All right. Good morning, everyone. Thanks for joining us today. I'm Jason Bednar , Covered MedTech here at Piper. Next fireside chat is with Solventum. Very happy to have with us today, Solventum's Chief Strategy and Corporate Development Officer, Rachel Ellingson . Also, Amy Wakeham from Solventum's Investor Relations Group. Thanks for joining us both. I really appreciate it. We're gonna just dive right into Q&A if that's all right.
Sounds great.
Yeah. So we have some recent news to talk about. I'm really glad you're here, Rachel. We're looking forward to talking about the deal you announced here recently. You're the perfect person to talk about it. Before we get to that, I think it'd just be helpful for everyone in the room. They may not be as familiar with you as, say, Bryan or Wayde . Can you talk about the opportunity set that you saw in coming to Solventum? What made the situation at Solventum more interesting, say, than your prior role?
Yeah. I think for me, I'm always attracted to large organizational transformations, which have a big component of active portfolio management, right? That's been my whole career, whether it was investment banking or, and then shifting into working with companies. That's what I saw at Solventum, right? It was the opportunity to be at the front end of a large portfolio transformation where I would have an opportunity to really build both an M&A engine, execute divestitures, and really have a seat at the table for strategic decisions and driving our strategy. I had never been part of fun companies off, but I've never actually been part of a spin. It was another new opportunity for me to be on that side.
That's awesome. You kinda were alluding to some of those things. I mean, you have some very high-profile transactions that folks in the room are probably familiar with, may not realize that you were associated with some of those, like St. Jude and Thoratec, Abbott and St. Jude, lesser but still important, the spinning of ZimVie from Zimmer Biomet. It's no secret that, look, Bryan and Wayde came into Solventum, and they had the idea of turning this business around organically, but they were also very intent on supplementing that organic growth with inorganic growth. We saw the first move here a couple weeks ago, the acquisition announcement of Acera. I think the whole leadership team has been very methodical with some of these turnaround moves. I think you only have, like, one first attempt at making a good impression.
Why was this the right first deal for Solventum?
Yeah, absolutely. When I think about M&A, I always talk about it's the right target at the right time at the right value. That is a really hard trifecta to get right. Acera absolutely hit every box. The right target, it's in advanced wound care, which is an attractive space for us. It's a space we're very focused on. It's a synthetic tissue matrix technology, which we appreciate. It doesn't have some of the issues that Biologix has in terms of tissue variability and supply chain. Love that it was synthetic, differentiated, protected. Innovation is something that we also always look at. It serves the $900 million acute care space, which is growing double digits, and it's a very attractive space. Good categories, good markets, good technology.
It is a good clinical sale, which is very aligned with our clinical sale in terms of it is a complementary therapy to negative pressure wound therapy. It checks a lot of boxes for us on the right target. Financially, of course, it is attractive. It is accretive to our growth. It has been growing above market and accretive to our gross margin, and it is profitable. When I think about strategic reasons, financial reasons, definitely the right target, the right time matters too. For us, very publicly talked about, we needed to get our purification filtration divestiture closed, closed that September 1. A couple months later, we are able to execute this. Time also matters for the target, right?
The target was also interested in being acquired and was looking for a partner that would really help them accelerate their access to customers and patients. That's, again, something that we're very well suited to do. That's my right time. Right value, I think we structured a transaction that very clearly delivers attractive returns. Returns that ROIC is something we focus on a lot. It's well above our weighted average cost of capital here. At $725 million paid at close, and we talked about the $90 million we expect them to deliver this year. It's right down the middle of the fairway when you think about revenue multiples. I feel like right target, right time, right value. I think this couldn't be a more perfect first acquisition for Solventum.
All right. That's well said. Maybe to pick on a couple of those things.
Yeah.
To expand further, return on capital. I mean, anything that you can share on what the internal metrics that, kinda hurdle rate that you and Wayde definitely wanna get over by what time period? I don't know if that's something you've shared previously or not, but how do you think about, even if you don't wanna get quantitative, like. High level, how do you think about return on capital for deals like these?
I think you're generally looking to be accretive to your weighted average cost of capital, right? I mean, that's pretty standard. I don't know if we've said, but I would. Okay. We haven't said.
Thanks, Amy. So.
As much as here, she's here too, to be honest.
I know. I know. No, I honestly didn't know it was something that had come up previously. I appreciate that. On the right time, I think you framed it well. I also know that these things sometimes take time to come together. Can you talk about maybe when that, like, how those first interactions started? Was Acera something that the Solventum team had identified as a possible, you know, target, you know, early, very early on, or did this all happen pretty quick?
Yeah. It's probably a little bit of both. I would say we, it was definitely on our list as when I, even before I joined, and certainly when I joined, we spent a lot of time looking at our markets, prioritizing our markets, our areas of focus, and then building out target lists that could be complementary to the areas that we're most interested in. Acera was absolutely on that list. I'd say, some period of time.
Okay. And then building on, you know, you alluded to doing more with the asset. They wanted to have more access. Can you talk a little bit more? You know, what was a, what, what can Solventum help Acera do that Acera wasn't able to do on its own?
We have a specialized wound care sales force, as you know, and they have clearly a strong sales force. I think their view is that, you know, just expanding access, there's only so much they could do as a smaller company. Their goal really is just to get in front of as many customers and patients, customers in particular, as they can because they know when they can get there, it's an easier sale.
I think our clinical synergies here from a clinical sales perspective are very strong. I think there are other things, of course, we bring to the table too in terms of just marketing and reimbursement and some other capabilities. The strongest one, I think, is really on the commercial side.
Okay. All right. I doubt you're done with Acera, maybe temporarily until the deal closes and whatnot. How different do you think the portfolio could look, Solventum portfolio could look a few years from now versus where we're at today?
I think portfolio transformation, we're very clear and open about that. That is, that is the goal. You should expect Acera is not the last. I definitely have come into this thinking that we're going to do a steady cadence of tuck-in acquisitions, just kind of that machine that you build and you continue to do that. That is what we've been working for in terms of just getting ready. We continue to look at the markets we want to be in and have target lists associated with that and build relationships, to your point, over time, is the better way to do it. We have that going. I think, you know, portfolio optimization continues to be something that we are very front-footed about as well. Obviously, we've talked about the derationalization progress that we're making, which has been very strong.
We obviously have the purification filtration divestiture. I think people should look at us as a company that's making really good progress against our active portfolio management goals.
Okay. I know we spent a lot of time on M&A, but I, again, I wanna draw on your experience here, and, you know, how you and the team are thinking about it because it's very, I think, portfolio transformation and evolution is very important to the story and also matters, should matter for investors in the stock. When we think about how you look at transactions, strategic fit versus financial fit, again, it sounds like Acera was kind of a nice marriage or, you know, kinda very symbiotic. But if you had to rank the two, you know, strategic fit versus financial fit, when you look at transacting, you know, how would you and Wayde respond to that?
I think we're both very aligned. You have to start with strategic fit. I think if you don't have strategy right, you could have the best financials, but you won't really be able to be the acquirer that can drive it forward.
Strategic fit, you know, probably hit on some of these already, but we always make sure it's, you know, mission-centric. Does it give us a path to leadership? Is it in an attractive, high-growth market? Is it differentiated, protected technology? And then what do we bring from a synergy perspective, whether it's commercial, technology, manufacturing? There's gotta be some kind of one plus one equals three.
Financially, we, you know, Wayde and I would both say accretion to growth, very important. Hopefully accretion to gross margins also important. And certainly a clear path to operating margin expansion. Sometimes earlier stage companies don't get that right away, but you gotta see that you have a clear path. And then, of course, as we talked about, attractive returns. ROIC is a, is a, metric we focus on quite a bit.
Okay. We talked a lot about the acquiring side. There's also other parts to portfolio management and evolution. We saw one with the T&S sale. You have, as I mentioned earlier, experience in spinning off the dental business from your ZB days. Bryan's been clear that Solventum Dental's different than Zimmer Biomet Dental. You know, whether it's dental or something else in the portfolio, can you take us through the process on whether, you know, when and when it's decided or how an asset is viewed as still making sense within the Solventum portfolio?
I think there's probably all kinds of decisions, right, or thought processes that go into a divestiture. You have to understand the portfolio health across your business, and you're always evaluating resource allocation. I think a lot of those decisions are based on things like, are we able to fund them at a rate that keeps them competitive? Because we've got a lot of capital finite everywhere. You always have to think about resource allocation. You have to think about, are we the right own best owner? Does someone else have a different view of value than maybe we do internally? If that's the case, you can redeploy the capital that you would have and, again, allocate those resources to an area that maybe you do have a more clear right to win or path to leadership.
I think it's always assessing and constantly assessing your various businesses, products at any level, right? It doesn't have to be a whole business. It can be other areas, product lines, etc. And derationalization would be part of that as well.
Sure. Okay. When we think about the strategic review process that goes into these decisions, and again, I know this is not a, you know, a once-a-year type thing.
Knowing Bryan and Wayde , these are, you know, probably very frequent. How frequent, if you can talk about the frequency? Is this like a once a month, a once a week, even more frequent as far as strategic reviews? And then how should investors think about the speed of this portfolio management journey?
Hopefully on speed, we've already shown we move pretty fast.
You do. Yeah.
I think on, you know, there's lots of different operating mechanisms. You have some for strategic reviews. You have some within the businesses that have monthly portfolio meetings where we talk about whether it's internal innovation or external innovation, M&A, and you make those have those make versus, you know, build versus buy kinds of conversations, right? That would be something that happens in the business. There are monthly and quarterly kinds of meetings where you're reviewing different opportunities, making sure that you are socializing different targets, that you're building those relationships, that you have those plans. You have annual things. Even our annual strategic planning process, both at the enterprise level, we also have annual processes at the business level that happen actually on a quarterly cadence. There's always different times to review all of those kinds of decisions.
I would say from my team, where we spend a lot of time is focusing on the frameworks we use to assess the market, and then we partner closely with the business where they're looking at the customer needs. Market attractiveness is something I think I mentioned earlier. We spent a lot of time and review on just understanding the framework of how we define something as attractive. Is it a place that we think we can improve care, improve standards of care? What are the barriers? Are there barriers that we can influence? There's actually a lot of process that goes into end markets and then figuring out submarkets inside of the submarkets and where are the best places for us to prioritize and spend time. That's all part of that strategic planning and portfolio committee review process.
Okay. Perfect. Maybe zooming out more on the business level, and Amy, feel free to weigh in too if you have anything to add. But organic growth improvements at Solventum, I think, have been pretty impressive. It's been pretty consistent. It's part of the reason why I know we came in and upgraded the stock earlier this year. The glide path has just been very nice. Is that the right way to think about the path forward here too as we think about 2026 where, you know, things start at a segment level continuing to get steadily better? Is that kind of the mantra at Solventum?
Yeah. I can take that one. Yeah, that's definitely the way that we're looking at it. Now, for 2026, you know, the one thing I'll call out, and as I know, you know this, is we do have another 100 basis points of derationalization. If we take that out, we are expecting to continue to drive organic growth both at the top and the bottom line for the business. That's really through continued improvements that we've made, operational efficiencies, product innovation, particularly within our dental business in areas. That's a key focus for us.
Okay. Everyone always was wondering controllable versus not controllable within that. The confidence level sounds like there, there's a lot of controllable elements with your glide path higher. Is that a fair characterization?
I think that's fair. Absolutely. I think we take a very pragmatic and reasonable approach. When we think about how we look at the business and where the growth is coming from, it's not built on a lot of the what-ifs. It is around really the things that we can control or as much as we can and trying to put in place and understand those controllable items.
Okay. Also, big picture pricing across the portfolio. We've seen a lot of med tech players take a little bit of price, not a ton, but a little bit of price, mostly in response to tariffs here recently. It doesn't seem like that was at least a talking point on this last, last quarter, especially in dental. The dental growth was very good, but was, you know, I think described as being largely organic. Is pricing something you that Solventum sees as a lever for growth, or is it more upside from what we were just talking about on, like, this glide path higher?
We would view pricing as an option, but it's not what we're relying on. This is really building sustainable growth over the longer term through volume. There is a lot of expansion opportunity, whether it's to take share or to expand the overall market and further penetrate. It really is around volume-driven growth and then using price where it might make sense in certain, you know, opportunities or options. That's not what our, organic, to use your word, glide path, glide path, glide path is dependent on for the business. We think about pricing from a normalized perspective. If it's plus or minus 1%, that's within the normal bounds.
Now, if I take a step back, within a couple parts of the business, dental, you mentioned, there are some contractual areas where we can take price up, but that's not what we're depending on. To your point, in the third quarter, that really was driven by just continued adoption of our recent innovations and new products.
Yeah. Yeah. Those were well on display yesterday at the Greater New York Dental Meeting too. Got a good chance to see those. Let's talk a little bit about the innovation pipeline. Dental, I think, has been pretty solid. I think Bryan was very forward early on in saying dental's ahead of MedSurg as far as the product development, the pipeline, and the innovation. Where do we stand on the MedSurg side? Is that a, are we at a point where we can start talking about a MedSurg pipeline starting to build and having some new product flow on that part of the business?
Yes. You want to go? Absolutely. I mean, I think, and I know we've talked about a number of products that Bryan shared on the last earnings call, but the refocus and the reshifting of our R&D process has really started to bear a lot of fruit. I think it's very well known that we kind of had to transform our R&D process internally with much better focus on making sure decisions are made in the business, focused on really what customers are looking for and what patients need. In very short order, I think we've reprioritized a lot of that portfolio, and you're gonna see a lot more innovation coming out of that, I think. Yeah. I think what I build on that is where dental really has needed to introduce, you know, some new product innovation.
They hadn't had new products, I think, for the 24 months before the spin. In the last two years, have introduced, I think, six to eight new products. Within MedSurg, there is a clear pathway to new product innovation, and we're seeing some of that. It is also looking at the existing product portfolio we have within MedSurg, using our Peel and Place as an example. That was a product that was introduced, and the launch plan was really just so small in terms of the opportunity. A lot of when we think about the new product innovation and the pipeline opportunity within MedSurg, it's expanding some of the newer products that we already have introduced and just thinking bigger about the opportunity and making sure that we have the supply and the capacity to support.
Because I think Tegaderm's another great example where we, you know, launched some, launched some innovations with Tegaderm, but really didn't have the support and the supply behind it. Once we were able to increase the supply and increase the manufacturing capacity, we've really seen that product take off. There are pockets of opportunity like that that are, I think, nearer term than we expected that's going to help support MedSurg as well.
Okay. Rachel, we were, we talked before about, you mentioned Tuck-in acquisitions being a preference. Those are usually commercial stage. How do you feel about pre-commercial, pre-revenue, almost doing a little external R&D to help fund that innovation pipeline? Is that something that's under consideration, or you prefer to, you know, the assets you acquire to already have, like, de-risk that commercial step?
No, we would definitely look at pre-revenue. It would have to be something that we clearly have a synergy to bring from a commercial perspective. I think a mix is healthy. I think you should have some that are commercial stage, and you're gonna see good opportunities. To your point, using it as external R&D is something that would very much be on the table for the right markets and the right areas that we're focused in and where we have that commercial strength that we could leverage pretty quickly.
Okay. I wanna shift over to the restructuring programs. We had a big one announced. It was almost a year ago at this time, $120 million Solventum Wayde. I always get, like, these nice little brand names on these restructuring programs. And now, very recently, we had a much larger one, more than, more than, what, 4x the size, $500 million longer-term program. But, you know, that one, you know, I'm, I'm calling it TFTF. The why was how are these, these two I guess, how, how did you arrive at, like, two very large restructuring programs so close together is, like, maybe the, the first question. The second question would be, like, why is $500 million the right number for this most recent program you announced?
Yeah. Starting, it's interesting. I think Solventum Way, which we had introduced, I think on our second quarter 2024 call, but really started to take hold at our, at your conference last year.
was really a one-year program. There were some immediate things that were identified that we needed to do, whether it was to shift resources, reorganize the business, and in support of the culture that Bryan was working to build and as part of his phase one. That was pretty easy to identify and to knock off. It was always the intent that we would have another larger program follow over time and really more focused. It is very intentional and may transform for the future. It is not just a, okay, cost-out reorganization, restructuring. It is how are we thinking about operating more efficiently? How are we thinking about, particularly as we start to roll off more and more TSAs from 3M, really standing ourselves up as an organization?
We can think differently about supplier consolidation, system optimization, where the focus up to now has been, you know, moving from 3M ERPs to now Solventum ERPs, but then now taking, okay, our Solventum ERPs, you know, are we optimizing how they're set up? How do we think about systems and automation and using technology differently and more effectively? How do we think more broadly across the organization and now that we've identified our growth driver areas to make sure we're investing resources in the right areas? Bryan likes to call it a mixed shift of resources. That might mean that we're bringing in new talent, but we might be exiting some other talent as we think about restructuring the operating structure of the organization.
The $500 million really was through, you know, we had some targets of, okay, here's what we think makes sense, but also through a bottoms-up build-out across the organization to really understand, okay, where are the opportunities? What can you realistically do over this period of time that we can feel comfortable going out and talking about from a street perspective? There is support behind that number that gives us confidence to put that out there.
All right. All right. Fair enough. Last couple minutes, I wanna talk a little bit about the LRP, that was introduced at the investor day earlier this year. I know there were, there was some doubt out from, from others out there. I'm not, I'm not sure I would count myself among those. But, you know, some of that doubt seems to be easing at this point. Part of that's, you know, kind of a, a function of just, like, really strong execution that, that the team has been putting together. But I'd really be curious to get your take, Rachel. You know, which milestones do you think investors should watch to confirm that, you know, we are still on the path or we're progressing towards hitting those LRP targets?
I'm happy to start, and I'm sure you're gonna, but I think, clearly the financial performance that we've been achieving has been strong every quarter, right? Your ability to continue to, credibility. Hopefully, what we're doing is we're building credibility as a team. I would think that's one of the most important things that you can think about in terms of delivering an LRP. Yeah. I think building on that, Rachel, and to use your words, Jason, you know, I think continuing our strong say-do execution is we're gonna continue to tell you what we're gonna do and just continue to deliver on that. I think the seven-quarters track record that we have is helping to support the overall confidence in getting to our LRP.
Certainly, each quarter, as we continue to drive growth, whether at the top and the bottom line, is gonna help continue to drive that as well. As we get further along, I think we're gonna get more and more comfortable providing more specifics around, milestones or, you know, deliverables or things that are gonna get us comfortable. I think that's built on just every quarter that we get under our belt. We get more and more confident within the business, within our forecasting, our ability to understand what we're doing and, you know, where we're going. That's gonna give us more confidence to maybe be more explicit about some of those milestones.
Great. Last, last question, the last few seconds here. What do you, either of you respond or both, what do you think are the maybe two or three most underappreciated parts of the Solventum story that maybe everyone in the room should take away?
I'm sorry. I'll start. I underappreciate to me is, is the velocity and speed at which we've been able to execute against what we said we were gonna do in terms of transformation across the board, not in my roles, in other roles, in other people's functions, just everywhere. I think that comes down to underappreciating probably the team that we have, the 20,000 solvers who are literally working every day to do this, separating while we're executing divestitures, while we're announcing our acquisition, while we're doing restructurings, you know, it's just, it's so much simultaneous work. It takes every single person really to be just committed to excellence every single day. I see it every day we're there. That's probably the most underappreciated. I would agree. Yeah. For sure.
All right. Excellent. We are out of time, but really, really great session. Love talking about the recent deal here. Thanks everyone for joining us, and thank you, Rachel and Amy.