Q1 2025 Solventum Corp Earnings Call
Good afternoon. My name is Amy and I will be your conference call operator for today I would like to welcome everyone to the solvent them first quarter 2025 earnings call. As a reminder, this call is being recorded and 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. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press star and the number one thank you.
Speaker Change: I would now like to turn the program over to your host for today's conference Amy Wake them Senior Vice President of Investor Relations and Finance Communications. Please proceed.
Speaker Change: Thank you good afternoon, and welcome to yourself and in this first quarter fiscal year 2025 earnings call.
Speaker Change: Joining me on today's call are Chief Executive Officer, Bryan Hanson, and Chief Financial Officer Wade Mcmillan.
Speaker Change: A replay of today's earnings call will be available later today on the Investor Relations section of our corporate website.
Speaker Change: The earnings press release and presentation are both available there now.
Speaker Change: During today's call our discussion and any comments, we make will be made on a non-GAAP basis, unless we have specifically called them out as GAAP.
Speaker Change: The non-GAAP information, we discuss is not intended to be considered in isolation.
Speaker Change: Or as a substitute for the reported GAAP financial information.
Speaker Change: You are encouraged to review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers.
Speaker Change: Additionally, our discussion on today's call will include forward looking statements.
Speaker Change: Including but not limited to expectations about our future financial and operating performance.
Speaker Change: We make these statements are based on reasonable assumptions, however, our actual results could differ.
Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially.
Speaker Change: Any forward looking statements made today.
Speaker Change: Following our prepared remarks, we will hold a Q&A session.
Speaker Change: For the Q&A portion of today's call. Please limit yourself to one question.
Speaker Change: And one related follow up if.
Speaker Change: If you have additional questions you're more than welcome to rejoin the queue.
Brian: And with that I'd like to now hand, the call over to Brian.
Brian: Alright, Thank you Amy and do all of our shareholders and everyone interested in our company story, just thanks for joining us today for our first quarter results.
Brian: I'm just going to get straight to the point, we are off to a strong start for 2025 and as a result of this positive momentum favorable FX and decisive steps we've taken to mitigate the impact of known tariffs, we are raising our organic revenue guidance and confirming EPS for the year.
Speaker Change: Alright, before we jump into the strong start for the year. Let me just quickly address tariffs, specifically and Wayne will provide more details in a minute, but to be clear tariffs will be a headwind for us this year and without them, we would be raising our EPS guidance commensurate with the underlying momentum we're seeing in the business.
Speaker Change: Said, we've begun executing short term mitigation measures based on what we know today interactively developing analyzing and of course implementing additional strategies and as a result, and as I. Just mentioned, we expect to be able to manage the current year headwind within our existing full year EPS guidance.
Speaker Change: And obviously given just the fluid nature of the situation. We will continue to closely monitor the evolving policy changes and assess what they mean for our organization.
Speaker Change: Our relative to our continued momentum and progress here is further evidenced by our first quarter results.
Speaker Change: Marking another positive quarter of volume growth. This makes it now four consecutive quarters of positive growth and sequential improvement as we delivered four 3% organic sales growth and adjusted earnings per share of $1 34, again, continuing to perform ahead of expectations.
Speaker Change: I think this is particularly impressive though given the company's historical performance as I shared at our recent Investor day. This business experienced six years of a declining volume trend and seven quarters. That's nearly two years of negative volume growth before our spin now.
Speaker Change: Now stopping that decline and reversing the trend are direct results of the foundational enhancements we've made across three primary areas. The first being our mission and culture.
Speaker Change: Our talent and capabilities and third our efforts to stabilize the business across commercial productivity, our innovation process and our strategic focus and alignment.
Speaker Change: And as I referenced before I am very impressed with the team's ability to execute all of these changes as quickly as they have particularly given the distractions of the separation process.
Speaker Change: And I want to extend my gratitude to our dedicated team members around the globe not just for another strong quarter, but really for their hard work overall, which is advancing our mission and driving US forward. This team continues to impress me as they made significant progress in executing the separation and advancing across all three phases of our transformation.
Speaker Change: And very importantly, delivering results that have already changed the trajectory of this business.
Speaker Change: Now more broadly speaking from a macroeconomic perspective this quarter well. It has certainly been one of the more eventful starts to a new year and as such we are actively navigating a shifting geopolitical landscape and rapidly evolving trade policies now while we are managing this turbulent environment aggressively we are also ensuring that our pre.
Speaker Change: I'm Mary focus remains very clear number one and obviously delivering for our customers worldwide. So patients continue to receive the care they need and number two and very importantly, staying committed to investing in the key areas that will support continued and sustainable improvement in our growth and as a result, just as I outlined at our Investor day.
Speaker Change: We are fully committed to our growth and margin drivers to reposition this company for profitable growth and drive meaningful value for shareholders.
Speaker Change: Okay, now moving to our business segments, where progress and positive momentum continue the med surge business had a very strong quarter benefiting from positive underlying business performance and favorable order timing now regarding our underlying business performance. We continue to focus on driving the adoption of our recently launched back fuelling place dressing.
Speaker Change: As many of you may remember this is a product within our negative pressure wound therapy business, which is one of our key growth drivers as I've mentioned previously this product provides value in three areas. It simplifies the procedure. It reduces procedure time, and importantly reduces the number of dressing changes per week, all of which are meaningful advances for both patients.
Speaker Change: And providers and the team has done a really good job of ramping capacity to meet the very strong demand and our newly dedicated commercial team continues to drive momentum in this space.
Speaker Change: Now also in med surge the growth driver area of IV site management, we're very pleased with the traction that we're seeing in this space and our newly dedicated commercial team has successfully converted key accounts during the quarter, but given our momentum here and to further support the needs of this business. We have invested hundreds of millions of dollars for capacity expansion.
Speaker Change: And in the U S. Specifically in South Dakota was strong support of the then Governor Christie now.
Speaker Change: And moving to our dental solutions business, we saw benefits in three areas.
Speaker Change: First in our core restored as growth driver as well as our strategic bet area of aesthetics and across other recent product launches in core restored as our differentiated and strong brand recognition continues to resonate with our customers and it provides a solid foundation for growth and our recent product launch a filter easy match and our refocused.
Speaker Change: <unk> sales team continue to support solid growth in this area.
Speaker Change: Anesthetics customer response to the Q4 launch of our first to market in three D printed clarity precision grip attachments remains very positive and this product enhances our ability to offer a unique combination of dental and ortho solutions really enabling the team to expand their conversations with both dentists and orthodontists and then finally, our klim pro clear floor I tree.
And the launch continues to gain traction with customers and had strong demand in the quarter.
Speaker Change: It's the combination of these areas has helped to drive offsets for decelerating areas like impression materials to help stabilize the segment, even as overall market volumes remain challenged.
Speaker Change: Okay in our H I S business, we're focused on our growth driver of revenue cycle management and as you remember a key component of this is autonomous coding and as we've mentioned our AI driven autonomous coating technology really focuses on streamlining the coding process to help save our customers time and money and medical coding is incredibly complex and our.
Speaker Change: Our computer assisted and emerging autonomous technology can account for the constant tighter regulatory changes quality demands and local state and organization specific guidance and this H I S. Team is highly focused on leading the way in autonomous coding and doing so of course with leading AI driven solutions, that's for sure, but importantly, and probably most.
Speaker Change: Leveraging our decades of trusted high quality and compliant coding.
Speaker Change: Yeah.
Speaker Change: And last but not least turning to our purification and filtration business. We saw another quarter of robust demand for our bioprocess and solutions, which gives us confidence in the strength of the end markets and the value of the segment's differentiated technology and reoccurring revenue model and our investment in additional capacity in our industrial business supported accelerate growth in the quarter.
Speaker Change: As well and as we shared in our last quarter. The P&I business is very well positioned for growth under its new owner, where it has a really strong strategic fit we expect as we mentioned before to complete the transaction by the end of 2025 and our team is working very diligently for a smooth close and ultimately a smooth transition.
Speaker Change: At our recent Investor day, I spoke extensively about our progress across the three phases of our transformation plan and if you didn't see it I would encourage you to watch the replay or read the transcript for more details of both of those are available on our Investor Relations website, but just as a quick summary regarding phase one our mission and values have been deployed globally.
Speaker Change: And through our communications and transformation efforts, we are seeing deep understanding and most importantly connection from our team members to both win.
Speaker Change: We've hired great talent across a significant number of critical to transformation roles and our separation efforts continue to be on track as a matter of fact, we have a very large team mobilized right now across the globe and have just started this week with our largest ERP cutover to date and I know that team is working around the clock to execute is very important phase of our separation and I wanted to.
Speaker Change: Thank each and every one of them for burning the midnight oil and moving us forward.
Speaker Change: I'm moving to phase II as a global team I can tell you that we are very aligned and executing our long range plan. We just unveiled at our Investor day, and we are hyper focused on driving our five growth driver areas, which will help expand our scale within our most attractive markets and ultimately as a result of that increased the weighted average market growth of our business.
Speaker Change: And finally on phase III once we closed the divestiture of the P&I business, we anticipate being able to execute tuck in M&A, which as we said before we'll focus on enhancing our recently presented organic long range plan. So in summary, it's pretty clear that we are making steady progress on our transformation and we're extremely confident that the changes we've already.
He may combined with our newly defined strategic plan will accelerate sustainable and profitable volume growth and ultimately ultimately to deliver significant shareholder value.
Speaker Change: And with that I'll turn it over to Wade to walk us through more detail on our first quarter results and 2025 guidance as well as provide additional color on the separation and on everybody's favorite topic tariffs, Okay wait we'll pass it over to you.
Wade: Thanks, and thank you to everyone at solvent them for the continued progress and for delivering a strong start to fiscal year 2025.
Wade: As you heard from Brian, we're making meaningful progress on the three phase transformation plan as we complete our first full year as a public company.
Wade: I'll focus my comments initially on a quick separation update before moving into our Q1 financial performance.
Wade: Then we'll wrap up with our 2025 guidance update which includes the impact of tariffs.
Wade: Overall, the separation remains on track and we are executing against key milestones, while delivering on our financial goals.
Wade: To date, we have exited just over 30% of the more than 200 transition service agreements and we plan to exit all transition agreements over the next two years.
Wade: In operations and supply chain, we continue to make progress consolidating across manufacturing and distribution centers.
Wade: We expect to significantly advance progress on our ERP milestones with four deployments planned this year, including our first major deployment in Q2.
Wade: We want to thank our global team of dedicated people around the world for their efforts in this large scale separation.
Now turning to our Q1 results.
Wade: Starting with sales first quarter 2025 sales of $2 1 billion increased four 3% on an organic basis compared to prior year and increased two 6% on a reported basis.
Wade: During the quarter Foreign exchange was a 160 basis point headwind.
Wade: Overall, we had a stronger than expected volume performance driven by improved commercial execution as we drive focus and alignment across the organization on our growth drivers to accelerate sustainable sales growth.
Wade: We also benefited from order timing related to customers buying ahead of upcoming ERP and distribution center moves in FQ exits.
Wade: We expect this favorable timing benefit will be offset by year end, mostly in Q2 and Q3.
Wade: The impact of SKU exits in the quarter was 30 basis points.
Wade: All in we estimate our normalized Q1 organic sales growth is closer to two 5%.
Wade: Pricing remains consistent within our expected range and we are encouraged by the continued shift to delivering positive volume growth across the businesses.
Wade: Moving to the segments.
Our largest segment med surge delivered $1 2 billion of sales an increase of 6% on an organic basis.
Wade: Growth was broad based and led by the infection prevention and surgical solutions business, which grew eight 2% and was the primary beneficiary of the previously mentioned timing benefits, which drove the significantly higher than expected performance.
Wade: Advanced wound care growth of two 8% was driven by negative pressure wound therapy consumables and continued market adoption of single use negative pressure wound therapy.
Wade: Our dental solutions segment delivered $328 million of revenue an increase of 40 basis points on an organic basis.
Wade: And as you heard from Brian earlier, we are seeing the positive benefit of new product launches, even as the end market continues to be challenged and.
Wade: And we remain encouraged by the overall resilience of our dental portfolio.
Speaker Change: Our health information systems segment contributed $329 million of revenue an increase of three 9% on an organic basis.
Speaker Change: Which benefited from strong customer retention of our revenue cycle management software solutions.
Speaker Change: The competitive environment has resulted in continued declines in clinician productivity solutions. However, this product category grew in the current quarter, primarily due to an easy prior year comparison.
Speaker Change: Finally, the purification and filtration segment delivered $242 million of sales an increase of two 2% on an organic basis led by our bio processing filtration and industrial filtration categories.
Speaker Change: Similar to the prior quarter performance in these areas was partially offset by declines in membranes.
Speaker Change: As a reminder, wording timing benefits in Q1 last year resulted in a tough comparison.
Speaker Change: Looking down the P&L gross margins were 55, 6% of sales in the quarter slightly ahead of our expectations and down 260 basis points compared to the prior year.
Speaker Change: Our current quarter results include approximately 100 basis points of increased cost paid to <unk> as part of the supply agreement when comparing year over year grew.
Speaker Change: Gross margins also decreased sequentially as expected based on normal manufacturing seasonality.
Speaker Change: Operating expenses increased versus the prior year and were roughly flat on a sequential basis as planned.
Speaker Change: The increase year over year spend reflects public company standup costs and growth investments to support our business transformation.
Speaker Change: Savings from the recent restructuring are on track and we will continue to ramp through the year.
Speaker Change: Altogether operating expenses were in line with our expectations.
Speaker Change: In total we delivered adjusted operating income of $407 million, which translates to an operating margin of 19, 7% ahead of expectations.
Speaker Change: Moving down the P&L to nonoperating items, our net interest expense remained consistent with Q4.
Lastly, our effective tax rate of 19, 9% is just below the low end of our full year outlook and reflects a slightly favorable jurisdictional mix.
Speaker Change: Overall, we delivered earnings per share of $1 34.
Speaker Change: Ahead of our expectations driven by sales outperformance and favorable margins.
Speaker Change: We also ended the quarter with $534 million in cash and equivalents with no outstanding borrowings on our revolving credit facility.
Speaker Change: To date, we have made cumulative repayments of $400 million on our $1 5 billion pre payable term loans, which includes another 100 million paid off in March.
Speaker Change: For Q1, our free cash flow declined $80 million, which was consistent with our expectations and reflects both Q1 planned payments and one time separation costs as.
Speaker Change: As well as the timing of interest payments and shift into the execution phase across several of separation projects.
Speaker Change: Now turning to our 2025 guidance update which reflects our strong Q1 performance and momentum to start the year.
Speaker Change: As a reminder, our guidance is for the whole company, including the purification and filtration business, which is held for sale until the transaction closes which is expected before the end of the year.
Speaker Change: Starting with full year organic sales growth, we are increasing our outlook to a range of one 5% to two 5% an increase of 50 basis points above our prior guidance.
Speaker Change: We continue to estimate a 50 basis point impact of SKU Xs.
Speaker Change: Which we anticipate will ramp throughout the year.
Speaker Change: Excluding this planned impact our annual growth outlook is 2% to 3% reflecting.
Speaker Change: The momentum we are seeing in volume driven performance across our business segments as we execute against the phased approach to reposition for growth.
Speaker Change: Regarding foreign exchange given the recent weakening of the U S. Dollar. We now estimate currency will have a neutral impact on sales growth for the year.
Speaker Change: This compares to our prior outlook of a roughly 150 basis point headwind and we will have a positive benefit on our reported sales.
Speaker Change: And earnings per share.
Speaker Change: For earnings per share, we are maintaining our initial $5 45 to.
Speaker Change: To $5 65.
Speaker Change: Earnings per share guidance, including estimated tariff headwinds that will impact us during the second half of 2025.
Speaker Change: The current trade policy environment, and tariffs are an evolving dynamic and challenging to quantify.
Speaker Change: We currently estimate tariff headwinds of approximately $80 million to $100 million in 2025.
Speaker Change: Which translates to an earnings per share impact of 35.
Speaker Change: To 45.
Speaker Change: This will pressure, our gross margin and operating margin in the second half of the year.
Speaker Change: And we now anticipate operating margins for the year will be at the low end of our planned range of 20% to 21%.
Speaker Change: We expect our strong Q1 performance and business momentum phase.
Speaker Change: Favorable foreign exchange and mitigation actions to offset the impact of tariffs within our earnings per share guidance range.
Speaker Change: Our tariff estimate includes all known tariffs at this time with the following assumptions.
Speaker Change: Exports to China at 125% and represents about half of the total impact with expected exemptions.
Speaker Change: U S to and from the EU remains at 10%, which represents about one third of the total impact.
Speaker Change: The remaining balance of tariff impacts reflects smaller amounts for Mexico, and Canada, given the Usmc exemptions and minimal imports from China to the U S consistent with our prior view.
Speaker Change: It is important to highlight that due to the short duration of our inventory turns approximately one quarter the impact of tariffs implemented in Q2 will be fully realized in our financial results starting in Q3 and continuing through Q4.
Speaker Change: Our team has moved quickly to adapt to the changing situation.
Speaker Change: While this will be an ongoing process of assessment and mitigation, we've already taken steps in our executing several action plans to mitigate the headwinds.
Speaker Change: We have filed for and received nearly all outstanding U S MCA certifications and working across regions to secure additional exemptions.
Speaker Change: We're continuing to optimize our inventory leveraging sourcing options across our supply chain and thoughtfully evaluating selective pricing strategies.
Speaker Change: We are also maintaining our free cash flow guidance of $450 million to $550 million.
Speaker Change: Before closing out I also want to reiterate our commitment to continued investment.
Speaker Change: <unk> focused on the long term value creation opportunity ahead, while also looking for opportunities to expand margins and generate strong cash flows.
Speaker Change: In conclusion, we're building momentum having delivered a strong financial performance in Q1, as we execute on our separation plans.
Speaker Change: With that I will now hand, it back to the operator for the Q&A portion of the call.
Speaker Change: Thank you as a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Speaker Change: I would like to remind everyone to please limit yourself to one question and one related follow up.
Speaker Change: We'll pause for just a moment to compile the Q&A roster.
Speaker Change: Your first.
Speaker Change: First question comes from the line of Patrick Wood with Morgan Stanley. Your line is now open.
Patrick Wood: Beautiful thanks, guys. Thanks, so much for taking the question.
Patrick Wood: I will leave the tariffs to everybody else gets icon slides talking about that topic anymore I'm going to go on the top line actually.
Patrick Wood: How confident are you around that kind of two and a half underlying and I say this because obviously the remain co growth like is like four six obviously open mindful three like really really strong quarter is this like a SKU level analysis will swing like that because.
Patrick Wood: How confident are you that that's actually stocking from the customers and not just some of the commercial plans that you guys have been putting through and that for us a little bit more durable than maybe maybe you're suggesting.
Wade: Hey, Patrick it's Wade.
Patrick Wood: We're confident.
Patrick Wood: A number thats tough to predict beforehand, because it's difficult to know how much customers are going to be buying in the timing of it and to the extent of it but after the fact, we've got good analytics, we work with our distributor partners as well as our end customers and understand their order patterns and it's.
Patrick Wood: Something that were confident and it is still an estimate we specifically called it out closer to two 5% because there is some variability to it but the two 5% is a good number for us and Thats. What we think is the number that we.
Patrick Wood: Grew in the quarter exclusive of those customer order buying ahead and what that means for us is a really strong quarter.
Patrick Wood: More than double the growth rate that we had in 2024, so very happy to see the continued acceleration of the business and it's really across all four of our segments. So we had a really strong quarter here to start the year.
Speaker Change: Yes, Stephanie fasten than we thought and then just as a quick follow up on is it a fair assumption on RMS to assume that the the general price mix trends that you've seen in the previous quarter was consistent are you hinted at it in the opening remarks, but is it fair to assume that the entire delta basically as will volume.
Speaker Change: Yes, so we've been anticipating this for some time as we've got the business focused on volume growth, which we think is the sustainable strategy and sulfur pricing again this quarter. We saw it in that normalized range for us, which is between plus or minus 1% and it's not really the driver that we're focused on.
Speaker Change: It's all about volume growth for us from here.
Speaker Change: Thank you. Thanks, Brian Your next thank you. Your next question comes from the line of Rick Wise with Stifel. Your line is now open.
Brian Highway: Thank you Hi, Brian Highway.
Speaker Change: Maybe just.
Speaker Change: <unk>.
Speaker Change: To start with thinking about the year ahead.
Speaker Change: I mean to say that at its simplest.
Speaker Change: Tariffs are.
Speaker Change: A bigger headwind you were very clear.
Speaker Change: But offsetting that is the business momentum is the lower.
Speaker Change: Is the lower FX.
Speaker Change: Can you help us at all think through the quarterly cadence as we adjust our models.
Speaker Change: Just starting with the second quarter last year with sort of flat sequentially, but you have new products, you've got commercial momentum et.
Speaker Change: Et cetera.
Speaker Change: Help us a little bit Directionally, if you could.
Speaker Change: I just want to make sure that we clarify Rick are you talking about growth by quarter or whether you're talking to.
Speaker Change: Growth of our dollars have in can.
Speaker Change: Can you report higher numbers in the second quarter, given all the positives.
Speaker Change: Relative to the negative impact of tariffs.
Speaker Change: Topline topline Bryan Im sorry, if im not unfair.
Speaker Change: Probably for clarification tariffs really don't have a significant impact for us on the top line.
Speaker Change: Definitely more of a bottomline challenge for us.
Speaker Change: The ordering ahead or the timing that we saw in the quarter was more associated with our ERP cutover.
Speaker Change: Changes in some buy head on the SKU rationalization.
Speaker Change: That will come back in Q2 Q3, maybe even Q4 most of the impact will be in Q3 as we were looking at it today because by the time, we get to Q3 will be asked to distribution center changes and we should be free and clear see those.
Speaker Change: Changes.
Speaker Change: Thank you. The next question comes from the line of Jason Bednar with Piper Sandler Your line is now open.
Jason Bednar: Hey, good afternoon.
Speaker Change: Nice start to the year here guys.
Jason Bednar: Who want to come back a little bit on Patrick's question and talking about that that two 5% underlying.
Speaker Change: I guess my question is more around how does that.
Speaker Change: <unk> to what you were internally expected it sounds like it's nicely above my nicely above most of our models, but I guess kind of where are you at where are you out executing.
Speaker Change: And then we're five weeks removed here from quarter end I guess on that order timing that you referenced for <unk> did you have any additional buy ahead in April or did some of that did you already start seeing some of that drawdown in April and early may.
Speaker Change: Why don't I'll start maybe with how we're looking at $2 five an hour compared to our performance our assumption of performance and one way you could talk more about the drawdown.
Speaker Change: It was above our expectations too, but we're very happy with the $2 5 million as a matter of fact, if you think about it on an annual basis by saying we are going to be two five but the last time. This company. Two five years I think 2018 was a long time ago. So we are very happy with performance in the quarter. It was definitely ahead of our expectations, even on an underlying basis and really the key driver for us.
Speaker Change: The thing that we talked about at our Investor meeting, which is we are seeing the benefits of our enhancements to the commercial organization and the focus that we now have as you remember we've enhanced the commercial organization by dedicating sales organizations to those growth driver areas and we're just seeing traction as a result of it now we have to keep that going and quite frankly.
Speaker Change: It shouldnt be happy with two 5% because we're still not a market, but it's a really nice improvement last year.
Speaker Change: And then just picking up on what we're seeing so far in Q2.
Speaker Change: who will see the majority of that order timing come back in Q3.
Speaker Change: It is tough to predict we could see more of it in Q2 or a little bit more in Q4, but our expectation is most of it comes on the back of our ERP and distribution center moves, which the big moves are coming here in Q2.
Speaker Change: As far as a quarter to date for us, it's in line with those expectations, but we've got a ways to go yet, and we are actually just as Bryan said in his prepared remarks.
Speaker Change: The team is hunkered down right now as we go through the ERP implementation this week and we're right in the throws of it. So from that standpoint, expectation would be we could see some of the headwind come back here in Q2 but we think majority will be coming in Q3.
Speaker Change: Thank you. Your next question comes from the line of David Roman with Goldman Sachs. Your line is now open.
David Roman: Thank you. Good afternoon, everybody. I want to go into a little bit more detail here on the top line.
David Roman: and Drivers, especially in Med Surgeon, and certainly appreciate the order of timing dynamic, but as you look at on an underlying basis.
Speaker Change: It sounds like both infection prevention and advanced wound care are tracking ahead of where your original expectations are, so could you maybe just unpack for us in a little bit more specific, some of the drivers there? How much of that is new product launches or some of the commercial changes that you've made in the downstream organization that I've got to follow up on the PNL?
Speaker Change: Yeah, they're kind of connected, but you hit both of them.
Speaker Change: The way we look at it is there were three vectors of advancing the growth of our business.
Speaker Change: The first one and the one that is really benefiting us today is the commercial execution improvements but as you have those improvements you can also benefit from existing brands that we have in the marketplace and then new product launches as well the ones that we just recently launched and so it's a combination of the team is just focused. [inaudible]
Speaker Change: is delivering the urgency around and the focus on delivering what you commit to is there which makes a big difference. We've had a lot of changes in leadership as we talked about so we got a lot of different folks in place that are driving this harder than before. [inaudible]
Speaker Change: We look at some of the names that we're talking about that create an opportunity now for that new engine to drive it, which should be things like Tiger or THG, that is a product that's been out for a while.
Speaker Change: But it's a brand that has highly recognized, it's differentiated, and it's significantly underpenetrated as you probably remember from our presentation during the investor day. Backfueling place is another one. It's a great product. And it doesn't sound that right when you hear it, but it's a game changer when it comes to negative pressure on therapy.
Speaker Change: and the team is highly focused on it. Eboy <expletive> is in our sterilization assurance business. This is basically taking an 80-year-old process that was antiquated and is digitizing it. It's changing the game. So it's a really cool technology as well. And then you've got two pro-clear, clarity precision grip attachments that you would have in the dental business. That's different from message, but again, this whole theme of the engine now being able to leverage your products is there. And it's the same thing in HIS. It's another motivator for the new team.
that's focused on this to drive autonomous coding.
which is part of the Revenue Cycle Management that growth driver.
Speaker Change: So across the board, whether it's in Medsorge, whether it's in Dental, whether it's in HIS, it's the commercial focus that we have.
Speaker Change: It's the you know the desire now to achieve the goals that are set and it's the focus on these new product launches that are really driving. Thank you very much.
Speaker Change: Thank you. Your next question comes from the line of Travis Steed with Bank of America. Your line is now open.
Travis Steed: Thank you guys, congrats on the good quarter. I wanted to ask a little more on the terrace, but a way that you could help us kind of think about the mitigation efforts, how you're offsetting 40 cents of earnings here, how much of that assets, how much it's operational and all that.
Travis Steed: Yeah, those are the key areas for us. So just to maybe reiterate what we've got out there and keep in mind.
Travis Steed: The inventory turns fast for us, so we just want to make sure we emphasize that because we have to be one of the fastest inventory turn companies out there. You know, I think under 3M inventory was managed very tightly and we continue to have a 90 day inventory turn here a three month turn. The inventory turns fast for us, so we continue to have a 90 day inventory turn here a three month turn.
So as a result of that,
Travis Steed: We see the impact immediately start in Q3 and we'll have it in Q4. So in other words, we have two quarters of impact here and so that 80 to 100 million that we're estimating will be spread across Q3 and Q4 for us this year.
And so I think even before again into the mitigations.
Travis Steed: It exemptions played an important role here, and obviously we're working closely with our teams and working with their regional partners and exemptions in China are important to us.
And that's where we've landed at this estimate.
Travis Steed: So as far as mitigation goes, you've called it out, strong business performance in Q1 and we're expecting that through the remainder of the year.
Travis Steed: Favorable Foreign Exchange, as you mentioned, we're not putting specific dollar amounts on any of these, but they are all major drivers in the offset. And then within those additional mitigating strategies, we're continuing to optimize our inventory. Thank you very much.
Travis Steed: The sourcing teams are busy, it is incredible how much time and effort actually has been put into these initiatives that weren't expected and so the teams are heavily focused on sourcing options all across our supply chain.
and then obviously we're looking at, thoughtful. All right.
Travis Steed: pricing strategies, where we think they make sense for the long-term business, where they make sense for our customers, as well as those in our value chain. So, you know, overall we're very happy to be holding our key metrics here despite the tariff headwinds.
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Travis Steed: Thank you. Again, if you would like to ask a question or a follow-up question, please re-enter the queue by pressing star and the number one.
Vic Schoper: Your next question comes from the line of Vik Chopra with Wells Fargo. Your line is now open.
Vic Schoper: Hi, it's Blake calling in for Vic, and thanks for taking the questions. Just two related to tariffs, please. First, clarification, the 10% you're assuming for Europe , so it sounds like you're not assuming that rate goes up after the 90-day pause. I just want to confirm that, and two, can you just get some color around how we think about annualized?
Vic Schoper: Tariff Impact, if we should start by, you know, just analyzing what you've given for this year or could it be higher, lower, given mitigation, etc. Thank you.
Vic Schoper: Sure Blake, I can take that one. So you heard the prepared remarks correctly. We're assuming that the 10% to and from the EU stays in place and so we're not assuming those exemptions go away and there's any change to that. So our assumption is just it's 10%.
Vic Schoper: for the rest of the year and that's we're including in our guidance.
Vic Schoper: On the annualized, it's really difficult to annualize right now, and so the short answer is no, I would not annualize our 80 to 100 million that we're expecting here in Q3 and Q4, and it's too early to try to annualize a number or think about what the impact of 2026 might be, it's just too early to call. You'll obviously the tariffs are subject to change on an annual basis or over a longer span.
Vic Schoper: and our mitigation strategies are underway and some of those are a shorter term but some are longer term as well. I mentioned the manufacturing supply chain team have been working on mitigations. [inaudible]
Vic Schoper: Some of those have time sensitivity with them and we've been to date and will continue to strengthen our regional supply chain strategy. So these are strategies that were before tariffs. Certainly we've given them a higher sense of urgency, but they'll be ongoing over time. Thank you very much.
Vic Schoper: We're also continuing to work with our industry trade associations to secure more exemptions in the various regions.
Vic Schoper: and then I mentioned the selective pricing strategy. So it's really not something that I would recommend trying to annualize at this point, just given the difference between the impacts we're expecting here in 2025 and mitigations related to those. And what the impacts might be over the longer term. Thank you.
Vic Schoper: as well as what our mitigation strategies might be over the longer term. Our goal, obviously, is to manage the business and hit our metrics, and so we're very happy to be holding our key metrics here.
Speaker Change: Thank you. Your next question comes from the line of Steven Valiquette with Mizuho. Your line is now open.
Oh thanks, good afternoon everyone.
Stephen Valliquette: Um, maybe just a question on the dental firm moment here. You know, last quarter, when you guys had 4% organic growth, you talked about you were taking share.
Speaker Change: Relative to the market growth. This quarter a little bit slower at the 0.4%, but a lot of surveys suggest the market also kind of slowed down a lot in the quarter as well. So I guess I'm curious how you think you performed just relative to the market in dental in the first quarter. Thanks.
Speaker Change: Yeah, I think pretty well. I mean, generally speaking, if you think about that business, we are in categories that even in challenging times for the dental markets.
We're pretty resilient.
Speaker Change: You know, if you chip a tooth, you get a cavity, you're usually going to take care of it because there's pain involved.
Speaker Change: Certainly an aesthetic issue with it as well. So we're in, I would say generally speaking, more resilient areas, so that's a benefit to us.
Thank you.
Speaker Change: The last question comes from the line of Travis Steed with the follow-up question from Bank of America. Your line is now open.
Travis Steed: Hey, and a follow-up. Thanks for putting me back on. A curious way if you can help us characterize how much of the tear of impact is tied up with a PNF business versus Paul Remain Co.
Wayde: Yeah, so we're not breaking that out, Travis, and that's really because we're guiding for the whole company at this point and the timing related to PNF is somewhat variable as we look to plan to close before the end of the year.
Wayde: But I think just maybe part of your question, maybe as you're modeling this, you know, I think it's important to think about operating margins as well.
Wayde: You know, as I said in our prepare to marks, we're now planning for operating margins to be at the low end of 20 to 21 percent, but there's a key dynamic in here in timing throughout the quarters of the year.
Wayde: We're expecting Q2 to be another strong quarter, like we saw in Q1, in fact we're planning for it to be above that full-year number above 20%.
Wayde: and then with the pressure that we're seeing from the tariffs, we're expecting that pressure to be in the second half, and if you're just doing it mathematically for us to end up at the lower end of our guidance range, that would mean the second half of the year would have to be...
Wayde: below 20% and so I just want to make sure everybody has that as you're thinking about the phasing but we'll bring P&F into it when we close and we'll provide a pro forma financial information so that it's easy to see the business without P&F but at this point we're guiding with P&F still in the business as a whole go.
Thank you.
Amy Wake: At this time, there are no further questions, so I would like to turn it back over to Amy for closing remarks.
Amy Wake: Great. Thank you, Amy, and thank you everyone for listening and for your questions. We appreciate your interest in Solventum. If you do have any follow-up or need anything else, please don't hesitate to reach out to us directly. This concludes our first quarter of fiscal year 2025 conference call.
Operator, Amy, you can now close the call.
Amy Wake: Thank you. This concludes today's conference call. You may now disconnect.