Solventum Aktie

I think we can make a start here. So I'm Michael Toomey, U.S. med tech analyst with -- covering Matt Taylor and joined today by Solventum's CFO, Wayde McMillan; and Investor Relations, Amy Wakeham.

So Wayde, maybe just to set the tone and set the scene, you could go through what Solventum does for people less familiar with Solventum, and what's kind of changed since the spin a couple of years ago now?

Okay. Yes, really good. Well, first of all, thanks for having us, Mike, and good to see people here. It was nice to see Matt as well, walking in. Great place to start. So Solventum, we are the 3M Health Care business that was spun off in April of 2024. And we are a diversified business in three segments today: MedSurg, Dental and HIS. MedSurg is the largest, about 60% of our revenue. And then Dental and HIS, both just over 15%. And I would say our core competency, our core capability is material science and data science. And that is at our core, what we're very, very good at. We brought over a lot of that DNA in our R&D teams, engineering teams, manufacturing areas and at the core, that's what we're driving in excellence in material science, data science in support of our new mission as a new health care IPO. Very excited about the mission that we've created.

And we brought over just over 20,000 3M employees who are super excited about the focus coming out from an industrial company and the focus on a health care business. And so with that in mind, pivoting the second part of your question, Mike, around where we're at in the story today, we setup a 3-phase transformation for this separation from 3M at the -- actually even before the spin, our Investor Day in March of 2024 pre-spin, we said there's going to be three primary phases to the value creation for our business. The first phase is around commercial talent structure processes and the separation itself, which is a large body of work. And he second phase was our strategy and really building strategy for our new health care business and that's culminated into a focus on five key areas for us, five growth drivers, that are going to drive over 80% of our growth.

And we created our first long-range plan for our company, which we launched at our second Investor Day, and we're well on our way to achieving. And then the third phase of our transformation was around portfolio management and portfolio optimization. We've done a lot of work in this area as well. In fact, last year, we announced the divestiture of one of our businesses, purification filtration to a strong buyer in Thermo Fisher, and we feel we got great valuation for that business and really unlocked shareholder value there. We also did our first acquisition last year of Acera Technologies, a fantastic synergy for us. That business is a nice, strong, growing technology right in the area of our negative pressure wound therapy. So we're building on our advanced wound care capabilities here. And we acquired that business right at the end of 2024.

And in our first full quarter, we grew 40%, and that business is continuing its strong growth, and we're off to a great start, even ahead of our own expectations for that business in our first quarter. And so we're not done. We often say portfolio optimization is a continual part of our strategy, and we're going to continue to work on that. We also say that it's not just total segments, it's sub businesses as well as small product lines, whether we're either thinking about divesting them to unlock shareholder value or making acquisitions to create more shareholder value. So portfolio optimization certainly plays a large role in what we're doing to build value here. And then I'd probably just close by saying we're getting close to the end of the separation work.

In any of these large-scale spin-offs that we're in like we are here, spinning out from 3M Health Care. There is a very large body of work that has to happen to separate, and our teams have done a great job over the two years that we've been separate. And we're now in our last large ERP cutover, and we're getting to the end of our TSAs. We plan to be done our transition service agreements, 90% of them by the end of this year. So that will really free up a lot of our best and brightest, a lot of our resources from working on the separation, to working on building the business going forward. So a lot of exciting developments in our first two years. It's hard to believe two years has gone by so quickly, but we are executing very well across each of those three phases, happy to jump into any of those today, Mike. But a significant amount of progress, really engaged, excited group of employees across Solventum, and we think we're doing a great job for our customers in this new more focused strategy to deliver improved health care for our customers.

I had to check it was only two years, like five. But maybe we could double-click on the recent results. A lot of moving parts of the guidance and the ERP cutover. I appreciate there wasn't a real change to the full year guide, but maybe you can walk us through that. And I guess now you expect from the higher end of the EPS range. A lot of moving parts, tariffs. Maybe you can just recap and tell us what's baked into the year.

Okay. Yes, great. That's another great holistic question here just to update. And it is related to the separation work we're doing because it is always a little more complex as you're working through the separation. So after our first quarter, we had a really strong first quarter ahead of expectations, and that positions us to be very confident about achieving our full year guide, as you said, Mike. And then one of the things we introduced on our Q1 earnings call was one of our mitigation strategies for our last large ERP cutover because that's in the U.S. and Canada.

And the mitigation -- one of the mitigation strategies because most of the business goes through distribution in the U.S., we're going to send advanced orders to our distributors here in Q2, basically increased the amount of inventory in the channel. And we're starting to get over the ERP systems here in Q2, but the majority of the cutover starts in Q3. And what that will allow is less orders have to be processed in Q3 because we got the advanced orders out in Q2. And that just gives a little mitigation to the ERP ramp up throughout Q3. And so we've communicated that we think $100 million is approximately the range at least $100 million in Q2 of advanced orders will increase our revenue in Q2.

And then we think the mirror image of that most of it will come back in Q3 there going be a little bit left to take down in Q4, but we expect most of the $100 million that we are going to see extra in Q2 will be offset in Q3. And I think to your point, Mike, the full year guide is unchanged, and our expectations for still having a strong year and continuing accelerating sales growth rate. We did talk about our earnings per share as well. And given the strong start to the year, strong Q1, we moved the guide from the midpoint essentially to the higher end of our earnings per share guide because we're seeing some strong results in Q1 as well as strong expectations for the rest of the year. So that was the one update to our full year guidance was moving our EPS to the high end of the guide.

And when you're looking at the year, there are so many moving parts, I guess, what's the biggest upside, downside risk to guidance? Where do you have more certainty, and where's lease certainty, I guess, whether it's by segment or any of the moving parts here?

Yes, sure. Well, you mentioned tariffs in the previous question, I failed to cover that. So that is one of the areas that we have to watch here as well. So if I start on the top line for sales growth, market dynamics are always favorable or unfavorable. We pay attention to that across our businesses. But just on that one, I would say, we are a very durable business. We are in the primary areas of health care and dental care and our HIS business has a really strong position in its market. So I think -- as you think about us as a diversified health care business, we have some of the most durable markets that we participate in. We're in over 90 countries, tens of thousands of SKUs. So it's a very durable business.

And so the market dynamics won't be as significant as, say, a single-product company or a company that is more focused on elective or specialized procedural areas. But market dynamics do play into, and we have to think about that as we set our guide. But from there, the midpoint of our guide this year is continued accelerated growth that we saw last year. If we continue to accelerate from there, we'll be closer to the high end of our guide, and that's where we were in Q1. On a normalized basis, we're approximately 4% growth, which would put us right at the high end of the guide already in the first quarter of the year. So strong start. As you work your way down the P&L, puts and takes for us, certainly, tariffs are something we have to keep an eye on.

There's a lot of dynamics in the macro environment today, including oil pricing and other things. Again, what I would say is, although we have exposure to these areas, I think it's probably less than a lot of companies in the sense that oil doesn't play a major role in our raw material supply chain. It's certainly a factor for us. We do have resins for inputs, but not on a large scale. We have to keep an eye on the supply chain and distribution of our product in any oil-related increases there. And what we've talked about is that for this year, we don't expect oil to be a major impact. Depending on where the prices go for the rest of the year, we have to be cognizant of. But we have a lot of fixed pricing built into our contracts to start with, that would delay any increase in oil pricing as well as the capitalized variances.

So at whatever cost is being built into our inventory, it gets deferred a little over three months. And so because of that and the oil hitting more in the middle of the year here, we don't expect that to be a major impact. And then from a tariff standpoint, we've said that we think the tariff headwind will be $100 million to $120 million. We built that into our guidance, and we're just holding that estimate at this point in time, very difficult to estimate what that is. And so if we see favorability to that, it could be an upside to our guide. If it ends up being more than that depending on where tariffs shake out during the year could be a headwind. So those are some of the material puts and takes.

We also have a lot of programs running to improve our margins. We've got two major programs that we talked about at our last Investor Day, programmatic savings as well as our transform for the future programs. Both of those are designed to ensure; number one, we have flexibility to continue to invest in growth; and then two, to drive margin expansion for us. And that's why we've got a significant effort going in that area because we want to continue to accelerate sales growth, and we want to make sure we're continuing with those investments. And then we also want to make sure that we're driving operating margin expansion each year in pursuit of our long-range plan goal of driving 10% on earnings per share CAGR over that 3-year period of time.

Yes. Maybe double-clicking on the LRP there and the margins. Could you help us kind of build a bridge to that where that margin expansion is coming from. You've got a lot more innovations coming out higher price, but maybe the moving parts of the gross margin, R&D, SG&A, just a bridge to the LRP.

Okay. Yes, you hit on a couple of the key ones there, Mike. I would probably start with as sales accelerates for us, that's one of the larger drivers of margin expansion and profitability improvement for us because we can leverage that faster sales growth and drop through. You mentioned pricing. Pricing for us, we're thinking the normalized range is plus 1% to minus 1%. And it's not our expectation that we're going to be pressing hard on price, although we do have areas within our business where we do have good strong brands and good brand recognition, and we do get pricing improvements every year. We've talked about it in our HIS business in our long-term contracts. We've talked about it in areas like in dental. We've got very strong brand recognition. So overall, we're expecting price to be consistent in that normal normalized range, plus or minus 1.

We like it if we're on the positive side of that, leaning to plus 1. There may be years where there's negative pricing. Hopefully, that's because we're dictating that with achieving large volume contract wins and things where we may give up some price for volume. But as you mentioned, Mike, the key for us, and this is a change for the business is really focused on that sustainable volume growth. And inside of that is the innovation engine that you just mentioned. We have done a lot of work to improve both our existing pipeline but probably more important, the structure of our R&D organization, and how we innovate. And this is a change from a focused business under an industrial company that was more focused on the bottom line at 3M Health Care.

And by pivoting our incentives and our focus to the top line, it brought a lens to our R&D pipeline. And we had a very low vitality index in the business two years ago. And so we spent a lot of time on the existing pipeline. We took out a lot of products that did not have the value that we saw or had carried too much risk. We've doubled down on the areas that we think are good products to invest in and are going to drive a lot of that pipeline value. As a result, we've seen our vitality index move from 2% at spin to now mid-teens, and we're expecting that continue to go up as we continue to improve it. But inside of that was also a structural change in innovation. We've moved a lot of the R&D spend that used to be corporate. In fact, more than half the R&D spend was at corporate. We've now moved all of that R&D teams and funding into the segment. So it's much more closely aligned with our strategy in each of the segments.

And so the teams are working really well together. I'd probably just close out the work in innovation. We've also done a lot of work on the stage gate process, and how we innovate. We were typically a business that was creating hammers looking for nails. We're innovating exciting new technologies and then looking for where we would implement them. And our experience in med tech and dental areas, you really need to flip that around, and you need to focus on the customer needs, and then work it back up into the pipeline and develop products for those customer needs. So we've been doing a lot of work over the last two years to turn that. And it requires investments on the front end of that stage gate process. We have made investments in upstream marketing, clinical affairs, medical affairs, working with the teams so that they can get the customer needs nailed down and then work that back through to our talented R&D team so that we're developing products for that process. So with that in mind, innovation becomes the next layer for us. And to your question, becomes one of the bigger upside drivers for us over time.

Are there any particular ones or catalysts or events over the next kind of 18 months that you would point to on that pipeline? Or is it more a gradual increase on that vitality index and it's kind of bit by bit?

Yes. None we're announcing today. But we do have some exciting things in the pipeline that we will announce at the appropriate time as we go. We have announced some exciting new products recently. The peel and place product in our negative pressure wound therapy area is growing very strong. We've also just launched it in several countries outside of the U.S. that was new to the pro forma, was not planned to be launched outside the U.S., and so we've made the investment launching outside the U.S. and it's getting great traction outside the U.S. as well. So that's an exciting new product for us. The dental business has had a nice stream of new product launches over the last year. That business had not had new products in a couple of years, and the growth of our dental business is starting to improve, and a lot of that improvement -- in fact, most of that improvement is on the back of the new products that we've been launching there.

And then our HIS business as well, doing a great job of continually innovating inside of our core revenue segment management area. And as we've talked a lot about in previous conferences, layering in AI and deliver -- creating new autonomous coding options for our customers, that have multiple benefits. It helps customers on the cost side. It helps them capture more revenue. And certainly for us, allows us to same-store sales, essentially, we're providing more benefit, more software, more content to our customers, and that allows us to build more for our services as well.

And you brought up AI, HIS business. And I guess that's been a question from investors. I think you have more flexibility now with the April expiration of the spin-related tax constraints. So not expecting an announcement today, but just wondering how you're thinking about rationalization of the portfolio now you have more flexibility.

Sure. Yes. Why don't we talk about AI first, and then we can come back to that third phase portfolio optimization. So around HIS and AI, and Amy was at a recent conference with our HIS leader. So Amy may bring you in on this one as well. What we've talked about is that AI is an advantage for us, and our teams have been working on it for several years. The key for us and really our strength in this business is the critical mass of engineering talent that we have and the decades of experience that we have in working with the reimbursement system, particularly in the U.S. Most of our revenue here is in the U.S. And we have said that we're in over 75% of U.S. hospitals, use our software.

So we are heavily embedded with large scale and critical mass here, and that investment over decades has built algorithms and content and capability that positions us very well with our customers. And so with that in mind, what we've done over the last few years and continue to do is build AI into our service offerings, and that's allowing us to provide more autonomous coding options, but it's really only because we have all the content, all the algorithms, all the capability that sits behind it. For us, it's autonomous coding, not software coding, which I think we've seen a lot of the AI disruption more on the software side. And so for us, we think AI is an advantage. But Amy, you had the recent conference, anything else you'd add?

Yes. I would definitely encourage any of you, if you didn't get a chance to listen to Garri Garrison, our President of our HIS business, speak at BofA. He's mentioned a competitor conference, but it was a really great opportunity to hear from her, but specifically around building on what we've said, kind of a lot of people think about it, you just take the codes, and you kind of just code them and submit the claim. But it's the deep years of knowledge, and it's not as simple as a code to a claim. It's understanding the procedure, and the nature of the visit, and that changes what the claim may be and making sure that we're doing it accurately. And the hospitals and the health systems depend on the accuracy when they think about compliance and when they're submitting they want to reduce denials, they want to make sure that they're derisking their revenue, essentially their ability to capture revenue and building also on what Wayde said, one of the key areas is that decades of experience in all the years and the algorithms and the information that not only helps enable our autonomous coding, but it also is the layer on which many other payers and health systems are relying on.

We partner with CMS and helping to build their reimbursement system where kind of the information engine behind a lot of the payers and the DRGs that support reimbursement across 30- to 40-plus health care systems across the U.S. from a state perspective. So it's -- we're very much embedded, and that's because of the expertise and the accuracy and the dependency that our customers and the health systems have on us and the information and the data that we have behind the scenes.

Great. Thanks, Amy. And then just to pick up on the second part of your question on portfolio optimization. We're not going to talk about any specific segment other than to say that this third phase of our transformation that we call portfolio optimization, like all phases is running in tandem. And it's been a key for us as we talked about with the divestiture and acquisition that we've done to date, but it's going to be perpetual for us. We're going to continue working on our portfolio. And that both -- that means both potential divestitures and potential acquisitions over time. And we've also talked about, it's not just segment level, but it could be sub business or even a small product line category that we may look to either divest or acquire.

So I'd say, as you said, no updates today. There's been a lot of speculation on different parts of our business that we may be able to unlock shareholder value. For us, we think about it in three categories. First, strategic rationale. Is it the right strategic rationale for us to keep a business or acquire a business or divest it? And then we think about the shareholder value unlock potential. And we think like with the P&F divestiture we did last year, we unlocked significant value there. And then we think about RemainCo financial attractiveness and the attractiveness of the remaining business if we do make a divestiture, or if we do an acquisition and layer it on top. So we've got a significant amount of work perpetually running on our portfolio optimization lever and thinking about how we can continue to unlock value here.

All right. Great. We've got 1 minute left. So maybe just we'll touch on capital allocation. You talked about a bit with tuck-in M&A, but you've got the share buyback. So maybe just final thoughts on how you're thinking about capital allocation?

Yes. This is a great one for us in the sense that when we spun from 3M, we had a lot of debt, like a lot of spins do. And the P&F divestiture brought in a lot of cash that we were able to pay down a significant amount of debt, and that got our balance sheet strong, got us in a much stronger financial profile. We're right in line with our competitors. So our access to capital and our ability to compete for deals we're on par with our competition now. So we feel really good about our debt position, and we don't feel like we need to pay down significant more amounts of debt. So what that leaves us with then, and what we've communicated is a balanced capital plan strategy, one that's going to be focused on tuck-in M&A, like we've done with Acera last year and looking for ability to add shareholder value by acquiring businesses over time.

But importantly, these aren't large-scale transformational deals. We're very much focused on tuck-in acquisitions, and we said that's anything up to $1 billion. And so keeping it in that hundreds of millions or less type of range because we really have a target-rich environment. We've got a broad swath of very strong positions and strong brands in the marketplace. And we think we can leverage that like we've done with Acera and bring in strong growth categories for us. And so that's the key on the acquisition side. We're going to balance that with share repurchases, and we announced a $1 billion share repurchase program at the end of last year. We started that program in Q1. We also said publicly on our earnings call in the start of Q2 here that given the share price performance for our stock and a lot of stocks in med tech, that if we see more value in acquiring more shares faster, we will do that.

And so you should expect us to be accelerating share repurchases when we see our stock at lower levels than we would anticipate that they should be at. And so we're going to balance that over time. So how does that play out over the next several years, we're going to continue to evaluate our acquisition pipeline, and where we see value to acquire assets we will. We'll continue to evaluate the value we can unlock from repurchasing our own shares. We've committed to a minimum anti-dilutive strategy, which means every year, we will purchase at least shares -- at least enough shares to keep our share count approximately neutral. And then from there, we'll be opportunistic to deploy more capital, like we said that we're planning to do given current levels.

Great. We're out of time, but thank you very much, Wayde, Amy. Thank you very much.

Yes. Thank you, Mike. Thank you, everybody.

Travis Steed, Bank of America medical device analyst. Welcoming Solventum Corporation next up in Vegas. We have Garri Garrison, President of Health Information Systems; and Amy Wakeham, Senior Vice President, Investor Relations.

Welcome. Thanks for joining us.

Maybe on healthcare IT to start, maybe just provide a high-level description of your HIS segment and kind of how it fits within the broader Solventum portfolio. Are there any synergies or importance of the software business alongside the traditional medtech supplies business?

So Health Information Systems is really a system that -- or a business that we really have 3 business pillars in. We have our revenue cycle management business, we have our performance management business, and then we have what's called Clinician Productivity Solutions, which is our speech and ambient business. So it's more medical software. It's not device like what you see in a typical medtech.

But if you think about those 3 pillars, really what this is focused on is it's really around making sure that hospitals can get paid appropriately. So we build all of the software that's utilized by about -- greater than 75% of the market uses our product in the U.S. So it's well penetrated, it's a highly profitable business, it's a very attractive business.

And then when you think about performance management, performance management is really a pillar of businesses that really focus on what I call being able to get to the accurate payment. So if you think of RCM as being able to apply a code to a claim, the performance management system is actually what we call grouping of all of the information to be able to get to the right payment.

And then in our third pillar is speech and ambient, which is a physician tool to be able to get documentation placed into the electronic medical record sort of through speech-to-text. The ambient does an audio capture of not only the physician, but the patient and any family members in the room, and then creates that visit into a document, into the EHR for the physician. So that's kind of how our business is structured.

Thank you. That's a whole overview. Maybe if you look at Street estimates, they're calling for 4% growth in 2026, increasing to kind of 5% by '28. What are the kind of key puts and takes on accelerating growth in this business?

We are seeing accelerated growth. The last couple of quarters have been really good. Where we're seeing a lot of that opportunity is in a couple of different spaces. Autonomous coding for one. The market is beginning to pick up autonomous coding. We're starting that transition toward adoption.

The second area is the expansion of what we're seeing in the international markets around computer-assisted coding. So what we're seeing outside the U.S. is a lot of different countries are reevaluating their payment systems, and they want to move to payment systems similar to what we have in the U.S. And so that's driving a lot of growth for us in the external market outside the U.S. right now.

And then the third space I would say that we're seeing significant growth is in that grouping application. So a lot of people ask me, do you -- who's your competitors? We don't really look at the market that way. We look at the market more around coopetition. Because if we design the payment system that's utilized by either a payer or a state agency, then we sell those grouping applications to our competitors. And so we're seeing pretty significant growth there in the U.S. and outside the U.S. right now, growing faster than what we've seen in the market for a while.

Given the business operates primarily within the mid-cycle revenue management, can you emphasize that proportion of the market and what kind of share Solventum has approximately?

So this market is about a $10 billion SAM. What we're seeing in this particular space is market share is not a tool we really use. What we look at is we look at the number of hospitals that use 1 or more of our products, and right now that's greater than 75% of the U.S. markets using our product. Many of our customers may use 4 to 5 of our products in the revenue cycle space. So that's what we use to measure kind of how well we're doing and what kind of growth we're seeing.

The other thing that we do is we also see pretty significant growth as we expand our footprint in our client base. So we typically run contracts that are 3 years or 5 years in length. But we're seeing significant growth when we do those contract renewals of these customers adding additional modules. And so that's what's helping us achieve those growth rates.

What's the problem you're solving with your flagship RCM product in 360 Encompass? And where does it kind of sit within the software stack among the other EHR solutions?

So in the hospital setting, you have what we call clinical systems and you also have what we call financial systems. So our product actually integrates with both.

The problem that we're solving for the customers is multifaceted. So we are trying to get the most accurate documentation from the physician through the use of our speech models. And then that feeds the data into the RCM product to where we can actually get the most compliant, the most specified codes that describe the complexity of that patient.

And then we do the rules applications to be able to make sure that we meet the compliance standards and the regulatory standards around whether you're filing an accurate and clean claim. And then we actually do quality analysis of the care that was provided. And then we actually drop that back into a client's billing system.

So we take the actual information that's been documented into the electronic health record and bring that into our system so that our AI engines can read and interpret that. And then we actually do all the applications for payment and then drop that back into their billing system. So that's how it works.

Okay, helpful. How long does it typically take to onboard a customer and integrate a new customer? And what's the customer acquisition costs look like and kind of the major steps in the implementation process?

Sure. So a couple of things. If a customer already has one of our platforms, let's say they have 360 Encompass, and they're just adding a module, that can typically be done in about 30 days. That doesn't take long. If it's a new platform that they're installing, you're typically talking somewhere between 4 to 6 months to do an implementation there.

And the reason that it takes that long is that you're evaluating and actually integrating with all of the hospitals' clinical and financial systems. So we're bringing data feeds over from their electronic health record. If they have data feeds from a lab system, that is brought over. If they have a different OB system, then we bring that over into our actual platform. And if they have other components that they use, like a Philips system in radiology, then we integrate all of that into the actual database that we have.

So it's similar to doing an ERP. It's a pretty big lift. The other thing that you have to do at the same time is also evaluate all of the security connections to make sure that you're protecting that data, because it is PHI data. And so that's why you see a 4 to 6-month implementation period.

The way that we structure that is we also do training and education. We do change management in the process, teaching the client how to use that product during the implementation. And then we also test the data coming out of that. So is it giving us the right output? Is everything transitioning the way it's supposed to be done? And so it's about making sure the customer has full usage before it goes live.

We actually do our implementations in order to help our customers. We do them based on milestone billing. So once you reach a certain point, then you could bill for a portion of the implementation fees. But we do not start taking the license fees for the software until they're actually live. And then those are taken as 1/12 of what your annual license fee is. So on a monthly basis, you get a ratable revenue, is what you get.

And what's the typical contract cycles look like with hospital customers?

It's 3 to 5 years. The majority of them are 5-year contracts. And so we have a very high renewal rate. It gives us a lot of opportunities to work with the customer about any additional modules that they need in order to achieve what their internal goals and objectives are. And so we take every opportunity there to actually expand our footprint with the customers when we do those renewals.

Okay. And then RCM is your largest business within the Healthcare -- HIS segment. Increasingly, competitors are leveraging AI to try to gain into this market. Maybe describe why your competitive position is durable and what the market is getting right or wrong about that opportunity?

So I appreciate that question because we're hearing a lot about AI. I think you guys are all a little nervous about AI. But let me give you my viewpoint.

I've been around a long time. We've heard a lot of buzzwords. AI has some meat to it, but AI is an enabler. It is not a product. You still need to know the problem you're solving. You need to be able to have the subject matter expertise to solve that problem. So you need to know and be able to determine, is the output from the AI accurate or not? The AI systems today hallucinate and they're learning off of inaccurate data as well. So you have to have a large amount of data in order to be able to get really good output from the system.

Why I think we've been able to tap into that -- and I'll make one little statement. I told Amy I had to say this. We've been able to invest in AI and we've been investing very heavily, but we've also been able to maintain our margins at the same time. Not many companies can say that. And so that's pretty critical, is to understand there is a cost to AI and you're seeing a lot of investment, but you're not seeing people talk about being able to maintain their margin or getting a return from their investment today.

What we've done is we have been very, very focused on it, but our advantage is that we have the subject matter expertise of being in this space for over 40 years. We're the trusted leader in the market. Our customers trust our output. We focus on accuracy and compliance. And what's helping us with the AI models is we obviously can actually code faster, we can build automation faster, but we have the expertise to know when the output is right or wrong because we built over 1 million proprietary rules that have helped put guardrails up to give us those higher accuracy rates.

And so I think that's why we see a lot of opportunity in the space and why we're seeing the market start to adopt things like autonomous coding much quicker than we anticipated.

And as you said, you're not sitting still in AI either. So maybe talk about integrating kind of third-party AI tools and LLMs and kind of what remains internal and proprietary and kind of where we're at in kind of 3 to 5 years?

Right. So a lot of people ask me, do we build all ours internally or do we use external parties? We do both. So we build internally, but we also use a lot of the large language models or the small language models or agentic AI that we can get from other firms. What you see right now is some firms do well with certain case types, other LLMs by another firm may do better in a different specialty.

So we use them all. So we look for what's going to give our customers the highest value. And if we can get that value from external versus something we build internally, we're certainly open to that.

What we see with these models is they're ever changing. We see them actually growing at a rapid pace, which tells us there's more to come in this space, of what we can do with them. But again, it goes back to: what problem are you solving?

I'm often asked, are we seeing a lot of the startups enter into our space? Absolutely. But what we're not seeing is market share move there. Because at this point, they're not able to scale. So they may start with what we call 1 or 2 service lines, something that's very easy. But a hospital has a significant number of service lines. Are they going to try to find 15 vendors who can do 2 service lines each? They'll be looking for somebody who can do a comprehensive move to manage all their service lines with high accuracy rates.

And so with our move into this market in 2012 with what we call computer-assisted coding, we've been in that transition a long time, because we had to train the coding systems and the engines even when we were doing computer-assisted coding to get those high accuracy rates. So we've been marching down this path for some period of time. And so AI is giving us the opportunity to run faster, but it certainly isn't replacing all that subject matter expertise and the proprietary rules that we've had to build to get the accuracy rates that we do today.

I think some of us think it makes sense to include your RCM business as part of ERP or EHR solution. Does that make logical sense, or is that even realistic?

From a customer perspective today, they really look to us to be EHR agnostic. And the reason is, is that if you look at a system, you may have one large IDN that's 100% all of their systems are on one single EHR. The majority of them are not. So what you might find is that, on the inpatient side, they have one EHR, but in their physician clinics, they have second EHR. So what we've done is tried to stay agnostic to meet the market demands.

I think you will realistically see that that's probably the right approach because it's very difficult to have everything in one location. And if you think about it, if you're using just one data set from an EHR, then you don't have full data sets from across the U.S. market in order to get the advantage of the output that you would get with the use of AI.

Okay. And then in performance management and clinical productivity, what's kind of the revenue split of that business? What are the kind of key products in that business, and primary competitors? And where does each offering kind of sit in the value chain?

Okay. So performance management and Clinician Productivity Solutions is about 30% of our revenue. So let's talk about both of them individually.

Performance management is a couple of different components. It has our Grouper applications and our payment methodologies that are in there. It also has a consulting practice, a supplemental staffing program. We have analytics in there, and then we also have a small payer practice in there.

This particular area is seeing pretty strong growth coming out of that Grouper applications because we're starting to see our methodologies used much more broadly. And so competition in this space, we actually see very little in these Grouper methodologies that we have out there. You see some analytics by your typical accounting firms that are in the space, your consulting practice.

On the payer side, we do a lot of analytics for about 30 payers, and it's really around their value-based care programs. So if you were really looking to say who would be the market leader in that space, I would say you're still looking at Optum. We certainly aren't a market leader there. We have a small practice. We've done well with it. Our customers love what we do. We have high renewal rates. So we continue to serve that group.

Then when you think about the CPS business, or our Clinician Productivity Solutions, this is where you see speech and ambient. So your competition there would be Microsoft, I would say Epic's an emerging competitor there. And then we're #2 in the market right now with speech.

We're seeing a lot of, I would say, market churn in this space. With ambient coming into the market, we're also seeing speech price erosion during the time. I don't know if we're at the threshold on price yet, I don't know whether we're going to see it go down. But in both of those 2 spaces, we've seen some price erosion, as we've seen a lot of consolidation of who's really playing in that space.

We like this business. What this gives us is the opportunity to have a direct line to communicate with the physician around documentation as they're creating it. So that fits very well with our revenue cycle products, is be able to talk with the physician around what pieces of documentation are missing. Because ultimately, if that documentation is not there, you cannot charge for it. And so you can't make assumptions, that's where you hit fraud and abuse. So having that direct line, we've been inclined to keep that business.

We still have a solid business there and we have good margin there. And so we continue to look at it as a business that we intend to continue in our portfolio.

And then when you think about healthcare IT pricing in general, we've actually done some calls with hospital CEOs and CFOs, and it's a small portion of their overall budget. So is there ability to even increase price in some of these businesses?

So we look at a couple of different things when we're thinking about price, primarily 3 components. We look at the inflationary rates. We look at the cost of maintenance to our products. So for example, if CMS is making a lot of changes to the rules and regulations and we have to invest a lot of time to do that, then that can help drive price up because our cost to manage goes up.

And then the third thing we use around our pricing is the value that we bring to our customers. So we do use value-based pricing. We do look at what is the return on investment that clients are going to be able to achieve. And then we also look at what new features and functionalities that we're building into the product. Does that drive price at a renewal? So those are the types of things that we look at.

One of the things that I will tell you that does influence our ability as to whether we can take price is: where are hospital margins today? So for example, during COVID when hospital margins were negative, it was very hard to get price. Obviously, that was the time hospitals were in crisis. That was not the time to try to spend getting price.

So it's something that we look hard at every year and we take that into account. But most of our growth is coming from new customers and expanding that footprint into existing customers, is what I would tell you.

That's helpful. What do you think investors don't appreciate about RCM?

One word: the complexity. So in the market, a lot of people think that coding is easy. I can put in a word, I can put it in the search engine on my laptop, and I can put in a word and get a code right now. Unfortunately, there's a whole lot more to it than that. So a lot of people don't understand the complexity of how you actually get to the code. And then when you actually want to get to payment, you have significant amount of rules that you have to deal with.

So you have to figure out on the front end, number one, was there prior approval with my payer that I'm going to get paid for this? Did I even get cleared to do the procedure? Number two, am I in the right site of service? So is this -- should it have been done in the physician's office? Should it have been done in ambulatory surgery? Should it have been done in hospital outpatient? Is it an acute care admission?

Then you have to get to: do I have the documentation right? Do I have the specificity? Did the physician give me all the information? Was there a lot more complex conditions this patient had that was influencing the care that we did for them?

Then you have to get to the code. Then you have what's called the compliance rules. Then you have the regulatory rules, which is about -- think of it as tax law. That's the easiest way for me to explain to you about the regulatory environment that we have to live with. So if you have this code and that code, do you get to post both on the claim? If you have this code, does that mean this one over here gets demoted in the weight that it carries? There's an enormous amount of that.

And then you add into it things like post-payment rules. So if I had an acute care admission, a hospital admission, that the patient visited the ER within 72 hours prior to that admission, it gets bundled. You don't get to bill for both. So it gets very, very complex very quickly.

And so a lot of people look at it and go, there's a lot of startups, they can get to an AI-driven code very quickly, it's going to put your business at risk. I think a lot of people do not understand the complexity of how you get to what is an accurate code and how do you stay compliant and don't get yourself into trouble with fraud and abuse very quickly.

So you've had a few investor meetings already at the conference. Is there anything else that we're not -- we haven't talked about that you think is important?

I would say one of the things I got quite a few questions about in the meetings was the opportunity in the international space. It is growing pretty rapidly. What I would tell you is that it's a different type of kind of a sale. In the U.S., we go straight to the hospital IDNs, the physician offices, the ambulatory centers.

When you're actually going outside of the U.S., you're basically selling to a country. It's at the ministry of health level. It is not going to individual hospitals out of the gate. So you're doing market development as you're actually going into these countries.

In the past, I would tell you it would take us 3 to 5 years to bring a new country up on a payment system. Now that they've become digital, we're seeing that move in a much more rapid pace, between 1 and 3 years. And so you still have market development to do because they're trying to make global decisions for their country around what objectives they want to meet, what payment system they want, are they going to use something on the shelf, do they want you to build one for them.

And then once we actually go into the country and help them with those decisions, then it becomes the time for us to localize to that market. And you do have to localize. Even though healthcare is global, there are key differences. What we do in the U.S. may not work in another country. An example I used in one of the sessions is, in the U.S., if you go to the hospital and you have dehydration, we're going to give you some fluids in the ER. If you're really dry, we might keep you overnight in observation and give you more fluids overnight and send you home tomorrow.

We can't do that when you go into a country that has a very high heat index. Because medically, those patients will go into acute renal failure, which could kill them very quickly. The majority of those are admissions when you get into countries that have that kind of heat. So you can't just take what you do in the U.S. and plop it into another country. You literally have to localize to the market.

But that's what gives us the advantage, is we know these types of things. We know how to do the evaluation of the data. We can build their payment systems or we can use something off the shelf and adjust. And then we go into the country, work with those ministries of health, and then drive the market with the need for the RCM products and the Grouper applications that we take to market.

Thank you. Amy, I don't know if there's anything that you wanted to highlight kind of post-Q1 before we close, but you're welcome to if you want, or we could close here.

I think the only thing I'd highlight is I think if you listen to our conference call, you probably heard a lot of discussion, certainly, we started off the first quarter well and are excited about the rest of the year, where we did highlight upcoming ERP changes that are going to impact Q2 and Q3.

And so I just want to make sure that as you're thinking about our business, that you're taking that into account and that we highlighted expecting approximately $100 million of sales coming into Q2, out of Q3, and that that will reverse in Q3. And I know that's caused a little bit of consternation as we kind of work through that with investors. But certainly felt that was important.

But I think the most important message is the underlying business, we feel really good about. We're seeing margin expansion. We're seeing accelerating growth. A lot of the changes we've done over the last couple of years, we're really seeing -- starting to see take hold.

And everything that Garri is talking about when we think about the HIS business, that's a key component. And I think that's what's really exciting across all 3 of our business segments, is they're all really moving forward and accelerating, at different paces and timing, but really excited about what's upcoming and look forward to the rest of the year.

Yes. The one advantage that I have, and I love to remind my peers, is, A, I don't have tariffs; B, I don't have oil and gas that's influencing my business; C, I don't have supply chain. So I don't have a lot of the disruptions and the headwinds that they see. And so for us, it's a very stable business. And so we're able to predict pretty much what's happening, what's coming pretty quickly and have a lot more insight.

It's a great conversation. I learned a lot. Thank you.

Thanks for having us, Travis.

Thanks.

Hello, and welcome to Solventum's First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications. You may begin.

Thank you. Good afternoon, and welcome to Solventum's First Quarter Fiscal Year 2026 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 on a non-GAAP basis, unless they are specifically called out as GAAP. The non-GAAP information discussed is not intended to be considered in isolation or as a substitute for the reported GAAP financial information. Please review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers.

Our discussion on today's call will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. These statements are made 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. [Operator Instructions]

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

All right. Great. And thanks, Amy, and to all of our shareholders and everyone else following the Solventum story. I just want to say thanks, and welcome to our first quarter 2026 earnings call. And I'm going to start by addressing our Solvers around the world because I'm pretty sure that a few of them are listening in today. I just want to say thank you. I thank you once again for delivering on your commitments in our fast-paced transformation environment. I know it's not easy. I know it's not easy with the amount of change. But the results that we're sharing today, well, they just don't happen without you and your hard work. And I just want to say I'm extremely proud of not just your dedication, but the results that you continue to deliver.

This team's ability to drive outcomes while navigating ongoing separation efforts, ERP implementations and acquisitions, and divestitures, well, it's just -- it's a testament to the strong talent that we have in the organization. It's a testament to you, and it's a testament to the culture that we've already built. So again, to our global team members, thank you very much for making it happen.

Okay. Now let's get into it. We delivered first quarter results ahead of our plan and ahead of expectations. Organic sales growth and EPS both exceeded our plan. And it's, again, reflecting a very strong execution across the organization and the momentum that we've already built.

We saw solid performance across all segments and driven by strong commercial execution and new product launches. And thanks to positive volume, mix and continued progress on our savings initiatives, we also achieved better-than-expected performance on margins as well. This is a clear reflection of the discipline and the rigor we've built into how we manage this business.

Q1 is a clear indication that we are well on our way to delivering our 2026 guidance, and importantly, our go-forward LRP objectives. It's clear that our transformation journey is working. It's making progress. We've mentioned before, we've rebuilt our commercial engine with just clearer accountability and needed specialization and stronger leadership. And now innovation is reinforcing the commercial momentum that we've built.

We expect to have close to 20 new products launch over the next 2 years. And as we would expect, as anyone would expect, a meaningful portion of them will be within our growth driver areas. This will be additional fuel now for that new and enhanced commercial team. And when it comes to operational efficiency and the separation from 3M, where we've made meaningful progress on our ERP cutovers as well as the overall separation process. And I can tell you that the team continues to execute against these milestones with purpose.

Now that said, we cannot wait to get to 2027 and put the majority of the separation work behind us. We expect the resources and the bandwidth we free up to create significant value. And that's exactly what our Transform for the Future program is designed to capture.

And as a reminder, our Transform for the Future program is a multiyear $500 million savings program, and it is our way of proactively reshaping our operating structure while freeing up resources to invest for the long term. We are streamlining systems, increasing automation and optimizing our global footprint while repositioning spend towards the highest return areas of our business. This program is already paying dividends and will deliver more meaningfully in 2027 and beyond.

When looking at our portfolio optimization program, we've moved rapidly here with clear proof points of our ability to execute, ranging from SKU rationalization to the sale of the P&F business to the acquisition of Acera, and we are just getting started. We see portfolio optimization as a perpetual lever for value creation here at Solventum. In other words, as we said in our original Investor Day, we will continually assess our businesses for strategic and financial fit. And when we determine that someone else can offer more value for our business than we derive or we see another path to increase shareholder value, we will act decisively, just like we did with the Purification and Filtration business.

Relative to our SKU rationalization, we're more than halfway through this process and expect to finish by the end of this year. Our separation of P&F is on track and progressing well. And Acera, although it's early, the performance reinforces our ability to identify, close and effectively integrate attractive assets in our space. In fact, Acera is another great proof point that portfolio optimization isn't just a strategic priority. It's a value creation lever that we absolutely know how to pull. We targeted the right asset, a fast growth business that is aligned to our existing call points, and as a result, immediately beneficial to our combined commercial teams.

And importantly, we see Acera as just the beginning. We have a target-rich environment for additional tuck-in acquisitions and a balance sheet that gives us the flexibility to pursue them while also returning capital to shareholders. And as you probably remember, we have Board approval for up to $1 billion in share buybacks. And given the substantial value we see in our shares and the quality of our business, one should expect that we will accelerate execution of that approval.

Okay. So moving to our 3 operating segments. And I'll start with MedSurg, which, of course, is our largest business. We continue to see strong underlying performance in our growth driver areas. Negative pressure wound therapy was led by ongoing demand for traditional and single-use therapy, continued expansion of our V.A.C. Peel and Place stressing and of course, our specialized sales force.

And now with Acera, it opens the door to the fast growth acute care synthetic tissue space and really slots perfectly into our advanced wound care infrastructure. We're obviously early in integration, but the thesis is playing out. The team is executing and the product portfolio is resonating with our customers, and we expect Acera to be a meaningful contributor to reported growth as the year progresses.

In our Infection Prevention and Surgical Solutions business, while Tegaderm CHG remains a consistent performer as our team successfully upsell this important clinical solution and we're encouraged by the adoption of the recent Attest sterilization product launches as well. And both of these areas are benefiting from our specialized sales teams. In Dental Solutions, we are building on the momentum we saw in 2025. Our Clarity brand relaunch, the Filtek Easy Match and Clinpro Clear are resonating with our customers and benefiting again from a more specialized sales team. And as we exited 2025, this team made significant strides in improving back orders, and I can tell you that our customers are noticing. I want to thank our supply chain and the dental teams for making it happen.

Okay. Moving to our Health Information Systems business. We continue to benefit from the strength of our revenue cycle management sub-business. And inside RCM, our autonomous coding offering continues to gain traction in both outpatient and inpatient settings. And our international expansion is providing a really strong tailwind as well.

Relative to AI and autonomous coding, I'm going to reiterate what I said on our last call. We see AI as a helpful tool to deliver better outcomes when it comes to autonomous coding. But what differentiates the outcomes is the data, it's the rules, it's the rigor behind them. And we are differentially able to leverage AI, thanks to our unique ability to efficiently and effectively train it.

We've built deep rules and algorithms designed to ensure accurate and compliant reimbursement coding. And this, combined with our vast data sets, our proprietary workflows, it allows us to more effectively train and maximize AI and ultimately, as a result of that, deliver autonomous coding that our customers can trust.

And I can tell you, the economics of autonomous coding, they're compelling. Our customers benefit by improving productivity, eliminating FTE cost infrastructure and improving revenue capture thanks to increased accuracy. That's a powerful value proposition: reduce costs, improve productivity and capture more revenue. And you can see why our customers are interested in this pathway.

Now shifting gears to everyone's favorite topic, tariffs, we continue to expect the annual headwinds to be in that range of $100 million to $120 million. And I can tell you, from the very beginning, our supply chain teams have been actively working on mitigation strategies since we first saw tariff headwinds emerge. And our Transform for the Future program gives us additional firepower to offset these headwinds. And as a result, we've committed to expanding operating margins 50 to 100 basis points in 2026, and we absolutely intend to do so.

But let me just zoom out for a moment because I think it's important to keep the bigger picture in view. Going into Q1, we had people ask whether we could maintain the momentum we saw in 2025, was it sustainable. And I could see why. We did triple our comparable annual sales growth in 2025, but that was before the full benefits of our recent product launches, our pipeline innovation and the commercial enhancements that we made in 2025. So for our full year 2026 expectations, excluding SKU exits represent continued progress on that ramp. And as I've said in the past, and I'll say again, it's not a question of whether we get to our LRP targets of 4% to 5% organic sales growth. It's a question of when.

All right. So let me summarize the key messages that I want you to take away from the call today because we put a lot out there already, and Wayde hasn't even begun yet. But number one, our underlying commercial momentum, it's real. It's continuing. And our new product pipeline will be the fuel that, that momentum needs to continue from here.

Number two, our operational programs, the Transform for the Future, programmatic supply chain savings and the separation progress that we have made give us additional confidence in the margin expansion story for the full year, and of course, well beyond. Number three, we have moved with speed, and importantly, impact on portfolio optimization, but we are by no means finished. We will continue to actively shape this portfolio for the long term. And number four, the ramp toward our long-range plan is happening. It is real. And I think it's pretty clear it's happening faster than most people thought possible.

And with that, I'm going to hand things over to Wayde to walk through our financial details. And then, of course, we'll open things up to questions. Okay. Now Wayde, go ahead.

Thanks, Bryan. We're off to a great start in 2026, delivering first quarter results that were ahead of our plan and expectations on both sales and earnings. As usual, I'll begin with an update on separation progress and portfolio actions, then walk through the quarter and conclude with a review of full year outlook.

Our separation from 3M continues to progress well, and we have exited just over 50% of the transition service agreements and are on pace to exit over 90% by the end of 2026. We have also migrated 75% of over 1,200 system applications, which captures the recent and successful ERP cutover in Asia Pacific, including China. We're now looking ahead to our next wave of ERP cutovers, which includes the U.S. and Canada, planned for Q3.

There was also meaningful progress across our facilities with the move of our St. Paul, Minnesota facility from the legacy 3M campus to our new stand-alone facility in Eagan, Minnesota. And we achieved a meaningful milestone with the completion of our site migration activities covering several hundred sites around the globe. We also finished a strategic expansion of our manufacturing facility in South Dakota, which enhances our supply chain's flexibility to support existing product growth and new product launches. With further work to streamline our distribution centers, we are now down to 54 worldwide.

Regarding our recent portfolio activities, we continue to make progress on the P&F divestiture, with a majority of transition service agreements to be completed in 2027. And Acera integration efforts are tracking to plan while maintaining strong momentum of the commercial team.

Now turning to our first quarter results. Starting with top line performance. Sales of $2 billion increased 2.1% on an organic basis compared to prior year and decreased 3% on a reported basis. Foreign currency was a 270 basis point benefit to reported growth, while the net impact of acquisitions and divestitures was a 780 basis point headwind on reported growth.

Growth in the quarter was driven by stronger-than-expected performance across all segments, primarily from volume, while pricing remained within the expected range. Our SKU rationalization remains on track, with 100 basis points impact in the quarter tracking in line with our full year expectation. Organic growth on a normalized basis would have been approximately 4% when taking into consideration some separation-related timing benefits that accelerated sales volume of approximately 70 basis points from Q2 into Q1, along with the difficult year-over-year comparison and SKU headwinds, all before the contribution of Acera, which would have added another approximately 40 basis points.

Moving to the segments. MedSurg delivered $1.2 billion in sales, an increase of 1.2% on an organic basis. Within MedSurg, Advanced Wound Care grew 2.1%. Negative pressure wound therapy performance was driven by strong brand, new product launches and commercial enhancements. Acera contributed $28 million to reported sales, which is reflected in the Advanced Wound Care business.

Infection Prevention and Surgical Solutions performed well with a tough year-over-year comparison at 0.6% growth, reflecting improved commercial alignment and continued customer demand, as well as the previously mentioned separation-related timing benefits. As a reminder, IP&SS growth in the prior year was just over 8% as the primary beneficiary of order timing related to customers buying ahead of ERP and distribution center moves and SKU exits.

Our Dental Solutions segment delivered $354 million in sales, an increase of 3.4% on an organic basis. Growth was driven by innovation as well as separation-related timing benefits. Core restoratives led overall performance, driven by strong underlying demand and commercial execution leveraging new product launches.

Our Health Information Systems had another strong result with $342 million in sales, an increase of 4.7% on an organic basis, driven by strength across revenue cycle management and performance management solutions, offset by expected double-digit declines in clinician productivity solutions. Combined with strong customer retention, the pipeline activity and backlog conversion continue to support confidence in our sales growth. From an operational standpoint, we made further progress in supply chain execution during the quarter. Back orders across the portfolio continued to improve, reflecting improved manufacturing performance and the benefits of ERP and distribution actions.

Looking down the P&L. Even in the face of tariffs and inflation, our gross margins of 56.4% improved 80 basis points over prior year, driven by favorable programmatic savings, portfolio moves, as well as sales leverage and mix. And we were above our expectations, as typical first quarter seasonality was more than offset by benefits from additional sales, favorable mix and higher programmatic savings.

Operating expenses decreased versus prior year, although 100 basis points higher as a percentage of sales. This reflects the impact of portfolio moves, partially offset by the benefit of our savings programs, including Transform for the Future, outpacing investments. In total, we delivered adjusted operating income of $392 million or an operating margin of 19.5%, similar to last year and consistent with our expectations for a sequential seasonal decrease, as operational improvements mostly offset the impact of tariffs and inflation.

Net interest expense decreased year-over-year, primarily due to a lower average debt balance following the paydown of debt in our third quarter 2025 using proceeds from the P&F divestiture. Our effective tax rate of 20.4% was within our full year guidance range expectations. Altogether, we delivered earnings per share of $1.48 or 11% growth, ahead of expectations.

Shifting to our balance sheet. We ended the quarter with $561 million in cash and equivalents and net debt of $4.5 billion. From a free cash flow perspective, we finished ahead of our expectations, mainly due to timing within the year. We had several expected demands on cash flow in Q1, including higher separation costs and tax payments related to the P&F divestiture, as well as normal seasonality for annual compensation and expense timing. Like last year, we expect Q1 to be the lowest quarter of the year.

Looking ahead, free cash flow will improve, with Q4 representing the strongest quarter due to step down of separation-related costs, timing of tax and interest payments and outlook for improved operating results as we exit 2026. On our fourth quarter earnings call, we indicated the separation costs and P&F divestiture transient headwinds will mostly complete in 2026, and we continue to expect significant improvement in 2027.

We also started the first quarter of our share repurchase program and repurchased approximately 923,000 shares for a total consideration of $67 million for the 3 months ended March 2026. Our balance sheet strength is well positioned for us to execute our balanced capital plan, inclusive of share repurchases and tuck-in acquisitions.

Regarding our full year 2026 outlook. We delivered a solid first quarter performance, benefiting from commercial execution, increased contributions from innovation and portfolio moves. Our confidence in underlying growth and operating performance continues to increase, and we are off to a great start, with important ERP and separation milestones still to go while navigating an elevated macro headwind environment. As a result, we are maintaining our full year organic sales growth and free cash flow guidance as provided on our fourth quarter call. And following the better-than-expected start to the year, we now estimate that our earnings per share will be toward the high end of our initial $6.40 to $6.60 range.

We also want to provide some added insights about sales phasing as it relates to the last large ERP cutover, which is planned for the U.S. in Q3. We estimate over $100 million of sales timing benefit in Q2 that we expect will reverse in 2026, mostly in Q3. The additional sales phasing is an important part of our mitigation strategy, and we will update you on our Q2 and subsequent calls on the eventual impact.

Turning back to the full year. We continue to estimate a foreign exchange benefit of approximately 100 basis points on sales growth and our holding operating margin in the range of 21% to 21.5%, an increase of 50 to 100 basis points over prior year despite significant headwinds from tariffs annualizing and inflationary impacts. No change to our tax rate expectations of 19.5% to 20.5%.

In summary, we delivered a strong start to 2026. Business momentum is improving. The work in the portfolio is having a positive impact, and our execution is creating a clear path to margin expansion and cash conversion.

With that, I'll turn it back to the operator for Q&A.

[Operator Instructions] Your first question comes from Brett Fishbin with KeyBanc Capital Markets.

Just wanted to start off with one on some of the phasing commentary around the ERP event. Just -- maybe if you could flesh out a little bit where you expect to see the benefit relative to the different segments in Q2 just from a modeling perspective so we can help understand the transition?

Sure. Brett, it's Wayde. And Bryan, I can start this one.

Yes, go ahead.

So as we called out the prepared remarks, as you said, Brett, we are estimating over $100 million additional sales in Q2 as we're working with our customers and distributors to advance orders before we begin our Q3 cutover of ERPs in the U.S. and Canada. This is going to mostly impact IPSS and Dental, to your question.

And this is a key mitigation strategy for us to really ease the number of orders and shipments in Q3 as we ramp up on new ERP functionality. And keep in mind that U.S. is a very different region and that the majority of our sales go through distribution, and this helps mitigate any challenges with ERP cutovers with advanced orders into the distributors.

And then importantly here, when we eventually report Q2, we will provide the amount of orders shipped in advance and then adjust our second half accordingly. So as we've shared previously, it's difficult to predict advanced orders in volume. And therefore, we're giving you a heads up here on magnitude, but not precision. And we'll update you when we report our Q2.

So the key is we're not adjusting our full year guide. We expect all Q2 advanced orders will be offset in the second half of 2026, mostly in Q3. And the good news here really is that we're nearing the end of our heavy lift on ERPs from 3M. And this will be the last large cutover, as we plan to be done with ERPs and 90% of the TSAs by the end of the year.

I might just draft off of that, too. It sounds a little messy in big numbers that we're throwing around, but we feel pretty confident on this one. We got some -- we're lucky because it's a big region, obviously, the biggest region that we have in the ERP cutover. But we feel like the mitigation efforts that we have here are fantastic. It puts us in a really nice position to have almost all of our business run through distribution in the U.S. And because we can stock up with those distributors, even if we have a challenge, we can cover our customers and continue to recognize revenue, which is great.

And then in addition to that is Wayde said is our last one. So I think the team has gotten pretty good here. So we've got a tuned-up team that's capable on top of a really strong contingency program.

All right. Super clear. And I'll just ask one quick related follow-up. So just thinking about 2Q and that $100 million or so benefit. Just on an underlying basis, is there any major call out or a reason to think that the x, call it, ERP benefit run rate wouldn't be somewhere within the 2% to 3% current guidance range?

So in other words, if you neutralize the impact of it, I think is what you're saying, but I just want to make sure, are you saying that if we neutralize the benefit of that $100 million with the growth rate would typically be in Q2, is that what you're saying?

Yes. Essentially, just as I think underlying growth, if you would expect the underlying growth rate to still be somewhere within the guidance range or if there was any other major call-outs that we should be thinking about for 2Q?

No, that's it. And that's the intent of calling out the heads up here on this advanced ordering to just make sure that we've given the heads up because we do think it will be a larger magnitude than we experienced last year. And we're not giving quarterly guidance, but you should assume that given the strong performance in Q2, that we should continue that momentum -- or pardon me, in Q1, we should continue that momentum in Q2 and through the rest of the year.

Good way to look at it.

Your next question comes from David Roman with Goldman Sachs.

I know in your prepared remarks, you talked mostly about the contribution to revenue growth coming from volume and mix versus price. Can you maybe give us a little bit more flavor of what the volume versus mix contribution is? And what you're seeing from a new product launch perspective year-to-date?

Yes. Maybe I'll start with the new product launches. I'll tell you that as I referenced, even in my prepared remarks, one of the biggest catalysts we have right now we've been talking about is the commercial enhancements. But now we're feeding that commercial machine with some really nice product launches, and I've talked about those in my prepared remarks, they are definitely helping us. And we have more coming, as I talked about 20 new products that we're going to be launching over the next 2 years. So it's definitely a combination of the enhanced commercial organization, the focus that we have in growth drivers. And we're peppering in some really nice product launches as well. Wayde, maybe you can talk about that.

Yes, sure. On volume, mix, price, the way to think about it would be our price continues to be in that plus/minus 1%. So that means the majority of our growth is all volume based and significant contribution from volume.

Okay. Very helpful. And maybe just a follow-up. I know that this is the first quarter that you initiated the share repurchase program, another quarter with a lot of macro-related volatility. And recognizing that there are different timing elements in a quarter when you can and can't buy back stock. So how did you think about deploying the buyback in the quarter? Was there anything like competing considerations for capital that may have driven the amount to be where it was? Or is this something that we should expect to ramp over the course of the year?

Want to say nothing more around the soft stating dilution here.

Yes. Yes. So I can start us off there. So as you mentioned, David, we're very happy to have our share repurchase program kicked off. We started it here in Q1. And we have multiple layers to it. The first layer is to repurchase shares to offset dilution of stock-based comp and to hold our share count flat. And then we also have an opportunity to buy given if we see value in the shares.

And so we'll be certainly looking at that, where the stock has been more recently here in Q2. We're not commenting on Q2 yet. We'll do that for Q2. But you can imagine, we see a lot of value in the stock, where it's trading today. And then we're going to balance that with our M&A plan and our acquisitions.

And as you know, it's a balanced plan for us. We're going to be -- just like when we launched the authorization program, we also launched the first acquisition of Acera. And so we're going to have a balanced plan. We're going to be looking at tuck-in acquisitions and where we can drive value there. We'll also be looking at our share repurchase program with a minimum of anti-dilution and then being opportunistic where we see value in the stock.

Your next question comes from Ryan Zimmerman with BTIG.

Just want to follow up on some of the ERP cutover dynamics here. I think you called out, Wayde, about a 70 basis point impact from some order pull forward. And so as you think about what occurred in Asia with the ERP cutover, what did you see in terms of impact when you did that cutover that informs kind of -- and again, appreciating the logic behind the dynamics of 2Q versus 3Q with the U.S. But what have you seen thus far with that cutover? And how much of that 70 basis points was reflective of preparation for the Asia ERP cutover?

Yes, sure. And so obviously, a lot of questions around ERP, and it makes sense because we've got a lot of people around the company working on delivering these. And our primary objective is always to ensure we get product available for our customers. And we want to make sure, number one, we're servicing our customers. And we certainly want to keep ourselves on track from a financial standpoint as well.

So you brought up Asia Pac. So the good news there is we have had a very successful ERP cutover in Asia Pacific, and that included multiple countries plus China for us. And so that one is actually in the rearview mirror now, Ryan. And that is -- the team did a really nice job. We started with Europe, many countries in Europe, moved to Asia Pacific, and now we're moving to the U.S.

So the 70 basis points that you referenced that we called out in the prepared remarks was related to volume that's been purchased ahead of mostly SKU exits and some of the separation work that we're doing, not necessarily for ERPs. There's a little bit of ERP in there. But given that the ERP cutovers aren't until Q3, the majority of that is other separation activity. Think about countries where we're going to have a couple of months where we don't have registrations. We're cutting our registrations over from 3M to Solventum. So we had to ship some advanced orders to keep customers stocked as we transition and have a blackout on registrations.

So lots of complexity. We don't always share a lot of the details about what the teams are working through to deliver the separation and cutover from 3M. But the 70 basis points quarter, just to clarify, was volume that we would have normally seen in Q2. And so we've essentially got 70 basis points of extra volume here in Q1 from Q2.

Understood. Appreciate that, Wayde. And looking at margins, gross margins really came in well ahead of consensus is nice to see. I don't believe there's any refund activity in there, but you didn't call out -- I think your comments suggest that you're still holding the line on tariff assumptions for the year. But where is your head at on tariff refund or what we could see potentially through the year with some of those changes on the tariff?

Sure. Yes, I think two questions there, really. One, gross margin was strong in the quarter. And as we mentioned on the call, we had a benefit of sales and mix as well as some of the higher programmatic savings. And we normally expect some seasonality headwinds. In Q1, we saw those, but they were more than offset by those things that came in better than expected.

So really pleased that the team was able to deliver the programmatic savings and the margin expansion, especially in the face of tariffs, as you mentioned. So getting 80 basis points of margin expansion here. And we certainly benefited from the portfolio moves we've made as well. Both the P&F divestiture and the Acera acquisition are accretive to our gross margins.

And so then as you move to tariffs, the big headwind inside of that is certainly a fluid situation, as we all know. We're monitoring it, managing it very closely. But without clarity at this point, we're just holding our estimate in that same $100 million to $120 million for the year. Our Q1 came in right at the high end of that range from a quarterly basis. So we're still within our range. And it certainly does not include any booking of any potential refunds or anything there. We are not doing that at this point. We are in process of working on refunds like most companies are, but we have not booked anything in our results yet, and that will be something that we look at down the road.

Wayde, on the gross margin side that came out, maybe you could talk about anything you want to provide for the rest of the year? I don't know if you want to do it here, you want to do...

Yes, it's probably perfect timing, Bryan. Actually, thanks for bringing that up. So we do want to make sure everyone understands this was a strong quarter for us. And so we do expect the rest of the year to be slightly below Q1. Our estimate, we think is closer to 56% is probably a good estimate for the coming quarters for the rest of the year here. So strong Q1, little above 56%. We think the rest of the year is going to come in closer. Just under 56% would be a good estimate.

Your next question comes from Jason Bednar with Piper Sandler.

Actually, I'm going to layer on to the whole ERP cutover topic, but from a different angle. So you sound super confident around the planning. Maybe talk about what this big U.S. ERP change means for your OpEx savings plans? When do you begin realizing cost savings from this switch see those benefits later this year, early next year? And does that wrap into your restructuring cost savings program? Or is that -- are these two distinct items?

Yes. And maybe I'll just quickly say on the mitigation plan. I just want to call out the team right now because everyone is working really hard on ERP cutovers. And as you can imagine, it's a very large group of cross-functional people that are just flat out right now. I just want to give them kudos because the mitigation process that we've gone through is probably the best I've ever seen. So I feel very confident coming into Q3.

But really coming into your question, does this open up margin opportunity. Wayde, maybe I'll flip that over to you.

Yes. So not the primary objective. Primary objective here is separation from 3M. And because we were in a separation situation, there wasn't a lot of preplanning going around with the ERP cutovers. And so OpEx does not benefit significantly from the ERP cutovers at this time.

However, Transform for the Future is designed to then pick up on the systems that we have and start to work on what we can see from savings going into the future. And so first, we got to separate from 3M. We get the system stood up, then we'll be looking at through our Transform for the Future program for additional system, benefits, automation, system efficiencies. But that really is hand in glove with the rest of the Transform for the Future work we're doing, which thinks about structural areas as well. And it's not just efficiencies, but certainly looking for effectiveness there.

What I would say on our operating expenses, though, just to make sure we cover this, is we had $740 million of OpEx in Q1, which is lower in dollars but higher in -- as a percentage of OpEx. And that -- some of that was due to seasonality, which we always see higher seasonal expenses in Q1. But we do expect our operating expenses to step down from Q1 into Q2, 3 and 4. I just want to make sure everybody understands that as well, that there are seasonal pressures on Q1 OpEx that we have every year around compensation related and other timing of expenses that happened in the first quarter. That's one of the reasons our operating margins are always a seasonally low quarter for us. And then we look for a step down in OpEx expenses as we go through the rest of the year, which helps us increase our operating margins as we move through the year as well.

All right. Very clear. And thanks for the extra modeling color there. Just as a follow-up, Bryan, I think you mentioned 20 new products that are to come on over here in the next couple of years. Just -- sorry if I have any [ sales ] wrong going, through the airport. But any breakout you're able to give around the segment of those new products? What does the cadence look like of the launch activity? And just how are you thinking about the contribution to growth from these new products?

And I'm going to layer on one more. Just can you clarify, are these brand-new products? Or are these relaunches of existing products? I know you've talked about that latter item before. So just trying to figure out if these are, again, distinct or kind of captured within each other?

Yes. Thanks for the question. You remembered exactly. I said almost 20, and you nailed it, so I appreciate that. I would say that it's mainly -- the last question there, it's mainly new products. There are some relaunches in certain areas where we're going to do capacity expansion. Because we have a great demand, we just don't have the capacity. And once we get that demand, then we're going to relaunch the product on a global basis. But most of these, the largest majority would be new products in each of our businesses.

From a cadence perspective, you're asking about that. It's a pretty steady cadence. I'd say it's going to accelerate through the 2 years, but I don't want to give the impression it's back-end loaded. That's not the case. It's going to be a nice cadence this year, the same thing next year. And it's really dedicated to our growth driver areas. There are some outside of that, but mainly growth driver areas, and then across each of our businesses.

And what I would tell you, when we think about the portfolio, we're really thinking kind of singles, doubles, triples, right? We're not looking at one item as the game changer as the home run needs. So it really reduces the risk of the portfolio launches that we have. It's a combined portfolio that will launch on a cadence that we think is acceptable and digestible to the organization. And it will give that new commercial team the fuel they need to be able to hit our LRP targets and hopefully at some point beyond.

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

Congrats on the great quarter. I guess I'll follow up on some of the portfolio comments that you made in the prepared remarks. Just curious if there's anything else you could say on that? Do you have any signs that someone else maybe might be willing to pay a higher value than the public investors are valuing parts of the business at? And kind of timing, is there anything that might slow that down? It seems like something that could happen fairly quick. Just anything else you can say on the portfolio side?

Yes. We obviously had a feeling people might ask about that because we're leaning in on this being a vector of value creation. I would say the good news is where we are from a spin perspective. In a spend environment, I think most people know that there are considerations outside of the typical things you look at on whether you do or don't transact. And the further the spin gets in the rearview mirror, the more flexibility we have. So I think that by itself kind of indicates where we are.

And then it's just a simple formula that you said. I don't want to lean in one direction or the other because I don't want to give anything away. But my sense is that as we see others that view our businesses either strategically more relevant to them or financially, we're going to pay attention to it, right? We're going to unlock shareholder value, whether that be a transaction or other methods of being able to drive shareholder value, that would be our intent.

I don't want to speak to time line because I don't want to set any expectations. I just know that we're constantly looking at this as anybody would, should. And that means both ways. We're looking at things that could exit, and we're looking at things that should come in.

And Acera is a great example on the other side of that equation of exactly the type of deal we're looking for when it comes to portfolio optimization. It's a perfect asset, right? It's got great growth. It fits very squarely into the business that we have today. As a result, it's lower risk because we know the space, right? And then so you're going to expect us to do more of that. As I said, I think we've got a pretty target-rich environment, and we can do those, as well as give cash back to our shareholders. So we feel like we're in a good position here.

[Operator Instructions] Your next question comes from Rick Wise with Stifel.

And nice to see another excellent quarter here. It's hard to resist coming back to the second quarter, Wayde, only because I just always think it's important to get the numbers right so that you all can do your thing. And as you say, a lot of moving pieces here.

I'm just -- coming out another way, I mean, consensus is a shade over $2 billion for the second quarter coming into the call. I mean, do you feel like that adequately reflects or is a reasonable midpoint way to think about the second quarter? And again, just reflecting all the puts and takes.

Yes, Rick, so it's probably worth coming back to this one because it is certainly a dynamic that we want to make sure people understand in the quarter. So what we're not commenting on this guidance for the quarters here as we go. But what I would say is I wouldn't change for the quarterly phasing here.

So number one thing, our guidance stays the same for the year. I would like people to think about nothing changes for the total year. In fact, you might not even look at your models for Q2, just keeping them the way they are. When we get to Q2, we're going to overachieve because of a certain amount of advanced ordering. It's going to be higher or lower than 100. 100 is a very round large number. We have a lot of active work going on across multiple distributor channels now. When that number lands in Q2, we'll let everybody know, we can call it out, and then we'll get a clear read through of our numbers without that advanced ordering. And then we're just going to take that advanced order number, and we're going to take it out of the second half, mostly in Q3.

So we don't want to get too precise around that number and what we're thinking about for Q2 at this point. Just giving a heads up that we are using this mitigation strategy. It's great that we have a higher amount of products through distribution in the U.S., so it gives us a real nice mitigation strategy for the ERPs here.

Yes. I think it's...

Go ahead.

Because if you think about it, it's -- I think in the other question that we had, you can kind of expect Q2 -- again, not guiding to it, but in the normalized range in the guidance that we've given. And this is going to be substantial there. Q2 is going to come in substantially higher. We just don't want you to try to model it because it will be wrong. So when we get to Q2, we have the actuals, as Wayde said, we'll give you the information, and then we'll help you with your models in Q3 and Q4.

Okay. And I guess I can't think of anything much more related and making Amy heavy than talking about 2Q EPS. I mean, you nudged your range more towards the upper end. And again, if consensus is $1.65, I think, for the second quarter. Again, Wayde, leave it alone, even with the -- I mean, Acera is going to be more -- Acera is accelerating more new product, more cost reduction. You have an extra $100 million of revenue, presumably some leverage there. I mean, again, just conceptually, what do we do with that? Where do we stick it, so to speak?

Yes. I definitely see the challenge, Rick, yes. So if we just set aside the phasing for a second, and we look at the business, you're right. We should see improvement in EPS in Q2 because Q1 is our lowest operating margin quarter. And we had a very tough comp in sales in the first quarter. And so that put some pressure on our operating growth. But from a dollar standpoint, we're going to see Q2, from a dollar standpoint, have a good sales growth quarter. We're going to see higher operating margins, and that should help drive improvement in earnings per share.

But if you bring the phasing back into it, so we get an extra $100 million. If you just do the math on that, and we're not going to be increasing our investments or anything like that. So you're going to see a pretty clear drop-through in gross margins. Now we're going to wait to see what the mix looks like on that and how the -- what's the $100 million going to look like? Is it going to be higher or lower? What's the gross margin on it? We're not going to change investments.

So if you just do a natural look at it, it's about 5% extra sales. It's about 30% drop-through on EPS. And so again, I wouldn't recommend taking that from any angle of precision, just given that we haven't finalized what that phasing is going to look like, other than it's going to be a large magnitude.

And so with that in mind, I think Q2 looks like another strong quarter for us. We should see improved earnings per share. And then certainly, this phasing is going to drop through an additional amount. We just don't know exactly what it will be at this point.

Your next question comes from Steven Valiquette with Mizuho Securities.

So I guess for us, just within the HIS segment, you mentioned that the autonomous coding offering is still gaining pretty good traction here in both the outpatient and patient settings. Our understanding is that some customers will embrace this -- the fully autonomous coding maybe for some portion of their coding needs for medical billing, but not quite 100% yet. Others may still be in pilot phase, but some might still be using primarily your more traditional computer-assisted coding or CAC solutions.

So I guess what I'm really trying to get to is if you're able to kind of answer this would be just, what's the rough approximation for just your current mix of full AI autonomous coding versus CAC revenue within the franchise, if you think about it that way or maybe from a customer standpoint, if not a revenue standpoint?

It's a great question, actually. I'll say the good news -- I'll just take a step back -- is that our team is really increasing in their level of confidence on how much of the coding can eventually be done fully autonomous. So we're talking now 80%, 90% of all coding, whether that be inpatient or outpatient, we're talking about a high level of coding that should be able to migrate in that direction.

Now to be honest, when you look at it and implement it, it takes longer than just saying it. So you're in a definite mixed situation where some are using it in certain aspects, and others are not using it in those same aspects. And we're going to continue to proliferate it.

I'll give you probably a good view. And I think it's safe for us to say. Just during the strat plan period, our assumption is given the progress that we're making and really the trust that our customers have and our capability to do this in a safe way because the risk associated with doing it wrong is pretty significant from a revenue capture standpoint and also compliance.

But even with those as a backdrop, the progress that we're making, we think we can get close to 50%, 5-0 percent of our customers during the strat plan period moving over to autonomous coding. And then in those hospitals in those systems, we'll continue to move up the ladder on the percentage of autonomous coding that they use. So you're going to start with a particular swim lane, and then you're going to expand from there.

But you're right on. It's happening. Our confidence is growing, the confidence from our customers is growing. And as I said before, the benefit for our customers is pretty significant. When you bring this in, you see FTE infrastructure reductions, you see productivity because you're getting much faster speed in getting that reimbursement. And then you're getting reimbursement of revenue capture that's higher because you don't have as many mistakes.

So it's a really nice package for our customers, and we're moving extremely rapidly, but we're doing it safely. We want to make sure that we don't cause problems for our customers.

And your last question is a follow up from David Roman with Goldman Sachs.

I really appreciate your taking the additional follow-up. And I hate to come back to the Q2 dynamic, just getting so many questions on this that I thought it would be helpful for you just to clarify here on just the broad call, which is, is the message leave Q2 the same? We're going to leave Q2 and then lower the back half to rightsize that? Or is the message, on an underlying basis, Q2 would improve and there will be some unknown upside that may or may not come out of the back half of the year? I think there's just some confusion from investors about what exactly the message here on how to think about Q2 and then the implications for the back half.

Yes. Sure, David. And Bryan, I can start this one. We certainly talked a lot about this before the call, whether we thought it would be helpful to give a heads up for over $100 million phasing or if we just wait for Q2 to come in, and we said we think it will be more helpful even though it may be challenging for people.

So to restate it, we would recommend -- of course, you all can do whatever you'd like to do, but our recommendation would be to not change your models for Q2. Because just like you said, whatever the advanced orders are in Q2, we're just going to take the mirror image of that and take it out of the second half, mostly in Q3. So if you want to just take a simple approach, don't change anything. And when Q2 happens, we'll take the mirror image, reduce the second half or whatever the advance orders were. They'll end up being either above or below that $100 million, but we think it's going to be that kind of a magnitude.

To clarify -- and this is to Rick's question. I did just want to share with people that we do see momentum in the business. We do see our growth rate strengthening. Q1 was a very tough comp. So we would expect our growth rate to improve. And we'd also expect our earnings per share to improve because our operating margin is also improving. And we expect operating margin improvement off that Q1 seasonally low operating margin. So really two separate things there. But hopefully, that clarifies it, David, and thanks for bringing that back up.

Yes. No, that's very helpful. And then maybe just lastly, as you exit the year then, when all is said and done, you would expect 2026 growth to improve versus 2025 and continue to put you on a trajectory toward the LRP targets that you issued?

Absolutely. Yes. That's the whole goal. We've said before, we expect all of our segments to improve on an underlying basis. They all have growth drivers. They've all got commercial improvements, innovation improvements. We got a lot of momentum in all 3 businesses. And that's on an underlying basis.

As we know, Dental had a significant improvement in second half last year in back orders. And so you have to look at Dental on an underlying basis without that tough comp. But other than that, yes, we would expect the improvement across -- all of 2026 across all 3 businesses.

Okay. Great. I really appreciate taking the questions and making those additional clarifications.

Right, you want me, I think it was the last question. Okay. Maybe what I'll do, if we can, operator, before I pass to Amy to close this out. I did remember to do that. I just wanted to say a couple of words directly to our team members, a lot of them, I think, are listening in right now. What I know for a fact at Solventum is we focus on the things we need to do next. We don't spend a lot of time talking about the things we've already done.

And I want to just take a minute publicly and complement our team and really give them credit for a very fast paced transformation and the results that they're delivering. And I'm just going to give you a quick summary of things that they've accomplished here just since then. And I'm not going to complete laundry list, but it's some of the key things that have occurred, and I want to make sure they're getting credit for it.

I'll just start with almost 100% of the [ LT ] and 60% of our ex [ LT ] are new to the organization. And we've made those changes with a very little impact to the movement of the organization. We completed our first global restructuring. I think everybody remembers Solventum Way with over $100 million in savings, and that put us in place to have a structure that will drive our new culture.

We created a new mission. We created a new value system, our cultures. And all of that has been digested by our team with 90% of the team members understanding it and getting behind it, it's giving them energy. We scored above benchmark on our first global employee survey. That's a little surprising when you think about it because we have a lot of challenging situations, changing environment, turbulent environment. It gives you a sense of the type of people we have in this organization. They can go through that kind of fire and still feel good, which is amazing.

We completely [ reinvented ] our [ R&D ] process. We increased our [indiscernible] from 2% to the mid-teens, significantly increasing the pipeline value that we have. We identified our primary markets and our growth drivers. But importantly, inside of that -- people might miss this -- we specialized over 1,000 reps around the globe to be able to drive those growth drivers. That is a significant commercial change that we put into place. Completed more than half of our complex separation from 3M, and that includes multiple and concurrent ERP cutovers, some of those we just talked about. And also concurrent manufacturing and distribution center changes, closes and also openings.

We implemented a multiyear SKU rationalization program. We sold to begin separating our P&F business for $4 billion, which, by the way, is the best -- is one of the best, if not the best, multiples in the sector. We paid down half the original $8 billion debt that we had when we got on spin, acquired and began integrating Acera, announced and started implementing a $1 billion share repurchase program. We kicked off a multiyear global cost savings program aimed at $0.5 billion of savings. And all of that, all of that while this team has tripled the comparable sales growth from our starting point.

And I'd say this team has been a little bit busy. And I just want to take a second to say that, that is not possible if we don't have a deeply connected team with -- an experienced team. So I just want to say thank you to our global team members. And to everyone else, I just want to say thanks for listening. Thanks for being a part of today.

Great. Thank you, Bryan. Thank you, everyone, for listening and to our analysts for your questions. As a reminder, if you have any follow-ups or need anything else, please don't hesitate to contact the Investor Relations team directly. This concludes our first quarter fiscal year 2026 conference call. Era, you can go ahead and close things out.

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

All right. I'd like to welcome everyone back to the day 2 of the Sixth Annual KBCM Healthcare Forum. My name is Brett Fishbin, Senior MedTech analyst. And I'm pleased to be joined this morning by Solventum, who is represented today by Bryan Hanson, the CEO; Wayde McMillan, the CFO; and Amy Wakeham, SVP of Investor Relations. This will be a 100% Q&A session. Questions can be submitted below the video screen and time permitting, we'll relay to management, but I'll kick things off.

So Bryan, you've been CEO at Solventum now for over 2 years. It's been a super eventful period, thinking about the original separation from 3M. You defined a new mission, upgraded talent across the organization, started thinking about portfolio management as well as acquisitions. So I was just hoping we could kick things off with some high-level thoughts, just how you feel Solventum is in regards to standing the company up what some of the biggest accomplishments have been and then your key priorities for this year?

Yes. So first of all, thanks for having us, and looking forward to the conversation. I would say that you hit some of the things that we're proud of already. So I appreciate you listing those. But maybe if I could just take a step back and say, generally, and I know that my own team if they're listening, is sick of me saying this, but I'm very happy with the progress. I'm not satisfied with where we are, right? There's still things that we can improve. But there's no doubt that this team has done a lot in a very short period of time with a lot of things going on around them.

And so maybe I'll just spend a minute or 2 on the 3, I'm just going to call them sections or phases that we put into place in the transformation and talk about some of the things that we've done well and some of the areas that I want to see us continue to improve. And I'd say in that Phase 1 that we've talked about a lot, you referenced it, was around mission, talent, culture and separation. And that was what we really concentrated on there. And I was very happy with the change in the mission, gets people fired up to be here because we actually get to have a MedTech mission now. We've got some really nice upgrades in talent to be able to stand up the organization. We move very rapidly on that. And then, of course, the culture that we put into place allows us to be able to be a little more nimble, a little more fast-acting and more accountable organization. And so I've been very happy with those changes that we've made and people have really leaned in, as indicated by our engagement survey, which was above benchmark even in a challenging transformation setting. So very happy about that.

Separation, we're about halfway through, feeling good about the team that we brought on to separate. It hasn't been without challenges, but we've been able to manage the challenges, which says a lot about that team, particularly given the other projects that we've been running, but we still have another half to go. So we got to finish it this year. We're going to be mostly finished with the separation by the end of '26 coming into '27, a lot to do, but I have a lot of confidence in the team. So Phase 1 feels really good, but still a lot to do on the separation side. Phase 2 was around the strategic focus of the organization. We spent a lot of time looking at the markets, which markets we're going to invest in, which markets we weren't and then defining growth drivers inside of those and then completely restructuring the commercial organization to match those growth drivers and also change our innovation process to match those growth drivers.

So a lot of great progress there, concentrating on growth drivers, specializing the sales organization, changing up the innovation process, and that's allowed us to triple basically the growth rate from '24 when we looked at the '25 growth rate. So very happy about the progress there. But we have more to do. Our LRP is 4% to 5%. That's our market growth. We feel very confident that we should be able to get there. And then once we do, try to exceed it. But that's what we still need to prove. More of the same in that Phase II, but we've got to get to our market growth and beyond at some point. And then in Phase III, we've done a lot there, too. The SKU rationalization program, we're more than halfway through. The P&F sale was a big, big moment for us, obviously, for a lot of reasons.

And then the Acera acquisition just gives you a sense of where we're going to go from here. And I'd say we've got a lot more to do here as well. We've talked about transform of the portfolio -- transformation of the portfolio as being something we're going to continue to concentrate on, meaning that we will continue to look for assets to acquire in that small tuck-in type framework, and we'll continue to assess the strategic fit of the businesses that we currently have. So again, great progress in each of the 3 transformation phases, but a lot more to do in each of the 3 transformation phases.

All right. Perfect. And we're going to switch gears in a minute to the guidance and most recent quarter results. But also just to kick things off, it seemed like a really big priority, Bryan, for you was culture and upgrading the culture. So maybe just simply put, like what are some of the key elements that you've focused on and tried to implement that are different from when this company operated as part of a larger conglomerate?

First of all, I appreciate you asking the question because normally it goes right to the modeling questions. And this is probably one of the most important questions you will ask. And I would even broaden it. It's not just culture. It is that foundation in the business, its mission, talent culture. Those are the first 3 elements of the 5 that I focus on. So mission, talent culture, then it becomes strategy execution. Not to say they're unimportant, but they have to come after the foundation building. And that's what we've done. We spent a lot of time on the mission and the purpose of this organization. That means a lot, Brett, because people are working very hard. In a transformation, you are sprinting. It's a long-term sprint and people can get fatigued. And if you don't have a purpose around what you're doing, if you don't feel good about what you're accomplishing, you're probably not going to have the stamina to get through the transformation.

So mission and purpose is number one. Talent is obvious. You just hire people that love to work in that environment. You got to have people that love to work in that environment. And on the culture side, it's unleashing the great people that you have with the purpose that they have. And that to me means that you have decentralized decision-making so that you have better speed, you can be more nimble and you're more accountable for those decisions. And that's what we put into place. And people are leaning in. They're enjoying it. They're really enjoying this new environment probably faster than I expected them to. So I would say it's more than culture. It's those 3 elements that have built this foundation that are absolutely required in a transformation.

All right. Perfect. And then just switching gears a little bit. I wanted to ask about last year before we talk about this year. You finished 2025 with above 3% organic growth, which was above the initial guidance of 1% to 2%. So maybe just simply put, like what went better than expected in 2025?

Yes. So a lot actually. And because there were some risk coming into 2025. We did a global commercial restructuring of the sales organization. There's always potential risks associated with that. We did a significant ERP cutover as a part of the separation. There's always risk and distraction associated with that. We did the P&F transaction, the whole divestiture and delinking and we've done the Acera acquisition. So a lot of things that could have derailed our focus but didn't. So I would say that, first and foremost, the ability for the organization to digest that amount of change in those many projects and still deliver was fantastic.

And I expected more to go wrong. I was continue to knock on wood because I think we managed it well, but very impressive. But the big things in my view are that focus around the growth drivers that I said before that -- you don't know how fast an organization is going to move to that new strategic direction. We have seen a lot of movement very quickly led to the commercial restructuring and the focus on being able to drive those growth driver elements because of the specialization and the sales operations that we built around it and then the products that we've been launching in those areas. That's really what went better than expected, digesting all the change, all the projects while delivering on the new strategy and the new focus. That's what -- so it helped us deliver more than we expected in '25, and we'll continue to do that into '26.

Yes. So let's talk a little bit about 2026. Just starting with the revenue growth. The initial guidance was 2% to 3% or 3% to 4% adjusting for the 100 basis points of expected SKU reductions. So maybe just walk through at a high level, some of your key assumptions underlying that range. And I think a common question is what you see as the biggest swing factors driving potential upside or downside to that range?

Maybe on that one because it's more associated with the guide itself and top and bottom of it. Maybe, Wayde, I'll flip it over to you, if you don't mind answering that one.

Yes, sounds good. Happy to start that one. And as Bryan said, Brett, thanks for having us here today. So as we think about our 2026 guide, starting with that organic sales growth, we gave some color on our last earnings call to normalize our full year total company 2025 at about 3.5%. And that's factoring in the SKU headwind and then some of the improved Dental back orders that we saw that really boosted the Dental growth rate in the second half of 2025. So on a normalized basis, 3.5%. And so that's an important number for us as we looked at our guidance for 2026.

We put that 3.5% at the midpoint, again, on an ex-SKU basis and said, all right, if we continue to see the acceleration we saw last year, as Bryan said, that was a significant improvement over the 1.2% we had in '24. So if we continue to see that kind of acceleration, we'll be at the midpoint of our guidance. If we can improve upon that and actually continue to accelerate more, that will put us at the higher end, closer to that 4% on an ex-SKU basis. And that's really built on some of the things that get us there are just what Bryan laid out, improved commercial enhancements. We've got innovation improving. And it also factors in some of the market forces. There are some market forces that could push us really to the higher or the low end.

And then just a few other things we think about at the low end of that range is some of the separation activity that we have going on. We've got certainly a lot of ERP work to be completed here in 2026. and distribution center cutovers as well as all the TSA exits. And so we've got a lot of additional work on top of our day jobs to complete in the separation here in 2026. We certainly have to factor that into the guide. But having said that, as we said in our past earnings call, we're very excited about the momentum we're seeing, the strength in the sales growth rate already after just 1.5 years, 2 years of being spun and a separate public company, well on our way to that 4% to 5% market growth or long-range plan that Bryan just mentioned, and that's our first step and what we're targeting to get to.

Perfect. And maybe just digging in a little bit into some of the specific segments. I think on the earnings call, you guys did talk about the potential for improved growth in HIS compared to 2025. And I think you guys have probably been getting some more questions about AI and potential impact of AI companies on that business. So maybe just a little bit more about what gives you the confidence to kind of talk about the business that way for this year and how you're thinking about the overall competitive environment with some of the new entrants?

Yes. I mean -- so maybe just taking a quick step back, we expect because each of our businesses have growth drivers that each of our businesses will improve year-over-year. So that is -- in our view, it's kind of table stakes and an expectation that we're giving at each of our businesses. And that would be continue, right? I mean, again, every year that we have it, we're going to be looking for more the next year. HIS specifically, for us, AI is an opportunity. We look at this as an absolute opportunity because it's another tool in the tool belt, if you will, to be able to move an important initiative forward, which is autonomous coding. If you look at revenue cycle management, it is a category, is a growth driver. One of the major areas of growth inside of that over the next 5 years for us is going to be autonomous coding.

And one of the big variables in allowing us to make autonomous coding work would be AI. Now we've been using and leveraging AI for 10 years in this space. And of course, the tools are getting better and better. We don't see AI, and I think this is important like a large language model. We don't see it as a competitor. We see it as a variable in the equation that we can use to solve the equation, right? It by itself doesn't solve the problem. It in concert with what you train it is what allows us to solve the problem. And we think that we're differentiated in the way that we can train just given our decades of experience in the space. We've been dealing with customers at scale. We have a huge data set. We have proprietary algorithms, and we have proprietary rules that we use to be able to train our AI, which sets us ahead of competitors that are trying to do the same thing.

All right. Perfect. And then switching to Dental. It's been a relatively sluggish market really since COVID. And I wanted to just ask like if you guys are starting to see any signs of end market recovery and just how you're thinking about like the growth dynamic this year for that segment?

Yes. I think it was indicative of the fourth quarter. You just look at all the dental companies that presented, it was clear that there's a little momentum in the market. I'd say it's kind of stabilizing to improving, which is great. And if you think about our LRP assumptions, which goes out to 2028, we had assumed in that LRP assumption that the market by then would get back to that 3% to 5%, which is pretty typical of that market in a normal environment. So it's nice to see that it is stabilizing, and we are seeing some improvement. That said, Brett, we're not waiting on that. Our innovation is what's driving our growth, and we're going to continue to double down in the innovation.

They've done a great job in Dental. Pretty much all of our growth in '25 was because of new product innovation, and we expect that to continue with product launches into 2026. So we do expect the market to improve. We expected that from the very beginning with our LRP. It's glad to see it's beginning in to move that direction. But innovation is going to be the key for us to continue to drive performance here.

All right. Perfect. And then just turning to the operating margin guidance. Specifically, you guided 21% to 21.5% for the year. We viewed that as a really impressive and positive ramp, thinking about the full year impact of tariffs that are baked in. So wondering if you could just unpack a little bit some of the key levers that are supporting that type of margin expansion despite like the tariff headwind.

Yes, Wayde, I'll probably hand that one over to you.

Yes. Sounds good. I appreciate that comment, Brett. It is certainly a margin expansion story here for us, a multiyear margin expansion story for us, and we want to continue to expand margins every year, including 2026, which, as you call out, we are looking for about 70 basis points more headwind from tariffs, as we annualize tariffs, into 2026. We think it can be about another 70 basis points of headwind for us. So inside of that is our 50 to 100 basis points of margin expansion. So it's well over 1% even at the low end when you factor in the tariff headwinds.

And so the main drivers for that are sales leverage. As we continue to accelerate sales and we drop through more to the bottom line. And then we've got 2 efficiency and effectiveness projects running. First, the programmatic savings, which is mainly targeted at our supply chain. And we gave a good amount of detail on this at our last Investor Day, our Head of Supply Chain, Paul Harrington, laid out a comprehensive plan for driving significant savings, mainly in gross margin in the supply chain. And then we're building upon that with a new program we launched at the end of last year called our transform for the future. And again, this program is focused not just on efficiencies, but also effectiveness.

Think about areas around process and systems and structure. And the key here is to make sure that we can continue to invest for growth. We want to make sure that these programs drive efficiency. So it really fuels our investment for growth and drives operating margin expansion for us. So we put all that together, we do think we've got a nice margin expansion story. The transform for the future and the programmatic savings are multiyear projects that are designed to help us improve effectiveness and efficiencies over years to come here.

And then just one more on margins. The MedTech market and the market as a whole has been sluggish lately. I think part of it has to do with the conflict in the Middle East and rise in oil and commodity prices. So I was hoping you could just comment at a high level how you think about Solventum's exposure, maybe from just a revenue and margin perspective if this issue became very prolonged?

Yes. So maybe I'll start, Wayde, and if there's anything you want to add, please do. I'd say, first, we have relatively little infrastructure in the areas of the conflict, which is great. And at the same time, even though it's relatively little, there's still some of our people that are there. And of course, our first priority is to make sure that they're safe, and we're doing everything we can to keep them that way. And so far, mission accomplished. So that's the first thing. Secondly, because we have that little infrastructure, we don't really see a lot of revenue risk associated with this today and certainly feel comfortable with the guide that we gave in 2026 even with the conflict.

But to your point, we're going to have to watch it over time because this will have an impact to oil prices already has. Question is how long does that remain? There's certainly for every organization, if you have oil prices that are sustainably higher, you're going to have logistics cost issues, you're going to have raw materials cost issues. But for 2026, we don't see it as being a big of an issue. If it would sustain potentially more in 2027, but it would take it a while to sustain at that pricing to have a significant impact for us.

All right. Perfect. Perfect. And then just maybe to wrap up the guidance questions with just a little bit about cadence and free cash flow. So first on cadence, I think one of the biggest just like areas of pushback from investors, you kind of look at the full year guidance and it looks good, but there's like some considerations for 1Q. It seems to be shaping up as like the lightest quarter for growth and also margins. So just kind of I want to hear about what gives you confidence in like the type of ramp that's implied by the guidance, assuming 1Q falls in line with what you expected coming out of the 4Q call?

Wayde, do you want to take that one?

Yes, sure. Happy to. And Bryan, I'm glad you brought this one up. We covered a lot in our Q1 earnings call -- or pardon me, our Q4 earnings call where we addressed some of the expected Q1 phasing. And importantly, for us, it's not really a ramp for the year. What it really says is we've got a tougher comp in the first quarter. And last year, when we reported the first quarter, we called out that we had a lot of additional volume in Q1, and that was related to some of the business initiatives. We're certainly getting ready for ERP and distribution center cutovers as well as SKU rationalization announcements.

And so we ended up with a good amount of extra volume in the quarter. And then as we went through the year, we said that we would see the offset in the second half of the year, and we did see that mainly in Q3. So the setup for the year is on our organic sales growth rate, we have got this tough comp to deal with in Q1, but then an easing comp in Q3. So it doesn't really result in a ramp for the year. It's more just a tougher comp in Q1, easier in Q3, nets out almost perfectly for the full year. And so that's one of the drivers there. And then for Q1, we always have a seasonal pressure on gross margin and operating expenses in the quarter. And then we laid that out at our earnings call as well. And our expectation was that we would see the lowest operating margin of the year in Q1, which would be consistent with last year if that ends up being the case.

And so from there, we look at free cash flow as well. Free cash flow for us certainly has a couple of transient things in the guidance on operations to finish paying for the separation. We've got a lot of our operating expenses and capital expenditures still targeted at separation. And then we've got a due to from account that we need to clear out mostly by the end of 2026 between us and 3M. And so that's the separation-related costs. We'll have a much less divestiture costs in '26, but a little bit left there. And that's what got us to the full year guide.

And then I'll just add to that a little bit more. We wanted to make sure that people are aware that Q1 will be a low free cash flow quarter for us, and that's some seasonal impacts of paying out our cash tax payments as well as our annual incentive plans and things like that. So from a phasing standpoint, Q1 is low from a free cash flow generation standpoint, but then that's offset with favorable Q4 cash flow generation based on the improving operating metrics in Q4 for the year. So one new thing to add from what we laid out at our Q4 call is just the phasing of quarterly free cash flows.

Wayde, do you want to maybe just take a minute here before we shift to a few of like the longer-term questions, just to address free cash flow this year. And I think it's kind of like you have a little bit of a different type of year with some of the items you mentioned. Maybe just speak to what a normalized free cash flow profile for Solventum could look like, thinking like the latter part of your '28 planning period?

Yes. So it is interesting because we are a really strong free cash flow generator for -- if not for these transient items around separation and divestiture. So to your question, in 2027, as we look ahead, as the separation is almost all complete and the divestiture will be complete, we'll start to approach or get closer to that $1 billion of free cash flow that we would expect. And then in 2028, we'll be done with separation and certainly done with the divestiture. And so our expectation would be that we're starting to get closer to that $1 billion and starting to really reflect the strength of the free cash flow generation of the business once we're beyond those transient items.

All right. Perfect. And let's pivot a little bit to the long-term target and then also some of the more strategic questions. So your 2028 plan talks about a progression to 4% to 5% organic growth, which is above where you currently are. So what kind of gives you confidence or visibility to get to that range within the next 2 years?

Yes. We've been somewhat -- well, pretty much front-footed on this one. We have seen better traction, and we talked about this in the beginning, actually, Brett, when you asked the first couple of questions. We're seeing more traction than expected, quicker than expected with some of the changes we've made that's indicative of the nice growth increase that you saw in '25 versus '24 and '23 beyond that. And so we're already seeing the momentum. So our confidence level is very high, not just that we're going to get to the 4% to 5%. But as we've been saying, we believe that we're ramping faster than expected to that 4% to 5%. And of course, remember, once you get to the 4% to 5%, then we're going to look at how do we get beyond the 4% to 5%. The 4% to 5% is just get us to the market growth that we deserve, make sure that we get that sustainably and then let's start to ratchet up and try to be above that. But our confidence level is very high. And it's not just a -- we're pointing at something and we're having you hope that we get there. We're showing the progress faster than expected.

And then maybe just to follow up there. We talked about HIS and Dental a little bit, but a lot of the new product innovation has really been focused in the 3 growth categories that you've defined in the Medical segment or the MedSurg segment. So maybe just hit on some of the recent innovation that you've brought to the market, how that's helped trends in that category. And then maybe like a little bit of a directional preview about like where the cadence of future new products are focused like within those categories?

Yes. I mean, so I love that you know that we've got 3 growth drivers -- of the 5, 3 of those are in MedSurg. So 5 growth drivers are going to drive about 80% of our growth, more than 50% of our spend already. So that focus from the organization, as we referenced before, is happening very rapidly on those key areas of growth. And that will be the same for MedSurg. You will see disproportionate spend and focus in those 3 growth driver areas, which are negative pressure wound therapy, soon to incorporate Acera as well. And then you've got our IV site management, which is an IP&SS and then sterilization assurance. All 3 of those have seen really strong product launches in 2025, and we expect additional product launches between '26 and '27.

And those are the same areas that got the specialization of the sales organization. So just expect more of the same, right? Those growth drivers are not a flash in the pan. Those are areas that we're going to continue to invest in, hopefully adding new growth drivers over time. But the intent is to continue to focus in those areas, continue to launch new products in that more optimized sales organization and obviously, as a result of that, continue to drive the revenue growth rate up.

All right. Perfect. And maybe just double-clicking on one of those categories, which is negative pressure wound therapy. You've talked a lot at the Investor Day during that portion about how underpenetrated of a market that is. And it seems to be one of the faster-growing end markets that you participate in today. So like wondering what you think it takes for utilization of like those products to increase materially? And then like what that could mean for Solventum if we see that adoption rate pick up?

Yes. So if you look at negative pressure wound therapy overall, it's not as a total category, one of the faster growth end markets, but the submarket, which is probably what you're referencing is the single-use negative pressure wound therapy, which is a strong double-digit growth market. That's a very attractive submarket. Both are underpenetrated. So both traditional negative pressure wound therapy, which is slower growth and single-use are underpenetrated today. So a lot of opportunity for expansion. The nice thing is you get a natural mix benefit in the market and also in our business as single-use grows at a faster clip and becomes a larger percentage of the overall pie, when that occurs, you get a natural mix benefit to market growth and to our growth.

And we're going to continue to push that as an organization, and I'm sure the market will continue to push that as well. The ways that you do that are kind of the same that we've been talking about, specializing the sales organization and getting them clinically refreshed is a great way to sell clinically and the clinical differentiation of these products, not just the clinical differentiation between our product and the competitor's product, but our product in every other type of competitor. It doesn't have to be negative pressure wound therapy, right? You got to be able to take other people's business because of the capabilities of negative pressure wound therapy. That takes a clinical sale, it takes a specialized sales organization and a MedEd team that's extremely focused on it. And so that's what we've been doing.

And then it takes innovation. You've got to make this easier. You got to democratize the technology. It's a more challenging technology to use. And as a result of that, you see limited usage of it. As we make it easier to use with products like Peel and Place, we have that specialized sales organization, we start to leverage our clinicals in a more effective way and our contracting, that's the way you're going to see this market continue to move. But we do get that natural mix benefit because of the single-use piece becoming a larger portion of the overall market. And very importantly, it's a smaller portion for us and a smaller portion of the market, but we're the largest player in single-use. So it may be a smaller piece of our overall pie, but we're the largest player in the single-use space.

All right. Great. And I was going to ask about the long-term market growth expectation in Dental, but you kind of hit on that already. So maybe I'll shift a little bit to revenue cycle management with just 1 or 2 more questions there. So RCM is one of the 5 growth categories. We talked about the 3 in medical. And I think it's an area where some of like the MedTech investors may be a little bit like less familiar on what a typical growth playbook could look like. So I'm just curious kind of like how you think about driving growth in that, call it, like defined category of the 5 and like where you see opportunity and white space with that business?

Yes. I'd probably say less around white space and more around unless you define transforming a space as white space, right? Because we're going to play heavily in revenue cycle management. That's where we're going to focus a lot of our attention. And really the 3 growth vectors that we see inside of revenue cycle management is, number one, the 360 Encompass program that we already have, international expansion of that. I mean there's all kinds of opportunity to continue to get traction with that program. Autonomous coding is going to be a transformation of the space. that we're going to lead leveraging AI that I just talked about before. That is a significant opportunity to go to our customers today, which we have a large share of the market, as you can imagine, and convert them to technology that reduces their cost to do revenue cycle management and increases their revenue capture.

Those are 2 pretty good things for the customer. And for us, we can get an increase in price because we're bringing that value. So we see a great opportunity for autonomous coding in current customers that we can go to. We get more price, they get lower cost because you take out the coder, there's a big infrastructure cost associated with coding. If it's autonomous, you don't need that, those FTEs. And because you're going to have fewer mistakes, you're going to get more revenue. So that's a nice trade-off between the value that we're going to provide and the value they're going to give us. And then the other one is just broadly international expansion.

You see very little infrastructure of these types of tools on a global basis. And we've now put teams in place around the world to be able to get after that building that market, that market development, and we're seeing great traction so far. So those are really the 3 areas. It's the traditional 360 Encompass, it's autonomous coding with our current players and it's international expansion with both of those tools.

And then just one more on HIS. Just curious, it's -- I feel like it's a little bit early, but moving fast. And I'm just wondering like if you guys have thought or evaluate maybe like additional partnership opportunities in the AI space. It feels like you have a lot of experience in data and rules that you can bring to the table, but there may be like some external AI tools that are -- could potentially fit into what you do. So maybe just curious how you think about like those opportunities.

Yes. That's kind of the beauty of it is that we don't have to be the large language model or even small language model owners, right? The tools are coming, and we're fungible. We can change the tools and just plug them into our formula based on whoever is best. So that's the benefit to us. That's why we see AI by itself is not really a competitor, but a tool set that we can use. And given what we can provide it, we can use anybody's off-the-shelf AI. So as AI progresses and gets better, gives us an opportunity to be able to leverage it on a go-forward basis. We have a lot of AI capabilities. As you can imagine, we've been doing it now for 10 years in the organization. But these technologies are getting so good that we just would rather use it off the shelf and leverage it as a tool. So again, we see it as a significant opportunity, given what we have to train it and how differentially we're positioned to train AI.

All right. Perfect. And we have a few minutes left. I wanted to just wrap up with 1 or 2 questions on margins and capital allocation before we sign off today. So just maybe turning back to the LRP. The specific target is 23% to 25% operating margin at the end of the plan. So thinking about like a potential 2026 exit in that like 21%, 21.5% range. Just I wanted to hear a little bit more about key -- like visibility and the biggest levers driving that additional 200 or 300 basis points that are included in the LRP.

Yes. You can hit that one, Wayde. You kind of already hit the elements, but maybe just go through them.

Sounds good. And as you said, Brett, we're targeting that 23% to 25% margin in 2028. And that's 200 to 300 basis point step up from where we are today. I would just highlight that certainly, we didn't know tariffs existed at the time we set the targets. So that's over 100 basis points. And then we know we've communicated in the past that as part of the separation, we have about 2% of higher cost on raw materials coming from 3M. So that's about a 3% -- over 3% headwind with those 2 things that were -- did not exist before we spun. And so with that 23% to 25%, that's really a 26% to 28% type of a margin target. So we think it's a really good target. When we get there, we'll be achieving an operating margin higher than this business was achieving prior to the spin.

And so it's a good objective for us to get there. And as Bryan mentioned, it's really the same 3 drivers that we're leveraging here in '26 that will continue to contribute the major portions of that expansion. It's sales leverage as we continue to accelerate sales into our LRP sales targets. And then it's the programmatic supply chain savings plans that we have as well as the transform for the future restructuring project that we've laid out. So when you put all 3 of those together, it gives us high confidence that we're on track to achieve that 23% to 25% operating margin by 2028.

All right. Great. I think we'll have to see if some of the M&A and capital portfolio management questions for next time. But I wanted to thank all 3 of you so much for joining today, and thank you to everyone in the audience for listening. Bryan, if there's any final thoughts you wanted to leave the group with before we sign off, I'll hand it back to you.

No, I appreciate it, Brett. And I think the questions were great in the way that you framed them. I think those are the more important ones to get across. I think I'll just end with kind of the way we started. Very, very happy with this team. And anyone who's listening, I want to say congratulations again on a super strong year in 2025. I feel the momentum coming into '26. I know that we've got all kinds of opportunity ahead of us. And that's kind of the nice thing. When you've been able to perform the way we have in '24, '25 relative to the value we've created for shareholders, and still know that we have that much opportunity for revenue growth, margin expansion and free cash flow expansion that we've just laid out.

You don't typically see an organization with all 3 vectors ahead of them with the opportunity that we have. So as much as we progressed, there's still more meat on the bone, if you will, on each of those 3 vectors. So I just want to leave those as a final words. Congratulations to the team, expecting big things in '26. And to our investors, I feel very confident we've got a story that you're going to be happy about.

All right. Great. Thanks again, everyone. Have a great rest of the conference.

Thanks so much.

Good afternoon. My name is Audra, and I will be your conference call operator today. I would like to welcome everyone to Solventum's Fourth Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. [Operator Instructions]

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 Fourth 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 on a non-GAAP basis unless they are specifically called out as GAAP. The non-GAAP information discussed 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. These statements are made 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 from any forward-looking statements made today. Following our prepared remarks, we'll hold a Q&A session. [Operator Instructions]

I'd like to now hand the call over to Bryan.

All right. Thanks, Amy, and to all of our shareholders and everyone else that's interested in the Solventum story. I just want to say thanks for joining us today as we review our fourth quarter and our full year results, along with our 2026 guidance.

We closed 2025 with solid momentum, making significant progress in our first full year as a stand-alone public company. Looking back at the year, I'm very proud of what we accomplished. We formally launched our long-range plan and prioritize 5 growth drivers that are expected to now deliver more than 80% of our future growth. We built an experienced leadership team with strong med tech experience but also strong transformation experience. Solidified our mission and culture, revamped our innovation process, restructured our global sales organization and through our SKU rationalization program, sale of our Purification and Filtration business, an acquisition of Acera, we rapidly advanced our portfolio strategy as well, all while managing the separation process from 3M.

And inside of that, throughout the year, we consistently delivered on our strategic, operational and financial commitments. We improved volume growth, outperformed expectations and tripled our annual sales growth from a year ago. I think it's clear that we are moving toward our long-range revenue targets faster than expected, and have programs in place to overcome external headwinds and execute against our margin targets as well. This team's capacity to deliver results while navigating ongoing separation efforts, the implementations and acquisitions and divestitures is a testament to the strong talent and culture we've already built. And building on the foundation of our sales force restructuring project, our revitalized innovation process has meaningfully increased our vitality index. And as a result, we now expect a solid cadence of new product launches in our growth driver areas to drive further momentum with this more optimized sales team.

And as our separation progresses, we are gaining full ownership of our IT systems and freeing up needed resources to drive greater overall savings and efficiencies. Our Transform for the Future program was built to capture this opportunity and its impact is reflected in our 2026 operating margin outlook.

Okay. Moving to our quarter results. Well, the fourth quarter reflects another quarter of progress and provides a solid foundation as we head into the new year. And during the quarter, we announced and closed our first tuck-in acquisition, Acera Surgical, which not only opens the door to the fast growth synthetic tissue market, it also very well complements our existing technology categories and our call points. And as we move forward, portfolio optimization will remain a key lever for value creation here at solvent. In other words, we will continue evaluating attractive assets to acquire and assessing our current assets for go-forward fit, and our business performance and resulting healthy balance sheet now provide flexibility to return capital to shareholders.

And during the quarter, we announced a $1 billion share repurchase program, which we began executing in January of this year. We see this as a clear and important step in achieving a more balanced capital plan.

Okay. Moving to our business performance in the quarter. Overall, we delivered solid sales growth with Dental Solutions and MedSurg performing better than expected. Starting with MedSurg, we continue to leverage our existing brands, our new product innovation and newly specialized sales teams and are seeing traction in each of our growth driver areas, which, as you probably remember, our negative pressure wound therapy, IV site management and sterilization assurance. In our Advanced Wound Care business, we saw continued growth in negative pressure wound therapy, supported specifically by double-digit growth in Prevena and ongoing expansion of our innovative V.A.C. Peel and Place dressing.

As mentioned earlier, we recently closed the Acera acquisition, which will now be a part of our Advanced Wound Care business. We're obviously very early in the integration process, but sales teams across our newly combined business will now have access to an expanded suite of technologies to offer our joint customers. And with our combined clinical differentiation, our robust DME and differentiated infrastructure and proprietary technology, we have a meaningful runway for growth acceleration in this business.

In the Infection Prevention and Surgical Solutions business, we saw better-than-expected growth supported by our 2 growth driver areas: sterilization assurance and IV site management. Inside sterilization assurance, our strong brand equity continues to provide a solid foundation for our dedicated sales force and early momentum from our trio test sterilization product launches will continue to support the team's momentum to drive growth going forward. In IV site management, demand for Tegaderm CHG remains strong and our global launch continues to gain momentum. We have meaningful clinical differentiation and our specialized sales teams are focused on converting customers from standard films to this high-value solution that reduces the risk of infection. Tegaderm CHG is still significantly underpenetrated, providing a clear runway for continued growth.

And in our Dental Solutions business, our core restoratives growth driver was again a key component of our performance in the quarter. And was supported by our strong existing brands, recent new product launches and the sales force specialization that we put into place in 2025. From a new product launch perspective, we continue to see strong demand for products like Clinpro Clear and Filtek Easy Match, and overall new product sales are driving the majority of our underlying business growth. And building on last quarter service improvements, the Dental team once again significantly reduced back orders, which also contributed to growth in the quarter.

Our Health Information Systems business delivered another solid quarter, supported by its growth driver, revenue cycle management, and we continue to see adoption of 360 Compass progress against our international expansion efforts and gains in autonomous coding. And relative to autonomous coding, our strong automation and acceptance rates are further positioning us as the largest, and importantly, most capable autonomous coding vendor. Over decades, we've built deep rules and algorithms designed to ensure accurate and compliant reimbursement coding. This, combined with our vast data sets and proprietary workflows uniquely positions us to leverage AI-driven autonomous coding, our customers can trust.

And in summary, we finished the year building on the success and the momentum we achieved in the first 3 quarters. And it's clear to me that we have the right team and strategy and our momentum will continue into 2026 and beyond. And with that, I want to thank our global team for their hard work and ongoing commitment to our mission. It's you that are making a difference every single day by delivering for our patients, our customers and our shareholders.

And with that, I'll turn the call over to Wayde to review our financial results and our 2026 guidance. Wayde, I'll just pass it to you.

Thanks, Bryan. We reported another solid quarter as we completed our first full year as an independent public company. We made progress across both our transformation phases and turning around the business. Our commercial improvements yielded a significant increase in our organic sales growth, putting us on an accelerated path to reach our long-range plan sales growth target.

During the year, we were able to absorb tariff headwinds and expand operating margins off of the Q4 2024 baseline, while continuing to invest in commercial enhancements and innovation. We also moved quickly on portfolio optimization, resulting in accelerated execution of our capital plan to pay down debt. Our progress to date, combined with our planned strategies positions us well to deliver our long-range plan margin and free cash flow targets.

I'll start with an update on our separation activities, status of portfolio moves and then transition to our quarterly and full year financial performance. Concluding with the discussion of our 2026 full year guidance.

Overall, our work to complete the separation from 3M is going very well. Thanks to the dedicated separation management teams at both 3M and at Solventum. We are progressing well on major milestones, as we have now exited over 40% of our transition service agreements from 3M and remain on track to exit approximately 90% by the end of 2026. The ERP deployments continue to roll out with a plan to be complete this year. We've just gone live with our latest ERP deployment earlier this month across Asia Pacific, including China, and additional countries in Europe. We have also transitioned approximately half of the more than 1,000 systems to gain system independence from 3M, which is a significant step in our separation.

Regarding supply chain, we've taken further steps to separate from 3M and have now reduced our distribution center network to 55 locations, progressing towards our goal of 45. The P&F divestiture activity continues to progress as planned with the target completion at the end of 2027. There is close collaboration to ensure business continuity from Solventum to support the buyer's integration efforts across the nearly 200 transition service agreements.

Shifting to our recent Acera acquisition. Our early integration efforts are off to a good start following the close at the end of December. Our main focus is sustaining and accelerating the momentum that the team has generated in recent years.

Now turning to our Q4 results. Starting with top line performance. Sales of $2 billion increased 3.5% on an organic basis compared to prior year and declined 3.7% on a reported basis, which reflects the first full quarter impact of the P&F divestiture following the sale in September 2025. Foreign exchange was a 170 basis point benefit to reported growth. while the net impact of the P&F divestiture and Acera acquisition represented an 890 basis point net impact on our reported growth. Overall, we had stronger-than-expected sales growth driven by MedSurg and Dental. Volume remains the main driver of growth, and pricing remains within the expected range of plus or minus 1%. Our SKU rationalization program also remains on track with 70 basis point impact in the quarter bringing the full year impact to 60 basis points.

Moving to the segments. MedSurg delivered $1.2 billion in sales an increase of 3.2% on an organic basis. Within MedSurg, the Advanced Wound Care business grew 1.7%. Solid performance in our negative pressure wound therapy growth driver was partially offset by headwinds in the separate advanced wound dressings category, which was impacted by SKU exits and back orders. Infection Prevention and Surgical Solutions continues to outpace our expectations, delivering 4.2% growth that was driven by strong business performance partially offset by the remaining reversal of first half volume timing and the SKU rationalization program.

Our Dental Solutions segment delivered higher than expected $343 million in sales, an increase of 5.9% on an organic basis. Growth was driven by core restoratives, which benefited from further back order improvement. During 2025, the supply chain team led multiple efforts that helped reduce back orders to historic lows. On a normalized basis, 3%.

Our HIS segment also contributed to our performance with $348 million in sales, an increase of 3.2% on an organic basis, driven by revenue cycle management software solutions and performance management solutions. Together, this growth more than offset expected declines in clinician productivity solutions.

Looking down the P&L. Gross margins were 53.5% of sales, a 230 basis point sequential reduction, which reflects higher logistics costs and timing of manufacturing performance. Higher logistics costs were mainly driven by ERP and distribution center cutover mitigation efforts in the quarter. These headwinds were partially offset by the benefit of the P&F divestiture. On a normalized basis, gross margins were closer to 55%. Sequentially, operating expenses reduced to $672 million from $739 million, which reflects the P&F divestiture, timing of project spend and cost management. In total, we delivered adjusted operating income of $397 million, or an operating margin of 19.9%, below expectations due to gross margin headwinds, partially offset with lower operating expenses.

Moving down the P&L to nonoperating items. Our net interest expense and other nonoperating spend improved versus Q3, driven by a $30 million reduction in interest expense and higher interest income. These improvements are due to the full quarter benefit of the P&F divestiture, which resulted in a $2.7 billion debt paydown and a higher cash balance. Lastly, our effective tax rate of 16.6% was favorable due to an end of year release of tax reserves and a regional tax provision in combination with favorable geographic mix. We delivered earnings per share of $1.57, driven by sales outperformance as headwinds in gross margin were partially offset with operating expense savings.

Shifting to our balance sheet. We ended the quarter with just under $900 million in cash and equivalents and net debt of $4.2 billion. This includes funding the $725 million Acera acquisition, which closed on December 23. We're in a healthy position to accelerate our capital allocation strategy as indicated by our recent $1 billion share repurchase authorization and maintain flexibility to pursue tuck-in M&A. We generated cash flow of $33 million, below our expectations due to higher divestiture costs, the earlier than expected close of the Acera acquisition as well as higher costs to support the ERP and distribution center cutovers.

Now moving to full year 2025. We delivered 3.3% organic sales growth ahead of our expectations of 2% to 3% when normalizing for SKU exit impact and mainly the benefit of backorder improvement in Dental, our growth was approximately 3.5%. Operating margins finished at 20.5% within our assumptions of 20% to 21%, while absorbing 65 basis points of tariff impacts that were not contemplated at the beginning of the year. We also completed the Solventum restructuring program exceeding expectations and delivering annualized savings of approximately $125 million at a lower total cost of $90 million. Our adjusted tax rate of 19.1% and was also better than our assumption of 20% to 21%.

At the bottom line, we generated non-GAAP earnings per share of $6.11 and also ahead of our expectations of $5.98 to $6.08. Free cash flow was negative $10 million below our expectations of $150 million to $250 million due to higher Q4 costs to support portfolio moves and ERP cutovers. Excluding these, we were in line with our expectations. When adjusting for the P&F divestiture and separation costs during 2025, free cash flow would have been approximately $1 billion for the year.

Now turning to our 2026 guidance. Starting with our top line. We are guiding to an organic sales growth range of 2% to 3%. This translates to 3% to 4% and excluding the continued estimate of 100 basis point impact of SKU exits for '26. While not reflected in our organic sales growth outlook for 2026. We expect our recent Acera acquisition to contribute meaningfully to our reported growth going forward and will roll up as part of Advanced Wound Care sales. We also expect a modest 100 basis point tailwind for foreign exchange, mostly in the first half.

Looking down the P&L. We estimate operating margins of 21% to 21.5% for the year, expanding from the 20.5% full year 2025. Underlying the 50 to 100 basis points of margin expansion is a combination of sales leverage, programmatic savings for supply chain and our transform for the future program. We expect portfolio optimization for divestiture and acquisition activity to be neutral to operating margins.

Regarding tariffs in place, before last week's Supreme Court ruling we estimate full year impact of $100 million to $120 million. Given the evolving nature of the environment at this time, we are assuming the impact under any new tariffs will be within a similar range. For earnings per share, we are guiding to a range of $6.40 to $6.60. For free cash flow, we are expecting approximately $200 million in 2026, excluding mainly the impact of costs to separate from 3M as well as payments due to 3M and costs to support the recent divestiture, we would expect to be closer to $1 billion.

As a reminder, separation costs reduced significantly in 2027 as we complete the separation from 3M. Other considerations for 2026, include capital expenditures of $400 million to $450 million, an effective tax rate between 19.5% to 20.5% and nonoperating expenses of $300 million primarily due to net interest expense of around $270 million. To provide some additional color related to our first quarter 2026, Remember, we had a tough comparison given the approximately 180 basis points of additional sales volume benefit in the prior year. At our gross margins, Q1 will reflect the typical sequential seasonal pressure while year-over-year will reflect the additional tariff impact headwinds. All in, we anticipate operating margins will again be the lowest of the year.

In conclusion, we delivered another strong quarter to complete our first full year post separation. We're making great progress on our separation from 3M and on our portfolio moves to divest P&F and integrate Acera, and we're moving with urgency towards our long-range plan goals of accelerating sales growth to 4% to 5%, operating margins of 23% to 25%, and growing earnings per share at a 10% CAGR, and free cash flow conversion rate above 80%.

We want to extend our gratitude to all Solventum team members for their hard work and commitment to our values and mission, enabling better, smarter, safer health care to improve lives while consistently delivering or exceeding on our financial goals.

With that, we'll hand it back to the operator for the Q&A portion of the call.

[Operator Instructions] We'll take our first question from Travis Steed at Bank of America.

I guess first on margins. Wayde, I don't know if there's anything onetime in Q4. It was a little light versus -- the Street quarter. And then on 2026, if you can maybe elaborate a bit more on kind of what's assumed in that 50 to 100 basis points, how much of the $500 million cost savings is baked into that? And anything else that you kind of frame up for the margins in '26.

Sure, Travis. So margin is obviously an important part of our story. As we think about Q4 first, approximately 150 basis points of the cost in our gross margins was onetime in nature. So you'll see in our prepared remarks that we shared more normalized gross margin of 55% is more of what we would have expected. And we saw a lot of separation activity in Q4. So it ended up just costing us more. If we think about operating margins, certainly lower than we expected, but really just driven by that headwind in gross margins. We were able to offset it partially with some savings in our operating expenses.

And then as we think about 2026, first of all, I'll just say we are committed to growing our sales as well as expanding operating margins each year. And so in that theme, we're now planning to expand operating margins 50 to 100 basis points in 2026, as you mentioned. A couple of things that are important here. Certainly, tariffs are a headwind for us again in 2026. People may recall that we have a very fast inventory turn. And so we had approximately 2 quarters of impact of tariffs in 2025, and so we'll annualize that in 2026. You'll see from our prepared remarks, it's about a doubling of the tariff headwinds for us. And so with that in mind, it's a pretty significant margin expansion.

The drivers of that are sales, leverage, as we continue to drive sales on an accelerated basis. as well as our programs within gross margin. We've talked about programmatic savings. We gave a lot of detail at our Investor Day. And we've got significant effort to drive favorable gross margins over time. And then as you mentioned, Travis, our more recently announced Transformed for the Future restructuring project which is a longer-range project that is targeting several areas of efficiency, and we will start to see some of that in 2026, but it will benefit us more over the long term. So you put all that together, we do think we've got a nice operating margin expansion story again in '26 despite the tariff estimate that we have in the numbers at this time.

Okay. And I guess my follow-up question since there's been more focus on the health care IT business and some of the AI stuff that's going on, just would kind of love to give you the opportunity to kind of maybe explain that and explain your business a bit more for investors.

Yes. Thanks, Trevor. I'll probably answer that one. And I assume seeing your note that you might ask that question. So we're actually betting which question you would ask first and you ask both questions.

You know me well.

I know you pretty well. So I would just say, first of all, I think it's important to state right out of the gate. We actually see AI as an opportunity more than we do. I think that's you could probably end the statement there, but I think that's a really important statement to make. And then there's probably 3 vectors to look at it, which I think could be helpful to people. Number one, I think we see artificial intelligence as a lever to drive autonomous coding. That's why we've been spending so much in that area, and that's what's driving us in autonomous coding. But we don't see it by itself as the answer to autonomous coding. I think that's important, by itself is not the answer. It's just a piece of the equation. And we really don't see AI again by itself as a competitive -- we see it as a tool. We see it as a tool, a variable in the equation to solve for autonomous coding. Remember, autonomous reimbursement coding, not computer coding, right?

And then three, and this is important because AI will be available to anybody who wants to use it in autonomous coding or revenue cycle management. We truly do believe that we're differentially capable of using AI because, number one, we've been in the market for decades. And as a result of that, we have vast number of proprietary. I'm going to call algorithms and rules that we have around reimbursement coding actually close to 1 million plus of those rules and algorithms, which is substantial. And of course, because we working a scale of hospitals, we have very vast data sets as well.

So we really believe that what we have available to us allows us to train AI in ways that others can't. So we actually look at this as an opportunity more than we do with threat. But I appreciate you asking the question because there's a lot of folks that may not see it that way.

We'll move next to Jason Bednar at Piper Sandler.

Wayde, I wanted to come back to some of the guidance points we're making. I appreciate all the color around the first quarter. Maybe I wanted to give you an opportunity to talk if there's any other sequential call out. Last year, '25 was lumpy. It was good, lumpy, but lumpy in that you had the ERP cutover, the DTC cutovers that just created some volatility in the volumes. So anything else you'd call out as we try to model throughout the year? And then within that also in the first quarter, should we be considering any headwinds tied to just some of the weather dynamics that may or may not have impacted volumes for your businesses in the first quarter here?

Jason. Yes, I can certainly start that 1 for you. And I'm glad you picked up on the Q1 comments that we had in our prepared remarks because it is the 1 quarter for us. It's a little more challenging. The other quarters in the year look more stable. So maybe I'll just summarize the information that we shared and it's really in the 3 areas: sales, gross margin and OpEx. So for sales, we had 180 basis points of tough comp, and that's put a lot of pressure on our Q1 sales here. And so if you just take the full year guide of 2% to 3% and you take the midpoint, 2.5% if you use the 180 basis points of headwind, you get just under 1%. And so that's how we'd like people to think about the first quarter, and I think that would be a reasonable place to start.

If you move down the P&L, operating margin is setting up to be the lowest of the year in Q1, sequentially down from Q4 '25 to Q1 '26 but that's similar to what we experienced last year in 2025. So a very similar setup to last year, and that's really driven by gross margins, which relative to the normalized 55% we gave for Q4, we would expect to see some normal sequential seasonal headwind to that moving from Q4 '25 to Q1 '26. So same set up again as last year. Keep in mind, tariffs are a headwind in the first half as well before we annualize them.

And then when you move down to operating expenses kind of similar here, we'll have higher OpEx in Q1 as we have some seasonally higher expenses than Q4 '25. And Q4 '25 was a little unnaturally low as we had some favorable project timing. And then just given the gross margin pressures we were having in the quarter, we did some cost reduction initiatives that gave some favorable OpEx in Q4 as well.

We don't have any weather specific things to that specific question, Jason, nothing that we would call out. And then again, I would just say, for the remainder of the year, the setup looks more consistent other than I would just highlight, and it was really the driver of that volume in Q1. This first half, second half impact of IPSS. We had a lot of volume mainly in the first half last year. These were mostly ERP timing-driven impacts. But the good news is they're all contained within the year. So first half, second half dynamic, mostly additional volume Q3 give back. But the good news, the story actually gets quite simple at a full year basis, but there is that trade-off, particularly in IPSS between mainly Q1 and Q3.

All right. Very helpful. Bryan, I wanted to shift over to you, bigger picture question. You mentioned product pipeline that's expanded within some of the core growth categories you've identified or you identified at your Investor Day. Can you give us a sense as to some of the things you're more excited about or expected to be more impactful when we look out this year and also next year? Really to help bridge to that 4% to 5% growth target, knowing that you're targeting 3% to 4% underlying growth this year. What helps accelerate you that last 100 basis points to get to those LRP targets you have out there?

Yes. Yes. Appreciate the question. And I would say maybe first, just taking a step back because I have a feeling some of our [ Solvers ] are listening to this call as well. And I just want to say that I appreciate the work that they put into revamping and revitalizing our innovation process and it's paid dividends as we talked about in the prepared remarks. Vitality index has gone up and the cadence is more focused to products that we're going to see. I'm not going to speak specifically about any individual product, as you know, competitive reasons. But maybe I'll give you some color, that I think could at least help, we've got close to 20 new products that we're going to be launching now over the next 2 years relatively evenly over those 2 years. So it's not back-end loaded. And those, as you would expect, just given the size of MedSurg almost half of those are going to be MedSurg. The other half is split between HIS and Dental.

And as you would expect, a decent portion of those are going to be inside of the growth driver areas. But it's not just those. I kind of look at it as a 3-legged stool, right? You've got this opportunity for new products in that revitalization of innovation that I've been talking about. But we also have existing products and brands that are really strong in the marketplace. And I think some people underappreciate the fact that they're also under penetrated. So with the new specialized sales organization, we can get after that under penetration even with existing brands.

And the third leg of the stool is just the commercial enhancements we've made. And those really have 3 components to it. First is specialization, which is probably the most important. But we're also training those individuals now to being more clinically at depth, which is very important when you have clinically differentiated technology. And the bottom one is just to make sure that we have a sales operations team that is best-in-class to focus the organization and to make sure that they have the tools to be successful in the field. So it's all 3 of those really that's driving the growth.

We'll go next to Kevin Caliendo at UBS.

This is Dylan Finley on for Kevin. Maybe for a minute. Could you guys talk about the strong outperformance in dental this quarter. Again, you grew organically nearly 6%, how much of that was volume expansion versus price capture related to or not related to tariffs? And what do you think a normalized growth rate looks like in Dental, controlling for any sellouts or unusual comps.

Okay. Yes. So again, that was another 1 we thought we'd probably get a question on because it was pretty standout quarter again for Dental. So again, because I know they're listening to the call, Congratulations, great quarter. And I would say that probably the -- well, I know the biggest underlying reason for growth is new products. They have done a nice job of revitalizing innovation, launching new products, and that's really what's driving our underlying business performance. Now in the quarter, I think we said in the prepared remarks, that another factor was back order recovery. That's the second quarter in a row. They've done a really good job of capturing backward recovery, and that's boosting us. That's more of a onetime thing. I would think about that as a go-forward opportunity, but it definitely helped us in the quarter.

When we think about the market because I know that's probably inside of your question as well because I'm sure you're covering other companies in Dental. We kind of look at it the same as what you're hearing from others. It's a stable to maybe slightly improving market, but that's really the way we look at it. Stable market, slightly improving. We would expect that to go forward in 2026. But really, the momentum here is the new product development. They're just doing a great job with a specialized sales organization driving right now. Did you have another one? I didn't want to cut you off there. Sorry about that.

Sorry, yes, if I had a moment. Looking at the $500 million, the Transform for the Future program, and apologies if this was hit on earlier. But what should we contemplate regarding the phasing of those -- both the costs going into the restructuring and the timing of the benefits. Is that really a big growth driver discretely as we look at the benefit for 26? Or is the phasing more '27 and thereafter?

Bryan, I can start that one, if you want. So obviously, a very important program for us. It is a multiyear program. from starting this year, 2026 into '29 and '30. Maybe just to highlight, as you said, it's a $500 million cost takeout program. It's meant to support both margin expansion as well as opportunities to meaningfully invest for growth. We want to make sure that we're driving efficiencies that despite things like tariffs, we've got enough efficiencies going so we can continue to reinvest for growth given the importance of us continuing to drive and accelerate that sales growth line. Maybe just a little bit more about the program itself. It's targeted at transforming our cost structure I mentioned the operational efficiencies and then repositioning us for that profitable growth. We'll be looking at streamlining systems, increasing automation, it's a really comprehensive program.

To your question on the phasing, we haven't given details on that. We're still developing the program. As I said, it's a multiyear program. But I would say just generally, we will start to benefit from the program in '26, but the majority of the benefits will be in 2027 and beyond as it just takes time to put the programs together and then execute on them.

One other thing maybe to add to that too, what's very important about this program, it is a cultural shift for our organization, all around the concept of continuous improvement. We've got this mantra here that we can be satisfied. We could be happy, but we can never be satisfied, right? So we can be happy and celebrate success, but we can always get better. that's what this program is, it really is the concept of Transforming for the Future through continuous improvement. And it's not just at the senior level of the organization. This is transcends the organization, we're asking everybody to get involved in the program. So it really is a cultural event, not just a savings program.

We'll take our next question from Ryan Zimmerman of BTIG.

Just following up on the HIS comments, and there's been a lot of investor focus on this, late. I appreciate your answers earlier, Bryan. I got to dig a little deeper, though, I just kind of ask -- is there any guardrails that you want to put around this? If this is up for a competitive bidding or competitive entrants and so forth, I mean, how should we think about maybe what's contractually obligated over a certain time period or any other additional details, I think you can give that, again, kind of isolates what impact there may or may not be around the HIS business?

Yes. So I would tell you 2 things here. Number one, we have pretty long contracts, multiple year contracts. And so we feel comfortable. And I don't want to rest on that because I do believe we have significant differentiation here. We're going to be here today. We absolutely expect to be a leader in this transformation in the future. There's no question in our minds. We do have contractual obligations in our favor and there's switching costs associated with this. It doesn't happen overnight. And I think very importantly for people to remember here is you make mistakes, even small ones in your reimbursement model in your coding. Not only do you lose revenue, you have the risk of compliance concerns, and there's a trust factor that goes into that.

As a matter of fact, we look at autonomous coding competitors, as risking autonomous coding because we don't think they're going to do it the way we would do it, right? Again, using all those rules and all those algorithms that we have the proprietary to us. So we truly do believe we're going to win. We're going to transform. We're already we feel like we're going to continue to lead. And we do believe -- we really do believe that that's just the way it's going to be. I don't see this at this point in time as a risk. I see it as an opportunity and the contractual piece helps, but we're not going to rest on that.

Yes. No, that's helpful. I appreciate the color there. And then maybe turning to Acera, what are you embedding for expectations on Acera if you can provide any high-level commentary around it. I mean I think it was doing, call it, $90 million at the time of acquisition. And so where can that sustain once it turns organic and from a contribution to growth standpoint?

Well, I'll tell you, we wouldn't have bought the asset if we didn't believe that it had a real opportunity to help Advance Wound Care and MedSurg in the total business from a revenue growth standpoint. So we feel like it's a great starting point, but it is just a starting point. And to give you some perspective on it, if they're in $1 billion market, growing 10% right now. And they're in a subcategory synthetics inside of that market that's more attractive, and they've got differentiation in that space. So it is a healthy double-digit grower for us. And I want to continue to remind people, it's in the space we already play and have commercial infrastructure. So we have a force multiplier effect given our 2 organizations come together from a commercial standpoint, but also eventually from an innovation perspective. So I feel really good about this as a separate growth avenue for Advanced Wound Care for the total business, and it's profitable. It's really nice profitability.

We'll move next to David Roman at Goldman Sachs.

Maybe I could just go into the dental dynamic in a little bit more detail here. And I think last quarter, there was some more set of dynamics at play here. But maybe, Bryan, if you kind of maybe template Dental as 1 of the businesses where you have to -- I think you said in the follow-up last quarter that it is a good example when you have new products, what can happen to the top line, but you're seeing kind of that impact in one of those slower-growing categories that you serve. So maybe you could just extrapolate the experience in Dental to when we could -- when do you think it's reasonable to expect that same dynamic to play through in MedSurg and HIS. And I just had a follow-up on the buyback.

Yes. David, thanks for the question. I agree. I think Dental laid out the road map that was pretty clear to people, but you're already seeing it in merit's not just the commercial enhancements that we've made. We are launching new products in both MedSurg and HIS. Just to recap, I'll give you some of not a full list of them, but backfill in place was a big one. Tegaderm CHG was launched in the U.S., but now it's on a global launch. So we're rolling that out around the world. We've had CHG and [indiscernible] as well, which is a new product that we use in surgical procedures. We've had 3 in test sterilization products the [indiscernible] was also launched. So we've got a number of products launched in MedSurg. And in HIS, you've seen various applications in autonomous coding and a lot of applications for Encompass 360 when we look at outside the U.S. implementation. So they're not having product launches right now.

The key thing that's driving those product launches is the commercial enhancements. We didn't have those before. And as a result, those products are being launched into a void, if you will, general sales organization. So we're already beginning to see the momentum from those new products. And as I said before, we've got almost 20 new products coming over the next 2 years.

Got it. And then maybe, Wayde, it looks like the share count still stepped up on both a year-over-year and sequential basis that you obviously announced a large buyback authorization in November. How are you thinking about deploying the buyback? I think that there was quite a bit of volatility in the stock over the past several months. So maybe what -- what's sort of the strategy behind the buyback? And what are the factors that would drive you to deploy it either on a programmatic or more significant basis?

Sure. David. So I think directionally, it's reasonable to think about the authorization as offsetting the impact of our stock-based comp dilution and holding that share count relatively flat. I think that's 1 of the objectives that we have, as you said, without a share repurchase in place over the previous year, our share count went up. And so 1 of the major goals here is to, number one, offset that stock-based comp. And then over time, it is an opportunity for us. We've got room within the authorization if we see a need or a reason depending on performance of the share price to potentially purchase more shares. Obviously, if we do something like that, we have to work it through with our Board and make those decisions as well.

But I think just taking a step back, we're very happy with the accelerated capital plan over the last year. with our ability to pay down debt. And remember back from our Investor Day, that was the primary objective. Most spins spend with a pretty significant amount of debt, and 1 of our primary goals was to pay down that debt. We did that in an accelerated fashion. And now we're in a position to have more balanced return and returning capital to shareholders via this authorization. So as Bryan said in his prepared remarks, we started that in January. This is our first quarter and we're pretty excited to be moving in this direction as well.

Our next question comes from Brett Fishbin at KeyBanc Capital Markets.

First, just wanted to ask on the overall organic revenue guidance of 2% to 3%. And I was curious if you could just directionally provide any commentary on how you're thinking about that across the different segments, whether we should expect any material departure from what we've seen on a normalized basis in 2025? And then also, if the 100 basis point impact from SKUs would be more pronounced in any specific quarter.

Bryan, I'm going to start...

Maybe to rephrase that question on any specific quarter, you could maybe answer that, but also any specific business.

Yes. Yes, that's the key. So yes, maybe we'll start there. We don't see a significant difference across the quarters from the program. at this time. And so nothing to share there. But as Bryan just highlighted, we do see a significant more impact within MedSurg and particularly, the IPSS business.

So as we move from 60 basis points of impact in 25 to 100 basis points of impact in 2026, we'll see the majority of that 100 basis points hitting in the IPSS and MedSurg business. And then back to the front end of your discussion, and Bryan to start that one. We obviously put a lot of thought into this guidance. And I'm glad you brought it up because it gives us an opportunity to talk a little bit about it. we did intentionally share that for 2025, our sales growth rate on a normalized basis was about 3.5%. And that's important stake in the ground for us. It's really normalized for both the SKU program as well as mainly the dental back order.

And so with that 3.5% in mind, the way we looked about our guide for 2026 is we put that at the midpoint of our ex-SKU guide, we're 2% to 3% guide for '26 on a 100 basis point SKUs, we're guiding 3% to 4%. So what that really means is if we continue to perform at an accelerated rate here in 2026, we had big step-up in our growth in 2025. And if we continue that momentum, continue to perform at that level, we'll be at the midpoint of our guidance for 2026. And of course, at the high end, more 4% on an executed basis will be above last year's strong performance. And we're very focused on getting to that because then that would put us on an accelerated basis getting to the low end of our 4% to 5% target for our long-range plan. And so on an ex-SKU basis, the high end of our guidance is already touching the low end of our long-range plan guidance for 2028.

So we do feel that 2025 was a very strong year where we really accelerated the sales growth rate. We shared some of that detail in our prepared remarks, so I won't repeat it here. But that's some color in behind the full year. You did call out segments as well. As you know, we don't guide at the segment level, but I can provide a little bit of color here.

Overall, we expect all segments to improve their underlying growth year-over-year. And again, the momentum that we see in the business if it continues, we'll be at the high end.

Because it would be MedSurg is going to be impacted more by SKU and obviously, Dental's can be impacted by the backward recovery comp. But outside of that, no major impacts to the businesses.

All right. That was super helpful. And then just for my follow-up question, I wanted to ask, during the fourth quarter, you announced some changes to the management structure and I was hoping you could just touch on your decision to implement a Chief Commercial Officer position, and any thoughts on how that impacts the broader strategy for Solventum?

It's funny because that feels like old news to me already. I was looking at [indiscernible]. Yes. So as you know, we brought Heather in -- to be the primary leader of our businesses. So she is the Chief Commercial Officer now. And I feel very fortunate to be able to bring Heather in. She and I have a history of work at [ COVID-19 ] together. She's worked with me in the past. She's a very strong operator. So it was just serendipity that she became available at the same time that Chris was going to be exiting the organization. So very lucky to get her. But it was really just the continuation of the strategy, which would have been to combine the businesses under a leader Chris for his own reasons, couldn't do that and Heather was available, and we're able to get it, which is fantastic for us. I wouldn't read anything else into it, other than the fact that we've got a great operator now looking at synergies across our businesses.

Our next question comes from Vik Chopra at Wells Fargo.

It's [ Mike ] for Vik. My first one is ERP. I think you have another ERP implementation coming this year. Last year, when you had the European one, there was some pull forward buying in the first half. Is that something you should consider for 2026? And I have a follow-up.

Yes. So ERPs, obviously, we've got a lot of work going on in this area. We did share in our prepared remarks that we are planning to be done with the 3M separation ERPs in 2026. And so by definition, we've still got several ERPs to go. We've got a couple of large ones both in the first half and the second half of this year. I did share in my prepared remarks that we've started another wave here in February. We've got about 16 countries involved in that wave, and that's off to a really good start. And so we will have several more waves as we go along through the year, but planning again to be done by the end of the year.

Regarding volume, we're not [indiscernible] out at this time. It really is dependent upon at what point in the quarter as it falls, sometimes if it's early in the quarter, most of the inventory changes have washed out within the quarter. To the extent we see them and if we see additional volume either buying ahead or being delayed as relative to the ERPs, we'll call that out in our actuals, but very difficult to predict those. So we don't call them out.

Got it. That's helpful. And then on my follow-up, you talked about pricing being plus/minus 1% in Q4. Anything we should think about as far as pricing for '26 either for the overall company or across segments?

Yes. So as we've shared before, our focus for growing the sustainability of the business is all in volume. Our new products, our commercial efforts, all focused on, I shouldn't say all almost all on volume. We certainly have pricing capability, and we've got people looking at price. We do have several areas in the business where we have the ability to raise price than we do. But what we've shared is we expect price to be in a more normalized range of plus or minus 1%. And saw that again in Q4. And that's where we're expecting it to be again in 2026. So we don't see price being an outsized driver of the business again in 2026, more in that normalized range. And our growth will really be on sustainable volume growth.

We'll go next to Rick Wise at Stifel.

Bryan, just maybe reflect a little bit more on your updated thinking on your M&A strategy? Is it another deal possible? What are you prioritizing it with making so much progress towards to quote Wayde, on an accelerated path to your long-term targets. Is it more likely we're going to see additional tuck-in growth-enhancing, margin-enhancing deals sooner rather than later.

I probably won't speak to the timing, but I was pretty intentional and have been for a while. It was in our prepared remarks and every time I probably talk to you and others is -- it is definitely a lever we will continue to flex for value creation areas. So portfolio optimization to me and the reason why I'm leaning on it so much is I don't want people to think because we've done so much so fast that we're finished. This will be a perpetual lever that we're going to continue to flex in the organization, which will include acquiring companies on a tuck-in basis in a serial fashion to be able to drive revenue growth and profitability. It's a requirement. It's got the mission-centric first and foremost. It's got to be an attractive market with strong profitability in areas that we think we can win. And we'll continue to do that. I won't speak to the timing of that, but we do have the financial flexibility to do them. So that's probably all I'll say on that. But it clearly is a continued lever for us.

Okay. And just reflecting sort of stepping back and reflecting on the increasing probability that you're increasing confidence in goals on sales and margins and EPS, et cetera. Maybe just -- I'd be curious to hear maybe Wayde for you. It's like -- is it the SKU program being done as the debt coming down? Is it the exit of the TSA agreement. I mean what's the relative importance over the next 12 months in terms of observing that progress and building confidence in as you approach '27, '28?

Maybe I'll start on the revenue side, revenue growth line, and you can speak more to the margin. So I'd say [indiscernible] kind of been pudding, right? I mean at the end of the day, you look at our growth rates and you know when we normalize them at 3.5%, as we said, it's way is reference. That's pretty darn good, right? Out of the gate, that's almost 3x better than what we had in our base a couple of years before the spin. And that's great traction that we're seeing. It's coming from the commercial enhancements that we've made. It's coming from the brands that we already have, and it's coming from those new products that we've talked about. But that is giving us confidence. It was only a short period time ago in March of 2025 that I had people questioning whether we could ever get to the LRP targets that we are providing. I think it's pretty clear we'll not only get there, but we might do it faster than expected. Hopefully, we do it this year. That's the goal.

So I think it's really just all the things that we put into place are coming together and the team is making it work even in the face of all of the challenges we continue to throw on acquisitions, divestitures, ERP cutover, separations, you name it. This team has stayed focused and delivered. And again, I'll compliment the team that, I know is listening, congratulations for that.

On the margin side, we've had a lot of headwinds come our way as well since we put that LRP target out but we still feel like we've got the programs in place to deliver on those margin targets. And I think it's important when you think about us versus the organization before spin, we've got like 300 basis points of pressure that we're going to be feeling that we did not have before spin, looking at raw material increases, looking at tariffs that we didn't have before spin. And so that '23 to '25 is really like a '26 to '28 when you look at benchmarking where we were before the spin. So I'm pretty proud of the team leading in there as well. I probably just took everything you were going to say Wayde. So I apologize again.

No, no, I think covered it really well, Bryan. Maybe just to the sort of second part of your question, Rick, on the milestones or things that we need to clear along the way. You touched on a couple of important ones. In order to achieve those margin targets, Bryan mentioned, we do need to clear our separation from 3M. We are very excited. As I shared in my prepared remarks, 90% of the TSAs we plan to have done here in '26. We plan to be through the ERP here in '26. So '26 is a very important year for us, but we pretty excited to get to 2027 and put most of that separation work behind us and move a lot of our resources, a lot of our best and brightest focusing on the business versus on the separation.

And then maybe, Bryan, I'll just clear a couple of the other metrics we put out earnings per share to 10% CAGR. We are very confident with the initiatives that we have in place that will be supporting that sales growth that Bryan touched on achieving those operating margins and then driving that 10% EPS CAGR. And then the last thing is the free cash flow conversion over 80%. And we've got these transient issues that we're dealing with today around the separation costs, divestiture costs. And again, we can't wait to be complete -- mostly complete with the separation in '26 and shed a lot of these additional costs starting in '27. And so once we do get beyond those we will have very strong -- we are a cash -- very strong cash operating company. Without, again, those special projects around separation and divestiture. If you clear those out of the way, we're already at our free cash flow conversion targets. And so we're very confident and hitting all those metrics.

As Bryan said, sales growth with all the initiatives we have in place, operating margins with the initiatives we have there, including Transform for the Future, will lead us to that EPS 10% CAGR. And then we get beyond these transient projects, and we'll be at our 80-plus percent free cash flow. So very confident on our path to hitting our long-range plan targets by 2028.

And next, we'll move to Steven Valiquette at Mizuho Securities.

I guess at this point, it's probably more of a follow-up question, but just to come back on that topic on the TSAs and exiting 90% by the end of '26. For the 10% that's still going to be left -- just remind us again, is that really more on the supply side? And then you've talked about you have those 2027 headwinds, there was like a $100 million step-up in inventory costs from 3M or might have been quantified under basis points as well, but is that the piece that would still be kind of hanging out there? Or does some of that dissipated with your progress? Just want to just connect the dots around all those components.

Yes. Great question, Steven. And that will help us clarify because we do get this question quite a bit. I'll just start on the 90% of TSAs is primarily around separating our systems and our ERPs as well as our distribution centers. And our -- the manufacturing that we do for 3M and the 3M does for us. And so we'll have mostly rebranding work and some supply chain work to do in 2027, that remaining 10%. But I do want to just specifically differentiate between the raw materials work that we do. And that's the additional step-up that you're talking about that 3M gave themselves a contractual option to again step up our cost in 2027, and we've shared that, that's about a 100 basis point headwind for us if that in fact happens. We don't have any updates to share at this time, but we are working with 3M to see if there's a better solution for both companies, frankly, than going that road.

So that will be an update down the road. So with that in mind, we've got most of the separation work done in 2026. We do have some rebranding, some supply chain that we'll carry over into 2027. Brian, if there's anything to add.

I think maybe the only other 1 because sometimes there's confusion on the raw material piece. I just want to make sure that it's clear that with those raw materials, most of that is including intellectual property that we have access to. Actually, we own. There was a concern that we didn't have that intellectual property. We have full ownership rights in our field of use, and it is transferable. We can continue to buy from 3M as a raw material supplier with that intellectual property or we can go to another chemical manufacturer to use them as well. So I just want to be clear that even though we have that long-term supply agreement with 3M, we do have the option because we own the rights to the intellectual property to go elsewhere.

And that concludes the question-and-answer session. I'll now turn the call back over to Amy for closing remarks.

Awesome. Thank you, Audra, and thank you, everyone, for listening. We appreciate all your questions. If you do have any follow-ups or need to clarify anything, please don't hesitate to reach out to the Investor Relations team. Audra, you can go ahead and close the call.

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

All right. Good morning, everyone. Thanks for joining us today. I'm Jason Bednar. I cover 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.

So thanks for joining us both and really appreciate. And we're going to just dive right into Q&A, if that's.

So we had some recent news to talk about. I'm really glad you're here, Rachel. So really looking forward to talking about the deal you announced here recently. You're the perfect person to talk about it. But before we get to that, I think it would 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?

Yes. 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. So that's why I saw about 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. And I've never been part of spun companies off, but I've never actually been part of the spin. So it was another new opportunity for me to be on that side.

Awesome. So you kind of 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, St. Jude, lesser but still important, the spinning of ZimVie from Zimmer Biomet. So 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.

So we saw the first move here a couple of 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 that making a good impression. So why was this the right first deal for Solventum?

Yes, absolutely. So when I think about M&A, I always talk about it's the right target at the right time at the right value. And that is a really hard trifecta to get right. And Acera absolutely hit every box. The right target, it's an advanced wound care, which is an attractive space for us, 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 biologics have in terms of tissue variability and supply chain.

So 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. So good categories, good markets, good technology. And then it's a good clinical sale, which is very aligned with our clinical sale in terms of it's a complementary therapy to negative pressure wound therapy. So it checks a lot of boxes for us on the right target.

And then financially, of course, it's attractive. It's accretive to our growth. It's been growing above market. And accretive to our gross margin and it's profitable. So again, when I think about strategic reasons, financial reasons, definitely the right target and right time matters, too. So for us, very publicly talked about we needed to get our purification and filtration divestiture closed at September 1. And so a couple of months later, we're able to execute this. But time also matters for the target, right? And 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. And that's, again, something that we're very well suited to do. So that's my right time.

And then right value, I think we structured a transaction that very clearly delivers attractive returns. Returns ROIC is something we focus on a lot. It's well above our weighted average cost of capital here. And then 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. So I feel like right target, right time, right value. I think this couldn't be a more appropriate first acquisition for Solventum.

That's well said. Maybe to pick on a couple of those things to expand further return on capital? I mean, anything that you can share on what the internal metrics that hurdle rate that you and Wayde definitely want to 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 want to get quantitative like high level, how do you think about return on capital for deals like these?

I think you're generally looking at be accretive to your weighted average cost of capital, right? I mean that's pretty standard. And I don't know what we've said, but I -- Okay, then we haven't said.

No. I didn't know something that had come up previously. So I appreciate that. And then on the right time, I think you framed it well. I also note that these things sometimes take time to come together. Can you talk about maybe when that like how that -- those first interactions started? Is this -- was Acera something that the Solventum team had identified as a possible target very early on or this all happened pretty quick?

Yes. Well, it's probably a little bit of both. I would say we -- it was definitely on our list 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, and Acera was absolutely on that list. So I would say some period of time.

Okay. And then building on -- you alluded to doing more with the asset. They wanted to have more access. Can you talk a little bit more? What was -- what can Solventum help Acera do that Acera wasn't able to do on its own?

So we have a specialized wound care sales force, as you know. And they have clearly a strong sales force. And I think their view is that just expanding access. There's only so much they could do as a smaller company, and 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. And so I think our clinical synergies here from a clinical sales perspective are very strong. I think there's other things, of course, we bring to the table to in terms of just marketing and reimbursement, some other capabilities, but the strongest, 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. But how different do you think the portfolio could look -- Solventum portfolio could look a few years from now versus where we're at today?

Well, I think portfolio transformation, we're very clear and open, but that is the goal. You should expect Acera is not the last. I definitely have come into the thinking that we're going to do a steady cadence of tuck-in acquisitions. So just kind of that machine that you build and you to do that. And that's what we've been working for in terms of just getting ready, and we continue to look at the markets we want to be in and have target associated with that and build relationships, to your point, over time, is a better way to do it. And so we've got that going.

And then I think portfolio optimization continues to be something that we are very front-footed about as well. Obviously, we've talked about the SKU rationalization progress that we're making, which has been very strong. We obviously have the purification filtration divestiture. So again, I think people should look at us as a company that's making really good progress against our access portfolio management goals.

Okay. I know we spend a lot of time on M&A, but again, I want to draw on your experience here and how you and the team are thinking about it but I think portfolio transformation and evolution is very important to the story and also 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 kind of very symbiotic. But if you had to rank the 2 strategic fit versus financial fit, when you look at transacting, how would you and Wayde respond to that?

I think we're both bearing in mind. You have to start with strategic fit. I think if you don't have strategy right, you can have the best financials, but you won't really be able to be the acquirer that can drive it forward. So strategic fit, probably hit on some of these already, but we always make sure it's 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 got to be some kind of 1 plus 1 equals 3.

And then financially, we -- Wayde and I would both say accretion to growth, very important. Hopefully, accretion to gross margin is also important and certainly a clear path to operating margin expansion. Sometimes earlier-stage companies don't get that right away. So you got to see that you have a clear path. And then, of course, as we talked about attractive returns. ROIC is a metric we focus on quite a bit.

Okay. We talked a lot about the acquiring side. There's also other parts of the portfolio management evolution. We saw one with the P&F sale. You have -- as I mentioned earlier, you experienced in spinning off the dental business from your ZB days. But Bryan has been clear that Solventum Dental is different than Zimmer Biomet Dental. Whether it's dental or something else in the portfolio, can you take us through the process on whether -- when it's decided or how an asset is viewed is 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. So 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? And maybe 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. So 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, et cetera, and SKU rationalization would be part of that as well.

Okay. When we think about the strategic review process that goes into these decisions, I know this is not a once-a-year type thing, but knowing Bryan and Wayde these are probably very frequent. How -- if you can talk about the frequency? Is this like a once a month or 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?

Well, hopefully, on speed, we've already shown we move pretty fast.

You do.

I think on -- there's lots of different operating mechanisms as 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 -- have those make versus -- build versus buy kinds of conversations, right? That would be something that happens in the business.

And then 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. And then you've got 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. So there's always different times to review all of those kinds of decisions.

And I would say from my team, where we spend a lot of time is focusing on the framework we use to assess the market and then we partner closely with the business where they're looking at the customer needs. So 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 that's attractive. Is it a place that we think we can improve care, improve standards of care, what are the barriers or the 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 into 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 and upgraded the stock earlier this year. The guide 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 -- things start at a segment level, continuing to get steadily better. Is that the kind of the mantra at Solventum?

Yes, I can take that one. So yes, that's definitely the way that we're looking at it. Now for '26, the one thing I'll call out, as I know you know this, is we do have another 100 basis points of SKU rationalization. But 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, and that's really through continued improvements that we've made, operational efficiencies, product innovation, particularly within our dental business in areas, and that's a key focus for us.

Okay. And everyone always was wondering controllable versus not controllable within that. The confidence level sounds like 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. And when you think about how we look at the business and where the growth is coming from, it's not built on the -- a lot of the what it's 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 Medtech 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 quarter, especially in dental. The dental growth was very good, but was, I think, described as being largely organic. So is pricing something you said 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?

So 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. And there's a lot of expansion opportunity both whether it's to take share or to expand the overall market and further penetrate, but it really is around volume-driven growth and then using price where it might make sense in certain opportunities or options, but that's not what our organic -- to use your word glide path is dependent on for the business. And we think about pricing from a normalized perspective, if it's plus or minus 1%, that's within the normal balance.

Now if I take a step back within a couple of 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 pretending on and to your point, in the third quarter, that really was driven by just continued adoption of our recent innovations and new product.

Yes. And those were well on display yesterday at the Greater New York Dental Meeting. So I've got a good chance to see those. Let's talk about a little bit on the innovation pipeline. Dental, I think, has been pretty solid as Bryan was, I think, very forward early on in saying Dental is ahead of MedSurg as far as the product development, the pipeline and the innovation. Where do we stand on the MedSurg side? Is that -- are we at a point where we can start talking about a MedSurg pipeline starting to build and having some new product flow in that part of the business?

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 is really starting to bear a lot of fruit. So I think it's very well known that we kind of had to transform our R&D process internally with a much better focus on making sure decisions are made in the business focused on really what customers are looking for and what patients need.

And in very short order, I think we've reprioritized a lot of that portfolio and you're going to see a lot more innovation coming out of that, I think.

Yes. And I think what I'd build on that is where dental really has needed to introduce some new product innovation and they haven't had new products, I think, for 24 months before the spin. And then in the last 2 years have introduced, I think, 6 to 8 new products. Within MedSurg, there is a clear pathway to new product innovation, and we're seeing some of that. But also, it's 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.

So 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 is another great example where we had launched some innovations with Tegaderm, but really didn't have the support and the supply behind it. But then once we're able to increase the supply and increase the manufacturing capacity, we've really seen that product take off. And so 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 -- 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 a little external R&D to help fund that innovation pipeline. Is that something that's under consideration? Or you prefer the assets you acquired to already have like derisk 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. But I think a mix is healthy. I think you should have some that are commercial stage and you're going to 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 to focus in and where we have that commercial strength that we could leverage pretty quickly.

Okay. I want to shift over to the restructuring programs. We had a big one announced that was almost a year ago at this time, $120 million Solventum Way -- like these nice little brand names on these restructuring programs. And now very recently, we had a much larger one, more than 4x the size, $500 million longer-term program, but that one -- I'm calling it TFPF. So why was -- how are these 2 -- I guess, how do you arrive at like 2 very large restructuring programs so close together is maybe the first question. And then the second question would be like why is $500 million the right number for this most recent program you announced?

So starting -- it's interesting. I think Solventum Way, which we had introduced, I think, on our second quarter '24 call, but really started to take hold at your conference last year, was really a 1-year program. And 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 1. And so that was pretty easy to identify and to knock off.

And it was always the intent that we would have another larger program follow over time and really more focused and it's very intentional in the transform for the future. So it's not just a cost out reorganization, restructuring, it's 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 moving from 3M ERPs to now Solventum ERPs, but then now taking, okay, our Solventum ERPs 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.

And Bryan likes to call it a mix shift of resources, and 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. And the $500 million really was through -- 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. So there is support behind that number that gives us confidence to put that out there.

All right. All right. Fair enough. Last couple of minutes, I want to talk a little bit about the LRP that was introduced at the Investor Day earlier this year. I know there was some doubt out from others out there. I'm not sure I would count myself among those. But some of that doubt seems to be easing at this point. Part of that's kind of a function of just like really strong execution that the team has been putting together. But I'd really be curious to get your take, Rachel, which milestones do you think investors should watch to confirm that we are still on the path or we're progressing towards hitting those LRP targets?

I'm happy to start, and I'm sure -- but I think clearly, the financial performance that we've been achieving has been strong every quarter, right? So your ability to continue to credibility ultimately, what we're doing is we're building credibility as a team. I think that's one of the most important things that you can think about in terms of delivering the LRPs.

Yes, I think building on that, Rachel, and to use your words, Jason, I think continuing our strong say-do execution is we're going to continue to tell you what we're going to do and just continue to deliver on that. But I think the 7 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 going to help continue to drive that as well.

And as we get further along, I think we're going to get more and more comfortable providing more specifics around milestones or deliverables or things that are going to get us comfortable. And 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 where we're going, that's going to give us more confidence to maybe be more explicit about some of those milestones.

Great. Last question in the last few seconds here. What do you -- either if you respond or both, what do you think are the maybe 2 or 3 most underappreciated parts of the Solventum story that maybe everyone in the room should take away?

I'll start. Underappreciate to me is the velocity and speed at which we've been able to execute against what we said we were going to do in terms of transformation across the board, not in my roles, in other worlds, in other people's functions, just everywhere. And 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 restructuring, we -- it's just it's so much simultaneous work. It takes every single person really to be just committed to excellence every single day, and I see it every day we're there. That's probably the most underappreciated.

I would agree. Yes, for sure.

All right. Excellent. Well, we are out of time, but really, really great session. I love to talk about the recent deal here. Thanks, everyone, for joining us, and thank you, Rachel and Amy. Appreciate it.

Thank you.

Luckily, Wayde is not the Chief Executive Officer. He tells me, I'm not sure. Hey, Wayde, it was like you got promoted.

Yes, thanks for the promotion.

Exactly. You're always first in my heart. Wayde. Wayde McMillan is the Chief Financial Officer; and Doug Bartlett, attending his first ever sell-side event of this nature, is the Senior Vice President of Infection Prevention and Surgical Solutions or there's the reason people say IPSS. So they don't have to say all those words. Welcome to you both.

And I'm going to start in an unusual place, Wayde. Greg, this is not vetted by Greg. So don't blame it on him. I love the opening of my note that I wrote after the third quarter so much that I'm actually going to read the first sentence to everybody. I said underscored by truly positive and encouraging management commentary on the post release call, Solventum outperformed on basically every front sales, margins, EPS as nearly every segment beat consensus projections. I thought that was a great quarter. I love what I said so much that I just had to say it again. I assume you think that I captured the spirit of what's going on.

We certainly appreciate it, and we feel the momentum as well. It was a strong quarter. We're happy to put a string of quarters together since the IPO, and we certainly have things moving in the right direction. So thank you for those words.

It really feels like that. And in simple terms to start off, speaking as the first analyst to ever recommend the stock, and I have to say that every time, right? Where are we with the turnaround? Where is it ahead of plan? Where would you have hoped that turnaround actions you are taking might have gone even bigger and faster and let's pursue this theme for a minute to start.

Okay. It's going incredibly well. As we know, from a transformational standpoint, we had a 3-phase transformation, and I would say we're ahead in all 3 of those phases. Picking up on your part of your question around faster, bigger, I think we always want to go bigger and faster. As you know, our CEO, Bryan Hanson very well. He likes to say we're happy, but we're not satisfied. And so we're continually pushing that envelope for what's possible. But maybe just to capture a few things in there that we think are going well and putting us ahead of the transformation to this point.

Certainly, sales growth, our #1 metric and our focus to turn around. This business has been just over 1% growth in '23 and '24. And so for us now to be able to increase our guide to the high end of the underlying 2.5%, 3.5%, so just about 3.5% almost tripling that growth rate here this year. And that's really on the back of our commercial improvements and our existing R&D pipeline into projects -- air products like Peel and Place that are going extremely well. So the commercial and organic sales growth support from R&D is going very well. And I think we're ahead of schedule there.

From a margin expansion standpoint, we certainly have a lot going on there as well, and we just launched a new restructuring program to ensure that in 2026, we can continue expanding our margins in the face of tariffs. And so what we called out on our Q3 call is that we would expect in '26 to continue to improve our underlying sales growth rate as well as our margin expansion.

And then if we shift to a couple of other key areas of the transformation, one around portfolio management. We certainly think we're ahead there. We're very happy with the speed that we moved to divest the Purification & Filtration business as well as the value creation there. And that leads us into capital allocation, which we think we're ahead there as well, every spinner, most spins get a lot of debt when you spin out from a parent company, and that was one of the things we wanted to address as quickly as possible and the P&F transformation allowed us to do that. And so it really strengthened our balance sheet, put us in a strong cash position. And so we can now go on offense with portfolio optimization, and that's the third part of our transformation, third phase of our transformation.

And I would just remind everybody, we call it 3 phases, but all 3 are running in parallel. And so now we can start adding acquisitions to that portfolio optimization, third phase as well as we keep saying we're not done. We've moved on everything from SKUs to segments and we're going to continue evaluating our portfolio and making strategic moves within the portfolio. Again, everything from SKUs to total segments and everything in between until we get this portfolio in the shape that we want it in.

That's great. And I always like to remind people that's exactly the Covidien story from the beginning that you and I both lived through and so happily a few years back.

Yes. We're proud of that one, for sure. We created a lot of value. Doug, actually, who's with us today as you mentioned as well, was part of that and part of several key businesses in there. And there's -- the fact pattern is eerily similar in a lot of cases. We needed to change the incentive, the structure, the culture, the mission of the company, but there's also some differences in particular around R&D and innovation where 3M was stronger. But we can continue to improve there as well. But yes, we're very proud of that story and the playbook, we think, is a great setup, similar here as GE Healthcare has coming out of GE, Tyco Healthcare came out of Tyco, and here we sit with our business coming out of 3M.

Right. Exactly. That's a great place to start. And just, Doug, I want to loop you back into the conversation here and thank you again. And we'll try not to pick on despite what Wayde said, urged me to do so. But just at a high level, talk to us about IPSS, the division, just for people who maybe are less familiar, let's just start off there. A lot of attention has been given to the Advanced Wound Care business within MedSurg. But even though yours is the larger segment, it'd be really interesting to hear about how it's changed under your leadership. What's happened? Where are we now? And what's next? It'd be great. I'm actually really intrigued to hear this myself.

No. Thank you for the question because I think the Advanced Wound Care, rightfully so, does get a lot of the focus. But as the largest business, right, our mission was very similar to what Wound Care did. And it goes back to Wade's comments, the incentives to structure the culture. So really mission one was to create that specialized sales and marketing team with a cohesive message globally. That had been sort of an amalgamation before at the MedSurg level. And as you said, Rick, a lot of that attention went to Wound Care.

So creating that specialized team, getting them on plane with the standard sort of operating mechanisms, I mean, it's a very boring answer, right? We are essentially transforming from an applied material science company to a medical device company and setting up the operating mechanisms, cross-functional leadership team with one owner, all of the things that make a big medical device segment go. And in parallel, underneath that, really that portfolio optimization. We had source of supply challenges. We've deployed a lot of CapEx in the first 14 months to help stabilize that, while at the same time, as Wayde mentioned, really trimming a lot of the SKU exits that didn't make sense. A lot of those fell into my portfolio.

So a big dual combo of things to be done in that first year. When we talk about what's next, it's really that transformation of our innovation engine. We've got amazing innovators in our R&D group at 3M, legendary ones. What we didn't have was that rigorous process and governance and structure to make sure that you're meeting the customers' needs where they are. So that involves looking outside of your technical capability and saying in the case of IV site management, what are the needs at that site? And where are those adjacencies that you can look to for other areas that you need to develop or possible inorganic opportunities.

No, that's a great starting place. Let's sort of unpack each of those a little bit. Specialized because what can I say is that somebody focused on a turnaround, where are you now? What's next? And how do you get to the -- where you need to go? Specialized sales team creation. Are the teams created? Or are you halfway there? Is that going to impact 26? Or now, it's going to take longer? Set it up for us.

We are constantly messing with our mix, but I think the heaviest work has been done. In all regions now, we've got specialized sales, clinical support people and more importantly, specialized management to, again, drive that culture and that message. We have put upstream, downstream marketing in place. Again, very standard in the med device business, but getting those processes up and running, I'd say we're about halfway there. But I think we've got the team and the upgraded talent that we need to get this done.

And the portfolio, like what percentage of, say it as will, SKUs have been cut? Did you cut 5%, 20% of the business? And is the process basically done now?

Yes. Great. And I can answer that for total Solventum and then maybe Doug can add some color in his business. So maybe just a quick step back for context. When we first came into the business right at the spin, we took a look at the number of SKUs, tens of thousands of SKUs, very complex supply chain and network across the business. And 3M had done a good job of rationalizing negative or low profit SKUs, but there is still a lot of complexity out there. And so we launched our SKU rationalization program and turned out to be two waves.

The first wave we intended for it to be one, but the first wave was really the pretty simple areas that we get. We got about 5% of the SKUs out of that, but we wanted to go even a little deeper, but we needed more data and improved data insights to be able to do that. So it took us a little longer to get what I would call decision grade data to really fine-tune that. And so we ended up getting 8% of our SKUs out. So we had targeted between 5% and 10%. So to get 8% out is really strong. And what I would say is it doesn't have a huge impact on the ultimate sales growth rate or margin expansion. We'll get a little bit of benefit there. But where it's going to help us is just the ability to manage our supply chain and the efficiencies downstream. Taking 8% of our SKUs out on a global basis across the 90 countries, across our inventory stocking and supply chain management, it's a huge benefit.

So we're glad that we took the opportunity to stop, do that work. It's hard work. Doug would probably attest to the commercial and marketing teams. That's not the most fun work that they like to do at any period of time, but there will be significant downstream benefits for years to come around demand planning, supply planning, stocking. We also got the added benefit of as we were spinning, we had to rebrand all of our products from 3M to Solventum. And there's a cost to that. It's non-GAAP or out of our operating results, but it's still cash. And so the ability and the work to do it to be able to take out 8% of our SKUs so that we don't have to do the rebranding effort and cost on those almost 10% of our SKUs as well is really important. But Doug, any insights from your business?

I mean, again, the -- that 8% he talked about Solventum level, the lion's share of that fell into my business. And again, that's hard work for a commercial team to carry that message. But at the same time, remember, in parallel over the last year, we created our growth drivers. So really allowing them to then focus in on IV site management, on sterilization assurance and take a little bit of the noise out of that big bag of products that we've had that really aren't the areas that we see that are strategic growers.

But that's behind you. At the divisional level you're saying...

Even total Solventum. We're not planning a wave 3. This was the program to get it implemented. We'll always fine-tune SKUs for years to come, but we won't be talking about at this level of materiality.

Okay. And so just in a practical terms, Doug, what's -- so if you're not focusing on that and Wayde's on your back daily, I'm sure, to get it done. What is that for you to do? Are you now able to prioritize innovation or account opening? What's the top 2 or 3 things you're focused on now?

The top things that we are focused on are increasing our adoption of our growth drivers, full stop. Right? I'm not discounting any of the other businesses that I have, but our product brands, and I say our product brands, the Tegaderm, the Bair Hugger, the Attest. These are things that every clinician knows by heart. That's how our reps identify themselves when they walk around. And I want them to be on that story, on that message. And that, again, eliminating some of that noise allows us to do that and focus on that more.

Yes. And so it's not about account openings, it's going deeper in accounts or ensuring that -- I mean, what that current procedures are not using the whole portfolio. Help me understand just...

It's about understanding what the best solution is for patients and then doing the walk with the customer to show them the means to adopt it. And as an example with IV site management, we've had a powerful brand in Tegaderm for over 40 years, but a small percentage of our sales are antimicrobial, which we believe should be used in every type of IV. It's only 25% penetrated. So we've got a lot of work to do.

Now the nice thing is Tegaderm is a known entity in the hospital. But you've got to make the connection between the guidelines and the standards that exist and then help the customer walk the walk and implement that protocol. And that's where the power of specialization comes in. Because in the past, you'd have a huge bag and you'd have wound care and everything else. Now you've got the time and the discipline to be able to go with the customer and implement hospital by hospital, bedside by bedside. And we've had a lot of large systems that have responded well to that message in the first year. And again, that's our sole focus is growing in those types of areas.

It sounds like a low-hanging fruit really.

Yes, maybe to translate it to sales growth. So covered it really well, Doug, is I would say it's really two-pronged, Rick, in the sense that's like same store sales where you're upgrading your existing to antimicrobial, so you get the uplift from your existing customers adopting the new technology, which we think is a flywheel that Doug's team is really starting to turn with the new product launches, both on the infection prevention and surgical solutions side as well as share adoption.

We think with the improved specialized sales force as well as the -- we've built the apparatus as well with key account management and layered in some of the more typical things you would see in a med device sales force that didn't exist under 3M in a more efficient structure. And so we do anticipate that we'll continue to drive share as well.

Yes. And I'm sort of drilling into some of these things with you, Doug, and obviously, you understand, Wayde, because I feel like this is a proxy for I'm sure what's going on throughout the company. But just coming back to the innovation engine, where are you in creating -- and is it you, Doug, you have your own R&D in the division unit focus. Where are you in creating that and enough [ chit chat ] when are we going to see some new products that are going to drive it for growth?

No, no, great fair question. So the -- yes, the answer to your question is, yes, I do have my own R&D. We have just implemented that. As a part of our innovation transformation over the last 6 to 9 months, we took what was a very compartmentalized group and have allocated it out to each business in a much more standard way in the med device world. So now it's about getting that process and those standards and our governance up and running, we are literally in the midst of doing that. And I don't want to say we didn't have anything before because we've just launched in the sterilization space.

We have 3 new products that we've launched in just the last quarter or two. And those are the first significant launches in that space in many years. So you've got to work out some of that muscle memory as an organization to get those launches right, get them global. But we've seen a great message that has come along with it and has been great. I've been literally in every one of our regions in the last 6 weeks and visited hospitals there and to see the power of sales teams around the world saying the same thing and customers hearing from them what you expect to hear and also things you can improve. Like the team is just now getting that back into its DNA, and it's exciting to see.

Rick, I'd love to pick up with the total Solventum level, too, because I like your question. As we think about the other businesses, we've put out specific new products that we think are starting to move the needle. And Doug's parallel business in Advanced Wound Care, we've talked about Peel and Place, which we think is a real game changer in negative pressure wound therapy. We also have our Prevena product that's now back to growing double digits after we had some headwinds for the last couple of quarters internally. We've now got back to double-digit growth there.

So I think 2 to watch for us are Prevena as well as our Peel and Place in traditional. And then on the dental side, we've had several new launches there. That team is doing a really nice job of driving growth. In fact, we grew very strong in Q3, but we talked about an underlying growth rate of 2% to 3%, which was an improvement over the first half, and that is off of those new products. And that gives us the confidence to say that we continue to think Q4 will be stronger than the first half. That's all new -- almost all new product driven.

And then even in HIS, we've launched autonomous coding and revenue integrity. Those new products, those are again like the same-store sales concept, where we have the ability to upgrade our existing customers. And within HIS, we also have the international expansion growth driver. But specific to your question around new products, those are the key areas to watch in each of our businesses to determine if we're going to be successful in continuing to drive our sales growth rate up.

That's great. Just looking at the bigger picture, Wayde, I get a lot of questions about the 3M separation progress, particularly as it relates to the TSA exits. You obviously gave us some updates when you reported the third quarter, maybe talk about this a little bit. But I feel like that the questions I get suggest that people aren't as clear as they would like to be. And I'd like to be stronger in explaining to them. What talks us about the optimization is the primary reason to exit these to lower costs, to improve logistics, to optimize remaining facilities. What's the goal? What's the benefit? And where are we in realizing all those?

Yes. Rick, I'm glad you brought this one up. We've got one more year of separation-related activity, and it is significant, as you highlight. We have to separate from 3M, obviously, to be a stand-alone independent company. As part of that, we have to separate our ERP systems, our distribution centers, all of our related systems as well as rebrand all of the products and then also move manufacturing lines and really become independent companies. So to your question, the primary goal is to separate from 3M and to be able to stand alone as a separate independent public company.

As we do that, there are over 200 TSAs, and we're just over 1/3 of the way through those with one more year. We really can't wait to get through the heavy lift of the separation here in 2026. That will complete our transition off of 3M's ERPs, distribution centers, all of the line moves. And then we'll have a little bit more rebranding work to do after that and some of the raw materials. But the bulk of the work that's being done will be done in '26.

To the question on what other tangent benefits or headwinds come with the separation? Certainly, as we roll off those TSAs like all separating companies, you lose some scale advantage. So both 3M and us will have headwinds on certain spend that is tied to scale, and so we'll have some headwinds there. We also have a lot of new systems that we have to stand up for ourselves that will be newly amortized and new systems put in place.

On the other side of it, we have an opportunity to rethink our structure and rethink our processes. And so we're working on some of that now. The separation certainly soaks up a lot of our resources and time. But we're starting to plan for and working on what can we change as far as our processes and systems and automation go after we get stand-alone from 3M. And so there will be efficiencies to come on the other end.

Our net goal of all this is to try to be at least as efficient and try to drive more efficiencies. And you may have heard us in the Q3 call, Rick, announced a new restructuring program, which is timely given that we've got additional headwinds coming here in 2026 with the annualization of tariffs as we know them today as well as the TSA roll-offs we just talked about and then the P&F stranded costs.

So if you put all that into the equation, we're layering in a new restructuring program, which is really going to be pulling on some typical playbook that we've had in the past, where we're going to be looking at areas to reduce low-value spend. We'll be looking at indirect or procurement spend. We're looking at our structure, we're looking at our process, there's a team focused on manufacturing and supply chain inside of that. So these are things I'm sure you've heard over the years from other companies where they've attacked certain areas. We've put this all into one program, including that systems and improved automation to capture it and so that we can go be very specifically focused on driving these efficiencies over the next few years.

And I know you're really focused on driving it and it just feels like it's -- you're picking up speed and moving through all these things. It's great to see. Doug, just going back to you and Wayde mentioned IV site management underutilization, you've talked about as well. But just talk to us a little bit more maybe about some of the specific factors moderating or limiting greater antimicrobial solution utilization. And do you need more products? Or do you need expanded indications? Do you need data to make this all happen? Or you've got what you need. And it's just as you said earlier, just sort of getting everybody on the same page and sort of focused on it.

I would say it's 80% that, right?

The latter.

Yes. The benefits of CHG and antimicrobial is well known, right? We have 25-plus studies, we don't need that. We don't need a new killer clinical. What we need is the awareness around IV infection rates and the cost of them to the hospital. And as you mentioned, how do we drive that penetration? In the past, we were focused on what are called specialty IVs, picks, the ports, things that go directly into the patient's heart and clinicians knew that they needed to cover those with antimicrobials. Well, peripheral IVs and those are the kinds that we've all had whenever you've gone to the hospital or the emergency room, those cause infection, too, right? And they make up 90% of overall IVs. They are the most common invasive medical procedure in the world, over 1.2 billion of them. And the risk is very real.

And now more guidelines, more standards, more societies around the world are recognizing this because now hospitals have that data resolution. But what they don't have is the protocols, the ability to say, how do we do this? So now working with those societies, taking those guidelines. And then to your point, the data that customers are looking for is show us the framework, show us where the gaps are and then show us how your products are actually providing a benefit. And we're in the early stages of doing that.

Great. U.S. versus OUS. What's your current -- just your segment, the U.S. OUS mix, what do you aspire to have it be? And what steps are you making? And I'm going to jump ahead and assume to expand your non -- your outside of U.S. business?

I don't think we report that resolution at my level, but I can tell you that we are -- I am the more global of the businesses. I have a long background in doing global businesses. I think there's a tremendous amount of growth internationally. But with certain products like ones that contain CHG, it's going to be a 4-, 5-year approval period versus the United States. So -- and as an example, in the United States, we launched 5 years ago, Tegaderm antimicrobial that's a new product in Asia and Europe this year. So we are repeating that play. And again, same message, same discipline needed, but you've got a natural gap just again, due to some things outside of our control. But internationally, the need is there just like it is in the U.S.

Doug, it might be worth talking sterilization assurance because that's another area that's getting a lot more focus within the hospital today.

Massive. So sterilization assurance is very personal to me and the products themselves are small disposable products that verify that instruments have been sterilized. The reason you do that is so you don't get surgical site infections. Three years ago, I almost died from a surgical site infection. So this one, I can get very passionate around it, right? We have now launched 3 new products in the last 2 quarters, and it's all about helping customers to achieve standard, repeatable, consistent processes.

The sterilization department in a hospital, if you went into one, you might not know you're in a hospital, you think you're in a factory. They work 24/7. They are constantly trying to turn instruments to get them back to the OR, and they have some of the highest staff turnover ratios within the hospital. So products that seem very simple but help them make their processes repeatable and consistent versus different technicians doing things manually, which gives you inconsistent results. That's what eBowie-Dick, our clear test pack launches are all about. And again, this is a team that is already specialized. They're very, very expert in what they do. They haven't anything new to talk about in years. So it's really generating a lot of excitement.

Great application of the 3M applied science, really incredible capability here.

Wayde, turning from the elevated and life affirming and changing and saving to the mundane. I know you're anxious to talk about guidance for the quarter and for '26. I think Greg said, I should push you to do that, blame all the stuff on somebody else. It's my whole life work. But you're projecting fourth quarter organic growth of 2.2%. You have a tougher comp in the fourth quarter. What gives you confidence that you can drive another 2% plus quarter? And where are the opportunities if there were to be upside? And then we'll morph into your -- this is where I think you said you'd give '26 guidance.

Yes, I feel like we've had this conversation many times over the last 20 years. So I would say, absolutely, we're planning to be at the high end of our annual guide, which is 2% to 3% and 2.5% to 3.5% on an underlying basis, when you get to Q4, as you articulate the squeeze math is mid-2s there and that still has a bit of a headwind mostly in Doug's business where we're finalizing the give back of that extra volume in the first half that was related to the ERPs, the distribution centers and the SKU communication where customers bought ahead. So we're going to absorb the remaining piece of that in Q4.

If not for that, we have closer to the same growth rate we've had in the last couple of years on an underlying basis when you normalize just for the volume headwinds. And so we are very confident. All 3 businesses are accelerating. All 3 segments are accelerating. We're seeing good improvement. And as you asked about 2026, we haven't given specific guidance yet. We'll do that on our February Q4 call. But we did give some color in that our expectation is we would see our underlying growth rate improve in 2026. We see good momentum here throughout the year and building including the commercial improvements that we've talked about and the innovation improvements that are coming. We are expecting an improved underlying growth rate.

We'll have a little more SKU headwinds, 100 basis points next year. So a little more SKU headwind. But on an underlying basis, we expect our top line sales growth to continue to increase, and then the bottom line operating margins as well. And inside of that sales growth, we expect all 3 businesses to increase their sales growth rate in '26. And that's really because all 3 businesses have growth drivers that they're moving their strategy behind, and we're seeing good momentum in all 3.

That's exciting. We've just been hearing the change in your language over the last 12 to 18 months. Just reflecting on growth, and we're going to run a little over here. At what point will you be ready to be more active on the M&A front? You've got one of my favorite world-class Bizdev people recently hired and when is she going to help you all grow externally as well? When are you going to be ready for that?

This is such an exciting change for us because just completed the P&F divestiture and closed that and reshaped our balance sheet and our cash position. And so I'm glad you called out Rachel because she is fantastic, and she is bringing a whole new level of rigor and capability to our corporate development processes internally. So we are building a strong pipeline and we're getting ready to start to deploy some of that balance sheet strength. We do feel the inorganic part of our strategy is really important.

We want to continue to pepper in programmatic acquisitions over time. As Doug highlighted in his business, he's got a specialized sales force now, and we've built that apparatus much -- the commercial apparatus much stronger. So now to be able to take programmatic and tuck-in acquisitions and layer them into that structure, we think we've got a scale advantage over a lot of the competitors that we deal with today. And so we'll be able to we think, really maximize value out of acquisitions. So as you know, from Bryan and my past, we've had good success with acquiring faster-growing earlier-stage technologies that are ready to be built into the commercial structure that we have to help them accelerate.

And so that is a big part of what Rachel is doing for us here and building out those capabilities. So I do think portfolio management is going to be a big part of our success going forward as well.

That's exciting. I hate this topic because I got like 6 more pages of questions for you, but it's just great to see the momentum, great to meet you and hear about all the success that's happening there and look forward to much more. Thank you for being here.

Thank you.

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Solventum's Third Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. [Operator Instructions] 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, and good afternoon. Welcome to Solventum's Third 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 they are specifically called out as GAAP. The non-GAAP information discussed 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.

[Operator Instructions] And with that, I'd like to now hand the call over to Bryan.

All right. Great. Thank you, Amy, and thanks to everyone for joining us for our third quarter call today. Let's just jump right in. We delivered another strong quarter as we execute our 3-phase transformation plan. And the consistent underlying momentum we are seeing reflects not just the effectiveness of the changes we've already made but also the performance and the dedication of our global teams.

This momentum was reflected in our Q3 performance with positive volume growth driving top and bottom line results. And as such, we are again raising our sales growth and EPS guidance for the year. We are clearly ramping towards our LRP revenue growth targets faster than expected, and our momentum is anchored in 3 primary areas of progress and clear results. The first is the team's ability to manage the separation distractions and importantly, execute ERP implementations while also delivering on their commitments. And number two, the commercial restructuring and enhancements we executed last year are rapidly delivering results. We shifted, as you remember, over 1,000 positions to drive specialization. We upgraded commercial leadership; executed in an accountability culture with rigorous operating mechanisms; and changed incentives to bias growth, all of which are paying off.

And number three, our project to revitalize the innovation process, has derived a sharper, more aligned new product pipeline, almost doubling our previously forecasted vitality index and meaningfully increasing the value of our innovation pipeline. We are also seeing the underlying operating margin improvements we expected as we move through the year and remain focused on driving sustainable efficiencies, our momentum in programmatic savings and [indiscernible] strategies within our supply chain combined with our Transform for the future initiative we just announced today strengthens our ability to deliver our LRP margin targets even in the face of current tariff headwinds.

Our Transform for the Future initiative is a multiyear global initiative designed to further accelerate profitable growth and strengthen our position in a dynamic market. This initiative will reshape our cost structure improve operational efficiency and fuel innovation as we mix shift resources to our most attractive markets. As the separation progresses, we are unlocking new efficiencies by gaining full ownership of our IT systems and freeing up resources and bandwidth to more aggressively pursue savings and drive efficiencies for our team members.

In other words, given where we are in our journey, this is an excellent time to transform how we operate for a stronger future. Okay. As we move forward, the third phase of our transformation program, portfolio optimization remains a key priority. This is about making choices to shape our future, focusing on acquiring strategically attractive assets that fit our long-term vision and closely evaluating current assets to ensure go-forward fit. And I'm very proud of the progress we have already made in this phase, and we are more than halfway through our comprehensive SKU rationalization program, which is a solid step in refining our portfolio. and the successful and timely sale of our purification and filtration business is another tangible example of this strategy in action, allowing us to quickly and materially reduce our debt, refine our strategic focus and improve our leverage position, which has resulted in credit upgrades from 2 of our rating agencies.

We are now positioned to shift our focus toward offensive M&A, while expanding our options for capital allocation, including potential capital return initiatives. From an M&A perspective, we are targeting tuck-in opportunities generally valued under $1 billion in established and attractive markets where we already operate. This approach allows us to build scale in our most promising markets and leverage the capabilities of our enhanced global commercial team.

Okay. Moving to our businesses. Overall, our business mix in the third quarter was largely as expected, but with growth rates of dental solutions in HIS better than expected. Our MedSurg business continues to deliver strong year-to-date performance in all 3 of its growth driver areas, leveraging new product innovation, commercial specialization and consistent execution by the team. In Advanced Wound Care specifically, we saw a clear acceleration in growth led by our negative pressure wound therapy growth driver. Our newly specialized commercial organization is driving the planned ramp-up of Prevena therapy in the V.A.C. Peel and Place dressing. And with the strong clinical differentiation that we have in the space, a robust -- a very robust DME infrastructure that nobody else has, and significant underpenetration of this breakthrough therapy, we see meaningful runway for continued growth acceleration.

In Infection Prevention and Surgical Solutions, aside from the expected impact of the first half order timing, our underlying performance remained strong. Growth was fueled by our 2 growth drivers in this area sterilization assurance and IV site management. Looking at sterilization assurance first. Our dedicated sales team is capitalizing on the strong brand equity we already have in this space and the momentum from 3 new attest sterilization product launches, each designed to simplify and enhance the sterilization process for our customers. In IV site management, we continue to see robust demand for our Tegaderm antimicrobial solutions supported by recent launches across Europe, Asia and the U.S.

Our specialized teams are driving premium growth by converting customers from standard films to higher-value solutions that reduce catheter-related bloodstream infections and ultimately improve patient outcomes. Again, with our strong clinical differentiation, a robust and specialized commercial channel and once again, significant underpenetration of this breakthrough technology, we see meaningful runway for continued growth acceleration. In our Dental Solutions business, we continue to gain momentum in our core [indiscernible] growth driver, with results driven by a focused portfolio, accelerating new innovation and specialization in our sales channel. This quarter brought 2 major milestones: first, the launch of our refined and redesigned Clarity brand and the launch of the Solventum Filtek [indiscernible]. This is actually the first fully Solventum [indiscernible] restorative device. These efforts alongside continued strong demand for Clinpro Clear and Filtek Easy Match helped fuel strong sales growth in the quarter. We also saw significant service level improvements driving impressive backorder recovery in the quarter. confidence in our service levels is absolutely critical to driving growth, and I want to congratulate the team for making it happen.

In Health Information Systems, we delivered a solid quarter as we continue to modernize revenue cycle management. We made progress in our autonomous coating offering with high automation and acceptance rates being achieved in our partnership with Ensemble. This demonstrates our operational excellence and service line automation capabilities. These advances continue to position HIS as the largest autonomous coding vendor, underscoring our role as an AI-driven leader, transforming customer operations and setting new standards for efficiency and accuracy.

Another important element of our RCM strategy or revenue cycle management strategy is the international expansion of our flagship solution 360 Encompass and autonomous coding options. On track installations in Australia and ongoing expansion in the Middle East demonstrate our commitment to supporting health care providers around the world. In summary, our progress is palpable. From our navigation of separation activities, traction from commercial structure and innovation enhancements or portfolio optimization results. We are delivering and delivering with speed here at Solventum, and we are just getting started. I am absolutely convinced we have the right strategy the right global team and the right culture to continue unlocking value for our patients, partners and shareholders. I want to say thank you to the entire Solventum team for your unwavering resolve, your dedication to continuous improvement and you're inspiring progress every single day. And with that, I'm going to turn it over to Wade for a closer look at our financial results and other key updates.

Okay. Wayde, pass it to you.

Thanks, Bryan. We're pleased to report another solid quarter as we navigate the separation from 3M and transform our balance sheet following the sale of the purification and filtration business. Consistent with prior quarters, I'll provide you with updates on the separation and P&F divestiture and then transition to our Q3 financial performance and conclude with an update on our 2025 guidance. Overall, our work to complete the separation from 3M is going very well. The dedicated separation management teams at 3M and at Solventum are working well together on multiple fronts.

Our separation from 3M and the divestiture of PNF. We continue to execute against milestones while making foundational changes to deliver on our long-range plan. In Q3, after a successful European ERP conversion, we are winding down interim mitigation efforts and are fulfilling orders from our dedicated European distribution centers. We also continue to simplify our supply chain network. Now with 21 global Salventum-owned manufacturing locations, down from the 29% we had at the March 2025 Investor Day. Seven of the 8 facilities were conveyed as part of the sale of the Purification and Filtration segment, while the eighth facility was an exit from 1 of our 3 remaining dental plants. We have also completed about half of the manufacturing line transitions, all while improving product availability as part of our commitment to deliver for customers and patients.

Regarding the P&F divesture, the teams are finalizing plans and positioned for success. At the close, 1,700 employees transitioned as part of the successful handover along with initiation of nearly 200 transition agreements. Now turning to our Q3 results. Starting with sales. Third quarter 2025 sales of $2.1 billion increased 2.7% on an organic basis compared to prior year and increased 0.7% on a reported basis. During the quarter, foreign exchange was a 110 basis point benefit to reported growth, while the intra-quarter sale of the P&F business represented a 310 basis point impact on our reported growth. Overall, we had stronger-than-expected sales growth driven by higher performance in dental and HIS. Importantly, volume continues to be the main driver of growth as we align our organization to deliver sustainable sales growth and new product innovation. Pricing remains within the expected range of plus or minus 1%.

Our SKU rationalization program also remains on track with 60 basis point impact in the quarter. Moving to the segments. Our largest segment, MedSurg delivered $1.2 billion in sales, an increase of 1.1% on an organic basis. Within MedSurg, the Advanced Wound Care business grew 2.7%, an expected improvement over the first half of the year. which was driven by negative pressure wound therapy. Notably, growth was led by single-use Prevena, which exited the quarter at double-digit growth. As expected, Advanced Wound Care performance was partially offset by infection prevention and Surgical Solutions, which was flat in the quarter.

As a reminder, Infection Prevention and Surgical Solutions was the primary beneficiary of order timing in the first half of the year. We have communicated the first half benefit would reverse mostly in Q3 and and we anticipate absorbing the balance of the timing headwind in Q4. Our Dental Solutions segment delivered higher-than-expected $340 million in sales. an increase of 6.5% on an organic basis.

On a normalized basis, we grew in the 2% to 3% range. The additional growth came from backorder improvements, along with an easier comparable. Our focus on innovation across our restorative and prevention products as well as our Clarity aligners is translating to improved performance. Our HIS segment also contributed higher than expected $35 million in sales, an increase of 5.6% on an organic basis, driven by strong performance management solutions due to favorable consulting fees and service milestones in the quarter as well as strong revenue cycle management software solutions. Together, these more than offset expected declines in clinician productivity solutions. We remain focused on system implementations to support our hospital customers as they navigate a dynamic environment.

Looking down the P&L. Gross margins were 55.8% of sales in the quarter, a 20 basis point sequential reduction, which largely reflects the 130 basis point impact of tariff headwinds, including mitigation and offset by strong manufacturing performance. And to a lesser extent, the expected partial quarter 20 basis point benefit of the purification and filtration sale. Our manufacturing and supply chain organization remains focused on delivering programmatic savings and margin expansion.

Sequentially, operating expenses increased by $3 million to $739 million, driven mainly by an increase in equity compensation and other benefits, which were partially offset by the P&F sale and further savings from our Solventum Way restructuring program. In total, we delivered adjusted operating income of $431 million, which translates to an operating margin of 20.6%, in line with our expectations.

Moving down the P&L to nonoperating items. Our net interest expense and other nonoperating spend improved modestly versus Q2 driven by $10 million reduction in interest expense following the partial quarter benefit of the $2.7 billion debt paydown following the P&F sale. Lastly, our effective tax rate of 21.8% was higher than the first half due to a tax rate increase in a foreign jurisdiction during the quarter and a change in our geographic mix due to the significant paydown of U.S.-based debt. Overall, we delivered earnings per share of $1.50, ahead of our expectations, driven by sales outperformance, stronger gross margins and lower net interest expense. Shifting to our balance sheet. The higher estimated $3.6 billion net proceeds from the Purification & Filtration sale resulted in an improved $1.6 billion of cash and equivalents with no outstanding borrowings on our revolving credit facility.

Additionally, we paid down $2.7 billion of debt in the quarter. This represents a transformation of our balance sheet just 6 quarters following our separation from 3M. Looking ahead, we are well positioned to execute on our Phase III portfolio optimization with added flexibility across a range of capital allocation options to unlock shareholder value. For Q3, Free cash flow decreased by $22 million. Excluding P&F divestiture impact of $189 million, free cash flow increased $167 million. On a year-to-date basis, free cash flow, excluding separation costs and divestiture costs is $735 million with a conversion rate of 93%. As a reminder, we expect to see a step down in separation costs in 2026 and again in 2027 as we complete the separation from 3M.

Now turning to our 2025 guidance update, which reflects our Q3 performance and sustained momentum. Starting with our top line. we are increasing our guidance to the high end of our full year organic sales growth range of 2% to 3%. By segment, we expect MedSurg will improve sequentially again in Q4, and given continued strength in Advanced Wound Care and improving infection prevention and surgical solution volumes as we expect to digest the remaining first half volume benefit in Q4. We anticipate dental to again be stronger than the first half given strong new product momentum.

Finally, HIS is expected to grow in line with the first half of the year. and continue to benefit from strength in revenue cycle management. We continue to estimate a 50 basis point impact of SKU exits for this year and 100 basis point impact in 2026. Excluding this planned impact, our annual growth outlook for 2025 is now at the high end of 2.5% to 3.5%. And reflecting the continued volume-driven performance across our business segments as we execute against the phased approach to reposition for growth. We are progressing towards our 2028 long-range plan goal of 4% to 5% faster than expected with continued sales and margin improvement planned in 2026.

We are revising our full year net interest expense assumption to approximately $360 million and our total nonoperating expense assumption to approximately $400 million for the year and we continue to estimate the full year effective tax rate will be at the low end of our 20% to 21% range. Before commenting on earnings per share, our 2025 tariff headwind estimate remains unchanged at $60 million to $80 million, with a greater headwind expected in Q4 than the impact in Q3.

Altogether, for earnings per share, we have increased our guidance to a range of $5.98 to $6.08. This represents an increase following the $5.88 to $6.03 update we issued on September 1 after completing the EPS accretive purification and filtration sale. This further increase reflects our strong performance in the quarter, combined with expectations for continued execution as we complete our first full fiscal year as a stand-alone organization. For free cash flow, we have updated the guidance range to $150 million to $250 million due to the P&F divestiture, including classification of certain impacts to free cash flow. Excluding the impact of the P&F divestiture, free cash flows are still expected to be in the range of $450 million to $550 million. As Brian mentioned at the outset of the call, we have announced our transform for the future restructuring program.

This program is designed to offset the impact of tariff pressures, divestiture stranded costs and separation impacts as we exit TSAs. The program also fuels investment to drive sales growth, all while we deliver on our margin expansion plans consistent with our long-range plan. Once fully implemented, the 4-year program is projected to deliver annual savings of approximately $500 million and is expected to cost $500 million in total. We will provide more detail on our 2026 guidance on our Q4 earnings call.

Before wrapping up, I want to extend my gratitude to all Selventum team members for their outstanding work and collaboration in successfully completing the sale of the Purification & Filtration business. Closing this transaction, only 6 quarters after separation is a major achievement that strengthens our balance sheet and accelerates our transformation. At the same time, we're staying disciplined, balancing strategic investment with cost transformation to deliver expanding margins, robust cash flow and lasting shareholder value.

Concluding the financial section, we delivered another strong quarter and are making great progress towards achieving our long-range plan goals of accelerating sales growth to 4% to 5% and growing EPS and at a 10% CAGR. With that, I'll now hand it back to Bryan for a quick summary.

Thanks, Wayde. And so we had a lot of information in our prepared remarks, and I just want to make sure we summarize the most relevant points. So let me just do that now. First, our commercial and new innovation enhancements are delivering faster and more materially than we expected. And this has resulted in faster ramp towards our LRP revenue growth target and sets us up well for improvements in 2026.

Number two, our supply chain tariff mitigation and savings initiatives, together with our new Transform for the Future program, drive tangible confidence in our ability to improve margins in 2026 and deliver our LRP margin target. Even with significant tariff impacts that were not contemplated in those targets. Number three, with SKU rationalization and the PNF sale, we are seeing meaningful results in our portfolio optimization strategy and portfolio optimization will continue to be a lever for value creation here at Solventum. And then finally, our significant debt reduction has strengthened our position to pursue tuck-in M&A and it expands our options for capital allocation, including potential capital return initiatives.

Okay. And with that, I'm just going to reiterate once more, we have a bright future. We have the right strategy, we have the right team, and we are well on our way. Okay, let's go to Q&A.

[Operator Instructions] Our first question will come from the line of Patrick Wood with Morgan Stanley.

Beautiful. I'll keep it to one. But the transform for the Future program, was this one that was kind of kicking around that you guys had initiated pretty early on? Or was this a function of tariffs, do you see what I mean? And then when you're thinking about the savings and the reinvestment from that, what are -- if you had to pick a couple of buckets of the main areas you're most interested in internally reinvesting in where is that? Is that the sales force? Is that marketing? Like how should we think about that?

I'd just say maybe to start, it was something that we were always contemplating. If you just think about it, transform for the future is part of the transformation phase. We had those 3 phases that we've talked about. And so it's always been there, but we really had to wait until we were ready. We had to get through our Solventum Way of restructuring changes. Obviously, there was a lot that was happening there. We wanted to make progress on the separation from 3M and also the sale of P&F. And now we have I'm just going to call it the systems and the bandwidth to do transform for the future. So something we had always contemplated. And certainly, you can imagine the focus on it because the tariffs is pretty high. So with that may be I will transfer it to Wayde on a couple of the areas that we're going to focus on savings and then we can talk about the [indiscernible]

Yes, sounds good, Bryan. Happy to. And as Bryan said, it's a broad program. And so we are looking across all areas of the organization. Actually, it's very comprehensive. Looking at our operating structure, looking at procurement, cost management, supply chain team, manufacturing, looking at our global footprint as well. And then looking at streamlining our systems, as Bryan said in his prepared remarks, we'll be working through final ERP implementations here in 2026, taking over ownership of those systems. And then certainly, looking at increasing automation as well. So we're very focused on separation today. but looking forward to freeing up resources and working on this program over the next several years. And I think, Bryan, do you want to touch on the reinvestment.

Yes. And ultimately, when you think about the reinvestment, it just really accelerates our opportunity to mix shift our spend to those areas with the highest returns. You hit some of them. Obviously, research and development is going to be an area of concentration. The commercial infrastructure we need to drive it, so on and so forth. Those are the areas of the shift. Not saying that we don't spend a lot in those areas today. What I'm saying is we're going to shift the focus of that spend to the highest return areas.

Our next question will come from the line of Ryan Zimmerman with BTIG.

Just to dovetail on Patrick, just real quick, and then I have a more high-level question. the program, the $500 million in cost weight, is that equal over the next 4 years? Is that upfront? I might have missed that.

Yes, Ryan, we haven't given details on the cadence of the spend yet, just that, that $500 million costs we're planning over the next 4 years. And so it will be dictated by the different projects. There's many multiple projects that we're planning to execute over the next few years.

Okay. All right. And then if I think about kind of your guidance for the remainder of the year, getting into that kind of 3% or so, clearly, you guys outperformed in the back -- in this quarter, but it does imply a little bit of a lower growth profile in the back -- in the fourth quarter, excuse me. And so is there anything in there maybe from the dental back order dynamic that you're contemplating or that we should contemplate when we think about kind of your fourth quarter implied guidance.

Yes, I'm glad you asked that one, Ryan, because as you know and others know, we've had some lumpiness to the first half of the year around volume as our customers prepare for our and ERP systems and DC cutovers. And so just to reiterate there, what we've guided to now is the high end of our 2% to 3% annual guide. And what you're talking about is that Q4 essentially puts us at the midpoint of that around 2.5% for the quarter. But you have to remember that, that also includes absorbing the remaining first half volume give back in IPSS. So we'll still have some pressure in Q4 in IPSS. If you normalize for that, it's going to be in line with the growth rate in the previous 2 quarters.

Our next question will come from the line of Steven Valiquette with Mizuho Securities.

Congrats on the results, especially on the dental sector. So I guess my question in relation to dental, there was somewhat of a common geographic theme across most of the other publicly traded dental companies that Europe had a pretty strong recovery in but the U.S. market was still fairly choppy. Just curious with the near dental portfolio. Were you seeing similar trends geographically or perhaps with different dynamics for you guys?

Yes, thanks for the question. I would say we didn't see anything that was dramatically different by region. Real momentum for us comes around new products. So we've launched those on a global basis, and they're getting traction not just in the U.S. but outside the U.S. as well. So I'll just kind of give a shout out to that dental team. They're really doing a nice job from an innovation perspective and the specialized sales organization they put into place is receiving those new products quite well and delivering results.

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

Congrats on the results here. I've got two. I'll just ask the first and first here to start picking up on the dental theme, Wayde I heard you about pricing contributions for the company. But was there any benefit in your results there for dental from tariff-related price uplift. We've seen that from some other players. And just maybe what kind of visibility you have to sustaining that underlying 2% to 3% growth you saw during the quarter, maybe not just in 4Q like you guided, but even in quarters that follow.

Yes. I'm going to put the dental team on the spot because I absolutely believe that it's sustainable, if not something that we can improve. So I'm feeling good about the momentum in that business, again, really focusing on the commercial infrastructure they put into place a change in new product cadence, which looks really good and healthy, not just now but in the future. And so I'm feeling pretty good about the momentum we have there. And relative to pricing, we didn't see any extraordinary pricing in the quarter. It's in line with what we typically see.

All right. Understood. And then as for a follow-up, Bryan or Wayde, why is the tariff impact range still as wide as it is. I mean isn't all of that effectively capitalizing the balance sheet at this point? Shouldn't we be able to dial that into a tighter range than what we had 3 months ago?

Yes, Jason, we talked about that a lot heading into the quarter, and we decided just to hold it because it is such a dynamic environment. And so we'll wait to see here. That's the best estimate that we can have at this point in time, the range we felt is appropriate given the high and low end for what we think could happen. But of course, very dynamic out there, and we'll see how this progresses through the end of the year.

[indiscernible] I was going to say, just to your point in the way that we capitalize things, it would be even if things change to be very little impact to this year.

Our next question will come from the line of Travis Steed with Bank of America.

I wanted to ask about your comment on kind of progressing towards the '28 range plan of 4% to 5% faster than expected. Looks like already excluding SKUs, you're only 100 basis points away from market growth this year. How should we think about kind of that going forward? Can you close that gap next year and wait anything else to kind of think about on kind of puts and takes to consider as we dial in models for next year?

Yes. Maybe I'll start with that, Wayde, and if you want to provide any additional color. I'd just say that we are giving a lot of color right now. So we're not going to give any more than that relative to the guidance for '26. I think the takeaway is the ramp that we're seeing in the LRP [indiscernible] it is happening faster than expected. I remember that when we presented the LRP back in March, I had people come up afterwards saying, I don't know that you can get there. Are you reaching too far. I think anyone who doubted us now knows that we're already mapping pretty rapidly to it. And it's not a question of when -- not a question of if, it's a question of when. And remember, once we get there, the bus doesn't stop, right? That's not the final stop. We're going to revise once we get there and shoot for a higher target. We're not going to make that change now, and we're not going to try to change the time line in the LRP as is. but it's pretty clear we're progressing faster than people thought.

Yes. And just picking up on '26 guidance. Travis, I'd be disappointed you didn't ask for '26 on a Q3 call, knowing that we don't guide until Q4 but we do have some [indiscernible] that I think could help everybody as you think about our 2026 numbers. And one of them is the good news is that we don't see any full year significant buffer easy comps next year. And that's important because we've had some intra-quarter ups and downs during the year. And so we've provide color throughout the year so that it can support a modeling on a quarterly basis, but it all nets out for the year. Our expectation is that this final volume headwind for IPSS in Q4 will net us out for the year. And then on a full year basis, we won't see any tough or easy comps. But of course, we have to take a look at the intra-quarter timing as we get into 2026. But other than that, we're not guiding to 2026 just at this time, but hopefully, that's helpful on the sales line.

Yes, it's helpful. And glad unpredictable, Wayde kind of my second question is on in the comment you guys made on the balance sheet has been transformed in the 6 quarters and you're ready to execute on portfolio optimization. Just wanting to kind of dial into that a little bit and kind of what that means and how that could happen and the ability to kind of improve the free cash flow from where it is today to help fund those acquisitions.

Yes, absolutely. I think the reason why we're kind of doubling down on that capital allocation question is because we are feeling very confident about the operating cash that we're generating and we feel like it's extremely durable. And of course, combine that with where we are from a balance sheet perspective. And it allows us to do multiple things now, right? We can do the M&A that we've been talking about, and it certainly opens the door to giving giving cash back as well. So those are the things that we're contemplating, having conversation our Board, as you can imagine, and at the appropriate time, we'll update.

Yes. And I just pick up on the last part of your question around free cash flows. And again, glad you asked this one gives us an opportunity to talk a little bit more about it. As we called out in prepared remarks, we have some accounting for the P&F divestiture that impacts the free cash flow line, but that's offset in the investing cash flows. And so that caused us to revise our guidance for free cash flow for the year. But if you net out the impact of the P&F divestiture, we're still right in line with our beginning of the year $450 million to $550 million of free cash flows. And so what I shared last call on the Q2 call is that we do some timing throughout the year that we're dealing with, but our expectation would be similar cash flows to Q3, net of the divestiture, which I shared in my prepared remarks, around $170 million to $200 million. And so if we assume the same type of free cash flow benefit ex divestiture in Q4, we'll be right into our guidance range for the year. And we intentionally added some additional color around free cash flows, excluding the separation costs, which will step down somewhat in '26, but most of it and almost all done in 2027. And then these divestiture impacts that are classified to free cash flow because we want to make sure that we're highlighting the very strong free cash flow conversion for the business. And on a year-to-date basis, what we look like over 90% free cash flow conversion, excluding those 2 major initiatives. And so we can't wait to get to the other side of the separation as well as get through the divestiture here and really show the cash generation power of this business on the free cash flow line.

[Operator Instructions] Our next question will come from the line of Vik Chopra with Wells Fargo.

[indiscernible] You gave some helpful color on 2026 in terms of, I think, about the top line growth. Can you share any color as far as how to think about margin expansion kind of like that's also ahead of the plan as you look at the LRP target? And I have a follow-up.

Sure. So for 2026, what we shared in our prepared remarks is that we would expect to see continued improvement on both the top and the bottom line. What we do have to highlight is that obviously, tariffs are going to be -- assuming the assumptions that are in place today, there'll be more of a headwind next year and that will pressure operating margin expansion, but that's one of the reasons we've got our programmatic savings as well as our new transform for the future program here to offset that. So we might see a little bit more pressure on the bottom line in 2026. But just pulling back up to the long-range plan commentary we gave on the bottom line for earnings per share growth, we're planning a 10% CAGR for earnings per share over the 3-year long-range plan period. And it's our goal. We're looking to expand earnings per share 10% each year, might not happen every single year, but that's our goal.

Maybe just to draft on as well. One of the reasons we're talking about the programmatic savings, the tariff mitigation that we're doing in supply chain and also the transfer for the future is we wanted to take that concern off the table that tariffs might actually drive margins down in '26. We would just take that off the table. We're saying that we're going to improve margins. We're not going to say how much, but we just want to be very clear, that's the expectation.

That's super helpful. And just my quick follow-up is you mentioned a few times about the firepower to do deals and such going forward. Can you just remind us what you said about potential areas of interest. Any comment on how soon you might expect to see something.

Yes. We're actually actively looking for opportunities to move forward. And these would be tuck-in type acquisitions. We just referenced in the prepared remarks something below $1 billion in value, obviously not sales [indiscernible] in value and it would be close to the vest. The areas that we already play. We have commercial infrastructure that we can leverage. It would just fit to reduce the risk, reduce the complexity and ensure that we get a good outcome. So that's where we're going to concentrate. You can imagine, just given the scale of tissue, that's an area of concentration, but we're looking for these in all of our businesses right now.

I will now turn the call back over to Amy for closing remarks.

Great. Thanks, Regina, and thanks, everyone, for listening and to our analysts for your questions. If you have follow-up questions or need anything else, please don't hesitate to contact the Investor Relations team. This concludes our third quarter fiscal year 2025 conference call. Regina, you may now close things out.

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

Thanks. Welcome, everybody. It's Patrick on the U.S. Medtech team. Welcome to day 2 of the MS Global Healthcare Conference. Thanks for joining. Before we kick off, Morgan Stanley research disclosures, morganstanley.com/researchdisclosures, thrilling stuff. But what is good fun is to have the team [indiscernible] so we've got Wayde and Garri here Wayde, Chief Financial Officer. Garri, who runs the HIS business and can do all things exciting in tech. So thanks so much for joining guys.

Yes. Thanks for having us.

I guess, Wayde, why don't we start with you? And you've been in the role a little while now, time really flies, but still not very long. How have things been relative to what your expectations were prior to joining? I mean nothing is ever the same as what you imagined for you, but how has it been versus what your expectations were?

Yes. Okay. Yes, good to start at a high level here. I would say the thesis is intact. We're really excited about the value creation opportunity we have for Solventum, but also this rare opportunity to create a mission for a health care business and to take what the foundation that 3M had built, but under an industrial company and carve that out under a new health care mission is really exciting. And so I would say the momentum we have is what we had expected. In fact, I would say we're on track or even a little bit ahead. Our 3-phase transformation is well underway.

Clearly, that third phase around portfolio transformation, it's a pretty exciting couple of weeks for us with the close of our purification filtration divestiture. I'm sure you might want to talk about that a little bit today as well as paying down the debt, and we've had some announcements this week as well around that. So the P&F divestiture is a game changer for us. As you know, it is not only giving us a better leverage position, stronger balance sheet, but it gives us better operating margins. It's going to simplify the story for us from a portfolio standpoint. So just there's a lot we can talk about there.

I think you may want to get into that, but that's exciting for us and certainly one of the things we thought about coming into the company and part of the thesis. And then I'd say the separation also is going very well and on track. We knew that was going to be a challenge. All separations are, especially of this scale. And this one was particularly entangled. I think 3M did a really nice job of integrating and bringing a lot of the functions together.

So we're in the middle of pulling all that apart today. And I think we're on track there, if not ahead. We've got the rest of this year and then most of next year, 2026 is another heavy lift for separation, but then we're through it. And 2027, we'll have a little bit left, but we'll be almost all through it here in 2026. And so overall, I'd say we're just really excited again about that value creation story, the mission. And boy, we get on the other side of the separation, we'll be able to really unleash some of our best and brightest and continue to improve the business.

Yes, we'll definitely touch on P&F. I mean we've chatted before. I think people sometimes don't always appreciate how much time it takes to do that. And the time that you'll get back is focused on the core business later. Yes. Garri, interestingly, you've got a completely different setup because you've been in the business for a good length of time. And so I'm really interested in how has it changed relative to when it was inside of 3M to then actually now being -- we externally we always hear it's more dynamic. Is that actually true?

Things are going very well. So when I was under 3M and I was there 30 years. So I have a long history working in what we saw was an industrial market. We were a health care entity, but we were buried inside an industrial conglomerate. And the focus was very different. So 3M was very comfortable with us having margins of 1% to 2%, but we were focused on free cash flow and on margin. And obviously, when Bryan and Wayde came on board, the focus has shifted more to what we would say is the health care market, which is growth.

And so we're investing now very heavily in new products and a lot of the innovations that we were able -- weren't able to do under 3M in the past few years are really starting to come to fruition. The other thing that I will tell you is that we've also brought in a leadership team that's got a lot of depth in the health care space. And we have the capabilities internally now to make decisions and be able to transform ourselves pretty quickly with the leadership team that we brought in. And so it's a completely different operating model than what we were used to.

How important is that new team coming in because it must be quite a difficult mindset switch for people to go from a cash flow margin mindset to a growth mindset. Is that a critical part of that?

What I would say is my team has been very receptive to that because we were always worried about the fact that we were in a health care company, but we weren't being funded for the growth that we saw was achievable. So they've shifted very well. We have a very strong mission to really improve the lives of patients to be better, smarter health care. And we have a set of values and strategic imperatives that we're focused on. So the team is very focused on achieving that and being able to make contributions to Solventum overall.

I've got a hit on the P&F side of things because it's so topical, right? Obviously, that was essentially very recently announcement yesterday or the day before on the P&F sale. Could you just -- and also the debt and the pricing, could you just walk us through the time line and the big picture of what this means for the balance sheet for you guys and what that means for Solventum overall?

Sure. Yes, I love you went there early, too. It's so current for us. And we talk about transformation broadly, and we're working on it a lot. But this pillar around our portfolio transformation is really changing the company here in the last couple of weeks. And so to your question on the time line, we started the portfolio process early on with the separation and went through a pretty rigorous process to decide what area of the portfolio we thought maybe we should move on and divest.

And through our strategic and financial criteria, we landed on P&F, went through a process that we announced in February was the deal that we would do with Thermo Fisher. And then we started working on that through their diligence and integration. And just recently, we announced that we would keep the drinking water portion of that. It's about 1/4 of the business that was really designed to simplify the process. And what that allowed us to do then is close early.

And working with Thermo Fisher, they're a great partner. The real professionals. They do a lot of deals. And so they've been wonderful to work with as the 2 teams have come together. And we just recently announced the close on September 1 and 2 here that we're closing on that transaction. And that allowed us to then quickly move to start to pay down our debt. And that was another primary objective of ours. We've paid down about $100 million a quarter since we spun. So $500 million, we've been chipping away.

But now with the P&F divestiture, leverage position, that will put us on average with our peers or even better leverage than our peers, strengthens the balance sheet. And then just thinking about the strength of the financial statements, we also improve our operating margins by divesting this business. And then unlike most divestitures that can be EPS dilutive, this deal is EPS accretive. And what we've said is that it's a $0.25 to $0.30 accretion on an annualized basis.

We're going to get $0.18 of that this year. And we've talked about in our most recent press releases that we'll get a good amount of interest savings by using the debt to pay down -- or pardon me, using the cash from the deal to pay down interest. And so we'll get about $0.08 primarily related to the debt paydown and interest savings offsetting the loss of EPS from the divestiture.

And so that $0.18 this year leaves about $0.07 to $0.12 of further accretion in 2026. So accretive to EPS in both years, accretive to operating margins, strengthens our balance sheet, puts us in a great leverage position. And you've heard us talk about wanting to be programmatic acquirers of tuck-in smaller type deals to fill in our portfolio gaps and this deal allows us to switch from paying off debt incrementally, huge step forward to go on offense here on M&A. So really a truly transformational deal for our company.

Yes, I definitely want to pivot into the M&A side. I mean $2 billion on the debt and then $800 million of the term loan, $3.4 billion, but you've obviously got your own cash generation. Should we be thinking of that residual balance as kind of earmarked a little bit for M&A at this side? And is that the right way to think about it?

Yes, that's what we've talked about is that our next objective is to start getting active on the acquisition side of it. And again, thinking small tuck-in type acquisitions, nothing of a transformational nature. But we also have flexibility with our capital plan now for the first time since we separated. So we'll be thinking about other changes to our capital plan over time.

You obviously still operate in 3 different end markets. We, 3 different divisions, of call it, which [indiscernible] many end markets within the -- how is it going to work from a capital allocation standpoint on M&A in relation to those? Is it that -- and it's tough for Garri, but is it that each of the divisional heads would come to you with their various ideas and you would all sit in one room together, divisional heads, management team and sort of bang heads together. How do you envisage like that allocation?

Yes. So we have started a process of building capability in all 3 of our segments. But what I would say is MedSurg is the largest business. It's certainly the core, but it's also the area that's had the least amount of activity in the M&A front for a long time. I'll pass it to Garri in a second to talk about her business.

But having said that, we've got growth drivers within each of our 3 different segments, and we've shared in the past that we're expecting 80% of our growth to come behind those growth drivers. And so you could think about us primarily thinking in that area, but we'll also look at other areas to do tuck-in acquisitions within our footprint in any of the 3 businesses where we've got capability and scale, and it makes sense strategically for us. We do think it's a target-rich environment for us out there. There are opportunities.

Our pipeline is building already today. We've historically been disciplined acquirers. We balance both the strategic and the financial metrics as we go about it. And so yes, all 3 segments are working on their -- building their capabilities, building their pipelines. But Garri, do you want to talk about HIS?

So in Health Information Systems, obviously, if you look back at our history, we were used to under 3M doing an acquisition about every 3 years. But we haven't done any acquisitions since 2019. And the other thing that I saw in the history is that even when we did acquisitions, we really didn't fund them. So we were rarely able to achieve a lot of the performance of what we thought we would get from the acquisitions.

I think that will be different completely under Bryan and Wayde and the structure that we put into place. One of the things that we're constantly looking at is how can we disrupt the market. I don't want to acquire something that's a me-too. I don't want to acquire something where there's 200 vendors already in the spot. I want to look at how do we change the industry and how something can be replaced by technology, take labor out and be able to automate it. I'll be able to move it upstream.

So something that may be traditionally done after a patient is discharged, how can we do it during the encounter. That changes the industry. So those are the types of things that we're looking at. We'll also look at how do we enter countries that are now ready for the technology that we bring to the table. We're seeing a lot of changes in the international market right now where a lot of the countries are just now becoming digital so that they can take our products, but there are also many countries changing to a health care payment system similar to what we have here in the U.S., which is a DRG-based payment system.

And so we write payment methodologies within HIS. We work with a lot of the ministries of health outside the U.S. who want to change payment models. We get a lot of RFPs and a lot of them do adopt methodologies that are built by health information systems. And so we'll be looking at countries where we could actually go in and do acquisitions that can help us get footprint in those particular spaces as well.

So maybe more of an OUS focus than we had previously sort of thought about.

So what we're seeing right now is in international markets, a lot of these countries are growing double digit. So in becoming digital and we can localize our product to go into those countries pretty easily, that's giving us significant growth. And today, we're about 90% U.S. sales, 10% international. So there's tremendous amount of runway in the international space, whereas in the U.S., we're very heavily penetrated today.

We have 3 babies in the NHS in the U.K. and getting out of the hospitals to get them to find the discharge forms was a living nightmare. If you can just digitize that, that would help a lot of people.

There's a lot of opportunities in the revenue cycle management space, whether you're in the U.S. or whether it's OUS. There's a lot of paperwork, redundancies and still a lot of manual labor that we believe can be replaced by a lot of the AI that's actually becoming available and rapidly advancing.

I mean maybe to take a step back, thinking of HIS in general, the market is a kind of -- at the moment, it's a sort of 5% to 6% growth market, potentially more, but somewhere of that. How do you feel about your growth within that for the next 3 to 5 years, just big picture?

So in HIS, we have a plan to be able to reach market growth within the next 5 years is our target. And we're seeing a lot of that come from the expansion of what we call 360 Encompass in that international space as well as the move into what we call autonomous coding, which would be taking the human out of the process. And so we built models. We've actually sold a significant amount of customers already today.

You guys probably saw the announcement that we have with Ensemble Health. So we are actually putting in autonomous coding for their full customer base. And this will help hospitals take labor cost out. And so our goal is to automate at least 80% to 85% of the claims. We -- in some service lines, we can get much higher and then have a process to where if the confidence levels are not there, it would actually kick out to a human. And so this gives us a lot of runway. With us having deep penetration in the coding market today, this is an area of focus that our customers are requesting because we do cover the full service lines, not just 1 or 2 like some of the start-ups are doing.

Maybe for those who are less familiar in the room, when you're saying autonomous coding, what is the input that's being used to decide the code that will ultimately be filed?

So when you're a patient in a hospital or a doctor's office, the ED, the physician documents information about you in a patient record. And then what we do is we take that information, the documents, we utilize computer-assisted coding to read everything that the physician has stated, look at the diagnostics and create a code list of all the things that are going to be reported to your payer.

Sometimes that information that a physician provides is incomplete or not very specific or they don't actually make a diagnosis. They talk around it. They talk about your symptoms and the treatment plan. So our products are really focused on bringing that information to life, servicing it back to the physician to get the clarification, making sure you meet the compliance regulations and then be able to get that information into a format that it drops into the financial billing systems so that they can bill for that claim. And so that's the process that we utilize. And we do this all through information that's been documented about you as a patient.

And what for you like and when you're speaking with the customers, what does success look like here? Is this, to your point, a reduction in the labor force on their side of people having to do the coding? Is it a reduction in pushbacks from the payers? Like how do you measure success for the customers?

It's actually a combination. So the products that we build are actually revenue producing. So we're looking for the additional revenue that they've not captured. We're looking to make sure it's a compliant claim. We're looking to take cost out through automation. So how can we remove the amount of labor it takes to do the process, be able to do it right the first time. And then we're also looking for areas to improve quality of care.

So we focus on all of those particular areas. That's why it's very unique around the products that we bring, and our products are connected end to end. So we're working from one source of truth through that patient record all the way until we build that claim.

Is there a way to help the reimbursement confidence when reimbursement rates or codes change? So like an NTAP or a TPT or whatever comes in and a lot of the time, the docs we speak to, they're just not really aware of the codes that existing and what's -- and so sometimes they're not even doing procedures because they're not aware the economics have changed. How can you fit into that environment?

Same type of issue. So the codes change a lot like tax law. So once a year, you get a pretty massive change. And then there might be tweaks every quarter between. And so we constantly have to update our systems to be able to do that. And we do that using generative AI. We use a lot of large language models, but we also embed that with rules because there may not be any history to the new direction that you're being given, and we have to be able to produce a compliant claim by an exact date.

So we do a combination of that. But a lot of it is looking at what are you doing? Are you coding the right information as the rules change and then we communicate and educate to the physicians. And so it is a process. It is continual. It's never-ending changes. And you do that not only in the U.S., but you have to do it in every country you operate in because it is different in every country. Some countries reimburse for certain things and some don't. Some have policies around what gets sequenced first, some don't. And so we operate outside the U.S. in 34 countries. So this is a large component of what we have to maintain.

Yes. I don't know which I hate more filing my U.S. taxes or when CMS drops that mega code, pure hell.

Yes.

I mean -- and then to your point on the OUS side, like Germany has got a fairly advanced DRG system, but a lot of other countries to your point, aren't really digitized. How are you thinking about approaching those markets? Is it actually the central regulator or the health provider that you have to work with to encourage them to get the codes up, who's the point person?

So what we see in the international market is most of the payment system changes are driven by what we call the Ministries of Health. And so a lot of times, they will call us to the table because we have a long history of writing payment systems and helping them implement outside the U.S. So a lot of times, it will start as an initial RFP around the fact that they want to evaluate different payment models and what can be done.

Some choose the path that they want to write their own system or they want us to write a system for them. Others may adopt the Australian version or the German version, but they want to make localized changes. So they want to adapt those payment models to what they see as far as disease, diseases that occur in their country, but also treatment plans. So I'll give you an example. In the U.S., if a patient comes into the hospital and they have dehydration, -- we rarely admit those patients anymore. They go into observation. We give them fluids for 24 hours, and we send them home. They're not considering an inpatient.

You can't do that in a country like the UAE or Saudi Arabia because you have environmental issues. With dehydration, one of the risks that you have is going into acute renal failure, which can be deadly. When you get into a country where the temperatures are very high, you have to completely treat those patients different. So in their models, that would be covered inpatient. So those are types of things that we do with the country based on the data, the environmental issues and the treatment patterns that they have to deliver in their local markets. And that's our capability. We've being able to look at that data, work with them and then be able to localize a product for their market where it's not just a clone of someone else's.

Whether it's the U.S. or OUS, how does the -- how is the billing situation set up from your perspective to your customers? Are most of them paying like a flat fee? Is it associated with the number of claims they're making? How does that structure it?

What you see outside the U.S. is multiple different models. Some of them are on what I would say, some of the older versions that we had in the U.S. So it's still charge-based or it can be cost-based or it can be day rates. It's kind of all over the place. And then some of them is still free health care. What they're running into is the same challenges that we have is no one can afford not knowing what the health care budget is.

And so many of them are looking to move to what we call prospective payment that they have a budget based on the population and the historical population that's been treated. And so many of them are moving to a similar model to the U.S. model, which is DRG-based. So that it is basically a group of diagnoses or a group of procedures that have a set payment rate is what you're looking at.

The claims that are being submitted and going through, are you guys able to see -- how much detail are you able to see from the system as a whole as to what's being claimed and where?

We are able to see all of that because we bring in the full patient record, and then we are the ones who drop the bill into the billing system. So we have access to all of that. And then in some of our products where we talk about rev integrity, we're also bringing back in the information where the claims have either been paid or denied. So we're able to see the patterns by the payers.

You can imagine where I'm going with this, but is there a temptation for the rest of the business to use that intel. You can see literally what's happening in the system in quite a detailed way to get a sense of which categories are actually -- if you're looking at an M&A target, they're claiming that this market is growing at x. You have an ability to validate that in a way that other people might not. Is that something that happens internally?

That is correct. We also purchase publicly available data so that we can look broader than just our customer base. And we can look and see how often is a device used? Or is there a diagnosis that would support the indication for a device. That's something that's been available in the market a long time because many vendors purchase that public data.

Maybe if we can pivot to some of the long-range margin side of things. You guys -- we've got the 23% to 25% target that's out there that you put investing. What do you think is like the core drivers to get your perspective?

Yes. So as you said, Patrick, we've got a long-range plan target of 23% to 25% margins. Maybe just to give a little bit of context, as we were going through the first few quarters of the separation, we finished Q4 '24 at 20.4%. So that was what we had in mind when we set the target for about a 300 to 500 basis point expansion. And the major drivers for us are obviously sales growth. Our #1 metric, driving sales growth higher gives us leverage and volume down the P&L. Beyond that, we're certainly looking for mix improvements. We brought in a playbook that is also focused on driving favorable mix over time.

And then within the cost of goods sold and supply chain, we have a really strong team there that's heavily focused on driving efficiencies there. When we presented at our Investor Day, we called it programmatic savings. And there's a whole series of levers that we're working on to drive gross margin expansion there. And then we also have efficiency programs running within our SG&A categories as well, looking to drive efficiencies there. And so that's what gives us confidence to drive this 300 to 500 basis point margin expansion over time.

Certainly, there are some headwinds and tailwinds that we're dealing with inside of that, but that's for us to manage. And we want to get into this mid-20s operating margins because we know that that's where a lot of the peers are today. So as a first step, we want to get ourselves into that mid-20s operating margin. And really, what it does is as we're driving sales growth rate up and expanding margins at the same time, it gives us this confidence to give what we think is an exciting earnings per share growth or valuation story, which we also put out at our Investor Day for a 10% CAGR on earnings per share, which we think is probably one of the most exciting stories in Medtech today.

When you're thinking of the efficiency savings, is this a case of like initially slow and steady? Because I remember certainly from my, you don't always know what dollars are actually helping prop up growth and which are not. And so you inherit this car and you don't know which bits of the machinery you can take out safely. Is it just you start slow and see how things go and then you ramp? Or is it just fairly even through the projects?

You're on the right track when we talk about our growth drivers, but we have a lot of different lenses or programs we're putting on spend across the board. So maybe I'll just start with the growth drivers. And you've heard us talk about 80% of our sales growth is going to come behind the growth drivers that we've laid out, and we've got growth drivers within each of our segments, MedSurg, HIS and Dental. And so we are in the process of shifting resources behind those growth drivers.

And that's resources primarily in commercial and marketing and upstream marketing, but also in the support functions to make sure that we're aligned to driving those priority markets that we want to generate growth in. So that process is underway. And then we're also driving more traditional programs to look at leverage in our supply chain and our cost of goods sold across our manufacturing plants. There's a lot of good work going on there today, but obviously, we're still busy moving our manufacturing facilities from 3M as well as our distribution centers.

And so we'll get through, as I mentioned earlier, the meat of that or most of that in 2026, and that's where we'll really be able to put all of our attention on driving margin expansion. And then down in the functions, each of our functional leaders has programs that we're running across all functions, but also on specific to those individual functions, whether it be comparing them to benchmarks or where they want to take their function over time. So we've got quite a bit of activity going on to make sure that we're driving margin expansion as well.

A lot of projects to manage. 2027, you've got a cost up at 3M. Is that a certainty? Or is that triggered by something?

What I would say there is it's a certainty that it's in the agreement that we had post separation with 3M as they gave themselves the right to increase our cost at the 3-year mark, which would be, to your point, second quarter 2027. And that's on the back of them stepping up cost, 1% increase on the raw materials that they provide to us. So they have that contractual right. What I would say there is -- well, first of all, since we've created a project we call our Materials Reinvent project. And this is a team of people that are dedicated to bringing over the IP, the manufacturing know-how. A lot of the IP is within the manufacturing processes itself and then deciding if we want to put that into our own facilities or if we want to outsource that to other third parties.

So that's the main work that's going on underway today, and that's what's built into the contract. Having said that, we've already started discussions with 3M to say maybe there's a different way to do this now that we're separate companies, and it could be an economical benefit to both companies if we could find a different strategy than the original strategy at spin, which was just that we would move. And the good news is we have 10 to 12 years to move.

So we've got a good amount of time to bring that incredible strong IP and know-how over, and we're comfortable there. It's more is there a better economic benefit for both companies as we move along, and we've already started those discussions with 3M. So inevitably, we'll see what that step-up might look like in 2027. But currently, it's built into the long-range plan assumptions that we put out.

This is more of a go back to 2024, like how is the cost inflation environment today? I mean we all talk about the tariff side of things, but the base market, it's been a while, but has it been more normal or no?

It's certainly more normalized than the hyperinflationary that we saw through the COVID period. You mentioned taking tariffs out, but tariffs are certainly a cost driver -- inflationary cost driver within how we're thinking about the cost base today. But I would say it's certainly not calmed down or gone back to normal, whatever that would be.

Some product categories are more challenging than others. But I think our team is building a lot of competency in this area, building a lot of data, a lot of expertise from people who've done this in other large companies before. And so I think we'll do a good job of managing it going forward.

Garri, margins have actually been pretty strong for you guys. What's driven that?

Yes. So in Health Information Systems, we're really a high-margin business. We have been for years. And so the other thing that I would say that contributes to that is I have a division that has many, many Six Sigma Black Belt. And so we constantly look at any type of process or transformation that we can do that can continue to provide us with higher margins. And this team has just been built around that because we grew up in that with 3M. And so it's something that we constantly look at. Our goal is to help with the margins to help reach our long-range goals. And so we'll continually do that. We're not impacted by tariffs. I don't really have a supply chain. So when we're on calls and Wayde and the team are talking about that, I'm knocking on wood because it really does affect us.

No, that's a good position to be in.

It is.

The other metric that I think matters people is cash conversion side of things. And you got a target of 80% by 2028. But at the same time, there's a lot of moving pieces. There's potential M&A, there's like agreements with 3M. What gets you to the 80? What's the most critical part there?

Yes, I'm glad you picked up on this one, Patrick, because I think free cash flow is one of the major metric improvements that we're going to see here post separation. It's an important metric for us. We're incented on it. And as you said, we are spending a lot of cash today on the separation. You have to spend to separate our systems, as I mentioned, our manufacturing facilities, distribution centers, all of our processes.

And we're going to get through the bulk of that over the next 2 years, this year, '25 and '26. So what we've communicated is that we expect a step down, similar spend, but a step down in 2026 and then a major step down in the amount that we have to spend on separation in '27. There'll be a little bit of left over there, and then we'll be fully out of it in '28. So that will be the single largest driver to our improvement in our free cash conversion rate because we have these additional separation costs to deal with.

But obviously, we're working on margin expansion as well and growing the business. So we'll be generating more cash. And so I think the cash flow story is a really strong one for us. The other one I will just add is this flywheel around what we were doing in paying down debt every quarter. The more debt we pay down, the less interest we pay, the more cash we have, the more debt we can pay down. We are on a nice trajectory, $100 million a quarter through the first 5 quarters of the year. And now with the P&F divestiture and a significant leapfrog forward here in that program, we're going to pay down a significant amount of debt, which lowers our interest expense a lot, gives us a lot more cash. And so we're just in a really much stronger free cash flow position today. And then as you said, our long-range plan target is to get to 80-plus percent. We think the cash conversion power of this business is very strong.

If you guys do a fair amount of these meetings and things like that, what are you surprised you don't get asked more? Alternatively, what have I failed to ask you about that I should have asked you about?

Well, I think you've hit the big ones, Patrick. What we've been getting more of lately is we grew 1.2% last year and sales growth being that important metric. And we put on an LRP of 4% to 5%. And so I think some people quickly understood that because that's our market growth rate. That's a logical first step is let's get to competing where we're getting our market growth rates. But there were a certain number of people who said, well, that's quite a leap from 1% to 4% to 5%. How are you going to do that in just about 4 years.

And so I think we've taken a big step forward, and we've been talking a lot about already this year guiding to at the midpoint of our guide, double that growth rate from last year. And it's volume-driven, which is a major part of our strategy is to be focused on sustainable volume-driven growth. And so I think we get asked a lot about this early improvement that we're seeing. And what we're saying is of the 3 major areas of our transformation, commercial, improving the innovation engine and then the portfolio and M&A work, it's almost all on the commercial end. It's the early benefits of changing out talent, improving talent, upgrading talent, changing out our incentive structures, our organizational structure as we've gone to specialized sales forces in a lot of cases.

That's being led by an improved and changed marketing team with investments upstream there as well. We've changed out the regional sales teams, and they're working on the sales teams underneath that. And there are some people that are just within the business attracted to that, excited about it. There are others that it's not for them and they're moving on. And then there's a group of people in the middle that are still trying to figure it out. So I would say it's still early days in these improvements, but we like what we see. In fact, we'd say we're even a little ahead of our expectations.

There's always a bit of trepidation when you make that many changes, the people, the structure, the process, the incentives all at the same time. And we knew that there was some risk there, but we wanted to get all those changes in place and really fix that commercial apparatus. And now we're several quarters into it and very happy with what we're seeing and the progress that we're making. So sales growth, obviously, a major focus for us, and we get a lot of questions around that.

Great. Garri, thank you so much. Thank you for coming. Thank you.

Thank you.

Thanks, Patrick.

Thanks.

Okay. Good morning, everyone. My name is Vik Chopra, part of the medical devices’ equity research team here at Wells Fargo. Pleased to introduce management from Solventum for this session. Joining us from the company are Bryan Hanson, CEO; and Wayde McMillan, CFO. Thank you both for being here.

Yes. Thanks. Thanks for having us.

Bryan, let's talk -- start off with a few big picture questions. Talk about your vision for the company over the next 5 to 10 years.

I think probably the best way to talk about the vision is the same way we've been referencing it in the past. We've got a significant transformation that we need to put into place. Company's performance wasn't where we wanted to be. And so we needed to transform it. And we've put that into 3 transformation phases. Interestingly about the phases is they sound like they run in serial process, but they're actually concurrent. Sometimes it's in a planning phase. Other times, it's in an execution phase, but we have 3 different phases, nonetheless. The first one and probably the most important that we'll continue to move on is all around mission, talent and culture in the organization. So we're going to be highly focused on continuing to drive the mission that we put into place, which is getting a lot of traction with the organization. We're also going to continue to evaluate the talent, but we've made significant changes already in the capability to be able to stand up the organization as a separate company.

And then the third one is around culture, and we've done a lot here, not just in the way that we talk about the culture of the organization, but in the structure of the organization. And that just continues from here, right? So we put a structure in place that allows for more autonomy and decision-making, speed in that decision-making and then very importantly, accountability for the decisions that we make and the commitments that we make. So that's the big changes in Phase 1, and that will continue. Phase 2 is really more around strategic alignment, and that's going to continue as we go as well. All these phases are perpetual. But we just had to align on what markets do we care about, what are the growth drivers inside of those markets and then how do we align our resources against those. That took a lot of time, but we're executing against it now.

And that included specialization of our sales organization in those areas. And the third phase is what we're in the middle of today and we'll continue again perpetually is transforming for the future. A big element of that is portfolio transformation. That's our SKU rationalization project that we put into place. It is also the P&F transaction that we just closed, a big week for us, obviously, to get that closed. And then it will be moving into M&A as well now that we have a better leverage ratio. So those are the things that we're going to continue to do. It wasn't just a flash in the pan. It wasn't a 3-phased approach that ends. That will be what we do perpetually as an organization.

Great. So I think it's fair to say that Solventum is a very different company compared to a year ago. Talk about how you focused on real changes that matter, especially in terms of the talent and culture overhaul and the shift to increased accountability.

Yes. I mean that's a big one again, in Phase 1. You're focusing on the Phase 1, kind of the hearts and the minds, mission, talent culture piece of the organization. And just to say one of the most important things, I believe, if you're in a med tech company is to have a mission that you can kind of look up to and be inspired by. And that's exactly what we were able to create. We created a mission that shows that people's work and they're working very hard right now is improving lives around the world. So that was a big part of the change that we made right out of the gate. The other I mentioned it before is talent changes. We've got significant changes in the competency and capability of the talent that we put into place.

And that's not just at the senior level of the organization, that has cascaded down all the way through the organization, and we're going to continue to focus on that. And then as I mentioned before, it's the culture shift. That is a significant shift in the change in the way that we are going to show up as an organization, an organization that's looking for continuous improvement constantly, we always say that we can be happy about the progress we've made. We will never be satisfied with where we are. So it's a continuous improvement culture with an accountability mindset.

Talk about your innovation engine. What gives you confidence in that engine? And what are some of the launches we should be on the lookout for in 2025?

Yes. I'd tell you, it's actually a pretty good setup for us when you think about innovation. I think the first thing that's sometimes hard to do, but if you have it already, it's good, is to be in an attractive market. It's really important to be in an attractive market if you're going to be innovating inside of a market because you get the benefits of that. And so we're already in attractive markets pretty much across all of our categories. And if I look outside of that, it really comes down to do you have the capabilities inside the organization to innovate effectively. And coming from 3M, we have some of the best material and data scientists in the world. And this isn't just because I'm reading about it, and I know 3M had it. I'm visiting with these folks, and it is amazing the amount of power we have from a mindset perspective in the organization.

So that was already there. And then we have these brands that are in the market that are differentiated, that are respected. And that's a big deal, too, because now your company is already respected because of the technology in the marketplace. Those things existed. What we've added to that is now the alignment from a strategy standpoint, focusing on our growth drivers and putting those resources basically directly aligned to those growth driver areas. Before there was innovation for innovation's sake. Now it's innovation for the areas of concentration that we're in. The combination of those 2 things gives me a lot of confidence that we will invent new-to-the-world technologies that will make a difference.

Got it. Can you talk about the specific enhancements that you've made within the MedSurg leadership team, regional structure, governance and commercial organization to address the past underperformance of that business?

Sure, sure. I mean if you think about it, that was one of the businesses that needed probably the most attention. Before we moved into the positions we're in today, we had about 4 leaders in 5 years in that business. And that is a 50% of the overall health care business. And so that was an area that we really needed to dig into and make sure that we optimized. And interestingly enough, it became a microcosm of the macro, as you would expect, and it followed the same phases that we have as a broader organization. But on the talent side, I don't think I've ever seen as much of a refresh in talent as quickly as we did ever in my life. It's the group President over MedSurg. It's the presidents running the businesses underneath that individual. It's the regional presidents are different, even the Vice President of Sales, area Vice Presidents in the U.S. Our commercial operations leadership has changed. Our distribution leadership has changed. Our corporate sales leadership has changed.

So just a dramatic overhaul and refresh of the talent there. And then in concert with that, from a Phase 2 perspective, they have really aligned around their 3 growth driver areas. They've taken now research and development and medical education. We've moved that into the organization, and now they're aligned also to those growth driver areas. So you're just seeing a major alignment that you have not seen before in strategy and focusing of resources. And then we've also added M&A capabilities inside of that business because we want to look for scouting opportunities, upstream marketing opportunities and ultimately, integration of assets into those businesses.

Got it. So it seems like it's working well for you in MedSurg. Are you looking at similar opportunities in Dental and HIS as well?

Absolutely. I mean it's probably less of a need for the total revamp because you've had more consistency and leadership there. But where you're really seeing the changes as we've taken the kind of the corporate infrastructure around medical education and just Med Ed overall as well as R&D, and we've moved that into the businesses. They have more access now to those resources and they can dictate and drive where those resources are going to be spent. And that just wasn't the case before.

Got it. So let's move to the Purification and Filtration business. Congrats on the deal close. It was earlier than we were expecting. Wayde, maybe given the intra-quarter close and the timing of the debt tender, how would you have us think about the third quarter and fourth quarter split of the $0.08 of updated EPS guidance?

Yes, sure. Glad you got to this one early. As Bryan said, this is an exciting week for us, truly transformational. The earnings per share benefit is certainly a big part of it. But I would just start by reminding people, this is a game changer for us from a strengthening of our balance sheet and our financial profile, clearly improves our operating margins and then simplifies our portfolio for us. So wonderful transformation for us. As you said, we've put out publicly that on an annual basis, this will be a 25% to 30% benefit. We're going to get some of that in 2025. We've already had about $0.10 running through the P&L for the stop of depreciation on that asset for assets held for sale. And then as we just communicated in our press release, we're going to pick up another $0.08 of EPS benefit this year.

And to your question, most of that, almost all of that is going to come in the fourth quarter. That's due to the debt tender that you just mentioned. Our primary objective in using the cash from the sale of purification filtration will be to pay down debt, and we've already started that tender process. So as a result, we'll get a small benefit, think like $0.01 benefit here in the third quarter and almost all of that $0.08 will come to us in the fourth quarter. So if you add that to the $0.10 benefit from asset held for sale, we'll get about $0.18 of the benefit, that annual benefit this year and then the balance will come next year, call it, $0.07 to $0.12 incremental benefit next year to get us to that total 25% to 30% accretion from the divestiture.

So just to clarify, so the $0.25 to $0.30 deal accretion roll forward it sounds like you're getting more than half in '25 and then the balance in '26. Is that the right way to think about that?

You've got it exactly right, Vik. Yes. So we're going to start -- the primary trade-off is obviously by divesting purification filtration, we have less EBITDA running through the P&L, but we more than offset that with the interest savings from the debt paydown. And so the timing of when we pay down the debt and start to get the interest savings is what drives that fourth quarter, call it, $0.07 benefit. And then that's what will then carry over incrementally as we annualize that and call it that next $0.07 to $0.12 benefit that we'll pick up in 2026.

Got it. So you retained the drinking water filtration business. Are you going to explore a sale for that DWF business further down the road?

Yes. I mean, maybe if I take a step back and say why did we retain it, it's not necessarily because we see that business as being highly aligned with our strategy going forward, but it was just getting in the way of moving fast on the larger transaction. And as Wayde said, this is a pretty transformational transaction for us, and we didn't want anything to slow it down. So we pulled that out so that we could move faster. And as you've seen, we did. We closed earlier than expected, which is the benefit that we're seeing in this year relative to earnings per share benefit.

And we'll eventually look to sell that business. Our goal is to likely wait until we do our ERP cutover so that we can set that business up to be able to be separated without a bunch of additional IT work because we're a little busy with other things right now. But that was the intent. The intent was let's hold this business back. Let's move faster on the larger, more transformational transaction. We'll make sure that we keep enough value in that business. So when we sell it, we make money, but we're not in a rush to necessarily do so.

Got it. How should we think about the rest of the portfolio in terms of portfolio management? You divested P&F. Are there plans to look at other assets to divest down the road?

That was probably the reason why I said when we look at the phases of transformation for our organization, they're not a point in time. It is perpetual. So when I think of transforming for the future and a sub-element of that as being portfolio optimization and transformation, that never ends. So we will constantly look at the portfolio that we have, and we'll determine if assets belong with us or somebody else or if we need to acquire assets to be able to again drive our strategy. But that process of optimization of the portfolio does not end.

Okay. Got it. So obviously, the proceeds, I think you said the majority is going to be used for debt paydown this year. But just talk about the firepower you will have to do deals post the P&F sale? And how soon can we expect to see something?

So maybe I'll start with a few things and if you want to add to it. I would just say that we're not going to speak specifically to the level of firepower. But what I would tell you is given where we are in the journey and the targets that we have in front of us to acquire, I don't feel pressure from a capital perspective on being able to execute what I want to execute in 2026. So I feel like we've got plenty of room from a capital perspective to do the types of deals we're looking for, which we have stated are going to be pretty close to the best in markets that we're in where we can leverage our commercial infrastructure. We have a right to win and play. and are easily integrated into the organization. So those will be smaller tuck-in type of deals where we're leveraging our know-how and capabilities. So I feel no pressure on having enough capital to do those types of deals in '26. I don't know if you wanted to add anything else.

No, I think you covered it well, Bryan. It puts us in a nice leverage position, either in line with our peers or even slightly less leverage than our peers. So it allows us to go on offense, as Bryan said, and we're looking to be that programmatic serial acquirer of tuck-in acquisitions. So it's not like we'll be doing anything large and transformational and leveraging up in order to do that.

And what about potential areas of interest?

So again, the primary thing we're going to concentrate on for a myriad of reasons. But first, I would say we want to be very close to where we are today. So it's going to be in markets that are either in markets we're playing in or near adjacencies. And the obvious reason is, out of the gate, you want to test the machine. We've hired a lot of great people. We have a great apparatus right now to be able to do M&A, but you still want to test it. And the best place to test your machine is in areas that you know and you've got infrastructure in today, just lower risk and lower complexity as a result. And the other one is we have a lot going on still with the separation. So we just want to make sure that inside of that separation and the divestiture we just did, we have the capacity to be able to absorb that M&A. So just know that in the beginning, it will be smaller tuck-in deals in spaces that we know with less complexity and lower risk for, again, a number of reasons.

Okay. And just remind us of your M&A criteria in terms of accretion, dilution, ROIC targets.

Sure. Maybe I'll start and then -- so I'd say, first and foremost, we want to be a very mission-centric organization. As I said before, most people are in med tech because they like the mission. They like the purpose of the organization. And I want to make sure that we adhere to that when we're acquiring a company. It has to be mission-centric. It's got to feel good to the heart that we're actually solving real problems. That's number one. The second is it's got to have a market growth rate that is accretive to what we're in today. And of course, as a result of that, an ability to be accretive from a revenue growth perspective, not just an attractive market, but also be able to take advantage of that growth rate.

And we want to look at those markets that are more profitable. So if we know that we can drive mix benefit through those acquisitions, that's a very attractive way to go. So those are the obvious things that you want to do. And then you have all, as you would expect, the financial metrics and hurdles that we would focus on. We want to make sure that these are shareholder-friendly, right? It doesn't make any sense for us to do deals that aren't shareholder-friendly. So we have specific metrics that we'll look and make sure that we jump those hurdles before we buy. Anything else to add?

I think you hit it, Bryan. Specifically around the financial metrics, we want to be accretive to our overall market growth rates. We're buying into or acquiring into markets that will help increase our market growth rate over time and our [indiscernible] as well as a gross margin profile. A lot of times, early-stage acquisitions will have a lower gross margin until you get into the volume and gross margins. So you got to take a little bit of a longer look to gross margins. Internally, we have our return on invested capital hurdle rates. We don't share those for competitive reasons. But you can imagine we're paying very close attention to our return on invested capital as well as the capital intensity of the businesses that we're looking at.

And what are your comments around valuations? Like what are you seeing in the marketplace right now for these tuck-in deals?

Yes. I joke when you talk -- we talked about this last night, it always seems like except for P&F -- the asset you're trying to sell seems to have a lower multiple than you would like and the asset you're trying to buy has a higher multiple than you would like. And the good news is we got a great multiple for the sale of P&F. I think one of the best in the sectors that you've seen so far. And I would just say that I think all of us know the assets that we're going to be interested in, which are in those attractive markets, they're fast growth, they're profitable, are not inexpensive. That's why we have to remain disciplined. Does it meet the strategy that we're looking to move forward? And does it meet our financial hurdles? And will it be good for shareholders. So we're going to have that disciplined approach. But make no mistake, these are not inexpensive assets in med tech.

Got it. I want to touch on dental. I'd love to hear about the new launches you have in that business and perhaps more detail around market reception and commercial success of these new products since launch.

Yes, I'd say I'm really happy with what I'm seeing there, and it does speak to this concept of getting vitality index up and making sure that you get alignment of research and development with the strategy of the organization. It sounds like basic blocking and tackling, but it wasn't happening before. Just as an example, on Dental, they've really seen a change in fortune here because they had 2 years before the spin where they launched no products. Even though there's money being spent in research and development, that's crazy. And now they've launched 3 really solid products this year, and they're seeing strong traction from those products. And that's the reason why in our last earnings call, we said that we expect to see accelerated growth from them in the back half versus the first half, not because we think that the market is going to improve, but because we're seeing traction in those new products.

Clinpro Clear is a fluoride treatment that I truly do believe, I'm not just saying and I'm seeing it, is transforming the way fluoride treatment is going to be done. It dramatically reduces chair time and it dramatically reduces the inconvenience for the patient. That's a powerful combination when you're talking about dental procedures. So you're seeing it not just take share, you're seeing it expand the market. Because before it was so challenging, people didn't want to do it. Now it's like an impulse buy. You're in the chair, got an extra 15 minutes, I can get you the fluoride treatment. The dentist makes money, you take care of the patient, you protect the patient, and it's just a way of expanding the market. So I'm pretty excited about that one. It doesn't sound that exciting when you hear fluoride treatment, but it's a pretty cool technology.

And it does take advantage of the material science capabilities that we have in 3M to make it a water-based technology where others don't have that. The other one is Filtek Matrix, which is a composite that we have that's the most clinically studied composite on planet Earth when it comes to dental composites. And it is a brand name at that level that doctors and dentists understand. And what we're doing there is to make it easier to match. I don't think if you've ever been into the dentist and you've got to get a composite put on your tooth, they'll spend an enormous amount of time eyeballing the color of your tooth against a color pallet that's quite wide and they're trying to match that. We've simplified that process and somehow through our material science come up with 3 colors, just 3 colors that will match anybody's teeth. And so you only have to pick from those 3, you get a better quality outcome and a lot lower cost and time to do it.

And the other one is around clear aligners. We're a pretty small player in this area. One of the challenges associated with clear aligners is you have to go in every month. Some people don't know, you go in every month to get a new aligner. And then inside of those aligners, you have these things called attachments, which are like boosters to move the teeth in a more efficient, more effective way. Those have to be put on individually across each tooth. And you get flash when you do it, it's a whole process. It's a pain and it takes chair time. What we've done is because, again, the material science capabilities that we have, we have a certain material in our attachments that now allow it to be 3D printed. So we can 3D print the whole -- I'm just going to call it scaffolding so that you don't do them one at a time. You just pop the whole piece in. You put all the attachments in at one, you get less flash and then you put the clear aligner on. That's a game-changing technology inside clear aligners. Now we're a small player, but our growth rate is pretty good in that area because of it.

Great. You also recently announced a new partnership with Ensemble. Talk about the opportunity here and the time line for the rolling out of Solventum's autonomous coating technology across Ensemble's health system clients.

Yes. So maybe just take a step back because not everybody knows that space that well. Ensemble is a -- so when we play in revenue cycle management, we play through software solutions to help people do revenue cycle management. Ensemble basically takes over the service. They're a service provider like contract manufacturing almost. They come into the hospital and they basically take all FTEs and the entire responsibility for doing that revenue cycle management for that hospital or hospital system. And they're one of the largest service providers out there. And so the beauty for us is once they take that over, they make the decisions on the software packages that are going to be used. So as we have this partnership with a customer really, then we get access to all their accounts. The way that we help them is we go market their services to other hospital systems. And so the goal for them is to be able to provide the commitments they've made to the hospital at a lower cost, and we can do that through autonomous coding.

So that's really the big benefit here is we have this relationship. They are a customer for all intents and purposes. And their goal is to move autonomous coding in to reduce their cost to serve that customer and also get more reimbursement because you have fewer mistakes with autonomous coding because you're using AI versus a person who can make mistakes. So it's a great relationship between the 2 of us. The only thing is it takes a little bit of time to get the revenue. It's about 6 to 9 months to be able to get the software in place. And then once you put it in place, you don't get the annual revenue right away, you get a prorated basis on it.

So basically a 12th every month that you're accumulating. So we'll take all the hospitals they have. We'll do it in waves. We'll begin to move them to autonomous coding, takes 6 to 9 months per wave, and then we'll start to get 12 of the revenue each time as we go from there. So it's a great opportunity. It galvanizes us as the leader in autonomous coding, which is the new wave in revenue cycle management. And it puts us in a position with one of the largest providers of revenue cycle management.

Got it. Should we expect more deals like Ensemble going forward?

Potentially. If we -- that's a great one because it's a partnership, really no capital outlay at all. The more we can partner, not just in HIS, but any business is fantastic. Distribution arrangements are great because you can test before you potentially buy. But you would see all of those levers being pull, partnerships, distribution arrangements, acquisitions, all those will be flexed by the organization. And we're putting competency in each of the businesses so they have the capability of doing it.

Got it. So Wayde, you had your Q2 call about a month ago. You gave us the updated guidance for the year. How should we think about Q3 and Q4 in terms of cadence? And what are the key variables we should consider as we look at the back half of the year?

Yes. Happy to share some information there. And you have to just remember, we're still in the middle of a separation. So there's a lot of moving pieces within our numbers. So maybe to set the context, in the first half of the year, we grew 3.5%, and we called out several things that drove additional order volume in that first half of the year, some related to our ERP and distribution center cutovers and some related to the SKU exits where we're planning to exit some SKUs, and we've got customers buying some volume ahead of that. So what we said in the aggregate is that there's about 1% of additional volume in the first half related to those -- related to that order timing. So that normalizes our first half to about 2.5% growth.

In the second half, if you do the squeeze math on the guidance that you're referencing, Vik, it says that the second half should grow at 1.5%. And that's because we're giving up that volume to the first half. So if you normalize the second half, we think it's going to come out at about 2.5% as well, which puts us right at the midpoint of our 2% to 3% guide for the year. So inside of that, if you think about our MedSurg business, our biggest business, it's kind of a tale of 2 cities. We had a headwind in Q2 related to the Advanced Wound Care business. And then we think the Advanced Wound Care is going to accelerate in the second half. We'll have faster growth in the second half.

And then the Infection Prevention Surgical Solutions side of the business, which was the primary beneficiary of that volume in the first half, and that's mainly because it's a high volume, a lot of SKUs, a lot sold through distribution. That's where we think we're going to see most of the giveback of that volume in the second half. And then other than that, Bryan touched on dental already, just given the new product momentum we have there, we're expecting the second half of the year to see some stronger revenue growth in dental as well. So you put all that together, that's how we get to our guidance for the full year.

Okay. You also said that you've had a slow start on free cash flows in the first half of the year due to the timing of some payments. So can you talk about your confidence in achieving your free cash flow guidance for the year? I think it's $450 million to $550 million.

Yes. We're confident. We've got action plans in place. As you said, we had a slow start to the year, which really means we had some timing things impact the first half of the year that we're looking to see improvement on in the second half of the year. So we haven't changed the guidance, and that's what we're planning to deliver for the year.

Okay. We're in September. I'm sure you're planning for 2026 at this point. Maybe just sort of throw out some of the potential headwinds, tailwinds, puts and takes we should keep in mind as we look at our model for next year.

Okay. So -- and definitely, we're thinking about 2026 for sure. And I would say -- maybe I'll start with revenue and then pass it over to you for margin views. And of course, we don't want to give too much color, but I think some will help. So first and foremost, one of the biggest things that we're seeing in the acceleration of our growth rate is around the commercial improvements that we put into place and some of the new product launches that we have. That will continue, maybe not at the same pace because we saw a jump faster than I would have expected for those 2 things, but that will continue in the next year. So that's going to be a tailwind for us. So commercial enhancements and the new products that we've already launched and will launch in 2026, right? So that will help us there.

I would also say from a tailwind perspective, now that our cash position is in a different place, you could see some inorganic innovation being peppered in, and that could also help us with growth rates, certainly in '26, but beyond would be the key focus there. And so those would be the 2026, I would just define as tailwinds. From a headwind perspective, it's not really an underlying business headwind, but it is a growth rate headwind, which is going to be the SKU rationalization. That's going to be about 100 basis points of headwind in 2026. So that would be on the negative side.

I don't ever want to diminish the risk of ERP cutovers because we have some pretty substantial ERP cutovers in '26. I feel like we've got a great team in place, and we've got an excellent mitigation strategy, that's 3-pronged approach to mitigation, and we've done quite well so far. But you don't ever want to disrespect the ERP cutover. So I'm just keeping that in my mind, too, as a potential risk. So those would be the way that I would think about it. And of course, outside of all that from an umbrella standpoint, any kind of market movements could either help or hurt the business. But we're just assuming there's a relatively stable market coming into '26.

Okay. Just to double-click on that 100 basis point SKU impact for 2026. Can you just talk about the specific categories of SKUs being exited and why there's an acceleration in '26 versus '25?

Yes, sure. So maybe just taking a step back on this one as well. This was a program that we initiated right when we spun because we recognized that we had some house cleaning or simplification to do around all the SKUs in the business. And what we quickly realized is there was a group of decisions that could be made quite easily, and we call that wave 1, and those are underway today. And then we had to do a lot more work on the data granularity side of it to get the decision-making, called decision grade information to decide on what products we're focused on are the ones that are lower or negative growth or low growth that have lower margins or negative margins.

And so in order to clean all that up, we created a wave 2, did a bunch of work to decide what SKUs we're going to take out. The longer tail on it, as Bryan said, it's 50 basis points headwind this year. It's 100 basis points headwind next year is because there are some longer-term contracts that we have to work out as well as inventory that we want to work through as well. So we don't have a big write-off and work through all the transition plans, in some cases, transitioning from those exited SKUs to existing SKUs that we have today.

So overall, the program is going very well. We're on track. We've identified all the SKUs. The majority of them are in the MedSurg business because that's the biggest business by far, but even beyond that, waiting. The other businesses, in particular, dental has taken advantage of the program to simplify its SKUs out there. And the primary objective is, as I said, to simplify, we'll get a small benefit in the P&L, very small top line, a little bit of margin benefit, very small benefit over the next couple of years. But the primary benefit is it really simplifies our supply chain. You think about demand planning, inventory management across the 90-plus countries that we're in.

There's a lot of downstream benefits. And then another benefit we talked about was with the separation, there's a certain amount of cost to rebrand and to reregister the products from 3M to Solventum. And by avoiding thousands of products as part of this program, we'll avoid some of that cost. So overall, we think it's a good simplification program for us to run at the beginning here as we separate from 3M, puts us in a good position to have a much cleaner model moving forward.

Great. Any reason you can't grow above the 2025 revenue growth rate of 2% to 3% in 2026?

So I would say that -- so out of the gate, I'm very impressed with the growth rate that we're getting. It was funny because it was just a couple of quarters ago, we were doing the Investor Day, and we were talking about our LRP expectations on revenue growth, margin and also EPS. And a lot of people came up afterwards said, hey, it sounds great. I don't believe you. I don't believe you're going to be able to get there just based on the trend of this business. And I hope what we've shown in a very short period of time that even in 2025, we are well on our way to accomplish that LRP. That said, the LRP requires us to improve the underlying business performance, top and bottom line every year. That's the goal. That's the expectation. Again, remember, in 2026, you're going to have that offset of SKU rationalization. But if you take that out, we expect to see improvement in '26.

Okay. I just wanted to also touch on interest expense. You've lowered your guidance by $50 million for 2025. You'll pay down debt. I think you said the majority of the proceeds will be used for debt paydown. That implies a pretty significant step down in interest expense for 2026. I mean how should we think about interest expense in '26? And what's reasonable?

Yes. So we're not guiding to 2026 yet. So I won't give you a number yet, Vic, but I love that you're picking up on this one because it is a real value driver for us. We've been talking about since spin that we were going to work on reducing our debt load because of the interest expense we had. We started the year, as you said, guiding to $450 million of interest expense. And so that's cash out the door for interest. We've paid down $500 million in debt to this point. We've been paying down about $100 million every quarter since we've spun. And that's like a flywheel unto itself. The more debt we pay down, the less interest we pay, the more cash we have and the more debt we can pay down. And then with the purification filtration divestiture here, it is just a huge step forward for us to be able to significantly pay down our debt.

And as you said, it's going to significantly reduce our interest payments next year. We did call out the $50 million reduction related to primarily the fourth quarter here as we tender the debt here through September. And so you can annualize that into next year. So we are very excited about the transformation of many areas of our financial statement, but certainly, the interest expense reduction gives us a lot more cash for the business. and then we can decide what to do with it, as Bryan talked about earlier, now going on offense on M&A and starting to programmatically tuck in faster-growing assets.

Got it. So maybe the last minute that we have over here, I want to touch on pricing. What are your expectations for price in '25? And how should we think about that in '26?

Can you just answer that one, too, as you typically...

Yes, sure, absolutely. So what we've shared is that we're expecting this business in aggregate to be in that plus or minus 1% pricing. We've experienced that over the last few quarters, and that's been a change from the strategy prior to the separation from 3M. There was a significant focus on maximizing price prior to that. And that's just not a healthy strategy in this market. I think there were some volume trade-offs for that. So we're very much focused on sustainable volume growth, and all of our strategies are designed around sustainable volume growth.

Having said that, we do have some pricing capability within the businesses. We'll be offsetting that with trade-offs for volume over time. But again, it's our expectation that we should be in this flat to plus 1% is a good year. If we're just below 1%, that's because we're deciding to go there. We're deciding to make trade-offs for price for volume. But overall, we think it's a healthy business, strong business, and we're going to be focused on driving that volume side of it. Got it. Thank you very much.

Thanks for being here. Appreciate it.

Good afternoon. My name is Kate, and I will be your conference call operator today. I would like to welcome everyone to Solventum's Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. [Operator Instructions] 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 Second 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 release and presentation are both available on the site now.

During today's call, our discussion and any comments we make will be made on a non-GAAP basis unless they've been specifically called out as GAAP. The non-GAAP information discussed 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, [Operator Instructions]. And with that, I'd like to now hand the call over to Bryan.

All right. Great. Thanks, Amy, and to all of our shareholders and everyone else interested in our story, I just want to say thanks for joining us today for our second quarter results. And I'll just start by saying that we are continuing where we left off in Q1, delivering another solid quarter. And as a result of this positive momentum and strong execution, we are raising our sales growth and EPS guidance for the year.

Now this continued strong momentum gives us even more confidence in delivering the growth and margin targets that we outlined at Investor Day back in March. Certainly, there is still work to be done. There's no question about that. But I am very happy with the progress the teams are making across all of our businesses. And we are quickly and importantly, decisively building on the strong foundation established by 3M.

Our differentiated brands in attractive and diverse markets now combined with the cultural and structural enhancements we've already made are delivering results and accelerating our growth and importantly, again, putting us on a clear path to achieve our long-range plan commitments. And in addition to this, our work to revamp our innovation process is on track, and our forecasted new product pipeline is steadily increasing in value as a result.

And then once we close the P&F transaction, as we've stated before, we will focus on disciplined tuck-in M&A to further enhance our progress. Overall, it's clear to me that our value creation framework and our mission to improve lives have aligned our organization to focus on and deliver results. and begin to establish Solventum as a mission-driven performance leader in our industry.

And I want to thank our dedicated global teams for advancing our mission and driving our success. This type of transformation just doesn't happen without your dedication and your desire to win. So again, thank you for making it happen. Okay a few quick updates before moving to our business segments. Let's start with separation. Wayde is going to give more color on separation in a minute, but I'll just quickly highlight that things are proceeding well, and they are on track.

And I can say that a big part of our success here is thanks to the very experienced team that we have assembled. They have been there and done this before, and they are leveraging past insights to mitigate risk in our process. And our multiyear ERP implementation reached an important milestone as we executed the system cutover in Europe this quarter.

And as most of you probably know, the implementations --- these types of implementations are not without challenges. And well, we experienced some of those challenges in the quarter. But the solvers in IT, our global supply chain and our businesses came together and worked as a team to leverage our comprehensive risk mitigation plans. And as a result, they delivered the quarter, but most importantly, they delivered for our customers and patients.

And I can tell you that this success is a strong example of one of Solventum's 5 core values, call it advancing together. And it increases our confidence, certainly my confidence that even when things don't go exactly as planned, we have the right team with the right experience and the commitment to overcome and deliver. This is also a great example of this team's ability to effectively manage our go-forward ERP implementations as well.

Okay. Switching to tariffs. Again, Wayde is going to provide more detail here. But just as a quick summary, last quarter, we discussed some of the mitigations we've already put into place and have been executing against to offset the tariff impact. And based on what we know today about current trade policy and our mitigation efforts, we're reducing the estimated tariff impact for 2025. Obviously, given the fluidity of the environment, we will continue to actively monitor the situation and implement new strategies as needed.

Okay. Now I'm going to move to our business segments, where we continue to demonstrate positive momentum. And I can tell you, a big part of this progress stems from the strategic clarity that we've created through our market and growth driver selection process. That was a very important process to create clarity of focus. And as a reminder, we have 5 growth drivers that will account for 80-plus percent of our growth over the long-range plan. And as we've stated, the 5 growth drivers are negative pressure wound therapy, IV site management, sterilization assurance, core restoratives and revenue cycle management.

Now starting with our MedSurg business. We had another solid quarter of progress fueled by our existing and differentiated brands, our recent new product launches and our commercial restructuring to specialize the sales channel in our growth driver areas. For some additional color on the 2 subsegments of MedSurg, our IP and SS business showed solid underlying business performance in the quarter and also benefited from some follow-on advanced order timing. Now this order timing benefit was offset by short-term pressure in our Advanced Wound Care business due to a voluntary recall that had no patient safety concerns.

Now as we look forward into the back half of 2025, we expect Advanced Wound Care to accelerate and our IP and SS sales to moderate. Relative to Advanced Wound Care, we expanded our V.A.C. Peel and Place launch into Europe and established a dedicated acute care sales team to ensure focus on this game-changing technology. Importantly, we've also recently won several large negative pressure wound therapy customers, reaffirming our confidence in our technology differentiation and boosting momentum as we come into the back half of the year.

When it comes to IV site management, we continue to see strong demand for our Tegaderm antimicrobial solutions with new product launches in major markets across Europe and Asia, again, supported by specialized sales teams across our regions. And within our sterilization assurance business, we have seen early success with our 3 new product launches. And even though these are in early stages of the launch, we are already gaining renewals from our larger customers, and our specialized sales team is generating the momentum to drive to full adoption.

In our Dental Solutions business, we continue to gain momentum in core restoratives with results driven by a focused portfolio, accelerating new product innovation and specialization of the sales channel. New product launches were a key contributor in the quarter, driven by strong demand for Clinpro Clear and Filtek Easy Match. And our customer response to our first-to-market 3D-printed Clarity Precision Grip Attachments has remained positive, enhancing our ability to deliver a seamless combination of dental and orthodontic solutions.

This innovation underscores momentum within the dental team's internal bed area of custom smile solutions. And collectively, these categories help offset pressure in areas like impressioning materials and core orthodontics, helping us to stabilize the segment even in a challenging market environment. And the team expects new product demand to accelerate into the back half of the year and ultimately drive sales growth improvements as well.

Okay. In our Health Information Systems business, we are clearly focused on revenue cycle management and a key component of this is autonomous coding. And here, we recently announced a new partnership with Ensemble, who is a leading end-to-end provider of revenue cycle management services. This is yet another step in solidifying HIS as the largest autonomous coding vendor and underscores its leadership in AI-driven solutions that transform customer operations.

The ongoing success of 360 Encompass showcases HIS' ability to streamline workflows and deliver meaningful customer benefits. And in our international markets, we are seeing 360 Encompass installations in Australia and expansion efforts in the Middle East, demonstrating HIS' commitment to equipping health care providers with the tools they need to operate smarter around the globe.

Last month, I was on site with over 300 of our HIS customers at our Annual Customer Experience Summit. And I'd tell you it was a fantastic opportunity to engage with customers, hear direct feedback about our solutions and importantly for me, to learn more about our customers' views on the future of the space. Overall, I would say it was an exciting week, very well spent with very good feedback.

And last but not least, turning to our Purification and Filtration business. We saw continued strong demand for our bioprocessing solutions, again, reaffirming the importance of our advanced technologies in this space. And our investment in expanded capacity for our industrial business also contributed, driving accelerated growth throughout the quarter. Overall, the P&F business is well positioned for sustained growth, and our transaction process with Thermo is moving along nicely.

And relative to the P&F transaction, in June, we filed an amendment to our agreement for Solventum to retain the drinking water business. This has helped simplify the transaction and importantly, increases the opportunity to accelerate the close. Keeping drinking water also provides Solventum with the opportunity to unlock additional value tied to this business.

And I would just say, overall, Thermo has been a great partner, and we appreciate their collaboration, not just in streamlining the process, but also very importantly, their commitment to ensuring the success of our P&F business. Now before I close, I'd like to highlight a couple of external recognition honors we received during the quarter. Now first, Solventum earned its place on the Fortune 500 in our first year as a stand-alone company.

We are also excited to be named as a best company to work for by U.S. News & World Report. And I would tell you, this recognition, in particular, reflects the hard work of our teams and the early success in driving our values and strategy to put people first and become a best and preferred place to work. And in closing, I'd just say that thanks to our company-wide teamwork and progress against our transformation plan.

Solventum continues to chart a solid path forward. We have an incredible opportunity to create meaningful value, and we are making consistent and repeatable progress in that value creation story. The foundation we inherited, combined with the aggressive actions we've already taken, positions us well for continued growth and margin acceleration and ultimately, sustainable value creation. And with that, I'll turn it over to Wayde for a closer look at our financial results and other key updates. Okay. Wayde, pass it over to you.

Thanks, Bryan. We're pleased to be able to report another solid quarter as we navigate the separation from 3M and prepare for the divestiture of Purification and Filtration, all while gaining momentum in the business amidst an uncertain macro environment backdrop. Consistent with prior quarters, I'll provide you with a separation update and then transition to our Q2 financial performance.

I'll conclude my prepared remarks with an update on our 2025 guidance as well as a financial update for the pending sale of Purification and Filtration, [ plus ] the drinking water business we are retaining. We continue to execute against separation milestones while making foundational changes to deliver on our long-range plan. In Q2, we made further progress on our supply chain separation initiatives.

We moved our European distribution centers from 3M to multiple third-party distribution centers and exited a distribution center in South America, along with executing our largest ERP cutover to date. We've made further progress exiting 35% of transition service agreements to date, including support services for commercial operations and logistics, human resources, marketing, technology and quality and regulatory.

Finally, we're making good progress coordinating our product packaging and rebranding strategies and have materially completed our corporate rebranding, which includes our facilities, media and trade shows.

Now turning to our Q2 results. Starting with sales. Second quarter 2025 sales of $2.2 billion increased 2.8% on an organic basis compared to prior year and increased 3.9% on a reported basis. During the quarter, foreign exchange was a 110 basis point benefit to reported growth. Overall, we had stronger-than-expected sales growth that benefited from positive contributions across all segments.

Importantly, volume continues to be the main driver of our continued execution as we align our organization towards delivering sustainable sales growth and new product innovation. We managed ERP and distribution center challenges in Europe as we began executing our ERP and distribution center cutovers. We still expect the favorable timing benefits from Q1 and to a lesser extent in Q2 will be offset by year-end, mostly in Q3. Pricing remains within our expected plus or minus 1% range and the impact of SKU exits in the quarter was 60 basis points.

Moving to the segments. Our largest segment, MedSurg, delivered $1.2 billion in sales, an increase of 3.9% on an organic basis. Growth was again led this quarter by the Infection Prevention and Surgical Solutions business, which grew 5.9% and benefited from follow-on advanced order timing, which contributed to the higher-than-expected performance. Advanced Wound Care growth of 0.8% was driven by negative pressure wound therapy with growth muted by the previously mentioned product recall.

Looking ahead to the second half, we expect a trade-off as Infection Prevention and Surgical Solutions absorbs the pullback associated with the order timing benefits in Q1 and Q2, while Advanced Wound Care delivers improved growth driven by acceleration in negative pressure wound therapy led by single-use Prevena and the continued rollout of Peel and Place. Our Dental Solutions segment delivered $338 million of sales, an increase of 70 basis points on an organic basis.

We continue to demonstrate resilient performance despite a challenging market, aided by innovation across our restorative and prevention products as well as our Clarity aligners. Our Health Information Systems segment contributed $339 million in sales, an increase of 3.2% on an organic basis, which benefited from strong customer retention of our revenue cycle management software solutions, more than offsetting expected declines in clinician productivity solutions.

We remain focused on system implementations to support our hospital customers as they navigate a challenging and dynamic environment for health care spending. Finally, the Purification and Filtration segment delivered $252 million of sales, an increase of 3.1% on an organic basis. Similar to prior quarters, growth was led by our bioprocessing filtration and industrial filtration categories, partially offset by declines in membrane OEM.

Looking down the P&L, gross margins were 56% of sales in the quarter, an improvement of 20 basis points over prior year. As a reminder, gross margins include a headwind associated with the 3M supply agreement, which was more than offset by improved sales mix and programmatic savings. Notably, Q2 results also included $4 million related to the accounting treatment of the P&F business, which is treated as a held-for-sale asset and provided a $0.02 EPS benefit in the quarter related to a reduction of depreciation expense.

Excluding the held-for-sale benefit, underlying gross margins improved 20 basis points sequentially compared to Q1, consistent with our expectations for seasonal improvement. Operating expenses of $736 million increased modestly compared to the prior year, which reflects inflationary headwinds, public company stand-up costs and growth investments, mostly offset by savings from our restructuring program, which remains on track to deliver $120 million of annualized savings.

In total, we delivered adjusted operating income of $474 million, which translates to an operating margin of 21.9%, ahead of expectations. Moving down the P&L to nonoperating items. Our net interest expense and other nonoperating spend improved modestly versus Q1. Lastly, our effective tax rate of 18.3% was better than our expectations, driven by favorable geographic mix.

Overall, we delivered earnings per share of $1.69, ahead of our expectations, driven mainly by sales outperformance and favorable margins. We also ended the quarter with $492 million in cash and equivalents with no outstanding borrowings on our revolving credit facility.

To date, we have made cumulative repayments of $500 million on our $1.5 billion prepayable term loans, which includes another $100 million paid off in June. For Q2, we generated free cash flow of $59 million, which was consistent with our expectations of improvement over Q1 and reflects normal seasonality and the timing of interest payments.

Now turning to our 2025 guidance update, which reflects our Q2 performance and momentum to start the year. As a reminder, our guidance is for the whole company, including the Purification and Filtration business, which is treated as held for sale until the transaction closes. Starting with full year organic sales growth, we have increased our outlook to a range of 2% to 3%, a 50 basis point increase 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 2.5% to 3.5%, reflecting the continued volume-driven performance across our business segments as we execute against the phased approach to reposition for growth.

Regarding foreign exchange, we now estimate currency will have a favorable impact of approximately 50 basis points on sales growth for the full year. This compares to our prior expected impact of neutral and will have a positive benefit on our reported sales and earnings per share. And based on better-than-expected effective tax rate through the first half of 2025, we are now comfortable at the low end of our initial guidance range of 20% to 21%.

Before commenting on earnings per share, I want to bring you up to date on our latest thinking on tariff headwinds, which we now estimate to be $60 million to $80 million, down from our initial range of $80 million to $100 million and impacting Q3 slightly less than Q4. The reduction represents improved estimates for U.S. and China tariff rates, partially offset by higher rates for Europe and other smaller regions.

The favorable update will ease pressure on gross margin and operating margin in the second half of the year, and we continue to anticipate achieving full year operating margins now closer to the midpoint of our initial plan range of 20% to 21%. Altogether, for earnings per share, we have increased our guidance to a range of $5.80 to $5.95 from the previous guidance of $5.45 to $5.65, which reflects the strong performance in the quarter, combined with further improvements into the second half of the year.

We are maintaining our free cash flow guidance in the range of $450 million to $550 million. As a reminder, free cash flows are impacted in 2025 from separation-related costs, and we expect our free cash flows to improve in the future as those costs step down in 2026 and again in 2027 as we complete the separation from 3M. Before closing out, I also want to provide you with an update on our purification and filtration divestiture.

Following the amended terms Bryan touched upon earlier, we are updating our estimated pro forma annual adjusted EPS deal accretion to a range of $0.25 to $0.30 (sic) [ $0.35 ], an increase of $0.10 compared to the estimated EPS accretion shared at our Investor Day. We are also revising the gross margin accretion to approximately 100 basis points compared to our earlier estimate of 200 basis points and revising our operating margin accretion to 50 basis points compared to the earlier estimate of 100 basis points.

This deal represents a major milestone for our portfolio transformation strategy and accelerates our time line to pay down debt to deleverage our balance sheet, which we expect to achieve through further paydown of our term loan and bond buybacks while positioning us to pursue programmatic tuck-in M&A. On an annualized basis, the transaction improves our gross margins, operating margins and earnings per share. Based on expected close by year-end, we continue to anticipate the impact on earnings per share will be neutral in 2025.

Finally, I want to reiterate our commitment to continued investment, consistent with our attractive growth driver opportunities and realization of the long-term value creation ahead. We will balance these investments by identifying opportunities to expand margins and generate strong cash flows.

In conclusion, we had a solid quarter and are making great progress towards achieving our long-range plan goals of accelerating sales growth to 4% to 5% and growing earnings per share at a 10% CAGR.

We are also executing well on our plan to separate as an independent company. We can feel the momentum building and are excited about the continued value creation story at Solventum. With that, I'll now hand it back to the operator for the Q&A portion of the call.

[Operator Instructions] Your first question comes from the line of Jason Bednar with Piper Sandler.

Real nice quarter here. Why don't we start with the organic growth guide. You're doing really well with MedSurg, especially considering the pull forward of the business you had last quarter. Maybe talk about the trajectory that you're seeing in that part of the business? What's driving some of that upside? Is it the commercial organization, just the focus? Anything you can add there? And then maybe talk a little bit about the back half, knowing that your comps here are still really favorable for that part of the business?

Yes. Good to hear from you, Jason. Why don't I start with what's driving the MedSurg business, and then you can speak to any movement between quarters. So what I would say is that right now, MedSurg, as we've talked about before, has 3 of our growth drivers. So if you've got 3 growth drivers in your business, you better start to see some traction because that means we're spending a lot of time and effort in those areas.

And inside of those growth drivers, regardless of which one we're looking at, there are really 3 levers that we're seeing. The first one, as you referenced, is the commercial restructuring that we've done to specialize the team. That is paying significant dividends. It really is -- it's a whole cultural change that we have in place. It's a specialized team, and it's an incentive plan that is getting people focused on growth. So that's a big piece of the movement right now.

But the second one is pretty big, too. It really is taking advantage with this new engine with these brands that we have that are differentiated in the space. And I probably don't talk about this enough, but these are brands that have been around for a long time that have real clinical differentiation that are as valuable as a new product launch in the right hands with the right focus. So that's a significant benefit to us that probably I underappreciated when we started the game here.

And then third is just the new product launches that we've had that we've talked about, either in sterilization assurance or negative pressure wound therapy or other parts of IP and SS. So those are the variables that are working. And here's the thing, we're just getting started. So the momentum is there. The confidence is growing, and I would expect to see us continue to grow ahead of where we are today. So I don't know, Wayde, do you want to talk to anything about.

Yes, sure. Jason, on the second part of your question there around growth rate in the second half. And I think for context, it would be helpful just to frame it for the total year. So keep in mind, we reported 3.5% growth in the first half. And as we've shared, about 1% of that is due to order timing that we got in advance in the first half of the year, and we expect to see that pull back in the second half, mostly in Q3.

And if you look at our guide now at 2% to 3% for the year, the second half implies a midpoint of 1.5%. And so as we give that 1% to the first half, we take it from the second half. And if you normalize what we said in the first half was we were normalized at 2.5%. And if you shift that 1% back to the second half, it would be at 2.5% at the midpoint. In other words, we think we're growing consistently in this 2.5% range in the first half when you normalize for order timing.

And in the second half, at the midpoint of our guide, if we continue to grow at the rate we are, we'll be in that 2.5%. And as Bryan said, we feel like we've got really good momentum in the business here. Certainly, there's puts and takes, but we've got, I think, a real building success story here with the commercial output that Bryan just outlined.

Very helpful. And Wayde, I'll stay with you. Just a question on maybe the EPS bridge, if you could, from last quarter to this quarter, you raised by $0.32 at the midpoint. You beat it almost by a quarter.

We're picking up a dime on updated tariff assumptions, but you've got FX as a tailwind, it doesn't seem like there's much being attributed to back half organic growth numbers maybe inching up a little bit. Tax is a good guy. So I'm just wondering what may be cutting the other way that we're not accounting for? Or is this just conservatism on only raising by the amount that you did here today?

Yes. I noticed how you asked the question there. It is quite a strong rise, and we are only halfway through the year. So what we'll say here is we're tightening the range as we progress through the year. And given the year-to-date performance, it raises our confidence. And as you said, we're in that $0.33 increase at the midpoint.

And this accounts for the Q2 beat plus upside in the second half. And as you know, and you just listed several of them, we're certainly managing a lot of variables. Number one, the separation activities, but also tariffs, taxes, foreign exchange. And given we're only halfway through the year and that these variables can turn, we are comfortable with the raise that we put in place this quarter.

We're very happy to be tracking ahead of our commitments for the year, including offsetting pretty substantial tariffs here. And so we think it's a strong raise. We'll continue to monitor all these multiple variables, continue to progress on our separation activities, and we'll see how we look in the second half of the year.

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

I guess, Wayde, there was a lot of moving parts in the quarter, order timing, patient recall, ERP, SKU rationalization. I don't know if there's a way to kind of walk through those again and kind of bridge the 2.8% you reported and just kind of get to more of an underlying growth rate in the quarter that's kind of apples-to-apples. And then that way we kind of think about the underlying growth in Q3 a little bit better versus kind of first half, second half.

Yes. Good to hear from you, Travis, and I appreciate you thinking that I can't answer that question. You go right. But I'd tell you that what I would say is we did have a lot of puts and takes particularly on the revenue line in the quarter. And we wanted to call those out in the prepared remarks because people would have questions on why certain businesses were up, certain businesses were down.

But I think on an underlying basis, if I take all those puts and takes into account, the 2.8% that we posted is a good view of what the realistic growth was in the quarter. So you can kind of take that 2.8% and say that's the bank number. That's what we did. Puts and takes for sure, but they offset for the most part, and that's a good view of what we did in the quarter.

Bryan, I think you covered that really well. Just to highlight a couple of other data points that we put in the release and in our prepared remarks. As Bryan said, 2.8% is pretty representative of what we think the business is growing with several puts and takes. Order timing was less in Q2 and certainly less than we saw in Q1, but had a benefit, as we said, primarily Infection Prevention Surgical Solutions, again, just given the setup of that business.

And we called out the SKU impact of 60 basis points headwind. That was about double the impact that we saw in Q1. So those are a couple of pieces there. I certainly appreciate a lot of moving pieces. Obviously, in a separation like this, we've got more to deal with. But having said that, we're still very happy with the momentum we saw, the momentum we're building here in Q2 and the strength of Q2 to give us the confidence to raise the guide here, puts us in a good position for the second half of the year.

Great. sorry, Bryan. But the other thing I'd like to ask is kind of more like -- so you're kind of at this kind of mid-2% underlying growth rate right now. And as you look forward, and I know you're not going to give next year's guidance, but is there any kind of reason why we shouldn't think about this growth rate getting better? Or does decel for certain reasons or accelerate for certain reasons? Just kind of trying to think through the puts and takes in the model going forward.

Yes. So we're going to have a -- as you probably remember, a bigger SKU impact next year. We had talked about 50 basis points this year, waiting before I say it, did we already say what it is. It's going to be about 100 basis points next year. So just -- you got to take that into account first and foremost.

But outside of that, if you just get rid of SKU for a second and you look at underlying business strength, we would fully expect to continue to enhance our growth. That's the plan. And it's going to be through those 3 vectors, the commercial restructuring that we've done and the focus that we have will continue to pay dividends, the new product launches that will continue to come in 2026 as well. And of course, the brands that we already have in the market that we're basically relaunching.

And I can't wait at some point, we need to get folks out to the businesses so they can talk about some of these brands that have been out there for a long time, but are significantly underpenetrated. They're very profitable. They're clinically relevant, and we are going to relaunch those products.

Your next question comes from the line of Patrick Wood with Morgan Stanley.

I'll keep it to one. I guess, at least from our perspective, the organic growth is going better than expected and doing well on that side. And if all things go well towards the end of this year, you're going to have a balance sheet that looks pretty radically different.

So I guess, compared to when you first took over the business, how are you feeling about that capital allocation? You mentioned bolt-on M&A, but like how much you feel you need to do that to buy into the kind of midterm growth range versus the levers that you've already got, we're early with Peel and Place.

How are you thinking about interplay between buying new businesses to kind of augment the growth versus what you have on hand today versus when you first took over, if that makes sense?

Okay. Thanks, Patrick, and thanks for the one question. I thought it was going to be a really long one. So I appreciate the one question, and it's relatively short. I would say that the M&A to me is an enhancement to not a requirement to get to the mid-single-digit growth rate. We had said 4% to 5%, which gets into mid-single digits in our LRP.

That is an organic go get that we're feeling much better about. And if anybody was doubting whether we could get there or not, I think our performance so far is [indiscernible] that out. But I don't look at M&A as a way to get there. I see M&A as a way to potentially accelerate getting there or potentially overachieve.

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

Maybe talk about, if you would, a couple of the underpinning processes underway. You highlighted, Bryan, the progress -- the positive progress on the ERP front in the EU. Maybe talk us through the next big milestone there, time lines there. And just maybe remind us, if you would, the impact of this process going on and being maybe when it's totally completed and the impact you think it's going to have on the business? How are we going to see it? I mean, does it -- is it going to -- is it more in working capital that we're going to see it, something about cash flow? Just help us think through about the positive longer-term implications of this process.

Yes. Thanks, Rick. And so maybe I'll start with that, and then I'll pass it over to Wayde to talk about some implications. Implications beyond the obvious. If something goes wrong, it has -- could have an immediate impact on revenue, but our goal is to make sure that, that doesn't happen. So you can talk about other potential implications.

And I would just say that, first and foremost, we just need to complete this larger implementation that we're in. That's what we're highly focused on. Things have had some challenges, but we've really overcome them. So I'm feeling great about where the team is, but that's first and foremost.

We've got some smaller implementations through the rest of the year, but they're immaterial relative to this one. And then we don't have our next large cutover until 2026, where we have 2 that we're expecting in 2026. And we'd be pretty much fully through this as we come into the end of 2027. And then Wayde, anything you'd want to...

Yes, sure. So on the cost, I think, is your question, Rick, where we're incurring cost to separate both in OpEx that we carve out for non-GAAP separation costs as well as capital expenditures. And as we said a couple of times, we will expect to see that ramp down in 2026 and then ramp down further in '27, as Bryan said, the big [indiscernible] here to move are those ERP implementations. And as Bryan said, we're planning to have those completed in 2027.

As a result of that, we're expecting our free cash flows. That's the metric that we'll see significantly improve in 2026. And then again, in 2027 as we don't have to incur those separation-related costs anymore. And I think I would just add to this one as part of your question is not having the distraction and the level of work and focus that people have to put on separation activities while they're doing their day job.

We've got a lot of our best and brightest working really hard on the separation. And I think what we're looking very much forward to is getting to the other side of the separation and then focusing just on building and strengthening the business.

Got you. Just a brief follow-up. You highlighted that, of course, and remind us that the drinking water business, you've kept it for all the reasons you said. And I think Bryan's words were the potential to unlock additional value here. Maybe talk through that. When -- how might that value be realized? How big a priority? Is that something that could happen this year or next year? Any additional color would be welcome.

Yes. Thanks, Rick. And I would say for a number of reasons, I probably don't want to get into too many specifics about the timing of a transaction, particularly a future transaction. But the goal here is to really just take the time that we need because we got a lot going on right now to ultimately be prepared for a transaction and also ensure that we find the right home for our drinking water business and our team members there. So it's not an urgent thing for us. It is one that we want to make sure that we've got the time to do, and we find the right company.

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

So really, I just want to follow up on the Health Information Systems segment. Curious to hear more about the partnership with Ensemble for autonomous coding. And they're the leader on kind of full RCM outsourcing. And from that press release in May, really, I mean, it says that Ensemble is going to implement your autonomous coding solution really across all 28 of their health system clients, if I read that right. I mean it seems like to be like a pretty large revenue opportunity.

So one, are you able to quantify the revenue opportunity tied to that partnership? And also, what's the timing of that sort of implementation? I mean that would be pretty large to make sure that in the way I'm reading it right that, that size and magnitude. But just any quantification around all that would definitely help.

Yes. So maybe just for some that don't know Ensemble, I'll just take one step back and then answer the question. Ensemble really is a -- as you referenced, it is a leader in outsourcing the revenue cycle management services. So in other words, they would come into an account, they absorb that whole responsibility, including the FTEs from the account and then they provide those services for the hospital or hospital systems.

So it's different than what we do. It's truly absorbing that entire process. And then inside of that, they would use products like ours. Now obviously, with this relationship, there's going to be a bias to our technology, things like Encompass 360, for instance, or 360 Encompass. So that's the relationship. The benefit that we'll see is the marketing arm of our organization, can now talk about the benefits of Ensemble and potentially get customers to move towards them.

The benefit we get, which is what you referenced, is now Ensemble then will begin to integrate our technologies into their accounts or new accounts. And the benefit they have as a result of putting it in, particularly with autonomous coding, is it can take the cost down for them to service those accounts and that increases their margin profile. Now to be fair, autonomous coding is in early stages. We're moving rapidly, obviously, but it's not going to be applicable everywhere.

But I fully expect us where we can do it to move aggressively with Ensemble to be able to, again, make the process more efficient. And ultimately, the goal here is not just efficiency, is to get better reimbursement because as you drive autonomous coding versus a human being and being involved in the process, you get fewer mistakes. And as a result of fewer mistakes, the concept is you get better revenue capture.

So that's the reason why Ensemble is focused here and excited about it. And I'm pushing pretty hard, the same way you are is to make sure that we're driving fast. I don't want to size the opportunity, but we wouldn't have done the partnership if we didn't think there was a real opportunity here.

Okay. The only real quick follow-up is to win that partnership, was there like an RFP where you had to compete against others to get that partnership? Or was there already like just a through a relationship kind of evolved into this? Just curious of any sort of back color on that as well.

It's more of a relationship and I'd say a mutual respect. I mean one of the most dangerous things that we can do in autonomous coding is go with folks that don't know the quality aspects of doing coding. And so if you're going to bring autonomous coding, you've got to be careful not to do it too rapidly where you lose the quality control.

And I think Ensemble trust that we're going to do that and do it well, and we trust that they're also going to do the same thing. So that, to me, is what makes the relationship really strong. They're high quality, and we're the same way.

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

This is Jenny Rabinowitz on for David. Just a quick one from me. I was hoping you guys could walk through the decision to raise organic sales growth and EPS guidance while maintaining free cash flow and more broadly, the puts and takes you consider for free cash flow throughout the year.

Yes, sure. So the logic to raise organic sales growth, I think we've talked about -- Bryan had it in his prepared remarks and a little bit more color in the Q&A here where we feel really strong with the commercial improvements even faster than we expected, and that's what's given us confidence there. And then obviously, down the P&L, we're seeing mix benefits and strong performance in margins, and that's what's also helping us on the EPS side.

Having said that, I think the main crux of your question is why not seeing that increase in free cash flows as well. And what I would say there is that we've had a slow start on free cash flows at the beginning of the year. Here, we've had some timing of payments that we had to make in the first half.

And so we've got some work to do in the second half to achieve the guide. And so that's why we're holding the guide where it is. We are anticipating improvements in working capital as well as lower deferred cash payments and that's really what improves the second half over the first half. But as I think everybody knows, cash flow can be lumpy. And so we still anticipate delivering in that range for the year.

Your next question comes from the line of Brett Fishbin with KeyBanc Capital Markets.

Maybe I'll shift to, I think, the one segment that hasn't come up yet. I was just curious if you could maybe touch on how you're viewing the underlying patient trends in the Dental Solutions business. Obviously, it's been a little bit of a challenging space post-COVID. But just wondering if you've started to see like any change in kind of the underlying volume trend around patients.

Yes. We really haven't seen a dramatic change. I would almost say, unfortunately, at the end of that statement because we'd like to see it improve. The good news, I guess, is that it's not decelerating at least on a broad-based perspective -- from a broad-based perspective, but we're not seeing the acceleration yet either.

I would say that when we talk about acceleration in our business, we're not depending on any acceleration in the market. We're truly depending on the new products and the traction they're getting in the marketplace and our specialized sales organization. Now if we happen to get a positive traction in the market, that would benefit us for sure, but we're not counting on it right now.

Yes, makes sense. I'll also ask one kind of open-ended follow-up. It sounded like you had some new product launches expected in dental into the back half. Maybe just more broadly, if you're willing to touch on any new products or general areas that we should be looking out for in that segment or in the rest of the business in 2H?

Yes. In dental, specifically, I'll give the team credit because they had a period of time where there were no product launches, and they've done a nice job of really accelerating that machine and launching this year, and that is what is going to drive our growth.

And it's products that they've already put out. I don't want to talk about any they haven't launched yet, but Clinpro Clear is a big one in fluoride treatment, the Filtek Easy Match, which is just a simplified process to be able to get a match when you use Filtek composites and then the Clarity Precision Grip attachments, which can be used with our Clarity trays or anybody else's trays as well. And those are great launches that they have that are building momentum in the field, and that's what will drive that performance.

[Operator Instructions] Your last question comes from the line of Lei Huang with Wells Fargo.

This is Lei calling in for Vik Chopra. Congrats on a nice quarter. You talked about some of the segments in terms of outlook, MedSurg kind of underlying growth first half, second half. Can you talk about how do we -- how should we think about quarterly cadence for growth in the second half in general? And any additional comments around growth outlook for the other segments in the back half?

I think maybe I'll take a shot at that just to see if I got the question right. But I would say from a cadence standpoint as we come into the back half, Wayde talked about the first half, second half kind of growth rates before.

And obviously, when you look at on the surface, not underlying growth, but on the surface, you're going to see a bit of a pressure point in Q3 because we believe that's when we're going to get most of that order timing up. And then you'll see improvement from Q3 and Q4. But that's probably the most I can give from a cadence standpoint. So pressure in Q3 because of the order timing unwind, a little bit in Q4, but not as much.

Yes. I think you got it, Bryan. We're not giving specific quarterly organic sales growth rate. But just as you framed it, we're expecting a little lower sales growth rate in Q3 as a result of that pullback in orders that we saw in the first half and a little higher in Q4.

I'll now turn the call back over to Amy for closing remarks.

Great. Thank you, Kate, and thank you, everyone, for listening and for your questions. We do appreciate your interest in Solventum. If you have follow-up questions or need anything else, please don't hesitate to contact the Investor Relations team directly. This concludes our second quarter fiscal year 2025 conference call. Kate, you may now close the call.

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

All right. Good afternoon, everyone. I think this is the last -- this session sits between now and cocktail hour. So hopefully, this is very engaging for folks to keep everyone attentive. But I'll just remind everyone that these presentations are not open to the press. And with that, I welcome the management team from Solventum. Very happy to have Wayde McMillan, Chief Financial Officer; and Karim Mansour, President of the Dental Solutions business. I think this is one of the first times you've been out at an investor conference, so a great opportunity to dive into one of the more significant businesses here at the company. Yes, looking forward to that, and I appreciate your making the time.

This is being -- this presentation is being webcast. Happy to take questions from the audience. To the extent to which there are any, just raise your hand and either we'll get a mic over to you or I'm happy to repeat questions so those participating virtually can hear as well.

So maybe we just kind of start higher level. You had an analyst meeting in March, had about -- been a few months since then you've had an earnings call. Maybe just kind of give us your reflections on what are some of the messages that you think are resonating in your investor conversations and what are some of the things that people, maybe present company included, are -- might be missing from your perspective?

Yes, sure. Great place to start, David, and good to see everybody here, and thanks for those joining online. I think the Investor Day went a long ways for us. We've done a lot of work over the last year in hiring the leadership team. At our first Investor Day, many were either new, including myself and Bryan, new to the company or have been hired since the Investor Day. So we've been doing a lot of work on our strategy, and it was great to have our second Investor Day here recently to articulate that strategy. And I think it's becoming clearer and clearer to investors what the value creation story is, and the Investor Day went a long ways for that.

And it's really prioritizing growth for us is a big change in the metrics, and we've articulated our growth driver strategy where 80% of our growth is going to come behind 5 growth drivers. And hopefully, we'll get a chance to talk about some of those today. We've got Karim here as well. And then we're going to pair that with an exciting operating margin expansion story, which we think will be something that people are interested in as we look for efficiencies across the business, and we think we've got a lot of levers to do that as well.

And then we're focused on free cash flow and improvements there as well. So we've got a lot of opportunity. Coming out of a separation, we had a great foundation. We've got great brands. We got a great business, but we had a lot of work to do, and we've got a 3-phase transformation, which we can probably talk about today as well. We've made great progress on the first phase, which is really resetting the mission, the talent, the structure for the company and then getting into the second phase now around commercial productivity and innovation. I'm sure we'll probably get into that a little bit today as well. And then with the P&F divestiture that we announced, we're pretty excited about being able to delever our balance sheet faster than we had originally expected and just to go on offense for M&A, which may be something else you might want to talk about today. We certainly have a lot going on.

Yes. So a lot to dive into here. I wanted to -- I think as we can reflect on your period of time as a public company from -- even when we start with the analyst meeting in March of last year to 2024 to where we are today, there's been sort of an evolution ebb and flow about how you and Bryan have sort of talked about the business. We started with this sort of really dire, sky is falling, we've got the spin, lots of complexity, things go a lot better in 2024. Come into this year, started the year similar sort of like cautious tone, get to the analyst meeting positive. Q1, good quarter, but it's all -- but it's transient. Like how do you think about -- is this -- are you focused on just trying to keep expectations in check and execute a beat and raise? Like -- or is your impression of the business really evolving at a pretty rapid pace?

Yes, there's a lot there. If I think about the first year, maybe I'll start there, 2024, when we started in our first Investor Day, we guided 0% to minus 2%, and that certainly contemplated the newness of the business. I don't think I'd articulate the sky is falling because the business had been declining volumes for a couple of years before that. So we really guided consistent with the volume that we were seeing, but we were happy to then eventually report a 1.2% growth rate. So I guess we beat our original guide by 1%, which I think is pretty reasonable given that our original guide was set so early in the company's separation and spin.

But even having said that, shortly after we got into the year when we realized the SKU rationalization program really wouldn't have an impact until this year, until 2025, that was one of the reasons along with some of the strong business performance or stronger business performance. We raised our guide to the high end of 1% midway through the year, which would be by 20 basis points. So 2024, somewhere between 20 basis points and 1%, I think, is pretty tight to our original guide range and obviously good to be on the beat side of that.

Here in 2025, we felt we were leaning into the guidance, frankly. As I mentioned, we grew 1.2% in '24. Some of that was still benefiting in the first half of last year from some price carryover and benefit. So when we set at 1% to 2%, if you take ex SKU, it's 1.5% to 2.5%. So at the high end, it was more than double the growth rate we saw last year. And we did have a very strong first quarter this year. We wanted to make sure people understood some of the unique volume benefits tied to some of the SKU rationalization and the ERPs and DC moves that we're making. There's no doubt we benefited in the first quarter from volume. But even with that normalized, the 2.5% growth rate was even better than we expected.

So the good news, the read-through there is the stronger pickup of the commercial execution, and that's all volume-driven improvements in turnaround. We're seeing some strong contract wins out of our new team already. We've hired some really experienced people who are versed in how to manage, especially in the U.S., a turnaround in the business. So we were very happy to see it, and we raised 50 basis points. So at this point, we're 50 basis points up in 2025. So I'd articulate it as a reasonable guide that we beat by just over 1% last year. And so far this year, we're 50 basis points ahead. So I don't know what your other companies do, but I think that's pretty tight.

Okay. I want to come back to some of the quarterly phasing in a second. But one of the areas that we've also talked about is just the WAMGR that you had put out at the time of the analyst meeting, the 4% to 5%. Maybe just remind people about how you think of the difference between current market growth and WAMGR and what the respective time horizons are that you're contemplating in that presentation.

Yes. It's a great question, David, because that's the key to the story here really is when we, I could say can we, but when we get our internal growth rates up to our WAMGR. And that's our goal is to get our growth rate up to our market growth rates, which we call 4% to 5%. And that's right in line with MedSurg, which is a 4% to 5% market, pretty tried and true market out there and diversified med tech. And we've got good momentum, and we've got a lot of opportunity to improve our growth rate to hit that, particularly around our growth drivers in negative pressure wound therapy, IV site management and sterilization assurance. We can talk about those. We want to get into those. But we've got 3 really strong growth drivers that are going to drive most of the growth in MedSurg.

I'll just touch on HIS quickly and then hand it to Karim, who's with us here on the dental side. For HIS, we think this is a great business -- software business with a really strong moat in revenue cycle management. We do have one challenged area in clinician productivity solutions. That's been declining double digits, and we think it will continue to do that. The good news it's becoming a smaller and smaller piece of our business as we grow revenue cycle management. So we're actually the closest to our market growth rates already in HIS in that revenue cycle management. If you take CPS out, it's already close to market growth rates.

So one of the reasons we have Karim here today, I think, is helping investors understand why we think we have the ability for our Dental business to grow mid-single digits and why we think the dental market will get back to a 3% to 5% market growth rate. But Karim, it's probably good to you.

So I can speak about that for sure. So again, my name is Karim Mansour, leading Dental Solutions, and happy to be here. Thank you for the invitation. So dental has obviously been a challenging market over the last few quarters. Reason for that level of low growth in the market is as you see economic pressure, it does impact consumer confidence. It's a reality in the dental market. Important caveat to share with everybody is that it does impact furthermore elective dentistry, think about aesthetics, that it does impact essential care, essential dentistry. So that's something to keep in mind.

And I would say also that as it put pressure on dental clinic revenue, also ability and willingness for dentists and orthodontists to invest in capital in equipment is also under pressure. So that is hard to say when the market will recover. But that being said, there are trends and dynamic in this market that are no different from any med tech industry. If you think about aging population, as people get older, I mean, dental services will be a key requirement, and they will repeat over time.

Another reason is that the rising demand for dental services is a reality why all of us as much as health care authorities and government around the world do feel the need to better take care of dentistry as it does impact overall health. And so we see even incentives around the world starting popping up, more coverage towards dental care. And last but not least, we see definitely significant technology advancement in this market. And those dentists and orthodontists are looking for those efficient solutions. So all in all, even if it's hard to say by when the market will recover, the 3% to 5% over time will be there, and we are confident that it's going to rebound.

And I think probably worth going into dental in a little bit more detail as we have you here. And also, I think as you look at market growth today versus that 4% to 5%, probably one of the biggest variances is dental and what -- that market today probably is closer to flattish.

True.

And then moving that up to the 3% to 5% represents an important...

But I think it's important there to also speak a little bit about who we are. I talked about the difference between essential dentistry and elective dentistry. Those are important factors. A significant portion of what we do is towards tooth restoration, much more biased to essential care. So as we keep and we made core restorative, the growth driver #1 for dental. We have some leadership position, but there is much more that we can do. And so as we think about this one, this is our level of confidence in being in the lower range of the 3% to 5%. For sure, we are extremely confident about getting to the 3%. And as the market rebound, we'll get the full leverage of that growth.

Okay. And as you think -- I think your business is roughly 80-20 essential dentistry and then 20%...

One way to say it is, as we shared during Investor Day, if you were to look at the pipeline...

Yes. Not that...

A significant portion of what we do is tooth restoration, core restorative, you're right, and more biased to essential care.

Yes. Okay. I want to get into the 5 key -- the key growth drivers. But maybe we can sort of cover off just some of the dynamics that I think are specific to 2025. You started the year at a little over 4% organic growth rate. You talked about, I think, relatively similar expectations for Q2 and then a deceleration in the back half of the year. And if I remember correctly, one of the factors influencing the better performance in Q1 was higher inventory in the channels in advance of an ERP change, which I think is the second time you've done this, right? You did that right before -- you did that, I think, the third quarter of '23. There was a dynamic there as well before you did the cutover. So maybe just update us -- first help us understand why if that was just channel fill in Q1, you wouldn't see the deceleration in Q2?

Yes. I'm glad you brought that one up as well, David. We've got a few questions throughout the day on ERP as well. So maybe just a quick update on ERP and then can talk about some of the dynamics in the quarter. So we've given a rule of thumb when doing an ERP implementation that there's a checkpoint at 3 days, 3 weeks and 3 months. And we gave the 3-day checkup at the last conference we were at a few weeks ago, it's really 1.5 weeks, that things were going well, not perfect, but well, and we're making good progress there. And the good news is we have the same update here. The ERP implementation and cutover continues to go well. Our DC cutovers continue to be planned and continue to be on track. So all on track, all good. Of course, not perfect.

I want to say thank you to our teams out there, our hypercare teams who are working through the challenges. Sometimes working with our customers through the night and days and making sure that wherever we do see some challenges, they're helping to work through it. But at this point, we don't see any significant challenges to the ERP impacting our quarter. So that's great news, getting through 3 days and 3 weeks, and then we'll continue to progress through 3 months where we start to get a real sense for where things settle in, but couldn't be happier with the performance on ERP right now.

And so with that, what we talked about in the first quarter was what we knew could happen but ended up being even a little larger than we expected was we saw some volume increases in Q1 that were really timing related. And some of the bigger impacts were that were related to the ERP and DC cutover where we had customers buying volume ahead. And we saw this mostly in the categories where we sell through distribution, where the distributors stocked up and more of the higher flow, higher in-demand disposable products, a lot in our IPSS business. And so they did that.

We also saw some customers buying ahead of when we've talked to them about SKU reductions or SKU rationalization. So where we talked about eliminating SKUs down the road, they went ahead and started stocking up. And so we've talked about the timing of that. We think we'll -- actually, just to put numbers to it, as you mentioned, we grew 4.3% in the quarter, but we normalize for those volume trends. And we think the normalized growth rate was closer to 2.5% in Q1, which is still a great growth rate, still more than double what we did in 2024 and an improvement importantly across all 4 segments. So...

And all volume driven unlike previous...

Almost all volume driven. Yes, very small pricing in the quarter. And so you could say almost volume driven across 4 segments, which for us is a really great sign that all 4 segments continuing to improve even on a normalized basis. And then we said, well, when will the timing start to come back? And we said it's sometime between Q2 and Q4. We think it's this year with the majority or mostly in Q3. Of course, we don't know exactly when that's going to happen. The reason we expect that is talking to our customers and distributors and expectation for them to bleed those inventories back down. And that's really because we're going through the ERP implementation here in Q2, and we get to the other side of it, it would make sense to start bleeding some of those inventories down.

So right now, you -- on the ERP cutover, people can still buy through the old -- so transact on the old ERP system?

No, we're cutting over in Europe where this is where we're cutting over the regional ERPs. And through distribution centers, we have -- we're progressing through the ERP implementation now, and we're flowing orders through the new ERP system.

Okay. So where would the outside inventory buys come from this quarter?

So for the ERPs and distribution centers be in Europe and for the SKU rationalization in the U.S.

SKU -- but if you've cut over...

And some of the outside the U.S. regions.

I get the Q1 piece like pre the cutover. But once you've cut over, why would you see continued prebuying?

I don't think we will, meaning we'll give back the inventory in Q3, meaning customers will order less...

In Q3. No, no, no, in Q2.

It just depends when they slow down the orders and burn down the inventory that they have.

Okay. So but you haven't seen -- you've not seen a slowdown in orders.

No. And we're just cutting over the ERPs now, so I wouldn't expect it.

You wouldn't expect it. So customers were able to order under the old ERP in April, for example.

Yes, through April, exactly. And as we cut over in May, now they're ordering through the new system.

Okay. So the question is so the underlying growth rate in some ways will sort of surface in the back half of the year.

Not...

You're disclosing it, but yes.

Yes. Our anticipation is that, that will happen. Now could some customer ERP goes really well here in May and June and they slow down their orders at the end of June, that's possible, but we're not expecting that at this point.

Okay. And are customers carrying like really disproportionate levels of inventory? Or is it possible they just keep buying at this run rate?

Yes. In some cases, it's much easier to read because they're telling us how they're buying, and we can see it in the distributor order patterns. Some of it is more quantitative where we're assessing it across -- we can't talk to everybody. So we're assessing it across multiple distributors. So it is somewhat of an analysis versus specific.

Okay. I want to go -- one sort of other kind of very short-term question and then go back to the growth drivers, tariffs. I think within very short order of your first quarter results, there was a significant update on tariffs, especially as it relates to China. And I know you provided some perspective at the last conference where you gave some incremental updates. So maybe here we are, it's almost like there are no tariffs relative to what we thought 6 weeks ago. Like what framework should people use to recalibrate their expectations around tariffs now?

I wish there was a framework for calculating tariffs at this point. It's certainly a fluid situation. As you mentioned, it changes almost daily and weekly here. So the approach we're taking is we're going to update on a quarterly basis. Just given the ups and downs and the fluidity of it, we're not going to update intra-quarter other than, as you said, it was almost -- the ink was almost just dry on Q1. And at the time, China was with the U.S., 125% and 145%. Of course, our assumptions for Europe were at the lower end 10%. And so since then, there's at least been a 90-day pause on the China side of things with significantly lower percentages, but the European percentages are higher. And so when you put that together, what we said at the last conference is there's potential for earnings per share upside for us. But to keep in mind, it's not a one-for-one drop-through on the $80 million to $100 million that we put out there because some of the mitigation strategies go away if [indiscernible] don't come through the tariffs. But we do feel like we've had a real strong start to the year and a good business performance that we think could drive better performance for us if it weren't for tariffs. And so we're going to continue to monitor it. We'll update quantitatively once a quarter to try to just manage through the ever-changing tariff landscape here.

Okay. Great. Why...

Good news is I would just say it does look better than it did in Q1.

Okay. Excellent. Let's go back to the growth -- the 5 growth drivers. Maybe I want to make sure we leave a little bit of time for P&L and M&A. So maybe just sort of tick through them and give us kind of latest updates.

Yes, sounds good. Why don't I hit MedSurg and HIS quickly, and we've got Karim here can talk about dental for us. So as you said, 5 growth drivers, and it's more than just picking growth drivers to grow the business. This is part of our overarching strategy to really optimize where we're going to put resources and our capital resource planning and where we want to grow and invest in the business. So the idea was to come to settle on what are the growth drivers. And again, it will get over 80% of the growth behind us. So it's not that we can't change growth drivers over time. And in the past, we have. We've added growth drivers. We've taken some out. But these are the areas that we want to grow the business. So if you want to understand and if you want to try to decide if you think we're going to get to 4.5% -- 4% to 5% growth rate or better over time, it's in these 5 areas.

And so in MedSurg, I mentioned negative pressure wound therapy, which is a business that we are the rightful owners of. We have the majority of the share in traditional and then the faster-growing double-digit growing part of the market, which is the single-use or disposable, we're the largest. We have the most revenue in that area as well. We're growing double digits there, too. But we also have a competitor in that space. The majority of their business is on the disposable single-use side of it. But we think this is a great market, even the traditional side.

So single-use disposable, it's growing great. There's a great lower acuity setting opportunity for that market. Traditional negative pressure wound therapy, we also think is a great opportunity. And because we're the majority of the market, it's really on us to develop that market. It's a significantly under-penetrated market. It is unfortunate how many people have problems with wounds today and hard-to-treat wounds. And it's really because the market hasn't evolved with our technology. And we think that's part of the just lack of investment in developing that market. And so we're going to double down here behind our growth drivers. We're going to shift a lot of our resources into all 5 of these, but in particular, negative pressure wound therapy.

We think with all the clinical data out there that we will be able to develop this market and get it growing faster. So it's not a share-take opportunity in traditional. It's more us developing and getting the penetration and getting more of these hard-to-heal wounds treated with our technology.

If we move then to IPSS, we've got 2 growth drivers there, one around sterilization assurance, and this is a unique area within med tech focused on the sterilization department. We've actually had 2 recent new product launches, call them singles, but it's nice to see innovation coming to this area. We think, again, we're a natural owner in this space, and there's so much opportunity. We've been talking to key opinion leaders in this area. And when you think about hospital-acquired infections and where they originate, a lot of it is in the sterility of the products. And we are the majority leader and a natural owner to win in that space. So we're pretty excited about the growth driver there.

And then IV therapy as well. So we've got an opportunity with the products that we have with Tegaderm with the brand name and our new product, CHG, which is a price uplift opportunity, a better performance of the product. So we've got some innovation behind that one. So we're pretty excited what we have in MedSurg. And then for HIS, we've decided to double down again on revenue cycle management, the area where we have significant moat, significant capability. And there, it's really autonomous coding. It's an opportunity to leverage some of the newer technologies. So that team has been building talent and building partnerships with AI, machine learning companies to try to augment what we do today and have such a significant moat in. So we're pretty excited about what we can do with that growth driver as well.

And then Karim, I'll turn it to you for dental.

In dental, we've made core restorative growth drivers, again, back to the domain knowledge and science we have in tooth restoration. And not only because it's a more resilient portion of the market, but there is significant opportunity ahead of us. And so as we start from a position of strength with significant brand equity, we have the right commercial reach, I mean more than 60 countries. We have presence in more than 60 countries. And we've started the journey on beefing up our commercial engine, bringing more efficiency in that -- in the way we commercialize our product. What needed to happen was bringing new product to market. We have what it takes to bring new product to market. We just needed new products to bring to market.

As I said during Investor Day, unfortunately, in 2022 and 2023, we had no new product to bring to market. Believe it or not, despite the level of investment and the science we had, we were not efficient at bringing new product to market. In 2024, at the end of 2024, as I said during Investor Day, again, we brought 4 new product to market, and we have now a very significant pipeline that we feel extremely strong that we're going to win in this space.

One last update on what I shared during Investor Day. We spoke about Clinpro Clear, a new varnish fluoride treatment. Happy to report that 9 months after the launch, we became #1 market share in the U.S. So kind of a proof point of if we are on point with the right level of innovation, we can win because we have access, and we have credibility in the eyes of dentists and orthodontists.

Excellent. It's a good opportunity with the business unit president here to ask this question. R&D spending has been pretty flattish at $145 million a quarter. It's actually a pretty decent sized number as a percentage of sales. If I were to get him without you, what would you say about the level of R&D investment and [ good enough for you ]?

You know what, the way I would answer to this is I don't think we can complain about the level of R&D investment we have in Dental Solutions. It's the use of it. And so now that we became clear about what is our focused portfolio strategy and that we also brought rigor and discipline into the R&D processes, there was some kind of a lot of waste despite the talent we had, and we needed to challenge that talent to the right project. So we stopped some key projects. We maintained some and we are bringing additional new projects. And so making sure that this efficiency in the R&D is back and PVI will be the way to measure that in the future. It is, as you can imagine, with no new product launch, it's very low as we speak. But this is the focus. It's more channeling the organization and our investment towards the growth drivers and making sure we take good decision there.

And then maybe on the SG&A side, we've seen pretty progressive increases in SG&A, which should be fully expected as you transition to being an independent public company. Are all of those investments behind you in terms of standup costs? And are we at a point now where we can -- when can you start to see kind of normal SG&A leverage?

Yes, that's right, David. We think we've made the critical investments. And as you mentioned, we've made investments as part of standing up as a public company. Clearly, you have to have a Board and CEO and leadership team and all those types of investments. But beyond that, we made investments in cybersecurity and quality and compliance and control areas that we just felt were necessary as a business. And so we have annualized those. And so those are now in our P&L. And obviously, a lot of work going on in the TSA side of things as well. So we've had to ramp up a lot of resources to manage through that. But having said that, I think we're in a position now where we've leveled off with the investment side of things from a standup public company.

From a growth side of things, that's what we're going to be balancing over time with our margin expansion. So we've got a lot of efficiency projects that we're teeing up, some we're executing, some we're keeping in queue just because we've got a lot going on across the business right now with the separation and the divestiture, but we do think we've got good opportunities to drive leverage. Paul Harrington, our leader of supply chain, talked about the cost and COGS side of things where we think we've got significant opportunity all through the COGS lines. Our segment leaders are working on their segment mix strategies and pricing excellence strategies. But then focused on your question down in SG&A, we're working on projects to think about how we can get more efficient over time. And part of that is around the stranded cost work that we're doing as part of the P&F divestiture, which are always a challenge whenever you're divesting a business.

So we do think we're queuing up a good amount of levers to start to drive efficiencies here, but we just have to -- and we actually have a whole project team. We've hired a new leadership team member actually managing the transition management office for us, given that we've got so many major projects happening at the same time. So we'll be queuing those up. But I did just want to touch on that balance between investing for growth and operating margin expansion. The first lever of our growth -- revenue growth improvement is around commercial productivity. And we're working off the investment that we have today. But if we see opportunities to further invest for commercial support of our growth, we'll do that. But we're going to balance that with our operating margin expansion here over time.

And as you think about just growth rates of SG&A, if you assume flat head count, shouldn't SG&A grow at 2% to 3% a year, just merit increase alone and other natural inflation?

Yes. That might be about -- it might be a reasonable estimate just as you think about merit, it's a different number depending on the countries around the world, but it's a reasonable estimate. If you weren't driving efficiencies, you would expect to see something like that.

Okay. So driving efficiencies is what allows you to get SG&A leverage even with the top line growth rate in this 2.5% to 3.5%?

Top line growth rate, hopefully, is the biggest driver for us. It's an opportunity for us to not just drive leverage but also more volume, and that volume helps the COGS side of things as well.