Q2 2024 Solventum Corp Earnings Call

Ellie: Good day. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Solventum second quarter 2024 earnings call. As a reminder, this conference is being recorded. All lines have been placed on mute to prevent any background noise.

Ellie: Good day. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to this

Speaker Change: Solventum second quarter 2024 earnings call. As a reminder, this conference is being recorded.

Speaker Change: All lines have been placed on mute to prevent any background noise.

Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the star and then the number 1 key again. Thank you.

Ellie: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star and then the number one key again. Thank you. I would now like to turn the program over to your host for today's conference, Kevin Moran, Senior Vice President of Investor Relations. Please proceed.

Speaker Change: I would now like to turn the program over to your host for today's conference, Kevin Moran, Senior Vice President of Investor Relations. Please proceed.

Kevin Moran: Good afternoon and welcome. Today we will discuss Solventum's second quarter fiscal 2024 results along with an update to our 2024 outlook. Just after the market closed today, a press release was issued with our earnings results and updated outlook. The press release and earnings presentation are available on the investor section of the Solventum website. Joining me today are Bryan Hanson, our Chief Executive Officer, and Wayde McMillan, our Chief Financial Officer. During the call, we will be making forward-looking statements that are subject to risk and uncertainty.

Kevin Moran: Good afternoon and welcome. Today we will discuss Solventum's second quarter fiscal 2024 results along with an update to our 2024 outlook.

Speaker Change: Just after market closed today, a press release was issued with our earnings results and updated outlook.

Speaker Change: The press release and earnings presentation are available on the Investor section of the Solventum website.

Speaker Change: Joining me today are Brian Hanson, our Chief Executive Officer, and Wade McMillan, our Chief Financial Officer.

Speaker Change: During the call, we will be making forward-looking statements that are subject to risks and uncertainties.

Kevin Moran: For a full description of these risks and uncertainties, please refer to our SAC filings and the forward-looking statement slide at the beginning of the presentation. Please note that during our discussion today, all our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. Gap to non-gap reconciliations for all relevant periods can be found in the schedules attached to our press release. For the Q&A portion of the call, we kindly ask that you limit yourself to one question and one follow-up. And with that, I'll hand the call over to Bryan.

Speaker Change: For a full description of these risks and uncertainties, please refer to our SAC filings and the forward-looking statement slide at the beginning of the presentation.

Speaker Change: Please note that during our discussion today, all our comments will be on a non-GAP basis unless they are specifically called out as GAP.

Speaker Change: Gap to non-gap reconciliations for all relevant periods can be found in the schedules attached to our press release.

Speaker Change: For the Q&A portion of the call, we kindly ask that you limit yourself to one question and one follow-up. And with that, I'll hand the call over to Brian.

Bryan Hanson: All right, great. Thanks, Kevin. And thanks to everyone for joining us today. I'd say it's exciting to be here for our first earnings call as a publicly traded company, and I want to start that call by saying that I'm encouraged by the progress that we have made and with the results of the quarter, which reflect our ability to come together as a new team and maintain business continuity in the midst of the separation.

Brian Hanson: All right, great. Thanks, Kevin, and thanks to everyone for joining us today. I tell you, it's exciting to be here for our first earnings call as a publicly traded company, and I want to start that call.

Speaker Change: by saying that I'm encouraged by the progress that we have made.

Speaker Change: and with the results of the quarter, which reflect our ability to come together as a new team and maintain business continuity in the midst of the separation.

Bryan Hanson: And we're raising our full-year outlook as we continue to progress our plans to get this business to where we expect it to be. Simply said, we are moving with urgency, and we remain confident in our ability to create value. And for all the solvers that I know are listening out there, I want to say thank you. It's your hard work that has gotten us to this point. Make no mistake; this would not be happening.

Speaker Change: And we're raising our full year outlook as we continue to progress our plans to get this business to where we expect it to be.

Speaker Change: Simply said, we are moving with urgency and we remain confident in our ability to create value.

Speaker Change: And for all the solvers that I know are listening out there, I want to say thank you. It's your hard work that has gotten us to this point. Make no mistake, this would not be happening, we would not be here without you.

Bryan Hanson: We would not be here without you. And for the call today, I'm going to provide a brief reminder of our investor day presentation, specifically around our situation analysis and reasons to believe in the value creation story, as well as a reminder of an update on our phased approach for the transformation and turnaround, and then I'll pass it over to Wayde for a deeper dive on the quarter and our improved outlook for 2024.

Speaker Change: And for the call today, I'm going to provide a brief reminder of our Investor Day presentation, specifically around our Situation Analysis and reasons to believe in the value creation story, as well as a reminder of and update on our phased approach for the transformation and turnaround.

Speaker Change: And then I'll pass it over to Wade for a deeper dive on the quarter and our improved outlook for 2024. And of course, we'll save time for Q&A and certainly look forward to that conversation.

Bryan Hanson: And of course, we'll save time for Q and A and certainly look forward to that conversation. But as some of you may be new to the story since our investor day in March, let me start by giving some background on Solventum, our team, and again, why we're confident in the value creation story. And I think the right place to start is the spin itself. We've talked about this before, but we have extensive IP that we share with 3M. And as a result of that, we are executing a highly entangled and therefore complex separation.

Speaker Change: As some of you may be new to the story since our investor day in March, let me start by giving some background on Solventum, our team, and again, why we're confident in the value creation story.

Wade Mcmillan: And I think the right place to start is the spin itself. We've talked about this before, but we have extensive IP that we share with 3M. And as a result of that, we are executing a highly entangled and therefore complex separation.

Bryan Hanson: But to ensure in a situation like that we proactively mitigate the risk associated with this type of separation, we have intentionally assembled a team with significant spin and transformation experience. And given the regulatory requirements of the sector, which can significantly impact the planning and implementation of a separation, we have also ensured this team has deep, regulated business experience. Simply put, we have done this before, and we are going to do it again.

Speaker Change: But to ensure in a situation like that, we proactively mitigate the risk associated with this type of separation. We have intentionally assembled a team with significant spin and transformation experience.

Speaker Change: And given the regulatory requirements of the sector, which can significantly impact the planning and implementation of a separation, we have also ensured this team has deep, regulated business experience.

Bryan Hanson: Now, relative to the business setup, our business segments are in attractive and growing markets. We have strong sub-brand recognition in those markets, significant IP protection, solid levels of investment in R&D, and we have a global reach. That said, we also have businesses that have consistently underperformed their markets with flat volume growth over the last two years, coupled with a declining volume trend, mainly due to misaligned and unfocused end metrics, which resulted in commercial misalignment and poor R&D productivity.

Speaker Change: Simply put, we have done this before and we are going to do it again.

Speaker Change: Now relative to the business setup, our business segments are in attractive and growing markets.

Speaker Change: We have strong sub-brand recognition in those markets, significant IP protection.

Speaker Change: Solid levels of investment in R&D, and we have global reach.

Speaker Change: That said, we also have businesses that have consistently underperformed their markets with flat volume growth over the last two years, coupled with a declining volume trend.

Speaker Change: mainly due to misaligned and unfocused and metrics, which resulted in commercial misalignment and poor R&D productivity.

Bryan Hanson: Now with this as context, and of course, what we are going to do about it, I'd like to remind you of our phased approach to stabilize and then separate the business, reposition it for profitable growth, and optimize the portfolio. As discussed at our investor meeting, we have outlined this in three phases, which are all currently underway and running in parallel. As you may remember, phase one is focused on mission, talent, culture, and structure, as well as the spin-related activities to separate from 3M, which are critical, all of them, critical catalysts for driving business growth.

Speaker Change: Now, with this as context and of course, what are we going to do about it, I'd like to remind you of our phased approach to stabilize and then separate the business.

Bryan Hanson: Phase two is developing and implementing a long-range plan that will reposition us for profitable growth, and phase three is portfolio optimization. Okay, starting with phase one, specifically related to mission, talent, and also culture and structure, we've already created a new mission statement and articulated our company values. And I have to tell you what an amazing opportunity it was to help write the mission and values for a new company. I feel incredibly lucky to be a part of something so meaningful.

Speaker Change: reposition it for profitable growth, and optimize the portfolio. As discussed at our investor meeting, we have outlined this in three phases, which are all currently underway and running in parallel.

Speaker Change: As you may remember, Phase 1 is focused on mission, talent, culture, and structure, as well as the spin-related activities to separate from 3M, which are critical, all of them, critical catalysts to driving business growth.

Speaker Change: Phase 2 is developing an implementing our long-range plan that will reposition us for profitable growth, and Phase 3 is portfolio optimization.

Speaker Change: Okay, starting with phase one, specifically related to mission, talent, and also culture and structure. We've already created a new mission statement and articulated our company values.

Speaker Change: And I've got to tell you what an amazing opportunity it was to help write the mission and values for a new company. I feel incredibly lucky to be a part of something so meaningful.

Bryan Hanson: I see the mission and the values of a company as absolutely critical to its success because, when done right, it becomes a common purpose in connection across the team, capturing the hearts and minds of all of our team members, which again, I see as an essential enabler of sustainable business performance. And we've held mission ceremonies around the globe, meeting with thousands of our employees to discuss how they will bring the mission to life.

Speaker Change: I see the mission and the values of a company as absolutely critical to its success because when done right it becomes a common purpose in connection across the team.

Speaker Change: capturing the hearts and minds of all of our team members, which again I see as an essential enabler of sustainable business performance.

Speaker Change: And we've held mission ceremonies around the globe, meeting with thousands of our employees to discuss how they bring the mission to life. It doesn't matter what region, or country, or business on a man it is clear. The team is excited and ready for the future as self-entum.

Bryan Hanson: It doesn't matter what region, what country, or business I'm in; it is clear the team is excited and ready for the future at Solventum. Now, relative to talent, which is really one of the key areas where spinning up a company creates value, we continue to move fast. We've completed the selection of our level one leadership team, finalized the structure for level two, and identified key positions at levels three and four that are critical to the turnaround.

Speaker Change: Now, relative to talent, which is really one of the key areas where spinning a company creates value, we continue to move fast. We've completed the selection of our level one leadership team.

Speaker Change: finalize the structure for Level 2 and identify key positions at Levels 3 and 4 that are critical to the turnaround. And we're actively internally sourcing or acquiring experienced talent in these roles as well.

Bryan Hanson: And we're actively sourcing or acquiring experienced talent in these roles as well. At the end of the day, we're trending ahead of my expectations in talent acquisition, benefiting from a lot of high-level industry talent that understands the value creation story and is interested in joining this team. We're also making great progress on our culture and structure project. This is a restructuring project we are calling the Solventum Way.

Speaker Change: At the end of the day, we're trending ahead of my expectations in talent acquisition. Benefiting from a lot of high-level industry talent that understand the value creation story and are interested in joining this team.

Speaker Change: We're also making great progress on our culture and structure project. This is a restructuring project we are calling the Solventum Way. The goal here is to create a more nimble and less hierarchical structure that drives increased autonomy, speed, and very importantly, accountability.

Bryan Hanson: The goal here is to create a more nimble and less hierarchical structure that drives increased autonomy, speed, and, very importantly, accountability and will also help us ensure that we have the ability to invest for growth while enhancing margin. Moving to the separation activities inside of phase one, you know, it's obviously early days with most of the work still ahead of us, but these are critical months in the separation, and I'm happy with our progress. This quarter's financial performance alone speaks to a successful start with our business continuity efforts while standing up a newly independent company.

Speaker Change: and will also help us ensure that we have the ability to invest for growth while enhancing margins.

Speaker Change: Moving to the separation activities inside of phase one, you know, it's obviously early days with most of the work still ahead of us, but these are critical months in the separation, and I'm happy with our progress.

Speaker Change: This quarter's financial performance alone speaks to a successful start with our business continuity efforts while standing up a newly independent company. Again, I want to compliment the teams for delivering on their commitments in the face of separation distraction.

Bryan Hanson: Again, I want to compliment the teams for delivering on their commitments in the face of separation distraction. For areas like our supply continuity project, manufacturing, and IT separation, I feel good about our disentanglement plans. This is hard work, but the teams are progressing these initiatives with speed. From a timeline perspective, our supply continuity project will extend beyond 24 months, but we expect the majority of Phase I activities to be completed in 12 to 24 months post-spin. I should also note that given the time frame of phase 1, it will naturally overlap with phases 2 and 3.

Speaker Change: For areas like our supply continuity project, manufacturing, and IT separation, I feel good about our disentanglement plans. This is hard work, but the teams are progressing these initiatives with speed.

Speaker Change: From a timeline perspective, our supply continuity project will extend beyond 24 months, but we expect the majority of Phase I activities to be completed in 12 to 24 months post-spin.

Speaker Change: I should also note that given the timeframe of phase 1, it will naturally overlap with phases 2 and phase 3.

Bryan Hanson: Phase two is focused on a Solventum-wide long-range plan to position us for profitable growth. Because we were able to accelerate talent acquisition in phase one, we've actually shortened the path to finalizing our strategic plan in phase two. Now we expect to share this plan during our fourth-quarter earnings call, which will coincide, as one would expect, with our 2025 guidance.

Speaker Change: Phase two is focused on a Solventum wide long-range plan to position us for profitable growth.

Speaker Change: Because we were able to accelerate talent acquisition in Phase 1, we've actually shortened the path to finalize our strategic plan in Phase 2. Now we expect to share this plan during our fourth quarter earnings call, which will coincide, as one would expect, with our 2025 guidance.

Bryan Hanson: So key elements of that plan, a couple of hints, but key elements of that plan will be our primary market and sub-market selection, again those markets that we're going to double down on. Inside those markets will be the growth driver initiatives to be able to build scale, and probably most importantly, showing that we're going to shift our commercial R&D and eventually resources to those growth driver areas. And, as you would expect, we're currently assessing primary markets and growth drivers, and our intent is to finalize these decisions before the end of the year.

Speaker Change: So, key elements of that plan, not comprehensive, but key elements of that plan will be our primary market and sub-market selection, again, those markets that we're going to double down in. Inside of those markets will be the growth driver initiatives to be able to build scale.

Speaker Change: and probably most importantly, showing that we're going to shift our commercial R&D and eventual M&A resources to those growth driver areas.

Speaker Change: And as you would expect, we're currently assessing primary markets and growth drivers, and our intent is to finalize these decisions before the end of the year.

Bryan Hanson: Once we've identified the primary markets and the growth drivers, we'll begin shifting, as I said before, our resources, starting with commercial infrastructure changes. You know, things like specializing the sales organization, things like changing the incentive plans that we have for the sales organization to bias our focus on the growth driver areas.

Speaker Change: Once we've identified the primary markets and the growth drivers, we'll begin shifting, as I said before, our resources, starting with commercial infrastructure changes. You know, things like specializing the sales organization.

Speaker Change: I think it's like changing the incentive plans that we have for the sales organization to bias our focus in the growth driver areas. We'll also shift where we spend our $1,000 so that we align our new product pipeline toward innovation that matters and is material in the growth driver markets.

Bryan Hanson: We'll also shift where we spend R&D dollars so that we align our new product pipeline toward innovation that matters and is material in the growth driver markets. And finally, as we expect that our focus on debt reduction over the next 24 months will allow more flexibility to expand our capital allocation priorities, including potential tuck in M&A tied to our, again, growth driver areas. Okay, moving on to phase three, we're looking at pathways for portfolio optimization through inorganic means in order to bring additional strategic clarity, organizational focus, and value creation.

Speaker Change: And finally, as we expect that our focus on debt reduction over the next 24 months will allow more flexibility to expand our capital allocation priorities, including potential Tuck and M&A tied to our, again, growth driver areas.

Speaker Change: Okay, moving on to phase three, we're looking at pathways for portfolio optimization through inorganic means in order to bring additional strategic clarity, organizational focus, and value creation.

Bryan Hanson: And as a result, we are actively assessing our various markets and businesses and their value contribution to deliver on our strategic and financial priorities. That said, given how early we are in the spin process, there are contractual considerations that will influence phase three. Okay, to summarize what I just said, because I think I threw a lot at you. Number one, our foundational work on mission, talent, culture, and structure is ahead of schedule and progressing well, positively impacting our phase two timing.

Speaker Change: And as a result, we are actively assessing our various markets and businesses and their value contribution to deliver on our strategic and financial priorities. Now, that said, given how early we are in the SPIN process, there are contractual considerations that will influence Phase 3.

Speaker Change: Okay, to summarize what I just said because I think I threw a lot at you. Number one, our foundational work on mission, talent, culture, and structure is ahead of schedule and progressing well and positively impacting our phase two timing.

Bryan Hanson: From a separation perspective, it's early days, but also pivotal days in the process, and things are progressing well, and I have confidence in our team. Number three, given our early progress on our strategic plan and SKU project, we now intend to share our long-range plan during our fourth quarter call, which again will coincide with our 2025 guidance. And number four, Wayde will speak more about the quarter in a minute, but our first quarter as an independent company was a good early sign when it comes to business continuity and progress on our phased approach.

Speaker Change: From a separation perspective, it's early days, but also pivotal days in the process, and things are progressing well, and I have confidence in our team.

Speaker Change: to

Speaker Change: Number three, given our early progress on our strategic plan and SKU project, we now intend to share our long-range plan during our fourth quarter call, which again will coincide with our 2025 guidance.

Speaker Change: And number four, Wade will speak more of the quarter in a minute, but our first quarter as an independent company was a good early sign when it comes to business continuity and progress on our phased approach.

Bryan Hanson: Before I turn it over to Wayde, I just want to reiterate that we have an incredible opportunity to create significant value and that I believe the actions we are taking today, relative to executing the separation and identifying opportunities to reposition this company for profitable growth, will set us up for significant value creation in the future.

Speaker Change: Before I turn it over to Wade, I just want to reiterate that we have an incredible opportunity to create significant value.

Speaker Change: and that I believe the actions we are taking today, relative to executing the separation and identifying opportunities to reposition this company for profitable growth, will set us up for significant value creation in the future.

Wayde McMillan: I'll start by echoing Bryan's sentiment and thank everyone at Solventum for their hard work getting us to where we are today. Our three-phase approach is designed to create significant value over time. I'll keep my remarks mostly focused on updates related to phase one and separation activities before getting into phase two performance and then wrapping up with guidance. To separate, we have significant efforts underway.

Wade: Okay, wait

Wade: I'll start by echoing Brian's sentiment and thank everyone at Solventum for their hard work getting us to where we are today.

Speaker Change: Our three-phase approach is designed to create significant value over time.

Speaker Change: I'll keep my remarks mostly focused on updates related to Phase I and separation activities before getting into Q2 performance and then wrapping up with guidance.

Wayde McMillan: We're moving our manufacturing lines from 67 plants to 29 Solventum plants, two of which we're building new at this time. We're also separating our distribution and supply chain by changing from 122 to 73 distribution centers. Our rebranding efforts are significant across 90 countries. We have changed our commercial distribution models in over 60 countries. The IT workstreams may be the most complex, as we're working to transition over 1,000 systems and stand up over 70 new platforms, including our new SAP ERP system globally.

Wade: To separate, we have significant efforts underway. We're moving our manufacturing lines from 67 plants to 29 Solventum plants.

Wade: two of which we're building new at this time.

Wade: We're also separating our distribution and supply chain by changing from 122 to 73 distribution centers.

Wade: Our rebranding efforts are significant across 90 countries.

Wade: We have changed our commercial distribution models in over 60 countries.

Speaker Change: The IT workstreams may be the most complex, as we're working to transition over 1,000 systems and stand up over 70 new platforms, including our new SAP ERP system globally.

Wayde McMillan: In parallel to the separation work, we are already making progress on the turnaround, which is centered on improving revenue growth and expanding margins. It's important to understand the historical baseline, and I'll provide some background for each metric as well. For revenue, we have historically underperformed our mid-single-digit markets with flat and declining volumes over the past two years. This was clearly reflected in 2023, where price was more than all the revenue growth for the year as we move out of a hyperinflationary period and price normalizes. We are intently focused on turning around the negative volume growth. Bryan covered the Solventum Way Restructuring Project, which touches every segment, function, and region in the company.

Wade: In parallel to the separation work, we are already making progress on the turnaround.

Wade: which is centered on improving revenue growth and expanding margins.

Wade: It's important to understand the historical baseline, and I'll provide some background for each metric as well.

Speaker Change: For revenue, we have historically underperformed our mid-single-digit markets with flat and declining volumes over the past two years.

Wade: This was clearly reflected in 2023, where price was more than all the revenue growth for the year.

Wade: As we move out of a hyperinflationary period and price normalizes.

Wade: We are intently focused on turning around the negative volume growth.

Brian Hanson: Brian covered the Solventum Way restructuring project, which touches every segment, function, and region in the company.

Wayde McMillan: This effort is ongoing, and will be an important part of our investment to reposition for growth and margin enhancement plan. Additionally, we remain focused on a comprehensive global SKU rationalization initiative. Our goal is to streamline and simplify the company by eliminating less strategic, low-growth, and or low-margin SKUs or product families. We have already identified approximately 3,500 SKUs to be eliminated as part of Wave 1 of this initiative.

Wade: This effort is ongoing and will be an important part of our investment to reposition for growth and Margin Enhancement Plan.

Wade: Additionally, we remain focused on a comprehensive global SKU rationalization initiative.

Brian Hanson: Our goal is to streamline and simplify the company by eliminating less strategic, low-growth, and or low-margin SKUs or product families.

Brian Hanson: We have already identified approximately 3,500 SKUs to be eliminated as part of Wave 1 of this initiative.

Wayde McMillan: They represent about 5% of total SKUs and will help simplify the supply chain, and they will not have a material impact on revenue and margin in 2024. This is a promising start and real progress achieved to date. The way of two is expected to be more impactful to revenue and margin in 2025. The turnaround is also focused on improving margins. The before mentioned Solventum Way and SKU projects are designed to identify efficiencies to reinvest and improve margins.

Brian Hanson: They represent about 5% of total SKUs and will help simplify the supply chain.

Brian Hanson: And they will not have a material impact to revenue and margin in 2024.

Brian Hanson: This is a promising start and real progress achieved to date. Wave 2 is expected to be more impactful to revenue and margin in 2025.

Brian Hanson: The turnaround is also focused on improving margin. The before mentioned Solventum Way and SKU projects are designed to identify efficiencies to reinvest and improve margins.

Wayde McMillan: We have seen our historical operating margins step down from approximately 25% in our 2022 and 2023 Carvote Financial Statements in the Form 10, to our planned 21-23% in 2024. We're not including 2021 in our baseline, given it was significantly inflated by the post-COVID rebound.

Brian Hanson: We have seen our historical operating margins step down from approximately 25% in our 2022 and 2023 carve-out financial statements in the Form 10.

Brian Hanson: to our planned 21 to 23 percent in 2024.

Brian Hanson: We're not including 2021 in our baseline, given it was significantly inflated by the post-COVID rebound.

Wayde McMillan: This 200 to 400 basis point decline is due to the additional cost of products supplied by 3M, as well as increased operating expenses to stand up a public company and the investments to reposition for growth. Turning now to the financial update, I want to remind everyone this is the first time we'll be presenting financial results as a standalone company.

Brian Hanson: This 200 to 400 basis point decline is due to the additional cost of product supplied by 3M, as well as increased operating expenses to stand up a public company and the investments to reposition for growth.

Brian Hanson: i

Brian Hanson: Turning now to the financial update. I want to remind everyone this is the first time we'll be presenting financial results as a stand-alone company. We previously reported Q1 2024 results under a car vote basis, as the first quarter was still under 3M.

Wayde McMillan: We previously reported Q1 2024 results under a Carvo basis, as the first quarter was still under 3M. With that, I'll provide an overview of our Q2 results and then shift to full year guidance. Starting with sales, for the second quarter of 2024, sales of 2.1 billion increased 20 basis points compared to the prior year on a reported basis while improving 1.3% on an organic basis. During the quarter, foreign exchange was a headwind of 110 basis points.

Brian Hanson: With that, I'll provide an overview of our Q2 results and then shift to full year guidance.

Brian Hanson: Starting with sales, for the second quarter of 2024, sales of 2.1 billion increased 20 basis points compared to prior year on a reported basis, while improving 1.3% on an organic basis.

Brian Hanson: During the quarter, foreign exchange was a headwind of 110 basis points.

Wayde McMillan: Sales growth reflected the expected normalizing of price. Additionally, we reported a slight volume increase in the quarter. This included a discrete benefit from back order improvement, without which volumes would continue to decline. Moving to the segments, our largest segment, MedSurge, delivered $1.2 billion in sales, an increase of 1.8% on an organic basis, led by the negative pressure wound therapy product category and continued adoption of our antimicrobial IV site management solutions. This segment was the primary beneficiary of reduced back orders.

Brian Hanson: sales growth reflected the expected normalizing of price.

Speaker Change: Well, we reported a slight volume increase in the quarter. This included a discrete benefit from back order improvement without which volumes continue to decline.

Brian Hanson: Moving to the segments, our largest segment, MedSurge, delivered $1.2 billion of sales, an increase of 1.8% on an organic basis, led by the negative pressure wound therapy product category, and continued adoption of our antimicrobial IV site management solutions.

Brian Hanson: This segment was the primary beneficiary of reduced back orders.

Wayde McMillan: Our dental segment delivered $331 million of revenue, a decrease of 2%, which reflects volume pressures associated with challenging market conditions, partially offset by pricing. The HIS segment contributed $328 million of revenue, an increase of 3.6%, which was fueled by continued adoption of 360 and Compass inside of Revenue Cycle Management and steady results in performance management solutions. Similar to the prior quarter, strength in these areas was partially offset by declines in clinician productivity solutions.

Brian Hanson: Our dental segment delivered 331 million of revenue, a decrease of 2%, which reflects volume pressures associated with challenging market conditions, partially offset by pricing.

Brian Hanson: HIS segment contributed $328 million of revenue, an increase of 3.6%, which was fueled by continued adoption of 360 and Compass inside of Revenue Cycle Management and steady results in performance management solutions.

Brian Hanson: Similar to the prior quarter, strength in these areas was partially offset by declines in clinician productivity solutions due to changing market conditions and inconsistent investment.

Wayde McMillan: Do changing market conditions and inconsistent investment. Finally, the Purification and Filtration Segment delivered $238 million in sales, a decline of 0.9% which was impacted by performance in drinking water filtration, partially offset by better-than-expected strength in bioprocessing filtration. Overall, volume declines were partially offset by price.

Brian Hanson: Finally,

Brian Hanson: In purification and filtration segment delivered 238 million of sales, a decline of 0.9% which was impacted by performance in drinking water filtration.

Brian Hanson: partially offset by better-than-expected strength in bioprocessing filtration.

Brian Hanson: Overall, volume declines were partially offset by pricing.

Wayde McMillan: Gross margins were 55.8% in the quarter. This represents a reduction of 200 basis points over the prior year, primarily driven by increased costs in international and Unfair will mix within medsurf, which was driven by backorder recovery in the lower margin OEM business. On a sequential basis, these two factors, along with the return to more normalized pricing, weighed on gross margins.

Speaker Change: Girls margins were 55.8% in the quarter.

Brian Hanson: This represents a reduction of 200 basis points over prior year, primarily driven by increased costs in international

Brian Hanson: and unfavorable mix within MedSurge that was driven by backorder recovery in the lower-margin OEM business.

Brian Hanson: On a sequential basis, these two factors, along with the return to more normalized pricing, weighed on gross margins.

Wayde McMillan: As expected, operating expenses increased both versus prior year results and sequentially compared to Q1. The added spend includes setting up new functions to support our growth strategy. It's also important to note that Q2 SG&A was high due to a stock-based compensation charge for legacy 3M employees. This and other smaller discrete items in Q2 represented an additional spend of approximately $30 million. In total, we delivered adjusted operating income of $430 million, which translates to an operating margin of $20.7. Moving down the P&L, interest expense also increased sequentially, reflecting the first full quarter impact of our February 2024 debt issuance, which was partially offset by interest income.

Brian Hanson: As expected, operating expenses increased both versus prior year results and sequentially compared to Q1.

Brian Hanson: The added spend includes standing up new functions and to support our growth strategy.

Brian Hanson: It's also important to note that Q2 SG&A was high due to a stock-based compensation charge for legacy 3M employees.

Brian Hanson: This, and other smaller discrete items in Q2, represented an additional spend of approximately $30 million.

Brian Hanson: In total, we delivered adjusted operating income of $430 million, which translates to operating margin of $20.7.

Brian Hanson: Moving down the P&L, interest expense also increased sequentially, reflecting the first full quarter impact of our February 2024 debt issuance, which was partially offset by interest income.

Wayde McMillan: Lastly, our effective tax rate of 12.2% came in favorable due in part to the estimated geographic mix of our statutory income post-spin, which includes a year-to-date adjustment. All in, we delivered earnings per share of $1.56, ahead of our internal expectations. Turning to the balance sheet, we ended the quarter with $897 million in cash and equivalents with no outstanding borrowings on our credit facility. We generated $297 million of free cash flow in Q2, bringing our year-to-date total to $637 million.

Brian Hanson: Lastly, our effective tax rate of 12.2% came in favorable due in part to the estimated geographic mix of our statutory income post-spin, which includes a year-to-date adjustment.

Brian Hanson: All in, we deliver earnings per share of a dollar and 56 cents ahead of our internal expectations.

Brian Hanson: Turning to the balance sheet, we ended the quarter with $897 million in cash and equivalents with no outstanding borrowings on our credit facility.

Brian Hanson: We generated $297 million of free cash flow in Q2, bringing our year-to-date total to $637 million.

Wayde McMillan: Importantly, we're committed to maintaining our investment grade rating and expect debt paydown to remain the priority over the next 24 months. We maintain a strong liquidity and financial position with continued free cash flow generation in addition to our $2 billion revolving credit facility. Now turning to guidance, for 2024, we are raising our organic sales growth guidance range up to zero to up 1%. This reflects first-half performance, including the benefit from backorder reduction in Q2, an updated assumption that SGU rationalization will not have a material impact on 2024 results, and importantly, building confidence in business continuity.

Brian Hanson: Importantly, we are committed to maintaining our investment-grade rating and expect debt pay down will remain the priority over the next 24 months.

Brian Hanson: We maintain a strong liquidity and financial position with continued free cash flow generation in addition to our $2 billion revolving credit facility.

Brian Hanson: Now, turning to guidance.

Brian Hanson: For 2024

Brian Hanson: We're raising our organic sales growth guidance range up to zero to up 1%.

Brian Hanson: This reflects first-half performance, including the benefit from back-order reduction in Q2, and updated assumption that SQU rationalization will not have a material impact on 2024 results, and importantly building confidence in business continuity.

Wayde McMillan: We are not providing quarterly guidance, but I do want to be sure to highlight the second half dynamics of the year-over-year comparison, which will play a large role in the organic sales growth in Q3 and Q4. For background, Q3 was the highest growth rate in 2023 and therefore has a tougher comparison and results in expected flat to down growth rate in Q3. Well, Q4 was the second lowest growth rate of 2023, with an easing comparison for Q4 2024.

Brian Hanson: i

Brian Hanson: We are not providing quarterly guidance, but I do want to be sure to highlight the second half dynamics of the year over year comparisons.

Brian Hanson: which will play a large role in the organic sales growth in Q3 and Q4.

Brian Hanson: For background, Q3 was the highest growth rate in 2023, and therefore, as a tougher comparison, and results in expected flat to down growth rate in Q3 2024.

Brian Hanson: while Q4 was the second lowest growth rate of 2023.

Brian Hanson: with an easing comparison for Q4 2024.

Wayde McMillan: For earnings per share, we are raising our guidance to $6.30 to $6.50 on our improved sales outlook and favorable estimated tax rate. We continue to expect free cash flow in the range of $700 to $800 million. For reference, here are a few additional items we've previously shared.

Wayde McMillan: On gross margins, we continue to expect incremental gross margin headwinds from the 3M supply agreement markup will begin to flow through our P&L in Q3 2024. For operating expenses, we anticipate the continued ramp-up of investment to build out standalone functions and support our growth strategy through the second half of the year. All in, we continue to expect full-year 2024 operating margin in the range of 21 to 23 percent. Turning to tax, we are updating our full-year effective tax rate to 18 to 19 percent, an improvement of 200 basis points from our earlier assumption of 20 to 21 percent.

Brian Hanson: An improvement of 200 basis points from our earlier assumption of 20% to 21%.

Wayde McMillan: It's important to recognize that this change to our tax rate is expected to be temporary for 2024, as we're benefiting from a near-term favorable mix based on where we are generating our income, which is a function of realizing separation costs in certain jurisdictions.

Brian Hanson: It is important to recognize that this change to our tax rate is expected to be temporary for 2024 as we are benefiting from a near term favorable mix based on where we are generating our income.

Brian Hanson: Which is a function of realizing separation costs in certain jurisdictions.

Ellie: In conclusion, we're off to a solid start closing our first public quarter. We're delivering on our near-term financial commitments, executing on separation activities, focusing on turning around the business, while raising the top and bottom line guidance for the year. Looking ahead, we will continue to execute on our phased approach to transform our business and make improvements across our key operational metrics, such as Accelerating Revenue Growth, Expanding Margins, Driving Free Cash Flow, and Optimizing Our Capital Allocation.

Brian Hanson: In conclusion, we're off to a solid start closing our first public quarter, we're delivering on our near term financial commitments.

Speaker Change: <unk> on separation activities, focusing on turning around the business or raising the top and bottom line guidance for the year.

Brian Hanson: Looking ahead, we will continue to execute on our phased approach to transform our business and make improvements across our key operational metrics accelerating revenue growth expanding margins driving free cash flow and optimizing our capital allocation.

Ellie: We will use our expertise in health, material, and data science to deliver our mission. We are encouraged by the early progress and look forward to the value creation plan ahead. I'll now hand it back to the operator for the Q&A portion of the call.

Speaker Change: We will use our expertise in health material and data science to deliver our mission.

Brian Hanson: We are encouraged by the early progress and look forward to the value creation plan ahead.

Speaker Change: I'll now hand, it back to the operator for the Q&A portion of the call.

Ellie: At this time, I would like to remind everyone that in order to ask a question, press star and then the number one on your telephone keypad. We'll pause for a brief moment to compile the Q&A roster. Our first question comes from Travis Steed from Bank of America. Your line is now open.

Speaker Change: At this time I would like to remind everyone in order to ask a question press star.

Speaker Change: Alright, and then the number one on your telephone keypad, well pause for a brief moment to compile the Q&A roster.

Speaker Change: Our first question comes from Travis Steed from Bank of America. Your line is now open.

Bryan Hanson: Hey everybody, congrats on your first earnings call. I guess, Wayde, I wanted to start with the guidance raise and really understand kind of all the moving parts there. I guess a lot of the EPS raise came from the tax, but it sounds like things are maybe even tracking ahead of plans and pushing the ski rationalization to 2025. Is anything, are you kind of more confident in kind of the outlook here, what kind of drove the guidance raise, and how to think about Q3 and second half modeling for the different line items?

Speaker Change: Thank you everybody and congrats on your first earnings call.

Travis Steed: I guess the way I wanted to start with the guidance raise.

Travis Steed: And really understand kind of all the moving parts there I got a lot of the EPS raise came from attacks, but it sounds like things are maybe been tracking ahead of plans and push the SKU rationalization in 2025, if anything are you kind of more confident in kind of the outlook here.

Travis Steed: Drove the guidance raise and how to think about Q3.

Speaker Change: And second half modeling for.

Speaker Change: The different line items.

Bryan Hanson: So hey Travis, it's Bryan. Maybe I'll start with some of your questions, particularly around just some of the and Wayde Alpass. So obviously, three components that Wayde talked about that are driving our roadmap and really our confidence. The first is just the business continuity is feeling pretty good right now, and we're making great progress against our plan. So that's number one.

Speaker Change: So <unk>. This is Brian maybe I'll start with some of your question, particularly around just some of the confidence we have in what's kind of pushing our guide and then Wade opacity to get into more specifics there.

Wade: So obviously three components that we talked about that are driving our guide and really our confidence and the first is just the business continuity is feeling pretty good right now and we're making great progress against our plan.

Bryan Hanson: Number two, as Wayde mentioned in his prepared remarks, it's just the backwater recovery that we banked in Q2. And then this Q clarity, and Wayde will talk more about that in a second, but we just have better clarity of the impact we're going to see in 2024 versus 2025. That's broad-based, you know, what we're feeling right now, and that's the reason for the guide change. I think it's important, though, just to maybe click down on business continuity and progress against our plan.

Speaker Change: That's number one number two as we referenced in his prepared remarks, it's just the backorder recovery that we think in Q2.

Travis Steed: And then the SKU clarity and wait to talk more about that in a second but we just have better clarity of the impact we're going to see in 2024 versus 2025.

Travis Steed: It's broad based.

Travis Steed: Feeling right now and Thats. The reason for the guide change I think importantly, though just maybe quick down in that business continuity and progress against our plan.

Bryan Hanson: You know, it doesn't feel like a long time. You know, it's only been four months now, but those are pretty pivotal months in the separation. A lot can happen in those months. And, you know, for the most part, we delivered in pretty much every primary area during that time, and, I think, most importantly, business continuity. That's where the biggest risk sits.

Travis Steed: It doesn't feel like a long time.

Travis Steed: Only been four months now, but those are pretty pivotal months in the separation.

Travis Steed: It can happen in those in those months.

Speaker Change: For the most part we delivered in pretty much every primary area during that time and I think most importantly business continuity and that's where the biggest receipts.

Bryan Hanson: And every day that passes, Travis, you know, we just feel better about reducing risk, retiring risk, and then further executing on our turnaround strategy. I guess probably the simplest way to say it is that a lot could have gone wrong, and it didn't, which is great. It doesn't mean it's going to be simple from here, but the momentum is positive, and that drives our confidence. But probably equally, maybe even more important than that, we're really moving fast in talent acquisition.

Travis Steed: Everyday that passes grabbing that we just feel better about reducing risk retiring risk and then further executing on our turnaround strategy.

Travis Steed: Yes, probably the simplest way to say it is a lot could have gone wrong and it didn't which is great. It.

Travis Steed: It doesn't mean, it's going to be simple from here, but the momentum is positive and that drives our confidence, but probably equally maybe even more important than that.

Travis Steed: We are really moving fast in talent acquisition, and I think probably anybody would recognize that you don't really want to put a strategy and if you don't have the people in place that are accountable for the strategy. So the faster you can move that.

Bryan Hanson: And I think anybody would recognize that you don't really want to put a strategy in if you don't have the people in place that are accountable for the strategy. So the faster you can move to put people in place, particularly in L1 and L2 positions, it's just critical to formulating the strategy, having ownership of the strategy, and eventually to flawless execution of the strategy. So those are the things that we feel like are moving in the right direction, increasing our optimism, and hopefully that's reflected in our tone in the guide. So maybe with that, Wayde, we can give a little more color on the other components.

Travis Steed: They put people in place, particularly in <unk> and <unk> positions.

Travis Steed: It's just critical to formulating the strategy, having ownership of the strategy and that eventually that flawless execution of the strategy.

Travis Steed: Those are the things that we feel like we're moving in the right direction, increasing our optimism and hopefully thats reflected in our tone in the guide so maybe with that way, we can give a little more color on the other components, yes. It sounds good happy to pick up on sort of how we're thinking about guidance here and the SKU.

Wayde McMillan: Yeah, sounds good. Happy to pick up on how we're thinking about guidance here and the SKU project. As Bryan said, we're really pleased to be in a position where we can raise our full-year guidance after just our first standalone quarter here as a public company. So let me talk about the new range.

Travis Steed: <unk> as Brian said, we're really pleased to be in a position where we can raise our full year guidance. After just our first standalone quarter here as a public company. So let me talk about the new range.

Wayde McMillan: It really built off the back of what we called out in the quarter here. In Q2, revenue was slightly ahead of our expectations because of the back order reduction that we got. And that was due to an improvement in service levels. So, positive signs, as Bryan said, for business continuity. So the new range then contemplates normalizing the second half for the price benefit that we've been seeing, and it continues to wane into the second half, as well as a tougher comp for that backorder recovery.

Travis Steed: Built off the back of what we called out in the quarter here in Q2 revenue was slightly ahead of our expectations because of the back order reduction that we got and that was from an improvement in service levels. So positive signs as Brian said for business continuity.

Travis Steed: The new range, then contemplates normalizing the second half for that for the price benefit that we've been seeing and it continues to wane into the second half as well as a tougher comp for that back order recovery. When you normalize for those two things from the first half the high end assumes we see improvement in the.

Wayde McMillan: When you normalize for those two things from the first half, the high end assumes we see improvement in the business, and then near the low end assumes a more consistent performance. So we feel really comfortable with the range here that we have for the second half.

Travis Steed: Business and then near the low end assumes a more consistent performance. So we feel real comfortable with the range here that we have for the second half. It's early days, but we are pleased with the business and its performance to date.

Good day.

Operator: My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to Solventum 2nd quarter, 2024 earnings call. As a reminder, this conference is being recorded.

Wayde McMillan: It's early days, but we are pleased with the business and its performance to date through the first half of the year, really, with the second half to go, and just keeping a focus on that our number one priority for us is our growth driver strategy. A little color down the P&L, if we think about gross margins. We mentioned in the preparative marks a couple of things that drove costs higher in the quarter, both the international costs and some unfavorable mix in med-surg, really around the margin on those back-order recovery products. And so lots to consider, puts and takes. It could be different next quarter,

Travis Steed: Through the first half of the year really with the second half to go and just keeping a focus on that number one priority for us is our growth driver strategy.

Operator: All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star, and then the number one key again.

Travis Steed: Little color down the P&L, if we think about gross margins.

Travis Steed: We mentioned in the prepared remarks, a couple of things that drove costs higher in the quarter.

Travis Steed: Both the international costs, and some unfavorable mix in med surge really around the margin on those back order recovery products.

Travis Steed: So lots to consider puts and takes it could be different next quarter, we are still expecting a step up in cost from <unk>.

Wayde McMillan: We are still expecting a step up in cost from 3M, but that doesn't necessarily mean a step up in gross margins because there are a lot of puts and takes. And so even with all that and the step up in cost, we are still comfortable with our 21% to 23% operating margin expectations for the full year of $24. And I should probably just touch quickly on OPEX, because that is also an important part of how we think about modeling here.

Operator: Thank you.

Travis Steed: But that doesn't necessarily mean, a step up in gross margins because there are a lot of puts and takes and so even with all of that.

Kevin Moran: I would now like to turn the program over to your host for today's conference, Kevin Moran, Senior Vice President of Investor Relations. Please proceed. Good afternoon, and welcome. Today we will discuss Solventum 2nd quarter, fiscal 2024 results, along with an update to our 2024 outlook. Just after market closed today, a press release was issued with our earnings results and updated outlook. The press release and earnings presentation are available on the investor section of the Solventum website.

Travis Steed: Step up in cost, we are still comfortable with our 21% to 23% operating margin expectations for the full year of 24.

Speaker Change: Probably just touch quickly on Opex because that is also an important part of how we think about modeling here, we called out in our prepared remarks that we had good amount of discrete items not unexpected in our separation, it's always a bit noisy with.

Wayde McMillan: We called out in our prepared remarks that we had a good number of discrete items, not unexpected in a separation. It's always a bit noisy with things that are coming out of the separation-related work. So we called out one in particular, a large expense that we took for stock-based comp and then a few other things that really were about $30 million in the quarter. So with that, we still anticipate the continued ramp for the investment to build out our standalone functions and to support our growth strategy through the second half of the year, but that will be off a normalized Q2 without those discrete items. So all in all, I feel really good about the guide and happy to be raising both the high end and the low end at this time.

Kevin Moran: Joining me today are Brian Hansen, our Chief Executive Officer, and Wade McMillan, our Chief Financial Officer. During the call, we will be making forward-looking statements that are subject to risk and uncertainties. For a full description of these risks and uncertainties, please refer to our SEC filings and the forward-looking statement slide at the beginning of the presentation.

Speaker Change: With things that are coming out of the separation related work. So we called out one in particular a large.

Speaker Change: Expense that we took for stock based comp and then a few other things that really were about $30 million in the quarter. So with that we still anticipate the continued ramp for the investment to build out our standalone functions and to support our growth strategy through the second half of the year, but that will be off a normalize.

Kevin Moran: Please note that during our discussion today, all our comments will be on a non-gap basis unless they are specifically called out as GAP. GAP to non-gap reconciliation for all relevant periods can be found in the schedules attached to our press release.

Speaker Change: Q2 without those discrete items.

Speaker Change: All in feeling really good about the guide and happy to be raising both the high end and the low end at this time.

Wayde McMillan: Great. Thanks for all the colorways!

Speaker Change: Great. Thanks for all the color ways and I guess the next question I have is thinking or.

Speaker Change: When can you guys start growing earnings again, I know 2025 is kind of a down year, but thinking about the plans that you have.

Kevin Moran: For the Q&A portion of the call, we kindly ask that you limit yourself to one question and one follow-up.

Bryan Hanson: I guess the next question I have is thinking more, you know, when can you guys start growing earnings again? I know 2025 is kind of a down year, but if you think about the plans that you have, you know, it's 26 a year where you potentially could grow earnings, and I don't know if there's any way, high level, to think about some of the things that you have to deal with in 2025 and some of the headwinds you have in 2025, like the tier rationalization and kind of help us size some range of impact on that, and thanks for the question.

Speaker Change: It's 26, a year, where you potentially could grow earnings and if theres any way high level to think about some of the the thing.

Speaker Change: You have to deal with 25 and some of the headwinds you have in 25 of the SKU rationalization and kind of help us size some range of impact on that.

Bryan Hansen: And with that, I'll hand the call over to Brian. All right, great. Thanks, Kevin, and thanks to everyone for joining us today.

Speaker Change: And thanks for the questions Wade if you want to provide a little more color on that some of the pressure points and 25, obviously <unk> talked about in his prepared remarks, and <unk> got some unique and utilization of expenses that are going to put pressure on us and youre right 25 is going to be a tough year for EPS, but we absolutely would expect that to begin to recover in 'twenty six we would be.

Bryan Hanson: and Wayde, if you want to provide a little more color on some of the pressure points in 25. Obviously, Wayde talked about it in his prepared remarks, 25's got some unique annualization of expenses that are going to put pressure on us, and you're right, 25's going to be a tough year for EPS, but we absolutely would expect that to begin to recover in 26. We'd be extremely disappointed if we didn't start to head in the right direction in 26. So, Wayde, I don't know if you want to provide anything more in 25. I thought you provided a lot in your prepared remarks.

Bryan Hansen: I say it's exciting to be here for our first earnings call as a publicly-traded company, and I want to start that call by saying that I'm encouraged by the progress that we have made and with the results of the quarter, which reflect our ability to come together as a new team and maintain business continuity in the midst of the separation. And we're raising our full-year outlook as we continue to progress our plans to get this business to where we expect it to be.

Bryan Hansen: Simply said, we are moving with urgency and we remain confident in our ability to create value. And for all the solvers that I know are listening out there, I want to say thank you. It's your hard work that has gotten us to this point. Make no mistake. This would not be happening. We would not be here without you.

Speaker Change: Extremely disappointed if we didn't start to head in the right direction and 'twenty six so way down if you want to provide anything more than 25 without you provided a lot in your prepared remarks, but yes, certainly can just I'll have to say, we're not guiding to $25 26, yes. There are certainly a lot of moving pieces as we are in our first year post separation we do.

Bryan Hansen: And for the call today, I'm going to provide a brief reminder of our investor-day presentation, specifically around our situation analysis and reasons to believe in the value creation story, as well as reminder of and update on our phased approach for the transformation and turnaround.

Wayde McMillan: Mark Speck. Yeah, I certainly can. You know, I'll have to say we're not guiding to 25 and 26 yet. There are certainly a lot of moving pieces as we're in our first year post-separation. We do have a lot going on to grow revenue and expand margins and, as Bryan said, resulting EPS growth over time. However, we do think it's well understood that we'll be pressured by the annualization of some of these costs post-span in 2025.

Bryan Hansen: And then I'll pass it over to Wade for a deeper dive on the quarter and our improved outlook for 2024. And of course, we'll save time for Q&A and certainly look forward to that conversation.

Speaker Change: A lot going on to grow revenue and expand margins and as Brian said, resulting EPS growth over time.

Speaker Change: We do think it's well understood that will be pressured by the annualized <unk> of some of these costs post spin in 2025. So just to list them. We've got the <unk> supply markups that will annualize will be annualized our standup functional expenses and then below the line will be annualized interest expense.

Bryan Hansen: As some of you may be new to the story since our investor day in March, let me start by giving some background on Solventum, our team and again why we're confident in the value creation story. And I think the right place to start is the spin itself. We've talked about this before, but we have extensive IP that we share with 3M. And as a result of that, we are executing a highly entangled and therefore complex separation.

Wayde McMillan: So just to list them, we've got the 3M supply markup that we'll annualize. We'll be annualizing our stand-up operating expenses, and then below the line, we'll be annualizing interest expenses. And all of this is because we've got three quarters this year as a public company, and we'll annualize a fourth quarter next year. And then I did mean to touch on the SKU project as well, because this one is just great. Great progress out of the gate.

Speaker Change: And all of this is because we've got three quarters. This year as a public company and will annualize our fourth quarter next year.

Bryan Hansen: But to ensure in a situation like that, we proactively mitigate the risk associated with this type of separation. We have intentionally assembled a team with significant spin and transformation experience and given the regulatory requirements of the sector, which can significantly impact the planning and implementation of a separation, we have also ensured this team has deep regulated the business experience. Business. Simply put, we have done this before, and we are going to do it again.

Speaker Change: And then I didn't mean to touch on the SKU project as well because this one is just great great progress out of the gate real nice start we found that there was a lot of opportunity to take out a significant number of skus already in our first wave here and the good news is they don't impact revenue in a material way there is a very small impact.

Wayde McMillan: A real nice start. We found that there was a lot of opportunity to take out a significant number of SKUs already in our first wave here, and the good news is they don't impact revenue in a material way. There's a very small impact.

Wayde McMillan: We don't expect them to impact margins or revenue in 2024. And the real benefit is that they will help us simplify the supply chain. It will save a few million dollars on rebranding as well because we don't have to rebrand these SKUs that have a very low value to us. So the team is continuing to work on the next wave, which we do anticipate will have more of an impact in 2025. But that work is still underway, and we don't have an update on that yet.

Speaker Change: We don't expect them to impact margins or revenue in 2024, and the real benefit as it will help us simplify the supply chain.

Bryan Hansen: Now, relative to the business setup, our business segments are in attractive and growing markets, we have strong sub-brand recognition in those markets, significant IP protection, solid levels of investment in R&D, and we have global reach. That said, we also have businesses that have consistently under-performed their markets, with flat volume growth over the last two years, coupled with a declining volume trend, mainly due to misaligned and unfocused end metrics, which resulted in commercial misalignment and poor R&D productivity.

Speaker Change: Save a few million dollars on rebranding as well because we don't have to rebrand. These skus that had very low value to us. So the team is continuing to work on the next wave, which we do anticipate we will have more of an impact on 2025, but that work is still underway and we don't have an update there yet.

Wayde McMillan: Great. Thanks a lot.

Speaker Change: Great. Thanks, a lot.

Speaker Change: Yes.

Ellie: Our next question comes from Vik Chopra from Wells Fargo. Your line is now open.

Speaker Change: Our next question comes from Vik Chopra from Wells Fargo. Your line is now open.

Wayde McMillan: Hey, good afternoon, and congrats on a nice quarter; a couple for me. So, by our math, the revenue guidance raise adds about $80 to $150 million of dollar upside to 2024. Maybe just help us understand what business segments are driving this. And then I had a follow-up question, please.

Vik Chopra: Hey, good afternoon, and congrats on a nice quarter a couple for me.

Bryan Hansen: Now, with this context, what are we going to do about it? I would like to remind you of our phased approach to stabilize and then separate the business, reposition it for profitable growth, and optimize the portfolio. As discussed in our investor meeting, we have outlined this in three phases, which are all currently underway and running in parallel. As you may remember, phase one is focused on mission talent, culture, and structure, as well as the spin related activities to separate from 3M, which are critical, all of them, critical catalysts to driving business growth.

Matt: So Matt.

Speaker Change: And that the revenue guidance raise adds about a $80 million to $150 million of of.

Vik Chopra: Dollar upside to 2024, maybe just help us understand what business segments are driving this and then I had a follow up please.

Wayde McMillan: Yeah, Vik, happy to take that. You know, we don't break it down by segment, but what we can say is that the message that we put into the prepared remarks was the most important one. There's a good amount of risk as we separate the business and business continuity, and we gained a lot of confidence. We went a long ways from having no quarters to having one quarter. It was, as Bryan mentioned, a pivotal quarter for us.

Speaker Change: Yes happy to take that we don't break it down by segment, but what we can say is that the message that we put into the prepared remarks was the most important one there's a good amount of risk as we separate the business and business continuity and we gained a lot of confidence if we go from a long ways from having no.

Speaker Change: Quarters, having one quarter as Brian mentioned, it was a pivotal quarter for us So that's where the confidence really group and so it's really across the board that we're thinking that we're going to see some strength obviously.

Wayde McMillan: So that's where the confidence really grew, and so it's really across the board that we think that we're going to see some strength. Obviously, the backward recovery and med surge was a good size, as Bryan called it, banking it in the second quarter here, a good size bump for us. So it's that, the business continuity plan, and then also the SKU reduction program. We don't think it's going to have as much of an impact on 24. That would be just across the three segments with products, not including HIS.

Bryan Hansen: Phase two is developing and implementing our long-range plan that will reposition us for profitable growth, and phase three is portfolio optimization. Okay, starting with phase one, specifically related to mission talent and also culture and structure. We've already created a new mission statement and articulated our company values, and I've got to tell you what an amazing opportunity was to help write the mission and values for a new company. I feel incredibly lucky to be a part of something so meaningful.

Speaker Change: Backorder recovery in Med surge was a good size.

Speaker Change: Frank hold at banking it in the second quarter here, a good sized bump for us. So it is that the business continuity and then also the SKU reduction program. We don't think it's going to have as much of an impact on 24 that would be just across the three segments with products not including <unk>.

Bryan Hansen: I see the mission and the values of a company as absolutely critical to its success, because when done right, it becomes a common purpose and connection across the team. Capturing the hearts and minds of all of our team members, which again, I see as an essential enabler of sustainable business performance. We've held mission ceremonies around the globe, meeting with thousands of our employees to discuss how they bring the mission to life.

Bryan Hanson: Yeah, I might just add to that too, you know, if you think about really four vectors, and I won't go through all of them, but there's four vectors that you can accelerate growth with, and there's no rocket science here, they're pretty basic, but they're the things you've got to do to drive it. One of the first things you can do, with the fastest impact, is just upgrading talent to drive better commercial rigor and just changing incentives for your commercial organization to focus on growth.

Speaker Change: Yeah, Mike just to add to that too if you think about.

Speaker Change: Four vectors and I won't go through all of these but theres four vectors that you can accelerate growth with us.

Speaker Change: No there's no rocket science here, they're pretty basic but put to the things you got to do to drive it one of the first things you can do the fastest impact is just upgrading talent to drive better commercial rigor.

Bryan Hansen: It doesn't matter where region, country, or business I'm in, it is clear. The team is excited and ready for the future assault anthem. Now, relative to talent, which is really one of the key areas where spinning a company creates value, we continue to move fast. We've completed the selection of our level one leadership team, finalized the structure for level two, and identified key positions at levels three and four that are critical to the turnaround.

Speaker Change: And just changing incentives to your commercial organization to focus on growth in those are the things. We can do right now right, we're bringing in great people, we've accelerated and promoted people that are very capable in the organization and bring brought people from the outside that will have a dividend pretty quickly because they will increase the rigor and accountability in the.

Bryan Hanson: And those are the things we can do right now. We're bringing in great people. We've accelerated and promoted people that are very capable in the organization and brought people from the outside. That will pay dividends pretty quickly because they will increase the rigor and accountability in the organization. So that we would expect to help us in the back half of 24 and certainly into 25.

Speaker Change: <unk>, so that we would expect to help us in the back half of 'twenty, four and certainly into 'twenty five.

Bryan Hansen: And we're actively internally sourcing or acquiring experienced talent in these roles as well. Now, at the end of the day, we're training ahead of my expectations in talent acquisition, benefiting from a lot of high-level industry talent that understand the value creation story and are interested in joining this team. We're also making great progress on our culture and structure project. This is a restructuring project we were calling this self-entom way. The goal here is to create a more nimble and less hierarchical structure that drives increased autonomy, speed, and very importantly accountability.

Bryan Hanson: Got it, very helpful. Then just my follow-up question. Can you just share some high-level feedback on your conversation with the activists and just provide an update as to how much of a stake they've actually amassed? Thank you.

Speaker Change: Got it very helpful. And then just as my follow up question can.

Speaker Change: Can you just share some high level feedback on your conversation with the activist and.

Speaker Change: Just provide an update as to how much of a stake they've actually Ms. Thank you.

Bryan Hanson: You know, as you would imagine, as a public company, we don't talk about any individual investor. That said, as a public company and humble people, we absolutely listen to our shareholders and appreciate the feedback, but probably have no more to say about that.

Bryan Hanson: But, you know, as you would imagine, as a public company, we don't, we don't.

Speaker Change: But as you would imagine as a public company, we don't we don't talk about any individual investor.

Speaker Change: <unk> said as a public company and humble people, we absolutely listen to our shareholders and I appreciate the feedback, but probably no more to say about that.

Bryan Hansen: And we'll also help us ensure that we have the ability to invest for growth while enhancing margins. Moving to the separation activities inside of phase one, you know, it's obviously early days with most of the work still ahead of us, but these are critical months in the separation and I'm happy with our progress. This quarter's financial performance alone speaks to a successful start with our business continuity efforts while standing up a newly independent company.

Ellie: Next question, please, Operator.

Speaker Change: Next question please operator.

Ellie: Our next question comes from David Roman from Goldman Sachs. Your line is now open.

Speaker Change: Our next question comes from David Roman from Goldman Sachs. Your line is now open.

Ellie: Thank you. Good afternoon, everybody.

David Roman: Thank you and good afternoon everybody.

David Roman: Does it get one in here on the financial side and then one follow up on the strategic planning side, maybe just starting on with respect to the outlook for the balance of the year I'm trying to put together some of the moving parts as it relates to first half versus second half and maybe weighed you could help us bridge a little bit the commentary around the reiteration of the 'twenty one to 'twenty three.

Wayde McMillan: I hope to get one in here on the financial side and one follow-up on the strategic planning side. Maybe, just starting with respect to the outlook for the balance of the year, I'm trying to put together some of the moving parts as it relates to first half versus second half. And maybe, Wayde, you could help us bridge a little bit the commentary around the reiteration of the 21 to 23 percent operating margin.

Bryan Hansen: Again, I want to compliment the teams for delivering on their commitments in the face of separation distraction. For areas like our supply continuity project, manufacturing and IT separation, I feel good about our disentanglement plans. You know, this is hard work, but the teams are progressing these initiatives with speed. From a timeline perspective, our supply continuity project will extend beyond 24 months, but we expect the majority of phase one activities to be completed in 12 to 24 months post-spin. I should also note that given the timeframe of phase one, it will naturally overlap with phases two and phase three.

David Roman: 3% operating margin.

Wayde McMillan: That's roughly what you did here in the first half with some of the commentary around the 3M supply agreement, as well as the incremental investments and what that implies for sort of an exit rate for the year. And then, as I look at free cash flow year-to-date and the updated guidance, it implies a significant step up in cash utilization here in the second half. Can you maybe help us understand some of the moving parts there as well? Wayde McMillan, Bryan Hanson, Kevin Moran, Wayde McMillan, Vikramjeet Chopra, Solventum

Speaker Change: Roughly what you did here in the first half with some of the commentary around the <unk> supply agreement as well as the incremental <unk>.

Speaker Change: Investment and what that implies for sort of an exit rate for the year.

Speaker Change:

Speaker Change: As I look at free cash flow year to date and the updated guidance. It implies a significant step up in cash utilization here in the second half can you maybe help us understand some of the moving parts there as well.

Bryan Hansen: Phase two is focused on a Solventum-wide long-range plan to position us for profitable growth. Because we were able to accelerate talent acquisition in phase one, we've actually shortened the path to finalize our strategic plan in phase two. Now we expect to share this plan during our fourth quarter earnings call, which we'll coincide as one would expect with our 2025 guidance. So key elements of that plan, not comprehensive, but key elements of that plan will be our primary market and sub-market selection.

Speaker Change: Sure.

Wayde McMillan: So just to cover a little bit more, David, to your question on the first half and second half outlook. You know, I think I touched on revenue a good amount there, just highlighting that we had a couple of items in the first half that won't repeat in the second half. Pricing, weighing, and then the backward recovery, which is opportunistic, and we don't anticipate seeing that in the second half at this point. And so that's what gets us our revenue growth rate, and it's zero to one percent for the year.

Speaker Change: So just to cover a little bit more David to your question on first half second half outlook I think I touched on revenue a good amount there.

Speaker Change: Highlighting that we had a couple.

Speaker Change: Items in the first half that won't repeat in the second half pricing waning and then tobacco recovery, which is opportunistic and we don't anticipate seeing that in the second half at this point and so that's what gets us our revenue growth rate and it's a zero to 1% for the year and so you can do the math on that for the <unk>.

Bryan Hansen: Again, those markets that we're going to double down in. Inside of those markets will be the growth driver initiatives to be able to build scale. And probably most importantly, showing that we're going to shift our commercial R&D and eventually resources to those growth driver areas. And as you would expect, we're currently assessing primary markets in growth drivers, and our intent is to finalize these decisions before the end of the year. Once we've identified the primary markets and the growth drivers, we'll begin shifting, as I said before, our resources starting with commercial infrastructure changes.

Wayde McMillan: And so you can do the math on that for the second half. I do just want to highlight from our prepared remarks that there is a significant comp issue between Q3 and Q4. So that's important for revenue.

Speaker Change: Second half I do just want to highlight from our prepared remarks that there is a comp significant comp issue between Q3 and Q4.

Speaker Change: That's important for revenue.

Speaker Change: You mentioned bridging the.

Wayde McMillan: You mentioned bridging the exit rate around operating margins. The way we're thinking about this is Q2 had some headwinds in gross margins and operating margins for us. Those are offset with the favorability in revenue, and so that's what gives us confidence to hold the 21 to 23 percent for the year. We're not going to comment on an exit rate at this point. We're not giving quarterly guidance.

Speaker Change: And the exit rate around operating margins the way we're thinking about this as Q2 had some headwinds in gross margins and operating margins for us those are offset with favorability in revenue and so that's what gives us confidence to hold the 21% to 23% for the year.

Bryan Hansen: You know, things like specializing the sales organization, things like changing the incentive plans that we have for the sales organization to bias our focus in the growth driver areas. We'll also shift where we spend R&D dollars so that we align our new product pipeline toward innovation that matters and is material in the growth driver markets. And finally, as we expect that our focus on debt reduction over the next 24 months will allow more flexibility to expand our capital allocation priorities, including potential tuck in M&A, tied to our, again, growth driver areas.

Speaker Change: We're not going to comment on an exit rate at this point, we're not giving the quarterly guidance. Obviously, we've just got one quarter under our belt and we've got a long ways to go.

Wayde McMillan: Obviously, we've just got one quarter under our belts, and we've got a long ways to go. We're just not going to get to that level of detail.

Speaker Change: We're just not going to get to that level of detail, but what we can tell you is.

Wayde McMillan: But what we can tell you is we gained a lot of confidence in the quarter, and we learned a lot about the business post-separation. So it's building confidence, and that's what allowed us to raise both the top and the bottom line here just after our first quarter. You mentioned cash as well. I would say probably the biggest things that we're managing here post-separation are just all of the timing of the intercompany work that we're doing, as well as setting up our capital expenditure processes. And so we do think we will be using more cash in the second half of the year to settle out some of those, as well as ramping up our capital expenditure use in the second half.

Speaker Change: We have gained a lot of confidence in the quarter and we learned a lot about the business post separation. So it's building confidence and that's what allowed us to raise both the top and the bottom line here before we just.

Bryan Hansen: Okay, moving on to phase three, we're looking at pathways for portfolio optimization through inorganic means in order to bring additional strategic clarity, organizational focus, and value creation. And as a result, we are actively assessing our various markets and businesses and their value contribution to deliver on our strategic and financial priorities. Now, that said, given how early we are in the spin process, there are contractual considerations that will influence phase three.

Speaker Change: Just after our first quarter, you mentioned cash as well.

Speaker Change: I would say probably the biggest things that we're managing here post separation is just all of the.

Speaker Change: Timing of the intercompany work that we're doing as well as.

Speaker Change: Standing up our capital expenditure processes and so we do think we will be using more cash in the second half of the year to settle out some of those as well as ramping up our capital expenditure use in the second half.

Bryan Hansen: Okay, to summarize what I just said, because I think I threw a lie at you, number one, our foundational work on mission, talent, culture, and structure is a head of schedule and progressing well and positively impacting our phase two timing. From a separation perspective, it's early days, but also pivotal days in the process and things are progressing well and I have confidence in our team. Number three, given our early progress on our strategic plan and skew project, we now intend to share our long range plan during our fourth quarter call, which, again, will coincide with our 2025 guidance.

Wayde McMillan: Got it. And then, Bryan, I appreciate your comments about being ready to share more with us on the fourth quarter call, but I think you've made comments in other forums about the kind of turnaround on the top line being roughly a five-year period of time. Can you maybe update us on any thoughts with respect to that outlook and how that falls into the context of the phasing of the different parts of the Solventum turnaround that you referenced earlier?

Brian Hanson: Got it and then Brian I appreciate your comments on kind of being ready to share more with us on the fourth quarter call, but I think you've made comments in other forums about kind of the turnaround on the top line being roughly.

Speaker Change: A five year period of time can you maybe update us on any thoughts with respect to that outlook and how that falls into the context of the phasing of the different different parts of the solvents of turnaround that you referenced earlier.

Bryan Hanson: Absolutely and good to hear from you. So I would say, you know, I'll repeat a little bit of what I said and then maybe add some additional color. I see this as an opportunity for us in our strategic plan to very clearly articulate what markets and sub-markets we're going to care about. We're going to double down on, and those will be our faster growth markets, as you can imagine. We're working through that now, and I would expect to pick those by the end of 2024.

Brian Hanson: And good to hear from me is what I would say.

Speaker Change: I'll repeat a little bit of what I said, and then maybe add some additional color.

Bryan Hansen: And number four, wait, we'll speak more of the quarter in a minute, but our first quarter as an independent company was a good early sign when it comes to business continuity and progress on our phase approach. Before I turn it over to Wade, I just want to reiterate that we have an incredible opportunity to create significant value, and that I believe the actions we are taking today relative to executing the separation and identifying opportunities to reposition this company for profitable growth will set us up for significant value creation in the future.

Speaker Change: I see this as.

Speaker Change: An opportunity for us.

Speaker Change: Our strategic plan to very clearly articulate what markets and Submarkets, where going to care about right, we're going to double down in and those will be our faster growth markets. As you can imagine we're working through that now would expect to pick those by the end of 2024.

Bryan Hanson: Once we do that, that begins the shift of resources commercially, R&D, and M&A when we get to that point, and that begins to drive traction and focus in those areas. That just takes time, but maybe I can double-click on the revenue growth accelerators. I referenced that there were really four of those, and it just is again, there's no secret sauce here.

Speaker Change: Once we do that that begins to shift of resources commercially R&D M&A, when we get to that point and that begins to drive traction and focus in those areas.

Wade Mcmillan: Okay, Wade. I'll start by echoing Bryan's sentiment and thank everyone at Solventum for their hard work getting us to where we are today. Our three-phase approach is designed to create significant value over time.

Speaker Change: It takes time, but maybe I can double click on the revenue growth accelerators that I referenced that there were really four of those.

Speaker Change: And it just is again there is no secret sauce here, if you've ever run a business and you turn went around and drove revenue acceleration. These are the things you have to do it's just a question of doing them and how much time, they take and so I'm just kind of start with the first is as I referenced getting great people in place that know how to drive rigor in our commercial organization is paramount and it's the fastest way.

Bryan Hanson: If you've ever run a business and you've turned one around, driving revenue acceleration, these are the things you have to do. It's just a question of doing them and how much time they take. I'll just kind of start with the first, as I referenced, getting great people in place that know how to drive rigor in a commercial organization is paramount, and it's the fastest way to drive revenue growth. The second fastest way is commercial structure changes, either specialization or just increasing reach in those important spaces that we're going to concentrate on.

Wade Mcmillan: I'll keep my remarks mostly focused on updates related to phase one and separation activities before getting into Q2 performance and then wrapping up with guidance. To separate, we have significant efforts underway. We're moving our manufacturing lines from 67 plants to 29 Solventum plants, two of which we're building new at this time. We're also separating our distribution and supply chain by changing from 122 to 73 distribution centers. Our branding efforts are significant across 90 countries.

Speaker Change: To drive revenue growth.

Speaker Change: Second fastest way as commercial structure changes, either specialization or just increasing reach and those important spaces that we're going to concentrate on third as you would expect would be increasing the productivity of R&D. We have to do less of these iterative approach is in R&D and more impactful more meaningful launches inside of the high growth are.

Bryan Hanson: Third, as you would expect, would be increasing the productivity of R&D. We have to do less of these iterative approaches in R&D and more impactful, more meaningful launches inside of the high growth areas. And then, probably, in parallel with that, would be portfolio optimization. I look at that in two ways.

Speaker Change: Areas and then probably in parallel with that would be portfolio optimization and I look at that in two ways. The first would be tuck in acquisitions to gain more scale in those fast growth markets and the other would be potentially exit exiting categories that are slow growth alright. Those are the ways that you would get there if I just think about the timing of those things kind of going to your question.

Wade Mcmillan: We have changed our commercial distribution models in over 60 countries. The IT workstreams may be the most complex as we're working to transition over 1000 systems and stand up over 70 new platforms, including our new SAP ERP system globally. In parallel to the separation work, we are already making progress on the turnaround, which is centered on improving revenue growth and expanding margins. It's important to understand the historical baseline, and I'll provide some background for each metric as well.

Bryan Hanson: The first would be tucking in acquisitions to give more scale in those fast growth markets, and the other would be potentially exiting categories that are slow growth. Those are the ways that you would get there.

Bryan Hanson: If I just think about the timing of those things going to your question, again, on the talent side, it's right now. In the back half of 24, into 25, we should expect to see that benefit. Commercial structure changes just take a little longer because you've got to know where you're going to do them. And then you've got to actually hire people and change the structure. That's more probably the latter part of 25. If I think about R&D productivity, once you start a project, the best case when you start one is 2026, but likely beyond that, just depending on the product complexity and the regulatory requirements.

Speaker Change: Again on the talent side, it's right now in the back half of 'twenty four 'twenty five we should expect to see that benefit commercial structure changes just take a little longer because you got to know where you're going to do them and then you've got to actually hire people and changed the structure. That's more probably latter part of 'twenty five if I think about R&D productivity. Once you start a project.

Wade Mcmillan: For revenue, we have historically underperformed our mid-single digit markets, with flat and declining volumes over the past two years. This was clearly reflected in 2023, where price was more than all the revenue growth for the year. As we move out of a hyperinflationary period and price normalizes, we are intently focused on turning around the negative volume growth. Brian covered the Solventum way restructuring project, which touches every segment, function, and region in the company.

Speaker Change: Probably best case, when you start one is 2026, but likely beyond that just depending on the product complexity. The regulatory requirements and then portfolio optimization really at least on the acquisition side depends on just deleveraging timing.

Bryan Hanson: And then portfolio optimization really depends, at least on the acquisition side, on just deleveraging timing. And so when I think about the LRP, why this is important is because we're figuring out now the mix of these elements that we're going to need to accelerate growth and where the major gaps are. And as we work through that mix, that will inform not just our LRP but the time to accelerate revenue growth. So hopefully, that gives a little more color versus what I've said in the past. But those are the elements that will get us there.

Speaker Change: So when I think about the DLR P. Why these are important is because we're figuring out now the mix of these elements that we're going to need to accelerate growth, whereas the major gaps are and as we work through those that mix that will inform not just our MRP, but the time to accelerate the revenue growth.

Wade Mcmillan: This effort is ongoing and will be an important part of our investment to reposition for growth and margin enhancement plan. Additionally, we remain focused on a comprehensive global SKU rationalization initiative. Our goal is to streamline and simplify the company by eliminating less strategic, low-grow, and or low margin SKUs or product families. We have already identified approximately 3,500 SKUs to be eliminated as part of Wave 1 of this initiative. They represent about 5% of total SKUs and will help simplify the supply chain, and they will not have a material impact to revenue and margin in 2024.

Speaker Change: So hopefully that gives a little more color versus what I've said in the past, but those are the elements to get us there.

Ellie: That's great; I appreciate all the details. Thank you.

Speaker Change: That's great I appreciate all the detail. Thank you.

Speaker Change: Yeah.

Ellie: Our next question comes from Vik Chopra from Walsh Fargo. Your line is now open.

Speaker Change: Our next question comes from Nick Chopra from Wells Fargo. Your line is now.

Wayde McMillan: That $22 million of corporate and unallocated revenues, do you expect those to continue going forward? Should we be building those into our revenue projections?

Nick Chopra: Hey, just hopping and back and back to you for a couple of quick follow ups.

Speaker Change: That $22 million of corporate.

Nick Chopra: Right.

Speaker Change: Allocated <unk> of revenues do you expect those to continue going forward issue should we be building those into our revenue projections.

Wayde McMillan: Yeah, I'm glad you asked that one, Vik. An approximate number to the 22 for the rest of the year, yeah, so in other words, that's a good estimate for the next couple quarters.

Speaker Change: Yes, I'm glad you asked that one Vic.

Speaker Change: An approximate number to the 22 for the rest of the year, yes. So in other words.

Speaker Change: That's a good estimate for the next couple of quarters this year.

Wayde McMillan: Okay, so build out 22 million roughly for Q3 and Q4. Got it. And then I don't think I heard an updated FX assumption for the year. Can you help us out with that? Thank you.

Wade Mcmillan: This is a promising start and real progress achieved today. Wave 2 is expected to be more impactful to revenue and margin in 2025. The turnaround is also focused on improving margin. The before mentioned Solventum Way and SKU projects are designed to identify efficiencies to reinvest and improve margins. We have seen our historical operating margins step down from approximately 25% in our 2022 and 2023 Carvote financial statements in the form 10 to our planned 21 to 23% in 2024.

Vic: Okay to build out $22 million roughly for Q3 and Q4 got it and then I don't think I heard an updated assumption for the year can you help us out with that thank you.

Wayde McMillan: Oh, FX. So we just use the current FX rates at this point. For the following, Kevin, do you actually have that?

Speaker Change: Oh FX.

Speaker Change: So we are.

Speaker Change: We just use the current FX rates at this point.

Kevin Moran: For the for the following Kevin do you actually have that yes, so right now the.

Kevin Moran: Yeah, so right now, the last assumption we provided from a revenue perspective is 50 basis points of impact. We did not update that, so it's safe to assume that that's still our best guess.

Kevin Moran: The lapse assumption, we provided from a revenue perspective is 50 basis points of impact we did not update that sort of safe to assume that.

Kevin Moran: Still our best guess.

Wayde McMillan: And the way we do that, Vik, is we just take the current rates, approximately right now, and apply that. So we're expecting 50 basis points for the full year.

Kevin Moran: And the way we do that Vic is we just take the current rates approximately right now and apply that so we're expecting 50 basis points for the full year.

Wade Mcmillan: We're not including 2021 in our baseline given it was significantly inflated by the post-COVID rebound. This 200 to 400 basis point decline is due to the additional cost of products supplied by 3M as well as increased operating expenses to stand up a public company and the investments to reposition for growth.

Wayde McMillan: Got it. Thank you very much.

Vic: Got it thank you very much.

Ellie: Our next question comes from David Roman from Goldman Sachs. Your line is now open.

Vic: Our next question comes from David Roman from Goldman Sachs. Your line is now open.

Wayde McMillan: Thank you. I appreciate you taking the additional questions here. Maybe a few clarification items. Maybe, Wayde, starting with the tax rate. I know you talked about some catch-up items here that occurred in the quarter, but I think as you look at the year-to-date tax rate and the updated guidance, it kind of puts the tax rate in that 20% to 21% range in the back half of the year. Is that a fair characterization of where that should land? And secondly, you did make a passing reference to restructuring. Are you already at a point where you are ready to start rationalizing down costs, and how is that impacting your outlook here?

David Roman: Thank you I appreciate youre, taking the additional questions here.

David Roman: Just maybe a few clarification items that may be weighed starting with them with the tax rate I know you talked about some catch up items here that occurred in the quarter, but I think as you look at the year to date tax rate and the updated guidance it kind of put the tax rate in that 20% to 21% range in the back half of the year I guess is that is that a fair.

Wade Mcmillan: Turning now to the financial update, I want to remind everyone this is the first time we'll be presenting financial results as a standalone company. We previously reported Q1 2024 results under a Carvote basis as the first quarter was still under 3M. With that, I'll provide an overview of our Q2 results and then shift to full year guidance. Starting with sales, for the second quarter of 2024, sales of 2.1 billion increased 20 basis points compared to prior year on a reported basis while improving 1.3% on an organic basis.

Speaker Change: <unk> of of where that that should land and then secondly, you did make a passing reference to restructuring.

Speaker Change: Are you already at a point, where you are ready to start rationalizing down costs and is that how is that impacting your outlook here.

Wayde McMillan: Sure, I'll pick up on tax rate, and then, Bryan, if you want to talk about some of our strategies here, that's probably the right way to take it. So on tax rate, you've got it. Basically, we've had a better than expected tax rate for the first half of the year. We had a pretty sizable year-to-date catch-up here in our first quarter post-separation, and the second half is similar to what we expected for the full year when we gave our full year expectations.

Brian Hanson: Sure I'll pick up on tax rate and then Brian If you want to talk about some of our strategy zero is probably the right way.

Speaker Change: Yeah.

Brian Hanson: So for tax rate you've got it basically.

Wade Mcmillan: During the quarter, foreign exchange was a headwind of 110 basis points. Sales growth reflected the expected normalizing of price. While we reported a slight volume increase in the quarter, this included a discrete benefit from back-order improvement without which volumes continued to decline. Moving to the segments, our largest segment, Med Surge, delivered 1.2 billion of sales, an increase of 1.8% on an organic basis led by the negative pressure wound therapy product category and continued adoption of our antimicrobial IV site management solutions.

Speaker Change: <unk> had better than expected tax rate for the first half of the year, we had a pretty sizeable year to date catch up here in our first quarter post separation in the second half is similar to what we expected for the full year. When we gave our full year expectations and this was one of the areas that has the subtle load a little bit.

Wayde McMillan: And this is one of the areas that, you know, has to settle out a little bit as we separate, and our tax team is hard at work on it. So that's what we're comfortable with for a guide at this point.

David Roman: As we separate and and our tax team is hard at work at it. So that's what we're comfortable with where our guide at this point.

Speaker Change: And then from a restructuring standpoint, Brian Yes, great Great question, David glad Jeff.

Bryan Hanson: Yeah, great question, David; glad you asked it. So, what I would tell you is that our work is, we do feel like we're in the right position to start this project, and I think it might be, it might surprise you, actually, the primary reason for it. So there are really two in my mind, but the one that comes to me as the most important is the restructuring. We're calling it again, Solventum Way, it's focused on streamlining our structure so that we can complement the culture shift that we're putting into place.

Brian Hanson: So what I would tell you is our work as we do feel like we're in the right position to start this project.

Speaker Change: It might be it might surprise you actually the primary reason for it so theres really two in my mind, but the one that comes to me is the most important is the restructuring is focused we're calling it again sold in some way is focused on streamlining our structure. So that we can complement the culture shift that we're putting into place we are going to change the culture of this company, we're going to look for.

Wade Mcmillan: This segment was the primary beneficiary of reduced back orders. Our dental segment delivered 331 million of revenue, a decrease of 2%, which reflects volume pressures associated with challenging market conditions, partially offset by pricing. HIS segment contributed 328 million of revenue, an increase of 3.6%, which was fueled by continued adoption of 360 encompass, inside of revenue cycle management, and steady results in performance management solutions. Similar to the prior quarter, strength in these areas was partially offset by declines in clinician productivity solutions due to changing market conditions and inconsistent investment.

Bryan Hanson: We are going to change the culture of this company. We're going to look for speed. We're going to move faster. We're going to be autonomous, and we're going to drive accountability in the organization. You have to have the right structure to drive that culture shift, and I promise you that when we do it, and we are doing it today, it will turn into growth. That drives growth in an organization, and as we know, growth drives leverage in an organization in a really sustainable way.

Speaker Change: <unk>, we're going to move faster and we're going to be autonomous and we're going to drive accountability in the organization you have to have the right structure to drive that culture shift and I promise you when we do it and we're doing it today.

Speaker Change: We'll turn into growth that drives growth in an organization and as we know growth drives the leverage in an organization and a really sustainable way. The second part of a program like that is what you would normally do in a business and wait and advised have done in the past it's to allow us the headroom to not only invest for growth, which we have to do that as a primary area of focus but also drive <unk>.

Bryan Hanson: The second part of a program like that is what you would normally do in a business, and Wayde and I have done in the past. It's to allow us the headroom to not only invest in growth, which we have to do, that's the primary area of focus, but also drive margin expansion. So we absolutely feel like that's the right thing to do now for those reasons. Thank you.

Speaker Change: Expansion. So we absolutely feel like that's the right thing to do now for those reasons.

Wade Mcmillan: Finally, in purification and filtration segment delivered 238 million of sales, a decline of 0.9%, which was impacted by performance in drinking water filtration, partially offset by better than expected strength in bioprocessing filtration. Overall, line declines were partially offset by pricing. Gross margins were 55.8% in the quarter. This represents a reduction of 200 basis points over prior year, primarily driven by increased costs in international and unfavorable mix within Med Surge that was driven by backward recovery in the lower margin OEM business.

Wayde McMillan: Bryan, I think you covered that really well. I'll just add that I think part of the question was around timing and maybe to reflect back on the investor day in March where we laid out our four key actions for value creation, and we talked about driving efficiencies to fuel the investment that Bryan just covered, and so you know, no change in strategy, just sharing more about our efforts as we go here. Revenue growth remains the top metric for sure, but as Bryan said, driving efficiencies will help us first fund additional growth initiatives as well as we look to expand gross margins over time.

Brian Hanson: So Brian. Thank you cover that really well I'll just add I think part of the question was around timing and just maybe to reflect back on the Investor day in March where we laid out our four key actions for value creation, and we talked about driving efficiencies to fuel the investment that Brian just covered and so no change in strategy just sharing more.

Speaker Change: About our efforts as we go here revenue growth remains the top metric for sure, but as Brian said driving efficiencies will help US first fund additional growth initiatives as well as we look to expand gross margins over time.

Wayde McMillan: I got it. Thanks for the clarification.

Speaker Change: Got it thanks for the clarification.

Kevin Moran: Okay, it looks like there are no further questions, so I will close by just saying thank you so much for joining us on our first public call, and we look forward to engaging with many of you over the coming months. Thanks, and have a great day.

Speaker Change: Okay. It looks like there are no further questions. So I will close it by just saying. Thank you so much for joining us on our first public call and we look forward to engaging with many of you over the coming months, thanks and have a great day. Thanks, so much.

Wade Mcmillan: On a sequential basis, these two factors, along with the return to more normalized pricing, weighed on gross margins. As expected, operating expenses increased both versus prior year results and sequentially compared to Q1. The added spend includes standing up new functions and to support our growth strategy. It's also important to note that Q2 SGNA was high due to a stock-based compensation charge for legacy 3M employees. This and other smaller discrete items in Q2 represented an additional spend of approximately 30 million.

Brian Hanson: Thank you everyone for attending today's conference call. You May now disconnect have a wonderful day.

Ellie: Attending today's conference call. You may now disconnect. Have a wonderful day.

Speaker Change: [music].

Wade Mcmillan: In total, we delivered adjusted operating income of 430 million, which translates to operating margin of 20.7. Moving down the P&L, interest expense also increased sequentially, reflecting the first full-quarter impact of our February 2024 debt issuance, which was partially offset by interest income. Lastly, our effective tax rate of 12.2% came in favorable due in part to the estimated geographic mix of our statutory income post-spin, which includes a year-to-date adjustment. All in, we delivered earnings per share of a dollar and 56 cents ahead of our internal expectations.

Wade Mcmillan: Turning to the balance sheet, we ended the quarter with 897 million in cash and equivalence with no outstanding borrowings on our credit facility. We generated 297 million of free cash flow in Q2, bringing our year-to-date total to 637 million. Importantly, we are committed to maintaining our investment-grade rating and expect debt paydown will remain the priority over the next 24 months. We maintained a strong liquidity and financial position with continued free cash flow generation in addition to our 2 billion revolving credit facility.

Wade Mcmillan: Now, turning to guidance for 2024. We are raising our organic sales growth guidance range up to zero to up 1%. This reflects first half performance, including the benefit from backorder reduction in Q2, an updated assumption that SKU rationalization will not have a material impact on 2024 results, and importantly, building confidence in business continuity. We are not providing quarterly guidance, but I do want to be sure to highlight the second half dynamics of the year-over-year comparison, who will play a large role in the organic sales growth in Q3 and Q4.

Wade Mcmillan: For background, Q3 was the highest growth rate in 2023 and therefore has a tougher comparison and results in expected flat to down growth rate in Q3, 2024, while Q4 was the second lowest growth rate of 2023, with an easing comparison for Q4, 2024. For earnings per share, we are raising our guidance to $6.30 to $6.50 on our improved sales outlook and favorable estimated tax rate. We continue to expect free cash flow in the range of 700 to 800 million.

Wade Mcmillan: For reference, a few additional items we have previously shared. On gross margins, we continue to expect incremental gross margin headwinds from the 3M supply agreement markup will begin to flow through our P&L in Q3, 2024. For operating expenses, we anticipate the continued ramp for investment to build out standalone functions and support our growth strategy through the second half of the year. All in, we continue to expect full year 2024 operating margin in the range of 21 to 23%.

Wade Mcmillan: Turning to tax rate, we are updating our full year effective tax rate to 18 to 19%, and improvement of 200 basis points from our earlier assumption of 20 to 21%. It's important to recognize that this change to our tax rate is expected to be temporary for 2024, as we're benefiting from a near-term, favorable mix based on where we are generating our income, which is a function of realizing separation costs in certain jurisdictions.

Wade Mcmillan: In conclusion, we're off to a solid start closing our first public quarter, we're delivering on our near-term financial commitments, executing on separation activities, focusing on turning around the business, while raising the top and bottom line guidance for the year. Looking ahead, we will continue to execute on our phased approach to transform our business and make improvements across our key operational metrics, accelerating revenue growth, expanding margins, driving free cash flow, and optimizing our capital allocation. We will use our expertise in health, material, and data science to deliver our mission. We are encouraged by the early progress and look forward to the value creation plan ahead.

Operator: I'll now hand it back to the operator for the Q&A portion of the call. At this time, I would like to remind everyone in order to ask a question, press star, and then the number one on your telephone keypad. We'll pause for a brief moment to compile the Q&A roster.

Travis Steed: Our first question comes from Travis Steed from Bank of America.

Travis Steed: Your line is now Thank you, everybody.

Bryan Hansen: It's Greg Tonier, first turning call. I guess the way I wanted to start with the guidance rays and really understand all the moving parts there. I got a lot of the EPS rays came from the tax, but it sounds like things are maybe been tracking ahead of plans and pushed the ski rationalization to 2025.

Wade Mcmillan: So, hey, Travis is Bryan and maybe I'll start with some of your question, particularly around just some of the confidence we have and what's kind of pushing our guide and then way it all past you, you get into more specifics there. So, obviously three components that we talked about that are driving our guide and really our confidence. The first is just the business continuity is feeling pretty good right now and we're making great progress against our plan.

Wade Mcmillan: That's number one. Number two is way referenced in as prepared remarks. It's just the backwater recovery that we thanked in Q2. And then this Q clarity and way to talk more about that in a second, but we just have better clarity of the impact we're going to see in 2024 versus 2025. That's broad based, you know, what we're feeling right now and that's the reason for the guide change. I think importantly though, just to maybe click down in that business continuity and progress against our plan, you know, it doesn't feel like a long time.

Wade Mcmillan: You know, it's only been four months now, but those are pretty pivotal months in this operation. A lot can happen in those in those months. And you know, for the most part, we delivered in pretty much every primary area during that time and I think most importantly, business continuity. That's where the biggest risk sits. And every day that passes, we just feel better about reducing risk, retiring risk and then further executing on our turnaround strategy.

Wade Mcmillan: I guess probably the simplest way to say it is a lot could have gone wrong and it didn't, which is great. It doesn't mean it's going to be simple from here, but the momentum is positive and that drives our confidence. But probably equally maybe even more important than that is we're really moving fast in talent acquisition. And I think probably anybody would recognize that you don't really want to put a strategy in if you don't have the people in place that are accountable for the strategy.

Wade Mcmillan: So the faster you can move to put people in place, particularly in L1 and L2 positions, it's just critical to formulating the strategy, having ownership of the strategy and that eventually that flawless execution of the strategy. So those are the things that we feel like are moving in the right direction, increasing our optimism and hopefully that's reflected in our tone and the guide.

Wade Mcmillan: So maybe with that way, we can give a little more color on the other components. Yeah, it sounds good. Happy to pick up on how we're thinking about guidance here and the SKU project. As Brian said, we're really pleased to be in a position where we can raise our full year guidance after just our first standalone quarter here as a public company. So let me talk about the new range. You really built up the back of what we called out in the quarter here in Q2.

Wade Mcmillan: Revenue was totally ahead of our expectations because of the back order reduction that we got. And that was from an improvement in service levels. So positive science as Brian said for business continuity. So the new range then contemplates normalizing the second half for that for the price benefit that we've been seeing and it continues to wane into the second half as well as a tougher cop for that back order recovery when you normalize for those two things from the first half the high end assumes we see improvement in the business and then near the low end assumes more consistent performance.

Wade Mcmillan: So we feel real comfortable with the range here that we have for the second half. It's early days, but we are pleased with the business and its performance today. Through the first half of the year really with the second half to go and just keeping a focus on that number one priority for us is our growth driver strategy. A little color down the P&L if we think about gross margins. We mentioned in the prepared remarks a couple of things that drove costs higher in the quarter, both the international costs and some unfavorable mix and med surge really around the margin on those back order recovery products.

Wade Mcmillan: And so lots to consider puts and takes you know it could be different next quarter. We are still expecting a step up and cost from 3M, but that doesn't necessarily mean a step up and gross margins because there are a lot of puts and takes. And so even with all that and the step up and cost we are still comfortable with our 21 to 23% operating margin expectations for the full year of 24.

Wade Mcmillan: And I should probably just touch quickly on opX because that is also an important part of how we think about modeling here. We called out in our prepared remarks that we had good amount of discrete items not unexpected in a separation. It's always a bit noisy with things that are coming out of the separation related work. So we called out one in particular a large expense that we took for stock based comp and then a few other things that really were about 30 million dollars in the quarter.

Wade Mcmillan: So with that we still anticipate the continued ramp for the investment to build out our standalone functions and to support our gross strategy through the second half of the year. But that will be often normalized to you too without those discrete items. So all in, feeling really good about the guide and happy to be raising both the high end and the low end at this time. Great, thanks for all the comments.

Bryan Hansen: I guess the next question I have is thinking, when can you guys start growing earnings again? I know 2025 is kind of a down year, but if you think about the plans that you have, you know, it's 26th of the year with potentially good grow earnings and I don't know if there's any way high level to think about some of the things that you have to deal with in 25 and some of the head ones you have in 25, like the two rationalization and kind of help us size somewhere in terms of impact on that.

Bryan Hansen: May I ask the next question? Wait, if you want to provide a little more color on the, some of the pressure points in 25. Obviously, a way to talk about it is prepared to mark. 25's got some unique annualization of expenses that are going to put pressure on us and you're right. 25's going to be a tough year for EPS, but we absolutely would expect that to begin to recover in 26.

Bryan Hansen: We would be extremely disappointed if we didn't start to head in the right direction in 26. So wait, I don't know if you want to provide anything more in 25. I thought you provided a lot in your prepared remarks, but yeah, I certainly can. You know, just I'll have to say we're not guiding to 25 and 26 yet. There are certainly a lot of moving pieces as we're in our first year post separation.

Bryan Hansen: We do have a lot going on to grow revenue and expand margins and as Brian said, resulting EPS growth over time. However, we do think it's well understood that we'll be pressured by the annualization of some of these costs posts spent in 2025. So just to list them, we've got the 3M supply markup that will annualize. We'll be annualizing our standard functional expenses and then below the line will be annualizing interest expense. And all of this is because we've got three quarters this year as a public company and we'll annualize a fourth quarter next year.

Wade Mcmillan: And then I did mean to touch on the SKU project as well because this one is just great. Great progress out of the gate, real nice start. We found that there was a lot of opportunity to take out a significant number of SKUs already in our first wave here. And the good news is they don't impact revenue in a material way. There's a very small impact. We don't expect them to impact margins or revenue in 2024.

Wade Mcmillan: And the real benefit is it will help us simplify the supply chain. We'll save a few million dollars on rebranding as well because we don't have to rebrand these SKUs that had very low value to us. So the team is continuing to work on the next wave, which we do anticipate will have more of an impact on 2025, but that work is still underway and we don't have an update there yet.

Wade Mcmillan: Great. Thanks a lot.

Vik Chopra: Our next question comes from Vick Chopra from Will Spargo. Your line is now open. Hey, good afternoon and congrats on a nice quarter couple of meetings. So by Matt, the revenue guidance raised as about 80 to 150 million dollars of dollar upside to 2024. Maybe just help us understand what business segments are driving this, and then I had a follow-up, please. Yeah, I'm happy to take that. You know, we don't break it down by segment, but what we can say is that the message that we put into the prepared remarks was the most important one.

Vik Chopra: There's a good amount of risk as we separate the business and business continuity, and we gained a lot of confidence. We go from a long ways from having no quarters to having one quarter. It was as Brian mentioned, it was a pivotal quarter for us. That's where the confidence really grew. And so it's really across the board that we're thinking that we're going to see some strength. Obviously, the backward recovery and med surge was a good size, as Brian called it, banking it in the second quarter here, a good size bump for us.

Vik Chopra: So with that, the business continuity, and then also the SKU reduction program, we don't think it's going to have as much of an impact on 24. That would be just across the three segments with products, not including H.I.

Bryan Hansen: Yeah, I might just add that to you know if you think about really four vectors and I won't go through all these but there's four vectors that you can accelerate growth with and there's no rocket science here they're pretty basic but but the things you got to do to drive it one of the first things you can do the fastest impact is just upgrading talent to drive better commercial rigor and just changing incentives to your commercial organization to focus on growth. In those are the things we can do right now right we're bringing in great people we've accelerated and and promoted people that are very capable in the organization and bring brought people from the outside that will have a dividend pretty quickly because they will increase the rigor and accountability in the organization so that we would expect to help us in the back half of 24 and certainly into 25 got it very helpful and this is my follow up question can you just share some high level feedback on your conversation with the activists and you know just provide enough to this to how much of a stake they've actually amassed thank you but you know as you would imagine as a public company we don't we don't talk about any individual investor that said as a public company and humble people we absolutely listen to our shareholders and appreciate the feedback but probably no more to say about that.

Operator: Next question please operator.

David Roman: Our next question comes from David Roman from Goldman Sachs your line is narrow.

Wade Mcmillan: Thank you and good afternoon everybody I hope to get one here on the financial side and then one follow up on the strategic planning side maybe just starting on with respect to the outlook for the balance of the year I'm trying to put together some of the moving parts as it relates to first half versus second half and maybe way you could help us bridge a little bit. The commentary around the reiteration of the 21 to 23% operating margin that's roughly what you did here in the first half with some of the commentary around the 3M supply agreement as well as the incremental investment and what that implies for sort of an exit rate for the year and then as I look at free cash flow year to date and the updated guidance and implies a significant step up in cash utilization here in the second half can maybe help us understand some of the moving parts there as well.

Wade Mcmillan: So just to cover a little bit more data to your question on first half second half outlook you know I think I touched on revenue a good amount there just highlighting that we had a couple items in the first half that won't repeat the second half pricing waiting and then the back of recovery which is opportunistic and we don't anticipate seeing that in the second half at this point and so that's what gets us our revenue growth rate and it's a zero. To 1% for the year and so you can do the map on that for the second half I do just want to highlight from our prepare remarks that there is a cop significant cop issue between Q3 and Q4 so that's important for revenue.

Wade Mcmillan: You mentioned bridging the exit rate around operating margins the way we're thinking about this is Q2 had some headwinds in gross margins and operating margins for us. Those are offset with the favorability in revenue and so that's what gives us confidence to hold the 21 to 23% for the year.

Wade Mcmillan: We're not going to comment on an exit rate at this point we're not giving the quarterly guidance obviously we've just got one quarter under our belt and we've got a long ways to go you know we're just not going to get to that level of detail. But what we can tell you is you know we we gained a lot of confidence in the quarter and we learned a lot about the business post separation so it's building confidence and that's what allowed us to raise both the top and the bottom line here before we you know just after our first quarter.

Wade Mcmillan: You mentioned cash as well. I would say probably the biggest things that we're managing here post separation is just all of the timing of the inter company work that we're doing as well as standing up our capital expenditure processes and so we do think we will be using more cash in the second half of the year to settle out some of those as well as ramping up our capital expenditure use in the second half.

Bryan Hansen: And then Bryan, please do your comments on kind of being ready to share more with us on the fourth quarter call. But I think you've made comments in other forums about kind of the turnaround on the top line being roughly a five-year period of time. Can you maybe update us in any thoughts with respect to that outlook and how that falls into the context of the phasing of the different parts of the Solventum turnaround that you referenced earlier?

Bryan Hansen: Absolutely, and good to hear from you. So I want to say, you know, I'll repeat a little bit of what I said and then maybe add some additional color. I see this as an opportunity for us in our strategic plan to very clearly articulate what markets and some markets we're going to care about. We're going to double down in. And those will be our faster growth markets as you can imagine. And we're working through that now would expect to pick those by the end of 2024.

Bryan Hansen: Once we do that, that begins the shift of resources, commercially, R&D, M&A, when we get to that point, and that begins to drive traction and focus in those areas. That just takes time. But maybe I can double click on, you know, the revenue growth accelerators. I referenced that there were really four of those. And it just, again, there's no secret sauce here. If you've ever run a business and you've turned one around and drove revenue acceleration, these are the things you have to do.

Bryan Hansen: It's just a question of doing them and how much time they take. And so I'll just kind of start with the first as I referenced, getting great people in place that had a drive rigor and a commercial organization is paramount. And it's the fastest way to drive revenue growth. Second fastest way is commercial structure changes. Either specialization or just increasing reach in those important spaces that we're going to concentrate on. Third, as you would expect, would be increasing the productivity of R&D.

Bryan Hansen: We have to do less of these iterative approaches in R&D and more impactful, more meaningful launches inside of the hydrotharious. And then probably in parallel with that would be portfolio optimization. I look at that in two ways. The first would be tucking acquisitions to give more scale in those fast growth markets. And the other would be potentially exiting categories that are slow growth. Those are the ways that you would get there.

Bryan Hansen: If I just think about the timing of those things kind of going to your question, again, on a talent side, it's right now. In the back half of 24 into 25, we should expect it to see that benefit. Commercial structure changes just take a little longer because you got to know where you're going to do them and then you got to actually hire people and change the structure. That's more probably a latter part of 25.

Bryan Hansen: If I think about R&D productivity, once you start a project, probably best case when you start one is 2026, but likely beyond that, just depending on the product complexity, the regulatory requirements. And then portfolio optimization, really, at least on the acquisition side, depends on just de-leveraging timing. And so when I think about the LRP, why these are important is because we're figuring out now the mix of these elements that we're going to need to accelerate growth.

Bryan Hansen: Where the major gaps are. And as we work through that mix, that will inform not just our LRP, but the time to accelerate the revenue growth. So hopefully that gives a little more color versus what I've said in the past, but those are the elements to get us there.

Bryan Hansen: That's great. I appreciate all the details.

Operator: Thanks.

Vik Chopra: Our next question comes from Vik Chopra from Wells Fargo. Your line is now. Hey, just hopping in back to you for a couple of quick follow ups. That 22 million dollars of corporate and unallocated revenues. Do you expect those to continue going forward? Should we be building those into our revenue projections? I'm glad you asked that one, Vik. An approximate number to the 22 for the rest of the year, yes. So in other words, that's a good estimate for the next couple of quarters this year. Okay, to build that 22 million roughly for Q2 and Q4 got it.

Wade Mcmillan: And then I don't think I heard an updated tax assumption for the year. Can you help us out with that? Thank you. Oh, FX, yeah. So we just used the current FX rates at this point for the following 70 actually have that. Yeah, so right now the last assumption we've provided from a revenue perspective is 50 basis points of impact. We did not update that. So it's safe to assume that that's still our best gap. And the way we do that, Vik, is we just take the current rates approximately right now and apply that. So we're expecting 50 basis points for the full year. Got it. Thank you very much.

David Roman: Our next question comes from David Roman from Goldman Sachs. Your line is now open. Thank you. Appreciate you're taking the additional questions here. Just maybe a few clarification items. Maybe we're starting with with the tax rate. I know you talked about some catch up items here that occurred in the quarter, but I think as you look at the year-to-date tax rate and the updated guidance, it kind of puts the tax rate in that 20 to 21% range in the back half of the year.

David Roman: I guess is that a fair characterization of where that should land? And then secondly, you did make a passing reference to restructuring. Are you already at a point where you are ready to start rationalizing down costs? And how is that impacting your outlook here? Sure. I'll pick up on tax rate and then Brian, if you want to talk about some more strategies here, let's probably the right way to take it. So for tax rate, you've got it.

David Roman: Basically, we've had better than expected tax rate for the first half of the year. We had a pretty sizable year-to-date catch up here in our first quarter post separation. And the second half is similar to what we expected for the full year when we gave our full year expectations. And this is one of the areas that has to settle out a little bit as we separate and our tax theme is hard to work at it.

David Roman: So that's what we're comfortable with for a guide at this point. And then from a restructuring standpoint, Brian. Yeah, great question, David, glad you answered. So what I would say is our work is we do feel like we're in the right position to start this project. And I think it might be, it might surprise you actually the primary reason for it. So there's really two in my mind. But the one that comes to me is the most important, is the restructuring is focus.

David Roman: We're calling it again, self-intensive way. It's focused on streamlining our structure so that we can complement the culture shift that we're putting in the place. We are going to change the culture of this company. We're going to look for speed. We're going to move faster. We're going to be autonomous. And we're going to drive accountability in your organization. You have to have the right structure to drive that culture shift. And I promise you, when we do it, and we are doing it today, it will turn into growth.

David Roman: That drives growth in an organization. And as we know, growth drives a leverage in an organization in a really sustainable way. The second part of a program like that is what you would normally do in a business and wait and that might have done in the past. It's to allow us the headroom to not only invest for growth, which we have to do. That's the primary area focus, but also drive margin expansion.

David Roman: So we absolutely feel like that's the right thing to do now for those reasons. Brian, I think you covered that really well. I'll just add, I think part of the question was around timing and just maybe to reflect back on the investor day in March where we laid out our four key actions for value creation and we talked about driving efficiencies to fuel the investment that Brian just covered. And so, you know, no change in strategy, you know, just sharing more about our efforts as we go here. Revenue growth remains the top metric, for sure. But as Bryan said, driving efficiencies will help us first fund additional growth initiatives as well as we look to expand gross margins over time.

Wade Mcmillan: I got a thanks for the clarification.

Operator: Okay, it looks like there are no further questions, so I will close it by just saying thank you so much for joining us on our first public call and we look forward to engaging with many of you over the coming months. Thanks, then have a great day. Thanks so much. Thank you everyone for attending today's conference call. You may now disconnect. Have a wonderful day.