Ryan Taylor:

Good morning, everyone, and 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 & Presentations. A replay of this call will be available until August 9. Before we begin, I'd like to highlight a few recent disclosures. On July 24, we issued our 2024 sustainability report. That report can be viewed on our main website under Sustainability or on our Investor website under Corporate Governance. Yesterday, we issued our second quarter news release, earnings presentation, and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. Additionally, our Form 10-Q was filed yesterday. These materials are available in the Investors section of our website under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are 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 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. With that, I'll turn the call over to Jennifer.

Sameer Ralhan:

Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the second quarter on Slide 8. Net sales grew 2.8% on a year-over-year basis to about $1.29 billion. Core sales grew 3.8%. Currency was an 80 basis points headwind or approximately $10 million. And the small divestiture of Salsnes was a modest headwind. Our core growth in this quarter was balanced, with both volume and price increases driving our growth. Price contributed 2% growth in this quarter, in line with our expectations and historical levels. Volume grew 1.8%, with positive volume growth across both Water Quality and PQI. This marks the first quarter since the second quarter of 2022 in which volume grew across both segments. Our recurring revenue grew mid-single digits year-over-year and comprised 62% of our total sales. We expanded margins at both segments through strong operational leverage, improved productivity, and cost optimization. Gross profit increased 7% year-over-year to $774 million. Gross profit margin improved 230 basis points year-over-year to 60%, reflecting the benefits of pricing, as well as improved productivity and reduced material costs. Adjusted operating profit increased 5% year-over-year and adjusted operating profit margin expanded 70 basis points to 24%. We delivered strong margin expansion, while investing in our sales and marketing efforts to drive future growth. We also increased our R&D investments, with R&D as a percent of sales increasing 20 basis points over the prior-year period. These investments are aligned with our strategic growth plans and we expect to continue to fund ongoing growth investments. Looking at EPS for second quarter, adjusted earnings per share grew 6% year-over-year to $0.85. And free cash flow was $240 million, down from the prior year, primarily due to standalone public company costs and cash tax payments, which were not incurred in the prior-year period. Moving on, I'll cover the segment highlights, starting with Water Quality on Slide 9. Our Water Quality segment delivered $777 million of sales, up 2.8% on a year-over-year basis. Currency was an 80 basis points headwind and the divestiture of Salsnes had 40 basis points impact versus the prior-year period. In addition to this divestiture, small product lines that were strategically exited in the fourth quarter of 2023 resulted in approximately 80 basis points headwind to core growth for the Water Quality segment in the second quarter. Despite this headwind, core sales grew 4% year-over-year. Pricing contributed 2.4% and volume growth contributed 1.6% to year-over-year core sales growth. Our 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 growth in sales of lab instrumentation, reagents, and chemistries to municipalities. Recurring sales across the Water Quality segment grew mid-single digits. Adjusted operating profit increased 5.5% year-over-year to $192 million, and adjusted operating profit margin increased 70 basis points to 24.7%. The increase in profitability and margin reflects strong pricing execution, leverage on volume growth, and improved productivity. To a lesser extent, our adjusted operating profit margin also benefited from a favorable sales mix this quarter. Moving to the next page, our PQI segment delivered sales of $511 million in the second quarter, up 2.7% year-over-year. Currency was a 70 basis point headwind. Core sales grew 3.4%. Positive volume contributed 2% growth and price increases contributed 1.4% to the year-over-year core sales growth. PQI's recurring sales grew mid-single digits year-over-year for the fourth consecutive quarter with growth across the portfolio. Recurring revenue increased to 63% of PQI sales mix in the second quarter of this year. Breaking this down by business, core sales growth in our marking and coding business was in line with the segment, driven by growth in both consumables and equipment. This growth was driven by both CPG and industrial end markets. In our packaging and color business, core sales grew about 3% year-over-year, led by growth in recurring software and subscription revenue. PQI's adjusted operating profit was $141 million in the second quarter, resulting in adjusted operating profit margin of 27.6%. That represents a 100 basis points improvement in adjusted operating profit margin over the prior-year period. This was another quarter of margin improvement for PQI, driven by the strong operating leverage, particularly on the recurring revenue growth and productivity improvements. Turning now to our balance sheet and cash flow. In the second quarter, we generated $251 million of cash from operations and invested $11 million in capital expenditures. Free cash flow was $240 million in the quarter, or 118% conversion of GAAP net income. As of June 28, gross debt was $2.6 billion and cash on hand was just over $1 billion. Net debt was $1.6 billion, resulting in net leverage of 1.3 times. In summary, our financial position is strong. We have flexibility in how we deploy capital to create long-term shareholder value with a bias towards M&A. Turning now to our guidance for 2024, beginning with our updated expectations for the full year. We increased our full year guidance to reflect our strong second quarter execution and incrementally positive view of our end markets. For core sales growth, our target remains low-single digits, however, we are trending towards the high end of low-single digits. Through the first half of 2024, core sales growth was 2.8%. For the second half, we are targeting core sales growth in the low to mid-single digits range, similar to what we achieved in the second quarter. Looking at adjusted operating profit margin for the full year, we now expect to deliver approximately 75 basis points margin expansion year-over-year, which would put our full year adjusted operating profit margin at about 24%. This implies an incremental margin or fall-through of around 50%. For adjusted EPS, we raised our full year guidance range to $3.37 to $3.45 per share. At the midpoint, this represents 7% growth year-over-year and is $0.11 or about 3.5% higher than our previous guidance. And our guidance for free cash flow conversion remains in the range of 100% to 110% of GAAP net income. Looking at our guidance for Q3, we are targeting core sales growth in the low-to-mid single digits on a year-over-year basis. At the midpoint of our Q3 guidance, we are modeling a core growth rate similar to second quarter. We expect adjusted operating profit margin of approximately 23.5% in the third quarter. This represents 100 basis points of improvement in adjusted operating profit margin on a year-over-year basis. And our Q3 2024 guidance for adjusted EPS is $0.82 to $0.86 per share. At the midpoint, that represents double-digit year-over-year growth. With that, I'll hand the call back to Jennifer for closing remarks.

Operator:

[Operator Instructions] Thank you. We'll take our first question from Scott Davis of Melius Research.

Sameer Ralhan:

Good morning.

Scott Davis:

I've got to ask -- good morning. I got to ask about the gross margins just because they've been so incredible, strong. Is -- A, I guess, is 60% the new normal or is that just more of kind of a shorter-term impact? And second, maybe I heard the word price in the context of pricing power more on this quarter and last one, too, than we would have thought in the past. And are you finding there's just more pricing power in your markets maybe than you thought you had before and that's driving that 60% gross margin. Is that a fair takeaway?

Jennifer Honeycutt:

Yeah. And I think, Scott, what you're seeing relative to price is our ability to sort of hold the value of our products in terms of commercial excellence related to VES. So the teams commercially are executing well around the world, but we have seen price normalize to historical levels, which we believe fit in the range of 100 bps to 200 bps.

Jennifer Honeycutt:

Yeah. We remain pretty convicted about our M&A approach. We've got really robust funnels for both PQI and Water Quality. We're looking at a lot of assets and we're actively engaged in our market activity here. But consistent with what we've said on prior calls, we're really going to stay close to our heritage and the disciplined capital allocation around market, company, and valuation. So we obviously like businesses that have similar operating models and secular durability, financial profiles that look like us, and certainly businesses where we think VES can add value. So we're active here. We're excited about the space. We're working hard kind of on both sides of the fence, and more to come.

Jennifer Honeycutt:

Thanks, Scott.

Deane Dray:

Thank you. Good morning, everyone.

Deane Dray:

Good morning. Hey, I'll echo…

Deane Dray:

Scott's comments, that's a clean quarter, kind of hard to find anything to quibble about. So maybe I'll start with product quality. Your primary competitor had some similar results yesterday in terms of strong aftermarket, but it looks like your printer sales are stronger. I know the 2380 sounds like that was a boost. Just can you comment on the mix and the go-forward, especially with the recovery expected in the consumer packaging goods?

Deane Dray:

It's all very helpful. And just a geographic question. Just for both businesses, what was the sense of demand in China and the outlook? The expectation is that you all have a very defensive type of mix there, but will you feel any of the ongoing pressures in the economy over the next couple of quarters?

Sameer Ralhan:

And then, Deane, from a guide perspective, effectively, you assume China will be sequentially flat, right? So, as you know, we were down quite a bit in the Q3 and Q4. So you're going to see a little bit of an uptake on a year-over-year basis as we kind of get into the second half, but sequentially, it's effectively flat.

Operator:

We'll take our next question from Andrew Kaplowitz of Citigroup.

Sameer Ralhan:

Good morning, Andy.

Andrew Kaplowitz:

Jennifer, Sameer, you raised your revenue guidance by $100 million for '24, I think, versus last quarter's forecast. So, maybe just give us a little more color into what markets are better than you expected. I know you just talked about Videojet equipment starting to accelerate. What are you baking now -- baking in now for the second half of that improvement? And then in Water Quality, is it more that water treatment is driving continued strong momentum, or are you seeing more improvement in water analytics?

Andrew Kaplowitz:

Very helpful. And then Jennifer, just going back to M&A, like, I know timing is always difficult, but would you expect to get something done this year? And then under what conditions would you do a larger deal where you may potentially raise equity?

Sameer Ralhan:

And Andy, just going to look, think about the equity side, it's just one of the components of how we think about funding any transaction. The main thing is value creation, right? Anything that can ultimately help us create long-term value, we'll look at all forms of funding, as we have kind of talked in the past. Main thing for us as we're going to think of any kind of funding is maintaining investment-grade balance sheets. That's sacrosanct for us.

Operator:

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

Sameer Ralhan:

Yeah, John. Thanks for that. As you kind of look at the free cash flow conversion, quarter-to-quarter, it can vary. As you know, we have the bond payments that come in, in the first quarter and the third quarter. So that gets -- impacts timing of the cash payments. So I would say, when you look at the free cash flow conversion, really look at it on a full year basis. Overall, given the strength that we're seeing in the business, the execution, we feel pretty good about delivering 100% to 110% free cash flow conversion, that's off GAAP net income.

Sameer Ralhan:

Yeah. I think it's -- let's take it in two buckets, right? One is -- first, on the business side, as we kind of told you, right, at the beginning of the year, we will be we -- are investing in the sales and marketing side to really drive the growth of the business, and you've seen that kind of really coming through or flowing through the numbers in the first quarter and second quarter. John, inflation is there a little bit, I think, just like everybody else. There's nothing outsized. But it's -- these are really heads that are added more on the sales and marketing side to drive the growth, and you started seeing a little bit of the impact and more in the 2025 that you're going to see. So I would say, on the business side, we are more or less in a normalized state, so to speak, and SG&A as a percent of revenues. On the corporate side, we were very judicious in how we bring the cost in. So what you're going to see is more of a run rate view of the corporate expenses in the second half of the year. So there's going to be a little uptick in the second half versus the first year that you're going to see on the corporate side, but that should normalize in the second half. So, nothing extraordinary on that front.

Operator:

We'll take our next question from Mike Halloran of Baird.

Jennifer Honeycutt:

Good morning, Mike.

Mike Halloran:

So, just some thoughts on the product rationalization side of things, some of the initiatives you're doing there. Maybe just how far along do you think you are in that journey in general? Have most of the areas been identified already, or do you think that there's more to come on that side of things?

Mike Halloran:

Makes sense. And then just to follow up on, I think, Andy's question earlier, when you think about the greater confidence going into the back half of the year, has anything actually changed, or is this just about starting to see the momentum into this year, first quarter, and is actually having to materialize that gives you extra confidence? In other words, has there any -- been really any change in your thinking about how these end markets are going to progress?

Mike Halloran:

Appreciate it. Thank you.

Operator:

Our next question is from Brian Lee of Goldman Sachs.

Sameer Ralhan:

Good morning, Brian.

Sameer Ralhan:

Hey, Brian. Yeah. I'll take that one. The mix comment is really around consumables. We've seen a good amount of consumable uptick that's driving it. As you've seen, our recurring revenue is almost at 62% right now and that is predominantly mix and a little bit of spares and the -- some of the SaaS software side, but predominantly consumables. If you recall and go back into the history, when things are more normalized, that tends to be in the high-50s, right. So that kind of helps you dimensionalize now the transition as the volume comes back on the printer side, in PQI, instrumentation side, on the Water Quality side, it's going to be a multi-quarter journey as we kind of move. So, you're not going to see a big variation quarter-to-quarter, but that sort of 62% versus high-50s is the way to dimensionalize the change over time.

Jennifer Honeycutt:

Yeah. Relative to packaging and color, as we mentioned, we've just concluded our Drupa Trade Show. That's a trade show that runs once every four years. And given the pandemic, this is the first time that show has been conducted in eight years. So there were some really good kind of pent-up demand that we saw there. But I think our solutions and, particularly those around innovation that we're providing in the S2 cloud-native digital integration of the workflow has got the attention of a lot of brand owners, because they are under pressure to compress their development cycles and ensure the integrity of the information that they're working with, which gives every user of that system access to the same information. So we had a great showing there. The teams -- all three teams in terms of Esko, Pantone, and X-Rite really did a great job there. And I think the -- outside of the enthusiasm generated in Drupa, the recovery of the CPG markets will lend itself to new product releases and new product innovations from brand owners. So they are getting ready. They have a number of projects that they're considering in terms of new product releases and so on and so forth. And so, this is the front end of that. And I think we're well positioned to be able to help them with their solutions.

Operator:

We'll move next to Brad Hewitt of Wolfe Research.

Jennifer Honeycutt:

Good morning, Brad.

Sameer Ralhan:

Yeah, Brad. This is Sameer. Effectively, really two things here. The first one is the mix comment that you made earlier. Our mix is pretty rich in consumables and recurring revenue right now. We have started seeing some good, encouraging signs on the equipment side. We said in the second quarter, we finally see -- saw a positive revenue growth on the equipment side. So we've modeled in kind of a decent equipment growth in the Q3 and second half of the year. So mix impact is what's kind of flowing through here. And the other one I would say is really on the corporate side. As we kind of get into the second half of the year, we are going to be getting more towards the run rate expenses on the corporate expenses. So that's impacting the margin side as well. So it's really those two things that are impacting the margin.

Sameer Ralhan:

Yeah. No. Thanks for that. Look, I mean, it's first of all, really kudos to all our teams, all our 16,000 people that are really helping drive this kind of fall-through that you're seeing, right? Really proud of what we've been able to achieve this year. But as you kind of think about 30% to 35% is really on the -- over the longer term, right? We do want to incorporate in that long-term value creation algorithm, a healthy investment mix from the sales side, from R&D side. So I think from a long-term value framework perspective, I think still 30% to 35% is the right way to look at it. But I think -- and in the near term, really good performance and execution of the teams is driving a fall-through close to 50%.

Operator:

We'll take our next question from Nathan Jones of Stifel.

Jennifer Honeycutt:

Good morning, Nathan.

Sameer Ralhan:

No. I think as you kind of think about long term, Nathan, these investments should be supportive of the mid-single digit growth framework, right? And that is 4% to 6% kind of a range, as we have kind of talked about. So as when we think about that mid-single digit growth framework, we do reflect the incremental contribution coming from these investments on the sales and marketing side, as well as on the R&D side, right? This is a technology-heavy business as you kind of think about in the commercial execution business. So those investments are key as we kind of think about long-term sustainable value creation.

Sameer Ralhan:

Yeah.

Sameer Ralhan:

It kind of depends, right -- just to make sure, Nathan, right, it -- on average, right, this is a cumulative thing that we're looking at. Of course, the new investment should be incrementally driving higher growth from their side, but some things fall out of the portfolio, too.

Jennifer Honeycutt:

Yeah. Thanks for the question, Nathan. We do see great demand here in recycle, reclaim, and reuse. The businesses most impacted by that certainly is our Trojan business who is well positioned there to help customers with their sustainability initiatives in this space. ChemTreat also has a play here. And certainly, if you're going to be moving water around, you're going to have to test it as well. So it does create some opportunity for our analytics businesses. But the primary beneficiary really of this opportunity would be our Trojan business. And frankly, we see this space growing probably mid-to-high single digits for the foreseeable future. Lots of industries are under pressure to achieve their sustainability targets, and we're well positioned with solutions to help them.

Operator:

Our next question is from Andrew Krill of Deutsche Bank.

Andrew Krill:

Thanks. Good morning, everyone. I wanted to circle back on margins again from a little bit more of the medium-term perspective. I know there's been a lot of discussion just that the company has meaningfully more opportunities to improve margins than might be improved -- appreciated by investors. Just can you update us any of, like, the findings you've had since the spin on that and whether you would consider explicitly quantifying those at any point? And then would you also say, is there more opportunity in one segment versus the other or do you think it's kind of similar? Thanks.

Andrew Krill:

Okay. Great. Very helpful. And then can you give us an update on the situation in Argentina and maybe just how much contingency, if you will, you have left in your guidance for the full year? And then, I guess, depending on how that shakes out the rest of the year, how that could help or hurt PQI margins in the back half? Thanks.

Andrew Krill:

Okay. Great. Thank you.

Jennifer Honeycutt:

Good morning, Andrew.

Sameer Ralhan:

Good morning.

Sameer Ralhan:

Yeah. No, thanks for that. It really comes down to how you're going to think about the CPG markets, right? CPG markets are evolving, incrementally becoming positive, but it's a pretty fast-changing views that we are seeing. So I think, as you kind of look at the guidance range, one of the big drivers is how we kind of think about the CPG markets and the impact they will have on the on the PQI topline. I would say -- if there's one thing I can say, that's one of the key things. And then on the margin side, right, I mean, there's always the raw material price versus raw material contribution we always look at. We believe we have baked in a pretty prudent view here. So, any benefit from that will be more enduring towards the high end of the range.

Jennifer Honeycutt:

Yeah. We continue to be interested in this space. But as you know, this is an incredibly difficult and complex problem to solve. We believe that we're well positioned, given our 70-year history at Hach for democratizing tests and analytics and our long track record at Trojan for developing treatment solutions. So we continue to invest in this space and stay focused there, but real fit-for-purpose solutions that are focused on at-site or in-line testing and at-site real-time destruction of PFAS are going to be -- remain a difficult problem to solve. But we're focused on creating winning outcomes for our customers that have fit-for-purpose solutions. So, still a few years away here, but we are interested in the space, as we are with sort of all of the micro-contaminants that come into the regulation frame.

Operator:

We'll take our next question from Joe Giordano of TD Cowen.

Jennifer Honeycutt:

Good morning, Joe.

Jennifer Honeycutt:

Yeah. I think what you're seeing here is that there's really three things that differentiate us from other industrials. We play in the end markets with really attractive and kind of non-optional secular growth drivers, right? So, when you've got a business that's 85% of our sales into food, water, and pharma, it's -- these are not elective areas of testing, right? So these are really durable markets. And as a consequence, the way our businesses have been built are durable in turn. 60% of our recurring revenue or 60% of our revenue is kind of in this recurring revenue space. It's a razor-razorblade business model with high-margin consumables. And these products and services that are deployed for our customers are essential parts of their operation. So, if they choose not to use our products or they choose not to treat and measure and monitor and so on, the cost of failure to them is high, because we're really tied to sort of product quality and public health. So the last thing I would say is, VES provides a competitive advantage for us really in terms of differentiating us relative to talent growth and continuous improvement.

Sameer Ralhan:

Yeah. Joe, I'll take that one. It's really the sales and marketing, right? If you -- just to take you back, effectively, when you look at the P&L, it really aligns with how we create value in the business. It's more driven by investments in R&D, it's a technology-driven business, and then on the commercial side, right? The secret sauce, what we believe and our competitive strength, is a direct business model that effectively does result in the sales and marketing that you -- impact that you see on -- in the numbers. Overall, we feel really good about our business model that is more direct, and it really drives a competitive advantage in the marketplace.

Operator:

And this does conclude our question-and-answer session. I'd be happy to return the conference to Ryan Taylor for closing comments.

Operator:

This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.

Ryan Taylor:

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. The replay of the webcast will be available on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will be available until May 8, 2024.

Sameer Ralhan:

Good morning, everyone. I will begin with our consolidated results for the first quarter on Slide 7. First quarter net sales grew 1.8% on a year-over-year basis to about $1.25 billion. Currency was a modest benefit, offset by the divestiture of Salsnes product line. Salsnes was a small commodity filter product line in our Water Quality segment that was divested in January.

Jennifer Honeycutt:

In summary, as a stand-alone company, we have increased focus, discipline and accountability across all levels of the enterprise, which has elevated our level of execution. We are driving continuous improvement and investing in future growth as our end market environment gradually improves. We are off to a positive start in 2024 with solid growth and strong margin expansion in the first quarter.

Operator:

[Operator Instructions]

Scott Davis:

The 60% gross margin is a pretty incredible number when you really think about the mix of businesses you have. But should we think about this as kind of high watermark or would you think about it as more of a step up into a new level of entitlement? How do you guys think about it?

Jennifer Honeycutt:

Yes. I mean I think it's always challenging to provide an equal level of focus across a very, very large enterprise like Danaher has I think a smaller, more nimble $5 billion business, obviously, allows us to focus exclusively on these businesses, whereas there were many more factors sort of previously with the life sciences and diagnostics side in Danaher.

Operator:

And we'll take our next question from Andy Kaplowitz with Citigroup.

Jennifer Honeycutt:

Yes. We're really encouraged by the PQI performance here in Q1, particularly around our consumable revenue stream or recurring revenue. Is this the third sequential quarter that we've seen mid-single-digit growth there. And with regard to sort of how those markets, particularly in food and beverage, recover from a downturn, we will always see the consumable revenue stream ramp first.

Sameer Ralhan:

Andy, only other thing I would add from a guide perspective, we're building equipment recovery more in the second half, while the owners, as Jennifer mentioned, in March, were very encouraging, good discussions with the customers that those business teams are having but we're still cautious and we are building into anything on the equipment side in the second half than in the second quarter at this point.

Jennifer Honeycutt:

Yes. So the nice thing about our business, Andy, is it's largely an OpEx-focused set of businesses. So interest rates, CapEx approval cycles we are minimally impacted by. And because we operate at the high end of the value continuum in terms of being integral to operating municipal water plants. We see steady spend there.

Jeffrey Sprague:

Hey Jennifer, just first on just kind of the M&A side of the equation. Obviously, a couple of quarters out of the box here probably kind of a solid year. So to think about it given the time line of the spin. Just wonder how the pipeline is coming together. Do you see things that are actionable. And do they lean towards one segment or the other?

Jeffrey Sprague:

And then maybe unrelated and for Sameer. Given that maybe kind of the consumables versus equipment mix doesn't really shift a whole lot until we get into the second half of the year. Why is it that margins would be down sequentially Q1 to Q2 on sequentially higher revenues?

Sameer Ralhan:

No, it's pretty universal across the board.

Michael Halloran:

So following up on Jeffrey's question, as you became a stand-alone company, did you have to change processes lean in any way from an organizational perspective with incremental resources, whatever, to essentially build the muscle on the M&A side, obviously, a little bit less prioritized at Danaher?

Jennifer Honeycutt:

So clearly, standing up -- a stand-alone company does require a corporate organization to support it. Previously, tax and treasury and all of those functions were taken care of for us. But with respect to sort of the M&A trajectory, we were very deliberate in bringing in top talent in our strategy and sustainability function and our corporate development function. Both of those individuals that sit on my staff have long-standing histories within Danaher building strategy and executing on M&A. Insofar as the muscle building within the operating companies themselves.

Michael Halloran:

And the second one is just kind of putting the commentary together on the Water Quality and the PQI side as far as starting to see some green shoots in specific areas or recovery in specific areas. How much of that is embedded from here from a guidance perspective? Are we talking relatively normal sequentials, or is there an assumption for an improved backdrop as we get through the year and just had some context?

Deane Dray:

I appreciate all the color and specifics in the slides in your prepared remarks. I'd like to get a very specific question in Water Quality, if I could. So the new EPA regulations on PFAS, the 4 parts per trillion is really -- as that pushes the testing technology limits. And right now, it's still you have to use a prohibitively expensive mass spec, no utility really can afford that.

Jennifer Honeycutt:

Yes. Great question, Deane. We knew that the EPA was headed towards a 4 parts per trillion limit of detection here. So that's not fundamentally new news for us. What is new news there is the time line for compliance with [ Salsnes ] in 2027, but you are right that this is a phenomenally difficult and complex problem to solve in a fit-for-purpose way. Right now, the way to solve for this is water sample set to centralized lab, run through GC mass spec, answers come back, a couple of weeks later.

Deane Dray:

That's really helpful. And I fully appreciate that time line that you've suggested that's everything that we've heard as well. There's a question between wanting something and there's a demand -- industry demand versus the practicality given the complexity of the molecules. But I really appreciate the color. And I'm so glad to hear you mention destruction as well because that's an opportunity.

Operator:

We'll take our next question from Andrew Krill with Deutsche Bank.

Sameer Ralhan:

Yes. Andrew, if you look at free cash flow conversion, right, just as a reminder, we do give the conversion on the basis of the GAAP metrics, right, not on any kind of adjusted metrics. So essentially, when you look at that, just add the amortization and the share compensation or the stock-based compensation, I think based on all that stuff, we should be a little bit on the 100%, a little over 100% but really going towards 100% to 110% range this quarter for the full year for us. That guidance is really driven by getting more conviction on the margin side.

Operator:

And we'll take our next question from Nathan Jones with Stifel.

Jennifer Honeycutt:

Yes. I mean I think it's probably the same answer as for water. I mean we do have distribution and we do consider use of distribution depending upon where we're selling in the world and what types of products are in the portfolio. This is something that we always consider in terms of when we when we decide to make investments and which product lines actually require a more significant level of applications, knowledge and insight.

Jennifer Honeycutt:

This is a great question, and absolutely. We see a great deal of activity, interest and growth potential in both recycle and reuse. And it's one that is pan-operating company, I would say, across our water quality businesses. So the intersection of ChemTreat, Trojan and Hach, can all play in that space. And in fact, do have conversations amongst themselves and amongst the sales folks in the field relative to solving those kinds of applications.

Andrew Buscaglia:

So I just wanted to check on the Water Quality side, you're talking about really strong industrial demand in your guide -- you did much better than your guidance. I'm wondering what changed, I'd say, from December, January to what transpired throughout the quarter? And then just the sustainability around that? What's driving that really?

Sameer Ralhan:

Yes, Andrew, as we've kind of stated in the past, and when it comes down to M&A, it really -- we follow a very disciplined and rigorous approach around markets, companies and valuation with respect to the financial metrics, it really is a combination of multiple factors, right? We look at ROIC, we look at margin, what's are the things that we can add to the portfolio that can drive overall core growth and create synergies, how do we apply VES into the acquired businesses to really create the differentiated value.

Operator:

We'll take our next question from Brian Lee with Goldman Sachs.

Jennifer Honeycutt:

Yes. I mean, I think what we see here is visibility for equipment in the 60- to 90-day time frame, right? This is the short-cycle business. So a lot of our confidence around equipment here in the second half is a product of history, right, where we see cycles of food and beverage and consumer packaged goods sort of decline in recovery. We see typical patterns, which is pretty intuitive of the inks and solvents, spare parts, consumables recovering first as these lines are brought back online and then equipment following when funds are available to do line expansions, equipment upgrades and so on and so forth.

Brian Lee:

And then just one on Water Quality. I think a couple of questions ago, you were talking, Jennifer, about the demand in water reuse, water recycling somewhat from an ESG footprint from a growing subset of your customers. I think there's also a growing subset of customers and industries here levered to power gen growth. We're seeing low growth on the grid in the U.S. especially. First time in a while really seeing some positive inflection.

Jennifer Honeycutt:

So the business that is -- benefits most from the CHIPS Act and microelectronics is Trojan that sells UV treatment systems in for high-purity -- ultra-high-purity water. That water has to be exceedingly pure given the manufacturing requirements for semiconductor wafer fab. But there are pockets of other equipment and analytics and so on that get sold into that space. But we've really seen some nice growth in our UV treatment business as a result of sort of the onshoring or reshoring of fabs here in North America as well as the ones that continue to be built in China.

Operator:

And it appears that we have no further questions at this time. I will now turn the call back over to Ryan Taylor for any additional or closing remarks.

Operator:

That concludes today's teleconference. Thank you for your participation. You may now disconnect.

Ryan Taylor :

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 investor section of our website later today, under the heading Events and Presentations. A replay of the call will be available until February 21, 2024. Before we begin, I'd like to point out that yesterday we issued our fourth quarter news release, earnings presentation, and supplemental materials, including information required by the SEC Regulation G, relating to any adjusted or non-GAAP financial measures. These materials are available in the investor section of our website, www.veralto.com, under the heading quarterly earnings. Reconciliations of adjusted figures and all non-GAAP measures are 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 most recent SEC filings. Actual results may differ materially from any forward-looking statements that we make today. 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.

Sameer Ralhan:

Thanks, Jennifer, and good morning everyone. I'll begin with our consolidated results for the fourth quarter on slide eight. Fourth quarter net sales grew 3.3% on year-over-year basis to $1.29 billion. Our core sales were up 1.7% and currency contributed 1.6%. We continued to execute well on pricing, which contributed 3% to sales growth in the fourth quarter over the prior year period. You can see this benefit in our gross profit, which increased 5% on a year-over-year basis to $746 million. Gross margin was 57.9%, up 90 basis points from the prior year fourth quarter. Adjusted operating profit increased 5% year-over-year, and adjusted operating profit margin expanded 50 basis points to 23.8%. As Jennifer mentioned, further devaluation of the Argentine peso was a significant headwind that we offset in Q4. Late in the fourth quarter, the Argentine peso declined by more than 50% relative to the US dollar. This reduced the value of our cash-on-hand in the region and led to a significant chart quarter in the PQI segment. On a year-over-year basis, the impact of the fourth quarter was $17 million or 130 basis points to our total adjusted operating profit margin. And for the full year, it was a $29 million headwind or 55 basis points headwind to the adjusted operating profit margin. We ended 2023 with approximately $15 million of cash and $5 million of accounts receivable in Argentina. We continue to evaluate options to mitigate the impact of further devaluation while serving the needs of our customers in the country. The net EPS impact from the Argentine peso devaluation was approximately $0.03 in the fourth quarter. Despite the headwind, we delivered adjusted earnings per share of $0.87 in the fourth quarter, up 9% year-over-year and $0.03 above the high end of our adjusted EPS guidance range. We also delivered strong cash conversion in the quarter. We generated $241 million of free cash flow, representing free cash flow conversion of 121%. Moving to the next chart, I'll cover the segment highlights, starting with Water Quality. Our Water Quality segment delivered $782 million of sales, up 3.4% on a year-over-year basis. Currency was a 1.3% benefit. Core sales grew just over 2% year-over-year as compared to 9.5% core growth in the prior year period, bringing the two-year core growth stack for Water Quality to about 6%. Pricing contributed 4.2% to core sales growth in Q4, 2023. We continue to see strong demand for our water treatment solutions, with steady growth across industrial markets at ChemTreat and high demand for Trojan's UV systems in both municipal markets and in the semiconductor industry, where manufacturing of chips requires ultra-pure water. And in water analytics, as expected, we experienced lower year-over-year demand in China, where municipal budgets continue to be impacted by reductions in government funding. On a positive note, sequential sales for water analytics in China have been consistent now for three consecutive quarters. Adjusted operating profit increased 9% year-over-year, with margins up 150 basis points to 26%. The increase in profitability was across all key businesses in the Water Quality segment and primarily reflects strong pricing execution and improved operating productivity. For the full year, Water Quality delivered steady, profitable growth, with core sales up 5% and adjusted operating profit margin up 80 basis points to 24.5%. As Jennifer mentioned, 2023 marked a record year for Water Quality, with sales over $3 billion and adjusted operating profit of $746 million, both all times high levels on an annual basis. Moving to the next page, our PQI segment delivered sales of $506 million in the fourth quarter, up 2.9% versus the prior year period. Currency was a 1.8% benefit. Core sales grew 1.1%, as 1.8% benefit from pricing more than offset modest volume declines from the prior year quarter, primarily related to CPG markets. While still down year-over-year, demand from CPG customers steadily improved during the quarter and came in better than our guidance assumptions. Additionally, sales into China came in better than anticipated, up 1% over the prior year quarter. From a product perspective, core sales in both marketing and coding solutions and packaging and color solutions grew in line with the segment at about 1% year-over-year. PQIs recurring sales grew mid-single digits year-over-year, with growth across every major product line, an encouraging sign. We continue to see signs of sequential stabilization across PQIs and markets, led by increased demand from our food and beverage customers. That said, we are still in the early stages of recovery here and are cautiously optimistic about CPG volumes as we begin 2024. PQIs adjusted operating profit was $123 million in the fourth quarter, resulting in adjusted operating profit margin of 24.3%. These results include the unfavorable impact from the devaluation of the Argentine peso. That impact resulted in 330 basis points of headwind to adjusted operating profit margin on a year-over-year basis for the fourth quarter, and 145 basis points headwind to the full year. Excluding the impact from the Argentine peso devaluation, for the fourth quarter PQIs underlying operating profit grew low double digits year-over-year, and adjusted operating profit margin expanded to about 28%. And for the full year, PQIs underlying profit grew in the high single digits on flat sales, and adjusted operating profit margin expanded to about 27%. Strong pricing execution and benefits from cost optimization actions were the primary drivers of improved underlying profit and margin performance. For the full year, PQIs sales and profitability were essentially flat year-over-year, a great result considering the significant headwinds from destocking and lower volumes at consumer packaged goods customers, a challenging economy in China, and the currency devaluation in Argentina. The teams within the PQI segment were able to withstand these headwinds to turn in a great result for 2023, with positive momentum building as we enter 2024. Turning now to our balance sheet and cash flow. During the quarter we generated $263 million of cash from operations, and invested $22 million in capital expenditures. Pre-cash flow was $241 million in the quarter, resulting in free cash flow conversion of 121%. This quarter again demonstrates the strong free cash flow generation capabilities of our businesses. Note that we did not have any cash payments related to interest costs in Q4, 2023. Beginning in 2024, we will have interest payments in the first and third quarter. At year end, gross debt was $2.6 billion and cash on hand was $762 million. Net debt was $1.9 billion, resulting in net leverage of 1.5x. In summary, we further strengthened our financial position during the quarter and have ample liquidity. This gives us flexibility in how we deploy capital to create long-term shareholder value. Our bias as you know, is to drive compounding growth in earnings and cash flow, through investment in high ROIC organic growth opportunities, aligned with secular growth drivers in both of our businesses, and strategic acquisitions that drive long-term value creation. Within our framework, we also maintain flexibility to return capital to shareholders. In line with the capital allocation framework, we declared a cash dividend of $0.09 per share for the fourth quarter. Turning now to our guidance for 2024. Beginning with an expectation for the full year, we expect core sales to grow low single digit on a year-over-year basis. This assumes low single digit growth across both of our segments. We are targeting 100 to 200 basis points of price, consistent with historical pre-pandemic levels. Our guidance assumes corporate and other expenses of about $100 million, reflecting the full annual run rate of standalone costs. Looking at adjusted operating profit margin, we are targeting 50 to 75 basis points of improvement this year. This assumes 65 to 90 basis points of operating profit margin improvement across the businesses and approximately 25 basis points benefit from lower exposure to the Argentine peso. These benefits more than offset a 40 point headwind from the full run rate level of corporate and standalone company expenses. Our adjusted EPS guidance for the full year 2024 is in the range of $3.20 per share to $3.30 per share. This assumes an effective tax rate around 25%. From a sequential perspective, our guidance assumes that year-over-year core sales growth steadily improves quarter-to-quarter through 2024, with core sales growth in the first half of the year relatively flat, and core sales growth in the second half up low to mid-single digits. Looking now at Q1, 2024, we expect core sales to be approximately flat year-over-year. At segment level, we expect core sales and Water Quality to be flat to modestly positive, and core sales in PQI to be flat to modestly negative. As a reminder, Water Quality core sales growth was 11% in Q1, 2023, resulting in a tough year-over-year comparison. Additionally, turning of the portfolio, which resulted in the shutdown of small product lines in Water Quality, represents 60 basis points headwind to core sales growth for the segment and the quarter. We anticipate adjusted operating profit margin in the range of 23% to 23.5%, and our Q1, 2024 guidance for adjusted EPS is $0.73 to $0.78 per share. That concludes my prepared remarks. At this time, I'll turn the call back to Jennifer for closing remarks before we open up the call for questions.

Operator:

[Operator Instructions] And we'll take our first question from Scott Davis with Melius Research. Your line is open.

Jennifer Honeycutt:

Good morning, Scott.

Jennifer Honeycutt:

Yeah, I mean I think in the fourth quarter China came in a little bit better than how we were anticipating. We saw some nice growth in our Trojan UV systems, really related to semiconductor chip manufacturing. We did anticipate municipal markets to be down, and as expected, they were year-over-year, but we have seen now three quarters of consecutive stability in that market. I think going forward in 2024, I think we're pretty much near the bottom, and we anticipate steady sequential performance improvement stability for the second half of 2024. So a little bit more of the same. We'll see year-on-year sales decline during the first half, which we expect to improve throughout the balance of the year.

Scott Davis :

Okay, helpful. And then just changing gears, I know I don't want to over read this, but Sameer, in your prepared remarks, you just mentioned something about returning – potential for returning capital. Still I would imagine the focus is on around M&A. So perhaps just an update on what you're thinking on an M&A pipeline and likelihood or potential of transactions in 2024, and how you guys are feeling about that part of the equation. Thanks.

Scott Davis:

Well, Freudian slip. Best of luck in ’24 and congrats on the start, CEO. Thank you.

Operator:

And we'll take our next question from Deane Dray with RBC Capital Markets. Your line is open.

Jennifer Honeycutt:

Good morning, Dean.

Sameer Ralhan:

Yeah Dean, let me just start with the frictional costs. I think as we kind of said in the guide, starting Q1, we should pretty much start seeing the run rate costs on the standalone company basis, that's a little of the corporate function. So $100 million in the corporate number that you have in the guide kind of really represents the run rate. So beyond that, there's no sort of a major frictional cost, although one-time costs are pretty much done as well. On the TSA side, Deane, as you said earlier, this was a very clean separation from a TSA perspective. So there's very minimal in terms of dollars, like it's a nominee matter. So I wouldn't think about any kind of remaining frictional costs per se. On the portfolio side – then on the portfolio side it's roughly 60 basis points, in fact as we said on the Water Quality side. So again, you can do the math. It comes down to $15million, $20 million-ish kind of headwind, kind of actions that we took. Really cleaning up some of the product lines as we inherited some of the filtration assets from Danaher. We are as good stewards of capital just sitting back saying, hey, every product line has to earn its place in the portfolio, and some of the product lines and geography combinations just did not meet that hurdle, so we took some actions. But that is a minor sort of a regular portfolio cleanup frankly.

Jennifer Honeycutt:

Yeah. I mean, the two minor strategic actions we took amounted to about $20 million in annual revenue. We look at the portfolio on an ongoing basis and I would say that there's nothing material that needs to be done from a transformation standpoint. But we will continue to sort of prune and invest as appropriate, where we see the growth opportunities and the required return on investment.

Jennifer Honeycutt:

Yeah, you bet. Well, as you cited there, the Aria Filtra business is the rebranded Paul Water business, and we've actually pivoted how we're investing in this business. We're seeing very strong demand, particularly in critical applications for drinking water and portable reuse. So when it comes to recycle reclaim, it's an essential technology, and certainly in the macro that's become a more important part of water conservation. But we have repositioned this product line to allocate resources to highest return opportunities with more focus in North America and additional investments in mobile water treatment.

Jennifer Honeycutt:

You bet.

Andy Kaplowitz:

Good morning, everyone.

Andy Kaplowitz:

Jennifer, Sameer, can you give us more color into what you are seeing in product quality focused markets? I think you had guided to download and mixing the digits Q4 yet, as you said you came in over 1% core growth. And core growth accelerated relatively significantly versus Q3. We know comparisons are a bit easier, but you did mention the early signs of recovery, particularly with food and beverage packaging customers. So could you elaborate on what you're seeing? Have you seen continued recovery as we started Q1 here? And I know you suggested lessening the budget growth for the segment ‘24. Is it just a tough comparison that is leading you to guide to flatten down for Q1?

Sameer Ralhan:

And Andy, if I can just add a couple of comments as it relates to the guide. We expect steady recovery in the CPG market sequentially, but overall being cautious as we kind of look at the commentary from the CPG customers and also what we're seeing in the channel. So from an overall year perspective, we're modeling in low single-digit core growth for the business, but the volume is going to be a tale of two halves. Effectively at this point, from a guide perspective we're modeling in low single-digit decline in the volume side, and that essentially means accelerating into positive low single-digits in the second half on gradual market recovery. So that's how we're kind of modeling it in the guide.

Jennifer Honeycutt:

Yeah, I mean it's probably the comp challenge, right. I think in the first quarter here is the last of our really tough comps on a year-over-year comparative basis. But in North America, we saw nice growth and continue to see nice growth for demand of our UV Trojan systems, and this is particularly related to reuse treatment for potable water. We see demand for analytics steady on a year-over-year basis, and saw some increase sequentially from Q3 to Q4. Europe, we see steady demand there coming out of Q4. I do think China is still a little bit suppressed in terms of its demand, although we're seeing a sequentially stable demand throughout the third quarter here. Year-over-year demand was down in China just due to lower government funding relative to 2022, but we're cautiously optimistic about the sequential improvement over the course of the coming quarters in China. We don't think it's going to get any worse and we've had a positive start here in January right out of the gate. So it's a little bit variable across the geographies, but we see good demand for where investments are happening.

Andy Kaplowitz:

Appreciate the detail.

Mike Halloran:

Hey. Good morning, everyone.

Mike Halloran:

Maybe we could have a similar conversation. How you are thinking about the margins, given the separation and moving pieces around everything. How do you think about the jump-off point into ‘24 from a margin level? Is the fourth quarter, if you adjust for the deval, the right way to think about the two segments? And then how do you think about cadencing through the year in 2024? Should you just kind of follow that revenue pattern you were talking to or is there a different pattern to think about?

Mike Halloran:

Okay. And I might have missed this, and I appreciate that. What's the interest expense expected to be this year?

Mike Halloran:

Great. I appreciate it. Thank you, everyone.

Operator:

And we'll take our next question from Nathan Jones with Stifel. Your line is open.

Jennifer Honeycutt:

Good morning.

Jennifer Honeycutt:

Yeah, I think it's typically a couple of quarters. It certainly depends upon the individual company and customer, but generally I would say that it's around two quarters.

Jennifer Honeycutt:

Yeah, I mean certainly every business will take a look at its portfolio and position it to be – to fully meet the needs of the customers and certainly align with where the opportunities are. That is not currently in our purview, but remains to be something that could conceivably be considered in the course of sort of moving the strategy along.

Nathan Jones :

And just the last one on price-cost, you said 100 to 200 basis points in 2024. Are you assuming that that's neutral to margins or slightly accretive to margins?

Nathan Jones :

Awesome. Thanks very much for taking my questions.

Jennifer Honeycutt:

You bet.

Andrew Krill :

Hey, thanks. Good morning, everyone. I wanted to go back to the 1Q margin guide of 23% to 23.5%. It just seems like a pretty big step down sequentially versus the around 25% in 4Q if we add back the Argentina number. I know I mentioned this is in a very seasonal business and there's a little bit more corporate cost, but just anything else going on sequentially and maybe any help by segment on margins? Thanks.

Andrew Krill :

Great. Then just a quick follow-up. I know in the intro comments, I think there's a lot of discussion on the innovation, new products for this year. Is there any way you can quantify how much of a benefit that might be in 2024? And is it more focused on one segment versus the other? Thanks.

Andrew Krill :

Thank you.

Ryan Taylor:

Thanks, Shelby. This is Ryan Taylor. I just want to thank everybody for joining us on our fourth quarter and full year earnings call today. We appreciate your engagement and your support, and we look forward to talking to you next time. Thank you.

Jennifer Honeycutt:

Thank you, Ryan, and good morning, everyone.

Jennifer Honeycutt:

Thanks, Sameer.

In closing, I want to reiterate our long-term value creation framework. Over the long term, we expect to deliver mid-single-digit core sales growth with incremental margin fall-through in the 30% to 35% range, and we expect 100% free cash flow conversion annually. We intend to complement core growth with disciplined strategic acquisitions. We are confident that the durability of our business, the essential need for our technology solutions and the strong secular growth drivers of our end markets will provide steady growth consistent with our historical track record. The combination of our leading brands, proven value creation playbook powered by the Veralto Enterprise System and the strength of our balance sheet differentiates Veralto, and positions us to deliver sustainable long-term shareholder value. And as we look to build our future, we are unified and inspired by our shared purpose:

Safeguarding the World's Most Vital Resources.

Michael Halloran:

Congrats on a good public -- first quarter as a public company. So let's start on the margin side here. Maybe you can give some context on why the healthy sequential uptick from the third quarter to the fourth quarter on the margin line. Any help you could give us by segment would be great. And then is this the right jumping-off point, adjusting for seasonality and revenue levels and all that? But is this the right jumping-off point as we think about 2024?

Michael Halloran:

Got it. And then -- but is that the right thought process then for next year? I mean, is the fourth quarter more representative run rate as you think about things relative to the third quarter?

Michael Halloran:

Makes sense. And then on the PQI side, some comments about certainly softness in China. I don't think that's a surprise to anybody, but you also commented on the destocking side of things on the consumable side. So, a couple of things. One, could you just give us some thoughts on how you think this demand picture plays out as we look on a forward basis? But also in the fourth quarter, is the thought process that sell-in and sell-out are a little bit more balanced from a portfolio perspective? Or is there a little bit more to come?

Michael Halloran:

That makes sense. And last one, if I may, on the Water Quality side of things. It certainly seems like if you exclude the China part of the business, where there's just broader-based weakness that there's a lot of stability across the portfolio here. Maybe just talk about how you think about the economic sensitivity of that segment, excluding the China piece? It certainly seems like that's built to be a little bit more resilient here.

Operator:

[Operator Instructions] We'll take our next question from Andy Kaplowitz with Citigroup.

Sameer Ralhan:

Yes, Andy. Thanks for the question. Look, I think overall for the PQI side, overall, yes, in general, the volumes are low. You're going to see some impact on the absorption side. But overall, the biggest impact actually was a currency one. So, that's why I highlighted that in my prepared remarks. And just to frame that for you, essentially, the impact if the Argentina peso devaluation impact you remove, actually PQI would have been up by almost 60 basis points. So that gives you just a sense of how big the impact was going from 22.8% to almost 24.2%.

Andrew Kaplowitz:

That's great, Sameer. And Jennifer, just -- I want to follow up on your comments on municipalities sort of holding back, I guess, at Hach. Seems like that's happening in North America. We know you have tough comps versus last year. But sort of what gets them to sort of accelerate to get back to, I would assume that you still think Hach could grow mid-single digits across the cycle. So what do you need to see to sort of get that to happen?

Andrew Kaplowitz:

Got it. One more question, if I could. Like, how are you thinking about the M&A pipeline, the potential timeline of your first deal as a public company? Do you need a bit of transition time to execute as a public company before you consummate a bigger deal? Or could we expect M&A to ramp up sooner versus later? And maybe are there any particular areas of interest as you sort of come out on M&A?

Michael Anastasiou:

This is Michael on for Joe. Yes, I was just curious, as you look towards the fourth quarter, what customers might be telling you around the potential for a budget flush? What does the guidance kind of assume versus historical patterns?

Sameer Ralhan:

And Joe (sic) [ Michael ], maybe if I can add a little bit is as we talked at the Investor Day, right, we are lot more tied to the operating budgets to the -- of our customers rather than capital side, so that kind of helps us as well as you're going to move forward.

Ryan Taylor:

Thanks, Shelby. This concludes our third quarter earnings call. We thank you very much for joining us. I'll be available over the next several days for follow-ups should you have any additional questions. Thank you once again, and that concludes our call.