Solventum Technologies Q1 2026 Earnings Call - Momentum and Margin Expansion Outpace Separation Headwinds

Conference Operator, Moderator: Hello, and welcome to Solventum’s 1st quarter fiscal year 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. I would now like to turn the conference over to Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications. You may begin.

Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications, Solventum Technologies: Thank you. Good afternoon. 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. For this portion of today’s call, please limit yourself to one question and one related follow-up. If you have additional questions, you can rejoin the call queue. With that, I’d like to now hand the call over to Bryan.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: All right, great. Thanks, Amy, and to all of our shareholders and everyone else following the Solventum story. Just want to say thanks and welcome to our first quarter 2026 earnings call. I’m gonna start by addressing our solvers around the world because I’m pretty sure that a few of them are listening in today, and I just wanna 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. I just wanna say I’m extremely proud of not just your dedication, but the results that you continue to deliver.

You know, this team’s ability to drive outcomes, while navigating ongoing separation efforts, ERP implementations and acquisitions and divestitures, well, it’s just a testament to the strong talent that we have in the organization. It’s a testament to you, it’s a testament to the culture that we’ve already built. Again, to our global team members, thank you very much for making it happen. Okay, now let’s get into it. We delivered 1st quarter results ahead of our plan and ahead of expectations. Organic sales growth and EPS both exceeded our plan, 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, driven by strong commercial execution and new product launches.

Thanks to positive volume, mix, and continued progress in 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. You know, Q1 is a clear indication that we are well on our way to delivering our 2026 guidance, and importantly, our go forward LRP objectives. You know, it’s clear that our transformation journey is working. It’s making progress. You know, 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.

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. When it comes to operational efficiency and the separation from 3M, well, we’ve made meaningful progress on our ERP cutovers as well as the overall separation process. I can tell you that the team continues to execute against these milestones with purpose. That said, we cannot wait to get to 2027 and put the majority of the separation work behind us. You know, 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.

As a reminder, our Transform for the Future program is a multi-year $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 toward 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, you know, 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. When we determine that someone else can offer more value for a business than we derive, or we see another path to increase shareholder value, we will act decisively, just like we did with the Purification & 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. 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. 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. As you probably remember, we have board approval for up to $1 billion in share buybacks. 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. Moving to our 3 operating segments. 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 Dressing, and of course, our specialized sales force. 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. You know, the team is executing, 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, we’re encouraged by the adoption of the recent Attest sterilization product launches as well. 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. As we exited 2025, this team made significant strides in improving backorders, 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. Inside RCM, our autonomous coding offering continues to gain traction in both outpatient and inpatient settings. 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. What differentiates the outcomes is the data. It’s the rules. It’s the rigor behind them. We are differentially able to leverage AI thanks to our unique ability to efficiently and effectively train it. You know, we’ve built deep rules and algorithms designed to ensure accurate and compliant reimbursement coding. 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. I can tell you, the economics of autonomous coding, they’re compelling. You know, 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 cost, improve productivity, and capture more revenue.

You can see why our customers are interested in this 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. 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. Our Transform for the Future program gives us additional firepower to offset these headwinds. As a result, we’ve committed to expanding operating margins 50 to 100 basis points in 2026, and we absolutely intend to do so. Let me just zoom out for a moment, because I think it’s important to keep the bigger picture in view.

You know, going into Q1, we had people ask whether we could maintain the momentum we saw in 2025. Was it sustainable? I can 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. For our full year 2026 expectations, excluding SKU exits, represent continued progress on that ramp. 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%-5% organic sales growth. It’s a question of when.

All right, 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 Wade hasn’t even gone yet. Number one, our underlying commercial momentum, it’s real, it’s continuing, and our new product pipeline will be the fuel 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.

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. With that, I’m gonna hand things over to Wayde to walk through our financial details, and then, of course, we’ll open things up to questions. Okay? Wayde, go ahead.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Thanks, Bryan Hanson. 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. 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 standalone facility in Eagan, Minnesota. 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. The Acera Surgical 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, IPNSS 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.

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 pay down 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. 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 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. 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. 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-$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 are holding operating margin in the range of 21%-21.5%, an increase of 50 basis points-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%-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 clearer path to margin expansion and cash conversion. With that, I’ll turn it back to the operator for Q&A.

Conference Operator, Moderator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. As a reminder, please limit yourself to 1 question and 1 follow-up, and rejoin the queue as needed. Thank you. Your first question comes from Brett Fishbin with KeyBanc Capital Markets. Your line is open.

Brett Fishbin, Analyst, KeyBanc Capital Markets: Hey, guys. Thank you so much for taking the questions. 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. Thank you.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Sure. Hey, Brett. It’s Wayde. Brett, I can start this one.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah. Go ahead, man.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: As we called out in 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 gonna mostly impact IPNSS and dental, to your question. 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. Keep in mind, the U.S. is a very different region in that the majority of our sales go through distribution, and this helps mitigate any challenges with ERP cutovers with advanced orders into the distributors.

When we eventually report Q2, we will provide the amount of orders shipped in advance and then adjust our second half accordingly. As we’ve shared previously, it’s difficult to predict advanced orders and 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. 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. The good news here really is that we’re nearing the end of our heavy lift on ERPs from 3M. This will be the last large cutover as we plan to be done with the ERPs and 90% of the TSAs by the end of the year.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: I might just draft off of that too. You know, it sounds a little messy, it’s big numbers that we’re throwing around, but we feel pretty confident on this one, we’re lucky because it’s a big region, obviously the biggest region that we have in the ERP cutover. 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. 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. Then in addition to that, as Wayde said, it’s our last one. I think the team’s gotten pretty good here.

We’ve got a tuned-up team that’s capable on top of a really strong contingency program.

Brett Fishbin, Analyst, KeyBanc Capital Markets: All right. Super clear. I’ll just ask one quick related follow-up. Just thinking about, you know, Q2 and that $100 million or so benefit, just on an underlying basis, is there any, you know, major call-outs or reason to think that, you know, the XX, call it ERP benefit run rate wouldn’t be somewhere within the 2%-3% current guidance range? Thank you so much.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: In other words, if you neutralize the impact of it? Yeah, I think Is that what you’re saying, Brett? I just wanna make sure. Are you saying that if we neutralize the benefit of that $100 million, what the growth rate would typically be in future this Q2? Is that what you’re saying?

Brett Fishbin, Analyst, KeyBanc Capital Markets: Yeah, essentially just asking-

Bryan Hanson, Chief Executive Officer, Solventum Technologies: I think it-

Brett Fishbin, Analyst, KeyBanc Capital Markets: the underlying growth. If you would expect the underlying growth rate to still be, you know, somewhere within the guidance range or if there was any other, you know, major call-outs that we should be thinking about for Q2. Thanks again.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: No, that’s it. That’s the intent of calling out the, you know, heads-up here on this advanced ordering to just make sure that we’ve given the heads-up ’cause we do think it’ll be a larger magnitude than we experienced last year. We’re not giving quarterly guidance, but you should assume that, you know, given the strong performance in Q1, we should continue that momentum in Q2 and through the rest of the year.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Good way to look at it.

Brett Fishbin, Analyst, KeyBanc Capital Markets: All right. Great. Thank you.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah. Thanks, Brett.

Conference Operator, Moderator: Your next question comes from David Roman with Goldman Sachs. Your line is open.

David Roman, Analyst, Goldman Sachs: Thank you. Good afternoon, everyone. 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?

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah, maybe I’ll start with the new product launches. I tell you that, as I referenced even in my prepared remarks, one of the biggest catalysts we have right now, and we’ve been talking about, is the commercial enhancements. 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. We have more coming, as I talked about, 20 new products that we’re gonna be launching over the next 2 years. 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.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yeah, sure. On volume, mix, price, the way to think about it would be, our price continues to be in that plus/minus 1%. That means the majority of our growth is all volume-based and significant contribution from volume.

David Roman, Analyst, Goldman Sachs: Okay. very helpful. 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. 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?

Bryan Hanson, Chief Executive Officer, Solventum Technologies: You want to take that one more?

David Roman, Analyst, Goldman Sachs: Sure.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: soft state dilution here?

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yeah. Yeah. I can start us off there. 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. We also have an opportunity to buy, given if we see value in the shares. 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, you know, for Q2. You can imagine, we see a lot of value in the stock where it’s trading today. We’re gonna balance that with our M&A plan and our acquisitions.

As you know, it’s a balanced plan for us. We’re gonna be just like when we launched the authorization program, we also launched the first acquisition of Acera. We’re gonna have a balanced plan. We’re gonna 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.

Conference Operator, Moderator: Your next question comes from Ryan Zimmerman with BTIG. Your line is open.

Ryan Zimmerman, Analyst, BTIG: Good afternoon, thanks for taking our questions. Just wanna 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. You know, as you think about what occurred in Asia with the ERP cutover, you know, what did you see in terms of impact when you did that cutover, you know, that informs kind of 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, you know, preparation for the Asia ERP cutover?

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yeah, sure. Obviously a lot of questions around ERP, it makes sense because we’ve got a lot of people around the company working on delivering these. And, you know, our primary objective is always to ensure we get product available for our customers. We wanna make sure, number one, we’re servicing our customers, and we certainly wanna keep ourselves on track from a financial standpoint as well. You brought up Asia Pac. 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. That one’s 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. 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 gonna have a couple 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 registration. 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 cut over from 3M. The 70 basis points a quarter, just to clarify, was volume that we would’ve normally seen in Q2. We’ve essentially got 70 basis points of extra volume here in Q1 from Q2.

Ryan Zimmerman, Analyst, BTIG: Understood. Appreciate that, Wayde. You know, 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 know, you didn’t call out I think your comments, you know, suggested that, you know, you’re still holding the line on tariff assumptions for the year. You know, where is your head at on tariff refunds, or what we could see potentially through the year with some of those changes on the tariff front?

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Sure. Yeah. I think 2 questions there, really. 1, gross margin was strong in the quarter. You know, as we mentioned on the call, we had a benefit of sales and mix, as well as some of the higher programmatic savings. We normally expect some seasonality headwinds in Q1. We saw those, they were more than offset by those things that came in better than expected. 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. Getting 80 basis points of margin expansion here. We certainly benefited from the portfolio moves we’ve made as well. Both the P&F divestiture and Acera acquisition are accretive to our gross margins.

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. Without clarity at this point, we’re just holding our estimate in that same $100 million-$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. 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. You know, that’ll be something that we look at down the road.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Wayde, on the gross margin side, you know, came up, maybe you could talk about any, anything you wanna provide for the rest of the year. I don’t know if you wanna do it here.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yeah, it’s probably perfect timing, Bryan. Actually, thanks for bringing that up. You know, we do wanna 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. You know, our estimate, we think is closer to 56% is probably a good estimate for the coming quarters for the rest of the year here. Strong Q1, little above 56%. We think the rest of the year is gonna come in closer, just under 56% would be a good estimate.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Thanks.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Thanks, man.

Conference Operator, Moderator: Your next question comes from Jason Bednar with Piper Sandler. Your line is open.

Jason Bednar, Analyst, Piper Sandler: Hey, afternoon, guys. I’m going to layer on to the whole ERP cutover topic, but it’s from a different angle. You sound super confident around the planning. Maybe talk about, you know, what this big U.S. ERP change means for your OpEx savings plans. When do you begin realizing, you know, cost savings from this switch? Do you see those benefits later this year, early next year? Is that wrapped into your restructuring cost savings program, or are these two distinct items?

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah. Maybe I’ll just quickly say on the mitigation plan, I just want to call out the team right now because everyone’s working really hard on the ERP cutovers. 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. I feel very confident coming into Q3. Really coming into your question on, does this open up margin opportunity? Wayde, maybe I’ll flip that over to you.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yes. Not the primary objective. Primary objective here is separation from 3M. Because we were in a separation situation, there wasn’t a lot of pre-planning going around with this, with the ERP cutovers. OpEx does not benefit significantly from the ERP cutovers at this time. 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. First we gotta separate from 3M. We get the system stood up, we’ll be looking at through our Transform for the Future program for additional system benefits, automation, system efficiencies. 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.

It’s not just efficiencies, but certainly looking for effectiveness there. What I would say on operational or 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. That some of that was due to seasonality, which we always see higher seasonal expenses in Q1. We do expect our operating expenses to step down from Q1 into Q2, three and four. I wanna 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 happen in the first quarter. That’s one of the reasons our operating margins are always a seasonally low quarter for us.

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.

Jason Bednar, Analyst, Piper Sandler: 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, you know, to come on over the year, the next couple of years. Sorry if I have any of these details wrong going through the report. Any breakout you’re able to give around the segmenting of those new products? What does the cadence look like of the launch activity? Just how are you thinking about the contribution to growth from these new products? Sorry, I’m gonna layer on 1 more. Just to, you know, can you clarify, are these brand new products or are these relaunches of existing products?

’Cause I know you’ve talked about that latter item before, just trying to figure out if these are, again, distinct or, like, kinda captured within each other.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: 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 gonna do capacity expansion because we have great demand. We just don’t have the capacity. Once we get that demand, then we’re gonna relaunch the product on a global basis. Most of these, the largest majority would be new products in each of our businesses. From a cadence perspective, you were asking about that. It’s a pretty steady cadence. I’d say it’s gonna accelerate through the 2 years, but I don’t wanna give the impression it’s back-end loaded. That’s not the case.

It’s gonna 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, mainly growth driver areas and then across each of our businesses. What I would tell you when we think about the portfolio, we’re really thinking kinda singles, doubles, triples, right? We’re not looking at one item as the game changer, as the home run need. 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’ll give that new commercial team the fuel they need to be able to hit our LRP targets and hopefully at some point beyond.

Jason Bednar, Analyst, Piper Sandler: Got it. Thank you.

Conference Operator, Moderator: Your next question comes from Travis Steed with Bank of America. Your line is open.

Travis Steed, Analyst, Bank of America: Hey, thanks for taking the question. Congrats on a good 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? Kinda timing, you know, is there anything that might slow that down? Seems like something that could happen fairly quick. Just anything else you can say on the portfolio side?

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah. We obviously had a feeling people might ask about that ’cause we’re leaning in on this being a vector of value creation. I would say that, you know, the good news is where we are from a spin perspective, you know, in a spin 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. The further the spin gets in the rear view mirror, the more flexibility we have. I think that by itself kind of indicates where we are. Then it’s just the simple formula that you said. I don’t wanna lean in one direction or the other ’cause I don’t wanna give anything away.

My sense is that as we see others that view our businesses either strategically more relevant to them or financially, we’re gonna pay attention to it, right? We’re gonna 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 wanna speak to timeline ’cause I don’t wanna 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. 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 cause we know the space, right? You’re gonna 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. We feel like we’re in a good position here.

Travis Steed, Analyst, Bank of America: Great. Thanks a lot. I’ll leave it there.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah. Thanks, Travis.

Conference Operator, Moderator: Once again, if you have a question, it is star one on your telephone keypad. Your next question comes from Rick Wise with Stifel. Your line is open.

Rick Wise, Analyst, Stifel: Good afternoon, Bryan Hanson. Hi, Wayde McMillan, nice to see another excellent quarter here. It’s hard to resist coming back to the second quarter, Wayde McMillan, only because I just always think it’s important to, you know, get the numbers right so that you all can do your thing, as you say, a lot of moving pieces here. I’m just coming at it 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, you know, again, just reflecting all the puts and takes?

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Rick, you know, 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. You know, what we’re not commenting on the guidance for the quarters here as we go, but what I would say is, I wouldn’t change the total year for the quarterly phasing here. Number 1 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 keep them the way they are. When we get to the 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’s 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, we’ll get a clear read-through of our numbers without that advanced ordering. We’re just gonna take that advanced order number, we’re gonna take it out of the 2nd half, mostly in Q3. We don’t wanna get too precise around that number and what we’re thinking about for Q2 at this point. Just giving a heads-up that, you know, 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, you know, a real nice mitigation strategy for the ERPs here.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah.

Rick Wise, Analyst, Stifel: And I can’t-

Bryan Hanson, Chief Executive Officer, Solventum Technologies: I think it’s appropriate.

Rick Wise, Analyst, Stifel: Sorry. Go ahead.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: ’Cause, you know, if you think about 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 gonna be substantially higher. Q2’s gonna come in substantially higher. We just don’t want you to try to model it because it’ll be wrong. 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, Q4.

Rick Wise, Analyst, Stifel: Okay. Thank you for that color. I guess I can’t think of anything much more related and making Amy happy than talking about 2Q EPS. I mean, you nudged your range, you know, more toward the upper end. Again, if consensus is $1.65, I think for the second quarter, again, Wayde, leave it alone even with the Acera is accelerating, more new product, more cost reduction. You know, you have an extra $100 million in revenue, presumably some leverage there. I mean, again, just conceptually, what do we do with that? Where do we stick it, so to speak?

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yeah, I see, I definitely see the challenge, Rick. Yeah. 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. You know, that puts some pressure on our operating growth. From a dollar standpoint, we’re gonna see Q2 from a, from a dollar standpoint, have a good sales growth quarter. We’re gonna see higher operating margins, and that should help drive our improvement in earnings per share. 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 gonna see a pretty clear drop-through in gross margins. Now we’re gonna wait to see what the mix looks like on that and how the, you know, what’s the $100 million gonna look like? Is it gonna be higher or lower? What’s the gross margin on it? We’re not gonna change investments. If you just do a natural look at it’s about 5% extra sales. It’s about $0.30 drop-through on EPS. Again, I wouldn’t recommend taking that from any angle of precision, just given that we haven’t finalized what that phasing is gonna look like other than it’s gonna be large magnitude.

With that in mind, I think Q2 looks like another strong quarter for us. We should see improved earnings per share. Certainly this phasing is gonna drop through an additional amount. We just don’t know exactly what it’ll be at this point.

Rick Wise, Analyst, Stifel: Appreciate all that. Thanks for the color.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Thanks, Rick.

Conference Operator, Moderator: Your next question comes from Steven Valiquette with Mizuho Securities. Your line is open.

Steven Valiquette, Analyst, Mizuho Securities: Thanks. Good afternoon. 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 inpatient settings. Your understanding is that, you know, some customers will embrace this, you know, 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, you know, primarily your more traditional, you know, computer-assisted coding or CAC solutions.

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

Bryan Hanson, Chief Executive Officer, Solventum Technologies: That’s a great question, actually. The, I’d 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. 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. To be honest, when you look at it, implement it takes longer than just saying it. 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. We’re gonna continue to proliferate it.

I’ll give you a probably good view, and I think it’s safe for us to say, just during the strap plan period, our assumption is, given the progress that we’re making and really the trust that our customers have in 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. Even with those as a backdrop, the progress that we’re making, we think we could get close to 50% of our customers during the strap plan period moving over to autonomous coding. In those hospitals, in those systems, we’ll continue to move up the ladder on the percentage of autonomous coding that they use.

You’re gonna start with, you know, a particular swim lane, and then you’re gonna expand from there. You’re right on. It’s happening. Our confidence is growing. The confidence from our customers is growing. As I said before, the, you know, 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 or revenue capture that’s higher because you don’t have as many mistakes. It’s a really nice package for our customers, and we’re moving extremely rapidly, but we’re doing it safely. We wanna make sure that we don’t cause problems for our customers.

Steven Valiquette, Analyst, Mizuho Securities: Okay, that’s great. Thanks.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah, thank you.

Conference Operator, Moderator: Your last question is a follow-up from David Roman with Goldman Sachs. Your line is open.

David Roman, Analyst, Goldman Sachs: Thank you. I really appreciate you taking the additional follow-up. 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 the message leave Q2 the same, we’re gonna beat Q2 and then lower the back half to right size that? Or is the message on 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 is about how to think about Q2 and then the implications for the back half.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yeah. Sure. David, and Bryan, I can start this one. You know, we certainly talked a lot about this before the call, whether we thought it would be helpful to give a heads-up for, you know, over $100 million phasing, or if we just wait for Q2 to come in. We said we think it would be more helpful, even though may be challenging for people. 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 gonna take the mirror image of that and take it out of the second half. Mostly in Q3.

If, if you wanna just take a simple approach, don’t change anything. When Q2 happens, we’ll take the mirror image, reduce the second half or whatever the advanced orders were. They’ll end up being either above or below that $100 million. We think it’s gonna be at that kind of a magnitude. To clarify, this was to Rick’s question, I did just wanna 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. We’d also expect our earnings per share to improve because our operating margin is also improving. We expect operating margin improvement off that Q1 seasonally low operating margin.

Really two separate things there, but hopefully that clarifies it, David, and thanks for bringing that back up.

David Roman, Analyst, Goldman Sachs: No, that’s very, very helpful. 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?

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Absolutely. Yeah, that’s the whole go-goal. You know, 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. So you have to look at dental on an underlying basis without that tough comp. Other than that, yes, we would expect the improvement across all of 2026 across all 3 businesses.

David Roman, Analyst, Goldman Sachs: Okay, great. No, really appreciate you taking the questions and those additional clarifications.

Brett Fishbin, Analyst, KeyBanc Capital Markets0: Yeah, really helpful, David. Thank you.

Bryan Hanson, Chief Executive Officer, Solventum Technologies: Yeah, agreed.

Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications, Solventum Technologies: Did-

Bryan Hanson, Chief Executive Officer, Solventum Technologies: All right, you want me, I think that was the last question, right? Okay. Maybe what I’ll do, if we can, before I pass it to Amy to close us out, Amy, ’cause 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 thing that we need to do next. We don’t spend a lot of time talking about the things we’ve already done. I wanna just take a minute publicly and compliment our team and really give them credit for a very fast-paced transformation and the results that they’re delivering.

I’m just gonna give you a quick summary of things that they’ve accomplished here just since spin. I’m not gonna complete laundry list, but it’s some of the key things that have occurred, and I wanna make sure they’re getting credit for it. I’ll just start with, you know, 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.

All of that is then digested by our team, with 90% of the team members understanding it and getting behind 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 revamped our R&D team and R&D process. We increased our IT index because of that from 2%. Just pause there a sec. 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 have missed 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 Company, 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 multi-year SKU rationalization program. We sold and began separating our P&F business for $4 billion, which by the way, is one of the best, if not the best, multiples in the sector.

We paid down half the original eight billion dollar debt that we had when we got on spin, acquired and began integrating Acera, announced and started implementing a $1 billion share repurchase program, and kicked off a multi-year global cost savings program aimed at a half a billion dollars of savings. All of that, while this team has tripled the comparable sales growth from our starting point. I’d say this team has been a little bit busy, and I just wanna take a second to say that that is not possible if we don’t have a deeply connected team with an experienced team. I just wanna say thank you to our global team members, and to everyone else, I just wanna say thanks for listening. Thanks for being a part of today. Amy?

Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications, Solventum Technologies: 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. Sarah, you can go ahead and close things out.

Conference Operator, Moderator: Thank you. This concludes today’s conference call. Thank you for joining. You may now disconnect.