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DATE

Thursday, November 6, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

  • President and Chief Executive Officer — Bryan C. Hanson
  • Chief Financial Officer — Wayde D. McMillan
  • Head of Investor Relations — Amy Wakeham

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TAKEAWAYS

  • MedSurg Sales -- $1.2 billion, reflecting 1.1% organic growth driven by advanced wound care acceleration and new sterilization product launches.
  • Gross Margin -- 55.8% of sales.
  • Operating Expenses -- $739 million, an increase of $3 million, primarily due to higher equity compensation and employee benefits, partially offset by cost savings from the Purification & Filtration (P&F) sale and restructuring efforts.
  • Free Cash Flow -- Decreased by $22 million, with guidance indicating net free cash flows for the year (excluding P&F divestiture impact) aligned with the $450 million to $550 million range target.
  • Pricing -- Remained within the expected ±1% range, highlighting disciplined pricing strategy across product lines.
  • SKU Rationalization -- Program impact measured at 60 basis points in the quarter, contributing to product portfolio optimization.
  • Tuck-in Acquisitions -- Management reaffirmed an active M&A pipeline focused on deals generally valued under $1 billion, supported by strengthened capital position.
  • Long-Range Revenue Plan -- CFO McMillan noted, “Your comp is kind of progressing towards the 21% range plan of 4% to 5% faster than expected,” indicating outperformance versus internal targets.
  • EPS Growth Target -- Management disclosed a long-range plan for 10% compound annual earnings per share growth over the current three-year period.
  • Dental Segment Highlights -- Notable milestones included the launch of the redesigned Clarity brand and the Solventum Filtek composite warmer, marking the company’s first fully Solventum-branded restorative device.
  • Health Information Systems (HIS) -- HIS reported better-than-expected growth, with “demonstrate our operational excellence and service line automation capabilities,” according to Bryan C. Hanson reinforcing its leadership in autonomous coding.
  • ERP Implementation -- European ERP conversion completed successfully, enabling order fulfillment from dedicated continental distribution centers and further reducing supply chain complexity.
  • Capital Return Initiatives -- Management is expanding capital allocation options, including potential shareholder return programs, pending an update at the “appropriate time.”

SUMMARY

Solventum (SOLV +7.91%) delivered reported growth in its largest segment, MedSurg, as well as in its Dental Solutions and Health Information Systems businesses, which both surpassed internal expectations for the quarter. Management confirmed that the company is advancing toward its long-range revenue and earnings objectives faster than anticipated, with continued asset restructuring and portfolio optimization initiatives. The Wayde D. McMillan emphasized that operating margin expansion is “the expectation” for 2026 despite tariff headwinds, supported by ongoing transformation and supply chain efficiency programs.

  • Management stated the company is actively evaluating “offensive mergers and acquisitions” according to Bryan C. Hanson specifically targeting opportunities under $1 billion in value to build scale in its core and promising markets.
  • Free cash flow remains within annual guidance excluding P&F divestiture timing, and material separation costs are expected to be almost all done in 2027.
  • Post-European ERP conversion, Solventum is “fulfilling orders from dedicated European distribution centers,” signaling operational autonomy after separation from 3M.
  • The SKU rationalization initiative produced a 60-basis-point impact within the quarter, which management identified as a tracked contribution to the overall optimization strategy.

INDUSTRY GLOSSARY

  • P&F (Purification & Filtration): Solventum’s segment providing filtration technologies, divested during the quarter and referenced as a material event impacting financials.
  • ERP (Enterprise Resource Planning): Business management software enabling integration of core processes, referenced in context of Solventum’s system conversion for European operations.
  • Autonomous Coding: Use of advanced software and artificial intelligence to automate medical coding and billing, highlighted as a capability of Solventum’s Health Information Systems.
  • SKU Rationalization: Strategic reduction of lower-performing product lines (stock-keeping units) to optimize operational efficiency and margins.

Full Conference Call Transcript

Bryan C. Hanson: Thank you, Regina. Good afternoon, everyone, and thank you for joining us today. We are pleased to report another solid quarter for Solventum Corporation. The consistent underlying momentum we are seeing reflects not just the effectiveness of changes we have already made, but also the performance and dedication of our global teams. This momentum is driving us towards our long-range revenue growth targets faster than expected. The commercial restructuring and enhancements we executed last year are rapidly delivering results. We have shifted our focus towards asset vitality and are meaningfully increasing the value of our innovative solutions to strengthen our position in a dynamic market. This initiative will reshape our cost structure, improve operational efficiency, and fuel innovation.

Given where we are in our journey, this is an exciting time for Solventum Corporation as we focus on acquiring strategically attractive assets that fit our long-term vision. We are closely evaluating and timing our focus toward offensive mergers and acquisitions 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. This approach allows us to build scale in our most established and attractive markets where we already operate, promising markets, and leverage the capabilities of our enhanced global commercial team.

Moving to our businesses, overall, our mix in the third quarter was largely as expected, but with growth rates of dental solutions and HIS better than expected. Our MedSurg business continues to deliver strong year-to-date performance in all three of its growth driver areas, leveraging new product innovation, commercial specialization, and consistent execution by the team. In advanced wound care specifically, we saw clear acceleration in growth led by our negative pressure wound therapy growth driver. Our newly specialized commercial organization is driving growth from three new sterilization product launches, each designed to simplify and enhance the sterilization process, reduce catheter-related bloodstream infections, and ultimately improve patient outcomes.

With our strong clinical differentiation, a robust and specialized commercial channel, and 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 restorative growth driver, with results driven by a focused portfolio, accelerating new innovation, and specialization in our sales channel. This quarter brought two major milestones: the launch of our refined and redesigned Clarity brand and the launch of the Solventum Filtek composite warmer. This is the first fully Solventum branded restorative device. These efforts, alongside continued strong demand for ClinProClear and Filtek EasyMatch, 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.

Acceptance rates being achieved in our partnership with Ensemble demonstrate 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 operations and setting new standards for efficiency and accuracy. In summary, our progress is palpable. From our navigation to 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 dedication to continuous improvement and resolve, inspiring progress every single day. And with that, I am going to turn it over to Wayde D. McMillan for a closer look at our financial results and other key updates.

Wayde D. McMillan: Thanks, Bryan. We are pleased to report another solid quarter. The dedicated separation from 3M is going very well, while making foundational changes to deliver on our long-range plan. After a successful European ERP conversion, we are winding down interim mitigation efforts and are fulfilling orders from dedicated European distribution centers. We also continue to simplify our supply chain network, now with 21 global Solventum-owned manufacturing sites. While the inter-quarter sale of the P&F business represented a $310 million 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 a 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, Infection Prevention and Surgical Solutions were flat in the quarter. As a reminder, infection prevention and surgical solutions are expected to grow in the 2% to 3% range. The additional growth came from backorder improvements along with an easier comparable. Our focus on innovative performance management due to favorable solutions is evident. Looking down the P&L, gross margins were 55.8% of sales in the quarter.

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 do see higher than expected performance across a range of capital allocation options to unlock shareholder value. For Q3, free cash flow decreased by $22 million, a greater headwind expected in Q4 than the impact in Q3. Our significant debt reduction has strengthened our position to pursue tuck-in acquisitions. Thank you, Bryan.

Operator: Our first question will come from the line of Patrick Wood with Morgan Stanley. Please go ahead.

Patrick Wood: Beautiful. Thanks so much. I will keep it to one. The Transform for the Future program, was this one that was kind of kicking around?

Wayde D. McMillan: Good to hear from you, and thanks for the question. I would say maybe to start, it was something that we were ready for. We had to get through our Solventum restructuring there. Obviously, there was a lot that was happening. We wanted to make progress on separation from 3M and also the sale of P&F. And now we have, I am 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 of tariffs is pretty high. Actually, it is very high through final ERP implementations here in 2026.

Taking over ownership of those systems and then certainly looking at increasing automation as well. So we are on separation today, very focused, but looking forward to freeing up resources and working on this program over the next several years. And I think, Bryan, you want to touch on the reinvestment?

Bryan C. Hanson: Patrick, just real quick, and then I have a more high-level question. The program, $500 million in cost, Wade, is that kind of 3% or so? We have had some lumpiness to the first half of the year around. And what you are talking about is that Q4 essentially puts us at the midpoint of that around 2.5% for the quarter. That also includes absorbing the remaining first half volume give back. And a geographic theme across most of other publicly traded demo companies that Europe had a pretty strong performance.

Operator: Our next question comes from the line of Jason M. Bednar with Piper Sandler. Please go ahead.

Jason M. Bednar: Hey, good afternoon. Thanks for taking the questions and congrats on the results here. I have got two, just picking up on the dental theme. Just to start, Wade, I heard you about the first one. First here, pricing contributions for the company, maybe not just in Q4 like you guided, but even quarters that follow. At this point, should we be able to dial that into a tighter range than what we had three months ago?

Wayde D. McMillan: Yeah, Jason, we talked about that. When we think about what we think could happen, of course, it is very dynamic out there. And we will see how this progresses. Your comp is kind of progressing towards the 21% range plan of 4% to 5% faster than expected. Excluding SKUs, you are only 100 basis points away from market growth this year. So we are not going to give any more additional color right now. I just say that we are giving a lot of relative guidance for 2026. I think the takeaway is the ramp that we are seeing in the LRP is happening faster.

I remember that when we presented the LRP back in March, we are going to revise once we get there and shoot for a higher target. We are not going to make that change now, and we are not going to try to change the timeline. We are going to keep the LRP as is. But it is pretty clear we are progressing faster than people thought.

Jason M. Bednar: Yeah. And just picking up on 26 guidance, Travis, I would be disappointed. That is important because we have had some intra-quarter ups and downs during the year, so we have provided color throughout the year so that it can support the month. Of course, we have to take a look at the inter-quarter timing as we get into '26. But other than that, we are not guiding to 2026. But, you know, I have been trying so I have been just six quarters and you are ready to execute on portfolio optimization.

Wayde D. McMillan: Going down on capital allocation question to speak because we are feeling very confident. Conversations with our board, as you can imagine, and at the appropriate time, we will update.

Jason M. Bednar: Wade, anything? Yeah. And I could just pick up on the last part of your question around the free cash flows. 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 that impacts the free cash flow line, but that is offset in the investing cash flows. And so that caused us to revise our guidance for free cash flows for the year. But if you net out the impact of the P&F divestiture, we are still right in line with our beginning of the year guidance of $450 million to $550 million of free cash flows.

And so what I shared last call on the Q2 call is that we do have some timing throughout the year that we are 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 will 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 be almost all done in 2027.

Then these divestiture impacts that are classified to free cash flow. Because we cannot wait to get to the other side of the separation major initiatives. And so as well as get through the divestiture here and really show the cash generation power of this business on the free cash flow line.

Patrick Wood: Can you share any color as far as how to think about margin expansion? And I like that is also ahead of plan. As you look at the LRP target, and I have a...

Wayde D. McMillan: Sure. So for 2026, what we shared on our prepared remarks is that we would expect to see continued improvement on both the top line and the bottom line. What we do have to highlight is that obviously, tariffs are going to be the assumptions that are in place today, they will be more of a headwind next year, and that will pressure operating margin expansion. But just pulling back up to the one range plan commentary we gave on the bottom line for earnings per share growth, we are planning a 10% CAGR for earnings per share over the three-year long-range plan period. And it is our goal. We are looking to expand earnings per share 10% each year.

Might not happen every single year, but that is our goal.

Bryan C. Hanson: Yeah. Maybe just to draft off that as well. And one of the reasons we are talking about the programmatic savings, the tariff mitigation that we are 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 just take that off the table. We are saying that we are going to improve margins. We are not going to say how much, but we just wanted to be very clear that is the expectation.

Patrick Wood: That is super helpful. Thank you. And just my quick follow-up is you mentioned a few times about the, you know, the firepower to do deals and such going forward. Can you just remind us what you have said about, you know, potential areas of interest and any comment on how soon you might expect to see something? Thank you.

Wayde D. McMillan: Yeah. We are 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 a billion dollars in value. Obviously, sales, but a billion dollars in value. And it would be...

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

Amy Wakeham: Thank you, Regina. This concludes our third quarter 2025 conference call. You may now disconnect.