Solventum : Transcript (Q1FY25 Earnings Transcript vF)

Solventum Q1 FY25 Earnings Call Transcript

May 8, 2025

4:30 p.m. EST

Corporate Speakers: Amy Wakeham - Solventum Corporation; Senior Vice President, Investor Relations & External Finance Communications Bryan Hanson - Solventum Corporation; Chief Executive Officer Wayde McMillan - Solventum Corporation; Chief Financial Officer Participants: Steven Valiquette Mizuho - Managing Director and Senior Equity Research Analyst Lei Huang Wells Fargo - MedTech Equity Associate Research Analyst Travis Steed Bank of America; Analyst Rick Wise Stifel - Managing Director Patrick Wood Morgan Stanley - Research Division, MD of Equity Research Jason Bednar Piper Sandler - Analyst David Roman Goldman Sachs - Managing Director Operator

Good afternoon. My name is Amy, and I will be your conference call operator for today. I would like to welcome everyone to the Solventum First Quarter 2025 Earnings Call. As a reminder, this call is being recorded. Thank you. I would now like to turn the program over to your host for today's conference. Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications. Please proceed.

Amy Wakeham - Solventum Corp; Senior Vice President, Investor Relations & External Finance Communications

Thank you. Good afternoon, and welcome to Solventum's First Quarter Fiscal Year 2025 Earnings Call. Joining me on today's call are Chief Executive Officer, Bryan Hanson and Chief Financial Officer, Wayde McMillan. A replay of today's earnings call will be available later today on the Investor Relations section of our corporate website. The earnings press release and presentation are both available there now.

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. The non-GAAP information we discuss 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 GAAP 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, we'll hold a Q&A session. And with that, I'd like to now hand the call over to Bryan.

Bryan Hanson - Solventum Corp; Chief Executive Officer

All right. Thank you, Amy, and to all of our shareholders and everyone interested in our company story, just thanks for joining us today for our first quarter results. And I'm just going to get straight to the point. We are off to a strong start for 2025. And 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.

All right. Before we jump into the strong start for the year, let me just quickly address tariffs specifically, and Wayde 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.

Now that said, we've begun executing short-term mitigation measures based on what we know today, and are actively 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. 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.

Relative to our continued momentum, progress here is further evidenced by our first quarter results, marking another positive quarter of volume growth. This makes it now four consecutive quarters of positive growth in sequential improvement as we delivered 4.3% organic sales growth and adjusted earnings per share of $1.34, again, continuing to perform ahead of expectations.

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 stopping that decline and reversing the trend are direct results of the foundational enhancements we made across three primary areas: the first being our mission and culture. The second, our talent and capabilities; and third, our efforts to stabilize the business across commercial productivity, our innovation process and our strategic focus and alignment.

And as I've 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. 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 make significant progress in executing the separation and advancing across all three phases of our transformation plan and very importantly, delivering results that have already changed the trajectory of this business.

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 primary focus remains very clear. Number 1, and obviously, delivering for our customers worldwide so patients continue to receive the care they need and number 2, 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, we are fully committed to our growth and margin drivers to reposition this company for profitable growth and drive meaningful value for shareholders.

Okay. Now moving to our business segments, where progress and positive momentum continue. The MedSurg 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

V.A.C Peel and Place dressing. 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 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.

And also in MedSurg, in the growth driver area of IV side management, we are 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. Given our momentum here and to further support the needs of this business, we have invested hundreds of millions of dollars for capacity expansion in the U.S., specifically in South Dakota with strong support of the then Governor Kristi Noem. And moving to our Dental Solutions business, we saw benefits in three areas: first, in our core restored as growth driver as well as our strategic bed area of aesthetics and across other recent product launches. In core Restoratives, 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 of Filtek Easy-Match and our refocused dedicated sales team continued to support solid growth in this area.

Anaesthetics customer response to the Q4 launch of our first-to-market and 3D 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 Clinpro Clear Fluoride Treatment launch continues to gain traction with customers and had strong demand in the quarter. It's the combination of these areas has helped to drive offsets for decelerating areas like impressioning materials to help stabilize the segment even as overall market volumes remain challenged.

Okay. In our HIS business, we are 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 coding technology really focuses on streamlining the coding process to help save our customers time and money. And medical coding is incredibly complex, and our computer-assisted and emerging autonomous technology can account for the constant tide of regulatory changes, quality demands and local, state and organization specific guidance. And this HIS 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 important, leveraging our decades of trusted high-quality and compliant coding.

And last but not least, turning to our Purification and Filtration business. We saw another quarter of robust demand for our bioprocessing 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 accelerated growth in the quarter as well. And as we shared in our last quarter, the P&F 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. 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. Both of those are available on our Investor Relations website. But just as a quick summary regarding Phase I, our mission and values have been deployed globally and through our communications and transformation efforts, we are seeing deep understanding and most importantly, connection from our team members to both.

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 this very

important phase of our separation, and I want to thank each and every one of them for burning the midnight oil and moving us forward.

And moving to Phase II as a global team, I can tell you that we are very aligned and executing a 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, increase the weighted average market growth of our business.

And finally, on Phase III, once we closed the divestiture of the P&F business, we anticipate being able to execute tuck-in M&A, which as we said before, will 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 made, combined with our newly defined strategic plan will accelerate sustainable and profitable volume growth and ultimately, ultimately deliver significant shareholder value.

And with that, I'll turn it over to Wayde 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, Wayde, we'll pass it over to you.

Wayde McMillan - Solventum Corporation; Chief Financial Officer

Thanks, and thank you to everyone at Solventum for the continued progress and for delivering a strong start to fiscal year 2025. As you heard from Bryan, we're making meaningful progress on the three-phase transformation plan as we complete our first full year as a public company. I'll focus my comments initially on a quick separation update before moving into our Q1 financial performance. Then we'll wrap up with our 2025 guidance update, which includes the impact of tariffs.

Overall, the separation remains on track and we are executing against key milestones while delivering on our financial goals. 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.

In operations and supply chain, we continue to make progress consolidating across manufacturing and distribution centers. We expect to significantly advance progress on our ERP milestones with four deployments planned this year, including our first major deployment in Q2. 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. Starting with sales. first quarter 2025 sales of $2.1 billion increased 4.3% on an organic basis compared to prior year and increased 2.6% on a reported basis. During the quarter, foreign exchange was a 160 basis point headwind. 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.

We also benefited from order timing related to customers buying ahead of upcoming ERP and distribution center moves and SKU exits. We expect this favorable timing benefit will be offset by year-end mostly in Q2 and Q3. The impact of SKU exits in the quarter was 30 basis points.

All in, we estimate our normalized Q1 organic sales growth is closer to 2.5%. Pricing remains consistent within our expected range and we are encouraged by the continued shift to delivering positive volume growth across the businesses.