing issues related to DRAM?
A:The company's exposure to DRAM in dollar terms is very small, and no material impact is expected.
Q:Can you provide more color on the 50 basis points of margin expansion guidance excluding In-Situ?
A:The 50 basis points of margin expansion is primarily driven by pricing and the rolling off of tariff-related headwinds by the second half of 2026. Investments in services and sales expansion are offsetting factors. In-Situ integration costs will have an upfront impact, but the net year basis impact is expected to be 25 basis points.
Q:Will data centers contribute meaningfully to growth in 2026?
A:Sales into data centers are still relatively small and are not expected to contribute meaningfully to core growth in 2026, despite growing double digits.
Q:What is the impact of the high-protein boom on the PQI business?
A:The CPG market is stable with solid demand for new product innovations like UV laser. Changes in food products and packaging generally benefit the business, as they drive volume for coding and marking equipment and consumables.
Q:Why was Western Europe down year-on-year in terms of core growth in 4Q?
A:The decline was driven by the impact of three fewer shipping days year-over-year. On a full-year basis, growth in Western Europe was solid, supported by recurring revenue.
Q:Why is EPS growth guidance for 2026 more modest compared to previous years?
A:The guidance reflects prudence due to macroeconomic uncertainties. The In-Situ acquisition contributes $0.02 per share to operating earnings but results in a $0.04 dilution from the lack of interest income due to cash usage.
Q:Does warmer water cooling in data centers change the opportunity for Veralto?
A:Liquid cooling increases the need for Veralto solutions due to the requirement for high-purity fluids and precision control, regardless of water temperature. This benefits ChemTreat, Hach, and Trojan businesses.
Q:What is the confidence level in completing more M&A deals in 2026?
A:The company has a strong M&A pipeline and remains disciplined in pursuing top-tier assets at the right valuation. Share buybacks are an alternative for returning value to shareholders if M&A activity is lighter.
Q:What are the integration plans for the In-Situ acquisition?
A:The focus is on top-line synergies by combining complementary product portfolios and leveraging global channels. Cost synergies will be achieved through operational efficiency, global supply chain optimization, and VES tools.
Q:What will unlock volume growth in the water segment?
A:Volume growth is supported by steady demand drivers in municipal and industrial markets, particularly in data center ecosystems. Full-year volume growth for Water Quality was over 3% in 2025.
Q:How does Veralto monetize demand in the PQI segment?
A:The PQI segment uses a SaaS-based model with recurring revenue. Growth comes from new accounts, particularly in mid-market brands, and product expansion, such as integrating AI offerings into existing platforms.
Q:What factors influence the low to mid-single digit growth guidance range?
A:The range reflects prudence due to macroeconomic uncertainties. Margin expansion of 50 basis points is achievable even at the low end of the range, with flexibility to adjust costs as needed.
Q:What are the benefits of regionalizing the supply chain?
A:Regionalization mitigates tariff risks and improves operational efficiency. The company has diversified manufacturing lines across regions, with ongoing efforts to optimize capacity and absorption.
Q:What is the expected price contribution to growth in 2026?
A:Price contribution is expected to be at the high end of the historical range (100-200 basis points), with both carryover and new pricing actions contributing.
Q:How will organic growth phase throughout 2026?
A:Organic growth is expected to accelerate each quarter, with Q4 benefiting from easier comps and reaching mid-single digits.
Q:Review of Unclear Management Responses
A:Management avoided directly answering the question about the total addressable market (TAM) for data centers, stating that they do not size their markets publicly. Additionally, while discussing the integration of In-Situ, management provided general plans but lacked specific numerical details on expected synergies or timelines.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
FX mid
India Middle
Middle East
OTT
Situ acquisition
Situ world
acquisition FX
acquisition Situ
addition
analytics portfolio
class
combination
day basis
demand product
digit cash
efficiency
expansion mid
footprint
freshwater
function
hydrology market
instrumentation
investment TraceGains
mid digit
net
offering
outset
point tailwind
product service
quantity quality
sale core
sale margin
sale price
shipping day
support
treatment solution
use
water analytics
water hydrology
VLTO Transcript
Veralto Corporation (VLTO) Q4 2025 Earnings Call Transcript
Positive2-4
The earnings call summary indicates strong financial metrics with raised guidance for earnings per share and free cash flow, along with strategic focus on acquisitions. Despite some macroeconomic uncertainties, the company shows resilience with steady demand across key markets and recurring revenue. The Q&A section highlights positive sentiment from analysts, with no major concerns raised. The guidance raise and strategic plans suggest a positive stock price movement, likely in the 2% to 8% range over the next two weeks.
Veralto Corporation (VLTO) Q3 2025 Earnings Call Transcript
Positive10-29
The earnings call summary reflects a generally positive outlook with raised EPS guidance, steady demand, and growth in key segments like Water Quality and PQI. The Q&A session highlights strong growth drivers, strategic focus on M&A, and positive sentiment towards pricing and market share strategies. While some margin adjustments were noted, the overall guidance and strategic initiatives suggest a positive sentiment, likely leading to a stock price increase.
Veralto Corporation (VLTO) Q2 2025 Earnings Call Transcript
Positive7-29
The earnings call summary indicates strong financial performance, with optimistic guidance and strategic initiatives such as the acquisition of AQUAFIDES and opening a new U.S. factory. The Q&A section reveals confidence in core sales growth and effective cost management, despite some unclear management responses. The reaffirmation of EPS guidance and a focus on water quality growth in Europe are positive indicators. Overall, the sentiment is positive, suggesting a likely stock price increase in the next two weeks.
Veralto Corporation, Inc. (VLTO) Q1 2025 Earnings Call Transcript
Neutral4-30
VLTO Slides
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