Earnings Call
Solventum Corp (SOLV)
Earnings Call Transcript - SOLV Q4 2025
Operator, Operator
Good afternoon. My name is Audra, and I will be your conference call operator today. I would like to welcome everyone to Solventum's Fourth Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. 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.
Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications
Thank you. Good afternoon, and welcome to Solventum's Fourth Quarter Fiscal Year 2025 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 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. You are encouraged to review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers. 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. 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 from any forward-looking statements made today. Following our prepared remarks, we'll hold a Q&A session. I'd like to now hand the call over to Bryan.
Bryan Hanson, CEO
All right. Thanks, Amy, and to all of our shareholders and everyone else that's interested in the Solventum story. I just want to say thanks for joining us today as we review our fourth quarter and our full year results, along with our 2026 guidance. Well, we closed 2025 with solid momentum, making significant progress in our first full year as a stand-alone public company. Looking back at the year, I'm very proud of what we accomplished. We formally launched our long-range plan and prioritized 5 growth drivers that are expected to now deliver more than 80% of our future growth. We built an experienced leadership team with strong med tech experience but also strong transformation experience, solidified our mission and culture, revamped our innovation process, restructured our global sales organization and through our SKU rationalization program, sale of our Purification & Filtration business, and acquisition of Acera, we rapidly advanced our portfolio strategy as well, all while managing the separation process from 3M. And inside of that, throughout the year, we consistently delivered on our strategic, operational and financial commitments. We improved volume growth, outperformed expectations and tripled our annual sales growth from a year ago. I think it's clear that we are moving toward our long-range revenue targets faster than expected, and have programs in place to overcome external headwinds and execute against our margin targets as well. This team's capacity to deliver results while navigating ongoing separation efforts, ERP implementations and acquisitions and divestitures is a testament to the strong talent and culture we've already built. Building on the foundation of our sales force restructuring project, our revitalized innovation process has meaningfully increased our vitality index. As a result, we now expect a solid cadence of new product launches in our growth driver areas to drive further momentum with this more optimized sales team. As our separation progresses, we are gaining full ownership of our IT systems and freeing up needed resources to drive greater overall savings and efficiencies. Our Transform for the Future program was built to capture this opportunity and its impact is reflected in our 2026 operating margin outlook. Moving to our quarter results. The fourth quarter reflects another quarter of progress and provides a solid foundation as we head into the new year. During the quarter, we announced and closed our first tuck-in acquisition, Acera Surgical, which not only opens the door to the fast growth synthetic tissue market, it also very well complements our existing technology categories and our call points. As we move forward, portfolio optimization will remain a key lever for value creation here at Solventum. In other words, we will continue evaluating attractive assets to acquire and assessing our current assets for go-forward fit, and our business performance and resulting healthy balance sheet now provide flexibility to return capital to shareholders. During the quarter, we announced a $1 billion share repurchase program, which we began executing in January of this year. We see this as a clear and important step in achieving a more balanced capital plan. Moving to our business performance in the quarter. Overall, we delivered solid sales growth with Dental Solutions and MedSurg performing better than expected. Starting with MedSurg, we continue to leverage our existing brands, our new product innovation and newly specialized sales teams and are seeing traction in each of our growth driver areas, which, as you probably remember, our negative pressure wound therapy, IV site management and sterilization assurance. In our Advanced Wound Care business, we saw continued growth in negative pressure wound therapy, supported specifically by double-digit growth in Prevena and ongoing expansion of our innovative V.A.C. Peel and Place dressing. As mentioned earlier, we recently closed the Acera acquisition, which will now be a part of our Advanced Wound Care business. We're obviously very early in the integration process, but sales teams across our newly combined business will now have access to an expanded suite of technologies to offer our joint customers. With our combined clinical differentiation, robust DME and differentiated infrastructure and proprietary technology, we have a meaningful runway for growth acceleration in this business. In the Infection Prevention & Surgical Solutions business, we saw better-than-expected growth supported by our 2 growth driver areas: sterilization assurance and IV site management. Inside sterilization assurance, our strong brand equity continues to provide a solid foundation for our dedicated sales force and early momentum from our Attest sterilization product launches will continue to support the team's momentum to drive growth going forward. In IV site management, demand for Tegaderm CHG remains strong and our global launch continues to gain momentum. We have meaningful clinical differentiation and our specialized sales teams are focused on converting customers from standard films to this high-value solution that reduces the risk of infection. Tegaderm CHG is still significantly underpenetrated, providing a clear runway for continued growth. And in our Dental Solutions business, our core restoratives growth driver was again a key component of our performance in the quarter. It was supported by our strong existing brands, recent new product launches and the sales force specialization that we put into place in 2025. From a new product launch perspective, we continue to see strong demand for products like ClinPro Clear and Filtek Easy Match, and overall new product sales are driving the majority of our underlying business growth. Building on last quarter's service improvements, the Dental team once again significantly reduced back orders, which also contributed to growth in the quarter. Our Health Information Systems business delivered another solid quarter, supported by its growth driver, revenue cycle management. We continue to see adoption of 360 Encompass progress against our international expansion efforts and gains in autonomous coding. Relative to autonomous coding, our strong automation and acceptance rates are further positioning us as the largest, and importantly, most capable autonomous coding vendor. Over decades, we've built deep rules and algorithms designed to ensure accurate and compliant reimbursement coding. This, combined with our vast data sets and proprietary workflows, uniquely positions us to leverage AI-driven autonomous coding that our customers can trust. In summary, we finished the year building on the success and the momentum we achieved in the first 3 quarters. It's clear to me that we have the right team and strategy and our momentum will continue into 2026 and beyond. With that, I want to thank our global team for their hard work and ongoing commitment to our mission. It's you that are making a difference every single day by delivering for our patients, our customers and our shareholders. With that, I'll turn the call over to Wayde to review our financial results and our 2026 guidance. Wayde, I'll just pass it to you.
Wayde McMillan, CFO
Thanks, Bryan. We reported another solid quarter as we completed our first full year as an independent public company. We made progress across both our transformation phases and turning around the business. Our commercial improvements yielded a significant increase in our organic sales growth, putting us on an accelerated path to reach our long-range plan sales growth target. During the year, we were able to absorb tariff headwinds and expand operating margins off of the Q4 2024 baseline, while continuing to invest in commercial enhancements and innovation. We also moved quickly on portfolio optimization, resulting in accelerated execution of our capital plan to pay down debt. Our progress to date, combined with our planned strategies positions us well to deliver our long-range plan margin and free cash flow targets. I'll start with an update on our separation activities, status of portfolio moves and then transition to our quarterly and full year financial performance, concluding with the discussion of our 2026 full year guidance. Overall, our work to complete the separation from 3M is going very well. Thanks to the dedicated separation management teams at both 3M and at Solventum. We are progressing well on major milestones, as we have now exited over 40% of our transition service agreements from 3M and remain on track to exit approximately 90% by the end of 2026. The ERP deployments continue to roll out with a plan to be complete this year. We've just gone live with our latest ERP deployment earlier this month across Asia Pacific, including China, and additional countries in Europe. We have also transitioned approximately half of the more than 1,000 systems to gain system independence from 3M, which is a significant step in our separation. Regarding supply chain, we've taken further steps to separate from 3M and have now reduced our distribution center network to 55 locations, progressing towards our goal of 45. The P&F divestiture activity continues to progress as planned with the target completion at the end of 2027. There is close collaboration to ensure business continuity from Solventum to support the buyer's integration efforts across the nearly 200 transition service agreements. Shifting to our recent Acera acquisition. Our early integration efforts are off to a good start following the close at the end of December. Our main focus is sustaining and accelerating the momentum that the team has generated in recent years. Now turning to our Q4 results. Starting with top line performance. Sales of $2 billion increased 3.5% on an organic basis compared to the prior year and declined 3.7% on a reported basis, which reflects the first full quarter impact of the P&F divestiture following the sale in September 2025. Foreign exchange was a 170 basis point benefit to reported growth, while the net impact of the P&F divestiture and Acera acquisition represented an 890 basis point net impact on our reported growth. Overall, we had stronger-than-expected sales growth driven by MedSurg and Dental. Volume remains the main driver of growth, and pricing remains within the expected range of plus or minus 1%. Our SKU rationalization program also remains on track with a 70 basis point impact in the quarter bringing the full year impact to 60 basis points. Moving to the segments. MedSurg delivered $1.2 billion in sales, an increase of 3.2% on an organic basis. Within MedSurg, the Advanced Wound Care business grew 1.7%. Solid performance in our negative pressure wound therapy growth driver was partially offset by headwinds in the separate advanced wound dressings category, which was impacted by SKU exits and back orders. Infection Prevention & Surgical Solutions continues to outpace our expectations, delivering 4.2% growth that was driven by strong business performance partially offset by the remaining reversal of first half volume timing and the SKU rationalization program. Our Dental Solutions segment delivered higher than expected $343 million in sales, an increase of 5.9% on an organic basis. Growth was driven by core restoratives, which benefited from further back order improvement. During 2025, the supply chain team led multiple efforts that helped reduce back orders to historic lows. On a normalized basis, Dental grew closer to 3%. Our HIS segment also contributed to our performance with $348 million in sales, an increase of 3.2% on an organic basis driven by revenue cycle management software solutions and performance management solutions. Together, this growth more than offset expected declines in clinician productivity solutions. Looking down the P&L. Gross margins were 53.5% of sales, a 230 basis point sequential reduction, which reflects higher logistics costs and timing of manufacturing performance. Higher logistics costs were mainly driven by ERP and distribution center cutover mitigation efforts in the quarter. These headwinds were partially offset by the benefit of the P&F divestiture. On a normalized basis, gross margins were closer to 55%. Sequentially, operating expenses reduced to $672 million from $739 million, which reflects the P&F divestiture, timing of project spend and cost management. In total, we delivered adjusted operating income of $397 million, or an operating margin of 19.9%, below expectations due to gross margin headwinds, partially offset with lower operating expenses. Moving down the P&L to nonoperating items. Our net interest expense and other nonoperating spend improved versus Q3, driven by a $30 million reduction in interest expense and higher interest income. These improvements are due to the full quarter benefit of the P&F divestiture, which resulted in a $2.7 billion debt paydown and a higher cash balance. Lastly, our effective tax rate of 16.6% was favorable due to an end of year release of tax reserves and a regional tax provision in combination with favorable geographic mix. We delivered earnings per share of $1.57, driven by sales outperformance as headwinds in gross margin were partially offset with operating expense savings. Shifting to our balance sheet. We ended the quarter with just under $900 million in cash and equivalents and net debt of $4.2 billion. This includes funding the $725 million Acera acquisition, which closed on December 23rd. We're in a healthy position to accelerate our capital allocation strategy as indicated by our recent $1 billion share repurchase authorization and maintain flexibility to pursue tuck-in M&A. We generated cash flow of $33 million, below our expectations due to higher divestiture costs, the earlier than expected close of the Acera acquisition as well as higher costs to support the ERP and distribution center cutovers. Now moving to full year 2025. We delivered 3.3% organic sales growth ahead of our expectations of 2% to 3%. When normalizing for SKU exit impact and mainly the benefit of backorder improvement in Dental, our growth was approximately 3.5%. Operating margins finished at 20.5%, within our assumptions of 20% to 21%, while absorbing 65 basis points of tariff impacts that were not contemplated at the beginning of the year. We also completed the Solventum Way restructuring program, exceeding expectations and delivering annualized savings of approximately $125 million at a lower total cost of $90 million. Our adjusted tax rate of 19.1% was also better than our assumption of 20% to 21%. At the bottom line, we generated non-GAAP earnings per share of $6.11, also ahead of our expectations of $5.98 to $6.08. Free cash flow was negative $10 million, below our expectations of $150 million to $250 million due to higher Q4 costs to support portfolio moves and ERP cutovers. Excluding these, we were in line with our expectations. When adjusting for the P&F divestiture and separation costs during 2025, free cash flow would have been approximately $1 billion for the year. Now turning to our 2026 guidance. Starting with our top line, we are guiding to an organic sales growth range of 2% to 3%. This translates to 3% to 4% excluding the continued estimate of 100 basis point impact of SKU exits for '26. While not reflected in our organic sales growth outlook for 2026, we expect our recent Acera acquisition to contribute meaningfully to our reported growth going forward and will roll up as part of Advanced Wound Care sales. We also expect a modest 100 basis point tailwind for foreign exchange, mostly in the first half. Looking down the P&L, we estimate operating margins of 21% to 21.5% for the year, expanding from the 20.5% full year 2025. Underlying, the 50 to 100 basis points of margin expansion is a combination of sales leverage, programmatic savings for supply chain and our Transform for the Future program. We expect portfolio optimization for divestiture and acquisition activity to be neutral to operating margins. Regarding tariffs in place, before last week's Supreme Court ruling, we estimate full year impact of $100 million to $120 million. Given the evolving nature of the environment at this time, we are assuming the impact under any new tariffs will be within a similar range. For earnings per share, we are guiding to a range of $6.40 to $6.60. For free cash flow, we are expecting approximately $200 million in 2026, excluding mainly the impact of costs to separate from 3M as well as payments due to 3M and costs to support the recent divestiture, we expect to be closer to $1 billion. As a reminder, separation costs reduce significantly in 2027 as we complete the separation from 3M. Other considerations for 2026 include capital expenditures of $400 million to $450 million, an effective tax rate between 19.5% to 20.5% and nonoperating expenses of $300 million primarily due to net interest expense of around $270 million. To provide some additional color related to our first quarter 2026, remember we had a tough comparison given the approximately 180 basis points of additional sales volume benefit in the prior year. On gross margins, Q1 will reflect the typical sequential seasonal pressure while year-over-year will reflect the additional tariff impact headwinds. All in, we anticipate operating margins will again be the lowest of the year. In conclusion, we delivered another strong quarter to complete our first full year post separation. We're making great progress on our separation from 3M and on our portfolio moves to divest P&F and integrate Acera, and we're moving with urgency towards our long-range plan goals of accelerating sales growth to 4% to 5%, operating margins of 23% to 25%, growing earnings per share at a 10% CAGR, and free cash flow conversion rate above 80%. We want to extend our gratitude to all Solventum team members for their hard work and commitment to our values and mission, enabling better, smarter, safer health care to improve lives while consistently delivering or exceeding on our financial goals. With that, we'll hand it back to the operator for the Q&A portion of the call.
Operator, Operator
We'll take our first question from Travis Steed at Bank of America.
Travis Steed, Analyst
I guess first on margins. Wayde, I don't know if there's anything onetime in Q4. It was a little light versus the street in the quarter. And then on 2026, if you can maybe elaborate a bit more on kind of what's assumed in that 50 to 100 basis points? How much of the $500 million cost savings is baked into that? And anything else that you kind of frame up for the margins in '26?
Wayde McMillan, CFO
Sure, Travis. So margin is obviously an important part of our story. As we think about Q4 first, approximately 150 basis points of the cost in our gross margins was onetime in nature. So you'll see in our prepared remarks that we shared more normalized gross margin of 55% is more of what we would have expected. We saw a lot of separation activity in Q4. It ended up just costing us more. If we think about operating margins, certainly lower than we expected, but really just driven by that headwind in gross margins. We were able to offset it partially with some savings in our operating expenses. As we think about 2026, first of all, I'll just say we are committed to growing our sales as well as expanding operating margins each year. In that theme, we're now planning to expand operating margins 50 to 100 basis points in 2026, as you mentioned. Tariffs are a headwind for us again in 2026. People may recall that we have a very fast inventory turn. So we had approximately 2 quarters of impact of tariffs in 2025, and we'll annualize that in 2026. You'll see from our prepared remarks, it's about a doubling of the tariff headwinds for us. With that in mind, it's a pretty significant margin expansion. The drivers of that are sales leverage, as we continue to drive sales on an accelerated basis as well as our programs within gross margin. We've talked about programmatic savings. We gave a lot of detail at our Investor Day. We've got significant effort to drive favorable gross margins over time. As you mentioned, Travis, our recently announced Transform for the Future restructuring project is a longer-range project targeting several areas of efficiency, and we will start to see some of that in 2026, but it will benefit us more over the long term. So you put all that together, we do think we've got a nice operating margin expansion story again in '26 despite the tariff estimate that we have in the numbers at this time.
Travis Steed, Analyst
Okay. And I guess my follow-up question, since there's been more focus on the health care IT business and some of the AI stuff that's going on, I would love to give you the opportunity to kind of maybe explain that and explain your business a bit more for investors.
Bryan Hanson, CEO
Thank you, Travis. I'll take that question. I anticipated you'd ask something like this, and you've posed both questions I expected. It's crucial to emphasize that we view AI as an opportunity rather than a threat. I could stop there, but it's a significant point to make. There are three aspects worth considering. First, we see artificial intelligence as a tool to enhance autonomous coding, which is why we invest heavily in that area. However, we don’t believe AI alone is the solution to autonomous coding; it's only part of the bigger picture. Again, we don’t see AI as a competitor; we see it as a useful tool in solving for autonomous coding, specifically related to reimbursement coding, not computer coding. Importantly, AI will be accessible to anyone interested in utilizing it for autonomous coding or revenue cycle management. We believe our experience in the market sets us apart; we've amassed nearly a million proprietary algorithms and rules around reimbursement coding. This extensive background allows us to train AI in ways that others may not be able to. We regard this as an opportunity rather than a threat, and I appreciate your question, as many others might not share this perspective.
Operator, Operator
We'll move next to Jason Bednar at Piper Sandler.
Jason Bednar, Analyst
Wayde, I wanted to come back to some of the guidance points we're making. I appreciate all the color around the first quarter. Maybe I wanted to give you an opportunity to talk if there's any other sequential callout. Last year, '25 was lumpy. It was a good lumpy, but lumpy in that you had the ERP cutover, the DC cutovers that just created some volatility in the volumes. So anything else you'd call out as we try to model throughout the year? And then within that also in the first quarter, should we be considering any headwinds tied to just some of the weather dynamics that may or may not have impacted volumes for your businesses in the first quarter here?
Wayde McMillan, CFO
Jason. Yes, I can certainly start that one for you. I'm glad you picked up on the Q1 comments that we had in our prepared remarks because it is the one quarter for us that's a little more challenging. The other quarters in the year look more stable. So maybe I'll just summarize the information that we shared; it's really in the 3 areas: sales, gross margin and OpEx. For sales, we had 180 basis points of tough comp, and that's put a lot of pressure on our Q1 sales here. So if you take the full year guide of 2% to 3% and you take the midpoint, 2.5% if you use the 180 basis points of headwind, you get just under 1%. That's how we'd like people to think about the first quarter; that would be a reasonable place to start. If you move down the P&L, operating margin is setting up to be the lowest of the year in Q1, sequentially down from Q4 '25 to Q1 '26, but that's similar to what we experienced last year in 2025. So a very similar setup to last year, driven by gross margins, which relative to the normalized 55% we gave for Q4, would expect to see some normal sequential seasonal headwind to that moving from Q4 '25 to Q1 '26. Same setup again as last year. Keep in mind, tariffs are a headwind in the first half as well before we annualize them. When you move down operating expenses, we will have higher OpEx in Q1 as we have some seasonally higher expenses than Q4 '25; Q4 '25 was a little unnaturally low as we had some favorable project timing. Considering gross margin pressures we were having in the quarter, we did some cost reduction initiatives that gave some favorable OpEx in Q4 as well. We don't have any weather-specific things to call out, Jason, nothing that we would mention. For the remainder of the year, the setup looks more consistent, although I would just highlight the driver of that volume in Q1. This first half, second half impact of IPSS; we had a lot of volume mainly in the first half last year. These were mostly ERP timing-driven impacts. But the good news is they're all contained within the year. So the first half, second half dynamic, mostly Q1 additional volume, Q3 give back. The good news, the story actually gets quite simple on a full year basis, but there is that trade-off, particularly in IPSS between mainly Q1 and Q3.
Jason Bednar, Analyst
Super helpful. Bryan, I wanted to shift over to you; bigger picture question. You mentioned product pipeline that's expanded within some of the core growth categories you've identified or you identified at your Investor Day. Can you give us a sense as to some of the things you're more excited about or expected to be more impactful when we look out this year and next year? Really to help bridge to that 4% to 5% growth target, knowing that you're targeting 3% to 4% underlying growth this year. What helps accelerate you that last 100 basis points to get to those LRP targets you have out there?
Bryan Hanson, CEO
Yes. I appreciate the question. First, just taking a step back because I have a feeling some of our Solvers are listening to this call as well. I appreciate the work that they put into revamping and revitalizing our innovation process, and it's paid dividends. As we talked about in the prepared remarks, the vitality index has gone up and the cadence is more focused on the products that we're going to see. I'm not going to speak specifically about any individual product for competitive reasons. But I can give you some color: we have close to 20 new products that we're going to be launching now over the next 2 years relatively evenly across those 2 years. It’s not back-end loaded. Almost half of those are going to be in MedSurg, while the other half is split between HIS and Dental. As you would expect, a decent portion of those will be inside of the growth driver areas. But it’s not just those. I look at it as a 3-legged stool; you've got this opportunity for new products in that revitalization of innovation that I've been discussing. But we also have existing products and brands that are really strong in the marketplace. Some may underappreciate the fact that they're also underpenetrated. So with the new specialized sales organization, we can address that underpenetration even with existing brands. The third leg of the stool is just the commercial enhancements we've made, which have 3 components: specialization, which is probably the most important; training those individuals to be more clinically deep, which is very important when you have clinically differentiated technology; and having a best-in-class sales operations team to focus the organization and ensure they have the tools to be successful in the field. All 3 of those are driving the growth.
Operator, Operator
We'll go next to Kevin Caliendo at UBS.
Dylan Finley, Analyst
This is Dylan Finley on for Kevin. Maybe for a minute, could you guys talk about the strong outperformance in Dental this quarter? Again, you grew organically nearly 6%; how much of that was volume expansion versus price capture related to or not related to tariffs? What do you think a normalized growth rate looks like in Dental, controlling for any sellouts or unusual comps?
Bryan Hanson, CEO
Yes. That was another one we thought we'd probably get a question on because it was a standout quarter for Dental. Congratulations, team, on a great quarter. I would say the biggest underlying reason for growth is new products. They've done a nice job of revitalizing innovation, launching new products, and that's really what's driving our underlying business performance. In the quarter, we stated in the prepared remarks that another factor was back order recovery. That's the second consecutive quarter they've done well capturing back order recovery, contributing to our growth. That's more of a onetime thing, so I wouldn't think of that as a go-forward opportunity, but it definitely helped us in the quarter. Regarding the market, we view it as stable to slightly improving; we expect that to continue in 2026. The momentum here is primarily due to new product development, as the team is doing a great job with the specialized sales organization driving it right now.
Dylan Finley, Analyst
Sorry, yes, if I've got a moment. Looking at the $500 million Transform for the Future program, what should we contemplate regarding the phasing of both the costs going into the restructuring and the timing of the benefits? Is that a big growth driver as we look at benefits for '26? Or is the phasing more '27 and beyond?
Wayde McMillan, CFO
Bryan, I can start that one, if you want. It's a very important program for us. It is a multiyear program from starting this year into '29 and '30. It's targeted at transforming our cost structure, and it supports margin expansion as well as opportunities to meaningfully invest for growth. We want to ensure we're driving efficiencies despite tariffs so we can continue to reinvest for growth given the importance of driving and accelerating that sales growth line. In terms of phasing, we haven't given details on that; we're still developing the program. But I would say generally, we will start to benefit from the program in '26, but the majority of the benefits will be in 2027 and beyond as it takes time to put the programs together and execute on them.
Bryan Hanson, CEO
One other thing maybe to add to that too: what's very important about this program is it is a cultural shift for our organization, all around the concept of continuous improvement. We've got this mantra here that we can be satisfied; we can be happy, but we can never be satisfied, right? This program is about continuously improving, and it transcends the organization, asking everybody to get involved.
Operator, Operator
We'll take our next question from Ryan Zimmerman of BTIG.
Ryan Zimmerman, Analyst
Just following up on the HIS comments; there's been a lot of investor focus on this, and I appreciate your earlier answers, Bryan. Got to dig a little deeper; are there any guardrails you want to put around this? If this is up for competitive bidding, how should we consider contract obligations over a certain time period?
Bryan Hanson, CEO
Yes. I would tell you 2 things here. First, we have pretty long contracts, multiple year contracts. We feel comfortable and we don't want to rest on that because we have significant differentiation here. We're a leader today. We expect to be a leader in this transformation in the future. We do have contractual obligations in our favor, and there's switching costs involved; it doesn't happen overnight. Remember, if you make mistakes in your reimbursement model, you lose revenue and face compliance concerns. We see autonomous coding competitors as risking autonomous coding because we don't think they will do it the way we would, using our proprietary rules and algorithms. We believe we are going to win, continue to lead, and this is an opportunity.
Ryan Zimmerman, Analyst
That's helpful; could you provide any high-level expectations on Acera? At the time of acquisition, what are your sustained growth targets for it?
Bryan Hanson, CEO
We wouldn't have bought the asset if we didn't believe it had a real opportunity to help Advanced Wound Care and MedSurg and the total business from a revenue growth standpoint. We feel like it's a great starting point, but just a starting point. They're in a $1 billion market, growing 10% now, in a subcategory of synthetics that's attractive with differentiation in the space. It’s a healthy double-digit grower for us. We want to remind people, it's in the space we already play and have commercial infrastructure. So we feel good about this as a growth avenue for Advanced Wound Care and total business, and it’s profitable, very nice profitability.
Operator, Operator
We'll move next to David Roman at Goldman Sachs.
David Roman, Analyst
Could you go into the Dental dynamic in a little more detail here? I think last quarter, there were more dynamics at play. But Bryan, if you could template Dental as one of the businesses where you've seen what can happen to the top line with new products, when can we expect that same dynamic to play through in MedSurg and HIS?
Bryan Hanson, CEO
Yes. David, thanks for the question. I agree. Dental laid out a clear roadmap; you're already seeing it in MedSurg. It's not just the commercial enhancements that we've made; we are launching new products in both MedSurg and HIS. Just to recap, we've had big launches like V.A.C. Peel and Place, and Tegaderm CHG globally. We've also had 3 test sterilization products launched. We are beginning to see the momentum from these new products. As I said earlier, we've got almost 20 new products coming over the next 2 years.
Operator, Operator
We'll take our next question from Brett Fishbin at KeyBanc Capital Markets.
Brett Fishbin, Analyst
I wanted to ask on the overall organic revenue guidance of 2% to 3%. Could you provide any commentary on how you're thinking about that across different segments? Any material departure from what we've seen on a normalized basis in 2025? Should we expect 100 basis points of SKU exit impact to be more pronounced in any specific quarter?
Wayde McMillan, CFO
Bryan, I'm going to start that one. We don't see a significant difference across the quarters from the program at this time. Nothing to share there. We expect all segments to improve their underlying growth year-over-year. The momentum we see in the business, if it continues, could be at the high end. We expect significant more impact within MedSurg, particularly in the IPSS business, seeing a transition from 60 to 100 basis points hitting in the IPSS and MedSurg business. As you said, we intentionally shared that for 2025, our sales growth rate on a normalized basis was about 3.5%. We've been focused on maintaining growth rates, and we'll be at the high end.
Bryan Hanson, CEO
Because MedSurg will be impacted more by SKU and obviously, Dental will be impacted by back order recovery comp. But outside of that, no other major impacts to the businesses.
Operator, Operator
You announced some changes to the management structure and I was hoping you could touch on your decision to implement a Chief Commercial Officer position, and any thoughts on how that impacts the broader strategy for Solventum?
Bryan Hanson, CEO
It's funny because that feels like old news to me already, but as you know, we brought Heather in to be the primary leader of our businesses. I feel very fortunate to have her. I have a history of working with her in the past and she's a strong operator. It was serendipity that she became available at the same time Chris was going to be exiting the organization. It was really just a continuation of the strategy to combine the businesses under a leader. We now have a great operator looking at synergies across our businesses.
Operator, Operator
Our next question comes from Vik Chopra at Wells Fargo.
Lei Huang, Analyst
My first question is on ERP. I think you have another ERP implementation coming this year. Last year, when you had the European one, there was some pull forward buying in the first half. Is that something to consider for 2026? And I have a follow-up.
Wayde McMillan, CFO
Yes. We have several ERP implementations planned this year. We plan to finish the 3M separation ERPs in 2026. Pull forward buying depends on when the quarter it falls; we will call out any additional volume if we see them. It’s difficult to predict those, so we don't call them out.
Lei Huang, Analyst
For my follow-up, you talked about pricing being plus/minus 1% in Q4. Anything we should consider for pricing for '26?
Wayde McMillan, CFO
Our focus for sustaining the business is on volume. We certainly have pricing capability, allowing us to raise price when we can. We expect price to be in a more normalized range of plus or minus 1% again in 2026; pricing will not be an outsized driver. Our growth will rely on sustainable volume growth.
Operator, Operator
We'll go next to Rick Wise at Stifel.
Frederick Wise, Analyst
Bryan, just reflect a little more on your updated thinking on your M&A strategy? Is another deal possible?
Bryan Hanson, CEO
I probably won't speak to the timing, but this is a lever we will continue to flex for value creation. Portfolio optimization is ongoing, and we'll continue to acquire companies on a tuck-in basis to drive revenue growth and profitability. It has to be mission-centric, in an attractive market with strong profitability where we can win. We'll have the financial flexibility to pursue this. I'm not going to speak to the timing.
Frederick Wise, Analyst
Reflecting on the increasing probability and confidence in '28 goals on sales and margins and EPS, what are the milestones or things that we need to clear along the way?
Bryan Hanson, CEO
Proof is in the pudding, right? You look at our growth rates; we're increasing our normalized growth rates, and the commercial enhancements are working. I feel confident we will hit our long-range plan targets and could achieve them even faster than expected. This team has stayed focused and delivered in the face of challenges, and I want to acknowledge them for that. Our growth rates are strong, driven by our strategy and execution. We’re focused on achieving our long-range targets.
Wayde McMillan, CFO
We do need to clear our separation from 3M, and we plan to exit 90% of TSAs by 2026. We should complete the ERP implementations by the end of '26 while reducing costs. We believe we can deliver on our margin targets and achieve 10% EPS CAGR.
Operator, Operator
And next, we'll move to Steven Valiquette at Mizuho Securities.
Steven Valiquette, Analyst
What do you expect for TSAs and exiting 90% by the end of '26? What about the remaining 10%? Is that primarily on the supply side? Share the $100 million step-up in inventory costs from 3M.
Wayde McMillan, CFO
The 90% of TSAs is mainly around separating our systems, ERP, distribution centers, and the manufacturing we do for 3M. We will have some rebranding and supply chain work in 2027, but we are working with 3M to manage costs that will help mitigate future expenses.
Operator, Operator
And that concludes the question-and-answer session. I'll now turn the call back over to Amy for closing remarks.
Amy Wakeham, Senior Vice President of Investor Relations and Finance Communications
Awesome. Thank you, Audra, and thank you, everyone, for listening. We appreciate your questions. If you have any follow-ups or need clarification on anything, please don't hesitate to reach out to the Investor Relations team. Audra, you can go ahead and close the call.
Operator, Operator
Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.