Prepared remarks
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 Second Quarter 2026 Conference Call. 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 Sameer Ralhan, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. A replay of the webcast will be available in the Investors section of our website later today under the heading Events & Presentations. A replay of this call will be available until August 7. Yesterday, we issued our second quarter 2026 earnings news release, earnings presentation, prepared remarks and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. These materials are also available on 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. 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. And with that, I'll turn the call over to Jennifer.
Thanks, Ryan. I want to start by thanking our 17,000 associates for their efforts in delivering an excellent second quarter. In Q2, total sales grew 7.6% year-over-year. Adjusted EPS increased 19.4%, and we generated robust free cash flow of $328 million. We delivered 4.2% core sales growth led by Water Quality at 5.7% and PQI at 2%. As expected, core sales growth in both segments accelerated sequentially from Q1 to Q2. We expect year-over-year core sales growth to continue accelerating in the second half to approximately 5% to 6%. Based on our Q2 performance and momentum across the portfolio, we raised our full year adjusted EPS guidance to $4.35 to $4.43 per share, representing 12% to 14% growth year-over-year. We continue to advance long-term value creation through strategic bolt-on acquisitions, including last week's acquisition of Alfaa UV, an India-based leader in UV water treatment solutions. I'm excited to welcome our new associates from Alfaa UV to Veralto. And we also continue to opportunistically repurchase our shares. So far this year, we have repurchased over 5 million shares for approximately $480 million or just over 2% of the company. Overall, I'm proud of our team for their outstanding execution through the first half of the year and focus on our critical few, accelerating growth, optimizing cost and executing disciplined capital allocation. Looking ahead, with a strong balance sheet and robust cash generation, we remain focused on compounding long-term shareholder value through high-quality growth, VES-driven execution and disciplined capital allocation. That concludes my prepared remarks. And at this time, we're happy to take your questions.
Questions and answers
We will take our first question from Deane Dray with RBC Capital Markets.
We continue to really like this highly efficient release of your prepared remarks and a really crazy busy earnings season. It's just such a great innovation. So thank you for doing that again. And hopefully, it's a best practice as far as we're concerned. So my first question, can we start with the core revenue guidance that's implied and you referenced it here this morning, the impressive 5% to 6% for the second half. Maybe unpack the drivers and your degree of confidence in this acceleration.
Yes. Thanks for the question, Deane. And it's great to have you leading off today. But before answering your question, I just want to say that we are grateful for your decades of thoughtful analysis within both water and industrial markets. I think all the way back to when Danaher acquired Hach and Videojet, where I was working at Hach at the time when we had our investor conference out there, I think you were one of the first analysts that I met. So we wish you all the best in your next chapter.
Thank you, Jennifer. Look, it's been a great run, and I appreciate all the support and insight you and the team have provided me over the years. So thank you for those comments. But I still have my questions.
Yes, yes. We're getting to your question right now. So obviously, we saw some sequential acceleration between Q1 and Q2. We feel really good about the momentum coming out of the first half of the year and the durability of the growth drivers here in the second half. I'll just cite two key drivers in each segment. I think in water, our industrial market demand continues to be strong. And this is really on the back of the data center demand and the associated ecosystem there, including power, mining and semiconductor. Secondly, for water, we've got ongoing scarcity clearly exacerbated by climate change, which is propelling water recycling and reuse, giving us good opportunity to sell solutions into that space. For PQI, we continue to see strong demand for digital workflow solutions as CPG brands look to improve product compliance, traceability and time to market. And we see ongoing steady demand for our marking and coding solutions, clearly supported as well by easier comps in the fourth quarter. So based on where the funnels were at the end of Q2, we feel really good about the momentum and confident in the second half guide for core sales growth.
And maybe, Deane, I'll just add one more point. As you look at the second half core growth of 5% to 6%, we expect it to be led by volume with pricing moderating slightly, but still at or slightly above the high end of the range. So this will be a volume story in the second half of the year.
Great to hear all of that. And then just a second question on capital allocation. It's been really nice to see the balanced approach here. I mean you've been opportunistic on some bolt-on acquisitions and the buybacks coming through. Sameer, can you just give us a sense of how you're looking at these opportunities? What does the funnel look like? You've made some pretty obvious accretive deals here. What's that pipeline look like? And in the meanwhile, can you do more buybacks?
Thanks, Deane, for that question. Yes, as you kind of look at the capital allocation framework, there's really no change. Our first bias is, of course, towards M&A to create long-term value. And we will be opportunistic on the buyback side. If the valuation shows a disconnect between the free cash flow generation of the company and the public market value, we will be out in the market for share buybacks. On the M&A side, the funnels are pretty good on both sides of the house. We're in active cultivation and pretty actively looking at things. But as you know, M&A is episodic. So we'll stay patient and disciplined.
Our next question comes from Scott Davis with Melius Research.
I guess with Deane leaving, I'm going to have to actually learn what the water business is finally. I'll call him if I need any help. So maybe he'll be kind enough to give me his home number, and I'll just call him in future quarters. So anyways, he will be missed by us as well. He was a great colleague and friend. But anyways, guys, getting back to business. You talked a little bit about the opportunity around data center, power gen, semiconductors, I think you threw mining in there, too. Is there any way you can kind of size that if you combine those or even help us understand anything about how we can think about the TAM in those businesses or opportunities or how big of a potential tailwind that may be to your top line in industrial water treatment?
Scott, as you look at overall demand and the revenue that we're getting from data centers and the associated ecosystem, it's still a small number on the high-tech side. But overall, it's becoming pretty interesting as we move forward. At the Veralto level, it's still a relatively small number at this point, so we're not disclosing that breakdown publicly yet.
I mean you could think of ChemTreat Solutions in there to be strong double-digit growth. That team has been firing on all cylinders. It is still a smaller part of our overall business, but continues to be a really, really good grower along with some other industrial reshoring and near-shoring activities. So we're seeing lift across the board.
Okay. Fair enough. And then you guys in past quarters have kind of talked about this cost-out plan. Given the recovery you're seeing in some of your markets, is there an update on what you're planning on doing there? The timing and such?
Yes. The program is on track. We have started executing some actions. The impact as far as the savings are concerned this year will be small—maybe a few million dollars, mostly in Q4—and that's already baked into the guide. The biggest benefit will be in 2027. Overall, there's no change; we're fully committed and progressing well.
We will move next with Jeff Sprague with Vertical Research.
Maybe just two quick ones from me. First, on the volume pickup that you expect in the back half. Do you see that being led by equipment or consumables? Can you maybe unpack that a little bit?
It's a combination of both. On the water side, it's pretty balanced across equipment and consumables. On the PQI side, there are three building blocks. First is driven by the digital workflow solutions. Based on the ACVs of the contracts we've been booking, we have good visibility into the second half recovery in digital workflow. Marking and coding continues to be very strong, so the year-over-year comps will look very good, especially versus last year's Q4. And on color validation and certification instrumentation, we've started seeing funnels improve and velocity pick up, so we should see an uplift in the second half. So across PQI and Water Quality, it's broad-based and not tied to any single product line.
And then when you look at your price capture, it actually is very solid for a business that's not metals-intensive and I don't think had a lot of tariff-related pressure. Is that primarily reflective of price capture in consumables? Or how are you doing on the equipment side in terms of getting some incremental price?
Our philosophy is every product has to earn the right to be in the portfolio. We take a balanced approach and have been surgical about where and how much we increase price. We look to cover inflationary impact and tariffs. You see balanced price read-through on both consumables and equipment, though it's a bit higher on consumables given the captive nature of those products.
Our next question comes from Mike Halloran with Baird.
A couple here. Can we talk a little bit about back half margin progression, what the assumptions are? Any help you can give by segment and how that tracks to the quarters?
As you look at margin, we expect sequential improvement. In the guidance, we laid out roughly 25 basis points of margin expansion in Q3, and for the full year, 25 to 50 basis points. Q4 will show a nice margin uplift, especially in PQI where we saw impact from fixed cost absorption and duplicate production lines in marking/coding. So think about 25 basis points in Q3 and for the full year 25 to 50 basis points, with Q4 being north of 50 basis points.
Any nuance by segment there?
Q4 will be largely led by PQI, but on the water side it will be steady with what we've seen so far.
And then just on the PQI side of things, talk about what you're seeing on the equipment side and that headwind abating on the packaging and color side into the back half of the year. Maybe touch on what you're seeing on the workflow solutions that gives you confidence in the acceleration and the secular opportunity you're seeing on that side?
We have a decent ramp in PQI in the second half, driven by three things. First, we're seeing strong demand and bookings of our digital workflow solutions with the integration of Esko, TraceGains and now GlobalVision. Second, steady demand in marking and coding is bolstered by an easier comp in Q4. Third, we see recovery in our packaging and color equipment—exiting Q2 with better funnels and stronger service growth. We also have a number of new product launches that have come to market in PQI as a function of our increased investment at the time of the spin. The flywheel of innovation is accelerating and we have several good innovations coming to market.
Our next question comes from John McNulty with BMO Capital Markets.
Maybe just a quick one on the pricing side. Sameer, you said back half you're not assuming much in terms of further price acceleration. Is that a function of the comps being a bit tougher? Or is it because you don't see the need for it at this point, given that costs may have stabilized? How should we be thinking about pricing as we progress through the rest of the year?
Thanks, John. We expect pricing to remain strong in the second half—still at or slightly above the high end of the range. The moderation I referenced is largely a comp effect. We introduced price increases last year when tariffs started and had our regular annual price increases. In the first half of this year we saw the impact of both. As we move into Q3, we'll return to our normal cadence of price increases.
Got it. And maybe dig a little deeper into the data center opportunities and how you're targeting that. I know in Q2 there was a partnership with Dow on chemical solutions for data center applications. Should we expect further partnerships? How are you looking to grow that business and are there potential M&A opportunities that might help target that market?
We continue to engage in partnerships and are excited about our partnership with Dow to serve liquid cooling applications in data centers. This is normal course for us as we extend value into high-growth areas. We can't discuss specifics in the funnel yet, but we like our positioning. On M&A and partnerships, we'll look to our power alley of serving operating environments where there's a sticky razor/razor-blade relationship and where we're the right custodian to deliver value. We're well positioned and are actively looking at opportunities; you'll know when we have something to announce.
We will move next with Nathan Jones with Stifel.
I'll start in the packaging and color side of the business. You talked about Esko, TraceGains and GlobalVision and the impact they're having together. Can you talk about how you're leveraging each one to generate better sales and how that factors into the outlook in the second half? You mentioned environmental monitoring workflows, which I think plays into In-Situ and OTT and how they fit together to drive additional sales as well. So maybe sales synergies around the acquisitions?
We continue to stitch together assets that deliver more value to the consumer packaged goods digital workflow—from package design and integrity through compliance, regulatory compliance, ingredient traceability, and ensuring the print on the package is accurate. Seamless integration is where real value is derived. At our recent trade show, Esko World demonstrated packaging design changes that normally span months being done in weeks and in some cases days. GlobalVision has been a long-standing partner of Esko, so integration is straightforward. TraceGains provides value in ingredient traceability and regulatory compliance. We see good brand uptake and acceleration in the back half. On environmental workflows, In-Situ and OTT fit together like LEGOs—one is strong in analytical quantity, the other in analytical quality—so both quantity and quality are covered for influent monitoring into treatment plants, which is critical with more severe weather events. Integration is progressing well and we're liking what we see.
One additional point on the environmental side: as you look at the commercial synergy targets we talked about at the time of the transaction, the team is early days but executing very well. We are ahead on the commercial synergy numbers to date.
A housekeeping one around margins. You had the IEEPA tariff refunds in each segment. Can you talk about what the margin expansion was excluding the IEEPA refunds? And I think the guidance contains no more IEEPA refunds in it. Any chance there will be more coming?
We received roughly $16 million in tariff refunds—about $10 million in PQI and $6 million in Water Quality. Overall, the refunds contributed about 110 basis points to adjusted operating margin. Excluding that, margin came in pretty much in line with guidance at the company and segment levels. We have not included further tariff refund benefits in the second half. Based on filings, there could be another roughly $0.02 per share benefit, but timing is highly uncertain, so we did not include it in guidance.
We will move next with Andy Kaplowitz with Citigroup.
Jennifer, can you give us a little more color on how to think about the mix of Water Quality moving forward? For instance, how big is your overall industrial exposure at this point? Is it getting as large as your municipal exposure? And it sounds like industrial end markets are growing at least in the high single digits. How durable is that growth?
We're pleased with our industrial growth. About 50% of our water revenue comes from industrial applications, so it's quite significant. Most of that industrial revenue comes from North America, and we're seeing benefits from data centers and related feeder industries as well as near-shoring and re-shoring. Municipal markets are holding up well too—60% of our revenue is recurring. We sit in the operating side of the customer's plant where they need to avoid points of failure, so that business is sticky. The other 40% is related to equipment upgrades and new technology deployments. It's balanced across the portfolio: industrial is a higher driver of growth, but municipal is holding up well and we expect mid-single-digit growth or better in the municipal space.
On the municipal side, analytics contribute to consumables and Trojan gives us exposure in municipal through its business. Bid activity in wastewater, especially municipal, is pretty solid. So consider both analytics (Hach) and Trojan when thinking about municipal demand and growth.
We will move next with Ryan Connors with Northcoast Research.
I wanted to talk about ChemTreat. You've talked about pricing at various points in the call, but it looked like we were going to get some relief on input cost headwinds as oil prices had come down. It seems like that volatility has picked back up. Can you talk in more detail about price/cost dynamics in ChemTreat? Specifically price, cost and margins with volatile raw materials?
On ChemTreat, we've been working closely with customers given volatile chemical inputs to preserve margins and get proper value for solutions. Some pass-through can move with pricing, but we haven't seen a material change yet. Our goal is to preserve dollar margin. The ChemTreat team is having real-time discussions with customers and is supported by strong digital solutions for the sales teams.
Got it. And one more on the PQI side. With the high-profile Cyclospora infections and the lettuce outbreak, does that type of situation create an uptick in interest and selling opportunity for people to get tested when something like that is front-page news? Is that an opportunity for an uptick in interest and sales?
Absolutely. While Cyclospora is the latest public health risk, outbreaks are not uncommon. You can go back to E. coli, peanut butter, botulism and infant formula—these episodes happen. Our PQI franchise is ideally positioned: Esko, TraceGains and GlobalVision provide integrated workflows to help with regulatory compliance, ingredient traceability and packaging accuracy, and our coding and marking businesses aid in date, lot code and distribution traceability. It's an end-to-end solution for brand owners to ensure product safety. Together our portfolio provides source-to-shelf intelligence to help protect public health, and these events do drive interest in our solutions.
Our next question comes from Andrew Krill with Deutsche Bank.
Could you give us an update on what you're seeing on electronics inflation, including memory with all the demand from data centers? Anything unusual from a cost or availability perspective? Which products at Veralto are most exposed?
Our exposure in the electronics chain is primarily in instruments where we use memory and boards. These costs are a relatively small fraction of COGS. We're seeing higher prices like others in the industry, but the impact at the Veralto level is not material. Procurement is working actively; we haven't faced sourcing issues—it's mainly pricing, which we can pass through. R&D is also optimizing designs in a higher memory or semiconductor price environment to mitigate impact. Overall, not material to the company.
Okay, great. And switching gears, the Alfaa UV deal didn't get a ton of airtime. Can you give more on growth rates? I believe prepared remarks said double-digit growth this year. Is that sustainable? Any help on margins now and where they could go as you use VES and integrate the company?
We're happy to welcome Alfaa UV. It's highly synergistic with our Trojan business and expands our geographic footprint in India. Alfaa has a competitive portfolio of fit-for-purpose solutions and an established commercial presence in India. Think of it similar to the AQUAFIDES UV business we acquired in Europe—part of Trojan's global expansion. Alfaa helps us expand into other high-growth markets with different UV treatment applications (high flow, low flow, different water matrices). It's a small business in India but a double-digit grower and we believe that growth is sustainable going forward.
We will move next with Andrew Buscaglia with BNP Paribas.
You sound rather positive on the past acquisitions you've made. Some paid rich multiples and people are looking for signs of synergies coming through. Would you say they are tracking ahead of expectations in terms of growth or synergies? Could you give more color on that?
We've been pleased with the deals brought into Veralto since the spin. We've accelerated deal volume and size with a balance between PQI and water. The majority of these deals have provided near-term synergies around sales acceleration and combining product portfolios and go-to-market with joint sales teams. To date, these deals have accelerated our overall growth profile. There is opportunity for ongoing cost optimization and margin improvement, and that is baked into integration and transition plans going forward. We're pleased with top-line acceleration so far.
You see that in the guidance and our confidence for the second half and beyond. Part of the improved growth profile is driven by the transactions we've completed.
I wanted to ask a higher-level question. I get questions on your data center exposure in water, but there could be an AI angle in PQI. Do you see AI changing demand for things like inspection in marking and coding? We're seeing this in other adjacent industries. What's your take on AI influencing PQI?
Yes, you're seeing AI adoption. In our digital workflow solutions, particularly with GlobalVision, we are offering AI application layers on top of our solutions. This is expanding and we're investing organically and in talent to support this. We're already offering AI-enabled products to customers in the digital workflow area.
GlobalVision brings a deterministic inspection engine designed to produce the same answer every time—critical for regulated workflows where brands can't tolerate error. Esko, TraceGains and GlobalVision are all working together to employ AI throughout the workflow, enabling mistake-proofing and faster time to market while meeting regulatory and traceability requirements.
We will move next with Brian Lee with Goldman Sachs.
A quick one: comments around high-growth markets and the potential for further reacceleration. North America and Western Europe have been strong; can you touch on what you're seeing in high-growth markets and the forward outlook?
High-growth markets were relatively flat, with a bit of a tale of two cities for PQI and water. In China, PQI has strong growth while water is a bit down. Latin America has good order rates but sales are down year-over-year, improving sequentially. Underlying demand remains strong, but there are some project timing delays. We're pleased with the recovery in China for PQI and are watching Latin America closely. Execution across markets is a focus.
Thanks, Brian. We appreciate everybody that was able to engage with us on the call. At this time, we have hit our time limit of 45 minutes for the call, so we're going to have to cut it off here. As usual, I'll be available for follow-ups throughout today and over the course of the next several days. We thank everybody for joining us, and we'll talk to you next time.
Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.