Q2 2025 Solventum Corp Earnings Call
Earnings call. As a reminder, this conference is being recorded.
All lines have been placed on mute to prevent any background noise.
I would now like to turn the program over to your host for today's conference a victim, senior vice president of investor relations and finance Communications. Please proceed.
Thank you. Good afternoon and welcome to Solventum's second quarter fiscal year 2025 earnings call.
Joining me on today's call are chief executive officer, Brian Hansen and Chief Financial Officer Wade McMillan.
A replay of today's earnings call will be available later today on the investor relations section of our corporate website.
The earnings release and presentation are both available on the site now.
during today's call our discussion and any comments we make will be made on a non-gaap basis unless they've been specifically called out as Gap,
The non-gaap information discussed is not intended to be considered in isolation or as a substitute for the reported gaap financial information.
You are encouraged to review the supporting schedules in today's earnings, press release to reconcile, the non-gaap measures with The Gap reported numbers.
Additionally, our discussion on today's call.
Will include forward-looking statements, including, but not limited to expectations about our future financial and operating performance.
We make these statements 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 from any forward-looking statements made today.
Following our prepared, remarks will hold a Q&A session.
For the Q&A portion of today's call, as a reminder, please limit yourself to 1 question and 1 related, follow-up.
If you have additional questions, you're more than welcome to rejoin the queue.
And with that, I'd like to now hand the call over to Brian
All right. Great. Uh, thanks Amy and to all of our shareholders and everyone else interested in our story. I just want to say thanks for joining us today for our second quarter results. And I'll just start by saying that we are continuing where we left off in q1, delivering, another solid quarter. And as a result of this positive momentum and strong execution, we are raising our sales growth and EPS guidance for the year.
You know, this continued strong momentum gives us even more confidence in delivering, the growth in margin targets that we outlined at investor day back in March.
Certainly. There is still work to be done. You know, there's no question about that. But I am very happy with the progress that teams are making across all of our businesses and we are quickly and importantly, decisively building, on the strong Foundation established by 3M. Our differentiated brands in attractive and diverse markets. Now combined with the cultural and structural enhancements, we've already made our delivering results in accelerating our growth and importantly, again, putting us on a clear path to achieve our long-range plan commitments.
And in addition to this, you know, our work to revamp, our Innovation process is on track and our forecasted new product pipeline is steadily. Increasing in value. As a result,
and then once we close the pmf transaction as we've stated before, we will focus on discipline tucking m&a to further, enhance our progress
Overall, it's clear to me that our value creation framework, and our mission to improve lives. Have aligned our organization to focus on and deliver results and begin to establish solvent them as a mission-driven performance leader in our industry. And I want to thank our dedicated Global teams for advancing our mission and driving our success. This type of transformation just doesn't happen without your dedication and your desire to win. So, again, thank you for making it happen.
Okay, a few quick updates before moving to our business segments. Let's start with separation. You know, ways you going to give more color on separation in a minute, but I'll just quickly highlight that things are proceeding well and they are on track and I can say that a big part of our success here is thanks to the very experienced team that we have assembled. They have been there and done this before, and they are leveraging past insights to mitigate risk in our process.
And our multi-year ERP implementation reached an important milestone as we executed the system cutover in Europe this quarter.
Our Global supply chain and our businesses came together and worked as a team to leverage. Our comprehensive risk, mitigation plans, and as a result, they delivered the quarter, but most importantly, they delivered for our customers and patients.
And I can tell you that this success is a strong example. Of 1 of solvent's 5 core values. Call it advancing together at an increases. Our confidence, certainly my confidence that even when things don't go exactly. As planned, we have the right team with the right experience and the commitment to overcome and deliver. This is also a great example of this team's ability to effectively manage our go forward Erp, implementations as well.
Okay, Switching to tariffs again, Wade is going to provide more detail here. But just as a quick summary last quarter, we discussed some of the mitigations we've already put into place and have been executing against to offset the Tariff impact. And based on what we know today about current trade policy, and our mitigation efforts, we're reducing the estimated tariff impact for 2025, you know? Obviously, you know, given the fluidity of the environment, we will continue to actively monitor the situation and Implement new strategies as needed.
Okay. Now I'm going to move to our business segments where we continue to demonstrate positive momentum and I can tell you a big part of this progress stems from the Strategic Clarity that we've created through our market and growth driver, selection process. That was a very important process to create Clarity of focus. And as a reminder, we have 5 growth drivers that will account for 80 plus percent of our growth over the long range plan.
And as we've stated the 5 growth drivers are negative pressure. Wound therapy.
IV site management. The sterilization Assurance, core, restoratives and revenue cycle management.
Now, starting with our medsurg business, we had another solid quarter of progress fueled by our existing, and differentiated Brands, our recent new product launches, and our commercial restructuring to specialize, the sales channel in our growth driver areas,
For some additional color on the 2 Sub segments of merge. Our IP and SS business shows solid underlying business performance in the quarter and also benefited from some follow-on Advanced order timing. Now, this order of timing benefit was offset by short-term pressure in our Advanced wound care business due to a voluntary recall that had no patient. Safety concerns. Now, as we look forward into the back half of 2025, we expect Advanced wound care to accelerate and our IP and SS sales to moderate.
Relative to Advanced wound care. We expanded our vac peel and place launch into Europe and established. A dedicated acute care sales team to ensure focus on this game-changing technology importantly, we've also recently won several large negative pressure, wound therapy customers. Reaffirming our confidence in our technology, differentiation and boosting momentum. As we come into the back half of the year,
When it comes to Ivy site management, we continue to see strong demand for our Tegaderm, antimicrobial Solutions with new product launches in major markets across, Europe, and Asia, again, supported by a Specialized Sales teams across our regions.
And within our sterilization Assurance business, we have seen early success with our 3, new product launches. And even though these are an early stages of the launch, we are already gaining renewals from our larger customers and our Specialized Sales team is generating the momentum to drive to full adoption.
In our Dental Solutions business. We continue to gain momentum in core, restoratives with results driven by a focused portfolio.
Accelerating new product Innovation and specialization of the sales Channel, new product, launches were a key, contributor, in the quarter, driven by strong demand for a clinical clear and philtech EZ match.
And our customer response to our first to Market 3D printed Clarity. Precision grip, attachments has remained positive. Enhancing our ability to deliver a seamless combination of dental and orthodontic Solutions. This Innovation underscores momentum within the dental teams, internal bed area of custom smile Solutions.
In collectively, these categories help offset pressure in areas like impressioning, materials and core Orthodontics, helping us to stabilize a segment even in a challenging Market environment.
And the team expects new product demand to accelerate into the back half of the year and ultimately Drive sales growth improvements as well.
From customer operations.
The ongoing success of 360, Encompass showcases, his ability to streamline workflows and deliver, meaningful customer benefits. And in our International markets, we are seeing 360 Encompass, installations in Australia and expansion efforts in the Middle East.
Demonstrating his commitment to equipping, Healthcare Providers, with the tools. They need to operate smarter around the globe.
Last month I was on site with over 300 of our, his customers, at our annual customer experience Summit. And I tell you it was a fantastic opportunity to engage with customers hear direct feedback about our Solutions. And importantly, for me to learn more about our customers views on the future of the space overall. I would say it was an exciting week, uh, very well spent with very good feedback.
And last but not least, turning to our purification infiltration business, we saw continued strong demand for our Buyer Processing Solutions. Again, reaffirming the importance of our Advanced Technologies in this space and our investment in expanded capacity for our industrial business. This also contributed to driving accelerated growth throughout the quarter overall. The PMF business is well positioned for sustained growth, and our transaction process with Thermo is moving along nicely. In relation to the PMF transaction in June, we filed an amendment to our agreement for Sventom to retain the drinking water business. This has helped simplify the transaction and importantly, increase the opportunity.
To accelerate the clothes, you know, keeping drinking water, also provides sventom with the opportunity to unlock additional value, tied to this business. And I would just say overall Thermo has been a, a great partner and we appreciate their collaboration, not just in streamlining the process. But also a very importantly their commitment to ensuring the success of our pmf business.
Now before I close I'd like to highlight a couple of external recognition honors. We received during the quarter now first salvent, um earned its place on the Fortune 500 and our first year is a standalone company
We are also excited to be named as a best company to work for by US News and world report. And I will tell you this recognition in particular, reflects the hard work of our teams and the early success in driving our values and strategy to put people first and become a best and preferred place to work. And in closing, I just say that thanks to our companywide, teamwork, and progress against our transformation plan. So I'll ventum continues to chart a solid path forward. We have an incredible opportunity to create meaningful value, and we are making consistent and repeatable progress in that value creation story.
The foundation. We inherited combined with the aggressive actions. We've already taken positions us well for continued growth and margin acceleration and ultimately sustainable value creation.
And with that, I'll turn it over to Wade for a closer. Look at our financial results and other key updates. Okay, wait, pass it over to you.
Thanks Brian.
We're pleased to be able to report another solid quarter, as we navigate the separation from 3M.
And prepare for the divestiture of purification and filtration.
All will gain momentum in the business amidst an uncertain macroenvironment backdrop.
consistent with prior quarters all provide you with a separation update and then transition to our Q2 financial performance
I'll conclude my prepared remarks with an update on our 2025 guidance, as well as a financial update for the pending sale of purification and filtration less, the drinking water business. We are retaining
We continue to execute against separation Milestones while making foundational changes to deliver on our long range plan.
In Q2, we made further progress on our supply chain separation initiatives.
We moved our European distribution centers from 3M to multiple third-party distribution centers and exited a distribution center in South America along with executing our largest Erp cut over to date.
We've made further progress exiting 35% of transition service agreements to date including support services for commercial operations and Logistics Human Resources, marketing technology and quality and Regulatory.
Finally, we're making good progress. We are coordinating our product packaging and rebranding strategies, and we have materially completed our corporate rebranding, which includes our facilities media and trade shows.
Now, turning to our Q2 results.
IC basis compared to Prior year and increased 3.9% on a reported basis.
During the quarter, foreign exchange was a 110 basis, point benefit to reported growth.
Overall, we had stronger than expected sales growth that benefited from positive contributions across all segments.
Importantly volume continues to be the main driver of our continued execution. As we align our organization towards delivering sustainable sales growth,
And new product innovation.
We managed Erp and distribution center challenges in Europe. As we began executing, our Erp and distribution center cut overs.
we still expect the favorable timing benefits from q1 and to a lesser extent in Q2 will be offset by year end mostly in Q3
Pricing remains within our expected plus or minus 1% range and the impact of SKU exits in the quarter was 60 basis points.
Moving to the segments, our largest segment, Med search delivered, 1.2 billion in sales and increase of 3.9% on an organic basis.
Growth was again LED this quarter by the infection prevention and Surgical Solutions business which grew 5.9% and benefited from follow-on Advanced order timing which contributed to the higher than expected performance.
Advanced wound care. Growth of 0.8% was driven by negative pressure, wound therapy with growth muted by the previously, mentioned product recall.
Looking ahead to the second half, we expect a trade-off.
As infection prevention and Surgical Solutions. Absorbs, the pullback associated with the order timing benefits in q1 and Q2.
While Advanced wound care delivers improved growth driven by acceleration and negative pressure, wound therapy, led by single-use Pina and the continued rollout of Peel and place.
Our dental solution segment delivered $338 million in sales, with an increase of 70 basis points on an organic basis.
We continue to demonstrate resilient performance, despite a market.
Aided by Innovation across our restorative and prevention products as well as our clarity aligners.
Our health information system segments, contributed 339 million in sales, an increase of 3.2% on an organic basis, which benefited from strong customer retention of our revenue cycle management software Solutions.
More than offsetting expected declines in clinician productivity Solutions.
we remain focused on system implementations to support our Hospital customers as they navigate a challenge in Dynamic environment for Health Care spending
finally the purification and filtration segment, delivered 252, million of sales, an increase of 3.1% on an organic basis,
Similar to Prior quarters growth was led by our bioprocessing filtration and Industrial filtration categories, partially offset by declines in membrane OEM.
Looking down the p&l. Gross, margins were 56% of sales in the quarter and Improvement of 20 basis points over prior year.
As a reminder, gross margins include a headwind associated with a 3M Supply agreement, which was more than offset by improved sales, mix and programmatic savings.
Notably Q2 results also included 4 million related to the accounting treatment of the pmf business, which is treated as a held for sale asset. And provided a 2 cent EPS benefit in the quarter related to a reduction of depreciation expense
Excluding the held-for-sale benefit, underlying gross margins improved 20 basis points sequentially compared to Q1.
Consistent with our expectations for seasonal Improvement.
operating expenses of 736 million, increased modestly compared to the prior year, which reflects inflationary headwinds
public companies, stand-up costs and growth Investments, mostly offset by savings. From our restructuring program, which remains on track to deliver 120 million of annualized savings.
Which translates to an operating margin of 21.9% ahead of expectations.
Moving down, the p&l to non-operating items. Our net, interest expense, and other non-operating, spend improved modestly versus q1.
Lastly, our effective tax rate of 18.3% was better than our expectations driven by favorable Geographic mix.
Overall we delivered earnings per share of a dollar and 69 cents ahead of our expectations driven mainly by sales outperformance and favorable margins.
We also ended the quarter with 492 million in cash and equivalents with no outstanding borrowings on our revolving credit facility.
To date, we have made cumulative repayments of 500 million on our 1.5 billion pre-payable term loans, which includes another 100 million paid off in June.
For Q2 we generated free cash flow of 59 million which was consistent with our expectations of improvement over q1 and reflects normal seasonality and the timing of interest payments.
Now, turning to our 2025 guidance update, which reflects our Q2 performance and momentum to start the year.
As a reminder, our guidance is for the whole company, including the purification and filtration business, which is treated, as held for sale until the transaction closes.
Starting with full year, organic sales growth. We have increased our Outlook to arrange of 2 to 3%. A 50 basis. Point increase above our prior guidance,
We continue to estimate a 50 basis, point impact of SKU exits, which we anticipate will ramp throughout the year.
Excluding this plan, impact, our annual growth Outlook is 2.5 to 3.5%.
Reflecting the continued volume-driven performance across our business segments as we execute against the phase approach to reposition for growth.
Regarding foreign exchange.
We now estimate currency will have a favorable impact of approximately 50 basis points on sales growth, for the full year,
This compares to our prior expected impact of neutral, and will have a positive benefit on our reported sales and earnings per share.
And based on better than expected effective tax rate through the first half of 2025, we are now comfortable at the low end of our initial guidance range of 20 to 21%.
Before commenting on earnings per share, I want to bring you up to date on our latest thinking on tariff headwinds.
We now estimate that we are down 60 to 80 million, from our initial range of 80 to 100 million, impacting Q3 slightly less than Q4.
The reduction represents improved estimates for us and China, tariff rates partially offset by higher rates for Europe and other smaller regions.
The favorable update will ease pressure on gross margin and operating margin in the second half of the year. We continue to anticipate achieving full-year operating margins now closer to the midpoint of our initial plan, in a range of 20% to 21%.
Altogether for earnings per share. We have increased our guidance to a range of 5.80 to 5.95 from the previous guidance of 5.45 to 5.65, which reflects the strong performance in the quarter combined, with further improvements into the second half of the year.
We are maintaining our free cash flow guidance in the range of 450 to 550 million.
As a reminder, free cash flows are impacted in 2025 from separation related costs and we expect our free cash flows to improve in the future as those costs step down in 2026. And again in 2027 as we complete the separation from 3 a.m.
before closing out, I also want to provide you with an update on our purification and filtration Devastator.
an increase of 10 cents compared to the estimated EPS, accretion shared at our investor day,
We are also revising. The gross margin accretion to approximately 100 basis points compared to our earlier estimate of 200 basis points and revising, our operating margin accretion to 50 basis points compared to the earlier estimate of 100 basis points.
This deal represents a major milestone for our portfolio transformation strategy, and accelerates our timeline to pay down debt to de-lever our balance sheet, which we expect to achieve through further pay down our Term Loan and bond BuyBacks. While positioning us to pursue programmatic tuck in m&a.
On an annualized basis. The transaction, improves our gross margins operating margins, and earnings per share.
Based on expected. Close by year, end, we continue to anticipate the impact on earnings per share will be neutral in 2025
Finally, I want to reiterate our commitment to continued investment.
Consistent with our attractive, growth driver opportunities and realization of the long-term value creation ahead.
We will balance these Investments by identifying opportunities to expand margins and generate strong cash flows.
In conclusion, we had a solid quarter and are making great progress towards achieving. Our long-range plan goals of accelerating sales, growth to 4 to 5% and growing earnings per share at a 10% kegger.
We're also executing well on our plans to separate as an independent company. We can feel the momentum building and we're excited about the continued value creation story at Solventum.
With that, I'll now hand it back to the operator, for the Q&A portion of the call.
Thank you. If you would like to ask a question, press star, then the number 1 on your telephone keypad. I would like to remind everyone to please limit yourself to 1 question and 1 related, follow-up if applicable, we'll pause for just a moment to compile the Q&A roster,
Your first question comes from the line of Jason Bender with 5% Handler. Your line is open.
Hey, good afternoon, everyone. Thanks for taking the questions, and real nice quarter here.
um,
Why don't we start with the organic growth guide? You're doing really well with, with medsir, especially considering the pulse for the business, the business you had last quarter, maybe talk about the trajectory that you're seeing in that part of the business. You know, what's, what's driving? Some of that upside is it is the commercial organization, uh, just the focus, anything you can add there and, um, you know, and then maybe talk a little bit about the back half, knowing that your comps, here are still really favorable for that, part of the business.
Yeah, uh good, good to hear from you Jason, why don't I start with, um, with what's driving them in search business? And then you can speak to any movement between orders. Um, so what I'll say is that um you know, right now mitts are just we've talked about before has 3 of our growth drivers. So so uh you know if you've got 3 growth drivers in your business, you better start to see some traction because that means we're spending a lot of time and effort in those areas and inside of those growth drivers, regardless of which 1 we're looking at
There are really 3 levers that we're seeing the first 1 as you've referenced is the commercial restructuring that we've done to specialize the team that is paying significant dividends. It really is it's a whole cultural change that we have in place. It's a specialized team and it's a incentive plan that is getting people focused on growth so that that's a big piece of the movement right now, but the second 1 is pretty big, too. It really is taking advantage with this new engine, with these brands that we have that are differentiated in the space.
And I probably don't talk about this enough, but, but these are brands that have been around for a long time that have real clinical differentiation that are as valuable as a new product launch in the right hands with the right focuses. So, so that, that's a significant benefit to us that probably, I underappreciated when we started the, the game here and the third is just a new product. Launches, that we've had that, we've talked about either the serialization, Assurance or negative pressure, wound therapy, or other parts of Ip and SS. So so those are the variables that are working.
Half percent growth in the first half and as we shared about a percent of that is due to order timing that we got in advance, in the first half of the year. And we expect to see that pull back in the second half mostly in Q3. And if you look at our guide now, at 2 to 3% for the year, the second half implies a midpoint of 1.5%. And so as we get, give that 1% to the first half, we take it from the second half. And if you normalize what we said in the first half, was we were normalized 2 and a half percent, and if you shift that 1% back to the second half, it would be a 2 and a half percent at the midpoint. In other words, we think we're growing consistently in this 2 and a half percent range in the first half when you normalize for order timing and in the second half of the midpoint of our guide, if we continue to grow at the rate we are, we'll be in that 2 and a half percent. And as Brian said, we feel like we've got really good momentum in the business here. Um, certainly there's puts and takes. Um, but we've got um uh, I think
a real building success story here with the commercial output that Brian just outlined
It's very helpful and wait, I'll stay with you. Just, uh, question on on maybe the Epps Bridge if you could, um, you know, from last quarter to this quarter, you raised by 32 cents at the midpoint you beat at, you know, almost by a quarter. We're picking up a dime and updated tariff assumptions. But you got FX with the Tailwind. Um, it doesn't seem like there's much being attributed to back, half organic growth numbers.
Members may be inching up a little bit; taxes is a good guy. So I'm just wondering if you know what maybe cutting the other way that we're not accounting for, or is this just conservatism on only raising by the amount that you did here today?
Yeah, I I uh I notice how you asked the question, there. It is quite a strong race, um, and we are only halfway through the year. So what what we'll say here is, you know, we're tightening the range as we progress through the year and given the year to date performance, it raises our confidence. And as you said we're um in that 33 cents, uh increase at the midpoint and this accounts for the Q2 beat plus upside in the second half and as you know and you just listed several of them, we're certainly managing a lot of variables.
Number 1, the separation activities but also tariffs taxes foreign exchange and given we're only halfway through the year and that these variables can turn. We're comfortable with the raise that we put in place this quarter. Uh, we're very happy to be tracking ahead of our commitments for the year including offsetting pretty substantial tariffs here. And so we think it's a strong raise. Uh we'll continue to monitor all these multiple variable variables uh continue to progress on our separation activities and uh we'll see how we look in the second half of the year.
Your next question comes from from the line of Travis deed with Bank of America. Your line is open
Thanks for the question. Um I I guess wait there was a lot of moving Parts in the quarter. Uh order timing patient, recall Erp SKU rationalization, I don't know if there's a way to kind of walk through those again and and kind of bridge the, the 2.8% you reported. And uh just kind of get to more of an underlying growth rate in the quarter. That's kind of apples to apples. Uh, and then that way, we kind of think about the underlying growth in Q3 a little bit better versus kind of first half. Second half,
Yeah, good. Good to hear from you, Travis. I appreciate you thinking that I can't answer that question. You go right to me, but I'll tell you that, um, what I would say is we did have a lot of puts and takes, particularly on the revenue line in the quarter, and we wanted to call those out and they're very remarks because people would have questions on why certain businesses are up and certain businesses are down. But I think on an underlying basis, if I take all those puts and takes into account, the $2.8 billion that we posted is a good view of what the realistic growth was in the quarter. If you can kind of take that $2.8 billion, say that's the bank number, that's what we did—puts and takes for sure, but they all offset for the most part, and that's a good view of what we did.
To give us the confidence to raise the guide here. Puts us in a good position for the second half of the year.
That's great. Thanks. And uh, yeah. Sorry. Brian. I, I was thinking as much in a second, um, but the, uh, the other thing I'd like to ask um, is kind of more like the. So you're kind of at this kind of mid to percent underlying growth rate right now and you know, as you look forward and and you know, I know you're not going to give next year's guidance, but is there any kind of reason why we shouldn't think about this growth rate getting better? Um, or you know, the decel for certain certain reasons or accelerate for certain reasons, um, just kind of trying to think through the puts and takes and the model going forward.
Yeah, so so um we're going to have a as you probably remember a bigger skew impact next year that we had talked about 50 basis points this year. Way before I say it. Did we already say what it is? Yeah. Yeah. It's going to be about a 100 basis points next year. So so just you got to take that into account first and foremost but but outside of that, if you just get rid of skew for a second and you look at underlying business strengths what we would fully expect to continue to enhance our growth? That's the plan and it's going to be through those 3 vectors like commercial, restructuring, that we've done in the focus that we have. We'll continue to pay dividends the new product launches that will continue to come in 2026 as well. And of course the uh, you know, the brands that we already have in the market that we're basically relaunching, you know, and and I can't wait at some point. We need to get folks out to the businesses so they can talk about some of these brands that have been
Out there for a long time but are significantly under penetrated the very profitable, they're clinically relevant and we are going to relaunch those products.
Your next question comes from the line is Patrick Ruth with Morgan Stanley. Your line is open.
Love it. Um, thanks guys. I'll, I'll keep it to 1. Um, I guess.
You know at least some more perspective, the organic growth is going better than expected um and you know doing well on our side and if all things go well it was the end of this year. You're going to have a balance sheet that looks pretty radically different. So I guess compared to when you first took over the business how are you feeling about that Capital allocation you know you mentioned bolt on m&a but like how much you feel you need to do that to buy into the kind of midterm growth range versus the levers that you've already got. You know where early with peel and place. How you think about interplay between you know buying new businesses to kind of augment the growth versus what you have on hand today versus when you first took over, if that makes sense.
Okay. Thanks Patrick. And thanks for the 1 question, that's been. I thought it was going to be a really long 1. So, so I appreciate the 1 question in this relatively short, I, I would say that the um, m&a to me is an enhancement to not a requirement to get to the missing or digit growth rate. We had said 4 to 5%, which gets you in the mid single digits in our lrp that is an organic go get that we're feeling much better about and if anybody was doubting whether we could get there or not I think our performance so far is uh is score.
Watching that house but but I don't look at m&a as a way to get there. I see m&a as a way to potentially accelerate getting there or potentially overachieving.
Your next question comes from the line of requests with steel. Your line is open.
Uh, good afternoon. Um, hi Brian. Hi Wade. Um, maybe, um, talk about if you would a couple of the underpinning, uh, processes underway you, um, you you highlighted Brian, the the progress, the positive progress on the Erp front, uh, in the EU. Um, maybe talk us through, um, you know, the next big milestone, their timelines there and just maybe remind us if you would, uh, the impact of, of this process, uh, going on and and being maybe, uh, when it's totally completed and the impact, you think it's going to have on the business, how are we going to see it? I mean, does it, is it going to? Is it more? Uh, and working capital that we're going to see it. Uh, uh, uh, something about cash flow just help us think through about the the positives uh long.
Longer term implications of this process. Thanks.
Material relative to this 1, and then we don't have our next large cut over until 2026, where we have 2 that we're expecting in 2026, uh, and we'd be pretty much fully through this as we come into the end of 2027. And then, wait, anything you want to? Yeah, sure. So on the, um, cost I think is, is your question Rick where we're, you know, incurring, uh, costs to separate both in Opex that we carve out for non-gaap separation costs as well as capital expenditures. Uh, and um, as we've said a couple times, we will expect to see that ramp down in 2026 and then ramp down further, in 27. As Brian said, the big um, uh, older sear to move. Are those Erp implementations? And as Brian said, we're planning to have those completed in 2027 as a result of that, we're expecting our free cash flows. That's the metric that we'll see significantly improved in 2026 and then again, in 2027, as we don't have to incur those separation relations
Costs anymore. And I think I would just add to this 1. As, as part of your question is not having the distraction and the the level of work and focus that people have to put on separation activities while they're doing their day job. We've got a lot of our best and brightest working really hard on the separation. And I think what we're looking very much forward to is getting to the other side of the separation and then focusing on just on, uh, building and The Business.
Gotcha, just in in a brief follow-up. Um, you you you highlighted that that that, of course, it reminded us that the drinking water business. You've kept it for all the reasons you said and I think Brian's words were the potential to unlock additional value here. Uh, maybe talk through that, uh, you know, when how might that value be realized, uh, how big a priority is that a something that could happen this year next year? Any additional color would be welcome? Thank you.
Yeah. No thanks Rick. And and I, I would say, you know, for, for a number of of reasons, I probably don't want to get into too many specifics about the the timing of a transaction, particularly a future transaction. But but, you know, the goal here is to, um, really just take the time that we need, because we got a lot going on right now, uh, to ultimately be prepared for a transaction and also ensure that we find the right home for our drinking water business, and our team members there. So it it's not an urgent thing for us. It is 1 that we want to make sure that we've got the time to do and, uh, and we find the right, the right company.
Your next question comes from the line is Steven valakut with bisou Securities. Your line is open.
So really, I just wanted to follow up on uh, the health information system segments and curious to hear more about the uh that partnership with Ensemble front. Uh autonomous coding. I mean, they're the leader on kind of full RCM Outsourcing and from that press release. In May, it really? I mean it says that uh, you know, Ensemble is going to implement, you know, your autonomous coding solution really across all 28 of their health system clients. If I read that, right? I mean, it seems like it'd be like a pretty large Revenue opportunity. So 1 are able to quantify, you know, the revenue opportunity, tied to that partnership.
And also, you know, what's the timing of, you know, that sort of implementation. I mean, that would be pretty large. But make sure, you know that that in the way I'm reading it, right? That, you know, that is, you know, that size and magnitude but just any, uh, quantification around all that would definitely help. Thanks,
Yeah, so so maybe just for some that that don't know Ensemble. I'll just take 1 step back and then and then answer the question Ensemble, really is a, uh, as you reference, it is a, uh, a leader in Outsourcing the revenue cycle Management Services. So in other words, they would come into an account. Uh, they absorb that whole responsibility, including the FTE from the account and then they provide those services for the hospital or the hospital system. So so it's different than what we do. It's truly absorbing that entire process and then
But it's not going to be applicable everywhere, but I fully expect us where we can do it to move aggressively with Ensemble, to be able to again make the the process more efficient. And ultimately the goal here is not just efficiencies to get better reimbursement. Because as you drive, autonomous coding, versus a human being in, in being involved in the process, you get fewer mistakes. And as a result of your mistakes, the concept is you get better Revenue capture. So that's the reason why ensembles focused here and, uh, and, uh, excited about it. And I'm pushing pretty hard, same way you are, is to make sure that we're driving fast. I don't want to size the opportunity, but we wouldn't have done the partnership. We didn't think there was a real opportunity here.
Okay, yeah, the only real quick follow-up is, you know, to win, you know, that partnership was there like an RFP where you had to compete, you know, against others to, you know, get that, uh, that partnership, or was there already like a, you know, just a 3, or a relationship, uh, kind of evolved into this, just curious of any sort of back color on that as well. Thanks, it's more of a, a relationship and I'd say a mutual respect. I mean, 1 of 1 of the most dangerous things that we can do in autonomous coding is go with folks, uh, that don't know the quality aspects of doing coding. And so, if you're going to bring autonomous coding, you've got to be careful. Not to do it too rapidly, where you lose the quality control and I think Ensemble trusts that we're going to do that and do it well and we trust that they're also going to do the same thing. So so that that to me is what makes the relationship really strong, their high quality and we're the same way.
Your next question comes from the line of David Roman with Goldman Sachs your line is open.
Thanks for taking the questions. This is Jenny Reno. It's on for David, just for a quick 1 from me, I was hoping you guys could walk through the decision to raise, uh, organic sales growth and EPS guides while maintaining free cash flow and more broadly to put some takes you consider for a free cash flow throughout the year. Thank you.
Yeah, sure. Um, so the logic to raise organic sales growth, I think we've talked about Brian had in his prepared remarks and a little bit more color in the Q&A here, where we feel really strong with the commercial improvements even faster than we expected. And that's what's giving us confidence there. And then obviously down the pnl we're seeing mixed benefits and strong, performance and margins. And that's what's also helping us, uh, on the EPS side. Um, having said that, I think the main Crux of your question is, uh, why not seeing that increase in free, cash flows as well? And what I would say there is that, um, we've had a slow start on free cash. Flows. At the beginning of the year here, we've had some timing of payments that we've had to make in the first half. And so, uh, we've got some work to do in the second half to achieve the guide. And so that's why we're
Uh, holding the guide where it is. Um, we are anticipating improvements in working capital as well as lower deferred cash payments and um, that's really what uh, improves the second half over the first half. But as I think everybody knows cash flow can be lumpy and so we still anticipate delivering in that range for the year.
Your next question comes from the line of Brett Fishman with keybanc capital markets, your line is open.
For taking the question.
Curious if you could maybe touch on how you're viewing the underlying patient trends in the Dental Solutions business. You know, obviously it's been a little bit of a challenging space post-COVID, but just wondering if you've started to see any change in kind of the underlying volume trend around patients.
Yeah, you, you know, we really haven't seen a dramatic change. Uh, I would almost say unfortunately, at the end of that statement, because we'd like to see it improved, you know, the good news I guess is that it's not decelerating at least on a broad base perspective, from a broad-based perspective. But uh, but we're not seeing the acceleration yet either. I would say that when we talk about acceleration in our business, we're not depending on any acceleration in the market. We're truly depending on the new products and the traction, they're getting in the marketplace and our Specialized Sales organization. Now if we happen to get a positive Traction in the market that we've benefited us for sure,
But we're not counting on it right now.
Yep, makes sense. Um, I also asked 1, kind of open-ended follow-up, you know, it sounded like you had some new product launches expected in Dental into the back half, maybe just more broadly. Um, you know, if you're willing to touch on any new products or general areas that we should be looking out for in that segment or in the rest of the business into each. Thank you very much.
Clear is a big 1 in fluoride treatment, the filter filtech EZ match which is just a simplified process to be able to get a match when you use filtek Composites and then the clarity Precision grip attachments which can be used with our Clarity trays or anybody else's trays as well. And those are great launches that they have that are building momentum in the field. And that's what will drive that performance.
again, if you would like to ask a question,
Number 1 on your telephone keypad. Your last question comes from the line of Play 1 with both Fargo, your line is open.
Hi. This is, uh, late calling in for a VRA. Thanks for taking the last question Jack and congrats on a nice quarter. Um, you talked about a, some of the segments, in terms of Outlook, you know, meds are kind of underlying growth for a half second half, do you? Um, talk about how do we, how should we think about quarterly, Cadence for growth in the second half in general and any additional comments around. Will that look to the other segments in the back half? Thanks again.
Um, I think maybe I'll take a shot at that just to see if I got the question right? But but I would say from a Cadence standpoint as we come into the back half, we talked about the first half, second half kind of growth rates before and obviously when you look at on the surface, not underlying growth but on the surface, you're going to see a bit of a pressure point 23. Because we believe that's when we're going to get most of that order timing up and then you'll see improvement from Q3 and Q4. But but but that that's probably the most idea of a Cadence standpoint. So
Pressure in Q3 because of the order timing unwind.
A little bit of Q4 but not as much. Yeah I think you got it. Brian we're not giving Court specific quarterly organic sales growth rate but just as you framed it uh we're expecting a little lower sales growth rate in Q3 as a result of that uh pullback in orders that we saw in the first half in a little higher in Q4.
I'll now turn the call back over to Amy for closing remarks.
Great. Thank you. Kate and thank you everyone for listening, and for your questions, we do appreciate your interest until then, if you have follow-up questions, or need anything else, please don't hesitate to contact the investor relations team directly.
This concludes our second quarter fiscal year, 2025 conference call.
8, you may now close the call?
this concludes today's conference call, you may now disconnect