Q2 2025 Earnings Call Transcript

My name is Angela, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation Second Quarter 2025 Conference Call. [Operator Instructions] 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 on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will be available until August 7. Yesterday, we issued our second quarter 2025 news release, earnings presentation and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. 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 lines.

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.

Thank you, Ryan, and thank you all for joining our second quarter earnings call today. At Veralto, our focus on creating shareholder value includes delivering steady, predictable growth quarter-over-quarter, year after year. The ability to drive consistent, predictable growth is a hallmark of the Veralto operating companies and demonstrates the durability of our business model catalyzed by rigorous application of the Veralto Enterprise System. As part of this approach, we focus on the critical few and utilize visual daily management to drive consistent, efficient execution.

This helps ensure we are supporting our customers' growth and operating objectives while enabling more efficient workflows in their daily operations. It also helps us meet our financial commitments and achieve both our short- and long-term objectives. The second quarter of 2025 marks our fourth consecutive quarter of mid-single-digit core sales growth. Over that time, we increased adjusted earnings per share by nearly 13%.

I want to take a moment and commend our team of 17,000 associates around the world for delivering a strong performance over the past year, particularly considering the dynamic macro environment, geopolitical landscape and fluid trade policies. This includes standout performance by our procurement and supply chain teams, factory operations as well as outstanding execution by our commercial teams. Our commercial teams have spearheaded our growth by leveraging deep domain expertise and applying VES growth tools such as funnel management, lead generation, and sales productivity. We are benefiting from investments made last year to improve our commercial architecture, innovation, and sales and marketing efforts.

Through the first half of 2025, we have met or exceeded our financial commitments and delivered mid-single-digit core sales growth, expanded adjusted operating profit margins and double-digit adjusted earnings per share growth. This level of performance is a testament to the focused efforts of our global team, our durable business model and secular growth drivers across our end markets. Based on our first half performance, stable demand across our end markets and our current assessment of macroeconomic conditions, we raised our full year adjusted earnings per share guidance range to $3.72 to $3.80 per share.

Additionally, our first half free cash flow generation further strengthened our financial position giving us increased flexibility as we evaluate capital allocation opportunities to fuel long-term shareholder value. As we have previously stated, our capital allocation bias is towards acquisitions, including investments that augment our R&D and innovation efforts. Our pipeline of opportunities is comprised of a mosaic of target, and we continue to make progress even as we remain highly disciplined in our execution. Last week, we announced a EUR 20 million commitment to invest in Emerald Technology Ventures Global Water Fund II to support investments in emerging technology-oriented businesses.

Emerald's global presence and deep sector expertise is expected to provide our water quality team with early insights into emerging water-focused ventures, making it a strong strategic partner to augment our innovation and technology development efforts. This move strengthens our ability to identify and scale solutions that align closely with our customers' needs in addressing critical water challenges worldwide. As for the quarter itself, we delivered a strong second quarter led by outstanding commercial execution and steady broad-based customer demand. Looking at our second quarter results in detail, and building off our strong start to the year, we delivered 4.8% core sales growth and just under 10% adjusted EPS growth.

As I mentioned, this marks our fourth consecutive quarter of mid-single-digit core sales growth, consistent with our long-term growth algorithm. Our commercial teams continue to drive outstanding execution to deliver growth through new customer wins and increased market penetration while also capitalizing on steady demand across our key markets. Our core sales growth was broad-based across both segments with Water Quality delivering 5% core sales growth and PQI 4.6% core sales growth. In PQI, ongoing positive trends in consumer packaged goods markets and supported growth across all key product categories in our marking and coding business, and across our digital workflow solutions in packaging and color.

In our marking and coding business, Q2 marked our fifth consecutive quarter with year-over-year growth in both consumables and equipment. In water quality, we saw robust mid-single-digit growth across both water treatment solutions and water analytics. Moving on to margin performance. Adjusted Operating Profit Margin came in at 23.7%, in line with our underlying guidance assumption.

Adjusted Earnings Per Share grew 9.4% year-over-year to $0.93, $0.05 above the high end of our guidance, primarily due to better-than-expected sales volumes. Looking at [indiscernible] market, growth was broad-based across key verticals and regions with mid-single-digit growth across North America, Western Europe and High Growth Markets. Core Sales Growth in Western Europe was 6.3% growth in Water Quality. In North America, core sales grew 5.6% with both segments generating core sales growth above 5%.

And sales in the high growth markets were up just over 6% year-over-year with high single-digit growth in PQI and mid-single-digit growth in Water Quality. Taking a closer look in Western Europe, Water Quality grew 11.4%. This growth was once again led by our water analytics team in Western Europe and reflects the changes we made to our commercial architecture and sales leadership in Europe last year. These changes have contributed to rigorously generation, funnel management and VES catalyzed commercial execution.

And in PQI, sales into Western Europe were up 2.1%, led by growth in consumables and continuous inkjet marking and coding systems. Moving to North America. Core sales growth was led by Water Quality with 5.7% growth. We continue to capitalize on solid demand for our chemical treatment solutions where core sales grew mid-single digits year-over-year.

Our chemical treatment growth was broad-based across several industries with the strongest growth in chemical processing and data centers. We continue to see ongoing traction with new customers at exiting data centers and are well positioned to capitalize on the build-out of new data centers, the majority of which will consume large quantities of water. Taking a broader view, the infrastructure being built to support growth in technology and artificial intelligence will further strain water capacity. We believe our portfolio of water analytics and water treatment solutions is well positioned to support this trend and serve customers as new data centers, semiconductor fabs and power generation facilities come online.

In TrojanUV systems business, we continue to see growth in North America, driven by good momentum within municipalities primarily related to water reuse. In Q2, Trojan secured a significant order for a large-scale UV treatment system that will be part of a water reclamation project on Chicago's North Shore. This award will be supported by the manufacturing expansion we completed in Michigan earlier this year and demonstrates our ability to deliver large scale UV systems that meet U.S. Build America Buy America criteria.

It also highlights Trojan's differentiated revolutionary UVSigna technology, which eliminates the risk of bacteria and pathogens in wastewater while also reducing energy consumption and simplifying operations for our customers. Both the public health and economic benefits of water conservation, reclamation and reuse continue to provide opportunities for us to expand our business and support our customers' objectives to conserve water and efficiently manage its usage. We also continued to benefit from positive market trends across PQI in North America during the second quarter, with core sales growth above 5% year-over-year.

This was primarily driven by high single-digit growth in consumables and double-digit growth in software. Demand from CPG customers continue to support steady growth for our marking and coding products and services and our packaging and color software. We also continue to drive growth in PQI through strategic initiatives and commercial excellence. In High Growth Markets, core sales grew 6.1%, highlighted by strong growth in Latin America and India.

Overall, we delivered another strong quarter of growth with every one of our operating companies contributing to our Q2 results. At this time, I'll turn the call over to Sameer for a detailed review of our financial results and an update on our guidance.

Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the second quarter. Total sales grew 6.4% on a year-over-year basis to $1.37 billion. Currency was 150 basis points or about $20 million tailwind year- over-year.

Acquisitions net of divestitures contributed 10 basis points of growth primarily from TraceGains. Core sales grew 4.8%, led by broad-based volume gains across both segments. Price contributed 1.7% growth in the quarter in line with our expectations. Our recurring revenue grew mid-single digits year-over-year and comprised 61% of our total sales.

Gross profit increased 6% year-over- year to $822 million. Gross Profit Margin was 60%. Adjusted Operating Profit increased 5% year-over-year with Adjusted Operating Profit Margin coming in at 23.7%. Versus the prior year period, strong margin expansion in our Water Quality segment was offset by near-term margin pressure at PQI and corporate expense.

Looking at EPS for second quarter. Adjusted earnings per share grew 9.4% year-over-year to $0.93 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 second quarter, we generated $323 million of free cash flow, an increase of $83 million year-over-year.

I'll cover the segment results, starting with Water Quality on the next page. Our Water Quality segment delivered $825 million in sales, up 6.2% on a year-over-year basis. Currency was 110 basis points tailwind and the acquisition of AQUAFIDES contributed 10 basis points of sales growth. Core sales grew 5% year-over-year.

Increased volume drove 360 basis points of growth with pricing contributing 140 basis points of growth. Water Quality's volume growth was driven by strong demand for water analytics at municipalities, water treatment solutions in our industrial end markets and UV treatment insulation. Water Quality's equipment sales grew about 10%, with recurring sales growth steady at about 4% year-over-year. Adjusted operating profit increased 11.5% over the prior period to $214 million, and adjusted operating profit margin was 25.9%, up 120 basis points versus the prior year.

Overall, it was a very 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 a high level of recurring sales. Moving to our PQI segment on the next page. Sales in our PQI segment grew 6.8%, year-over-year to $546 million in the second quarter.

Currency was a 220 basis points tailwind. Contribution to sales from the acquisition of TraceGains was offset by the impact of the AVT divestiture, which was completed in Q1 2025. Core sales grew 4.6%. Volume growth was 2.4%, with price increases contributing 2.2% to core sales growth. PQI'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 sales were up just over 3%, with steady growth across marking and coding and packaging and color solutions. In the packaging and color businesses, we continue to see strong double-digit sales growth in Esko's software solutions. Additionally, core sales growth for TraceGains continues to exceed 20% year-over-year, and the integration is on track.

We continue to invest in TraceGains to scale the business and further penetrate the market. The secular growth drivers for TraceGains ingredient supply network are strong and we continue to be encouraged by its future potential. PQI's Adjusted Operating Profit was $140 million in the second quarter, about flat to the prior year period. Resulting in Adjusted Operating Profit Margin of 25.6%.

The year-over-year change in PQI's profitability reflects the impact from our acquisition investments and the tariff-related costs incurred in advance of targeted price increases. This includes costs related to product line shifts that are improving our ability to serve customers in all the regions. Additionally, we continue to invest in our sales and marketing efforts to drive market penetration and fuel future growth. Turning now to our balance sheet and cash flow.

In the second quarter, we generated $339 million of cash from operations. We invested $16 million in capital expenditures. As a result, free cash flow was $323 million in the quarter. At the end of the second quarter, gross debt was $2.7 billion and cash on hand was over $1.5 billion.

Net debt was $1.1 billion, resulting in net leverage just under 1x. Our financial position is very strong and provides us with the flexibility to be opportunistic in how we deploy capital to create long-term shareholder value. Having said that, we will remain prudent and disciplined in our approach to capital allocation 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.

As Jennifer mentioned, we have an attractive pipeline of opportunities in both Water Quality and PQI. Turning now to our guidance. Yesterday, we raised our 2025 full year Adjusted EPS Guidance to $3.72 per share to $3.80 per share, up from our prior guidance of $3.60 per share to $3.70 per share. Our underlying assumptions have been updated to reflect steady demand driven by secular growth drivers in our end markets, our most recent assessment of trade policies and currency translation.

Considering the progress we continue to make on our countermeasures and the current state of tariffs, we expect a neutral net impact from tariffs on our 2025 earnings per share. Our core sales growth of 2025 is now expected to be mid-single digits, up from our prior target of low to mid-single digits. Furthermore, we now expect currency translation to be about a 1% tailwind to our full year sales growth. Acquisition growth is expected to be modestly positive as sales contributions from TraceGains and AQUAFIDES are offset by the impact of AVT divestiture.

Our full year target for adjusted operating profit margin expansion remains flat to up 50 basis points year-over-year or approximately 25 basis points expansion at the midpoint. We continue to believe this is prudent given the dynamic macroeconomic landscape. And we maintained our guidance for free cash flow conversion in the range of 90% to 100% of GAAP net income. Looking now at our third quarter guidance, we expect core sales to grow in the mid-single-digit range and our Q3 2025 guidance for Adjusted EPS is $0.91 per share to $0.95 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 had a strong first half of 2025 and are navigating a dynamic macroeconomic environment with confidence. Given the essential need for our technology solutions, our durable business model and the secular growth drivers across our end markets, we maintain a favorable outlook for our financial performance this year. We will continue to leverage the power of the Veralto Enterprise System to drive continuous improvement and bolster our agility.

Our financial position strengthened in the quarter, 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 Veralto, its associates 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 are happy to take your questions.

Thanks, Jennifer. This is Ryan Taylor. Before we jump into Q&A, for transparency, I just want to point out that our geographic core sales growth on Slide 5 excludes the impact from acquisitions, divestitures and management estimates for currency translation. It is not adjusted, however, for intercompany sales, returns or allowances. At this time, we'll go right into our normal portion of Q&A.

[Operator Instructions] We'll take our first question from Deane Dray with RBC Capital Markets. And once more, Mr. Dray, your line is open. Please go ahead with your question. We'll go next to Andy Kaplowitz with Citigroup.

Jennifer, can you give us more color regarding the environment you're seeing in core Water Quality growth maybe by region? It doesn't really seem like you're feeling any changes from the U.S. Cisco environment. And then Europe continues to outperform with a lot of their own self-help as you talked about, how long can that continue?

And maybe China still seems weak, but offset by other high growth markets. Any more color would be helpful.

Yes. Thanks for the question, Andy. I mean, I think in the main, our businesses are fairly resilient on the Water Quality side to fluctuations in government funding. And that's largely because we sit on the high end of the value chain here where our products and services are integral to the operating environment of the customer.

So some of the secular drivers that we see right now are really focused, as we mentioned in the prepared remarks, around water reuse. We see that both in municipal and industrial sectors really driven by water scarcity, regulatory pressure, and sustainability goals. So on the industrial side, they're going to be motivated here by rising water cost, which are pushing water-intensive industries to adopt reuse solutions. And on the [indiscernible] side, you see secular trends of urbanization and climate resiliency, which are driving providers to pursue more wastewater treatment, including more progressive solutions such as potable reuse.

So for Water Quality, we've reflected this in our year-to-date results. Strong growth, both in analytics and UV treatment solutions in [indiscernible] applications and growing subsectors such as data centers and power generation within industrial markets. So again, pretty robust performance there by our water team really based on those secular drivers.

Can you guys still hear me because I'm getting a little bit of interference.

Sorry, Andy, we had a little bit of a break up here. Can you ask the question again?

I think it's clear now. So just on PQI, obviously, margins down in Q2 a bit despite core revenue growth. Can you walk us through how much of the compression was due to sort of tariffs and pricing will catch up? Does that happen in Q3? How much was acquisition- related cost pressure? Like how to think about margins in PQI moving forward?

Hi, Andy, this is Sameer. Yes, if you look at the margin side, it's roughly 200 basis points on a year-over-year basis. Impact is really driven by 3 factors. Impact is roughly 1/3 each.

The first one is from the acquisitions and divestitures activity, and that's primarily driven by TraceGains. TraceGains continues to grow at 20%. We want to make sure we fuel the growth of this high-margin business, as you know, this is 80% gross margin. So we continue to invest in that.

So roughly 1/3 of the impact is driven by that. The second one is the timing difference as you just -- just talked about between the impact of pricing actions and the tariff headwinds? And the last one, I would say is the investment is net of productivity. As you know, in PQI, it was a little more heavier lift as you kind of think about the supply chain moves and the manufacturing line changes we're doing.

Whenever you do that, there's always a little bit of a duplication of the cost, and there are some growth investments in there as well. So that's 1/3. So it's really 1/3, 1/3, 1/3. The impact of these as we move through the second half of the year should gradually phase out. A chunk of it should phase out in Q3 and then in Q4.

We'll take our next question from John McNulty with BMO Capital Markets.

I guess just the first one, in terms of volumes. I think in the first quarter, there was some concern, there was a little bit of prebuying. It looks like that really didn't play out the way -- the way we thought. It's actually just solid core growth.

I guess, is that a fair characterization? Do you see any risks around the timing of tariffs as we look into the second half? And how are you thinking about kind of general core growth in the second half?

Thanks for the question, John. Yes. We've done a deep dive here to [indiscernible] we've got any prebuying here in our customer base. And we really just don't see much of that.

We do see read-through on demand. And as you know, 75% of our sales are direct to end users. So we've got great visibility in terms of reading through to the end customer there. I would say core volume remains strong, really around the secular growth drivers if they continue to drive our end markets, Q3 orders are off to a good start.

There's really nothing unusual about the order patterns that we've seen thus far in the quarter. And again, we really operate in that critical to operations segment where 80% of the revenue is really tied to food, water, and essential goods.

And John, just one thing to add. As you kind of think about the volume from a guide perspective, our guide, as you know, we upped the core sales growth guide, that does reflect the confidence that we have as we look at the growth on the volume side as well. Definitely pricing is an element, but the volume confidence on the growth side is reflected in the upping of the guide as well.

And then maybe just a follow-up on free cash flow. Looking at the first half, so not even just the strong quarter, and you're up 36% year-over-year. It looks like you're pulling pretty hard on some of these working capital levers and free cash drivers. How should we be thinking about that going forward?

Are there more levers to pull? And then in terms of that flexibility, I know you're pretty anxious or excited about potential opportunities with regard to M&A. I guess, can you give us an update on the M&A markets?

Yes. I'll start with the free cash flow and Jennifer can jump in from the M&A side. Look, on the free cash flow side, really strong operating earnings, Andy -- sorry, John, that's kind of really driving it and then the working capital management has been pretty prudent. Some of the stuff is driven by some of the CapEx and the investments and the timing as well.

From an overall year perspective, as you know, in Q1 and Q3, we do have interest payments. So the cash interest payments, so that does impact the free cash flow. Q2 and Q4 tend to be heavier on the free cash flow side. Year-to-date, John, you're running a little over 100% at this point from a conversion perspective.

But if you look at the full year, at this point, we still feel very good about 90% to 100%, but as kind of a Q3 develops, [indiscernible] more of an update. But at this point, this model is from 90% to 100% conversion side.

Yes. John, in just respect to your kind of M&A pipeline question, pipelines for both PQI and Water Quality are active, full, and have a mosaic of targets within them. We remain disciplined in our approach in terms of making sure that we identify attractive markets, top- tier companies within those markets and that we can get them at a fair reasonable valuation. We continue to like targets with a similar operating model to ours and the durability of the secular drivers that I spoke about previously, where VES can really drive growth and margin expansion for us.

So current market valuations in the main, I think, remain a little bit elevated, but we continue to actively monitor opportunities. And our objective is to maintain an investment-grade balance sheet here, right? So...

We'll go next to Mike Halloran with Baird.

So just a couple of things here. Just could you help -- I know Sameer touched on a little bit with PQI and it was Andy's question. But -- maybe just help with the timing of the pricing. When that started being implemented, what pricing looks like in the back half of the year versus the front half of the year?

And I suppose you talked about 1/3, 1/3, 1/3, that 60 basis points that seems to be part more of the tariff timing. Is that [indiscernible] in the back half of the year functionally to see kind of a sequential improvement in the back half of the year? It doesn't seem like it's embedded in guidance, but it seems like the remarks that you're making imply that there should be some sort of uptick in the back half versus 2Q because of the timing of all those things. So maybe if you could just wrap that all together for me, that would be appreciated.

Thanks, Mike. I'll start off on that. On the pricing side, the pricing was one of the elements of the countermeasures, right? As you know, we are making supply chain changes and line changes as well as part of this whole process to mitigate the tariffs and mitigate any impact for 2025. Pricing actions, Mike, we have been -- as we said earlier, we've been very selective, very targeted, working very closely with the customers to make sure we are helping them in their operations side and positioned well for the growth side as well.

So the impact that you see in the second quarter is limited, it's almost like a month kind of an impact. So you saw a pricing uptick a little bit to 1.7%. We didn't reprice the backlogs. We work very collaboratively with the customer.

So we went for price increases, which are more sort of structure in place -- structure in nature. Expect them to continue into the second half. So we're going to start seeing the run rate impact in the -- in Q3 and Q4. There should be a little bit of an uplift from that. You're right, Mike, as we kind of move into Q3 and even more in Q4. I would say, by segment by segment, you're seeing it faster in Water Quality and in PQI just given how the contractual nature of the transactions work, it's going to come more in the second half of Q3 and in Q4. But for the full year, we fully expect to offset the impact.

And so just then to the margin piece. Sequentially, there should be an uptick into the back half of the year as the pricing timing comes in and given kind of the moving pieces around the cost side associated with all that? Or the cost piece of it come through and kind of mitigate the benefit sequentially such that it's pretty stable?

Yes. From a dollar basis, yes, you're going to start picking up right. On a percent basis, Mike, Q3 is going to be like Q2, maybe a little bit up, but really like more like a Q2. And then Q4, of course, you're going to start seeing the full run rate impact. So that should be meaningfully better than Q3.

We'll go next to Deane Dray with RBC Capital Markets.

I promise you it wasn't user error on my part, but anyway here we are. See, I was interested that you made a reference that you had made some investments in TraceGains. So are you adding salespeople? Just what kind of investments and what kind of returns you're expecting?

Yes. Thanks for the question, Deane. TraceGains continues to be a great performer for us, continuing to clock well over 20% growth in that business. And the investments we're making really are mostly commercially oriented headcount.

So sales feet on the street going to reached to more regions, particularly as we work with the synergy between both TraceGains and Esko, where Esko has got a strong position in enterprise accounts and can pull TraceGains up to those accounts and TraceGains has got a strong position in sort of mid-market accounts pulling Esko into those opportunities as well. So some R&D investment to accelerate new product development as well as sales investment. And it's an investment that we feel strong about, just based on making sure that they have a fast start and we expect them to continue to be good contributors to our growth and into 2026, contributing to profitability as well.

That's all good to hear. And then just a question on the data center opportunity. It is truly the fastest-growing vertical for the industrials, I'm not surprised given the water use how critically important it is to have the Water Quality at the right standards. Can you just talk about your go-to-market approach?

Is there an opportunity to have a modular offering? Or is it more a type of one-off testing? Just very interested in your approach here in this market.

Yes. Thank you. You broke up a little bit, Dean. Am I coming through clearly? Yes.

Yes.

Okay. I think I got the gist of your question really around data centers and how we're approaching data centers to capture that fast- growing market. Data centers for us is really a strong play for ChemTreat. So data centers in the main use incredibly large volumes of water and certainly require an incredible amount of energy the water usage there is, in fact, basically flows through or over heat exchangers to basically cool for the power generation cycle, right?

And so those assets are subject to corrosion. They're subject to biological filing and so on. And so ChemTreat's got a big play here, growing very strong with respect to being able to provide solutions to protect those assets with their chemical offering. And as you know, ChemTreat is entirely a direct-to-end-user sales approach.

And given the deep domain expertise, they're really able to capture that opportunity in terms of their ability to sort of understand the applications, the pain points of the customer and innovate solutions that help solve for some of those problems.

We'll go next to Jacob Levinson with Melius Research.

When you talk to your CPG customers and looking at their CapEx spending plans this year, has there been any real shift or change as a result of all these tariffs and the trade uncertainty and even if that they're reallocating their budgets within different geographies to localized capacity or whatever the case might be? It doesn't seem like there's been any change in trajectory around equipment sales and product quality, but just curious what your conversations with them are like these days?

Yes. Thanks for the question, Jake. We really see the CPG demand sort of stable and steady as she goes, and that's kind of irrespective of region. I think they are navigating the environment with care relative to their price increases.

I think they're dealing with an environment that's pretty consumer sensitive, particularly given sort of the post-pandemic inflationary environment. And so they're being cautious. We see really solid demand, stable demand for both equipment and consumables, right? This means over 5 quarters of continued growth here, that our customers continue to retool their lines, to upgrade their lines, make sure that they're running efficiently.

We don't yet see sort of new lines being built or greenfield facilities being built. But certainly, as the tariff environment motivates regionalization or reshoring activity, we're poised to be able to capitalize on that.

And just switching gears to China. I think it's been a market that seems to have had challenges in pretty much the day that you folks became an independent public company. Is there any -- I mean, is that a market in water, I guess, specifically, that's just bouncing along the bottom at this point and really, it's just going to take time for the structural issues with funding in the municipalities to work itself out before you can get a real recovery there?

I think that's largely the right way to think about it, Jake. Our China sales in the first half were flat to last year. A little bit tale of 2 cities where PQI is showing, increasing strength and strong sales, particularly on the coding and marketing side and selectively within packaging and color. Water Quality sales have been lower there.

One of the things we're dealing with here is a comp year-over-year relative to UV installations from Trojan, which were strong in Q2 of 2024 that was -- those were shipped to support chip processing. So water, the Main is bouncing along the bottom. Team's doing a great job of executing there where they can find opportunity. But China in the Main has become a more mature market, and we're navigating that accordingly.

So we're really not building any recovery further in China into our second half guidance. But we believe the team is executing well within the opportunities available there.

We'll go next to Nathan Jones with Stifel.

Jennifer last quarter, I asked you about the disruption that was going on from trade policy and you were pretty excited about the opportunity from a competitive standpoint that could present themselves to Veralto. So maybe with a quarter under your belt and at least a little bit more clarity on what that trade policy outlook might be, can you update us on your thoughts around where you believe Veralto is competitively advantaged? And how you're going about taking advantage of that to gain market share?

Yes. I think one of the things we see here is really the strong execution of the teams relative to applying the Veralto Enterprise System right? We've invested a fair amount relative to or commercial execution, funnel management, lead generation, product launch excellence, growth rooms and commercial architecture. So we're really positioned well I think with respect to sort of anything that comes through on trade policy.

Fluctuations in trade largely don't have a significant impact on us apart from sort of the tariff adjustments that we've been making relative to line -- shipping line manufacturing and the like. But if we think about trade relative to some of the -- like [indiscernible] and things of that effect, we think that going to provide incrementally a tailwind for us as ingredients change and the like. So not a huge impact from trade changes, but we're using VES to really sort of position ourselves well to respond dynamically in the markets that we're in.

And Nathan, maybe I can just add one more thing is, as you kind of think about how we are positioned to take advantage is really by having the region for region kind of manufacturing and a great proof point is what Jennifer mentioned earlier in the prepared remarks is the project in Chicago, right? By making the investment in Michigan being able to provide products, which is more compliant with Build America Buy America, those kind of things really help us position well from a competitive perspective. So think about things like that, that can really help us position to take advantage of the trade policies.

I guess my follow-up question then. I'm going to ask you about the U.K. specifically. There's obviously been a lot of news about the water utility picture in the U.K. recently. Can you talk about how you view that as an opportunity for increased spending by water utilities in the U.K. and your ability to take advantage of that?

Yes. I think we're well positioned whenever we see these kinds of episodes regardless of geography. Again, 75% of our sales are direct to customer. And so we're able to sort of not only identify those opportunities, but capitalize on them locally. So we're well positioned to take advantage of that, and we will do so.

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

I just want to ask on the recycle reuse opportunity with data centers. First off, are you selling directly to these hyperscalers? Are you selling to customers that sell to the hyperscalers? And then I'm wondering why this is -- the spending there has been going on for some time. Why do you think you're just sort of starting to see that now?

Great question. So there's two ways to think about this. One is sales of products and services into existing data centers, right? And so we see good growth there, both into accounts that we currently are in as well as new accounts or rather existing accounts that perhaps were not in, and that's on the back of really solid execution on behalf of the ChemTreat team.

I think relative to your second question, data centers for us in terms of the business is still a relatively small portion of our overall business, but certainly rapidly growing. And so as that continues to grow, it becomes a bigger lens for us to focus on and think about. So that's how we would see it.

And then are you able to quantify what portion of your growth this quarter came from that? Or any way to like kind of quantify a percentage of sales that this could be longer term for you?

No, I think, Andrew, at this point, it's still a small number, as Jennifer said, as a total part of the business. So we don't disclose that. But as it continues to grow, of course, more details to come.

We'll go next to Brian Lee with Goldman Sachs.

Most of mine have been covered, but I wanted to ask maybe two quick sort of modeling-oriented questions. One, so going back to the kind of the margin view for the rest of the year, it sounded like pricing tailwinds are going to hit a bit more in 4Q, then you have the better sales growth view for the year. So -- I mean it would imply maybe more of a margin uplift into year-end versus what you're forecasting. So maybe some of the puts and takes in the year-end for margins?

Are you expecting increased investment into 4Q like last year? Is there anything else just maybe offsetting potentially higher margin expansion potential into the year-end?

Yes. Brian, thanks for the question. As you kind of look at the margin side, right? Our approach is very similar on the guidance front that we had in Q2. Overall, given all the moving pieces still on the tariff side and things are getting to a better place by the way, with every day now.

But the things are still fluid. So we just wanted to be a little conservative and maintain our full year margin guide from 0 to flat -- flat to 50 basis points, so effectively 20 bps of the middle, the midpoint. So you're right. Look, at this point, we're going to see a bigger improvement in Q4. In that, we have built in some assumptions as we kind of laid out last year, right?

That look, Q4 is a time when we look at once we've done with the strategy, once we've done with the budget, so we have the resources that are lined up along with the strategy to execute in 2026. So yes, to the extent that we end up taking some actions, we built some of that into the guidance process.

And then I know you guys called out China kind of spoke to sort of the headwinds you continue to see there. I think across most geos, you saw strength. But in Western Europe, PQI thought that was maybe a bit weaker than anticipated. Can you kind of speak to what you saw in the quarter?

Is there anything going on in that particular end market and geo? And any views on kind of what the trend line could look like there for the rest of the year?

Yes. Thanks for the question, Brian. Western Europe, certainly we continue to see steady growth in consumables and continuous inkjet marking and coding systems. For PQI down sequentially from Q1, mostly related to timing of new equipment sales.

Looking at the data, there's really nothing concerning here. I will say that year-to-date growth for PQI in Europe is up 6% and certainly with our direct sales force, we're going to continue to monitor and adjust accordingly.

We'll go next to Andrew Krill with Deutsche Bank.

I want to ask another question on Western Europe, actually, I think on a more positive side with Water Quality at a 11% growth in Europe, 2 quarters in a row impressive. So maybe just can you give us some more sense of the opportunity there? I think you said the investments are paying off, but like are you taking share? And maybe like how long could this type of growth persist?

Or do you think we could have a little bit of moderation in the back half of this year?

Yes. Thanks for the question. Certainly, our water business continues to have really great growth there in Europe. And I think what we see as a demarcation relative to U.S., for instance, is that Europe tends to have a stronger focus on water reuse and investing there.

So we see good, strong municipal water reuse and reclaim and so on. And we mentioned before that on the back of some of the structural changes we made in the sales team relative to commercial architecture and really getting back to basics in terms of commercial execution through using VES, I think we're just seeing the team execute really well there, both with focus and rigor in using the tool set. We'll see how things continue to progress here. We've got a positive outlook in terms of ongoing demand and have built that into the guide accordingly.

And Andrew, one thing you see, kind of look at it ties back to the comment that Nathan as well made right on the U.K. side. So overall, as you kind of think of the investments are happening, so there are some secular growth drivers, and we are making the investments as well, as you noticed, we bought AQUAFIDES over there added to the portfolio. So we continue to make the right investments in Europe so that we can sustain the growth.

And then just on July, you mentioned that orders are going well, kind of consistent with what you would expect. And I wanted to ask -- it seems like trade deals across the globe are being -- the handshakes are happening. Just any sign of that is like helping with customer confidence as we go into the back half of the year?

I think it's largely reducing the confusion right? And I think customers they're not necessarily changing their demand patterns over that, right? We remain sort of essential to the daily operations of all of our customers just in terms of being critical to demonstrating clean water, safe food and trusted essential goods. That's going to continue.

But I do think there's less agitation or concern relative to making sure and having things settle down a little bit, which will read through, I think, in confidence. But for our businesses, it's really steady as she goes.

This is Ryan again. Thanks, Andrew, and thanks for everybody that joined the call. We appreciate the interest and engagement. At this time, we do need to end the call.

We knew we have some analysts in the queue that didn't get a chance to ask questions. We'll circle back with you next time around. And as always, I'll be available throughout the day and in the next few days to answer any follow-up questions. Thanks again for joining our Q2 call, and we'll talk to you next time.

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