Q3 2025 Solventum Corp Earnings Call

Speaker #2: Good afternoon . My name is Regina , and I will be your conference operator today . At this time , I would like to welcome everyone to Solventum third quarter 2025 earnings call .

Speaker #2: As a reminder , this conference is being recorded . All lines have been placed on mute to prevent any background noise . 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 .

Speaker #2: Please proceed .

Speaker #3: Thank you and good afternoon . Welcome to Solventum third quarter fiscal Year 2025 Earnings Call . Joining me on today's call are Chief Executive Officer Brian Hansen and Chief Financial officer Wayde McMillan .

Speaker #3: 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 .

Speaker #3: Now . During today's call . Our discussion and any comments we make will be made on a non-GAAP basis , unless they are specifically called out as GAAP .

Speaker #3: The non-GAAP information discussed is not intended to be considered in isolation or as a substitute for the reported GAAP financial information . You're encouraged to review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers .

Speaker #3: Additionally , our discussion on today's call will include forward looking statements . Including but not limited to , expectations about our future financial and operating performance .

Speaker #3: We make these statements 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 .

Speaker #3: Following our prepared remarks , we'll hold a Q&A session for the Q&A portion of today's call . Please limit yourself to one question and one related follow up .

Speaker #3: If you have additional questions , you're more than welcome to rejoin the call queue . And with that , I'd like to now hand the call over to Brian .

Speaker #4: All right . Great . Thank you Amy , and thanks to everyone for joining us for our third quarter call today . Let's just jump right in .

Speaker #4: You we delivered another strong quarter as we execute our three phase transformation plan . And the consistent underlying momentum we are seeing reflects not just the effectiveness of the changes we've already made , but also the performance and the dedication of our global teams in momentum .

Speaker #4: Was reflected in our Q3 performance with positive volume growth driving top and bottom line results . And as such , we are again raising our sales growth in EPs guidance for the year .

Speaker #4: We are clearly ramping towards our LRP revenue growth targets faster than expected , and our momentum is anchored in three primary areas of progress and clear results .

Speaker #4: The first is the team's ability to manage the separation , distractions and importantly , execute ERP implementations while also delivering on their commitments .

Speaker #4: And number two , the commercial restructuring and enhancements we executed last year are rapidly delivering results . You know , we shifted , as you remember , over 1000 positions to .

Speaker #4: Drive specialization . We upgraded commercial leadership , executed an accountability culture with rigorous operating mechanisms , and changed incentives to bias growth , all of which are paying off .

Speaker #4: And number three , our project to revitalize the innovation process has derived a sharper , more aligned new product pipeline , almost doubling our previously forecasted vitality index and meaningfully increasing the value of our innovation pipeline .

Speaker #4: We are also seeing the underlying operating margin improvements we expected as we move through the year and remain focused on driving sustainable efficiencies .

Speaker #4: Our momentum in programmatic savings and tariff mitigation strategies within our supply chain , combined with our transform for the future initiative , we just announced today , strengthens our ability to deliver our LRP margin targets even in the face of current tariff headwinds .

Speaker #4: Our transform for the future initiative is a multi-year global initiative designed to further accelerate profitable growth and strengthen our position in a dynamic market .

Speaker #4: This initiative will reshape our cost structure , improve operational efficiency and fuel innovation as we mix shift resources to our most attractive markets .

Speaker #4: As a separation progresses , we are unlocking new efficiencies by gaining full ownership of our IT systems and freeing up resources and bandwidth to more aggressively pursue savings and drive efficiencies for our team members .

Speaker #4: In other words , given where we are in our journey , this is an excellent time to transform how we operate . For a stronger future .

Speaker #4: Okay , as we move forward , the third phase of our transformation program portfolio Optimization , remains a key priority . This is about making choices to shape our future .

Speaker #4: Focusing on acquiring strategically attractive assets that fit our long term vision , and closely and closely evaluating current assets to ensure go forward .

Speaker #4: Fit . And I'm very proud of the progress we have already made in this phase . We are more than halfway through our comprehensive skew rationalization program , which is a solid step in refining our portfolio and the successful and timely sale of our purification .

Speaker #4: Filtration business is another tangible example of this strategy , in action , allowing us to quickly and materially reduce our debt , refine our strategic focus and improve our leverage position , which has resulted in credit upgrades from two of our rating agencies .

Speaker #4: We are now positioned to shift our focus toward offensive M&A 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 in established and attractive markets where we already operate .

Speaker #4: This approach allows us to build scale in our most promising markets and leverage the capabilities of our enhanced global commercial team . Okay , moving to our businesses .

Speaker #4: Overall , our business mix in the third quarter was largely as expected , but with growth rates of dental solutions . And his better than expected .

Speaker #4: 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 a clear acceleration in growth led by our negative pressure wound therapy growth driver .

Speaker #4: Our newly specialized commercial organization is driving the planned ramp up of preventive therapy and the VAC in place dressing . And with the strong clinical differentiation that we have in this space , a robust a very robust DME infrastructure that nobody else has .

Speaker #4: And significant penetration of this breakthrough therapy . We see meaningful runway for continued growth , acceleration in infection prevention and surgical solutions . Aside from the expected impact of the first half order timing , our underlying performance remains strong .

Speaker #4: Growth was fueled by our two growth drivers in this area sterilization assurance and IV site management . Looking at sterilization assurance , first , our dedicated sales team is capitalizing on the strong brand equity we already have in this space and the momentum from three new sterilization product launches , each designed to simplify and enhance the serialization process for our customers in IV site management , we continue to see robust demand for our Tegaderm antimicrobial solutions , supported by recent launches across Europe , Asia and the US .

Speaker #4: Our specialized teams are driving premium growth by converting customers from standard films to higher value solutions that reduce catheter related bloodstream infections and ultimately improve patient outcomes .

Speaker #4: Again , with our strong clinical differentiation , a robust and specialized commercial channel and once again significant penetration of this breakthrough technology , we see meaningful runway for continued growth , acceleration in our dental solutions business .

Speaker #4: 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 .

Speaker #4: This quarter brought two major milestones . First , the launch of our refined and redesigned clarity brand and the launch of the Solventum Filtek Composite Warmer .

Speaker #4: This is actually the first fully Solventum branded restorative device . These efforts , alongside continued strong demand for Clinpro clear and Filtek Ezmatch , helped fuel strong sales growth in the quarter .

Speaker #4: 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 , and I want to congratulate the team for making it happen in health information systems .

Speaker #4: We delivered a solid quarter as we continue to modernize revenue cycle management . We made progress in our autonomous coating offering with high automation and acceptance rates being achieved in our partnership with Ensemble .

Speaker #4: This demonstrates our operational excellence and service line automation capabilities . These advances continue to position his as the largest autonomous coating vendor , underscoring our role as an AI driven leader transforming customer operations and setting new standards for efficiency and accuracy .

Speaker #4: Another important element of our RCM strategy are revenue cycle management strategy is the international expansion of our flagship solution , 360 encompass and Autonomous coating options on track installations in Australia and ongoing expansion in the Middle East demonstrate our commitment to supporting healthcare providers around the world .

Speaker #4: In summary , our progress is palpable from our navigation of separation activities , traction from commercial structure and innovation enhancements or portfolio optimization results .

Speaker #4: We are delivering and delivering with speed here at Solventum , and we are just getting started . I am absolutely convinced we have the right strategy , the right global team and the right culture to continue unlocking value for our patients , partners and shareholders .

Speaker #4: I want to say thank you to the entire Solventum team for your unwavering resolve , your dedication to continuous improvement , and your inspiring progress .

Speaker #4: Every single day . And with that , I'm going to turn it over to Wade for a closer look at our financial results and other key updates .

Speaker #4: Okay , wait . I'll pass it to you .

Speaker #5: Thanks , Brian . We're pleased to report another solid quarter as we navigate the separation from three and transform our balance sheet following the sale of the purification and filtration business .

Speaker #5: Consistent with prior quarters , I'll provide you with updates on the separation and NDF divestiture . And then transition to our Q3 financial performance in conclude with an update on our 2025 guidance .

Speaker #5: Overall , our work to complete the separation from three M is going very well . The dedicated separation management teams at three M and at Solventum are working well together on multiple fronts .

Speaker #5: Our separation from three M and the divestiture of NDF, we continue to execute against milestones while making foundational changes to deliver on our long-range plan.

Speaker #5: In Q3 . After a successful European ERP conversion , we are winding down interim mitigation efforts and are fulfilling orders from our dedicated European distribution centers .

Speaker #5: We also continue to simplify our supply chain network . Now , with 21 global Solventum owned manufacturing locations , down from the 29 we had at the March 2025 Investor Day .

Speaker #5: Seven of the eight facilities were conveyed as part of the sale of the purification and filtration segment , while the eighth facility was an exit from one of our three remaining dental plants .

Speaker #5: We have also completed about half of the manufacturing line transitions , all while improving product availability . As part of our commitment to deliver for customers and patients .

Speaker #5: Regarding the divestiture , the teams are finalizing plans and position for success at the close , 1700 employees transitioned as part of the successful handover , along with initiation of nearly 200 transition agreements .

Speaker #5: Now , turning to our Q3 results . Starting with sales . Third quarter 2025 sales of 2.1 billion increased 2.7% on an organic basis compared to prior year , and increased 0.7% on a reported basis .

Speaker #5: During the quarter , foreign exchange was a 110 basis point benefit to reported growth , while the intra quarter sale of the NDF business represented a 310 basis point impact on our reported growth .

Speaker #5: Overall , we had stronger than expected sales growth , driven by higher performance in dental and his importantly , volume continues to be the main driver of growth as we align our organization to deliver sustainable sales growth and new product innovation .

Speaker #5: Pricing remains within the expected range of plus or minus 1% . Our skew rationalization program also remains on track with 60 basis point impact in the quarter .

Speaker #5: Moving to the segments . Our largest segment , Medsurg , delivered 1.2 billion in sales , an increase of 1.1% on an organic basis .

Speaker #5: Within Medsurge , the advanced wound care business grew 2.7% , an expected improvement over the first half of the year , which was driven by negative pressure wound therapy .

Speaker #5: Notably , growth was led by single use praveena , which exited the quarter at double digit growth . As expected , advanced wound care performance was partially offset by infection prevention and surgical solutions , which was flat in the quarter .

Speaker #5: As a reminder , infection prevention and surgical Solutions was the primary beneficiary of order timing in the first half of the year . We have communicated the first half benefit would reverse mostly in Q3 , and we anticipate absorbing the balance of the timing headwind in Q4 .

Speaker #5: Our dental solutions segment delivered higher than expected sales of $340 million, an increase of 6.5% on an organic basis. On a normalized basis, we grew in the 2% to 3% range.

Speaker #5: The additional growth came from back order improvements , along with an easier , comparable . Our focus on innovation across our restorative and prevention products , as well as our clarity aligners , is translating to improved performance .

Speaker #5: Our his segment also contributed higher than expected $345 million in sales . An increase of 5.6% on an organic basis , driven by strong performance management solutions due to favorable consulting fees and service milestones in the quarter .

Speaker #5: As well as strong revenue cycle management software solutions . Together , these more than offset expected declines in clinician productivity solutions . We remain focused on system implementations to support our hospital customers as they navigate a dynamic environment .

Speaker #5: Looking down the PNL gross margins were 55.8% of sales in the quarter . A 20 basis points sequential reduction , which largely reflects the 130 basis point impact of tariff headwinds , including mitigation and offset by strong manufacturing performance and to a lesser extent , the expected partial quarter 20 basis point benefit of the purification and filtration sale .

Speaker #5: Our manufacturing and supply chain organization remains focused on delivering programmatic savings and margin expansion . Sequentially . 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 sale and further savings from our Solventum way restructuring program .

Speaker #5: In total , we delivered adjusted operating of 431 million , which translates to an operating margin of 20.6% . In line with our expectations .

Speaker #5: Moving down the PNL to Nonoperating items , our net interest expense and other non-operating spend improved modestly versus Q2 , driven by 10 million reduction in interest expense following the partial quarter benefit of the 2.7 billion debt Paydown following the sale .

Speaker #5: Lastly , our effective tax rate of 21.8% was higher than the first half due to a tax rate increase in a foreign jurisdiction .

Speaker #5: During the quarter and a change in our geographic mix due to the significant paydown of US based debt . Overall , we delivered earnings per share of $1.50 ahead of our expectations , driven by sales outperformance , stronger gross margins , and lower net interest expense .

Speaker #5: Shifting to our balance sheet , the higher estimated 3.6 billion net proceeds from the purification and filtration sale resulted in an improved 1.6 billion of cash and equivalents , with no outstanding borrowings on our revolving credit facility .

Speaker #5: Additionally , we paid down 2.7 billion of debt in the quarter . This represents a transformation of our balance sheet just six quarters following our separation from 3 p.m.

Speaker #5: . Looking ahead , we are well positioned to execute on our phase three portfolio optimization with added flexibility across a range of capital allocation options to unlock shareholder value for Q3 free cash flow decreased by 22 million , excluding NDF divestiture .

Speaker #5: Impact of 189 million free cash flow increased 167 million on a year to date basis . Free cash flow , excluding separation costs and divestiture costs , is 735 million , with a conversion rate of 93% .

Speaker #5: As a reminder , we expect to see a step down in separation costs in 2026 and again in 2027 . As we complete the separation from 3 p.m.

Speaker #5: . Now , turning to our 2025 guidance update , which reflects our Q3 performance and sustained momentum . Starting with our top line , we are increasing our guidance to the high end of our full year organic sales growth range of 2 to 3% by segment .

Speaker #5: We expect Med Surge will improve sequentially again in Q4 , given continued strength in advanced wound care and improving infection prevention and surgical solution volumes .

Speaker #5: As we expect to digest the remaining first half volume benefit in Q4 . We anticipate dental to again be stronger than the first half given strong new product momentum .

Speaker #5: Finally , his is expected to grow in line with the first half of the year and continue to benefit from strength in revenue cycle management .

Speaker #5: We continue to estimate a 50 basis point impact of skew exits for this year , and 100 basis point impact in 2026 . Excluding this planned impact .

Speaker #5: Our annual growth outlook for 2025 is now at the high end of 2.5 to 3.5% , reflecting the continued volume driven performance across our business segments .

Speaker #5: As we execute against the phased approach to reposition for growth, we are progressing towards our 2028 long-range planned goal of 4% to 5% faster than expected, with continued sales and margin improvement planned in 2026.

Speaker #5: We are revising our full year net interest expense assumption to approximately 360 million , and our total non-operating expense assumption to approximately 400 million for the year .

Speaker #5: And we continue to estimate the full year effective tax rate will be at the low end of our 20 to 21% range before commenting on earnings per share , our 2025 tariff headwind estimate remains unchanged at 60 to 80 million , with a headwind expected in Q4 than the impact in Q3 .

Speaker #5: Altogether , for earnings per share . We have increased our guidance to a range of $5.98 to $6.08 . This represents an increase following the $5.88 to $6.03 update .

Speaker #5: We issued on September 1st . After completing the EPs accretive purification and filtration sale this further increase reflects our strong performance in the quarter .

Speaker #5: Combined with expectations for continued execution as we complete our first full fiscal year as a standalone organization . For free cash flow , we have updated the guidance range to 150 to 250 million due to the NDF divestiture , including classification of certain impacts to free cash flow .

Speaker #5: Excluding the impact of the divestiture , free cash flows are still expected to be in the range of 450 to 550 million . As Brian mentioned at the outset of the call , we have announced our transform for the future restructuring program .

Speaker #5: This program is designed to offset the impact of tariff pressures , divestiture , stranded costs and separation impacts . As we exit SSAs , the program also fuels investment to drive sales growth , all while we deliver on our margin expansion plans .

Speaker #5: Consistent with our long range plan , once fully implemented , the four year program is projected to deliver annual savings of approximately 500 million and is expected to cost 500 million in total .

Speaker #5: We will provide more detail on our 2026 guidance on our Q4 earnings call . Before wrapping up , I want to extend my gratitude to all Solventum team members for their outstanding work and collaboration in successfully completing the sale of the purification and filtration business .

Speaker #5: Closing this transaction only six quarters after separation is a major achievement that strengthens our balance sheet and accelerates our transformation . At the same time , we're staying disciplined , balancing strategic investment with cost transformation to deliver , expanding margins , robust cash flow , and lasting shareholder value .

Speaker #5: Concluding the financial section , we delivered another strong quarter and are making great progress towards achieving our long range plan goals of accelerating sales growth to 4 to 5% and growing EPs at a 10% kegger .

Speaker #5: With that , I'll now hand it back to Brian for a quick summary . .

Speaker #4: Okay . Thanks , Wade . And so we had a lot of information in our prepared remarks . And I just want to make sure we summarize the most relevant points .

Speaker #4: So let me just do that now . First our commercial and new innovation enhancements are delivering faster and more materially than we expected .

Speaker #4: And this has resulted in faster ramp towards our LRP revenue growth target and sets us up well for improvements in 2026 . Number two , our supply chain tariff mitigation and savings initiatives , together with our new transform for the future program , drive tangible confidence in our ability to improve margins in 2026 and deliver our LRP margin target .

Speaker #4: Even with significant tariff impacts that were not contemplated in those targets . Number three was skew rationalization in the NDF sale . We are seeing meaningful results in our portfolio optimization strategy and portfolio optimization will continue to be a lever for value creation here at Solventum .

Speaker #4: And then finally , our significant debt reduction has strengthened our position to pursue tuck in M&A and ended expands our options for capital allocation , including potential capital return initiatives .

Speaker #4: Okay . And with that , I'm just going to reiterate once more we have a future . We have the right strategy . We have the right team , and we are well on our way .

Speaker #4: Okay . Let's go to Q&A .

Speaker #2: Thank you . If you'd like to ask a question , press star . Then the number one on your telephone keypad . I'd like to remind everyone to please limit yourself to one question and one related follow up .

Speaker #2: If applicable . We'll pause for just a moment to compile the Q&A roster . Our first question will come from the line of Patrick Wood with Morgan Stanley .

Speaker #2: Please go ahead .

Speaker #6: Beautiful . Thanks so much . I'll keep it to one , but the the transform for the future program was this one that was kind of kicking around that you guys had initiated pretty early on , or was this a function of tariffs ?

Speaker #6: If you see what I mean . And then when you're thinking about the savings and the reinvestment from that , you know , what are if you had to pick a couple of buckets of the main areas , you're most interested in internally reinvesting in .

Speaker #6: Where is that ? Is that the Salesforce ? Is that marketing ? Like , how should we think about that ? Thanks .

Speaker #4: Yeah . Good to hear from you . And thanks for the question . I just say maybe to start , it was something that we were always contemplating .

Speaker #4: If you just think about it , transform for the future is part of the transformation phase . We had those three phases that we've talked about .

Speaker #4: And so it's always been there , but we really had to wait until we were ready . We had to get through our Solventum .

Speaker #4: We restructuring changes . Obviously there was a lot that was happening there . We wanted to make progress on the separation from three M and also the sale of NDF , and now we have I'm just going to call it the systems in the bandwidth to do transform for the future .

Speaker #4: So something we had always contemplated , and certainly you can imagine the focus on it because of tariffs is pretty high . So so with that , maybe I'll transfer to Wade on a couple of the areas that we're going to focus on savings .

Speaker #4: And then we can talk about the reinvestment.

Speaker #5: Yeah sounds good Brian . Happy to . And as Brian said it's a broad program . And so we are looking across all areas of the organization .

Speaker #5: Actually it's very comprehensive looking at our operating structure , looking at procurement , cost management , supply chain team manufacturing , looking at our global footprint as well , and then looking at streamlining our systems .

Speaker #5: As Brian said in his prepared remarks , we'll be working through final ERP implementations here in 2026 , taking over ownership of those systems , and then certainly looking at increasing automation as well .

Speaker #5: So we're very focused on separation today , but looking forward to freeing up resources and working on this program over the next several years .

Speaker #5: I think , Brian , you wanted to touch on the reinvestment . .

Speaker #4: And ultimately, when you think about reinvestment, it just really accelerates our opportunity to mix-shift our spend to those areas with the highest returns.

Speaker #4: You hit some of them , obviously , research development is going to be an area of concentration . The commercial infrastructure we need to drive it , so on and so forth .

Speaker #4: Those are the areas of the shift . Not saying that we don't spend a lot in those areas today . What I'm saying is we're going to shift the focus of that spend to the highest return areas .

Speaker #6: Love it . Thanks for the question , guys .

Speaker #4: Thanks , Patrick .

Speaker #2: Our next question will come from the line of Ryan Zimmerman with Btig . Please go ahead .

Speaker #7: Oh , thanks for taking the questions . Just to dovetail on Patrick's just real quick . And then I have a more high level question .

Speaker #7: The the program , the 500 million in cost . Wade , is that equal over the next four years ? Is that up front ?

Speaker #7: I might have missed that .

Speaker #5: Yeah . Ryan , we haven't given details on the cadence of the spend yet . Just that that $500 million cost . We're planning over the next four years .

Speaker #5: And so we'll be dictated by the different projects . There's many multiple projects that we're planning to execute over the next few years .

Speaker #7: Okay . All right . And then and then if I think about kind of your guidance for the remainder of the year , you know , getting you to that kind of 3% or so , clearly you guys outperformed , you know , in the , in the back in this quarter .

Speaker #7: But it does imply a little bit of a lower growth profile in the back in the fourth quarter . Excuse me . And so , you know , is there anything in there maybe from the dental back order dynamics that you're contemplating or that we should contemplate when we think about kind of your fourth quarter implied guidance ?

Speaker #5: Yeah , I'm glad you asked that one . Ryan , because as you know , and others , know , we've had some lumpiness to the first half of the year around volume as our customers prepared for our ERP systems and DC cutover .

Speaker #5: And so , just to reiterate , there , what we've guided to now is the high end of our 2 to 3% annual guide .

Speaker #5: And what you're talking about is that Q4 essentially puts us at the midpoint of that , around 2.5% for the quarter . But you have to remember that that also includes absorbing the remaining first half volume .

Speaker #5: Give back in IPS . So we'll still have some pressure in Q4 on IPS . If you normalize for that , it's going to be in line with the growth rate in the previous two quarters .

Speaker #2: Our next question will come from the line of Steven Valiquette with Mizuho Securities . Please go ahead .

Speaker #8: Thanks . Good afternoon . Thanks for taking the question . Congrats on these results , especially on the the dental sector . So I guess my question in relation to dental , there was somewhat of a common geographic theme across most of the other publicly traded dental companies that Europe had a pretty strong recovery in .

Speaker #8: Three Q but the US market was still fairly choppy . Just curious within your dental portfolio , were you seeing similar trends geographically , or perhaps with some different dynamics for you guys ?

Speaker #8: Thanks .

Speaker #4: Yeah , thanks for the question . I would say we didn't see anything that was dramatically different by region . The real momentum for us comes around new products , and we've launched those on a global basis , and they're getting traction not just in the US but outside the US as well .

Speaker #4: So I just , you know , kind of give a shout out to that dental team . They're really doing a nice job from an innovation perspective .

Speaker #4: And specialized sales organization they've put into place is receiving those new products quite well . And delivering results . Thanks for the question .

Speaker #8: Thanks .

Speaker #2: Our next question comes from the line of Jason Bednar with Piper Sandler . Please go ahead .

Speaker #9: Hey , good afternoon . Thanks for taking the questions and congrats on the results . Here . I've got two . Just ask the first first tier to start picking up on the dental theme .

Speaker #9: Wait , I heard you about pricing contributions for the company , but was there any benefit in your results there for dental from tariff related price uplift ?

Speaker #9: We've seen that from some other players . And just maybe what kind of visibility you have . To sustaining that underlying 2 to 3% growth you saw during the quarter .

Speaker #9: Maybe not just in in for Q like you guided , but , you know , even in quarters that follow .

Speaker #4: Yeah , I'm going to put the dental team on the spot because I absolutely believe that it's sustainable . If not something that we can improve .

Speaker #4: So so I'm feeling good about the momentum in that business . Again , really focusing on the commercial infrastructure they put into place a change in new product cadence , which looks really good and healthy , not just now , but in the future .

Speaker #4: And so so I'm I'm feeling pretty good about the momentum that we have there . And relative to pricing . We didn't see any extraordinary pricing in the quarter .

Speaker #4: It's in line with what we typically see .

Speaker #9: All right . Understood . And then for a follow up , Brian , why is the tariff impact range still as wide as it is ?

Speaker #9: I mean , isn't all of that effectively capitalized in the balance sheet at this point ? Shouldn't we be able to dial that in to a tighter range than what we what we had three months ago ?

Speaker #5: Yeah , Jason , we talked about that a lot heading into the quarter , and we decided just to hold it because it is such a dynamic environment .

Speaker #5: And so we'll wait to see here that that's the best estimate that we can have at this point in time . The range we felt is appropriate given the high and low end for for what we think could happen .

Speaker #5: But of course , very dynamic out there . And , you know , we'll see how this progresses through the end of the year .

Speaker #2: Our next .

Speaker #10: Question point , just to .

Speaker #4: Yeah , I was going to say , just to your point in the way that we capitalized things , it would be even if things changed would be very little impact to this year .

Speaker #4: Go ahead . I'm sorry .

Speaker #11: Next .

Speaker #2: Our next question will come from the line of Travis Steed with Bank of America . Please go ahead .

Speaker #12: Hey , thanks for the question . I wanted to ask about your comment on kind of progressing towards the 28 long range plan , a 4 to 5% faster than expected looks like already excluding skews , you're only 100 basis points away from market growth this year .

Speaker #12: How should we think about that going forward ? Can you close that gap next year ? And Wade anything else to kind of think about on kind of puts and takes to consider as we dial in models for next year ?

Speaker #10: Yeah .

Speaker #4: Maybe I'll start with that . Wade . And if you want to provide any additional color , I'd just say that , you know , we are giving a lot of color right now .

Speaker #4: So we're not going to give any more than that relative to guidance for 2026 . I think the takeaway is the ramp that we're seeing the LRP just stated it is happening faster than expected .

Speaker #4: I remember that when we presented the LRP back in March , I had people come up to me afterwards saying , I don't know that you can get there .

Speaker #4: You know , you're reaching too far . I think anyone who doubted us now knows that we're already ramping pretty rapidly to it , and it's not a question of when .

Speaker #4: It's not a question of if . It's a question of when . And remember , once we get there , the bus doesn't stop , right ?

Speaker #4: That's not the final stop . We're going to revise once we get there and shoot for a higher target . We're not going to make that change now , and we're not going to try to change the timeline .

Speaker #4: We're going to keep the LRP as is . But it's pretty clear we're progressing faster than people thought .

Speaker #5: Yeah , and just picking up on 26 guidance , Travis I'd be disappointed if you didn't ask about 26 on a Q3 call knowing that we don't guide until Q4 , but we do have some color that I think could help everybody .

Speaker #5: As you think about our 2026 numbers , and one of them is the good news is that we don't see any full year significant , tougher , easy comps next year .

Speaker #5: And that's important because we've had some intra ups and downs during the year . And so we've provided color throughout the year so that it can support the modeling on a quarterly basis .

Speaker #5: But it all nets out for the year . Our expectation is that this final volume headwind for Yps in Q4 will net us out for the year .

Speaker #5: And then on a full year basis , we won't see any tougher , easy comps . But of course , we have to take a look at the entire quarter timing as we get into 2026 .

Speaker #5: But other than that , we're not guiding to 2026 just at this time . But hopefully that's helpful on the sales line .

Speaker #12: Yeah , it's helpful and glad I'm predictable . Wade , I've kind of the second question was on on the comment you guys made on , you know , the balance sheet , you know , has been transformed in just six quarters and you're ready to execute on portfolio optimization .

Speaker #12: Just wanted to kind of dial into that a little bit . And kind of what that means and how quickly that could happen .

Speaker #12: And , and , and the ability to kind of improve the free cash flow from , from where it is today to help fund those acquisitions .

Speaker #10: Yeah . Yeah , absolutely . You know , I .

Speaker #4: Think , you know , the reason why we're kind of doubling down on that capital allocation question is because we are feeling very confident about the operating cash that we're generating .

Speaker #4: And we feel like it's extremely durable . And of course , combine that with where we are from , a balance sheet perspective .

Speaker #4: And it allows us to do multiple things now , right ? We can do the M&A that we've been talking about , and it certainly opens the door to giving that giving cash back as well .

Speaker #4: So so so those are the things that we're contemplating having conversations with our board . As you can imagine . appropriate time we'll update .

Speaker #4: Wait anything .

Speaker #5: Yeah . And just pick up on the last part of your question around the free cash flows . And again , glad you asked .

Speaker #5: This one gives us an opportunity to talk a little bit more about it . You know , as we called out in prepared remarks , we have some accounting for the divestiture that impacts the free cash flow line .

Speaker #5: But that's offset in the investing cash flows . And so that caused us to revise our guidance for free cash flows for the year .

Speaker #5: But if you net out the impact of the divestiture , we're still right in line with our beginning of the year , 450 to 550 million of free cash flows .

Speaker #5: And so what I shared last call in the Q2 call is that we do have some timing throughout the year that we're 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 .

Speaker #5: And so what I shared last call in the Q2 call is that we do have some timing throughout the year that we're dealing with , but our expectation would be similar cash flows to Q3 , net of the divestiture , which I shared in my prepared remarks , around

Speaker #5: we assume the same type of free cash flow benefit X divestiture in Q4 will be And at the 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 .

Speaker #5: But most of it and be almost all done in 2027 . And then these divestiture impacts that are classified to free cash flow , because we want to make sure that we're highlighting the very strong free cash flow conversion for the business .

Speaker #5: And on a year to date basis , what we look like over 90% free cash flow conversion , excluding those to major initiatives .

Speaker #5: And so we can't wait to get to the other side of the separation , as well as get through the divestiture here . And really show the cash generation power of this business on the free cash flow line .

Speaker #2: And as a reminder , to ask a question , press star one . Our next question will come from the line of Vic Chopra with Wells Fargo .

Speaker #2: Please go ahead .

Speaker #13: Hi . Thank you . It's Leah calling in for Vic . You gave some helpful color on 2026 . In terms of how to think about the top line growth .

Speaker #13: Can you share any color as far as how to think about March expansion ? Kind of like that's also ahead of plan as you look at the LRP target .

Speaker #13: And I have a follow up .

Speaker #5: Sure . So for 2026 , what we shared in our prepared remarks is that we would expect to see continued improvement on both the top line and the bottom line .

Speaker #5: What we do have to highlight is that obviously , tariffs are going to be more assuming the assumptions that are in place today .

Speaker #5: There'll be more of a headwind next year and that'll pressure operating margin expansion . But that's one of the reasons we've got our programmatic savings as well as our new transformation transform for the future program here .

Speaker #5: To offset that . So we might see a little bit more pressure on the bottom line in 2026 . But just pulling back up to the long range plan commentary we gave on the bottom line for earnings per share growth , we're planning a 10% kegger for earnings per share over the three year long range plan period , and it's our goal .

Speaker #5: We're looking to expand earnings per share 10% each year . Might not happen every single year , but that's our goal .

Speaker #4: Yeah , maybe just a draft of that as well . One of the reasons we're talking about the programmatic savings , the tariff mitigation that we're doing in supply chain , and also the transform for the future is we wanted to take that concern off the table that tariffs might actually drive margins down in 26 .

Speaker #4: We just would just take that off the table . We're saying that we're going to improve margins . We're not going to say how much , but we just want it to be very clear that that's the the expectation .

Speaker #13: That's super helpful . Thank you . And just my quick follow up is you mentioned a few times about the the firepower to do deals and such going forward .

Speaker #13: Can you just remind us what you've said about potential areas of interest and any comment on how soon we might expect to see something ?

Speaker #13: Thank you .

Speaker #4: Yeah, we're actually actively looking for opportunities to move forward, and these would be tuck-in type acquisitions. We just referenced this in the prepared remarks.

Speaker #4: Something below $1 billion in value . Obviously not sales , but $1 billion in value . And it would be close to the vest .

Speaker #4: It would be in areas that we already play . We have commercial infrastructure that we can leverage . It would just fit to reduce the risk , reduce the complexity and ensure that we get a good outcome .

Speaker #4: So that's where we're going to concentrate . You can imagine just given the scale of medsurg , that's an area of concentration . But we're looking for these in all of our businesses right now .

Speaker #2: I'll now turn the call back over to Amy for closing remarks .

Speaker #3: Great . Thanks , Regina , and thanks , everyone for listening . And to our analysts for your questions . If you have follow up questions or need anything else , please don't hesitate to contact the Investor Relations team .

Speaker #3: This concludes our third quarter fiscal year 2025 conference call . Regina , you may now close things out . .