管理層發言
Good afternoon, and welcome to Solventum's Second Quarter 2026 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.
Thank you. Good afternoon, and welcome to Solventum's Second Quarter Fiscal Year 2026 Earnings Call. Joining me on today's call are our 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 based on reasonable assumptions. However, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. Following our prepared remarks, we'll hold a Q&A session. I'd like to now hand the call over to Bryan.
All right. Thanks, Amy, and thanks to everyone joining us today. Before we get into the quarter, I want to talk directly to our team for just a minute. I know the work right now isn't easy. With the transformation work, the ERP cutovers and everything else we have in flight, it's a lot. And through all of it, you keep showing up, you stay focused and you deliver for our customers. And honestly, that's everything. So thank you. Thank you for making it happen. And speaking of making it happen, let's get into the quarter. The quarter came in ahead of plan, top and bottom line. Organic growth and EPS were both ahead of expectations and that comes down to the strong execution and the momentum this team keeps building. We saw healthy performance across every segment, led by our specialized commercial teams and new product innovation and operating margins also came in better than expected. That's the discipline we built into how we run this business showing up in the numbers. And just as we communicated last quarter, these results include the advanced orders we planned for the North America ERP cutover. We also put the balance sheet to work. During the quarter, we accelerated our $1 billion share repurchase program right in line with our balanced capital allocation strategy. So here's the bottom line on the quarter. We delivered across the board. We're clearly on track to achieving our long-range plan earlier than expected. And importantly, we did what we said, again, and that say-do equation really matters to us. And as strong as the quarter was, I'm just as encouraged by the progress on our transformation. And as a quick reminder, our transformation has 3 phases: stabilize and separate the business, reposition it for profitable growth and optimize the portfolio. And importantly, as we've said from the beginning, these phases are not sequential. They're running concurrently. Different initiatives are progressing at different speeds, but all 3 phases continue to move forward and increasingly reinforce one another. Let me start with the separation from 3M because we're now in the final steps. The final phases of our ERP cutover are already in motion. And getting to the other side of this, it's a big deal. It removes a significant amount of complexity from the business. It frees up talent and resources for innovation and margin expansion and it meaningfully improves free cash flow. Just put simply, we're very close to moving from an environment with separation distraction to full operating mode. Now let's talk portfolio optimization because we took another major step today. As we just announced, we're advancing the separation of our Health Information Systems business with a clear objective, pursuing the path that maximizes value. And let me walk you through the thinking because we obviously didn't arrive here casually. First, strategic fit. We believe HIS can create greater value outside of Solventum, either as an independent company or combined with a scale player in the space. It's a differentiated, trusted business with a highly resilient financial profile. And in a rapidly changing environment, this will better position it to capitalize on the fast-moving advances in AI. The second is value. We're confident a separation can unlock shareholder value and our intent is to leverage both the separation method and the use of proceeds to maximize that value. And third is focus. For Solventum, this will make us a more dedicated MedTech company, and it will sharpen our focus on MedSurg and Dental. And timing here matters. In April, as you probably remember, we passed the second anniversary of our spin. That gives us additional flexibility to evaluate and pursue more significant portfolio actions just like this one. And to support this next chapter, we're planning to host our third Annual Investor Day in Q1 next year. That's where we're going to lay out the post-HIS long-range plan and provide updates on our RemainCo strategy and innovation pipeline. Just two commitments before I move on. To our HIS team, you should be incredibly proud of what you've built over decades. And to be clear, you are part of the Solventum family until a transaction is finalized. You have my commitment and this leadership team's commitment that we will fully support you through this process. And to our HIS customers, nothing changes. We'll maintain our investment strategy in this business. We'll keep supporting your operations, and we will absolutely keep executing the innovation road map. Okay. Now moving to the M&A side of portfolio optimization. Acera, which, as you probably remember, is our first acquisition, continues to perform extremely well with year-over-year revenue growth above 40% and gross margin above 80%. And that's the M&A playbook, a differentiated technology in a space we know accelerated through customer relationships we already have, and we intend to keep running that tuck-in acquisition playbook in a disciplined way. But portfolio moves are only part of the story. The engine here is organic growth, and that's why we chose our 5 growth drivers with intention, durable markets, attractive growth and margin profiles and in spaces where we lead with differentiated solutions. And as a result, we see a multibillion-dollar growth opportunity in front of us and a big portion of it sits inside customers we already serve, where our preferred and differentiated solutions are still underpenetrated. And that's what gives us confidence that over time, we can sustainably deliver growth at or above our long-range plan. What makes this opportunity especially meaningful is that it goes beyond just market growth. In many cases, growth comes from helping to address challenges the health care systems and patients face every day. So basically, as adoption of our solutions expands, we create shareholder value for sure, but we're also helping improve outcomes for the patients that we serve. And let me just make that real with one example of our growth drivers, IV site management. IV-related infections impact an estimated 2 million to 3 million patients every year. They can increase mortality risk by 50%, and they create roughly $10 billion in health care costs in the U.S. alone. And for cancer patients with central lines, the stakes are even higher. Roughly 20% of those bloodstream infections are fatal. For patients already fighting cancer, preventable infection should never be the thing that takes their life, and that's where our products can help. Tegaderm CHG is the only transparent dressing cleared by the FDA to reduce catheter-related bloodstream infections. Studies show nearly 60% lower infection rates versus non-CHG solutions, and yet it's used less than 20% of the time. Think about that, a clinically differentiated solution, a potentially life or death problem and over 80% of the opportunity is still in front of us. That's just one example of the kind of upgrade opportunities that exist across the majority of our growth driver markets. Of course, attractive markets aren't enough. You need innovation and commercial focus, and that's where we've made real progress. Our innovation and commercial teams are now aligned around these growth drivers, and our new products are showing up in the results. As an example, in MedSurg, innovation is focused on 3 of our 5 growth drivers: IV site management, which I just talked about; negative pressure wound therapy; and sterilization assurance. Recent launches, including our V.A.C. Peel and Place dressing, three new Attest sterilization products and our global expansion of Tegaderm CHG are driving conversions to these higher-value solutions. In Dental, innovation is focused on our core restorative growth driver and a shift towards higher-growth aesthetics. Products like ClinPro Clear, Filtek Easy Match and Easy Match Flowable, our composite warmer and our Clarity aligner attachments are all gaining momentum with our customers. And in HIS, innovation remains focused on revenue cycle management, including new AI-driven autonomous coding and our international expansion efforts. Across all three segments, our specialized sales teams are accelerating adoption in these markets. And looking ahead, our vitality index improvements are working. The pipeline is strong. We're expecting to launch almost 20 new products through the first quarter of 2028. That includes meaningful MedSurg launches in the first half of 2027, particularly in Advanced Wound Care. We also have some exciting dental innovations in aesthetics starting later this year and a continual stream of market-leading autonomous coding applications in HIS. So when I take a step back, I see the transformation doing exactly what we designed it to do. The separation is nearly complete. The portfolio is getting more focused. The growth driver strategy is gaining traction, and our commercial structure and innovation is translating into performance. Okay. I've thrown a lot at you, so I just want to give you 4 key takeaways. First one, we delivered another quarter exceeding our expectations, including executing the ERP advanced order plan that we laid out in May. The key takeaway here is even in a complex environment, the say-do equation continues. Number two, we're nearing the end of the 3M separation journey. That takes risk off the table, improves free cash flow and lets us put our full energy into growth and margin expansion. Three, we're continuing to advance portfolio optimization through the separation of HIS, creating a greater focus for both HIS and Solventum, and we're confident this will unlock shareholder value with a full commitment to our HIS team and customers along the way. And four, our 5 growth driver catalysts represent a multibillion-dollar opportunity, much of it inside customers we already serve. And our commercial structure and innovation engine are increasingly converting that opportunity into results. Said simply, we're building a more focused, a more disciplined company, one that is well positioned to deliver sustainable growth, margin expansion and shareholder value. And with that, I'm going to turn it over to Wayde. Okay. Wayde, go ahead.
Thanks, Bryan. We delivered another solid quarter in Q2 with continued momentum across the business. Our commercial and operational performance continues to improve, and we made additional progress across our separation and portfolio activities, all while navigating our largest ERP cutover to date. Collectively, this increases our confidence in our 2026 outlook and acceleration towards achieving our long-range plan earlier than expected. As usual, I'll begin with an update on our 3M separation progress and portfolio actions, then walk through our second quarter financial performance and conclude with our outlook for the remainder of 2026. Our separation from 3M remains on track, and we're nearing completion of full separation. Inclusive of the ERP cutover activity since June, we have now exited nearly 70% of our approximately 200 transition service agreements, keeping us on pace to exit 90% by the end of 2026. We have migrated approximately 950 of 1,200 systems, including the majority of our ERP implementations and all of the Solventum site conversions. Our supply chain footprint remained consistent in the quarter with the majority of work focused on settling prior changes and planning for the ERP implementations. Global supply chain remains a critical work stream to establish a more efficient operating model while positioning us to capture the benefits of our longer-term transformation plans. Regarding portfolio actions, purification and filtration divestiture activities continue to progress according to plan, including the transition-related work streams supporting separation of the business. Our integration activities related to the Acera acquisition remain on track with several key system conversions already complete. The business continues to accelerate sales and exceed our expectations. As Bryan discussed earlier, we are moving forward with separating our Health Information Systems business. We expect the greater focus on MedSurg and Dental will unlock shareholder value as a pure-play MedTech company. We'll provide updates at a future date as appropriate. Now turning to our second quarter results. Starting with top line performance. Sales of $2.2 billion increased 9.5% on an organic basis compared to the prior year and 2.2% on a reported basis. Foreign currency was a 100 basis point benefit to reported growth, while the net impact of acquisitions and divestitures was an 830 basis point headwind, primarily driven by the sale of Purification and Filtration and partially offset by the Acera acquisition. Growth in the quarter was driven primarily by volume, including ERP advanced orders of approximately $125 million, while pricing remained within the expected range of plus or minus 1%. As we shared last quarter, we are managing through planned temporary advanced ordering as a mitigation to the ERP cutovers, which will mostly reverse in Q3. Q2 organic growth on a normalized basis was approximately 4% when taking into consideration approximately 630 basis points of ERP advanced orders, partially offset by approximately 100 basis points of our SKU rationalization plan headwinds and the partial separation timing benefit shared in Q1, mostly impacting the MedSurg business. Acera growth contribution is not yet included in our organic growth and would have added approximately 40 basis points to total growth and 70 basis points to MedSurg. Now moving to the segments. MedSurg delivered $1.4 billion in sales, an increase of 8.9% on an organic basis. ERP advanced orders represented approximately 700 basis points contribution in the quarter with the majority in the Infection Prevention and Surgical Solutions business. Within MedSurg, Advanced Wound Care grew 7.1% organically with continued benefit from performance and negative pressure wound therapy and a benefit from advanced orders. Acera contributed $32 million to reported sales. The business grew 48%, driven by its innovative synthetic tissue matrix technology and continues to outpace this attractive double-digit growth market. Infection Prevention and Surgical Solutions delivered organic growth of 10.1%, driven primarily by advanced orders and expanding adoption of antimicrobial solutions within our IV site management growth driver. Our Dental Solutions segment delivered $396 million in sales, representing organic growth of 15.2%. ERP advanced orders contributed approximately 10 percentage points in the quarter. Underlying performance continued to benefit from innovative new product launches. Health Information Systems delivered $354 million in sales, representing organic growth of 5.4%. Growth was driven by continued strength in revenue cycle management solutions, supported by healthy customer retention and ongoing commercial execution. Now moving down to P&L. Gross margins were 60.1%, an increase of 410 basis points compared with 56% in the prior year. The performance includes a one-time tariff refund benefit of $100 million. Excluding the refund, our gross margins were approximately 55.6%, consistent with our expectations and 40 basis points lower compared to prior year, driven by tariff impact of 150 basis points and inflation headwinds, partially offset by programmatic savings and portfolio optimization. Operating expenses were $701 million, the $35 million reduction versus the prior year reflects portfolio moves along with benefits from cost discipline and our savings initiatives outpacing ongoing investments to support our growth initiatives and the business. In total, we delivered operating income of $627 million or an operating margin of 28.4%. Removing the approximate 670 basis point benefit of advanced order sales timing and tariff refund, operating margins would have been approximately 21.7%, just above the high end of our initial full year outlook. This compares to 21.9% in the prior year with the year-over-year 20 basis points decline driven by 150 basis points of tariff headwinds, mostly offset by ramping Transform for the Future savings. Below operating income, nonoperating expense was $73 million, and our effective tax rate was 20.2%, both consistent with our full year expectations. Altogether, we delivered earnings per share of $2.55. This includes a $0.34 contribution from the advanced orders and $0.48 benefit of expected tariff refunds. Excluding both, we estimate earnings per share would have been $1.73, ahead of our expectations. Of note, we've recorded certain litigation costs of $157 million related to $204 million of estimated legal charges, net of $55 million related to insurance proceeds received to date that is included in our GAAP to non-GAAP supplemental schedule in the press release and excluded from our non-GAAP operating income and earnings per share. Turning to the balance sheet. We ended the quarter with $403 million in cash and equivalents and net debt of $4.7 billion. From a free cash flow perspective, we generated $144 million in the quarter, which was above our expectations due primarily to timing of tax payments and insurance proceeds. As we've discussed on prior calls, separation-related activities continue to create temporary demands on cash flow during 2026. Despite these headwinds, underlying cash generation year-to-date is ahead of our expectations, and we continue to expect meaningful improvement as separation-related costs decline beginning in Q4. During the quarter, we repurchased nearly 4 million shares for total consideration of $288 million under our authorized share repurchase program. This brings combined repurchases in the first 2 quarters to 4.8 million shares for a total purchase of $355 million. Our balance sheet remains well positioned to support our balanced capital allocation strategy, including tuck-in acquisitions and share repurchases. Turning to our 2026 outlook. We are tightening our organic sales growth range to the upper half of our initial 2% to 3% guidance range, raising our organic sales growth range to 2.5% to 3%. Excluding the expected 100 basis points impact of SKU exits this year, this now represents 3.5% to 4% growth. We continue to estimate currency will have a favorable impact of approximately 100 basis points on sales growth for the full year. Our outlook for operating margin is increasing to a range of 22.2% to 22.7%, an increase versus our prior 21% to 21.5%, which reflects the entire expected tariff refund benefit of approximately 120 basis points. Our expectation for annual nonoperating expenses of approximately $300 million and a tax rate in the range of 19.5% to 20.5% are both unchanged. Tariffs are now expected to have a neutral impact versus our prior estimate of $100 million to $120 million, given the tariff refund we recognized in Q2. Given our continued solid performance through the first half of the year and confidence in executing for the remainder of the year, along with the tariff refund, we are raising our earnings per share guide to $7.10 to $7.20 versus our prior range of $6.40 to $6.60. We now estimate free cash flow will be in a range of $200 million to $300 million versus our prior estimate of approximately $200 million, with the change reflecting the expected benefit of tariff refunds at the high end. The large majority of our free cash flow is still expected in Q4, consistent with timing of winding down separation charges. Regarding the third quarter, we expect the Q2 $125 million advanced order sales timing benefit and $0.34 contribution to earnings per share will mostly reverse in Q3. And as a quick reminder, our full year 2026 outlook includes the Health Information Systems segment. We'll update you on the financial impact of the expected separation at a future date. In summary, we delivered another quarter of solid business execution as we manage through very complex separation, transformation and several portfolio initiatives. As we shared previously, we are accelerating towards achieving our long-range plan targets earlier than expected with the high end of our new SKU sales growth and operating margin guidance already at or near the LRP ranges. Our execution to date on key priorities reinforces our confidence in our full year objectives and our longer-term financial commitments. We are making great progress on our 3-phase transformation and plans for shareholder value creation while serving our mission to enable better, smarter, safer health care to improve lives. With that, we'll turn it back to the operator for the Q&A portion of the call.
分析師問答
And your first question comes from the line of Jason Bednar with Piper Sandler.
Congrats on all the progress here team. I wanted to start with the HIS announcement this afternoon. A few questions. I'm just going to pack them all in here. Have you received any outside interest in the asset that helped spur this decision? Maybe talk about how far along you are just in this process and the kind of the separation decision. And then I'm interested just in the release, you're framing the decision as transitioning the business to a stronger growth profile, but maybe elaborate on that since HIS has been growing above the corporate average over the last several years.
Great. I just want to make sure on that last question, Jason. And it's funny, Wayde and I are kind of laughing across the desk because we were questioning whether HIS would be the first one or not. And then we were trying to say what would the sub-question be, you did most of them. On that last question, though, can you just provide context? I just want to make sure I got that right.
Sure. Yes. In the release, there was a reference to transitioning the business to a stronger growth profile, positioning it for a stronger growth profile. And I'm trying to understand that just in the context of HIS running at a growth rate that's been above the corporate average over the last several years that we have the financial data for?
I got you. Yes, that makes sense. I appreciate it. I was thinking about where you saw that. That's really one of the primary reasons why we're looking at this as being able to unlock value. We do have a really strong performing business and particularly now. The performance of the business has gone up since we took charge of it for sure. But we see significant opportunity. Just think about it. If you think about autonomous coding as a revolution inside of revenue cycle management, it is just beginning. There is no question about that. But to truly maximize it, we're going to have to see a different investment level. We're going to have to see a different pace of innovation. And we truly do believe that this asset on its own or with a scaled player that's in the HIT space will be able to get after that faster than we will. So we love the performance of the business; it's doing a great job inside of our organization, growing fast, great margins. But we know that there's more value to unlock here if it was on its own again or with an HIT player. And for us, we see it as a benefit to be a dedicated MedTech company that's going to be focusing on the businesses that we have that are MedTech related. So it's not an easy decision, as you can imagine, because it's an attractive asset, but we definitely see more opportunity with it being separate from us. Relative to how long we are in the process, we're earlier in the process. We've gone through the analysis to determine whether we should keep or not. We're obviously looking to separate. There are a number of reasons why we're early in the process. But one of the big ones is just that from a timing standpoint, we really couldn't look at this as an asset to remove because we had some barriers associated with where we were in the spin process. So when those are out of the way and we're seeing the market change in the way that it is, and we see this opportunity, we want to lean into moving this forward. Relative to are we getting any inbound offers or any inbound approaches, we've been getting that for a while. So that's not new. Certainly now, I think it's going to increase as a result of making this public. But there's no question in our mind that there's going to be a pretty large field of interested parties in this asset. Again, it's an attractive asset.
Yes, totally agree. I appreciate all that, Bryan. Maybe just to follow up a little bit. And I know you're super early, but are you agnostic as far as the transaction form, assuming when one occurs, how that takes place? And maybe walk through some of the considerations that you have with respect to speed of transaction and the value considerations when we think about like tax leakage or just overall value on a spin versus a sale? And maybe the final thing of just remind us how integrated HIS is into Solventum. I don't think it's highly integrated, but maybe refresh us there.
Yes. Again, all great questions. I'll start maybe with the second one and then go back to the first one. It's not highly integrated. And it's intentional, and it's purposeful. It is a very different business from a business model standpoint than the rest of our businesses and to try to integrate it just wouldn't make sense. There's not a lot of synergies that you could grab between the businesses. So we have left it very separate. And remember, it's not a manufacturing footprint. So from an ease of separation, this is about as easy as you're going to get. No separation is easy. I don't want to diminish the work that's going to be in front of us. But on a relative basis, because it's not a manufacturing footprint, and we don't have those synergies that drew those connection points, it will be easier than most. When I think about how agnostic we are in the separation process, that was what I was trying to get across in the prepared remarks. We are open to the separation process or method as well as if there are proceeds that are involved, which certainly, if there was a certain separation method, there would be proceeds. We would look to use both of those to be able to maximize shareholder value, so we want to leave our options open. As I said before, I think we're going to have a lot of interested parties to buy this asset, but we also see a spin as being a very reasonable path to move down. And we believe both of those potential methods could drive shareholder value. Our goal is just to maximize that value.
Your next question comes from the line of Ryan Zimmerman with U.S. Bancorp.
Congrats on all the progress as well. When you back out the advanced orders, we saw a nice acceleration in the underlying businesses in MedSurg and Dental. Bryan, I wonder if you could kind of speak to the health of the market, what you're seeing, again, ex the advanced orders because I think, again, if you look at the reports thus far this season, there's been obviously questions about utilization and so forth. And I think you can shed some light on that just based on your performance.
Yes. We appreciate it. We're paying a lot of attention to what we're hearing out there. There's no question that there's been a lot of noise. And there's been conflicting information that some people are saying that they're seeing that demand wane and others are saying they're not seeing it at all. And we're in that camp. We're not actually seeing right now, at least at this point, any softness in the procedures or the momentum of our business. So we feel pretty good about the environment. And I'm not just talking about MedSurg or Dental, I'm talking about HIS as well. Right now, it feels pretty good. So we're clearly not discounting what we're hearing, but we're not feeling it right now.
Understood. The other question, I mean, the cash flow is picking up. You obviously got a share buyback going on. Let's say, the HIS business gets done in some fashion, you're going to have certainly more cash proceeds or cash on the balance sheet. And Wayde, I'm curious kind of how you think about putting that to work? I mean whether that's more rapid debt pay down, whether that opens up the aperture in terms of M&A size. Just help us understand kind of the capital strategy and maybe I'm getting a little ahead of myself for this Q1 Investor Day next year, but I want to get your thoughts on it today.
I'm just curious, you don't think I can answer that question? Let me take a shot and then Wayde will correct me when I say it wrong. The assumption that you're making is that there's proceeds. So that's an assumption of a certain separation process. And then obviously, if there was that direction, it would be significant proceeds. And I would almost kind of bifurcate that. If you look at typical capital allocation, we're going to be looking at a very balanced plan. I think you're seeing that with the acquisition of Acera. You saw that with the $1 billion repurchase signal that we gave, and we're acting on it. But in this particular situation with these proceeds coming in, we would be more biased to applying those dollars to more direct shareholder return applications. And here's the good news. From a separation standpoint, in HIS, we're in a very different place than we were when we were separating from Purification and Filtration. We had a very different leverage ratio back then. So any proceeds that would come in now, obviously, some portion of those will have to go down to buy down debt so we don't hurt our leverage ratio. But the majority of proceeds can again be applied to those things that can drive shareholder value, and that's what we're going to be concentrating on.
Bryan, that was perfect. I think the only thing I would round off there is just to highlight that we're very happy with our solid investment-grade ratings today. And so I think whether we transact HIS and move forward in the future, we're looking at solid investment-grade ratings. And then the only thing I'd add is on the organic side of your question, I think Bryan covered really well. The HIS side of it is in this balanced plan that we're in, we're not looking to change our acquisition strategy. It would still be a tuck-in acquisition strategy. We're very happy with the Acera acquisition to date. Our teams are focused on building a queue of future opportunities for us, and building a pretty exciting pipeline for us actually. So we're looking forward to additional tuck-in acquisitions in the future. But we would not be looking to do anything larger scale than that. We've got a playbook here. We're excited about building momentum in the business. You mentioned generating free cash flow in the future, something else we can't wait to get to. This is a very strong cash-generating business. We just have to get through all the separation divestiture costs that we're dealing with right now. So we're pretty excited on all those fronts.
It's a good thing we have a combo there. That was one of the key messages we wanted to get out and I forgot it, that we're not going to be shifting to a large transaction as a result of proceeds when they come or if they come. So thank you, Wayde, for catching that.
Your next question comes from the line of Travis Steed with Bank of America.
Maybe a little bit of a follow-up to the last one. I guess, first, the health care IT business is a pretty high-margin business. And so how are you thinking about managing the EPS dilution if that is sold? Is there a willingness to buy back stock so you can kind of protect earnings there? And then I don't know if you could comment on why announce the intent to separate versus just announcing when something is done? And how you think about the business kind of post the separation, MedSurg, Dental, kind of both medtech, but it's two completely different call points. So just curious what happens in that situation over time.
Okay. I just don't want to forget that third one is around Dental and MedSurg. So let me start with the EPS dilution question that you referenced, and I would just reiterate, it is a very profitable business. There's no question. But the EPS dilution is, as you obviously know, pretty dependent on the method of separation. And also, as we just talked about before, the use of proceeds as they come in. And we're going to be looking, as I said in prepared remarks, at both of those to be able to minimize dilution, obviously, and also maximize shareholder value. So that's the reason why we're keeping the aperture open. We want to make sure that we're looking at both those levers to be able to do just that. From an HIS timing standpoint, why I say this: normally, we probably wouldn't be talking about it until it was done, two factors that drove us to do it. The first one is we've made the decision, obviously. So we made the decision, so we know we're going to do it. And there's just a lot of external noise already on the topic. And as a result of all that external noise, we need to control the internal and external questions that we're getting. We have to be able to respond to this. So it just put us in a position where we have to communicate it and make sure that we can control that messaging. When it comes to the medtech business, MedSurg and Dental, you're right, there are different call points and not a lot of synergies there. But there are a lot of synergies when it comes to the intellectual property that both businesses use in their products and also the capability in R&D. We have great overlap in material science and data science. So those are the reasons why they connect. And as you would imagine, as most of you know, most of you actually follow both subsectors, where most of you don't always follow things like HIT. So when we think about medtech, there's a fit for that reason. And clearly, it's a cleaner story for you as well.
No, that sounds good.
Your next question comes from the line of Steven Valiquette with Mizuho Securities.
Just a follow-up on the question earlier on the overall market utilization trends. From our view, it seemed like there was maybe not a major change in patient volumes overall, but maybe just an acceleration in the shift of patients from inpatient to outpatient setting. So I guess in light of that, I'm curious if you would maybe endorse that same sort of view or maybe saw something different. And maybe just remind us of your general mix of MedSurg revenues or volume tied to inpatient versus outpatient and whether that's drastically different in the market one way or the other.
And just to clarify, when you say outpatient, are you thinking like ambulatory surgery centers or care that would occur in alternate sites? My sense is I haven't seen and I can't report back that it accelerated in the short term here, but it's been a steady movement that's been going on for a while. So that movement from the hospital to the surgery center has been happening for a long time. I didn't personally see and I can't report that it accelerated recently, but we do business in both. We have products that are used across almost every procedure, used across multiple MedSurg needs. As a result, we're used in the hospital and we're used in the ASC, so it doesn't have as much of an impact on us as maybe somebody in orthopedics or other areas. But clearly, there has been a movement to ASCs for some time.
Your next question comes from the line of Brett Fishbin with KeyBanc Capital Markets.
Obviously, a lot of noise here, but one metric that stood out was just a very high level of growth from Acera. Maybe just expand a little bit on what drove the performance this quarter and thoughts on durability over the first year of ownership as you benefit from this integration.
Thanks for asking that question because that was one I was hoping somebody would ask. It's a great profile of what exactly Wayde said before: our acquisition strategy looks like. This is a very interesting asset in a space that we know with customer relationships we already have, where we can leverage their relationships on the Acera side and our team's relationships, and it's playing out. This is already in a very attractive $1 billion market in a much larger multibillion-dollar market. The synthetic tissue that Acera brought, Restrata, has a lot of differentiated qualities. So it's not only in an attractive space, but it is a highly differentiated technology versus what's being used in that space. So we're benefiting from all those things right now, and it feels pretty good. We absolutely feel that this will continue to be a double-digit grower for us. The longer it goes at that pace, it's obvious straight math: it's going to become a bigger element of our overall portfolio and will have a bigger impact on our overall growth. So we're pretty excited about and really happy with the integration so far.
Great. And then I'll just ask one more follow-up on the revenue trend. Just given the noise, the ERP advanced ordering ahead of the ERP, guidance came up by 50 basis points on an underlying basis. So maybe just removing some of the moving pieces around timing, what got better versus the last time you guided that's driving the increase?
So obviously, we've had a really strong first half to the year, normalized 4%, which would be at the high end of our previous annual guide. And so performing at the high end of our guidance and certainly accelerating over prior years, what gave us the confidence to raise and tighten our range to that 3.5% to 4% on an ex-SKU basis was the strength of performance. To add more color: on a pure reported basis, the first half of the year was 5.8%, and clearly that was elevated by the advanced orders. But just on a pure reported basis, 5.8% relative to a guide of 3.5% to 4% for the year means the second half math has to account for the reversal of those advanced orders. We're expecting Q3 to be in the minus 3% to minus 4% range as the advanced orders reverse mostly in Q3. To complete the math, that puts Q4 in the positive 3% to 4% range and gets the second half to flat growth. So we certainly have more variability given an ERP cutover, and this is our last large cutover that we're working through. It creates some noise among the quarters. But on a full year basis, we're very happy to be raising our guide again to that 3.5% to 4% on an ex-SKU basis.
And then I think you have to see how it actually lands. But again, on an ex-SKU basis, wherever we finish this year, our full expectation is we will be better next year. And as Wayde referenced, at the top end of that range, we're already at the bottom of the long-range plan that was supposed to be in 2028. So we're certainly not going to stop there. We're going to keep moving.
Your next question comes from the line of Rick Wise with Stifel.
Maybe start off with a little more — help us understand a little more about the advanced orders. I get the concept, $125 million, so just in case of disruption. But just as I reflect on it, I was just wondering, is this a quarter's worth of orders? Is it all used up by the end of this year? And so it won't have any impact on next year. Is it going to be used quickly, but how do we think — given all the orders this quarter, how do we think about the second half P&L and the potential impact on ex all the moving pieces on sales, margins and EPS?
I'll start and then Wayde can provide last bit of color. The $125 million is not a full quarter of orders. We did put additional inventory in and it will be used in Q3. It's going to be used in Q3. The big question becomes, can we then fill the inventory levels back up? When you have ERP cutovers, the reason why you build inventory is because you can have challenges. And certainly, in every one of these, you have challenges. So we have to fight through those challenges, rebuild inventory levels and get back to where we would normally be from an inventory standpoint in Q3. But make no mistake that $125 million is going to be burned through really quickly because it's not a full quarter.
We included in our prepared remarks the exact basis point impact of advanced orders: $0.34 on earnings per share, and you should assume as a mirror image that it would be minus $0.34 as we give the $125 million advanced order sales back. The $0.34 comes off of earnings per share as well. Then, of course, we included the expectation for tariff refunds, which we booked in Q2. That added $0.48 to the first half as well. So looking at the first half and the second half cadence of earnings per share, the headwind is the advanced orders and we're not expecting the tariff benefit to repeat in the second half. If you normalize for those two things, you will see earnings per share acceleration from the first half to the second half, and that's based on the confidence we have in the business and the momentum that we have here.
And just as a follow-up question, Bryan and Wayde, you talked from various perspectives about the end of this long very difficult process through implementing these ERP cutovers and transitions. Bryan, you repeatedly talked about language like it will free up people. There'll be cost savings, et cetera. I assume it lowers costs. Maybe help us think once it's all done from your perspective, what are you going to be able to do? Where do you take off your foot, maybe where do you put your foot on the gas pedal and redeploy people, invest, spend the cost savings and how do we think about the potential accelerant impacts once it's all done?
I appreciate the question. We're at the last phases of ERP and we're pretty experienced at it now. Even when things are going well on the ERP cutover, there are a lot of meetings at all levels in the organization where our brain power is being used on solving problems because no matter how good you are, things happen and you've got to respond. The team is doing a great job, but it is extremely distracting at all levels in the organization. It will feel very good to put this behind us. The places that we're going to focus on will be the growth driver areas. That gets a disproportionate level of our investment. It's going to be our multiple savings programs, including programmatic savings and Transform for the Future. Those are the areas where some of our best people are currently spending time on ERP cutovers and not on those programs. Once we move past this, we'll redeploy those sharp minds back into growth and savings initiatives.
Your next question comes from the line of Larry Biegelsen with Wells Fargo.
This is Nathan Treybeck on for Larry. Bryan, I appreciate your earlier comments on 2027, but any finer point you can give on what parts of the portfolio would drive the acceleration relative to 2026? And when you say acceleration, would that be relative to the 3.5% to 4% that you're guiding when adjusting for the SKU exit?
Yes. The right way to think about it is adjusting for SKU because we will not have a SKU impact in 2027. Any numbers we talk about would be ex-SKU. The 3.5% to 4% is the ex-SKU number and the assumption is we would accelerate past that next year. I'm not going to speak to specifics on how much past that, but we would be better than that. We expect acceleration from every one of our businesses: MedSurg, Dental and HIS. The areas of concentration for that acceleration will be in our growth drivers. It's not just the growth drivers but the R&D launches, the innovative products we are bringing to market and the specialization of our sales organization. Those are the ways we expect to accelerate year-over-year across the board.
Okay. And so heading into 2027, how should we think about the P&L and the level of noise from stranded cost or any remaining dis-synergies? Is that all cleared away as we head into 2027?
If you're speaking to the HIS transaction, we'll be providing future updates on that and providing information similar to what we did with the Purification and Filtration transaction. It's too early to provide any detail on that at this time. But you should expect us to follow a similar path where we provide a good amount of information.
Outside of HIS, a lot of the separation-related noise will wash out in 2027, though the HIS separation will be a new variable. We'll continue to keep you updated.
Your last question comes from the line of Vik Chopra with BMO.
Congrats on a nice quarter. Two for me. Bryan, with this HIS separation, does this transaction mark the final major portfolio action under the transformation plan or are there other businesses that could be candidates for divestiture or a strategic review? And I had a quick follow-up, please.
The straight answer is we're always looking at portfolio optimization at segment, business and product levels, so we won't take that off the table. That said, post-Purification and Filtration and eventually post-HIS, we see ourselves as a true MedTech company with MedSurg and Dental. We feel pretty good about that portfolio, though we will always look for ways to optimize.
Okay. And then a quick follow-up. You talked about 20 product launches by early 2028, including some significant advanced wound care launches next year. I'm just curious which launches have the greatest potential to move the weighted average market growth rate? Or is this more of a portfolio effect story?
I'm not going to get into specifics on individual products today, but yes, almost 20 new products by Q1 2028 is the plan. Because of the proximity to launch, at our Investor Day in Q1 we'll talk more about these products. The opportunity to drive the WAMGR comes from the growth driver strategy: technologies in market today that are underpenetrated, advanced technologies that solve real patient problems and reduce cost. I gave the IV site management example earlier, and four of our five growth drivers have that same model: underpenetrated, high-value solutions. That's the opportunity to grow WAMGR and overall revenue.
I will now turn the call back over to Amy for closing remarks. Amy?
Great. Thank you, Mark. And thank you, everyone, for listening and to our analysts for your questions. If anyone does have follow-up questions or need anything else, please don't hesitate to contact the Investor Relations team directly. This concludes our second quarter fiscal year 2026 Conference Call. Mark, you can now go ahead and close out the call.
This concludes today's conference call. You may now disconnect.