Veralto Corporation — 2023 Q3

Yes, Mike. This is Sameer. I'll jump in on that one. As you kind of look at the sequential margin improvement, that's primarily driven by some of the cost optimization things that we've been doing, especially in PQI and also the impact of the Argentine peso devaluation in Q3. We have not assumed that in Q4. It's a one-off item in Q3. So majority of the uptick that you see on a sequential basis going from Q3 to Q4 will be in the PQI segment.

Yes. If you're going to look at some of the costs, things like standalone costs, we are ramping from Q2, Q3. They're going to be on a more run rate basis in Q4. So, they're going to start reflecting. But overall impact from the demand of sales, [ we aim to be ] ultimately close to the margin as well. We'll give that guide, view as we are going to get the guide early next year for '24.

Yes. Thanks for the question, Mike. Relative to PQI, I think what we're seeing is signs of sequential stabilization. Again, in the prepared comments, this is really focused on sort of the improving consumable sales. We believe this is attributed to customer destocking being largely complete and resuming order rates more in line with run rate ordering, albeit at lower overall volume. So that said, as we think about the fourth quarter, consumer packaged goods volumes, we still expect to be net negative on a year-over-year basis, changes in consumer behavior relative to inflationary pricing means that these folks on the customer side are going to be doing fewer production runs and smaller batches. And that said, we still have a pretty variable and highly uncertain environment in China as well.

Yes. I mean, certainly, our biggest downdraft in volume in water was attributed to our China business. I think what we see here is we see some relatively good growth on the treatment side. Certainly, Trojan benefiting from the CHIPS Act. We've got ChemTreat that's seeing good positive momentum in sectors such as energy, agriculture and metals. On the muni, demand side for municipalities is a little bit softer. Municipalities are really focused on making sure that they are focused on regulatory compliance, and so their order patterns are consistent with that. But they're still holding off a little bit in terms of plant upgrades and investments related to optimization. So process optimization is still a little bit lackluster, but solid demand still in the municipal regulatory compliance side.

Yes, Andy. Thanks for the question. Look, I think overall for the PQI side, overall, yes, in general, the volumes are low. You're going to see some impact on the absorption side. But overall, the biggest impact actually was a currency one. So, that's why I highlighted that in my prepared remarks. And just to frame that for you, essentially, the impact if the Argentina peso devaluation impact you remove, actually PQI would have been up by almost 60 basis points. So that gives you just a sense of how big the impact was going from 22.8% to almost 24.2%.

Yes. I mean, I think some of these supply and demand nuances will start to level out. There is good funding available with the Infrastructure Bill here in North America. We're seeing a robust growth here for our municipal business in Europe. So it's really more of a matter, I think, of sort of the global economic environment and sort of a steady recovery of industrial markets. But we hold to the mid-single-digit performance for Water Quality going forward. These are essential solutions for people around the world. So, we think the underlying macro is a little bit choppy right now, but the secular drivers remain strong.

Yes. Thanks for the question, Andy. Our pipeline across both Water Quality and PQI is strong for M&A, and we've got a number of opportunities that are currently being considered. We do not anticipate that we will require a lengthy ramp time as a public company. We have executed the spin with a remarkable level of discipline and focus on the back of the learnings that Danaher had from its prior spends, and we feel pretty good about where we are positioned.

This is Michael on for Joe. Yes, I was just curious, as you look towards the fourth quarter, what customers might be telling you around the potential for a budget flush? What does the guidance kind of assume versus historical patterns?

Yes. I think that remains variable based on what industries, markets we're talking about. We do see some of our customer segments that are use it or lose it kinds of budgets. And we would expect that we will see some of that here in the fourth quarter, albeit at probably lower rates than we have seen sort of historically in the pre-pandemic era.

And Joe (sic) [ Michael ], maybe if I can add a little bit is as we talked at the Investor Day, right, we are lot more tied to the operating budgets to the -- of our customers rather than capital side, so that kind of helps us as well as you're going to move forward.

Thanks, Shelby. This concludes our third quarter earnings call. We thank you very much for joining us. I'll be available over the next several days for follow-ups should you have any additional questions. Thank you once again, and that concludes our call.