Veralto Q4 2024 Earnings Report

Veralto EPS Results

• Actual EPS: $0.95
• Consensus EPS: $0.90
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: N/A

Veralto Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $1.35 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Veralto Announcement Details

• Quarter: Q4 2024
• Date: 2/4/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, February 5, 2025
• Conference Call Time: 8:30AM ET

Veralto (NYSE:VLTO) Inc., trading on the New York Stock Exchange under the ticker VLTO, became an independent, publicly traded company in August 2023 through a spin-off from Danaher Corporation’s Environmental & Applied Solutions segment. The company traces its roots to established water-treatment and environmental technology businesses that have served municipal, industrial and commercial markets for decades. As a standalone enterprise, Veralto brings focused resources to advance its core mission of improving water quality and sustainability worldwide.

Veralto’s portfolio encompasses a broad range of water-quality and environmental solutions. Its offerings include laboratory and field instrumentation for water analysis, chemical treatment programs, advanced membrane- and media-based filtration systems, ultraviolet disinfection technologies and activated-carbon purification products. These solutions are designed to address challenges in potable water, wastewater, process water and industrial cooling applications. By integrating digital monitoring and control platforms, Veralto provides customers with real-time data analytics, predictive maintenance tools and remote operational support to optimize treatment performance and compliance.

The company serves a global footprint that spans North America, Europe, Asia Pacific and Latin America, with manufacturing, engineering and research-and-development facilities strategically located in key markets. Veralto’s customer base includes municipal water authorities, power producers, food and beverage processors, pharmaceuticals, petrochemicals and other industrial end users. Supported by a seasoned management team with deep expertise in water technology and environmental services, Veralto continues to invest in innovation, strategic partnerships and targeted acquisitions to expand its product capabilities and geographic reach.

Veralto Q4 2024 Earnings Call Transcript

Key Takeaways

• 2024 financial results: Core sales grew 3.7% year-over-year, adjusted operating margin expanded 80 bps, adjusted EPS rose 11% to $3.54, and free cash flow reached $820 M, with net leverage at 1.2×.
• Growth investments: The company expanded its direct sales force, increased R&D spend by 40 bps to 5% of sales, and launched new products such as the Videojet 7920UV laser, driving sequential volume gains and market penetration.
• Disciplined capital allocation: Veralto acquired TraceGains, took a minority stake in AgXene Water Technologies and divested the AVT line, improving portfolio growth rates, gross margins and recurring revenue profiles.
• 2025 outlook: Targeting low- to mid-single-digit core sales growth, 25-50 bps of margin expansion, adjusted EPS of $3.60–$3.70 (excluding a $0.08 currency headwind) and 90–100% free cash flow conversion.

Presentation

[Operator]

My name is Margaux, and I'll be your conference operator this morning. At this time, I'd like to welcome everyone to Corporation Fourth Quarter twenty twenty four Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Ryan Taylor, Vice President of Investor Relations. Mr. Taylor, you may begin your conference.

[Ryan Taylor, Vice President - IR at Veralto]

Good morning, everyone. Thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer and Sameer Rahan, 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 Investors section of our website later today under the heading Events and Presentations.

[Ryan Taylor, Vice President - IR at Veralto]

A replay of this call will also be available until February 19. Yesterday, we issued our fourth quarter and full year twenty twenty four 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 2025 full year and first quarter guidance. These materials are available in the Investors section of our website, www.veralto.com, under the heading Quarterly Earnings. Reconciliations of all non GAAP measures are also provided in the appendix of the webcast slides.

[Ryan Taylor, Vice President - IR at Veralto]

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 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.

[Ryan Taylor, Vice President - IR at Veralto]

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

[Jennifer Honeycutt, President & CEO at Veralto]

Thank you, Ryan, and thank you all for joining our call today. I'll begin with a look back at our 2024 accomplishments followed by a recap of our fourth quarter performance. Sameer will then take you through a detailed analysis of our Q4 results and 2025 guidance. Reflecting on 2024, I'm proud of our team for their strong execution in our first full year as a public company to grow our business, strengthen our portfolio and deliver attractive value creation for all stakeholders. In doing so, three notable accomplishments stand out.

[Jennifer Honeycutt, President & CEO at Veralto]

First, we delivered on our financial commitments. Second, we increased our growth investments. And third, we demonstrated a disciplined approach to capital allocation, executing strategic actions to improve our portfolio and increase our dividend in conjunction with our earnings growth. Let me expand on each of these. Beginning with our financial performance for the year, we delivered core sales growth, adjusted operating profit margin expansion and adjusted earnings per per share growth above our initial guidance.

[Jennifer Honeycutt, President & CEO at Veralto]

This outcome demonstrates the durability of our businesses fortified by the Veralto Enterprise System. Our simplification of VES and focus on leveraging high impact tools drove sales growth and margin expansion throughout the year. Our results reflect the benefits gained from our team's engagement in focused Kaizen events and leverage of VES growth tools to enhance commercial architecture, improve funnel management and increase lead generation. Our VES focus combined with increased investments in sales, marketing and R and D enabled us to capitalize on strengthening demand as the year progressed. This resulted in steady sequential improvement in volume growth partly attributable to new customer wins and increased market penetration.

[Jennifer Honeycutt, President & CEO at Veralto]

Across both segments, we delivered mid single digit core sales growth in the second half of twenty twenty four. On the strength of this growth and strong underlying margin expansion, we accelerated investments to drive future value creation. Specifically, we expanded our direct sales force, augmented our marketing efforts and accelerated innovation in verticals and regions with high return opportunities. We enhanced our talent through new hires and internal development programs and we increased our investment in innovation with our full year R and D expense up 40 basis points year over year to about 5% of sales. Our focus on innovation led to several new product and technology launches across our businesses throughout 2024.

[Jennifer Honeycutt, President & CEO at Veralto]

PQI led the way with digital offerings in packaging and color and a steady cadence of next gen technology launches in marking and coding. Videojet has now launched more than a dozen new products over the past two years. Its latest breakthrough, the 7920UV laser marking system launched in the fourth quarter. This laser enhances usability, adaptability and consistency in coding operations and was met with immediate enthusiasm and demand from customers. We shipped our first unit shortly after the product launched in November and continue to see strong demand here in Q1.

[Jennifer Honeycutt, President & CEO at Veralto]

The UV laser is optimized for high quality permanent coating onto lighter weight flexible films made from monomaterial plastics. These flexible films are among the fastest growing substrates in the packaging industry due to their high levels of recyclability further supporting our customers' sustainability goals. We are excited about this new UV laser technology along with many other products and solutions we brought to the market last year. In addition to delivering our financial commitments and increasing our growth investments, our third key accomplishment last year was executing disciplined capital allocation. In 2024, we took steps to improve our portfolio across both segments.

[Jennifer Honeycutt, President & CEO at Veralto]

This activity ramped in the fourth quarter as we acquired TraceGainz, our first acquisition of SAIS, invested a minority stake in Acxene Water Technologies and signed an agreement to sell Advanced Vision Technology or AVT, a print inspection product line in our PQI segment with approximately 40 quarter. It is a leading provider of cloud based software solutions that enable connected data and digital workflow management for consumer brands. TraceGain's digital solutions help customers innovate new recipes faster and significantly reduces time to market for new products. Additionally, it helps increase transparency to ingredient inputs for food and beverage safety. The acquisition of Tracegains in combination with our ESCO business strategically expands our digital offering and provides us the opportunity to deliver greater value to consumer brands as they digitize critical workflows with connected data across new product development, compliance and packaging.

[Jennifer Honeycutt, President & CEO at Veralto]

The integration of Trace Gains is going well. Our integration team is executing on all fronts. The customer response has been very positive and the team at Trace Gains has quickly embraced VES. Trace Gains fourth quarter core sales growth exceeded 20% year over year and importantly, we are on track with our growth investments. Late in the fourth quarter, ESCO entered into an agreement to sell its AVT product line.

[Jennifer Honeycutt, President & CEO at Veralto]

This sale is expected to be completed in the first quarter of twenty twenty five. This divestiture is another example of our stewardship of the portfolio. With ESCO's focus on providing source to shelf digital workflow solutions for our CPG customers, we believe new ownership of AVT will provide the necessary focus to drive its growth and innovation. In combination, acquiring Trace Gaines and divesting AVT enhances our packaging and color portfolio. Both deals are immediately accretive to PQI's core growth rate, gross margin and recurring revenue.

[Jennifer Honeycutt, President & CEO at Veralto]

In Water Quality, we have also taken actions to improve our portfolio. As previously discussed, since Veralta's spin off, we have strategically exited three product lines that were not aligned with our long term value creation strategy. In the fourth quarter, we made a minority investment in Accine, a provider of electrochemical oxidation technology used to destroy contaminants in water, including PFAS. Our water quality team has a long proven track record of developing and commercializing technologies that help customers detect and destroy emerging contaminants. A key part of our growth strategy in water quality is developing fit for purpose solutions to help our customers meet complex challenges.

[Jennifer Honeycutt, President & CEO at Veralto]

We believe AgXSEN's electrochemical oxidation technology provides a promising solution for difficult to treat organic contaminants and that our commercial partnership with Accxene will accelerate technology adoption over time. Overall, we are pleased with the progress we made in curating our portfolio in 2024. Moving forward, we expect acquisition growth to be a key value creation lever. The pipelines for both segments are full and active, and we continue to be disciplined in our approach to capital allocation. Looking now at 2025, we are starting off the year with an improved portfolio, positive trends in our end markets and a stronger financial position.

[Jennifer Honeycutt, President & CEO at Veralto]

Demand across our key end markets has strengthened compared to this time last year, highlighted by strong demand for industrial water treatment in North America and improved demand in consumer packaged goods markets globally. For the full year 2025, we are targeting low to mid single digit core sales growth with strong incremental margins, solid earnings growth and strong cash generation. And we believe the durability of our businesses fortified by the Veralto Enterprise System are competitive advantages that enable us to consistently grow and improve even in dynamic macro environments. Looking at our financial results for the full year 2024, total sales grew 3.4% year over year to just under 5,200,000,000 an all time high. We delivered 3.7% core sales growth with 80 points of adjusted operating profit margin expansion.

[Jennifer Honeycutt, President & CEO at Veralto]

And adjusted earnings per share grew 11% to $3.54 per share. Notably, we exceeded our initial guidance on all three of these metrics. And we generated $820,000,000 of free cash flow further strengthening our financial position. We ended the year with $1,100,000,000 of cash on hand and net leverage at 1.2 times. Overall, I'm pleased with the growth and margin expansion we delivered in 2024.

[Jennifer Honeycutt, President & CEO at Veralto]

Every operating company across both segments contributed core sales growth with positive volume. Our Water Quality team delivered 3.9% core sales growth with 50 basis points of adjusted operating profit margin expansion. They set all time highs with annual sales of over $3,000,000,000 and adjusted operating profit margin of 25%. And our PQI team delivered 3.3% core sales growth with 160 basis points of adjusted operating profit margin expansion. They also reached all time highs with over $2,000,000 in sales and adjusted operating profit margin of 27%.

[Jennifer Honeycutt, President & CEO at Veralto]

I'm proud of our teams across the world for their strong commercial and operational execution in support of our customers. We capped off a strong 2024 with solid fourth quarter results. Core sales grew 4.6 led by volume growth with both segments growing core sales by more than 4%. Adjusted earnings per share grew 9% year over year to $0.95 and free cash flow generation was strong at $263,000,000 in the fourth quarter further strengthening our financial position. Looking at core sales growth by geography and end market for the fourth quarter, growth across the enterprise was broad based across key verticals and regions, and our commercial teams executed well leveraging our VES growth tools and investments made earlier in the year.

[Jennifer Honeycutt, President & CEO at Veralto]

North America and Western Europe, which comprise about 70% of our total sales grew nearly 6% and high growth markets grew low single digits year over year. In North America, core sales grew 5.8% within both segments. In Water Quality, we continue to capitalize on strong demand for our chemical water treatment solutions, which grew high single digits in North America. From an industrial end market perspective, this growth was broad based with the strongest growth in food and beverage, chemical processing and power generation. We also continue to see strong growth for Trojan's UV systems at municipalities in North America, primarily related to water reuse.

[Jennifer Honeycutt, President & CEO at Veralto]

Veralta continues to benefit from strong secular drivers in water conservation, reclamation and reuse as we help our customers achieve their sustainability goals. Over the long term, we expect these secular trends to drive continued growth opportunities given the scarcity of water today, coupled with more frequent severe weather events and increasing water usage from industry such as data centers, which consume large quantities of water for cooling. It also includes traditional industries ranging from power generation to food and beverage processing. Both our Water Treatment and Analytics businesses are poised to benefit from increased industrial activity in North America. At PQI, core sales in North America also grew 5.8% in Q4 with mid single digit growth in both Packaging and Color and Marketing and Coating.

[Jennifer Honeycutt, President & CEO at Veralto]

PQI's growth in North America was largely driven by strong growth in equipment sales. This reflects a combination of improving end market demand from CPG customers and market penetration from our strategic initiatives. Specifically in North America, Videojet focused on new customer wins, differentiated new product launches and VES driven commercial excellence. In Western Europe, we saw continued momentum with core sales growth of 5.8% year over year led by 7.3% growth in water quality sales and 4.4% growth in PQI. The sales growth in Western Europe was largely driven by strong commercial execution by our Water Analytics team.

[Jennifer Honeycutt, President & CEO at Veralto]

Additionally, we drove growth across PQI in both our Marketing and Coating and Packaging and Color businesses. In high growth markets, core sales increased 1.5% in the fourth quarter led by Latin America and India. In China, PQI continued to drive solid year over year core sales growth. However, similar to our third quarter performance, PQI's growth in China was offset by lower sales in water quality. This is primarily due to ongoing soft demand for water analytics and a lower level of UV system installations for chip processing, which were exceptionally strong in the fourth quarter of twenty twenty three.

[Jennifer Honeycutt, President & CEO at Veralto]

Total company sales into China in Q4 were in line with our quarterly average for the year. We continue to view demand for our products in China as stable at low levels and do not expect China sales to grow in 2025. Overall, we delivered solid fourth quarter financial results on the back of strong commercial execution, while continuing to invest in future value creation. At this time, I'll turn the call over to Sameer to provide details on our fourth quarter results and 2025 guidance.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the fourth quarter. Total sales grew 4.4% on year over year basis to over $1,300,000,000 Currency was a 50 basis points headwind year over year and acquisitions contributed 30 basis points of growth, primarily driven by trace gains. Core sales grew 4.6%. Our core sales growth was primarily driven by volume, which grew 3.1% year over year.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Price contributed 1.5% growth this quarter, in line with historical levels. Our recurring revenue grew mid single digits year over year and comprised 59 of our total sales. The percentage of recurring revenue is in line with 2023 levels. However, it is down sequentially, primarily due to high single digit sequential growth in non recurring revenue, specifically water testing instrumentation and marking and coding equipment. Gross profit increased 7% year over year to $8.00 $1,000,000 Gross profit margin improved 170 basis points year over year to 59.6%, primarily driven by pricing.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Adjusted operating profit increased 5% year over year and adjusted operating profit margin was flat year over year at 23.8%. As Jennifer mentioned, in the fourth quarter, we continued to increase investments in our direct sales and marketing efforts on both a year over year and sequential basis. On a year over year basis, R and D as a percent of sales increased 70 basis points or $12,000,000 to 5.1%. In addition, our cost optimization investments in this quarter increased by about $7,000,000 on sequential basis. These investments are aligned with our strategic growth plans.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Looking at EPS for Q4, adjusted earnings per share grew nine percent year over year to $0.95 per share. As compared to our guidance, adjusted EPS came in stronger, primarily due to lower corporate expenses and a lower tax rate. These benefits more than offset a headwind from currency. As compared to our guidance expectations, strengthening of the U. S.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Dollar during the quarter resulted in about 2% or approximately $25,000,000 headwind to sales, primarily due to translation of foreign currencies. This led to a headwind of about $7,000,000 to adjusted operating profit or $0.02 to adjusted earnings per share as compared to our guidance assumptions. In the fourth quarter, we generated robust free cash flow of $263,000,000 or 116% conversion of GAAP net income. Moving on, I'll cover the segment highlights starting with Water Quality. Our Water Quality segment delivered $811,000,000 of sales, up 3.7% on a year over year basis.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Currency was a 60 basis points headwind. Divestitures reduced total sales by 60 basis points versus the prior year period. Core sales grew 4.9% year over year. Water Quality's core sales growth was led by volume, which grew 3.3%. Pricing contributed 1.6% growth year over year.

[Sameer Ralhan, Senior VP & CFO at Veralto]

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 a good volume growth in sales of analytical instruments, reagents and chemistries to municipalities. Recurring sales grew mid single digits and equipment growth was up low single digits year over year. Adjusted operating profit increased 2% year over year to $2.00 $7,000,000 and adjusted operating profit margin was 25.5%, marking Water Quality's highest quarterly margin performance this year. Moving to the next page.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Sales in our PQI segment grew 5.4% year over year to $534,000,000 in the fourth quarter. Currency was a 30 basis points headwind and acquisitions contributed 1.6% growth in the quarter. Core sales grew 4.1% with volume up 2.9%. Price increases contributed 1.3% to the year over year growth in core sales. PQI's recurring revenue grew high single digits year over year with positive momentum across the portfolio.

[Sameer Ralhan, Senior VP & CFO at Veralto]

PQI's equipment sales grew low single digits, primarily driven by marking and coding systems. On a sequential basis, equipment sales were up mid single digits, driven largely by marking and coating equipment. Breaking this down by business, marking and coating core sales grew mid single digits, driven by growth in both consumables and equipment. The strongest growth was in food and beverage applications within our CPT customer base. In our Packaging and Color business, core sales grew mid single digits year over year led by growth in both recurring software and subscription revenue.

[Sameer Ralhan, Senior VP & CFO at Veralto]

PQI's adjusted operating profit was $133,000,000 in the fourth quarter, up $10,000,000 over the prior year period, resulting in adjusted operating profit margin of 24.9%. That represents a 60 basis points improvement in adjusted operating profit margin over the prior year period. The margin expansion was primarily due to favorable currency benefit as the Argentine peso devaluation in Q4 twenty twenty three did not repeat. This benefit was partially offset by increased investments in sales, marketing and R and D, along with a higher mix of equipment sales and dilution from the Tracegains acquisition. For the full year, PQI delivered 3.3% core sales growth and 160 basis points of adjusted operating profit margin expansion.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Overall, it was a very good year for PQI and we continue to see positive momentum in our commercial execution and end market environment as we enter 2025. Turning now to our balance sheet and cash flow. In Q4, we generated $285,000,000 of cash from operations. We invested $22,000,000 in capital expenditures. Free cash flow was $263,000,000 in the quarter or 116% conversion of GAAP net income.

[Sameer Ralhan, Senior VP & CFO at Veralto]

At the end of the fourth quarter, gross debt was $2,600,000,000 and cash on hand was $1,100,000,000 Net debt was 1,500,000,000 resulting in net leverage of 1.2 times. As Jennifer shared, early in the fourth quarter, we acquired Trace Gains at a gross purchase price of $350,000,000 The deal was funded with cash on hand. We also invested approximately $15,000,000 to establish a minority interest in AgXene Water Technologies. Even after these investments, our financial position is strong and we continue to have flexibility in how we deploy capital. To that point, in the fourth quarter, our Board of Directors approved a 22% increase in our quarterly dividend.

[Sameer Ralhan, Senior VP & CFO at Veralto]

This is consistent with our approach to increase the dividend as we grow our earnings. Over the long term, however, our bias remains to create long term shareholder value through M and A. We have an attractive pipeline of opportunities in both water quality and PQI. We remain disciplined in our approach as we continue to deploy capital to create long term shareholder value. Turning now to our guidance for 2025, beginning with our expectations for the full year.

[Sameer Ralhan, Senior VP & CFO at Veralto]

We are targeting core sales growth in the low to mid single digit range on a year over year basis. At the midpoint of our guidance, we are assuming core sales growth consistent with the full year 2024. This assumes pricing in the range of 100 to 200 basis points, consistent with our historical range. We expect net acquisitions and divestitures to be neutral to growth as potential sales contribution from trade gains is largely offset by the impact of the AVT divestiture. Our full year guidance assumes that currency rates as of 12/31/2024, prevail for the remainder of the year.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Based on this assumption, currency is approximately 2% headwind to total sales on a year over year basis. This falls through roughly in line with our adjusted operating profit margin, resulting in operating profit dollar headwind of approximately $25,000,000 This represents an $0.08 headwind to adjusted earnings per share. Our guidance assumes corporate expense at a full annual run rate between $100,000,000 to $105,000,000 Looking at adjusted operating profit margin, we're targeting 25 to 50 basis points of improvement in 2025. This assumes margin expansion at both segments and total company incremental margins around 40%. Our adjusted EPS guidance for the full year 2025 is in the range of $3.6 per share to $3.7 per share.

[Sameer Ralhan, Senior VP & CFO at Veralto]

This assumes an effective tax rate of approximately 23%. Excluding the 0.08 per share currency headwind, our adjusted EPS guidance represents about 5% year over year growth at the midpoint and about 7% growth at the high end of the range. And we are targeting free cash flow conversion between 90% to 100% of GAAP net income. This assumes CapEx in the range of 1% to 1.5% of sales and a modest working capital investment to support our growth. Looking now at Q1 twenty twenty five, we expect core sales to grow in low to mid single digit range across both segments.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Currency translation is expected to be approximately 2% year over year headwind to sales. We anticipate adjusted operating profit margin in the range of 24% to 24.5%. And our Q1 twenty twenty five guidance for adjusted EPS is 0.84 to $0.88 per share. This assumes a $0.02 currency headwind. That concludes my prepared remarks.

[Sameer Ralhan, Senior VP & CFO at Veralto]

At this point, I'll turn the call back over to Jennifer for closing remarks.

[Jennifer Honeycutt, President & CEO at Veralto]

Thanks, Sameer. In summary, we capped off a strong first year as a public company. In 2024, we delivered on our commitments, invested in our future and improved our portfolio. We enter 2025 with a more positive outlook on our end markets and momentum throughout the enterprise. Longer term, we are confident that the essential need for our technology solutions and the strong thematic growth drivers across our end markets will provide steady, durable growth.

[Jennifer Honeycutt, President & CEO at Veralto]

And we will continue to leverage the power of the Veralto Enterprise System to drive continuous improvement and bolster our agility through dynamic macro environments. Our financial position remains strong and we continue to evaluate additional strategic opportunities within our disciplined capital allocation framework of market, company and valuation. 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're happy to take your questions.

[Operator]

Thank We'll take our very first question from Andy Kaplowitz from Citigroup. Please go ahead.

[Natalia Bak, Equity Research Associate at Citigroup]

Hi, good morning. This is Natalia Fox on behalf of Andy Kaplowitz.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Hey, Natalia.

[Natalia Bak, Equity Research Associate at Citigroup]

First question that I want to ask is, if you could break down or give more color into how you're thinking about your segments in terms of margin expansion, do they both grow in that 25 to 50 bps range and do you have trace gains weighing you down a bit more in PQI?

[Sameer Ralhan, Senior VP & CFO at Veralto]

Hey, Natalia, this is Samir. Yes, I think as you're going to think about the margin expansion, it's very similar. In fact, I would just take a step back and look at our overall company guide and how the segments are going to contributing. For both the segments, you should look at the core growth in a very similar place, low single digit to mid single digit and also from the margin expansion perspective, pretty similar contribution coming from both the segments.

[Natalia Bak, Equity Research Associate at Citigroup]

Got it. That's helpful. And then the second question I want to ask is, I'm just curious about the progression of DES. What specific initiatives have you implemented under DES to drive cost efficiencies and enhance margin? And how has it been evolving since you went public?

[Natalia Bak, Equity Research Associate at Citigroup]

Where do you see the most opportunity for further margin expansion in 2020, '20 '20 '5? And how are you balancing those increasing growth investments with the goal of improving margin performance?

[Jennifer Honeycutt, President & CEO at Veralto]

Thanks for the question, Natalia. I think we feel very good about how we have honed our VES toolset. Certainly, we had a big push in 2024 really to drive growth in commercial execution, but we also drove considerable amounts of margin expansion in just good factory discipline. So the things that we did in bringing the VES toolset over from Danaher post spin were to really narrow the focus and drive a greater depth of application and competency in the use of those tools. There are five to six tools that sit in our fundamentals and those fundamentals are relevant to everyone, whether you sit in a function or you sit in an operating company.

[Jennifer Honeycutt, President & CEO at Veralto]

And so we feel good about both our deployment there for commercial applications, accelerated new product development and factory focused optimization.

[Natalia Bak, Equity Research Associate at Citigroup]

Got it. That's helpful. Thank you so much.

[Operator]

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

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you. Good morning, everyone. Good morning. Hey, you all know I've covered Danaher for so many years. So whenever I hear about growth investments done at year end, that's really right out of the Danaher playbook because it's a good sign you're getting you're doing it from a position of strength.

[Deane Dray, Managing Director at RBC Capital Markets]

There's a way to jump start the new year. So I'm assuming that applies to you all. And if I look at the margin past couple of quarters sequentially down a bit, is it fair to say that's the impact of the growth investments? Can you size that impact and anything about the benefits and am I thinking about it the right way?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. Thanks, Dean. As you know, some of us here in the room have spent nearly a lifetime at Danaher, and so the playbook there is very familiar. I think it's right. We took the opportunity here on the back of strong growth to continue to reinvest in the business in areas that we think will set us up for a good 2025.

[Jennifer Honeycutt, President & CEO at Veralto]

So that's spot on and maybe I'll turn it over to Sameer to talk about the rest of your question.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Thanks, Jennifer. Yes, Dean, if you're going to look at sequential margin, right, the first one is really price gains, roughly 70 basis points dilutive to the PQI margins, right. But it really sets up really well in 2025 as you're going to look at driving the growth in PQI. The second one is actually great as you're going to think about the equipment sales coming back. So the mix of the equipment in PQI was a little higher, similarly to the water quality as well.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Again, as the installed base grows, as you know, our future recurring revenue grows. So it's a great to have that. And last for the point that you kind of made, Dean, really as you kind of think about the investments in R and D, commercial, cost optimization, these things are all, as you outlined, very intentional, very deliberate actions to make sure that we hit the ground running in 2025. So I think as Jennifer also said, playbook is very similar. Our focus is long term value creation.

[Sameer Ralhan, Senior VP & CFO at Veralto]

And if you're going to zoom out for full year 2025, we delivered 80 basis points in the full year while ramping up as a full year in the first full year as a public company, while investing in sales and marketing, while investing in R and D, all those things really positioning us really well as you're going to start 2025. So we feel good about the margin expansion.

[Deane Dray, Managing Director at RBC Capital Markets]

That's really helpful and I appreciate all those specifics. And second question, you might I might be tempted to ask about trace gains because that's kind of the marquee first deal, but I'm actually more interested in talking about the investment in AccXene. This electrochemical oxidation technology looks really promising. We've spoken with Axene before. They're established.

[Deane Dray, Managing Director at RBC Capital Markets]

And it looks like it could have good application for on-site PFAS destruction because they've already proven the technology in other complex molecules. So look, it's still early, I get that. I'm most interested in the strategy here of using M and A as a proxy for R and D, because you can make a really smart investment for $15,000,000 with potentially significant payoff down the road. Does your funnel have more candidates, investment candidates like this? Because pound for pound, that's a great way to be spending your capital?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. Thanks for the question, Dean. Look, we have a number of different levers to pull relative to capital allocation and we look at all sorts of modalities there to to create long term shareholder value. I think we feel good about our level of investment in Accine, just relative to proving out the technology, making sure that it matures in the right way relative to the markets that we serve. And we've got a very competent and capable science and technology team that's constantly canvassing the market for good opportunities to engage with other partners, be that in a minority investment or be that outright acquisition. So I think everything is on the table there.

[Deane Dray, Managing Director at RBC Capital Markets]

Really appreciate it. Thank you.

[Operator]

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

[Michael Halloran, Associate Director of Research at Robert W. Baird & Co]

Hey, good morning, everyone.

[Jennifer Honeycutt, President & CEO at Veralto]

Good morning, Mike.

[Michael Halloran, Associate Director of Research at Robert W. Baird & Co]

So let's just start with end markets and kind of a loose thought. What's changed as we sit here today versus the last time we talked in extending 3Q earnings? It sounds like you're pretty constructive coming into the year. It's just been a continuation of the trends you were seeing then or is there anything new that you think has developed over this period of time?

[Jennifer Honeycutt, President & CEO at Veralto]

I think it's largely a continuation of what we've seen, Mike. We've talked a lot about the strength in our industrial water businesses given the number of very thirsty industries, data centers, power generation and so on. That continues. We're seeing good steady growth in analytics as well, particularly in U. S.

[Jennifer Honeycutt, President & CEO at Veralto]

And Europe on the back of the secular drivers that require clean water for the population that they serve. And then I think on the PQI side, we see the continued recovery and the strength of CPG markets. We saw actually the sixth consecutive quarter of mid single digit to high single digit recurring revenue. We know that that recurring revenue always precedes sort of equipment growth. And now we've seen three consecutive quarters of year over year growth in equipment sales with in fact equipment sales coming in better than expected here in the fourth quarter.

[Jennifer Honeycutt, President & CEO at Veralto]

So with in fact equipment sales coming in better than expected here in the fourth quarter. So we think we're set up well given the macro and we enter the year here with continued momentum.

[Michael Halloran, Associate Director of Research at Robert W. Baird & Co]

Great. Appreciate that. And then when you think about the foundation for the guide for the year, I understand all the movie pieces gave a lot of color. Just two quick questions related to that. One, is the cadencing through the year expected to be kind of consistent with normal seasonality?

[Michael Halloran, Associate Director of Research at Robert W. Baird & Co]

And two, is the assumption that things just kind of hold trend as we sit here today or is there any improvement or decel assumed in what your end markets look like?

[Sameer Ralhan, Senior VP & CFO at Veralto]

Hey, Mike. Yes, from the guide perspective, as you're going to look at the top line, the growth side, this is going to be pretty consistent. As Jennifer just said, right, from the CPG markets perspective, from the water perspective, we're seeing some good trends. Feel really good about as we're going to enter 2025, those trends are continuing. So overall, from a seasonality perspective, as you know, we don't have a whole lot of seasonality maybe on the equipment side, instrument side.

[Sameer Ralhan, Senior VP & CFO at Veralto]

We see a little more pull through in Q4 as people are kind of managing their budgets, but overall not a whole lot of seasonality in our business. So but coming into 2025, we feel pretty good about the trends continuing and the numbers.

[Michael Halloran, Associate Director of Research at Robert W. Baird & Co]

Great. Really appreciate everyone. Thank you.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Thanks, Mike.

[Operator]

We'll take our next question from Nathan Jones from Stifel. Please go ahead.

[Nathan Jones, Managing Director at Stifel Financial Corp]

Good morning, everyone.

[Jennifer Honeycutt, President & CEO at Veralto]

Good morning, Nathan.

[Nathan Jones, Managing Director at Stifel Financial Corp]

Questions. I got a couple questions around margins. You can carry the margin expansion to '24 with '25. It ramps up R and D investments 40 basis points. So without that '24 would have been up like 120 basis points and the guidance for '25 on similar revenue growth is 25 to 50.

[Nathan Jones, Managing Director at Stifel Financial Corp]

So maybe you can just give us some more color on where you got that extra margin expansion maybe you're not anticipating in 2025? I'll start there.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Yes. Nathan, I'll start off with that. As you're going to look at from a '24 to '25, right, of course, in the '24, the margin expansion is pretty broad based really, as Jennifer said, all the way from the factory floor down to the commercial operations and functions. Did get offset a little bit by trace gains and some of the investments that we continue to make. As we move into 2025, from a price cost differential perspective, we still expect to be positive.

[Sameer Ralhan, Senior VP & CFO at Veralto]

I mean, that's positive in 2024. We expect that to continue. R and D will be in a very similar level, Nathan, roughly 5% of the sales. So that trend will be expected to continue in 2025. And that sort of stuff is really some really targeted investments on the commercial side, really in the sales and marketing as we continue to drive the growth. So that's kind of like how it's kind of panning out the 25 to 50 basis points. Still going to be pretty much pretty broad based, pretty across the board.

[Nathan Jones, Managing Director at Stifel Financial Corp]

Thanks for that. And then I guess I'll ask one on incremental margins. Jennifer, you talked about 40% incremental margins in 2025. Each year, it's probably a relatively of a small change at low to mid single digit growth. But I think originally when the business spun out, you guys had talked about 30% to 35% incremental margins.

[Nathan Jones, Managing Director at Stifel Financial Corp]

Just wondering if you can comment on is that structurally higher now or is it a one off this year? And if it is structurally higher, what's driven that?

[Sameer Ralhan, Senior VP & CFO at Veralto]

Yes, Nathan, if you're going to look at 30% to 35%, right, that's a long term view. We expect to make the right investments in the sales, marketing, R and D to continue to position the business for future growth as well, right? 2024, we feel really good about what teams have been able to deliver. We are north of 45%, close to 50% on the fall through. For 2024, given the kind of investment that we have laid out and have visibility into what we're going to be doing in 2025, we feel pretty good about delivering 40, all right?

[Sameer Ralhan, Senior VP & CFO at Veralto]

So the year over year, depending on some of the investments, things will change. But I think if you think about the long term value creation frame, 30% to 35% is a good one to keep.

[Nathan Jones, Managing Director at Stifel Financial Corp]

Great. Thanks for taking my questions.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Thanks, Nathan.

[Operator]

Thank you. And next we'll go to Sari Brodetsky with Jefferies. Please go ahead.

[Analyst]

Good morning. This is James on for Sari. Thanks for taking questions this morning.

[Jennifer Honeycutt, President & CEO at Veralto]

Good morning.

[Analyst]

I wanted to kind of touch good morning. I wanted to touch on the CPG market a little bit more. I mean, you talked about like continued like gradual recovery pass here over the last several quarters. So can you provide a little bit more color on the recovery pass? Like how far are we from like normalization in the industry?

[Analyst]

And like what percentage of like revenue is still missing from the like last like normal like state of the CPG market?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. I mean, I think the way we look at the recovery of CPG market is moth ball manufacturing lines will be turned back on and those will require spare parts, consumables. That then is followed by equipment upgrades. We are not yet at the point where we're seeing line expansions per se and new build. So that would be another sort of extension of the recovery.

[Jennifer Honeycutt, President & CEO at Veralto]

But given the fact that we've seen six consecutive quarters of mid to high single digit recurring revenue growth, which means those lines are coming back on and using ink and solvents, spare parts, filters and so on, and we've seen three consecutive quarters of year over year growth in equipment sales, it suggests that we're well into the recovery with the prospect of new builds still ahead of us should that happen.

[Analyst]

Got it. Great. Thanks for the color. And I guess I wanted to understand the like portfolio optimization like initiative a little bit better here. So like how much are left to do here?

[Analyst]

Like what are some spaces that you can still do? And how will like this initiative affect the top line and potentially margin like in 2025?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. The way we think about this is that every product line has to earn its right to be in the portfolio. And I think as an independent enterprise, we are tasked with being good stewards of the portfolio in terms of making sure that products that are part of the portfolio and services are at or better than the fleet average. And where we've got product lines that are below the fleet average in terms of core growth and operating profit, we'll look to make changes there. Now those changes may be additional investment to get them on the right track.

[Jennifer Honeycutt, President & CEO at Veralto]

It may be that we attenuate them over time and it may be that we divest them outright. But I think it's safe to assume that we're always looking to improve our portfolio and moving the portfolio towards nominally higher growth rates and increasing margins.

[Analyst]

Great. Thanks for the color. I will leave it there.

[Operator]

Thank you. And we'll next go to Andrew Buscaglia with BNP. Please go ahead.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Hi. Good morning, everyone.

[Jennifer Honeycutt, President & CEO at Veralto]

Good morning, Andrew.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

So I want to ask a high level question. You guys had a great year and the stock also had a pretty good year, but it sort of broke down the stock that is towards the end of the year on concerns around the Trump administration, what that means for your stock, I think. And you've got a couple of months to think about it now. So I'm wondering, at first, it was concerns around what it means for water quality, but then it kind of morphed into is this good or bad for PQI and you can hear different arguments on both sides. I'm just wondering, what are your latest thoughts for both segments under this administration?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. We're certainly operating in a fairly dynamic environment. But from a portfolio standpoint, 85% of our sales are tied to water, food and essential goods. It's never been out of style to protect public health and safety and regulations do help us do that. But these are issues that are important to everyone regardless of the political affiliation.

[Jennifer Honeycutt, President & CEO at Veralto]

So I would say sort of on the water side, because we are endemic to the operations environment of discharging clean water and cleaning up industrial wastewater and so on, I think we feel like that is still going to be a need. As long as we've got people on the planet, they're going to need clean water. On the PQI side, a lot of what we are focused on there is securing the inherent safety of the food supply chain, right? And we have a need to or consumer product brands have a need to ensure that what they are distributing to their consumers, that the ingredients, the formularies and so on are safe, traceable and can be recalled in the event that there is some sort of public health or safety issue. So we think even in the current environment, we've got strength in both of these businesses.

[Jennifer Honeycutt, President & CEO at Veralto]

These products and services not only provide essential public health and safety information, but in many cases, the products and services we provide, provide economic benefits to customers as well. So again, this is not a CapEx intensive set of businesses. We are focused on the daily operations and the essential need of our products and services there are we believe going to remain.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Yes. Okay. And maybe along those lines with tariffs, is part of your guidance imply some disruption around tariffs? And can you comment around the latest your latest thoughts around China, Mexico and Canadian tariffs, how that might impact you?

[Sameer Ralhan, Senior VP & CFO at Veralto]

Yes, Andrew, in the guidance, we have not reflected any sort of a sustained impact from the tariffs. Look, it's a very fluid and dynamic situation. But if you're going to step back, we procure our materials from globally. We have a global manufacturing footprint. And over the years, through the supply chain disruptions and things that have happened, we feel pretty good about the changes that the operations have made over the last four, five years to really position and fortify our supply chain.

[Sameer Ralhan, Senior VP & CFO at Veralto]

So if you feel pretty good, we're keeping an eye just like you guys on the things that are coming out. But overall, we feel pretty good. But if you say, hey, there's a sustained level of tariff changes, that's not baked into the guide.

[Andrew Buscaglia, Senior Analyst at BNP Paribas]

Okay. All right. Thank you.

[Operator]

Thank you. We'll take our next question from John Fennolte with BMO Capital Markets. Please go ahead.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

Yes, good morning. Thanks for taking my question. Maybe just a couple on the water side. So you highlighted some of the growth that you were seeing was really in the food and beverage and then on the power side. Those strike me as relatively stable market.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

So is the bulk of that share gain? And if so, I guess, can you help us to understand kind of what drove that? Was it some of the investments you've been making in North America? Or are there other things that we should be thinking about?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes, I mean, I think we participate in a well diversified set of markets with respect to our water business and the two that you cite there are certainly the strong growing industrial markets that we experienced in 2024. But the reality is these shift over time and we have good agility in pivoting our sales force to where the growth is coming from. Generally, we've been up year over year in most of our markets and we continue to feel good about industrial production and the need for our products and services, particularly as reshoring comes back to The U. S. And so on.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

Got it. Fair enough. And then maybe just one question on the data center side. There's some growing excitement around direct to chip cooling. There's also just an increase in general use.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

I guess, can you speak to whether you're agnostic as to how data centers cool going forward and some of the growth that you're seeing in terms of the opportunities from the data center side?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. I mean, I think the predominant focus here for us is our water cooled applications, right? But I would say that we have a very strong science and technology team on the ground that's regularly canvassing the customer base to understand sort of pain points and technology changes. I would say our mid single digit growth algorithm is really not tied to sort of single industry here. It's going to be broad based and we believe that the growth in data centers and power generation actually needed to run those centers will continue to be a potential have potential to be a meaningful growth driver certainly throughout our treatment business.

[John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets]

Great. Thanks very much for the color.

[Operator]

And next we're going to go to Andrew Creel with Deutsche Bank. Please go ahead.

[Andrew Krill, Vice President at Deutsche Bank]

Thanks. Good morning, everyone. Looking at free cash flow, I know the guidance 90% to 100% is a little below your medium term target of 100% and extra working capital was cited. So just should we be thinking that's kind of a one time 2025 event and that in 2026 we get back that 100% or so? And are there any other factors that you'd call out for this year on what's keeping you below 100%?

[Sameer Ralhan, Senior VP & CFO at Veralto]

Yes. Hey, Andrew, this is if you're going to look at the free cash flow conversion, yes, we had a pretty solid year in 2024 with a 98% conversion of GAAP net income. As you're going to move into 2025, there are really two things because of which we've guided a little bit below. And one of the reasons is on the CapEx side, as you know, historically we've been at least for the last three, four years, we've been our CapEx is kind of like close to 1% of revenue. We've guided towards 1% to 1.5%.

[Sameer Ralhan, Senior VP & CFO at Veralto]

That's a gain mostly tied to some of the growth investments that we are making in our sort of physical asset base in 2025. Some is just a good stewardship of the asset base. So if you're kind of just looking at the CapEx going to 1% to 1.5% of revenue, that's impact of only 4% on the free cash flow conversion. And the other one that we have built in is given the pretty dynamic world macro that we are living in just from the working capital perspective, we modeled a little bit higher working capital just to support the business and manage all the supply chain things from the tariffs that you're seeing. Those are two really the two things.

[Sameer Ralhan, Senior VP & CFO at Veralto]

As things normalize post 2025, of course, we expect it to be back up.

[Andrew Krill, Vice President at Deutsche Bank]

Okay. Makes perfect sense. That is a good segue. Just following up on tariffs. How do you size what your sourcing is, maybe for COGS from China, Mexico and Canada?

[Andrew Krill, Vice President at Deutsche Bank]

And like would any of those be a particular pain point where you're not in region for region sales? I believe some businesses like Trojan have pretty meaningful Canada exposure. So just any help or quantification there would be great. Thank you.

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. Thanks for the question, Andrew. We started several years ago, full decade, certainly to source raw materials and semi finished goods globally. We got a diversified number of manufacturing locations and we've diversified the supply chain Certainly, VES provides us the tools to proactively deal with countermeasures for different scenarios. And obviously, we're focused on controlling what we control.

[Jennifer Honeycutt, President & CEO at Veralto]

Relative to exposure, our primary exposure in Canada is Trojan, as you appropriately cited, which is headquartered in Ontario. We have taken actions there to localize consumables and spare parts for Trojan in The U. S. To derisk any supply chain disruption that we would see. It also gives us an opportunity to provide more agility in serving customers.

[Jennifer Honeycutt, President & CEO at Veralto]

I mean, I think the way to think about this is all told, Trojan's annual sales to The U. S. Are less than 5% of our total Veralta sales annually. So we think we're well positioned to sort of weather the storm here and we've got VES on our side to respond with agility and rigor.

[Andrew Krill, Vice President at Deutsche Bank]

Great. And just real quick on China, because I think it is 78% of sales is a bit bigger than some peers. Just is that fair that's mostly in region for region without a big like export imbalance?

[Jennifer Honeycutt, President & CEO at Veralto]

Yes. We've spent actually a longer period of time diversifying our supply chain around what we have in China. We have a good deal of in China for China, which certainly wouldn't be disrupted by any tariff changes. But again, we have spent the last several years diversifying that supply chain as well and think we're well positioned to be able to address any headwinds that we might see there.

[Andrew Krill, Vice President at Deutsche Bank]

Okay. Thank you very much.

[Operator]

And we'll take our last question from Brian Lee with Goldman Sachs.

[Brian Lee, Analyst at Goldman Sachs]

Hey, good morning, everyone. Thanks for squeezing me in. Just wanted to go back to a couple of margin questions. I guess first off, on the PQI side, the three fifty basis point margin contraction sequentially, I know part of that seems to be the higher mix of equipment sales. When we kind of back into it, it doesn't seem to explain the entire bridge.

[Brian Lee, Analyst at Goldman Sachs]

Can you kind of deconstruct the three fifty basis points for us across different moving factors?

[Sameer Ralhan, Senior VP & CFO at Veralto]

Hey, Brian, this is Sameer. Yes, as I kind of outlined earlier, right, the first one, of course, is a trace gain that's almost 70 basis points dilutive to PQI on a sequential basis. The next one is we kind of talked about some of the cost optimizations actions we took in my prepared remarks. I highlighted 7,000,000 higher on a sequential basis. Majority of that is in PQI.

[Sameer Ralhan, Senior VP & CFO at Veralto]

That's 120 ish kind of a business point, little more than that for PQI. And I would say the third one is that you're going to think about the R and D sequentially up as well tied to the investments we are making to drive the future growth in the business. On a sequential basis, majority of the jump is actually tied to PQ as well. And then last one you added the higher mix of equipment sales, which again really help us expand the installed base for future recurring revenue. So those are the four things.

[Sameer Ralhan, Senior VP & CFO at Veralto]

You add them up, you have kind of balanced out the 300 basis points gap that you laid out.

[Brian Lee, Analyst at Goldman Sachs]

Okay, that's great. Super helpful. And then I guess, fair to assume some of those factors do spill over to the early part of the year. I guess if I look at the Q1 guide, it implies margins are going to be down a few tens of bps year on year despite the low single digit growth. I know some of that is FX, but then your full year guide implies margin growth through the year off of Q1 with the same FX assumption.

[Brian Lee, Analyst at Goldman Sachs]

So maybe just kind of walk through the margin cadence, what's happening in Q1 that either doesn't repeat through the rest of the year? What margin gains are you seeing start to play out off of the back of Q1? Thank you.

[Sameer Ralhan, Senior VP & CFO at Veralto]

Yes. No, I think as you kind of move from Q4 to Q1, Brian, not a lot of these things are spilling over, right? Look, R and D on a sequential basis should be consistent at a higher level. And I would say cost optimization stuff is nothing is spilling over into Q1. Really, as you can look at from anything that's moving from this year to next is, you know, trace gains is going to be, as we highlighted, going to be a little bit of dilutive upfront as we continue to drive it.

[Sameer Ralhan, Senior VP & CFO at Veralto]

It's 20% growth business, so we have to make the right investments to make sure we're capitalizing on that. Those investments will be and then if the trends that we are seeing in the higher mix of equipment sales and PQI continues, maybe a little bit of impact from that, but nothing more than that that's kind of moving on or spilling over from Q4 to Q1.

[Operator]

Thank you. And at this time, I'll turn the call back over to Mr. Taylor for final remarks.

[Ryan Taylor, Vice President - IR at Veralto]

Thanks, Margo, and thanks everyone for joining us on the call. We appreciate the interest and engagement. As usual, we'll be around for follow-up questions. Just reach out to me if you'd like to ask anything to follow-up on the quarter or the guide for 2025. Thank you so much.

[Ryan Taylor, Vice President - IR at Veralto]

And that concludes our call. We'll talk to you next time.

[Operator]

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

Participants

Executives

• Ryan Taylor, Vice President - IR
• Jennifer Honeycutt, President & CEO
• Sameer Ralhan, Senior VP & CFO

Analysts

• Natalia Bak, Equity Research Associate at Citigroup
• Deane Dray, Managing Director at RBC Capital Markets
• Michael Halloran, Associate Director of Research at Robert W. Baird & Co
• Nathan Jones, Managing Director at Stifel Financial Corp
• Analyst
• Andrew Buscaglia, Senior Analyst at BNP Paribas
• John McNulty, Managing Director - Chemicals Analyst at BMO Capital Markets
• Andrew Krill, Vice President at Deutsche Bank
• Brian Lee, Analyst at Goldman Sachs