Solventum Corporation 2026 Q2 Earnings Call

Please proceed. Thank you. Good afternoon, and welcome to Solventum's second quarter fiscal year 2026 earnings call.

Joining me on today's call are our 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 the 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 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. I'd like to now hand the call over to Brian.

All right. Thanks, Aimee, and thanks to everyone joining us today. Before we get into the quarter, I want to talk directly to our team for just a minute. I know the work right now isn't easy. With the transformation work, the ERP cutovers, and everything else we have in flight, it's a lot. Through all of it, you keep showing up, you stay focused, and you deliver for our customers. Honestly, that's everything. Thank you. Thank you for making it happen. Speaking of making it happen, let's get into the quarter. The quarter came in ahead of plan, top and bottom line. Organic growth and EPS were both ahead of expectations, and that comes down to the strong execution and the momentum this team keeps building.

We saw healthy performance across every segment, led by our specialized commercial teams and new product innovation, operating margins also came in better than expected. That's the discipline we built into how we run this business, showing up in the numbers. Just as we communicated last quarter, these results include the advanced orders we planned for the North America ERP cutover. We also put the balance sheet to work. During the quarter, we accelerated our billion-dollar share repurchase program right in line with our balanced capital allocation strategy. Here's the bottom line on the quarter. We delivered across the board. We're clearly on track to achieving our long-range plan earlier than expected. Importantly, we did what we said, again, and that say-do equation really matters to us. As strong as the quarter was, I'm just as encouraged by the progress on our transformation.

As a quick reminder, our transformation has three phases: stabilize and separate the business, reposition it for profitable growth, and optimize the portfolio. Importantly, as we've said from the beginning, these phases are not sequential. They're running concurrently. Different initiatives are progressing at different speeds, but all three phases continue to move forward and increasingly reinforce one another. Let me start with the separation from 3M, because we're now in the final steps. The final phases of our ERP cutover are already in motion, getting to the other side of this, it's a big deal. It removes a significant amount of complexity from the business. It frees up talent and resources for innovation and margin expansion, it meaningfully improves free cash flow. Put simply, we're very close to moving from an environment with separation distraction to full operating mode.

Let's talk portfolio optimization because we took another major step today. As we just announced, we're advancing the separation of our Health Information Systems business with a clear objective, pursuing the path that maximizes value. Let me walk you through the thinking because we obviously didn't arrive here casually. First, strategic fit. We believe HIS can create greater value outside of Solventum, either as an independent company or combined with a scale player in the space. It's a differentiated, trusted business with a highly resilient financial profile. In a rapidly changing environment, this will better position it to capitalize on the fast-moving advances in AI. The second is value. We're confident a separation can unlock shareholder value, and our intent is to leverage both the separation method and the use of proceeds to maximize that value. Third is focus. For Solventum, this will make us a more dedicated med tech company, and it will sharpen our focus on MedSurg and dental.

Timing here matters. In April, as you probably remember, we passed the second anniversary of our spin. That gives us additional flexibility to evaluate and pursue more significant portfolio actions just like this one. To support this next chapter, we're planning to host our third annual Investor Day in Q1 next year. That's where we're going to lay out the post-HIS long-range plan and provide updates on our remainco strategy and innovation pipeline. Two commitments before I move on. To our HIS team, you should be incredibly proud of what you've built over decades. To be clear, you are part of the Solventum family until a transaction is finalized.

You have my commitment and this leadership team's commitment that we will fully support you through this process. To our HIS customers, nothing changes. We'll maintain our investment strategy in this business, we'll keep supporting your operations, and we will absolutely keep executing the innovation roadmap. Now moving to the M&A side of portfolio optimization. Acera, which as you probably remember, is our first acquisition, continues to perform extremely well, with year-over-year revenue growth above 40% and gross margin above 80%. That's the M&A playbook, a differentiated technology in a space we know accelerated through customer relationships we already have. We intend to keep running that tuck-in acquisition playbook in a disciplined way. Portfolio moves are only part of the story. The engine here is organic growth, and that's why we chose our five growth drivers with intention.

Durable markets, attractive growth and margin profiles, and in spaces where we lead with differentiated solutions. As a result, we see a multi-billion dollar growth opportunity in front of us. A big portion of it sits inside customers we already serve, where our preferred and differentiated solutions are still under-penetrated. That's what gives us confidence that over time, we can sustainably deliver growth at or above our long-range plan. What makes this opportunity especially meaningful is that it goes beyond just market growth. In many cases, growth comes from helping to address challenges that healthcare systems and patients face every day. Basically, as adoption of our solutions expands, we create shareholder value for sure, but we're also helping improve outcomes for the patients that we serve. Let me just make that real with one example of our growth drivers, IV site management.

IV-related infections impact an estimated two to three million patients every year. They can increase mortality risk by 50%, that's 50%, and they create roughly $10 billion in healthcare costs in the U.S. alone. For cancer patients with central lines, the stakes are even higher. Roughly 20% of those bloodstream infections are fatal. For patients already fighting cancer, preventable infections should never be the thing that takes their life, and that's where our products can help. Tegaderm CHG is the only transparent dressing cleared by the FDA to reduce catheter-related bloodstream infections. Studies show nearly 60% lower infection rates versus non-CHG solutions, and yet it's used less than 20% of the time. Think about that. A clinically differentiated solution, a potentially life or death problem, and over 80% of the opportunity is still in front of us.

That's just one example of the kind of upgrade opportunities that exist across the majority of our growth driver markets. Of course, attractive markets aren't enough. You need innovation and commercial focus, and that's where we've made real progress. Our innovation and commercial teams are now aligned around these growth drivers, and our new products are showing up in the results. As an example, in MedSurg, innovation is focused on three of our five growth drivers, IV site management, which I just talked about, negative pressure wound therapy, and sterilization assurance. Recent launches, including our V.A.C. Peel and Place dressing, three new Attest sterilization products, and our global expansion of Tegaderm CHG, are driving conversions to these higher value solutions. In Dental, innovation is focused on our core restoratives growth driver and a shift towards higher growth aesthetics.

Products like Clinpro Clear, Filtek EasyMatch, and EasyMatch Flowable, our composite warmer, and our Clarity aligner attachments are all gaining momentum with our customers. In HIS, innovation remains focused on revenue cycle management, including new AI-driven autonomous coding and our international expansion efforts. Across all three segments, our specialized sales teams are accelerating adoption in these markets. Looking ahead, our Vitality Index improvements are working. The pipeline is strong. We're expecting to launch almost 20 new products through the first quarter of 2028. That includes meaningful MedSurg launches in the first half of 2027, particularly in Advanced Wound Care. We also have some exciting dental innovations in aesthetics starting later this year and a continual stream of market-leading autonomous coding applications in HIS. When I take a step back, I see the transformation doing exactly what we designed it to do. The separation is nearly complete.