Solventum (NYSE:SOLV) released first-quarter financial results and hosted an earnings call on Tuesday. Read the complete transcript below.
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Summary
Solventum reported first quarter results ahead of expectations, with organic sales growth and EPS exceeding plans due to strong execution, product launches, and effective cost-saving initiatives.
The company’s Transform for the Future program is expected to generate $500 million in savings, focusing on operational efficiencies and portfolio optimization, including acquisitions like Acera and divestitures such as the PNF business.
Guidance for 2026 remains strong, with expectations of organic sales growth in the range of 4-5% and operating margin improvements of 50-100 basis points despite tariff and inflationary pressures.
Solventum continues to make progress on its separation from 3M, with significant milestones achieved in ERP cutovers and system migrations, and plans to complete the majority by the end of 2026.
Management highlighted the ongoing success of new product launches, the strengthening of its commercial teams, and a robust pipeline of nearly 20 new products expected over the next two years.
Full Transcript
OPERATOR
Hello and welcome to Solventum’s first 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 star1 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)
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 Brian Hanson and Chief financial officer Wade 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 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 and 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. And with that I’d like to now hand the call over to Brian.
Brian Hanson (Chief Executive Officer)
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 stakeholders around the world because I’m pretty sure that a few of them are listening in today. And 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. You know, this team’s ability to drive outcomes while navigating ongoing separation efforts, ERP implementations and acquisitions 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, 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, 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 built into how we manage this business. Q1 is a clear indication that we are well on our way, 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. And we expect to have close to 20 new products launch over the next two 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, 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. That said, 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 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 PNF 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 PNF 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. We, 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 three operating segments, I’ll start with Med Surg, 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 VAC peel in place dressing 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. 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. Well, 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 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. 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. And 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 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 Wade hasn’t even gone yet. But number one, our, 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 Wade to walk through our financial details and then of course, we’ll open things up to questions. Okay, Wade, go ahead.
Wade McMillan (Chief Financial Officer)
Thanks, Brian. 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 US 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 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 PNF divestiture with a majority of transition service agreements to be completed in 2027 and the Sara integration efforts are tracking to plan while maintaining strong momentum of the commercial team. Now Turning to our first question 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. Unreported 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 440 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 and 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 …
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