Good afternoon. My name is Amy [ph] 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 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. [Operator Instructions] 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.

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. For the Q&A portion of today's call, please limit yourself to one question and one 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 Bryan.

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 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 4 consecutive quarters of positive growth and 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,…

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 3-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 2 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 4 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…

[Operator Instructions] Your first question comes from the line of Patrick Wood with Morgan Stanley.

Beautiful. I'll leave the tariffs to everybody else because I can't survive talking about that topic anymore, so I'm going to go on the top line actually. How confident are you around that kind of 2.5% underlying? And I say this because, obviously, the remaining core growth like is at 4.6%. Obviously, we'll combine 4.3%, like a really, really strong quarter. Is this like a SKU level analysis or something like that? Because 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 therefore is a little bit more durable than maybe you're suggesting?

Patrick, it's Wayde. We're confident. It's a number that's 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 something that we're confident in. It is still an estimate. We specifically called it out closer to 2.5% because there is some variability to it. But the 2.5% is a good number for us and that's what we think is the number that we grew in the quarter, exclusive of those customer order buying ahead. And what that means for us is a really strong quarter. It's 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 4 of our segments. So we had a really strong quarter here to start the year.

Yes. It's definitely faster than we thought. And then just as a quick follow-up, is it a fair assumption on our end to assume that the general price mix trends that you've seen in the previous quarter was consistent here? You hinted that in the opening remarks but is it fair to assume that the entire delta basically is all volume?

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 so for 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. It's all about volume growth for us from here.

Your next question comes from the line of Rick Wise with Stifel.

Maybe just to start with thinking about the year ahead, I mean, to say it simplest, tariffs are a bigger headwind, you were very clear. But offsetting that is the business momentum is the lower -- is the lower FX. Can you help us at all think through the quarterly cadence as we adjust our models? I mean just starting with the second quarter, last year, it was sort of flat sequentially but you have new products, you've got commercial momentum, etcetera. Help us a little bit directionally if you could.

I just want to make sure that we clarify, Rick, are you talking about growth by quarter, or what are you talking about?

Growth or dollars in -- can you report higher numbers in the second quarter, given all the positives and relative to the negative impact of tariffs, top line -- top line, Bryan. I'm not -- sorry if I'm unclear.

Probably for clarification, tariffs really don't have a significant impact for us on the top line. It's definitely more of a bottom line challenge for us. The ordering ahead of the timing that we saw in the quarter was more associated with our ERP cutovers and plant distribution changes and some buy ahead on the SKU rationalization. That will come back in Q2, Q3, maybe even Q4. Most of the impact will be in Q3. That's the way we're looking at it today because, by the time we get to Q3, we'll be past the distribution center changes and we should be free and clear to see those changes.

The next question comes from the line of Jason Bednar with Piper Sandler.

Nice start to the year here, guys. I want to come back a little bit on Patrick's question in talking about that 2.5% underlying. I guess my question is more around how does that compare to what you were internally expecting? It sounds like it's nicely above -- nicely above most of our models. But I guess kind of where are you at? Where are you executing? And then we're 5 weeks removed here from quarter end. I guess, on that order timing that you referenced for 1Q, did you have any additional buy ahead in April? Or did some of that – did you already start seeing some of that draw down in April and early May?

Why don't I start maybe with how we're looking at the 2.5% and how it compared to our performance or assumption of performance? And then Wayde, you could talk more about the drawdown. It was above our expectations, too. We're very happy with the 2.5%. As a matter of fact, if you think about it on an annual basis, I'm not saying we're going to do 2.5% but the last time this company did 2.5% was -- I think 2018. So it was a long time ago. So we were very happy with the performance in the quarter. It was definitely ahead of our expectations, even on an underlying basis. And really, the key driver for it is 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. Because remember, we've enhanced the commercial organization by dedicating the sales organizations through 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, we shouldn't be happy with 2.5% because we're still not at market but it's a really nice improvement off of last year.

Yes. And then just picking up on what we're seeing so far in Q2, just before I get into Q2 specifically, as Bryan mentioned just a minute ago, the expectation is because of our ERP cutover and distribution center moves in Q2 that we'll see the majority of that order timing come back in Q3. 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. As far as 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, the team is hunkered down right now as we go through the ERP implementation this week and we're right in the throes of it. So from that standpoint, the expectation would be we could see some of the headwind come back here in Q2 but we think the majority will be coming in Q3.

Your next question comes from the line of David Roman with Goldman Sachs.

I wanted to go into a little bit more detail here on the top line drivers, especially in MedSurg and certainly appreciate the order timing dynamic. But as you look at -- on an underlying basis, 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? Then I have a follow-up on the P&L.

Yes. They're kind of connected but you hit both of them. The way we look at it is there were 3 vectors of advancing the growth of our business. 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. It’s just focus -- it’s 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've talked about. So we've got a lot of different folks in place that are driving this harder than before. And you 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 Tegaderm CHG, that is a product that's been out for a while but it's a brand that is highly recognized, is differentiated and is significantly underpenetrated, as you probably remember from our presentation during the Investor Day. V.A.C Peel and Place is another one. It's a great product. And it doesn't sound that great when you hear it but it's a game-changer when it comes to negative pressure wound therapy and the team is highly focused on it. eBowie-Dick is in our sterilization assurance business. This is basically taking an 80-year-old process that was antiquated and is digitizing it and it's changing the game. So it's a really cool technology as well. And then you've got Clinpro Clear, Clarity Precision Grip Attachments that you would have in the dental business. That's different from MedSurg but again, this whole theme of the engine now being able to leverage new 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 growth driver. So across the board, whether it's in MedSurg, whether it's in dental, whether it's in HIS, it's the commercial focus that we have. It's the desire now to achieve the goals that are set and it's the focus on these new product launches that are really driving it.

Your next question comes from the line of Travis Steed with Bank of America.

Congrats on a good quarter. I wanted to ask a little more on the tariffs in a way that you could help us kind of think about the mitigation efforts, how you're offsetting $0.40 of earnings here. How much of that is FX? How much of it's operational and all that?

Yes. Those are the key areas for us. So just to maybe reiterate what we've got out there and keep in mind, the inventory turns fast for us, so we just want to make sure we emphasize that, because we have to be 1 of the fastest inventory turn companies out there. I think, under 3M, inventory was managed very tightly and we continue to have a 90-day inventory turn here on a 3-month turn. So as a result of that, we see the impact immediately start in Q3 and we'll have it in Q4. So in other words, we have 2 quarters of impact here. And so that $80 million to $100 million that we're estimating will be spread across Q3 and Q4 for us this year. We provided the major components as well. U.S. to China is half of it. And so we're closely monitoring those. So I think, even before we get into the mitigations, exemptions play 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. So as far as the mitigation goes, you've called it out, strong business performance in Q1 and we're expecting that through the remainder of the year. 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. 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 pricing strategies where we think that makes sense for the long-term business, where it makes sense for our customers as well as those in our value chain. So overall, we're very happy to be holding our key metrics here despite the tariff headwinds.

[Operator Instructions] Your next question comes from the line of Vik Chopra with Wells Fargo.

It's Blake [ph] calling in for Vik. Just 2 related to tariffs, please, first, a 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 give some color around how we think about annualized tariff impact if we should start by just annualizing what you've given for this year? Or could it be higher or lower given mitigation, etcetera?

Sure, Blake [ph]. 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% for the rest of the year and that's what we're including in our guidance. On the annualized, it's really difficult to annualize right now. And so the short answer is no, I would not annualize our $80 million to $100 million that we're expecting here in Q3 and Q4. And it's too early to try to annualize the number or think about what the impact to 2026 might be. It's just too early to call. Now, obviously, the tariffs are subject to change on an annual basis or over a longer span and our mitigation strategies are underway. And some of those are shorter term but some are longer term as well. I mentioned the manufacturing supply chain team have been working on mitigations. Some of those have time sensitivity with them. And we've been, to date and we'll 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. We're also continuing to work with our industry trade associations to secure more exemptions in the various regions. 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, 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.

Your next question comes from the line of Steven Valiquette with Mizuho.

Maybe just a question on Dental for a moment here. Last quarter, when you guys had 4% organic growth, you talked about you were taking share relative to the market growth. This quarter, a little bit slower at the 0.4% but a lot of surveys suggest that 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.

Yes. 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 market, are pretty resilient. If you chip a tooth, you get a cavity, you're usually going to take care of it because there's pain involved. There’s 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. And we have launched new innovation. Dental, the implant group [ph] is probably out ahead of the reboot of innovation and they're launching products now that are absolutely giving them tailwind for the year and we fully expect that to continue throughout the year.

The last question comes from the line of Travis Steed with a follow-up question from Bank of America.

I’m curious Wayde, if you could help us characterize how much of the tariff impact is tied up with the P&F business versus kind of what [indiscernible].

Yes. 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 P&F is somewhat variable as we look to plan to close before the end of the year. But I think just maybe part of your question, maybe as you're modeling this, I think it's important to think about operating margins as well. As I said in our prepared remarks, we're now planning for operating margins to be at the low end of 20% to 21% but there's a key dynamic in here in timing throughout the quarters of the year. 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%. 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 below 20%. 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 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 holdco.

At this time, there are no further questions. I would like to turn it back over to Amy for closing remarks.

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 fiscal year 2025 conference call. Operator Amy [ph], you can now close the call.

Thank you. This concludes today's conference call. You may now disconnect.