Detailed narrative
Water Quality Performance and Outlook
The Water Quality segment experienced strong and stable demand across both municipal and industrial markets. Municipal markets are seen as a mid-single-digit grower, with incrementally stronger growth in wastewater due to recycle, reclaim, and reuse drivers. Industrial markets are growing mid- to high single-digits, with strength in data centers, semiconductors, power, and mining.
Trojan UV activity and order book remain strong, with current bookings expected to ship largely in Q4 '25, reflecting the longer cycle nature of this business. The municipal outlook embedded in guidance is pretty steady.
Cost Optimization Program
Veralto initiated a new cost optimization program as part of its continuous improvement mindset, aiming to enhance EPS growth and make its cost structure more competitive. This program will leverage certain functional attributes across the enterprise to improve efficiency while maintaining the decentralized operating model.
Most actions are planned for the end of FY26, with no benefit expected in FY26 guidance. However, 50% of the run-rate savings are anticipated in FY27, and full run-rate savings in FY28, representing a step change to the long-term margin expansion algorithm.
PQI Segment Dynamics
The PQI segment continues to see strong and steady demand from CPG customers for coding and marking, complemented by digital packaging and ingredient solutions, which will be further strengthened by the GlobalVision acquisition. However, packaging and color sales were down high single digits in Q1, primarily due to nonrecurring revenue and weakness in discrete industrial end markets such as automotive, textiles, and building materials.
Management expects incremental recovery in this area and anticipates PQI margins to have similar long-term opportunities as Water Quality.
Capital Allocation Strategy
Veralto deployed approximately $1 billion in capital during Q1 FY26, primarily through two strategic acquisitions (In-Situ and GlobalVision) and opportunistic share repurchases. The company maintains a disciplined approach with a bias for M&A, believing it creates the best long-term value.
However, it reserves the right to utilize capital for share repurchases when market dislocations are observed. The M&A pipeline remains active, with several cultivation activities underway.
China Market Performance
China sales in Q1 FY26 were up low single digits, consistent with recent quarters, indicating a more mature market behavior. The PQI segment led this growth with double-digit increases, benefiting from easier prior-year comparisons. Conversely, Water Quality sales in China were down low single digits, primarily due to the challenging funding environment for municipalities, with government money not yet flowing to support the industry.
Opportunistic sales continue in industrial segments.
Tariff and Cost Inflation Management
The company is well-positioned to manage tariff impact🌐s, with actions taken last year expected to roll over in the second half of FY26. The impact from new Section 232 tariffs is anticipated to be much smaller than in previous years.
Commodity and oil price impacts, potentially influenced by the Middle East conflict, have been baked into the current guidance. Management is actively engaged in discussions with customers regarding pricing and implementing productivity initiatives to mitigate these cost pressures.
Pricing Strategy
Veralto employs a disciplined and surgical approach to pricing across its operating companies, particularly in ChemTreat, leveraging customer intimacy to partner with clients. This strategy aims to offset rising costs while supporting mid- to high single-digit core sales growth. For the full year, pricing is expected to be at the high end of the 100 to 200 basis points range, with the PQI segment potentially exceeding this.