Q1 2025 Earnings Call Transcript

My name is Marco, and I'll be your conference operator this morning. At this time, I'd like to welcome everyone to Veralto's Corporation's First Quarter 2025 Conference Call. [Operator Instructions] I will now turn the call over to Ryan Taylor, Vice President, Investor Relations. Mr. Taylor, you may begin your program.

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 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 on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will be available until May 9. Yesterday, we issued our first quarter 2025 news release earnings presentation and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. In addition, we reaffirmed our full year 2025 earnings per share guidance, which now includes our current assessment of the macroeconomic environment, including tariffs and related countermeasures. These materials are available in the Investors section of our website, for varalto.com, under the heading Quarterly Earnings.

Reconciliations of all non-GAAP measures are also provided in the appendix of our webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. On that note, I'd like to point out that year-over-year sales growth in the first quarter of 2025 benefited from 3 additional shipping days as compared to the first quarter of 2024. 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.

Thank you, Ryan, and thank you all for joining our call today. Before discussing our first quarter results, I'd like to take a moment to recognize our 17,000 associates across the world for their commitment to serving customers, driving continuous improvement and safeguarding the world's most vital resources. As stewards of some of the world's most essential resources, we help ensure billions of people have access to clean water, safe food and trusted essential goods each and every day. Dynamic business environments, such as the one we are currently experiencing, provide us with the opportunity to demonstrate the essential nature of our products the durability of our business model and the power of the Varalto Enterprise system.

Our team embraces challenges as opportunities to drive differentiated winning outcomes for our customers associates and shareholders. That mindset has propelled us to a strong start in 2025 and prepared us to navigate this dynamic macroeconomic environment we are facing in the near term. In the first quarter, we delivered excellent results across the enterprise, driven by disciplined execution in both segments. And we are actively deploying several countermeasures to mitigate changes in the global trade and tariff landscape and enhance our operational flexibility.

I'm proud of our team and our collective performance thus far in 2025. Looking at the first quarter results in detail, building off the operating momentum generated last year, we delivered 7.8% core sales growth, 50 basis points of adjusted operating margin expansion and double-digit adjusted EPS growth. Our commercial teams executed on strategic initiatives to gain new customer wins and increased market penetration, while also capitalizing on favorable demand across our key end markets and geographies. Our core sales growth was driven primarily by volume and was broad-based across both segments with PQI delivering 8.3% core sales growth and water quality 4% core sales growth.

In PQI, positive trends in consumer packaged goods markets supported growth across all key product categories in our marking and coding business and across our digital workflow solutions and packaging and color. Notably, in our marking and coding business, Q1 marked our fourth consecutive quarter with year-over-year growth in both consumables and equipment. In water quality, we continue to drive robust growth of our water treatment solutions in North America complemented by steady growth in water analytics sales globally, including double-digit growth in Europe. Adjusted operating profit margin expanded 50 basis points year-over-year to 25% and an all-time high.

We expanded operating margin in Bodman with incremental margins in line with our long-term framework driven. By high-quality sales growth and efficient operating leverage, adjusted earnings per share grew 13% year-over-year to $0.95. This exceeded our guidance, primarily due to better-than-expected sales volumes. I'm proud of our team's disciplined execution to deliver a high-quality performance in the first quarter in service to our customers. In addition to our strong organic growth performance, we continue to make great progress on recent acquisitions.

The integration of TraceGains is on track. Sales are growing in line with our expectations, and we continue to invest in future growth. And in February, we signed a definitive agreement to acquire AQUAFIDES an Austria-based provider of ultraviolet water treatment for $20 million. AQUAFIDES treatment systems are used in drinking water, wastewater and a variety of industrial applications that require high-purity water, including food and beverage and pharmaceuticals.

This is a fantastic addition to our Trojan business. It expands our ability to serve European customers with local engineering support and service, while also expanding our UV treatment portfolio with high-quality, efficient fit-for-purpose solutions. We look forward to welcoming the AQUAFIDES team to Varalto and unlocking new growth opportunities together. Looking at core sales growth by geography and end market, growth was broad-based across key verticals and regions.

Our commercial teams executed well, leveraging VES tools and capitalizing on the investments made last year to expand our sales, marketing and innovation efforts. Sales growth in Western Europe was robust at nearly 11% with double-digit growth in both segments. In North America, sales grew approximately 8% with high single-digit growth in both segments. And sales in high-growth markets were up 6% year-over-year with PQI sales up high single digits and water quality up low single digits.

Taking a closer look. In Western Europe, water quality grew 11.3%. Our water analytics team in Western Europe continued to deliver exceptional growth through rigorous lead generation, funnel management and VES catalyzed commercial execution. And in PQI, sales into Western Europe grew 10.3%, driven by double-digit growth in packaging and color and high single-digit growth in Marketing & Coating.

In packaging and color, we saw strong software growth across most packaging applications, including increased mid-market penetration. This reflects increased focus on account management and fit-for-purpose solutions to accelerate software growth. And in Marketing & Coating, growth was driven across equipment, consumables and spares. Moving to North America.

Core sales growth was led by water quality with 8.3% growth. We continue to capitalize on increasing demand for our chemical water treatment solutions, which grew double digits in North America. Our chemical treatment growth was broad-based across several industries with the strongest growth in power generation, food and beverage and chemical processing. And we continue to see growth from new data centers as they become operational.

Also, sales of Trojan UV systems to municipalities, primarily related to water reuse contributed to our growth in North America. The economic benefits of water conservation, reclamation and reuse continue to provide opportunities for us to expand our business and support our customers' objectives to efficiently manage their water usage. Over the long term, continued North American growth in water quality is supported by attractive secular trends such as water scarcity, water reuse, more frequent severe weather events and increasing demand from heavy water consumption applications such as data centers and power generation.

We also continue to benefit from positive market trends across PQI in North America during the first quarter with core sales up 6.9% year-over-year. This was primarily driven by double-digit growth in recurring revenue, specifically consumables and software. This reflects a combination of improved end market demand from CPG customers, VES driven commercial excellence and market penetration from our strategic initiatives. In high-growth markets, core sales grew 6.1%, highlighted by strong growth in Latin America, India and the Middle East.

In China, sales grew low single digits, with strong growth in PQI, partially offset by a decline in water quality sales related to timing of ultraviolet treatment installations, which were strong in Q1 2024. Overall, we delivered strong broad-based growth in the first quarter across all of our operating companies. We believe the essential nature of our products, our durable business model and the secular growth drivers across our end markets position us to create value for our stakeholders over both the short and long term. We remain confident that the Varelto Enterprise system will enable us to navigate ongoing changes in the macroeconomic environment with agility and discipline.

In addition to delivering a strong first quarter, we implemented several countermeasures to help mitigate the impact of recent tariff hikes and enhance our operational flexibility. This includes strategic pricing road maps, targeted sourcing and supply chain initiatives and shifts in manufacturing footprint, including the addition of Trojan's first U.S. factory in Grand Rapids, Michigan. This factory opened in February and is designed to support consumables and light assembly for our domestic UV water treatment customers. This expansion creates greater manufacturing and supply chain flexibility for Trojan to support its U.S. customer base.

We leveraged the ES tools to prioritize and accelerate the opening of this facility by about 4 months ahead of schedule to help offset potential tariff headwinds. With greater flexibility and the exemption of product imports covered by the U.S. MCA, our current exposure to Canadian tariffs has been reduced significantly. This is a great example of how well equipped our team is to navigate the current macro environment with focus, agility and speed.

And we have several levers to pull to mitigate risk while supporting our customers and maintaining business continuity. Our decentralized operating model empowers our business leaders who are closest to our customers to make decisions quickly. Our diverse global footprint and flexible supply chain give us agility and optionality to maneuver quickly. And our leading market positions, direct sales force and the essential nature of our products give us the ability to be thoughtful with strategic pricing actions.

Confidence in our ability to deliver on our commitments is, in large part, grounded in the Varalto Enterprise system, our proven system for driving growth, operational improvements and leadership development. A core tenet of VES is continuous improvement or Kaizen. As we do annually in the first quarter each year, we completed Varalto's second CEO Kaizen week in February. CEO Kaizen Week, is a long-standing tradition of our enterprise system and personally one of my favorite weeks of the year.

This event is culturally important as it helps us stay close to the businesses and understand both their struggles and opportunities helping to catalyze decision-making and prioritize allocation of capital and resources. For 1 week, we immersed 20 cross-functional teams at Gemba where the real work happens at 10 locations across the world to address our biggest impact operates with the participation of Varalto executives. Building off our success last year, this year's CEO Kaizen Week, was designed to help us accelerate growth and reinforce that at Varalto, we are all practitioners of continuous improvement.

Among other opportunities, a few of this year's most strategic and impactful events focused on increasing adoption of packaging and color software within mid-market CPG customers, accelerating capture of design input requirements for new product development in water analytics and reducing lead time for consumables in one of our marking and coding product lines. The benefits of any Kaizen week include immediate solutions that are rapidly implemented and yield real-time results. Success is proven by sustaining these results, which we track following the Kaizen events. That concludes my opening remarks.

And at this time, I'll turn the call over to Sameer.

Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the first quarter. Total sales grew 6.9% on a year-over-year basis to over $1.3 billion. Currency was a 130 basis points or $16 million headwind year-over-year and acquisitions contributed 40 basis points of growth, primarily from TraceGains.

Core sales grew 7.8%, led by broad-based volume gains across both segments. Price contributed 1.3% growth in the quarter, in line with historical levels. Our recurring revenue grew high single digits year-over-year and comprised 61% of our total sales. As Ryan mentioned, the first quarter of 2025 had 3 more shipping days as compared to the first quarter of 2024. If we exclude the estimated benefit of those ex days, core sales growth in Q1 was still above 5%, solidly in the mid-single digits and our highest core sales growth quarter since becoming a public company.

Gross profit increased 8% year-over-year to $805 million. Gross profit margin improved 40 basis points year-over-year to 60.4%, primarily driven by volume leverage and to a lesser extent, pricing. Adjusted operating profit increased 9% year-over-year and adjusted operating profit margin expanded 50 basis points to 25%, an all-time high. Looking at EPS for Q1, adjusted earnings per share grew 13% year-over-year to $0.95 per share.

As compared to our guidance, adjusted EPS came in stronger, primarily due to higher sales volumes at both segments. Looking at cash flow in the first quarter, we generated $142 million of free cash flow, an increase of $40 million year-over-year. This increase was primarily driven by the growth in earnings. I'll now cover the segment results, starting with water quality on the next page.

Our Water Quality segment delivered $794 million of sales up 6% on a year-over-year basis. Currency was a 130 basis point headwind and divestitures resulted in a modest 10 basis points reduction in sales versus the prior period. Ford sales grew 7.4% year-over-year, including 100 basis points from price and 640 basis points from volume. 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 good volume growth in sales of analytical instruments, reagents and chemistries to municipalities. Water Qualities recurring sales grew high single digits year-over-year, and equipment growth was up mid-single digits. Adjusted operating profit increased 7.5% year-over-year to $200 million, and adjusted operating profit margin was 25.2% up 40 basis points versus the prior year. Overall, it was a strong quarter for water quality.

We expect to see steady growth over the balance of this year given our products are critical to our customers' ongoing operations and generate high level of recurring sales. Moving on to our PQI segment on the next page. Sales in our PQI segment grew 8.3% year-over-year to $538 million in the first quarter. Currency was a 130 basis point segment.

The currency headwinds were offset by 130 basis points of growth from acquisitions primarily trace gains. Store sales grew 8.3%, led by volume growth of 6.7% and price increases contributing 1.6% to core sales growth. CQI's core sales growth was driven by both recurring revenue and equipment shipments. Recurring revenue grew high single digits year-over-year, led by consumables and software.

Equipment growth also grew high single digits, led by marking and coating equipment. PQI's adjusted operating profit was $153 million in the first quarter, up $14 million over the prior year period, resulting in adjusted operating profit margin of 28.4%, an increase of 40 basis points year-over-year. The increased profitability was primarily driven by strong operating leverage on volume growth and to a lesser extent, pricing. Turning now to our balance sheet and cash flow.

In the first quarter, we generated $157 million of cash from operations. We invested $15 million in capital expenditures. As a result, free cash flow was $142 million in the quarter, up 59% over the prior year, primarily driven by the increase in earnings. At the end of the first quarter, gross debt was $2.6 billion and cash on hand was over $1.2 billion.

Net debt was $1.4 billion, resulting in net leverage of 1.1x. Our financial position is very strong and provides us the flexibility to be opportunistic in how we deploy capital to create long-term shareholder value. Having said that, we plan to be prudent and disciplined as we navigate this current economic environment. Over the long term, our goal is to continue to create shareholder value with a bias towards M&A.

And we have an attractive pipeline of opportunities in both water quality and PQI. Turning now to our guidance. Yesterday, we reaffirmed that 2025 full year adjusted EPS guidance of $3.60 per share to $3.70 per share. Our underlying assumptions have been updated to reflect currency rates and current assessment of tariffs and trade policies.

Our full year guidance now assumes an estimated gross impact from the announced tariff increases of approximately 3.5% of full year sales on an annualized basis, and we expect our countermeasures to largely offset tariff impacts. For the full year 2025, our year-over-year core sales growth target remains below to mid-single digits consistent with our prior guidance. Furthermore, we expect neutral impact to the full year sales growth from both currency translation and acquisitions net of divestitures. We expect sales contributions from TraceGains and AQUAFIDES to be largely offset by the AVT divestiture.

We are now assuming corporate expense at about $100 million as we control discretionary spending in light of the macroeconomic environment. Given the impact and timing of tariff increases and related countermeasures, we expanded our target range of adjusted operating profit margin. We are now targeting full year adjusted operating profit margin to be flat to up 50 basis points or approximately 25 basis points expansion at the midpoint. We believe this is prudent given the dynamic macroeconomic landscape.

And we are targeting free cash flow conversion between 90% to 100% of GAAP net income, in line with prior guidance. Looking now at our second quarter guidance, we expect core sales to grow in the low to mid-single-digit range year-over-year across both segments. And our second quarter 2025 guidance for adjusted EPS is $0.84 to $0.88 per share. That concludes my prepared remarks.

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

Thanks, Sameer. In summary, we're off to a strong start in 2025 and we are confident in our ability to navigate a more dynamic macroeconomic environment in the near term and are prepared to do so. We believe that the essential need for orthology solutions, our durable business model and the secular growth drivers across our end markets will support our financial performance this year. We continue to leverage the power of the Varalto Enterprise System to drive continuous improvement and bolster our agility.

Our financial position remains strong, and we continue to evaluate opportunities to create shareholder value within our disciplined capital allocation framework. We are excited about the bright future ahead for Varalto 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 trust essential goods. That concludes our prepared remarks. And at this time, we are happy to take your questions.

[Operator Instructions] We'll go first to Scott Davis with Emilios Research.

Congrats on the start of the year. I hate to do it, but I have to ask on tariffs because that's just so much of our incomings and you guys seem pretty confident in your ability to mitigate, but perhaps maybe provide a little bit more color on the sequencing. I imagine you can't mitigate overnight. This is going to take some time.

But I'll put that as kind of an open-ended question that just help us understand how the mechanics behind mitigation and kind of the timing and when you would expect to be fully offsetting the tariffs.

Thanks for the question, Scott. Yes, I think we feel very confident here. Our gross exposure to tariffs is about 3.5% of our sales. And bear in mind that in terms of running Varalto and using VES, we are constantly looking for opportunities to optimize the business, be that operational footprint, pricing, supply chain and strategic sourcing kinds of opportunities.

And so in fact, we always have this going on. We've accelerated some of the actions purely around derisking what we see today. But I would reiterate, as I said in the comments, we're well positioned here. So pricing actions have been and will continue to be undertaken.

We additionally derisk our Trojan manufacturing facility based in Canada by pulling forward some redundant manufacturing capability into their new manufacturing facility and distribution center in Grand Rapids, Michigan. And we continually work to align our supply chain and our sourcing strategies relative to derisking our tariff situation. So bear in mind, too, that we are effectively an asset- light manufacturing operation. Most of our business here is subassemblies and kitting, circuit boards, plastic enclosures, optics and so on.

So there's no additional capital needed to create redundant lines or, in fact, move manufacturing lines. And we do that regularly in the normal course of business. On average, we can move a line within a 6-month time frame. Some take longer, but we feel like we're really well positioned here.

Okay. No, that's helpful. And then if you just think about second derivative demand impacts, I would think Videojet would be a pretty good real-time demand indicator for really just customer confidence and such. What -- have you seen anything in Videojet in April that would lead you to be a little bit concerned about the customer confidence and folks plans on spending money in 2Q and beyond here in '25?

We really haven't, Scott. Demand remains strong for our PQI business and particularly coding and marking as well. So we don't see any demand change in the order patterns. We have just completed 4 consecutive quarters of growth for both equipment and consumables, which follows a good trajectory of consumer confidence and recovery in the CPG markets.

The trends between different types of consumer product goods are variable, right, beverages are up, salty snacks are down. And we stay close to the data. This is a volume game for us, right? And so we look at volume on a regular basis in terms of number of codes printed.

And we'll continue to watch the market closely. But at this point, we don't have any indication of that softening.

Scott, if I may. And as we're going to look at April, the old patterns are still pretty normal at this point. Interesting.

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

Love to get started here on the tariffs, follow-up to Scott's questions. And just can you talk about the price elasticity, I mean, it's really you've got there's high switching costs for your customers, especially on the water quality side. Can you just talk about the difference between consumables, elasticity versus equipment? And where would be the most risk that you have in increasing prices just if you think about your product line?

Thanks for the question, Dean. This is a dynamic situation that we continue to operate in, and we're relatively surgical in our approach to pricing. So it's going to depend based on the products, the customers in the regions that we're operating in. And so there's really not a one-size-fits-all approach.

I will say, as you know, that 80% of our sales goes into food, water and essential goods, and our products are essential to customer operations where the risk of failure is high and the overall spend relative to their operating budget is low. So it's well worth the investment here. And I would say that with 60% of our revenue tied to the consumables business, it's a pretty good relationship, as you know. So we've got the razor-razorblade relationship here.

But as you know, our decentralized operating model empowers our business leaders to effectively take pricing actions where they best see fit. And that's going to vary by operating company and product line.

Great. Just to clarify if you're using surcharges in addition to pricing?

Like I said, Dean, it's going to vary. In some cases, we're using surcharges. In some cases, it's pricing. It just depends upon the business, the product line in the region in which we're operating.

But I can say we remain confident in our ability to have our pricing actions be those surcharges or permanent increases to stick, and we believe we're well covered in terms of addressing any tariff impact going forward.

Great. And just a follow-up, and this is away from tariffs. Do you have any high-level observations on the EPA announcement this week regarding PFOS. There was a lot of hand wringing worrying that there might be some pullback from the enforcement here, especially the 4 parts per trillion, but it looks like it was a full endorsement of the enforcement of PFOS and just any commercial implications for you all?

And would love to hear, again, just high-level thoughts.

Yes. Thanks for the question. As you know, we remain excited about PFS in terms of both analysis and treatments, particularly in the area of destruction. We remain active with our minority investment in Axione Technologies, which is a destruction technology or PFOS.

Our teams are constantly canvassing the market looking for opportunities to innovate and particularly democratize test so that they can be fit for purpose for utilities and municipalities. So we think we're well positioned here. And as a reminder, there's nothing in our forecast going forward that has any component of PFAS sales, either treatment or destruction in it. I think it remains early days here in terms of how to go solve for this problem, but there's effectively no impact if the EPA decides to pull their 4 parts per trillion or increase it to some other minimum contamination level.

We remain committed to this space, and we think there's going to be a need to solve for this in the future.

Our next question comes from Mike Halloran with Baird.

I just want to make sure I understand how you guys are thinking about the year and however we can cadence this out. First, the selling days, does that come out of the second quarter? Or where does that bounce out over the course of the year? And then how are you thinking about the seasonality embedded in guidance, all else were relatively normal?

Any change more of a top line question here than the bottom line question.

Mike, thanks for the question. As you kind of think about the 3 [indiscernible] , it's really the impact it's going to be in Q4. So for the full year, there's not an impact. But for second quarter and third quarter on a year-over-year basis, there should not be any change in the number of days. So that's how you should think about that.

Despite that, our Q1 was really strong. So we feel really good about the execution of our team and greater than 5% of the core growth, even if we perform on average basis for the potential 3 days. So a really solid quarter. From a seasonality perspective, as you know, our business really does not have a whole of seasonality.

You may see a little bit of movement in for based on the budgets that the municipalities may have, things like that, but really from a seasonality perspective, our business is pretty steady.

And then probably this is almost two questions [indiscernible] the one, which I admit I had a time. But can you help us bridge between 1Q and 2Q? Relative to the strength of 1Q, even excluding the number of cell days and the benefit, it's still early the quarter, seems like a little bit of a change going in the second quarter. Is that the timing of how the tariffs roll through?

And then the second question embedded in that is how does the tariff mitigation work through years? Is it heaviest in 2Q and pretty light, if at all, in the fourth quarter? So if you could just kind of square those two dynamics for me.

Yes, Mike, is yes, there definitely two questions. So let's parse them out. I think first, let's look it from a growth perspective on the guidance. Look, I think Q1 was really strong again greater than 5% core growth, even if you perform on average for 3 days -- 3 extra shipping days.

Order patterns in April seems normal. But having said that, there's just a lot of geographical uncertainty from the trade policies. So what you've done is look at a lot of scenarios as you kind of try to rebalance between price and volume. Where we are is it feels pretty good about the low single digit to mid-single digit kind of overall core growth.

As you know, we don't guide between the price and volume. So that's how we kind of think about the core growth side at this point. I think it makes sense for us to be stable, judicious from a growth perspective. On the margin side, and that's where your tariff question comes in and how the impact will roll in.

We modeled in a little bit of a timing difference between the tariff increases and the related countermeasures. So that's kind of driving and why we've expanded the margin range a little bit. Also in the near term, what we have seen is, like Q1 was really good on the equipment sales, and of course, that so the seed for the future growth. So that's really a great outcome in Q1. We modeled in the equipment sales growing in Q2 as well.

So that's impacting on the margin side in the second quarter. And lastly, Mike, it's really math, right? The quantum of the numbers that we're looking at from a cost and then the price to offset that is going to -- we're trying to protect the OP dollars, right? That's where the EPS, we feel pretty good about 360 to 370. But when you try to particularly will be dollars, you're going to have a little bit of an impact just on a percent of the margin side.

So that's kind of like really playing into the guide as well. But overall, we feel really good about at this point on the countermeasures and how we're looking at the demand at least sitting here today.

Our next question comes from John McNulty with BMO Capital Markets.

Obviously 1Q, a lot stronger, I think, than even you all expected or at least guided to. At the same time, it doesn't sound like there was any pull forward or anything like that around the tariff side. So I guess, first, can you help us to understand where that strength surprised you? I mean your business is normally pretty predictable and yet it really came in a lot better than expected.

So I guess, what were the big surprises would you say?

Thanks for the question, John. We post spin, and we've been out of the starting blocks now 18 months or so, really had the benefit of reinvigorating VES and doubling down on commercial execution, new product development and making sure that we are operating out of the strongest positions for each of our businesses. And I think what you see coming out of the fourth quarter here is just sustained momentum, right? We made a number of investments in commercial execution.

We did some rearchitecting of our commercial teams in some of the businesses. And we doubled down really in terms of driving new product development and delivering fit-for-purpose products and solutions into the space. And I think what you see there is the ongoing momentum in just being disciplined in driving VES and ensuring that we're blocking and tackling each and every day. I don't know that we were necessarily surprised by anything in particular?

I think probably Europe came in a little bit stronger, particularly on the water side that we benefited from. But again, that's on the back of really solid leadership, commercial execution of blocking and tackling every day.

Got it. Okay. No, that's helpful. And I guess, maybe somewhat related to that, so the margins overall for the first quarter were pretty much at a record level.

And I think that was despite what you thought was going to be some pretty heavy equipment, slightly lower margin-type business coming in and you have the trace gains kind of weight of some of the investments there. So I guess how should we be thinking about the margin level that we're at right now and how that progresses through the year? I guess there may be some puts and takes around the tariff timing, but maybe you can help us to think about some of those levers that you're pulling there.

Yes, John, I just going to look at the Q1 margin, absolutely. Really great execution driving the 25% adjusted OP margins. So I feel really great about that. Some of the things in the Q1 that you kind of look at it from a margin perspective, it's really the fall-through from the volume side.

It's the volume leverage that was a big role -- played a big role in driving the operating margin uplift. I would say, as we kind of move on and look at the rest of the year, we've been a little -- we want to make sure that we build in a lag for any timing differences between the tariff increases and the counter measures, that's kind of played in equipment sales, as I said earlier, are rolling to that as well and rest is math. So those are some of the reasons at this point, given there are so many moving pieces, frankly, a lot of the stuff happening real time, as you know on a daily basis with things changing.

So we just wanted to be judicious and cautious at this point as we kind of think about the ad side.

We'll next go to Nathan Jones with Stifel.

I guess my tariff question is going to be around the competitive advantage or disadvantage that you might see from this. Obviously, there's certain competitors maybe in marketing and coding where you're pretty similarly positioned, but maybe some other businesses where you have some competitive advantages or disadvantages. Just based on where supply chain is positioned, where your manufacturing is positioned, et cetera, I would imagine being the big dog on the block in most of these businesses that is more advantage and disadvantage. But are there places where you see this as an opportunity to either use that better positioning to gain market share or to use that better positioned supply chain to [indiscernible] or any areas like that?

I love the question, Nathan. We actually look forward to market dislocations. This is an area where I think we can form really, really well. And that's on the back of just our multi-decade heritage around the Varalto Enterprise system.

As I mentioned, we are an asset-light manufacturing business in most cases. And that gives us really a lot of great optionality as to where we manufacture for the benefit of both our customers and to defray. So we feel very good about our position in being advantaged at this time. We feel like we've got great direct to customer sales strength with our 75% direct-to-sales model.

It gives us great insight as to what our customers are thinking and doing the problems that they're facing, how we can help solve those problems with them. And likewise, we're always working supply chain. That's just part and parcel to running a global business, and we got a lot of reps here, right? This is reflective memory for us.

So we're blocking and tackling. We're using VES, we're remaining nimble. And then when we say opportunities, we seize them with speed and agility.

And Nathan, if I can just add, are the speed and agility is really demonstrated by how we've been able to set up the Trojan facility in Grand Rapids, Michigan, right? So that's a great proof point of what Jennifer just said.

I guess, follow-up then is you said 3.5% of sales across the portfolio, but your business is like half U.S. or a little bit under half U.S. Does that imply that you need 7% price in the U.S.? Or are you deferring that across other parts of the business? And then is it relatively homogeneous?

Or are there parts that need significantly more than that, significantly less than that? And do you believe you can mitigate a significant portion of what's that 3.5% total today? And what could you get it down to?

Yes, Nathan, as you kind of look at a 3.5 percentage is really sort of a growth estimate. And when you look at that number effectively, it reflects the export as well as the imports, right, in the ports into China. And majority of this is tied to China as we talked about that. Overall, we say we should be able to defray pretty much all of it at Nathan.

And it's really 3 things. The sourcing strategy, supply chain stuff that Jennifer talked about. Second is all the manufacturing footprint, given our life manufacturing, we can move things around very fast. All those things are happening to make sure we're in a geographic location where we can serve our customers, maintain the continuity of a survey to customers.

At the same time, we can do it very fast. And then lastly, I would say, the pricing. So it's a combination of all 3 is how you should be thinking about defraying this 3.5% that we laid out a gross conservative view. This -- this is not all pricing.

We go next to Jeff Sprague with Vertical Research.

I'm a bit late but I think my team has updated and what you said so far, but pardon any duplication here. But first, just on the asset-light comment though, Jennifer, a lot of that derives right, from not being vertically integrated and sourcing and the like. Do you see, for example, kind of electronic sources of supply where you can divert out of China to other places to kind of put the deal with the input costs on that side of the equation?

Yes. Let me clarify, just because we say asset-light doesn't mean we're not leveraging collective spend for certain commodities. Okay? What we mean when we say asset-light is that we don't have any big heavy monuments for manufacturing equipment that has to be duplicated or rooftops that need to be built in order for us to be able to move supply chain.

We have a very capable strategic sourcing team centralized within our corporate organization that works directly with our sourcing teams within the operating companies to create that shared leverage. So that shared leverage shows up in collective circuit board purchases in chemicals, commodities, in plastics, injection molded parts, optics, et cetera. So we think we're well advantaged here in terms of being able to leverage the collective spend but also being nimble and swift when we want to diversify our manufacturing footprint.

And Jeff, one more point I would add is, as you kind of think from the supplier's perspective, right, there's a lot more flexibility on the supply footprint as well right now versus the first round of tariffs 6 to 8 years back, right? So it's a little different situation as well. So all of us have been working in building that resillency into a supplier base as well. That is a driver in our ability to move fast as well right now.

And thinking about what you can do versus what you will do, I mean, is there like a real list of sort of no-regrets footprint changes that you make here? Or are we still kind of tactically maybe leaning more on price at the beginning to see if some of the stuff goes away? Just interested in how you're kind of playing that potential arbitrage there.

Yes. If you think it from the supply chain and the manufacturing footprint perspective, Jeff, these are no regret moves for us. I think like Trojan one is a great example because of the Baba, we are already working towards and had a strategy to move have a footprint here in the U.S. The tariff situation just help kind of accelerate that.

So a number of [indiscernible] things that we have in play, and we are working on pretty close to getting done. We were a big part of our overall strategy for the longer term as well from a physical footprint perspective. So I would say these are no regret moves, Jeff.

And then maybe just finally on the days. I think you addressed it in your opening comments. But could you just elaborate if again or if you didn't, on the impact on the total enterprise consumables business versus maybe sort of product and projects, I assume there are some notable differences there.

Yes, Jeff, this extra 3 days, right, even if you pro forma for that, the core sales growth should be solid, above 5%. The impact, as you can imagine, primarily comes through consumables. That's where you would see it, not in the equipment side. And frankly, if you boil it down all the way to the EPS based on average margins stuff, it's so $0.03 per share impact.

So Net-net, if you look at that, I think have sitting here, if you were delivering high single-digit growth and 90-plus EPS, I think you'll all be feeling pretty good. So it's pretty solid execution.

We'll go next to Andrew Buscaglia with BNP Paribas.

I wanted to check in on the M&A front. It seems like you guys are -- you got another deal over the finish line, a small one, but I'm curious if tariffs are impacting things either positively or negatively in terms of your discussions.

Yes, they really aren't, Andrew. We remain excited about the opportunities that we have in M&A, both of our funnels for both segs of the house in terms of the two segments are full and actively being worked, where we continue to look at a number of strategic investment areas and we will stay disciplined in our approach. We absolutely will stay close to ensuring that it's a market that we like with the most attractive company assets that play in that space and to ensure that we get them at the right valuation. So we are undeterred in our approach to M&A, and we still have that as a bias for our capital deployment.

Okay. Okay. And on the tariff side, can you just clarify, are you a net exporter out of China to the U.S. It's kind of a balance. Look take all the stuff as well, and that's kind of reflected in the 3.5% number. So I wouldn't call it like it's one way or the other.

We'll next go to Andrew Kaplowitz with Citigroup.

This is Dalibor on behalf of Andy Kaplowitz. This first question -- maybe first question, just focusing on the volume component. So Q1 benefited from 6.5% volume growth. But how do you think about volume normalization in the second quarter and second half, particularly in like macro uncertainties and any inventory normalization in your new channels?

Yes. Thanks, Italia. Look, I think, as you know, we are majority direct, right, almost 70% direct to our customers. So we generally have a pretty good feel from the inventory perspective.

They're not a whole lot of distribution channels in between -- the buffers in between. So generally, we have pretty good line of sight and doesn't feel like there's any inventory build at this point. It's not also -- not reflected in the order patterns. So inventory is less of an issue as we kind of think about the second quarter and the rest of the year.

From a volume perspective, look, as you know, we don't point any specific guide for volume and price. As we drive the price, there could be some impact on the volume. Yes, we run all the different kind of scenarios. Our goal is always to rebalance to make sure we are optimizing the core growth.

So from a core growth perspective, low single digit to mid-single digit for the second quarter and the rest of the year is where we feel really good about at this point.

And then I noted sourcing optimization and standard work improvement for CEO Kaizen, I'm just curious, can you quantify any expected annualized run rate savings from these initiatives? And how and when do you think you'll be able to reinvest and secure these initiatives flow to the bottom line?

Yes. Look, this thing, first of all, the fundamental of any Kaizen event is we want to see the impact now, right? So these are the kind of things that we do execute. We start seeing the results look, as part of the budgeting process.

Every operating company has an operating margin expansion. So we fully expect to conduct a continuous improvement, Kaizen events to actually deliver on the commitments that are in the budget that's in the forecast. So these are all kind of part of the guidance that we give to you guys and the Intel is all kind of reflected in that. Overall, from a supply chain perspective, at teen, Natalia, I can tell you, I would say, if we do this thing every day, right?

I can tell you, there were a number of supply chain initiatives as well, just around the sourcing side and the procurement side but those benefits are reflected in the guidance and reflecting in the internal budgets we have with each operating company. So there's nothing additional up to that.

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

I know we're going to end the call here. So maybe I'll just combine my 2 questions into one, to be efficient. As you said, multiple times. I know you guys don't like to break out volume and price from an outlook perspective.

But when we look at Q1, maybe it's a little bit lighter, 1% for water quality, 1.6% or PQI. It seems like, at least directionally, that's going to go higher given the tariff impacts moving through the year. So just curious if you can -- without giving us the numbers, give us some sense of the cadence as you layer that in over the course of the next few quarters and into year end. And then, I guess, related to that, you mentioned no pull forward in Q1, but are you seeing any signs of any slowdown in real time with all the macro uncertainty and tariff impacts?

And sort of what are you budgeting for the expectations around demand elasticity as you see some price increases moving through the year. Is there any feedback real time from customers around whether that might limit some volume upside even through the rest of the year?

Thanks, Brian. I'll start with the second question. From a pull-forward perspective. No, we haven't seen anything of notice -- of note, rather, I should say, Brian.

This is -- overall, the demand has been pretty good. And I would say, as we kind of look at the order patterns in April, as I said at the beginning of the call, they still seem normal at this point. So we haven't seen any change in the order patterns yet. And from a more pull-forward inventory perspective.

As I said earlier, we sell mostly direct. So we have pretty good line of sight in the inventories at the end users. I think things seems to be abnormal at this point. Now we all see what's happening in the macro, and we're prepared for that, and we run different scenarios as we don't think about how we move -- as we increase the pricing, how it may impact volume and all that is reflected in the core growth in the low single digits to mid-single digits, depending on the scenario, price and volume is going to have a little bit of elasticity, but within the range of low single digits to mid-single-digit core growth.

Overall pricing, when you look at, Brian, historically, we delivered 100 to 200 basis points. So net-net, on average, we were $1.31 you're absolutely right. As we push pricing, we will move towards the higher end of the range, absolutely, that will happen. But that's being very surgical, right at the end of the day.

The goal is to position the business for success for the longer term to help customers maintain business continuity as well. So we're being very surgical, very methodical in how we're kind of pushing. And pricing, as you kind of think of it lastly, I would say, is one of the levers as we kind of think about offsetting the -- as part of the countermeasures after the tariff impact. We have a lot of things in our own control, right?

As you kind of think about the manufacturing footprint changes, it's going to have a very meaningful impact on the tariff countermeasures, you think about the supply chain side. Those things are in our control. So we are executing on all those things as well. So think of pricing as one of the 3 elements here.

The other 2 elements are within our control, and we are executing on those.

Thanks, Brian, and thanks for everybody that joined us on the call today. We appreciate the questions and the engagement. As usual, this is Ryan, I'll be available for follow-ups today and over the next several days. Thanks again for joining us, and this concludes the end of our Q1 earnings call. Thank you.

Thank you.

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