Solventum Corporation (SOLV) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon. My name is Carly, and I will be your conference call operator today. I would like to welcome everyone to Solventum's Third Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the program over to your host for today's conference, Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications. Please proceed.

Thank you. Good afternoon, and welcome to Solventum's Third 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 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 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 question-and-answer session. [Operator Instructions] I'd like to now hand the call over to Bryan.

All right. Thanks, Amy, and thanks to everyone for joining us today. And let me just start by saying that, in the third quarter, we executed the largest and most complex ERP cutover in the history of this company. And thankfully, it was also the last on our path to full separation. And I can tell you from experience that a cutover at that scale is never seamless, and ours was no exception. But the mitigation plan that we built, it held, and this team delivered through it. And to our customers, I want to say thank you for your partnership. You leaned in and worked with our teams, and that's what kept product moving to the patients who needed them. And to our team specifically, this was a significant cross-functional effort. We had supply chain, IT, commercial, customer service, quality, finance all pulling in the same direction. And that kind of team dynamic under that kind of team pressure isn't something you can just install. You either have it or you don't. We clearly have it. And speaking of having it, let's get into the quarter. All key financial metrics were in line or ahead of our expectations, with organic growth and EPS both above plan. And as we communicated in August, these results reflect the advanced orders reversing back out of the quarter following the ERP cutover. And once again, this team has proven that the say-do equation that we value so much is alive and well regardless of the challenges around us. And as solid as the quarter was, the progress in our transformation has been just as encouraged. Just a quick reminder, we're running a 3-phase transformation: stabilize and separate the business, reposition for profitable growth, and optimize the portfolio. And as always, those phases are not sequential. They're running concurrently. So let me start with separation because there's a pretty big headline here. With the Americas cutover behind us, separation is now more than 90% complete. Now we still have work to do to close out the rest, but the key message here, the important message is that the structural work, the risky work, that's done. This will also significantly strengthen our free cash flow as separation costs roll off, which will be reflected in our Q4 performance. I can just say this is a significant milestone for Solventum, and I'm extremely proud of the team for getting us here. And related to that, and this is also important, we successfully renegotiated our raw material supply agreement with 3M, aligning on a long-term supply agreement that is better for both companies. And there are 2 things I want you to take away from this for Solventum. First, it strengthens supply continuity for the critical materials that leverage our intellectual property; and second, it's an important variable in our ability to improve year-over-year margins in 2027, particularly given the known tariff headwinds created by the onetime tariff refund we received in 2026. And it clearly increases confidence in our holdco 2028 LRP target of 23% to 25%. Now moving on to portfolio optimization and specifically HIS. With a focus on continuing to execute our portfolio optimization strategy, in August, we announced our intent to separate our Health Information Systems business. And as I said last quarter, our focus here is clear. We're going to run the most shareholder-friendly separation process that we can, where both businesses have enhanced strategic clarity and more focused investment. And as a result, we're looking at both spin and sale options and taking the appropriate actions to move both of those options forward. When it comes to proceeds from the separation path chosen, we have 2 primary areas of focus. The first is paying down debt to hold our credit rating, and the second is returning capital to shareholders. And when it comes to RemainCo, we will have a very focused and compelling business. Remember that 4 of our 5 growth drivers as well as the Acera acquisition will remain with Solventum. And on a smaller base, their impact will be magnified, as will future tuck-in acquisitions. And the largest majority of our go-forward margin expansion levers, well, they sit inside of the RemainCo business. So our margin improvement opportunity off a new starting point will be even more compelling. But as I've said before, portfolio moves are only part of the story. The engine here is organic growth, and our growth driver areas continue to fuel the growth that we design into. As a quick reminder, there are 5 growth drivers: negative pressure wound therapy, IV site management, sterilization assurance, core restoratives and revenue cycle management. Together, they represent a multibillion-dollar opportunity. And for much of this opportunity, we're not trying to break into new accounts and displace an incumbent. We're simply going to customers who already trust us and showing them with data, a better standard of care that they're not using yet. That's fundamentally a lower risk path to growth, and it's a big part of why we have the conviction we do on the long-range plan. And let me just make it real with one example. This quarter, I'll talk about our V.A.C. system, which is our proprietary negative pressure wound therapy technology. And I'll look at the U.S. In the U.S. alone, complex and chronic wounds affect roughly 1 in 6 Medicare beneficiaries, 1 in 6 Medicare beneficiaries. And depending on whose study you read, that's about 10.5 million people at a cost to Medicare north of $20 billion per year. Those are big numbers. And as we know, big numbers tend to go in one ear and out the other, so let me describe it this way. For a patient with a diabetic foot ulcer, 5-year mortality runs somewhere between 30% and 55%. Once the patient progresses to major amputation, more than half will not survive the next 5 years. Studies with V.A.C. therapy show wounds are ready for closure almost twice as fast. Studies also show a 60% reduction in amputations versus non-V.A.C. treatments. And yet, V.A.C. therapy is only used about 10% of the time, so roughly 90% of this opportunity is still in front of us. And it's not sitting behind a technology gap. It's not sitting behind an evidence gap. The studies are clear. The therapy works. One of the major reasons it doesn't get used more often is just friction. It's the workflow complexity and the time of application on a busy short-staffed unit. That's why we've launched the V.A.C. Peel and Place dressing to engineer the complexity and the time out of the application. Peel and Place shows a 61% reduction in application time, and it can stay on for up to 7 days versus currently being changed every 2 to 3 days, significantly reducing time and complexity. But our innovation did not just enhance the clinical workflow. The design improves the patient experience with 10 out of 10 patients reporting no pain upon removal. And I can tell you, for busy care teams and their patients, simpler application, fewer dressing changes and less pain for removal make an established therapy easier to incorporate into everyday care. So think about this. Same customer, same call point, therapy we already have with outcome studies already in hand for patients who already qualify for it but 9 times out of 10 not getting it, and we intend to close that gap. Of course, attractive markets aren't enough. You also need to ensure cross-functional focus, particularly across your R&D engine, commercial and market development infrastructure. And that's exactly what our growth driver strategy accomplishes. In MedSurg, 3 of our 5 growth drivers live here. All 3 continue to contribute. And the area that I just talked about, negative pressure wound therapy, our V.A.C. Peel and Place dressing continues to ramp, and Prevena keeps building on the single-use side of the equation. In IV site management, we continue to gain traction behind Tegaderm CHG and our Curos caps, which really creates our belt and suspenders approach to reducing catheter-related bloodstream infections. And on sterilization assurance, we're now fully in market with the 3 new Attest products we launched earlier this year. On Acera, the integration continues to be on track, and the business delivered its best quarter on record. We also received a 510(k) clearance for the combined use of Restrata with the V.A.C. therapy faster than we expected, and it's the first of its kind. The commercial benefit here is every bit as important as a clinical one. It lets us now co-market the technologies and put our combined commercial organizations behind them. That's exactly the leverage we underwrote when we acquired Acera. In dental, core restoratives and new product launches are doing the heavy lifting, with Clinpro Clear, the Filtek Easy Match family of launches, our composite warmer and Clarity aligner attachments continuing to gain traction. We also moved forward with the limited launch phase of our Clarity Composite Veneers, which is obviously focused on the aesthetic space, with early market access, delivering 1,000-plus transformed smiles, giving us strong validation ahead of the full launch expected in the first part of 2027. And in HIS, our revenue cycle management continues to perform, with 360 Encompass adoption expanding, our AI-driven autonomous coding applications gaining traction and continued international expansion. This business is running hard. And I can say that this team has stayed completely focused through the separation announcement, and I can't tell you how much I appreciate that. Stepping back on innovation. Beyond the products I've already discussed, we still have a strong pipeline of new products across each of our businesses, and many of those will be discussed during our upcoming Investor Day in March of next year. The key message, I think, is pretty simple. We see significant opportunity for growth by leveraging our newly optimized sales channel to drive 3 key areas: first, the underpenetration of clinically differentiated brands like the V.A.C. system that are already in the market; two is newly launched innovation and our pending new product pipeline; and three is acquired innovation like Restrata. Okay. I've thrown a lot at you, so let me just leave you with a few key takeaways. First, we executed the largest ERP cutover in the history of this company and still delivered on revenue, margin and free cash flow. Even in the most operationally complex quarter, the say-do equation continues. Second, the separation of 3M is 90-plus percent behind us. That retires the execution risk of a major separation and it significantly strengthens our free cash flow. Third, our growth driver areas create a multibillion-dollar road map for revenue and margin growth, with much of this in customers we already serve. And then fourth, RemainCo will not only be a more strategically aligned and focused business, we will also have a compelling and enhanced growth and margin acceleration opportunity. Said simply, we are a more focused, more disciplined company with our separation nearly complete, our portfolio optimization in full swing, margin and free cash flow structure stronger, and growth engine running. And with that, I'm going to turn it over to Wayde. Okay. Wayde, take it from here.

Thanks, Bryan. We delivered another solid quarter in Q3 as we continue to execute our strategic and financial plans. Consistent with prior quarters, we'll provide a progress update on our separation from 3M and portfolio actions, then transition to third quarter financial results and conclude with an update on our 2026 guidance. Our separation from 3M remains on track and is nearing completion. During Q3, we successfully cut over our ERPs with ongoing activities to finalize. This marks the completion of a significant part of our separation from 3M, including all of the approximate 1,200 application system moves, and we have exited just over 90% of our transition service agreements, with plans underway to complete the balance by the end of 2027. Our supply chain and separation activities also continue to progress according to plan and are mostly complete. We've made great progress rationalizing our global supply chain. We've reduced our total plant footprint to 21, down from the 67 at the time of separation. This includes 2 new manufacturing plants we announced in 2024, plus the manufacturing site we acquired with Acera last year. We have 5 manufacturing line moves remaining, which we expect to complete in 2027. And we have significantly reduced our distribution centers from 73 at the time of separation to a current count of 54, with 9 more to exit to reach our target of 45. As Bryan said, we have also successfully renegotiated our raw material supply agreement and the reverse master supply agreement with 3M, with resulting benefits for both companies. In exchange for a volume commitment to 3M over a period of time, the amended master supply agreement eliminates the significant step-up in product costs that was scheduled for April 2027. As a result, we no longer anticipate the additional 100 basis points of gross margin headwind that could have begun in Q3 2027. Regarding portfolio actions, our Acera integration activities remain on track, and the business continues to perform above our initial expectations. Similarly, the Purification & Filtration divestiture activities are also moving ahead and on plan. We're also advancing activities for the planned separation of our HIS business, and we'll provide updates regarding the process and timing at a future date. Regarding the financial impacts of the HIS separation, I'll recap our public comments to date. The aggregate market growth rate for RemainCo is still 4% to 5%, with no impact to our existing long-range plan organic sales growth target, which is also 4% to 5%. Given the strong margins for HIS, it's reasonable to expect approximately 400 basis points of annualized net operating margin dilution after considering the anticipated benefit of transition service offsets in the short term for stranded costs and plans for further cost reductions and accelerated margin improvement over time. Regardless of the separation pathway, we expect to use proceeds to pay down debt to maintain solid investment-grade credit ratings, with the majority of the remaining proceeds returned to shareholders. Now turning to our third quarter results. Starting with top line performance. Sales of $1.95 billion decreased 7% on a reported basis. Foreign currency was a 30 basis point benefit to reported growth, while the net impact of acquisitions and divestitures was a 450 basis point headwind primarily driven by the sale of Purification & Filtration in September of 2025 and partially offset by the Acera acquisition in December 2025. On an organic basis, compared to prior year, sales decreased 2.8%, including the reversal of $125 million ERP-related advanced orders that benefited second quarter results as part of our planned cutover mitigation strategy. The reversal represented a headwind of approximately 630 basis points to organic sales growth. Q3 organic growth on a normalized basis was approximately 4% when taking into consideration the ERP-related timing impact and 90 basis points of SKU rationalization headwinds. Additionally, we highlighted some nonrecurring items during the prior year. The 4% normalized growth does not include the impact of Acera growth contribution, which would have added approximately 50 basis points to total growth and 80 basis points to MedSurg growth. Importantly, volume remained the primary driver of underlying growth, and pricing remained within the expected range of plus or minus 1%. Moving to the segments. Our largest segment, MedSurg, delivered $1.2 billion in sales, a decrease of 2.8% on an organic basis. As expected, growth was impacted by the reversal of ERP advanced orders for 710 basis points, primarily within infection prevention and surgical solutions. Within MedSurg, Advanced Wound Care grew 1.5% organically with continued performance in negative pressure wound therapy, supported by new product innovation and commercial execution, which partially offset the expected reversal of advanced order timing. Acera contributed $35 million to reported sales. The business grew 35%, driven by a synthetic tissue matrix technology and continues to outpace its attractive market growth. Infection prevention and surgical solutions decreased by 5.7% on an organic basis, driven primarily by the expected reversal of advanced order timing, partially offset by performance in IV site management and temperature management. Our Dental Solutions segment delivered $317 million in sales, a decrease of 7.4% on an organic basis. The reversal of ERP-related advanced orders represented just over 10 percentage points of headwind, partially offsetting the ERP headwinds with strong contribution from ongoing new product launches, combined with commercial execution. Our Health Information Systems segment delivered $356 million in sales, an increase of 4.4% on an organic basis. Growth was driven by continued strength in revenue cycle management solutions, supported by continued strong customer retention and ongoing commercial execution. Looking down the P&L. Gross margins were 57.1%, an increase of 120 basis points over the prior year. The year-over-year improvement reflects continued benefits from programmatic savings, portfolio optimization and operating improvements, partially offset by inflation and tariffs. Sequentially, gross margin declined 300 basis points from 60.1%, primarily reflecting the absence of the tariff refund benefit that added 450 basis points to Q2 gross margins, while Q3 benefited from lower logistics costs and lower tariffs. Operating expenses were $725 million. The $14 million decrease versus the prior year reflects the net impact of portfolio loans, along with benefits from savings initiatives, partially offset by investments to support our growth and operations. In total, we delivered operating income of $387 million or an operating margin of 19.9%, a decline of 70 basis points compared to 20.6% in the prior year. The decline was attributable to 250 basis points of ERP sales mitigation reversal headwind, mostly offset by stronger gross margins and Transform for the Future program savings. The reversal of the second quarter ERP mitigation benefits also represented approximately 400 basis points of a sequential pressure on operating margin. Excluding this timing impact, operating margin was approximately 22.3%, ahead of our expectations. Below operating income, nonoperating expense was $79 million. And our effective tax rate was 19.3%, both tracking to our full year expectations. Altogether, we delivered earnings per share of $1.45, which includes approximately $0.35 impact from the reversal of Q2 ERP-related advanced orders. Shifting to our balance sheet. We ended the quarter with $451 million in cash and equivalents and net debt of $4.6 billion. For Q3, free cash flow increased by $97 million, which includes costs for separation-related activities and portfolio optimization, which were more than offset by tariff refunds received and underlying cash flow generation. Excluding the combined separation activities and portfolio optimization, free cash flow would have been $334 million. As a reminder, we expect to see a step down in separation-related costs beginning in Q4 2026 and again in 2027 as we complete the separation from 3M. During the quarter, we repurchased approximately 570,000 shares for a total consideration of nearly $50 million under an authorized share repurchase program. This brings total repurchases through the first 9 months of the year to approximately 5.3 million shares for a total consideration of just over $400 million. Our balance sheet remains well positioned to support our balanced capital allocation strategy, including tuck-in acquisitions and share repurchases. Year-to-date, we have consistently delivered normalized sales growth of approximately 4%, with operating margins nearly 23%, both at or near the low end of our 2028 long-range plan targets. While we have more work to do, we've made great progress while navigating complexities of the 3M separation and multiple portfolio optimization initiatives, all while executing the turnaround. Now on to our 2026 outlook. Given our year-to-date performance, we're expecting organic sales growth toward the high end of our 2.5% to 3% range. Excluding the expected 100 basis point impact for SKU exits this year, this would represent growth closer to 4%. We continue to estimate foreign currency exchange rates will have a favorable impact of approximately 100 basis points on reported sales growth for the full year. Following the stronger-than-expected gross margins in Q3, we now expect our full year gross margins will be approximately 57%, which includes 120 basis points annual margin benefit from the Q2 tariff refund, which offset the expected full year tariff cost. Our outlook for operating margin is now toward the high end of the previously raised 22.2% to 22.7% range and compares with our initial fiscal year outlook of 21% to 21.5% before adding 120 basis points for tariff refunds. Excluding the tariff refund benefit, our outlook indicates an expected 100 basis points of expansion over prior year. The outlook reflects continued benefits from programmatic savings, portfolio optimization, operating improvements and our Transform for the Future program, partially offset by inflation and ongoing investments to support growth. We are also making meaningful progress on our Transform for the Future program. To date, we have spent approximately $180 million of the total $500 million estimated program cost, with savings of approximately $160 million of the targeted $500 million in estimated total annual savings. This program is building momentum and already helped expand margins, added capacity to fuel investment while we offset P&F stranded costs, absorb tariffs and roll off 3M transition service agreements. Looking ahead, it adds conviction to build on our track record of margin expansion. Our expectations for annual nonoperating expense of approximately $300 million and tax rate of 19.5% to 20.5% both remain unchanged. Given our performance through the first 9 months of the year and expectations for the remainder of 2026, we now expect earnings per share of $7.20 to $7.30 compared with our prior range of $7.10 to $7.20. For free cash flow, we maintain our outlook for $200 million to $300 million. We continue to expect a large majority of our free cash flow in the fourth quarter, consistent with the timing of winding down separation costs and other separation-related activities. Our underlying cash generation remains strong, with free cash flow tracking to approximately $1 billion for 2026, excluding separation and portfolio-related costs. And as a reminder, our full year 2026 outlook includes the Health Information Systems segment. In summary, we delivered another quarter of solid execution. While the quarters included complexities associated with the ERP cutover, the full year view nets out the ERP timing and provides a clear view of performance. Also, the SKU rationalization program ends next quarter. And we are now more than 90% through our separation from 3M, with the heaviest lift complete. With all of this behind us and coming to a close at the end of 2027, we are confident in the path ahead and the setup for significant value creation as RemainCo going forward. With that, we'll turn it back to the operator for the Q&A portion of the call.

[Operator Instructions] Your first question is from Patrick Wood with UBS.

Amazing. And congrats getting through the ERP side. I've done that and it sucks. The -- I guess, a boring financial one, right? So the growth that you guys have in the guide sort of implies a Q4 organic growth rate that may be a smidge below what you've been doing so far this year if we ex out all the various funnies. And so I guess, is there some kind of hold on? Or is this conservatism? And do you think that that's the right kind of exit rate as we move into '27?

Yes, thanks, Patrick. And first, I'll just comment on the ERP getting on the other side. I won't use the exact terminology that you did, but I agree fully. And we are very happy to be on the other side. But maybe, Wayde, you can address the...

Sure. Yes, happy to. So on that squeeze math you're talking about for Q4, it's one of the reasons that we moved the guide to the high end. So as you know, we increased our guide last quarter from 2% to 3% to 2.5% to 3%. In this quarter, we're moving it the high end 3%, which, on an execute basis, is closer to the 4%. And so right at the high end would be consistent performance with what we've had year-to-date. And so I think that's just the important piece. If we continue performing at the rate that we are, we'll see ourselves at the high end of the range, and that's why we moved the guide to the high end. As you think about 2027, obviously, we're not guiding for 2027 yet. But you do have the key pieces here. We would expect the momentum in the business to continue. And so I think a good place would be just what you said, is if we do finish this year at the high end of our guide at about 4% ex SKU, that's normalizing for the SKUs. And then, of course, Acera will kick in for us next year, which will give us improvement year-over-year.

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

So Wayde, the base install business improving, growth getting better, margins getting better. You've offset some of the 3M headwinds on the margin. So everything in the base business kind of moving higher, but it seems like also, you kind of balance that with health care, IT separation and what seems like a potential to be somewhat dilutive or a little dilutive. But how should investors today balance those 2 factors sitting here and think about kind of total shareholder value accretion and Street earnings revisions moving higher over time?

Yes. Maybe I'll start with that, Wayde, and on the top end. I think it's -- just from a margin standpoint, maybe, Travis, I'll start there because I think that's at the core of your question, and then maybe we'll jump over to EPS as well. But on the margin side, I think Wayde's given you a lot of detail here, right? He gave you the 400 basis points, which is kind of a straight math reset post separation from HIS. But what we're also saying there, and I think it's quite important to understand, is that we know that RemainCo from there isn't just going to sit still, right? But we're going to be able to be on a journey to move margin expansion forward, and we actually think that we're better positioned as RemainCo to do that. And for the very reasons I said in the prepared remarks, more of what we have in Transform for the Future sits in RemainCo. It's kind of obvious why it would because you look at the HIS margin profile, and there's not much additional juice from that orange if you will. So that's on the margin side. There's a clear math that takes you down, and then we're going to work on bringing it back up. On the EPS dilution side, which I think is your second part of the question, I would just say that we're too early in the process to really talk too much about EPS dilution at this point. Doesn't really make sense because big variables, like what is the separation method going to be, would have a significant impact on that. But again, we're giving you a lot of color that you can work with. I'll just kind of go through the list again. You've got the straight math that I just talked about in the 400 basis points range that we referenced. We're going to absolutely get after that, and we think RemainCo is very well positioned to do so. And from a proceeds perspective, regardless of the separation method, we're going to look at 2 primary areas of using those proceeds. The first would be to pay down debt because we're going to lose EBITDA, and we want to make sure that we're keeping our investment-grade rating. And then we're going to use the rest to be able to get after returning capital to shareholders in the quickest, most efficient, effective way we possibly can. So it's not everything you're looking for, but it's a lot of information that we're giving you that can help you build your models. Wayde, anything else you want to add to that? Okay.

Your next question is from Jason Bednar with Piper Sandler.

Can you hear me okay?

Yes, we got you.

We got you, Jason.

Perfect. So Wayde, maybe in a similar vein as Patrick's first question but more looking at margin. And again, I know this is a little messy here, but walk us through some of the puts and takes around the kind of the exit rate from this year into next year. You've expressed here recently just the confidence in margin improvement next year despite that tariff refund hurdle. I know the comps here might get almost washed out the door if -- with the HIS separation. But again, take us through some of the puts and takes, knowing that you had a lot of confidence on hurdling that tariff refund and also knowing that we had -- that was contemplated in the supply agreement that is now resolved. So do you have even more confidence around margin expansion next year, knowing that the supply agreement isn't there? Or does that get reinvested?

Yes. So there's a lot there, Jason, for sure. But I think the -- I'll just start with the end of your question, which is, yes, obviously, we had a good feeling given the great relationship that we have with the leadership team at 3M, that the negotiations, we're heading in the right direction. And we think we got to a really great outcome for both companies. And so we do have a lot of confidence in margin expansion for next year. We've been working on it for some time now in anticipation of getting to our long-range plan operating margin targets. So although we're expanding margins a lot this year, if we achieve the high end of the guide, which we just pointed everyone to, on the surface, that will be 100 basis points of margin expansion. That's if you remove the onetime benefit of the tariff refund as the base business this year is 100 basis points of margin expansion. But keep in mind, that's offsetting the annualization of tariffs from last year. That adds about another 50 basis points. So the underlying margin expansion this year, about 150 basis points. So that gives us the confidence in the momentum of the margin expansion that we're planning for again next year. But I would just back up a little bit more and talk about the strategic move with HIS is an important one for us, and Bryan touched on the 400 basis points. But you should -- as you're thinking about modeling this for next year on a holdco basis, you can take the operating margin that we're planning to finish the year at and then just tick it up a little bit because it will be offsetting that onetime tariff refund headwind of about 120 basis points. So if we can finish just -- if we can achieve next year just a little bit better than where we're finishing this year, that will be over 120 basis points of expansion because we'll have to overcome that headwind. But yes, we are very confident that we'll be expanding margins next year even with that tariff headwind.

Your next question is from Vik Chopra with BMO Capital Markets.

It's Anton Heldmann on for Vik. Bryan, you've highlighted that roughly 60% of the time Restrata is used, it's used alongside negative pressure wound therapy. And recently, you received a fast and anticipated 510(k) clearance for combined use. I guess, what does that combined use indication change commercially for you? Does it allow you to accelerate Restrata penetration or cross-selling through the negative pressure wound therapy and installed base in a way that you couldn't previously? And given Acera's kind of recent 40% growth trajectory, does this expand or extend the runway you see for that level of growth?

Yes. It's kind of part and parcel -- first of all, I'm glad you asked the question because I didn't think we were going to get it. It's a big deal for us to be able to get that regulatory approval to co-market these. To your point, many of our customers were already using them together, but we were not allowed to because we didn't have regulatory approval. We couldn't co-market them that way. And so this was, obviously, at the speed at which we got the regulatory approval, you knew that immediately after acquiring, we went to pursue it because it significantly opens up the door now for both of our commercial organizations to talk about the technologies together. And we're the only company that can do that. So it's a pretty big deal for us. It was part of the equation though. It was part of the calculus, if you will, in acquiring the company. So it doesn't necessarily change the trajectory of growth, but it confirms our assumptions in the growth rate that we've got today. So it's a really important step for us, but it was part and parcel to the decision to buy Acera in the first place. Hopefully, that helps. I appreciate the question though.

[Operator Instructions] Your final question is from the line of Steven Valiquette with Mizuho.

Sorry for the raspy voice here, a little bit under the weather this week. But related to another question to follow up on your expectation for the organic sales growth you said at the higher end of the range. I know it's kind of hard to parse this out, but I'm just curious if there's any sense for whether that improvement is driven more by maybe just the medical and dental end markets looking a little bit better from a volume standpoint. Or is it more driven by market share gains for you guys versus some of the competitors? Just any color on that might be helpful.

Yes. Thanks, and I understand the raspy voice because I just got over probably whatever you have right now. It's no fun, but hopefully, you'll get to the other side pretty soon. I'd say, generally speaking on both, MedSurg and dental, we're not really depending on any changes in market growth. This is all around running the game plan that we have. I'll just start with dental. Again, pretty stable market there, but we're continuing to see good expansion. Had a really good quarter actually in dental. You got to take out the ERP noise and the tough comp that we have because of some back orders last year that we talked about but a really strong quarter otherwise. And it's not because of market growth. It's because we're focused in our growth driver areas, and we have new products that we're feeding to a specialized sales organization. And that's really the same story in MedSurg. So we're not depending right now on market expansion or market growth improvements. We're just running the play that we have in our growth driver areas. Anything else, Wayde, that you want to add?

No, I think that's it. Yes, it is heavily dependent on the penetration opportunity in front of us. And that's, as Bryan laid out in his prepared remarks, last quarter and this quarter, again, with negative pressure wound therapy, the penetration opportunity for us far outweighs any market shifts.

Yes. One thing we'll make sure that we spend a lot more time on in the Investor Day, and I want to make sure it's not lost, I had it in my prepared remarks, but we've already, through Solventum Way, restructured the global sales channel to be specialized inside of the growth driver areas. But I just don't want people to miss that we've got 3 really strong levers to drive growth now with that optimized sales team. The first one is Wayde just said, we have a significantly underpenetrated situation with clinically differentiated technologies that we can now move forward through that direct channel and the market development apparatus we're putting around it. The second is pretty typical. It's just new product development. And we've got a really nice pipeline, and we've already launched some products recently. And the third is Acera. I mean, it's a great acquisition that drops right in the bag, and we can take advantage of our global infrastructure. And we're going to continue to do that, acquire these tuck-in acquisitions and drop it in that optimized commercial channel. But all 3 of those bring real value. It's not just new product development. It's that underpenetration of technologies we already have, and it's the acquisitions that we're going to be bringing in. I just want to make sure that, that resonates. We'll spend a lot more time on contextualizing that as we get to the Investor Day in March.

We do have a question from Brett Fishbin with KeyBanc Capital Markets.

Just with everything going well with the separation, the ERP cutover behind you, I'm wondering what's the next big milestone that we should be looking for in terms of that separation.

The separation itself, those are really the big milestones. Rebranding is a big one. Obviously, that's typically the longest tail, and we're going to work through that. It's -- I would call it, there's always risk involved in everything, but it's basic blocking and tackling, and we're going to be working with 3M to make sure that we move through that efficiently. But that -- just from a separation standpoint, that would be the longest tail. That would be the piece that we're going to be looking at. Outside of separation, obviously, the biggest next transformation is HIS, I mean, moving forward with that and really turning the jets on from a RemainCo standpoint. We talked about the fact that, from a revenue perspective, we feel like we're in a great position as RemainCo, and 4 of our 5 growth drivers sit there, as does Acera. And from a margin expansion standpoint, almost every lever we had in Transform for the Future stays with RemainCo because HIS margins were so high. So that's a pretty big transformation for us, and we're excited about it.

There are no further questions. I'll now turn the call back over to Amy for any closing remarks.

Great. Thank you, Carly, and thank you, everyone, for listening and to our analysts for your questions. If you have any follow-ups or need anything else, please don't hesitate to contact the Investor Relations team directly. This concludes our third quarter fiscal year 2026 conference call. Carly, you may now close out the call.

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