Solventum Corporation

Good day. My name is Ellie and I will be your conference operator for today. At this time, I would like to welcome everyone to the Solventum second quarter 2024 earnings call. As a reminder, this conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star and then the number one key again. Thank you. I would now like to turn the program over to your host for today's conference, Kevin Moran, Senior Vice President of Investor Relations. Please proceed.

Good afternoon and welcome. Today, we will discuss Solventum's second quarter fiscal 2024 results, along with an update to our 2024 outlook. Just after market closed today, a press release was issued with our earnings results and updated outlook. The press release and earnings presentation are available on the investor section of the Solventum website. Joining me today are Brian Hanson, our Chief Executive Officer, and Wade McMillan, our Chief Financial Officer. During the call, we will be making forward-looking statements that are subject to risks and uncertainties. For a full description of these risks and uncertainties, please refer to our SEC filings and the forward-looking statement slide at the beginning of the presentation. Please note that during our discussion today, all our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. For the Q&A portion of the call, we kindly ask that you limit yourself to one question and one follow-up. And with that, I'll hand the call over to Brian.

All right, great. Thanks, Kevin, and thanks to everyone for joining us today. I'd say it's exciting to be here for our first earnings call as a publicly traded company, and I want to start that call by saying that I'm encouraged by the progress that we have made and with the results of the quarter, which reflect our ability to come together as a new team and maintain business continuity in the midst of the separation. And we're raising our full year outlook as we continue to progress our plans to get this business to where we expect it to be. Simply said, we are moving with urgency and we remain confident in our ability to create value. And for all the solvers that I know are listening out there, I want to say thank you. It's your hard work that has gotten us to this point. Make no mistake, this would not be happening, we would not be here without you. And for the call today I'm going to provide a brief reminder of our investor day presentation, specifically around our situation analysis and reasons to believe in the value creation story, as well as reminder of an update on our phased approach for the transformation and turnaround. And then I'll pass it over to Wade for a deeper dive on the quarter and our improved outlook for 2024 and of course we'll save time for Q&A and certainly look forward to that conversation. As some of you may be new to the story since our investor day in March, let me start by giving some background on Solventum, our team, and again, why we're confident in the value creation story. And I think the right place to start is the spin itself. We've talked about this before, but we have extensive IP that we share with 3M. And as a result of that, we are executing a highly entangled and therefore complex separation. But to ensure in a situation like that we proactively mitigate the risk associated with this type of separation, we have intentionally assembled a team with significant spin and transformation experience. And given the regulatory requirements of the sector, which can significantly impact the planning and implementation of a separation, we have also ensured this team has deep regulated business experience. Simply put, we have done this before and we are going to do it again. Now, relative to the business setup, our business segments are in attractive and growing markets. We have strong sub-brand recognition in those markets, significant IP protection, solid levels of investment in R&D, and we have global reach. That said, we also have businesses that have consistently underperformed their markets with flat volume growth over the last two years, coupled with a declining volume trend, mainly due to misaligned and unfocused end metrics. which resulted in commercial misalignment and poor R&D productivity. Now, with this as context, and of course, what are we going to do about it, I'd like to remind you of our phased approach to stabilize and then separate the business, reposition it for profitable growth, and optimize the portfolio. As discussed at our investor meeting, we have outlined this in three phases, which are all currently underway and running in parallel. As you may remember, phase one is focused on mission, talent, culture, and structure. as well as the spin-related activities to separate from 3M, which are critical, all of them, critical catalysts to driving business growth. Phase two is developing and implementing our long-range plan that will reposition us for profitable growth. And phase three is portfolio optimization. Okay, starting with phase one, specifically related to mission, talent, and also culture and structure. We've already created a new mission statement and articulated our company values. And I got to tell you what an amazing opportunity it was to help write the mission and values for a new company. I feel incredibly lucky to be a part of something so meaningful. I see the mission and the values of a company as absolutely critical to its success because when done right, it becomes a common purpose and connection across the team, capturing the hearts and minds of all of our team members, which again, I see as an essential enabler of sustainable business performance. And we've held mission ceremonies around the globe, meeting with thousands of our employees to discuss how they bring the mission to life. It doesn't matter what region or country or business I'm in, it is clear. The team is excited and ready for the future at Solventum. Now, relative to talent, which is really one of the key areas where spinning a company creates value, we continue to move fast. We've completed the selection of our level one leadership team. finalize the structure for level two, and identify key positions at levels three and four that are critical to the turnaround. And we're actively internally sourcing or acquiring experienced talent in these roles as well. At the end of the day, we're trending ahead of my expectations in talent acquisition, benefiting from a lot of high-level industry talent that understand the value creation story and are interested in joining this team. We're also making great progress on our culture and structure project, This is a restructuring project we are calling the Solventum Way. The goal here is to create a more nimble and less hierarchical structure that drives increased autonomy, speed, and very importantly, accountability, and will also help us ensure that we have the ability to invest for growth while enhancing margins. Moving to the separation activities inside of phase one, you know, it's obviously early days with most of the work still ahead of us, but these are critical months in the separation, and I'm happy with our progress. This quarter's financial performance alone speaks to a successful start with our business continuity efforts while standing up a newly independent company. Again, I want to compliment the teams for delivering on their commitments in the face of separation distraction. For areas like our supply continuity project, manufacturing, and IT separation, I feel good about our disentanglement plans. This is hard work, but the teams are progressing these initiatives with speed. From a timeline perspective, our supply continuity project will extend beyond 24 months, but we expect the majority of phase one activities to be completed in 12 to 24 months post-spin. I should also note that given the timeframe of phase one, it will naturally overlap with phases two and phase three. Phase two is focused on a Solventum-wide long-range plan to position us for profitable growth. Because we were able to accelerate talent acquisition in phase one, we've actually shortened the path to finalize our strategic plan in phase two. Now we expect to share this plan during our fourth quarter earnings call, which will coincide as one would expect with our 2025 guidance. So key elements of that plan, not comprehensive, but key elements of that plan will be our primary market and sub-market selection. Again, those markets that we're going to double down in. Inside of those markets will be the growth driver initiatives to be able to build scale. And probably most importantly, showing that we're going to shift our commercial R&D and eventually resources to those growth driver areas. And as you would expect, we're currently assessing primary markets and growth drivers, and our intent is to finalize these decisions before the end of the year. Once we've identified the primary markets and the growth drivers, we'll begin shifting, as I said before, our resources, starting with commercial infrastructure changes. You know, things like specializing the sales organization, Things like changing the incentive plans that we have for the sales organization to bias our focus in the growth driver areas. We'll also shift where we spend R&D dollars so that we align our new product pipeline toward innovation that matters and is material in the growth driver markets. And finally, as we expect that our focus on debt reduction over the next 24 months will allow more flexibility to expand our capital allocation priorities, including potential tuck-in M&A tied to our, again, growth driver areas. Okay, moving on to phase three, we're looking at pathways for portfolio optimization through inorganic means in order to bring additional strategic clarity, organizational focus, and value creation. And as a result, we are actively assessing our various markets and businesses and their value contribution to deliver on our strategic and financial priorities. Now that said, given how early we are in the spin process, there are contractual considerations that will influence phase three. Okay, to summarize what I just said, because I think I threw a lot at you. Number one, our foundational work on mission, talent, culture, and structure is ahead of schedule and progressing well and positively impacting our phase two timing. From a separation perspective, it's early days, but also pivotal days in the process, and things are progressing well, and I have confidence in our team. Number three, given our early progress on our strategic plan and SKU project, we now intend to share our long-range plan during our fourth quarter call, which again will coincide with our 2025 guidance. And number four, Wade will speak more of the quarter in a minute, but our first quarter as an independent company was a good early sign when it comes to business continuity and progress on our phased approach. Before I turn it over to Wade, I just want to reiterate that we have an incredible opportunity to create significant value and that I believe the actions we are taking today relative to executing the separation and identifying opportunities to reposition this company for profitable growth will set us up for significant value creation in the future. Okay, Wade.