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Please standby. Your program is about to begin. [Operator Instructions] My name is Margo and I will be your conference operator this morning. At this time, I’d like to welcome everyone to Veralto Corporation's Fourth Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [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 February 19. Yesterday, we issued our fourth quarter and full year 2024 news release, earnings presentation and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. In addition, we also issued our 2025 full year and first quarter guidance. 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 slides. Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements, except as required by law. And with that, I'll turn the call over to Jennifer.

Thank you, Ryan and thank you all for joining our call today. I’ll begin with a look back at our 2024 accomplishments, followed by a recap of our fourth quarter performance. From there I will then take you through a detailed analysis of our Q4 results and 2025 guidance. Reflecting on 2024, I am proud of our team for their strong execution in our first full year, as a public company to grow our business, strengthen our portfolio and deliver attractive value creation for all stakeholders. In doing so, three notable accomplishments stand out. First, we delivered on our financial commitments. Second, we increased our growth investments. And third, we demonstrated a disciplined approach to capital allocation, executing strategic actions to improve our portfolio and increase our dividend in conjunction with our earnings growth. Let me expand on each of these. Beginning with our financial performance for the year, we delivered core sales growth, adjusted operating profit margin expansion and adjusted earnings per share growth above our initial guidance. This outcome demonstrates the durability of our businesses fortified by the Veralto Enterprise System. Our simplification of VES and focus on leveraging high impact tools drove sales growth and margin expansion throughout the year. Our results reflect the benefits gained from our team's engagement in focused time and events and leverage of VES growth tools to enhance commercial architecture, improved funnel management and increased lead generation. Our VES focus combined with increased investments in sales, marketing, and R&D enabled us to capitalize on strengthening demand as the year progressed. This resulted in steady sequential Improvement in volume growth, partly attributable to new customer wins and increased market penetration. Across both segments, we delivered mid-single-digit core sales growth in the second half of 2024. On the strength of this growth and strong underlying margin expansion, we accelerated investments to drive future value creation. Specifically, we expanded our direct sales force, augmented our marketing efforts and accelerated innovation in verticals and regions with high return opportunities. We enhanced our talent through new hires and internal development programs and we increased our investment in innovation with our full year R&D expense up 40 basis points year-over-year to about 5% of sales. Our focus on innovation led to several new product and technology launches across our businesses throughout 2024. PQI led the way with digital offerings in packaging and color and a steady cadence of next-gen technology launches in marketing and coding. Videojet has now launched more than a dozen new products over the past two years. Its latest breakthrough, the 7920 UV Laser Marking System launched in the fourth quarter. This laser enhances usability, adaptability and consistency in coding operations and was met with immediate enthusiasm and demand from customers. We shipped our first unit shortly after the product launched in November and continue to see strong demands here in Q1. The UV Laser is optimized for high-quality, permanent coding, bunch of lighter weight flexible films made from mono-material plastics. These flexible films are among the fastest growing substrates in the packaging industry, due to their high levels of recyclability, further supporting our customers’ sustainability goals. We are excited about this new UV Laser Technology, along with many other products and solutions we brought to the market last year. In addition to delivering our financial commitments and increasing our growth investments, our third key accomplishment last year was executing disciplined capital allocation. In 2024, we took steps to improve our portfolio across both segments. This activity ramped in the fourth quarter as we acquired TraceGains, our first acquisition of size, invested in minority stake in Axine Water Technologies and signed an agreement to sell Advanced Vision Technology or AVT, a print inspection product line in our PQI segment with approximately $40 million in annual sales. As we talked about on our Q3 call, TraceGains was acquired early in the fourth quarter. It is a leading provider of cloud-based software solutions that enable connected data and digital workflow management for consumer brands. TraceGains’ digital solutions help customers innovate new recipes faster and significantly reduces time to market for new products. Additionally, it helps increased transparency to ingredient inputs for food & beverage safety. The acquisition of TraceGains in combination with our Esko, business strategically expands our digital offering and provides us the opportunity to deliver greater value to consumer brands as they digitize critical workflows with connected data across new product development, compliance and packaging. The integration of TraceGains is going well. Our integration team is executing on all fronts. The customer response has been very positive and the team at TraceGains has quickly embraced VES. TraceGains’ fourth quarter core sales growth exceeded 20% year-over-year and importantly, we are on track with our growth investments. Late in the fourth quarter Esko entered into an agreement to sell its AVT product line. This sale is expected to be completed in the first quarter of 2025. This divestiture is another example of our stewardship of the portfolio. With Esko’s focus on providing source-to-shelf, digital workflow solutions for our CPG customers, we believe new ownership of AVT will provide the necessary focus to drive its growth and innovation. In combination, acquiring TraceGains and divesting AVT enhances our packaging and color portfolio. Both deals are immediately accretive to PQI’s core growth rate, gross margin and recurring revenue. In Water Quality, we have also taken actions to improve our portfolio. As previously discussed, since we're also spin-off, we have strategically exited thee product lines that were not aligned with our long-term value creation strategy. In the fourth quarter, we made a minority investment in Axine, a provider of electrochemical oxidation technology, used to destroy contaminants in water including PFAS. Our Water Quality team has a long proven track record of developing and commercializing technologies that help customers detect and destroy emerging contaminants. A key part of our growth strategy in Water Quality is developing fit-for-purpose solutions to help our customers meet complex challenges. We believe Axine’s electrochemical oxidation technology provides a promising solution for difficult-to-treat organic contaminants and that our commercial partnership with Axine will accelerate technology adoption over time. Overall, we are pleased with the progress we made in curating our portfolio in 2024. Moving forward, we expect acquisition growth to be a key value creation lever. The pipelines for both segments are full and active and we continue to be disciplined in our approach to capital allocation. Looking now at 2025, we are starting off the year with an improved portfolio, positive trends in our end-markets and a stronger financial position. Demand across our key end-markets has strengthened compared to this time last year highlighted by strong demand for industrial water treatment in North America and improved demand in consumer packaged goods markets globally. For the full year 2025, we are targeting low to mid-single-digit core sales growth with strong incremental margins, solid, earnings growth and strong cash generation and we believe the durability of our businesses, fortified by the Veralto Enterprise System, our competitive advantages that enable us to consistently grow and improve even in dynamic macro environments. Looking at our financial results for the full year 2024, total sales grew 3.4% year-over-year to just under 5.2 billion, an all-time high. We delivered 3.7% core sales growth with 80 points of adjusted operating profit margin expansion. And adjusted earnings per share grew 11% to $3.54 per share. Notably, we exceeded our initial guidance on all three of these metrics and we generated $820 million of free cash flow further strengthening our financial position. We ended the year with $1.1 billion of cash on hand and net leverage at 1.2 times. Overall, I'm pleased with the growth in margin expansion we delivered in 2024. Every operating company across both segments contributed core sales growth with positive volume. Our Water Quality team delivered 3.9% core sales growth with 50 basis points of adjusted operating profit margin expansion. They set all-time highs with annual sales of over $3 billion and adjusted operating profit margin of 25%. And our PQI team delivered 3.3% core sales growth with 160 basis points of adjusted operating profit margin expansion. They also reached all-time highs with over $2 billion in sales and adjusted operating profit margin of 27%. I'm proud of our teams across the world for their strong commercial and operational execution in support of our customers. We capped off a strong 2024 with solid fourth quarter results. Core sales grew 4.6%, led by volume growth with both segments growing core sales by more than 4%. Adjusted earnings per share grew 9%, year-over-year to $0.95. And free cash flow generation was strong at $263 million in the fourth quarter, further strengthening our financial position. Looking at core sales growth by geography and end-market for the fourth quarter, growth across the enterprise was broad-based across key verticals and regions. And our commercial teams executed well, leveraging our VES growth tools and investments made earlier in the year. North America and Western Europe, which comprise about 70% of our total sales grew nearly 6%. And high growth markets grew low-single-digits year-over-year. In North America, core sales grew 5.8% within both segments. In Water Quality, we continue to capitalize on strong demand for our Chemical Water Treatment Solutions, which grew high-single-digits in North America. From an Industrial end-market perspective, this growth was broad-based with the strongest growth in food & beverage, chemical processing and power generation. We also continue to see strong growth for Trojan's UV systems at municipalities in North. America, primarily related to water reuse. We're also continue to benefit from strong secular drivers in water conservation, reclamation and reuse.as we help our customers achieve their sustainability goals. Over the long term, we expect the secular trends to drive continued growth opportunities, given the scarcity of water today, coupled with more frequent, severe weather events and increasing water usage from industry, such a datacenters, which consume large quantities of water for cooling. It also includes traditional industries, ranging from power generation to food & beverage processing. Both our Water Treatment and Analytics businesses are poised to benefit from increased industrial activity in North America. At PQI, core sales in North America also grew 5.8% in Q4 with mid-single-digit growth in both packaging and color and marking and coding. PQI’s growth in North America was largely driven by strong growth in equipment sales. This reflects the combination of improving end-market demand from CPG customers and market penetration from our strategic initiatives. Specifically, in North America, Videojet focused on new customer wins, differentiated new product launches and VES-driven commercial excellence. In Western Europe, we saw continued momentum with core sales growth of 5.8% year-over-year led by 7.3% growth in Water Quality sales and 4.4% growth in PQI. The sales growth in Western Europe was largely driven by strong commercial execution by our Water Analytics team. Additionally, we drove growth across PQI in both our marking and coding and packaging and color businesses. In high growth markets, core sales increased 1.5% in the fourth quarter, led by Latin America and India. In China PQI continued to drive solid year-over-year core sales growth. However, similar to our third quarter performance, PQI’s growth in China was offset by lower sales in Water Quality. This is primarily due to ongoing soft demand for Water Analytics, and a lower level of UV System installations for chip processing, which were exceptionally strong in the fourth quarter of 2023. Total company sales into China in Q4 were in line with our quarterly average for the year. We continue to view demand for our products in China as stable at low levels and do not expect China sales to grow in 2025. Overall, we delivered solid fourth quarter financial results, on the back of strong commercial execution, while continuing to invest in future value creation. At this time, I'll turn the call over to Sameer to provide details on our fourth quarter results and 2025 guidance.

Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the fourth quarter. Total sales grew 4.4% on a year-over-year basis to over $1.3 billion. Currency was a 50 basis points headwind year-over-year and acquisitions contributed 30 basis points of growth, primarily driven by TraceGains. Core sales grew 4.6%. Our core sales growth was primarily driven by volume, which grew 3.1% year-over-year. Price contributed 1.5% growth this quarter, in line with historical levels. Our recurring revenue grew mid-single-digits year-over-year and comprised 59% of our total sales. The percentage of recurring revenue is in line with 2023 levels. However, it is down sequentially, primarily due to high-single-digit, sequential growth in non-recurring revenue, specifically, Water Testing Instrumentation and Marking and Coding Equipment. Gross profit increased 7% year-over-year to $801 million. Gross profit margin improved 170 basis points year-over-year to 159.6%, primarily driven by pricing. Adjusted operating profit increased 5% year-over-year and adjusted operating profit margin was flat year- over-year at 23.8%. As Jennifer mentioned, in the fourth quarter, we continue to increase investments in our direct sales and marketing efforts on both a year-over-year and sequential basis. On a year-over-year basis, R&D as a percent of sales increased 70 basis points or $12 million to 5.1%. In addition, our cost optimization investments in this quarter increased by about $7 million on sequential basis. These investments are aligned with our strategic growth plans. Looking at EPS for Q4, adjusted earnings per share grew 9% year-over-year to $0.95 per share. As compared to our guidance, adjusted EPS came in stronger, primarily due to lower corporate expenses and a lower tax rate. These benefits more than offset a headwind from currency. As compared to our guidance expectations, strengthening of the US dollar during the quarter resulted in about 2% or approximately $25 million headwind to sales, primarily due to translation of foreign currencies. This led to a headwind of about $7 million to adjusted operating profit or $0.02 to adjusted earnings per share, as compared to our guidance assumptions. In the fourth quarter, we generated robust free cash flow of $263 million or 116% conversion of GAAP net income. Moving on, I'll cover the segment highlights, starting with Water Quality. Our Water Quality segment delivered $811 million of sales, up 3.7% on a year-over-year basis. Currency was a 60 basis points headwind. Divestitures reduced total sales by 60 basis points versus the prior period. Core sales grew 4.9% year-over-year. Water Quality’s core sales growth was led by volume, which grew 3.3%. Pricing contributed 1.6% growth year-over-year. 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 a good volume growth in sales of analytical instruments, reagents and chemistries to municipalities Recurring sales grew mid-single-digits and equipment growth was up low-single-digits year-over-year. Adjusted operating profit increased 2% year-over-year to $207 million and adjusted operating profit margin was 25.5%, marking Water Quality’s highest quarterly margin performance this year. Moving to the next page, sales in our PQI segment grew 5.4% year-over-year to $534 million in the fourth quarter. Currency was a 30 basis points headwind and acquisitions contributed 1.6% growth in the quarter. Core sales grew 4.1%, with volume up 2.9%. Price increases contributed 1.3% to the year-over-year growth in core sales. PQI’s recurring revenue grew high-single-digits year-over-year, with positive momentum across the portfolio. PQI’s equipment sales grew low-single-digits, primarily driven by marking and coding systems. On a sequential basis, equipment sales were up mid-single-digits, driven largely by marking and coding equipment. Breaking this down by business, marking and coding core sales grew mid-single-digits, driven by growth in both consumables and equipment, a strongest growth both in food & beverage applications within our CPG customer base. In our packaging and color business, core sales grew mid-single-digits year-over-year led by growth in both recurring software and subscription revenue. PQI's, adjusted operating profit was $133 million in the fourth quarter, up $10 million over the prior resulting in adjusted operating profit margin of 24.9%. That represents a 60 basis points improvement in adjusted operating profit margin over the prior year period. The margin expansion was primarily due to favorable currency benefit as the Argentine peso devaluation in Q4 2023 did not repeat. This benefit was partially offset by increased investments in sales, marketing, and R&D, along with a higher mix of equipment sales and dilution from the TraceGains acquisition. For the full year, PQI delivered 3.3% core sales growth and 160 basis points of adjusted operating profit margin expansion. Overall, it was a very good year for PQI as we continue to see positive momentum in our commercial execution and end-market environment as we enter 2025. Turning now to our balance sheet and cash flow. In Q4, we generated $285 million of cash from operations. We invested $22 million in capital expenditures. Free cash flow was $263 million in the quarter or 116% conversion of GAAP net income. At the end of the fourth quarter, gross debt was $2.6 billion and cash on hand was $1.1 billion. Net debt was $1.5 billion, resulting in net leverage of 1.2 times. As Jennifer shared, early in the fourth quarter, we acquired TraceGains at a gross purchase price of $350 million. The deal was funded with cash on hand. We also invested approximately $15 million to establish a minority interest in Axine Water Technologies. Even after these investments, our financial position is strong and we continue to have flexibility in how we deploy capital. To that point, in the fourth quarter, our Board of Directors approved a 22% increase in our quarterly dividend. This is consistent with our approach to increase the dividend as we grow our earnings. Over the long term however, our bias remains to create long-term shareholder value through M&A. We have an attractive pipeline of opportunities in both Water Quality and PQI. We remain disciplined in our approach as we continue to deploy capital to create long-term shareholder value. Turning now to our guidance for 2025 beginning with our expectations for the full year. We are targeting core sales growth in the low to mid-single-digit range on a year-over-year basis. At the midpoint of our guidance, we are assuming core sales growth, consistent with the full year 2024. This assumes pricing in the range of 100 to 200 basis points, consistent with our historical range. We expect net acquisitions and divestitures to be neutral to growth as potential sales contribution from TraceGains is largely offset by the impact of the AVT divestiture. Our full year guidance assumes that currency rates as of December 31st 2024 prevail for the remainder of the year. Based on this assumption, currency is approximately 2% headwind to total sales on a year-over-year basis. This falls through roughly in line with our adjusted operating profit margin resulting in operating profit, dollar headwind of approximately $25 million. This represents an $0.08 headwind to adjusted earnings per share. Our guidance assumes corporate expense at a full annual runrate between $100 million to $105 million. Looking at adjusted operating profit margin, we're targeting 25 to 50 basis points of improvement in 2025. This assumes margin expansion at both segments and total company incremental margins around 40%. Our adjusted EPS guidance for the full year 2025 is in the range of $3.60 per share to $3.70 per share. This assumes an effective tax rate of approximately 23%. Excluding the $0.08 per share currency headwind, our adjusted EPS guidance represents about 5% year-over-year growth at the midpoint and about 7% growth at the high end of the range and we are targeting free cash flow conversion between 90% to 100% of GAAP net income. This assumes CapEx in the range of 1% to 1.5% of sales and a modest working capital investment to support our growth. Looking now at Q1 2025, we expect core sales to grow in low to mid-single-digit range across both segments. Currency translation is expected to be approximately 2% year-over-year headwind to sales. We anticipate adjusted operating profit margin in the range of 24% to 24.5%. And our Q1 2025 guidance for adjusted EPS is $0.84 to $0. 88 per share. This assumes a $0.02 currency headwind. That concludes my prepared remarks. At this point, I'll turn the call back over to Jennifer for closing remarks.

Thanks, Sameer. In summary, we capped off the strong first year as a public company. In 2024, we delivered on our commitments, invested in our future and improved our portfolio. We entered 2025 with a more positive outlook on our end-markets and momentum throughout the enterprise. Longer-term, we are confident that the essential need for our technology solutions and the strong thematic growth drivers across our end-markets will provide steady durable growth. And we will continue to leverage the power of the Veralto Enterprise System to drive, continuous improvement and bolster our agility through dynamic macro environments. Our financial position remains strong and we continue to evaluate additional strategic opportunities within our disciplined capital allocation framework of market, company, and valuation. We are excited about the bright future ahead for Veralto 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're happy to take your questions.

[Operator Instructions] We'll take our very first question from Andy Kaplowitz from Citigroup. Please go ahead.

Hi, good morning. This is Natalia Bak on behalf of Andy Kaplowitz.

Hi Natalia.

First question I want to ask is, if you could break down or give more color into how you're thinking about your segments in terms of margin expansion? Do they both grow in that 25 to 50 plus range? And TraceGains weighing you down a bit more in PQI?

Hey Natalia. This is Sameer. Yeah, I think the - as you kind of think about the margin expansion, it's very similar. In fact, I wish we just can take a step back and look at our overall company guide and how the segments are going to be contributing, for both the segments you should look at the core growth in a very similar place, low-single-digits to make-single-digit and also from the margin expansion perspective, pretty similar contribution coming from both the segments.

All right. That’s helpful. And then, second question I wanted to ask is, just curious about the progression of DDR. What specific initiatives have you implemented under VES to drive composition fees and enhanced margin? And how has it been evolving since you went public? Where do you see the most opportunity for further margin expansion in 2025? And how are you balancing those increasing growth investments for both improving margin performance?

Thanks for the question Natalia. I think we feel very good about how we have honed our VES toolset. Certainly, we had a big push in 2024 really to drive growth in commercial execution, but we also drove considerable amounts of margin expansion in just good factory discipline. So, the things that we did in bringing the VES toolset over from Danaher post spin or to really narrow the focus and drive a greater depth of application and competency in the use of those tools. There are 5 or 6 tools that sit in our fundamentals and those fundamentals are relevant to everyone, whether you sit in a function or you sit in an operating company. And so, we feel good about both our deployment there for a commercial application, accelerate new product development and factory focused optimization.

All right. That's helpful. Thank you so much.

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

Thank you. Good morning to everyone.

Good morning.

Hey Deane.

Good morning. Hey, you all know I have covered the Danaher for so many years. So whenever I hear about growth investments done at year end, that’s really read out of the Danaher playbook. Because it's a good sign you're getting – you are doing it from a position of strength. There's a way to jumpstart the New Year. So, I'm assuming that applies to you all. And if I look at the margin past couple of quarters sequentially down a bit. Is it fair to say that that's the impact of the growth investments? Can you size that impact and anything about the benefits and am I thinking about it at the right way?

Yeah. Thanks, Deane. As you know, some of us here in the room have spent nearly a lifetime at Danaher. And so the playbook there is very familiar. I think it’s right, we took the opportunity here on the back of strong growth to continue to reinvest in the business in areas that we think will set us up for a good 2025. So, that's spot on and maybe I'll turn it over to Sameer to talk about the rest of your question.

Thanks, Jennifer. Yeah, Deane, if you kind of look the sequential margin right, the first one is really TraceGains. Roughly 70 basis points dilutive to the PQI margins, right? But it really sets up really well in 2025 as you kind of look to driving the growth in PQI. The second one is actually, great, as you kind of think about the net equipment sales coming back, so the mix of the equipment in PQI, was little higher similarly in the Water Quality, as well. Again, as the installed base grows, as you know, our future recurring revenue grows. So it’s just great to have that. And last for the point that you kind of made Deane, really as you're kind of think about the investments in R&D, commercial, cost optimization, these things are all as you outlined very intentional, very deliberate actions to make sure that we hit the ground running in 2025. So, I think, as Jennifer also said, playbook is very similar. But our focus is long-term value creation, and if you kind of zoom out for our full year 2025, we delivered 80 basis points in the full year, while ramping up as a full year in the First full year as a public company, while investing in sales and marketing, while investing in R&D, all those things really positioning us, really well as we kind of start 2025. So we feel good about the margin expansion.

It’s really helpful and I appreciate all those specifics. And the second question, you might - I might be tempted to ask about TraceGains, because that's, kind of the marquee first deal. But I'm actually more interested in talking about the investment in Axine. This electrochemical oxidation technology looks really promising. We’ve spoken with Axine before. They are established. And it looks like it could have good application for on-site PFAS destruction because they’ve already proven the technology in other complex molecules. So, look it’s still early. I get that. I'm most interested in the strategy here of using M&A as a proxy for R&D, because you can make a really smart investment for $15 million with potentially significant payoff down the road. Because your funnel have more candidates – investment candidates like this because pound-for-pound, that’s a great way to be spending your capital.

Yeah, thanks for the question Deane. Look, I - we have a number of different levers to pull relative to capital allocation and we look at all sorts of modalities there to create long-term shareholder value. I think we feel good about our level of investment in Axine just relative to proving out the technology, making sure that it matures in the right way relative to the markets that we serve. And we've got a very competent and capable science and technology team that's constantly canvasing the market for good opportunities to engage with other partners, be that in a minority investment or be that outright acquisition. So, I think everything's on the table there.

Really appreciate it. Thank you.

Thanks, Deane.

And our next question comes from Mike Halloran with Baird. Please go ahead.

Hey morning, everyone.

Morning. Mike

Let’s just start with end-markets and kind of a loose start. What's changed as we sit here today versus the last time we talked, because I think 3Q earnings? It sounds like you're pretty constructive coming into the year. It's just kind of continuation the trends you're seeing then? Or is there anything new that you think has developed over this period of time?

I think it's largely a continuation of what we seen Mike. We've talked a lot about the strength in our Industrial Water businesses, given the number of very thirsty industries, datacenters, power generation and so on. That continues. We're seeing good steady growth in Analytics, as well, particularly in the US, and in Europe on the back of the secular drivers that require clean water for the population that they serve. And then, I think on the PQI side, we see the continued recovery in the strength of CPG markets. We saw actually the sixth consecutive quarter of mid-single-digits to high-single-digit recurring revenue. We know that that recurring revenue always precedes sort of equipment growth. And now we've seen three consecutive quarters of year-over-year growth and equipment sales with in fact, equipment sales coming in better than expected here in the fourth quarter. So we think we're set up well, given the macro and we enter the year here with continued momentum.

I appreciate that. And then, when you think about the foundation for the guide for the year, I understand all the moving pieces. You gave a lot of color. Just two quick questions related to that. One, is the cadencing through the year expected to be kind of consistent with normal seasonality? And two, is the assumption that things just kind of hold trend as we sit here today? Or is there any improvement or decel assumed in what your end-markets look like?

Hey Mike. Yeah, from the guide perspective, as kind of look at the top line of the growth side, it's going to be pretty consistent as Jennifer just said, right? Yeah, from the CPG markets perspective, on a water perspective, you're seeing some good trends. Feel really good about as we're going to enter 2025. Those trends are continuing. So overall, from a seasonality perspective, as you know, we don't have a whole lot of seasonality maybe on the equipment side, instrument side, we see a little more pull through in Q4 as people are kind of managing the budgets. But overall, not a whole lot of seasonality in our business. So, but coming into 2025, we feel pretty good about the trends continuing and then – and the numbers.

Great. Really appreciate everyone. Thank you.

Thanks Mike.

We'll take our next question from Nathan Jones from Stifel. Please go ahead.

Good morning, everyone.

Good morning, Nathan.

Couple questions - I got a couple questions around margins. When comparing the margin expansion in ’24 with ’25, ramped up R&D investments to 40 basis points. So without that ‘24 would have been up like 120 basis points in the guidance for ‘25 on similar revenue growth is ‘25 to 50. But maybe you can just give us some more color on where you got that extra margin expansion in, so that maybe you're not anticipating in 2025? I'll stop there.

Yeah, Nathan, I'll start off with that. As you kind of look at it from like 24 to 25, right, of course in the 24 the margin expansion was pretty broad based really as Jennifer said all the way from the factory floor down to the commercial operations and functions. Get offsets a little bit by TraceGains and some of the investments that we continue to make. As we move into 2025, from a price cost differential perspective, we still expect to be positive. I mean, as positive of 2024. We expect that to continue. R&D will be in a very similar level, Nathan. Roughly 5% of the sales, so that trend will we expect to continue in 2025 and that's sort of stuff is really some really targeted investments on the commercial side really into sales and marketing as we continue to drive the growth. So that's kind of like how it’s kind of panning out the 25 to 50 basis points. Still going to be pretty much - pretty broad-based, pretty across the board.

Thanks for that. And I guess I'll ask one on incremental margins. Jennifer, you talked about 40% incremental margins in 2025. Eight years probably, it relatively of a small change at low to mid-single-digit growth, but I think originally when the business spun out, you guys had talked about 30% to 35% incremental margins. Just wondering if you can comment on is that’s structurally high now or is it a one-off this year. And if it is structurally higher, what's driven that?

Yeah, Nathan, if you kind of look at 30% to 35%, right, that's a long-term view. We expect to make the right investments in the sales, marketing, R&D to continue to position the business for future growth as well, right. 2024, we feel really good about what the teams have been able to deliver. We are north of 45%, close to 50% on the fall through. For 2024, given the kind of investments that we have laid out and have visibility into what we're going to be doing in 2025, we feel pretty good about delivering 40%. All right? So the year the year-over-year depending on some of the Investments things will change, but I think if you think about a long-term value creation frame 30% 35% is a good one to keep.

Great. Thanks for taking my question.

Thanks, Nathan.

Thank you. And next, we'll go to Saree Boroditsky with Jefferies. Please. Go ahead.

Good morning. This is James on for Saree. Thanks for taking questions this morning.

Good morning, James.

I want to kind of touch on – good morning. I wanted to touch on the CPG market little bit more. I mean, you talked about like continued threshold recovery path here over the last several quarters. So can you provide a little more color on the recovery path like how far are we from like the normalization in our industry? And like what percentage of - like revenue is still missing from the like, last, like normal like date of CPG market?

Yeah, I mean, I think the way we look at the recovery of CPG market is, mothball manufacturing lines will be turned back on and those will require spare parts, consumables, that then is followed by equipment upgrades. We are not yet at the point where we're seeing line expansions per se and new builds. So that would be another sort of extension of the recovery. But given the fact that we've seen six consecutive quarters of mid to high-single-digit recurring revenue growth, which means those lines are coming back on and using ink and solvent spare parts, filters and so on and we've seen three consecutive quarters of year-over-year growth in equipment sales. It suggests that we're well into the recovery with the prospect of new builds still ahead of us should that happen.

Got it. Great. Thanks for the color. And I guess, I wanted to understand the like portfolio optimization like initiative a little bit better here. So like how much are left to do here? Like what are some spaces that you can still do and how will like this initiative affect the top-line and potentially margin, like in 2025?

Yeah, the way we think about this is that every product line has to earn its right to be in the portfolio. And I think as an independent enterprise, we are tasked with being good stewards of the portfolio in terms of making sure that products that are part of the portfolio and services are at or better than the fleet average and where we've got product lines that are below the fleet average in terms of core growth and operating profit we'll look to make changes there. Now, those changes may be additional investments to get them on the right track. It may be that we attenuate them over time and it may be that we divest them outright. But I think it's safe to assume that we're always looking to improve our portfolio and moving the portfolio towards nominally higher growth rates and increasing margins.

Great. Thanks for the color. I will visit there.

Thank you. And we'll next go to Andrew Buscaglia with BNP. Please go ahead.

Hi, good morning, everyone.

Morning, Andrew.

So I want to ask you a high-level question. You guys had a great year and the stock also had a pretty good year, but it sort of broke down the stock that is towards the end of the year on concerns around a Trump Administration. What that means for your stock I think? And you've got a couple months to think about it now. So I am wondering at first, it was concerns around what it means for Water Quality, but then it kind of morphed into is this good or bad for PQI and you can hear different arguments on both sides. I was wondering, what are your latest thoughts for both segments under this administration.

Yeah. We are certainly operating in a fairly dynamic environment, but from a portfolio standpoint, 85% of our sales are tied to water, food, and essential goods. It's never been out of style to protect public health and safety and regulations to help us do that. But these are issues that are important to everyone, regardless of the political affiliation. So I would say sort of on the water side, because we are endemic to the operation environment of discharging clean water and cleaning up industrial water, waste water and so on, I think we feel like that is still going to be a need, as long as we've got people on the planet, they're going to need clean water. On the PQI side, a lot of what we are focused on there is securing the inherent safety of the food supply chain, right? And, we have a need to or consumer product brands have a need to ensure that what they are distributing to their consumers. You know that the ingredients, the formularies and so on are safe, a traceable, and can be recalled in the event that there's some sort of public health or safety issue. So, we think even in the current environment, we've got strength in both of these businesses. These products and services not only provide essential public health and safety information. But in many cases, the products and services we provide, provide economic benefits to customers, as well. So, again, this is not a CapEx-intensive set of businesses. We are focused on the daily operations and the essential need of our products and services there are we believe going to remain

Yeah. Okay. And maybe along those lines, with tariffs is part of your guidance implied some disruption around tariffs and can you comment around the latest - your latest thoughts around China, Mexico and, and Canadian tariffs, how that might impact you?

Yeah, Andrew, in the guidance, we have not reflected any sort of a sustained impact from the tariffs. Look, it's a very fluid and dynamic situation. But if you kind of step back, we procure our materials from globally. We have a global manufacturing footprint. And over the years through the supply chain disruptions and things that have happened, we feel pretty good about the changes that the operations have made over the last four, five years. So really positioned and fortify our supply chain. So feel pretty good. We are keeping an eye on, just like you guys on the things that are coming out, but overall, we feel pretty good. But if you say, hey, there's a sustained level of tariff changes, that's not baked into the guide.

Okay. All right. Thank you.

Thanks, Andrew.

Thank you. We'll take our next question from John McNulty with BMO Capital Markets. Please go ahead.

Yeah, good morning. Thanks for taking my question. Maybe just a couple on the water side. So, you highlighted some of the growth that you were seeing were was really in the food & beverage and on the power side. Those striking is relatively stable markets. So is the bulk of that share gain and if so, I guess, can you help us to understand kind of what drove that? Was it some of the investments you've been making in North America or are there other things that we should be thinking about?

Yeah, I mean, I think, we participate in a well-diversified set of markets with respect to our water business and the two that you cite there are certainly the strong growing industrial markets that we experienced in 2024. But the reality is these shift over time and we have good agility in pivoting our sales force to where the growth is coming from. Generally we've been up year-over-year in most of our markets and we continue to feel good about industrial production and the need for our products and services, particularly as reshoring comes back to the US and so on.

Got it. Fair enough. And then, maybe just one question on the datacenter side. There's some growing excitement around directed chip cooling. There's also just an increase in general use. I guess, can you speak to whether you're agnostic as to how datacenters cool going forward and some of the growth that you're seeing in terms of the opportunities from the datacenter side?

Yeah, I mean, I think the predominant focus here for us is our water cooled applications, right? But I would say that we have a very strong science and technology team on the ground that's regularly canvasing the customer base to understand sort of paint points and technology changes. I would say our mid-single-digit growth algorithm is really not tied to sort of single industry here. It's going to be broad-based and we believe that the growth in datacenters and power generation actually needed to run those centers will continue to be a potential - have potential to be a meaningful growth driver certainly throughout our treatment business.

Great. Thanks very much for the color.

And next we're going to go to Andrew Krill with Deutsche Bank. Please go ahead.

Hi, thanks. Good morning, everyone. Looking at free cash flow, I know the guidance 90% to 100% is a little below your medium-term target of 100% and extra working capital was cited. So just, should we be thinking that’s kind of a one-time 2025 event? And that in 2026, we get back that 100% or so? And are there any other factors you could call out for this year on what’s CPG below 100%?

Yeah. Hey, Andrew this - if you kind of look at the free cash flow conversion, yes, we had a pretty solid year in 2024 with a 98% conversion of GAAP net income. As you kind of move into 2025, there are really two things because of which we guided a little bit below. And one of the reasons is on the CapEx site, as you know historically, we’ve been at least for the last three years, we’ve been – CapEx is kind of like close to 1% of revenue. We've guided towards 1% to 1.5% that's a gain mostly tied to some of the growth investments that we are making in our sort of physical asset base. In 2025, some it’s just a good stewardship of the asset base. So as we kind of just looking at the CapEx going to 1% to 1.5% of revenue that's impact of only 4% on the free cash flow conversion. And the other one that we built in is, given the pretty dynamic world macro that we are living in just from the working capital perspective, we modeled it a little bit higher working capital just to support the business and manage all the supply chain things from the tariffs that we are seeing. Those are two – really the two things as things normalize for 2025, of course we expect it to back up.

Okay. That makes perfect sense. That is a good segue. Following up on tariffs, have you dialed what your sourcing is maybe for COGS from China, Mexico and Canada? And would any of those particular paint points where are you not in regions or regions sales? I believe some of that like Trojan have – has pretty meaningful cam exposure or just any help or quantification there would be great. Thank you.

Yeah, thanks for the question, Andrew. We started several years ago, full decade certainly to source raw materials and semi-finished goods globally. We got a diversified number of manufacturing locations and we've diversified the supply chain accordingly. Certainly VES provides us the tools to proactively deal with countermeasures for different scenarios. And obviously, we're focused on controlling what we control. Relative to exposure, our primary exposure in Canada is Trojan as you appropriately cited, which is headquartered in Ontario. We have taken actions there to localize consumables and spare parts for Trojan in the US to derisk any supply chain disruption that we would see. It also gives us an opportunity to provide more agility in serving customers. I mean, I think the way to think about this is, is all told Trojan’s annual sales in the US are less than 5% of our total - for all those sales annually. So, we, we think we're well positioned to sort of weather the storm here. And we've got VES on our side to respond with agility and rigor.

Great. And just real quick on China, because I think it is 78% of sales it’s a bit bigger than some peers. Is that fair that’s mostly in region for region or that would be like headquarter imbalance?

Yeah, we've spent actually a longer period of time diversifying our supply chain around what we have in China. We have a good deal of in China for China. We certainly wouldn't be disrupted by any tariff changes. But again, we have spent the last several years diversifying that supply chain as well, and think we're well, positioned to be able to address any headwinds that we might see there.

Great. Thank you very much.

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

Hey, good morning, everyone. Thanks for squeezing me in. Just wanted to go back to a couple of margin questions I guess, first off, on, on the PQI side, the 350 basis point margin contraction sequentially. I know part of that seems to be the higher mix of equipment sales. When we kind of back into it, it doesn’t seem to explain the entire bridge. Can you kind of deconstruct the 350 basis points for us across different moving sectors?

Hey, Brian. This is Sameer. Yeah, as I kind of outlined earlier right, the first one of course is a TraceGains. That's almost 70 basis points dilutive to PQI on a sequential basis. The next one as we kind of talked about some of the cost optimizations actions we took in my prepared remarks I highlighted $7 million higher on a sequential basis. Majority of that is in PQI. That’s 120-ish kind of basis points, little more than that for PQI. And I would say the third one is, as you kind of think about the R&D sequentially up as well as tied to the investments you are making to drive the future growth in the business. On a sequential basis, majority of the jump is actually tied to PQI, as well. And then last one you add is the higher mix of equipment sales which again really help us expand the installed base for our future recurring revenue. So those are the four things, you add them up, you kind of balance out the 300 basis points gap that you laid out.

Yeah, I guess, fare to assume some of those factors do spillover to the early part. I guess, if I look at the Q1 guide, it implies margins are going to be down a few tens of BPS year-on-year despite the low-single-digit growth. I know some of that is FX, but then your full year guide implies margin growth through the year off of Q1 with the same FX assumption. So, maybe just kind of walk through the margin cadence, what’s happening in Q1 that doesn’t repeat through the rest of the year? What margin gains are you seeing start to play out off of the back of Q1. Thank you.

Yeah. No, I think it's going to move from Q4 to Q1, Brian. Not a whole lot of these things are spilling over, right? Look R&D on a sequential basis that should be consistent at higher level. And I would save cost optimization stuff, there's nothing is spilling over into Q1. Really as you kind of look at from anything that's moving from this year to next is TraceGains is going to be as we highlighted, it’s going to be a little bit of dilutive upfront as we continue to drive it's 20% growth business. So we have to make the right investments to make sure we are capitalizing on that. Those investments will be and then the mix, the trends we that we are seeing in the higher mix of equipment sales and PQI continues maybe a little bit of impact from that. But nothing, nothing more than that that’s kind of moving on or spilling over from Q4 to Q1.

Thank you. And at this time, I'll turn the call back over to Mr. Taylor for final remarks.

Thanks, Margo, and thanks everyone for joining us on the call. We appreciate the interest and engagement. As usual, we'll be around for follow-up questions. Just reach out to me if you'd like to ask anything to follow-up on the quarter or the guide for 20025. Thank you so much. And that concludes our call. We'll talk to you next time.