Solventum Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025

Key Takeaways

  • Solventum delivered 4.3% organic sales growth and $1.34 adjusted EPS in Q1, marking its fourth straight quarter of volume improvement.
  • The company raised its full-year organic revenue guidance to 1.5%–2.5% and maintained EPS guidance at $5.45–$5.65, citing strong momentum and favorable FX.
  • Expected tariff headwinds of $80M–$100M in H2 (≈$0.35–$0.45 EPS) are set to pressure margins, though management plans to offset them through FX gains, mitigation measures, and volume growth.
  • MedSurg sales rose 6% organically, driven by strong demand for Infection Prevention & Surgical Solutions and new VAC Peel & Place dressings in the negative pressure wound therapy business.
  • Dental Solutions grew 0.4% organically with robust uptake of new products like Filtek EasyMatch and Clarity Precision Grip Attachments, helping offset weakness in traditional impression materials.
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Earnings Conference Call
Solventum Q1 2025
00:00 / 00:00

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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 twenty twenty five 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

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
Amy Wakeham
Senior Vice President of Investor Relations & External Finance Communications at Solventum

Thank you. Good afternoon and welcome to Silventum's first quarter fiscal year twenty twenty five 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 press release and presentation are both available there now.

Amy Wakeham
Amy Wakeham
Senior Vice President of Investor Relations & External Finance Communications at Solventum

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.

Amy Wakeham
Amy Wakeham
Senior Vice President of Investor Relations & External Finance Communications at Solventum

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 and A session. For the Q and 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.

Amy Wakeham
Amy Wakeham
Senior Vice President of Investor Relations & External Finance Communications at Solventum

And with that, I'd like to now hand the call over to Brian.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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

Bryan Hanson
Bryan Hanson
CEO at Solventum

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 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, 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

Now stopping that decline and reversing the trend are direct results of the foundational enhancements we've made across three primary areas. The first being our mission and culture. 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

Number one, and obviously, delivering for our customers worldwide so patients continue to receive the care they need. And number two, and very importantly, staying committed to investing in the key areas that will support continued and sustainable improvement in our growth. And as a result, just as I outlined at our Investor Day, 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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 VAC 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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. Now also in MedSurg, 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

And moving to our Dental Solutions business, we saw benefits in three areas. The first in our core restorative 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 EasyMatch and our refocused dedicated sales team continue to support solid growth in this area. In aesthetics, customer response to the Q4 launch of our first to market and three d printed Clarity Precision Grip Attachments remains very positive, and this product enhances our ability to offer a unique combination of dental and ortho solutions, really enabling the team to expand their conversations with both dentists and orthodontists.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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 coating. 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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 and 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 twenty twenty five 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

Both of those are available on our Investor Relations website. But just as a quick summary regarding Phase one, our mission and values have been deployed globally and through our communications and transformation efforts, 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

And moving to phase two, as a global team, could 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 three, once we close the divestiture of the P and F business, we anticipate being able to execute tuck in M and 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 deliver significant shareholder value. And with that, I'll turn it over to Wade to walk us through more detail on our first quarter results and 2025 guidance as well as provide additional color on the separation and on everybody's favorite topic, tariffs. Okay. Wade, I'll pass it over to you.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Thanks. And thank you to everyone at Solventum for the continued progress and for delivering a strong start to fiscal year '20 '20 '5. As you heard from Brian, we're making meaningful progress on the three phase transformation plan as we complete our first full year as a public company. 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Now turning to our Q1 results, starting with sales. First quarter twenty twenty five sales of $2,100,000,000 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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. Moving to the segments.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Our largest segment, MedSurg, delivered $1,200,000,000 of sales, an increase of 6% on an organic basis. Growth was broad based and led by the Infection Prevention and Surgical Solutions business, which grew 8.2% and was the primary beneficiary of the previously mentioned timing benefits, which drove the significantly higher than expected performance. Advanced Wound Care growth of 2.8% was driven by negative pressure wound therapy consumables and continued market adoption of single use negative pressure wound therapy. Our Dental Solutions segment delivered $328,000,000 of revenue, an increase of 40 basis points on an organic basis. And as you heard from Brian earlier, we are seeing the positive benefit of new product launches even as the end market continues to be challenged.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

And we remain encouraged by the overall resilience of our Dental portfolio. Our Health Information Systems segment contributed $329,000,000 of revenue, an increase of 3.9% on an organic basis, which benefited from strong customer retention of our revenue cycle management software solutions. The competitive environment has resulted in continued declines in clinician productivity solutions. However, this product category grew in the current quarter, primarily due to an easy prior year comparison. Finally, the Purification and Filtration segment delivered $242,000,000 of sales, an increase of 2.2% on an organic basis, led by our Bioprocessing Filtration and industrial filtration categories.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Similar to the prior quarter, performance in these areas was partially offset by declines in membranes. As a reminder, awarding timing benefits in Q1 last year resulted in a tough comparison. Looking down the P and L, gross margins were 55.6% of sales in the quarter, slightly ahead of our expectations and down two sixty basis points compared to the prior year. Our current quarter results include approximately 100 basis points of increased cost paid to three ms as part of the supply agreement when comparing year over year. Gross margins also decreased sequentially as expected based on normal manufacturing seasonality. Operating expenses increased versus the prior year and were roughly flat on a sequential basis as planned. The increased year over year spend reflects public company stand up costs and growth investments to support our business transformation.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Savings from the recent restructuring are on track and will continue to ramp through the year. Altogether, operating expenses were in line with our expectations. In total, we delivered adjusted operating income of four zero seven million dollars which translates to an operating margin of 19.7%, ahead of expectations. Moving down the P and L to non operating items, our net interest expense remained consistent with Q4. Lastly, our effective tax rate of 19.9% is just below the low end of our full year outlook and reflects a slightly favorable jurisdictional mix.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Overall, we delivered earnings per share of $1.34 ahead of our expectations driven by sales outperformance and favorable margins. We also ended the quarter with $534,000,000 in cash and equivalents with no outstanding borrowings on our revolving credit facility. To date, we have made cumulative repayments of $400,000,000 on our $1,500,000,000 prepayable term loans, which includes another $100,000,000 paid off in March. For Q1, our free cash flow declined $80,000,000 which was consistent with our expectations and reflects both Q1 planned payments and one time separation costs as well as the timing of interest payments and shift into the execution phase across several separation projects. Now turning to our 2025 guidance update, which reflects our strong Q1 performance and momentum to start the year.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

As a reminder, our guidance is for the whole company, including the Purification and Filtration business, which is held for sale until the transaction closes, which is expected before the end of the year. Starting with full year organic sales growth, we are increasing our outlook to a range of 1.5% to 2.5%, an increase of 50 basis points 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 planned impact, our annual growth outlook is 2% to 3%, reflecting the momentum we are seeing in volume driven performance across our business segments as we execute against the phased approach to reposition for growth. Regarding foreign exchange, given the recent weakening of the U.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

S. Dollar, we now estimate currency will have a neutral impact on sales growth for the year. This compares to our prior outlook of a roughly 150 basis point headwind and will have a positive benefit on our reported sales and earnings per share. For earnings per share, we are maintaining our initial $5.45 to $5.65 earnings per share guidance, including estimated tariff headwinds that will impact us during the second half of twenty twenty five. The current trade policy environment and tariffs are an evolving dynamic and challenging to quantify.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

We currently estimate tariff headwinds of approximately 80,000,000 to $100,000,000 in 2025, which translates to an earnings per share impact of $0.35 to $0.45 This will pressure our gross margin and operating margin in the second half of the year. And we now anticipate operating margins for the year will be at the low end of our planned range of 20% to 21%. We expect our strong Q1 performance and business momentum, favorable foreign exchange and mitigation actions to offset the impact of tariffs within our earnings per share guidance range. Our tariff estimate includes all known tariffs at this time with the following assumptions: U. S.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Exports to China at 125% and represents about half of the total impact with expected exemptions. U. S. To and from the EU remains at 10%, which represents about one third of the total impact. The remaining balance of tariff impacts reflects smaller amounts for Mexico and Canada given the USMCA exemptions and minimal imports from China to The U.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

S, consistent with our prior view. It's important to highlight that due to the short duration of our inventory turns, approximately one quarter, the impact of tariffs implemented in Q2 will be fully realized in our financial results starting in Q3 and continuing through Q4. Our team has moved quickly to adapt to the changing situation. While this will be an ongoing process of assessment and mitigation, we've already taken steps and are executing several action plans to mitigate the headwinds. We have filed for and received nearly all outstanding USMCA certifications and working across regions to secure additional exemptions.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

We're continuing to optimize our inventory, leveraging sourcing options across our supply chain and thoughtfully evaluating selective pricing strategies. We are also maintaining our free cash flow guidance of $450,000,000 to $550,000,000 Before closing out, I also want to reiterate our commitment to continued investment focused on the long term value creation opportunity ahead, while also looking for opportunities to expand margins and generate strong cash flows. In conclusion, we're building momentum, having delivered a strong financial performance in Q1 as we execute on our separation plans. With that, we'll now hand it back to the operator for the Q and A portion of the call.

Operator

Thank Your first question comes from the line of Patrick Wood with Morgan Stanley. Your line is now open.

Patrick Wood
Patrick Wood
Managing Director at Morgan Stanley

Beautiful. Thanks guys and thanks so much for taking the question. I'll leave the tariffs to everybody else because I can't survive talking about that topic anymore. So I'm going go on the top line actually. How confident are you around that kind of 2.5 underlying?

Patrick Wood
Patrick Wood
Managing Director at Morgan Stanley

And I say this because obviously the RemainCo growth like is like 4.6, obviously all combined 4.3, like 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?

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Hey, Patrick, it's Wade. 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 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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 four of our segments. So we had a really strong quarter here to start the year.

Patrick Wood
Patrick Wood
Managing Director at Morgan Stanley

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'd seen in the previous quarter was consistent here? You hinted at it in the opening remarks, but is it fair to assume that the entire delta basically is all volume?

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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.

Operator

Your next question comes from the line of Your line is now open.

Rick Wise
Rick Wise
Analyst at Stifel Financial

Thank you. Hi, Brian. Hi, Wade. Maybe just to start with thinking about the year ahead, I mean to say it as simplest, tariffs are a bigger headwind, you were very clear. But offsetting that is the business momentum is the lower FX.

Rick Wise
Rick Wise
Analyst at Stifel Financial

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 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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

Rick Wise
Rick Wise
Analyst at Stifel Financial

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, Brian. I'm not sorry if I'm not clear. Probably

Bryan Hanson
Bryan Hanson
CEO at Solventum

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 or the timing that we saw in the quarter was more associated with our ERP cutovers and planned 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 q three.

Bryan Hanson
Bryan Hanson
CEO at Solventum

That that's the way we're looking at it today because by the time we get to q three, we'll be past the distribution center changes, and we should be free and clear to see those, those changes.

Operator

Thank you. The next question comes from the line of Jason Bednar with Piper Sandler. Your line is now open.

Jason Bednar
Jason Bednar
Senior Research Analyst at Piper Sandler Companies

Hey. Good afternoon. Nice start to the year here, guys.

Jason Bednar
Jason Bednar
Senior Research Analyst at Piper Sandler Companies

Want to come back a little bit on Patrick's question and 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 most of our models. But I guess, kind of where are you at? Where are you out executing?

Jason Bednar
Jason Bednar
Senior Research Analyst at Piper Sandler Companies

And then we're five 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 drawdown in April and early May?

Bryan Hanson
Bryan Hanson
CEO at Solventum

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, Wade, you could talk more about the drawdown. It was above our expectations too, but 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 beat 2.5, but the last time this company did 2.5 was, I think, 2018. So 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

Because remember, we we've enhanced the commercial organization by dedicating the sales organizations to those growth driver areas, and we're just seeing traction as a result of it. Now we have to keep that going. And quite frankly, we shouldn't be happy with 2.5% because we're still not in market, but it's a really nice improvement off of last year.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Yes. And then just picking up on what we're seeing so far in Q2. Just before I get into Q2 specifically, Brian 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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 Brian 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, expectation would be we could see some of the headwind come back here in Q2, but we think majority will be coming in Q3.

Operator

Thank you. Your next question comes from the line of David Roman with Goldman Sachs. Your line is now open.

David Roman
David Roman
Managing Director at Goldman Sachs

Thank you. Good afternoon, everybody. I wanted to go into a little bit more detail here on the top line drivers, especially in med surg and certainly appreciate the order timing dynamic. But as you look at 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?

David Roman
David Roman
Managing Director at Goldman Sachs

How much of that is new product launches or some of the commercial changes that you've made in the downstream organization? And I have a follow-up on the P and L.

Bryan Hanson
Bryan Hanson
CEO at Solventum

Yeah. Yeah. They're kind of connected, but you hit both of them. The way we look at it is there were three 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.

Bryan Hanson
Bryan Hanson
CEO at Solventum

But as you have those improvements, you can also benefit from existing brands that we have in the marketplace and then new product launches as well, the ones that we just recently launched. And so it's a combination of the team is just focus, is delivering, The urgency around and the focus on delivering what you commit to is there, which makes a big difference. We've had a lot of changes in leadership, as we've talked about. We've a lot of different folks in place that are driving this harder than before. And if 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 would 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, it's differentiated and it's significantly underpenetrated, as you probably remember from our presentation during the Investor Day.

Bryan Hanson
Bryan Hanson
CEO at Solventum

VACPEAL IN 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. Eboe Dick is in our sterilization assurance business. This is basically taking an eighty year old process that was antiquated and is digitizing it.

Bryan Hanson
Bryan Hanson
CEO at Solventum

It's changing the game. So it's a really cool technology as well. And then you've got PlumePro Clear, clarity precision grip attachments that you would have in dental business. That's different from MedSurg. But again, this whole theme of the engine now being able to leverage new products is there.

Bryan Hanson
Bryan Hanson
CEO at Solventum

And it's the same thing in HIS. It's another motivator for the new team that's focused on this to drive autonomous coding, which is part of the revenue cycle management, that growth driver. So across the board, whether it's in med surg, whether it's in dental, whether it's in HIS, it's the commercial focus that we have. It's the, you know, 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.

Operator

Thank you. Your next question comes from the line of Travis Steed with Bank of America. Your line is now open.

Travis Steed
Travis Steed
Managing Director - Equity Research at Bank of America

Hey, guys, congrats on a good quarter. I wanted to ask a little more on tariffs. 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's FX, how much of it's operational and all that?

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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 one of the fastest inventory turn companies out there.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

I think under three ms, inventory was managed very tightly. And we continue to have a ninety day inventory turn here or a three 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 two quarters of impact here. And so that 80,000,000 to $100,000,000 that we're estimating will be spread across Q3 and Q4 for us this year.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

And obviously, we're working closely with our teams and working with the 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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 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 they make sense for the long term business, where they make sense for our customers as well as those in our value chain.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

So overall, we're very happy to be holding our key metrics here despite the tariff headwinds.

Operator

Thank you. Your next question comes from the line of Vic Schopra with Wells Fargo. Your line is now open.

Analyst

Hi, it's Blake calling in for Vic and thanks for taking the questions. Just two related to tariffs, please. First clarification, the 10% you're assuming for Europe, so it sounds like you're not assuming that rate goes up after the ninety day pause. 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 analyzing what you've given for this year?

Analyst

Or could it be higher, lower given mitigation, etcetera? Sure,

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Blake. I can take that one. So that 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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. So the short answer is no. I would not annualize our 80,000,000 to $100,000,000 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

It's just too early to call. 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.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

Some of those have time sensitivity with them. And we've been to date and will continue to strengthen our regional supply chain strategy. So these are strategies that were before tariffs. Certainly, we've given them a higher sense of urgency, but they'll be ongoing over time. We're also continuing to work with our industry trade associations to secure more exemptions in the various regions.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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.

Operator

Thank you. Your next question comes from the line of Steven Valiquette with Mizuho. Your line is now open.

Steven Valiquette
MD & Senior Equity Research Analyst - Covering Health Care Technology & Distribution at Mizuho Securities

Thanks. Good afternoon, everyone. Maybe just a question on Dendlo 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.

Steven Valiquette
MD & Senior Equity Research Analyst - Covering Health Care Technology & Distribution at Mizuho Securities

So I guess I'm curious how you think you performed just relative to the market in Dental in the first quarter.

Bryan Hanson
Bryan Hanson
CEO at Solventum

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, 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, certainly an aesthetic issue with it as well. So we're in, I would say, generally speaking, more resilient areas.

Bryan Hanson
Bryan Hanson
CEO at Solventum

So that's a benefit to us. And we have launched new innovation. Dental the dental group 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.

Operator

Thank you. The last question comes from the line of Travis Steed with a follow-up question from Bank of America. Your line is now open.

Travis Steed
Travis Steed
Managing Director - Equity Research at Bank of America

Hey, I had a follow-up. Thanks for putting me back on. I'm curious, I'm curious, Wade, if you could help us characterize how much of the tariff impact is tied up with the P and F business versus kind of what, call it, RemainCo?

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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 and 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 said in our prepared remarks, we're now planning for operating margins to be at the low end of 20% to 21%.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

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%.

Wayde McMillan
Wayde McMillan
Chief Financial Officer at Solventum

And so I just want to make sure everybody has that as you're thinking about the phasing. But we'll bring P and F into it when we close, and we'll provide a pro form a financial information so that it's easy to see the business without P and F. But at this point, we're guiding with P and F still in the business as a holdco.

Operator

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

Amy Wakeham
Amy Wakeham
Senior Vice President of Investor Relations & External Finance Communications at Solventum

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 twenty twenty five conference call. Operator, Amy, you can now close the call.

Operator

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

Executives
    • Amy Wakeham
      Amy Wakeham
      Senior Vice President of Investor Relations & External Finance Communications
    • Bryan Hanson
      Bryan Hanson
      CEO
    • Wayde McMillan
      Wayde McMillan
      Chief Financial Officer
Analysts
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