Q4 2024 Solventum Corp Earnings Call

Ellie: Good afternoon. My name is Ellie and I will be your conference call operator today. I would like to welcome everyone to Sylvantem's fourth quarter 2024 earnings call.

As a reminder, this conference is being recorded.

Ellie: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.

Speaker Change: If you would like to withdraw your question, please press star and number 1 again. Thank you. 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 External Finance Communications. Please proceed.

Amy Wakeham: Thank you. Good afternoon and welcome to Solventum's fourth quarter fiscal year 2024 earnings call. Joining me on today's call are Bryan Hanson, our Chief Executive Officer, and Wade McMillan, our Chief Financial Officer.

Speaker Change: 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.

Speaker Change: During today's call, our discussion and any comments will be on a non-GAP basis, unless they are specifically called out as GAP.

Speaker Change: The non-GAAP information discussed is not intended to be considered in isolation or as a substitute for the reported GAAP financial information.

Speaker Change: 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.

Speaker Change: 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 Change: We make these statements based on reasonable assumptions, however, our actual results could differ.

Speaker Change: 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.

Speaker Change: For the Q&A portion of today's call, please limit yourself to one question and one related follow-up.

Bryan Hanson: If you have additional questions, you're welcome to rejoin the queue. And with that, I'd like to now hand the call over to Bryan.

Bryan Hanson: We're also going to talk about our 2025 guidance and clearly we'll discuss the announcement we made earlier this week concerning the definitive agreement to divest our purification and filtration business to Thermo Fisher.

Bryan Hanson: But first, I just want to take a minute to acknowledge that the team has done a really good job progressing over the past three quarters post our separation. And we've closed out fiscal year 2024 with solid performance across our businesses, which positions us well for 2025.

Bryan Hanson: We've advanced across each of the three phases of our transformation that we introduced last year at our first Investor Day. And given how the team is performing and the progress we've made, I've got to tell you that I'm even more excited about the opportunities ahead.

Bryan Hanson: For those of you that are new to our story, let me quickly recap the two main pillars of our transformation. Again, looking at transformation in two ways. The first is that we are focused on establishing our foundation as an independent company.

Bryan Hanson: and the second is where we're committed to turning around our business performance, particularly as it relates to profitable revenue growth. Both of these pillars should create significant shareholder value as we continue to execute against them.

Bryan Hanson: and our fourth quarter results demonstrate that our separation and transformation activities have taken root and point to the improving results that we expect as we go forward.

Bryan Hanson: Our global teams delivered business performance at the high end of our expectations, not just for the quarter, but for the full year. And Q4 marked another positive quarter of volume growth.

Bryan Hanson: making it three consecutive quarters of improvement. Now while there's obviously still a lot of work to be done...

This is a significant milestone for the company.

Bryan Hanson: Looking back before our spin, 3M Healthcare saw seven quarters of negative volume growth.

Bryan Hanson: Now stopping that decline and reversing it, especially amid a complex separation, global restructuring, a talent and cultural transformation, and a significant divestiture process.

Bryan Hanson: any of which posed real risk to business continuity represents a major achievement for this team. And the fact that this team made this progress while managing all these work streams concurrently is a testament to the strength and dedication of our solvers around the world.

Bryan Hanson: I'd actually like to just take a minute to thank all 22,000 plus team members around the world that I'm pretty sure are listening right now to this earnings call. It is your hard work, it is your dedication, you're the reason why we're ahead of plan.

Bryan Hanson: You've been absolutely crucial in maintaining business continuity and most importantly, as we always say, in delivering for our customers and our patients. Your commitment to our mission is clear, and I truly appreciate what you do every single day.

Bryan Hanson: Now moving to our business segments, where we are making progress and beginning to generate positive momentum. I'm going to start first with our largest business segment, MedSurge. We continue to focus on driving the adoption of our recently launched VAC peel-in-place dressing. And as I've shared before, this product gives us really three advantages. Number one, it simplifies the procedure.

Bryan Hanson: Two, it reduces procedure time, and three, it reduces the number of dressing changes per week. All three of these are meaningful advances for both patients and providers, and it will give us the platform and the opportunity to expand this market and serve more patients.

Bryan Hanson: we remain very focused on increasing capacity to meet the strong demand for this product.

Bryan Hanson: and in our Dental Solutions business, early customer response to the Q4 launch of our first-to-market

3D printed Clarity Precision Grip attachment has been very positive.

Bryan Hanson: This solution focuses on ensuring predictable aligner therapy and it is designed to simplify the procedure and ultimately, as a result of that, boost practice efficiency.

Bryan Hanson: And the products we discussed back in Q3, or the launch in Q3, the CLIMPRO Clear Fluoride Treatment and Filtek Easy Match are continuing to resonate with our customers as well. And in the case of CLIMPRO, as I mentioned before, this is another launch where we are rapidly increasing our manufacturing capacity to meet the strong demand.

Bryan Hanson: Okay, moving to our health information systems business. We continue to focus on our new autonomous coding payment models.

Bryan Hanson: And the team now believes that between 50% and 90% of cases have the potential to be automated.

Bryan Hanson: and that's thanks to our AI-driven autonomous coding technology which is really focused on, number one, saving time for our customers but also money for our customers when they look at revenue cycle management. Medical coding as I think most of us know is incredibly complex.

Bryan Hanson: and our technologies, both computer-assisted and the emerging autonomous coding, can account for the constant tide of regulatory changes, quality demands, and local, state, and organizational specific guidance.

Bryan Hanson: And of course, that brings us to our purification and filtration business. We saw another quarter of robust demand for our bioprocessing solutions business, giving us confidence in the strength of the end markets and the value of our differentiated technology and reoccurring revenue model.

Bryan Hanson: We'll provide more details obviously shortly, but I want to emphasize, this business is well positioned for growth under its new owner, who offers a strong fit strategically.

Bryan Hanson: Okay, shifting to our transformation phases, I want to spend just a few minutes talking about our progress across the three phases that we presented back at our initial Investor Day last year.

Bryan Hanson: Phase one is really all about laying the foundation to set the company up for success. I really do believe you have to have that foundation in place.

Bryan Hanson: In this phase, we've been focused on driving an inspiring mission, enhancing talent, and building a new culture, one that values decentralized decision-making, speed, and accountability. And of course, it includes all of our many separation activities.

Bryan Hanson: On the mission front, we've met with teams around the globe. I've traveled around the globe to directly engage our team members and share our new mission and values. I believe it is critical that everyone deeply understands our mission and their role in moving it forward.

Bryan Hanson: And I can tell you that the reception has been incredibly positive and it's helping us build a unified One Solventum mindset, which is absolutely instrumental in driving improved performance, particularly when you're looking at sustained improved performance

Bryan Hanson: In terms of talent, we've moved aggressively to address capability gaps.

Bryan Hanson: We've also made meaningful progress enhancing key positions that are critical to our performance transformation of these positions 60% against six zero percent were filled by current employees and 40% by external hires both groups chosen for their relevant experience and capabilities for this transformation

Bryan Hanson: And in terms of culture, we've selected leaders who embody our values and culture to help model our new behaviors. And we've implemented a global restructuring through our Solventum Way program to ensure that our structure also supports this culture.

Okay, and finally, on the separation front.

Bryan Hanson: Our ability to execute and deliver on our strategic and financial objectives does not make the deep and unique entanglement between 3M and Solventum any less complex.

It is a very complex separation.

Bryan Hanson: and there clearly remains risk to the separation work ahead with key milestones that will be happening in 25 and 26. Wade will talk more about those but we're making steady progress and I'm proud of the team we have assembled and very importantly proud of their performance to date.

Bryan Hanson: Okay, moving on to Phase 2. In Phase 2, we've been focusing on establishing a long-term strategic plan to unlock profitable growth and capture the value of the attractive markets where we play.

Bryan Hanson: You know, a key part of this phase has been analyzing the markets, the sub-markets, and the businesses that we have to shape our focused, long-term strategy. And as I've mentioned, the speed with which we've brought in new talent has allowed us to accelerate this process.

Speaker Change: And as a result, we said we'd be ready to share our long-range plan during this call, but after receiving feedback from many of you, we realized it would be better to separate the strategic discussion from this earnings call, particularly in light of the pending sale of our P&F business.

Speaker Change: And as a result, we'll unveil our long-term strategy at our Investor Day on March 20th in New York City.

Speaker Change: where we will have more time to not only outline the long-term strategy but also provide more details about each segment and the progress we've made to date and we certainly look forward to seeing you there live.

Speaker Change: All right finally phase three is all about optimizing our portfolio. In this phase we have thoroughly assessed the value and strategic alignment of our businesses.

Speaker Change: and the recently announced divestiture of our Purification and Filtration segment is a direct result of our Phase 3 review.

This decision will streamline our focus.

reduce our leverage, and improve key metrics.

and we are confident.

Speaker Change: Confident that PNF, with its highly motivated and innovative team, will thrive under Thermo Fisher.

Speaker Change: I just want to take a minute to personally thank the PNF team for getting us to this point and I have every confidence you will continue to bring your passion to work and deliver innovative solutions to your customers.

Speaker Change: So in closing, you know, we're making steady progress on our transformation and through in-depth analysis, leveraging both internal talent and external perspectives, we have a very clear understanding of why the 3M healthcare business has underperformed its markets in the past.

Speaker Change: and our primary focus at the upcoming Investor Day will be to share our findings, discuss the changes we've made to inflect improvements, and very importantly, reveal the key elements for our long-term strategy and financial plan.

Speaker Change: But just as a preview of what's to come, because I know that people are excited to hear it, but as a preview of what's to come, I can tell you that we have an incredible value creation story ahead of us.

Speaker Change: We are confident that the changes we've already made Combined with our forward-looking strategy will continue to accelerate sustainable volume growth and ultimately ultimately deliver significant shareholder value

Speaker Change: Okay and with that I'll turn it over to Wade to walk us through the financial results in more detail and provide our guidance for 2025. He's also going to give additional color on the separation and of course the divestiture. Okay, Wade.

Wade Mcmillan: Thanks, and thank you to everyone at Solventum for delivering on a successful first year. As you heard from Bryan, we've made significant progress in a relatively short time since our spin last March.

Wade: I'll focus my comments first on a separation update and then move into our Q4 financial performance before wrapping up with our 2025 guidance.

Wade: Overall, the separation is on track and we are executing against separation milestones while delivering on our financial goals.

Wade: To date, we have exited roughly one quarter of over 200 transition service agreements.

Wade: And we are planning to exit all transition service agreements over the next two years.

Wade: We have successfully implemented new ERP systems in six countries to date, including recent deployments in Europe and South America.

Wade: In operations and supply chain, we contracted to build a new plant in Brazil where we recently began construction and have entered into a contract with a new European distribution center partner as part of a planned cutover later this year.

Well, we've made significant progress separating.

Wade: Some of the hardest work is ahead with our largest ERP implementations and shifts to distribution centers in large regions, along with manufacturing transfers upcoming in 2025 and 2026.

Wade: Our progress to date is encouraging, and I want to thank our global team of dedicated people around the world for their efforts in this large-scale separation.

Now, turning to our Q4 results.

Wade: Starting with sales, fourth quarter 2024 sales of $2.1 billion increased 2.3% compared to prior year on an organic basis.

and increased 1.9% on a reported basis.

which reflects positive momentum and an easier year-over-year comparison.

Wade: During the quarter, foreign exchange was a 60 basis point headwind as the U.S. dollar strengthened considerably against most major currencies.

Wade: Sales performance benefited from favorable volumes, with pricing back to a normalized range consistent with our expectations.

Wade: While there remains significant work to sustainably elevate our growth, we are encouraged by the initial volume improvements post spin.

Moving to the segments.

Wade: Our largest segment, MedSurge, delivered 1.2 billion of sales, an increase of 1.8% on an organic basis.

Growth was led by higher OEM and advanced wound care.

Wade: Within advanced wound care, growth was driven by negative-pressure wound therapy consumables and continued market adoption of single-use negative-pressure wound therapy.

Wade: Our dental segment delivered $315 million of revenue, an increase of 4.2% on an organic basis.

Wade: And while dental was one of the primary beneficiaries of an easier year-over-year comparison, the segment also benefited from recent product launches, as mentioned earlier.

Wade: Our Health Information Systems segment contributed $336 million of revenue, an increase of 1.1% on an organic basis, which benefited from adoption of our Revenue Cycle Management Platform solution.

Wade: Strength in revenue cycle management was partially offset by a decline in clinician productivity solutions.

Finally, the Purification and Filtration Segment.

Wade: delivered 235 million of sales, an increase of 3.5% on an organic basis, fueled by continued strength in our bioprocessing filtration and industrial filtration. Performance in these areas was partially offset by declines in membranes.

Wade: Looking down the P&L, gross margin was 56.2% in the quarter, slightly ahead of our expectations, and down 100 basis points versus prior year. Results include approximately 100 basis points of increased cost paid to 3M as part of the supply agreement.

Wade: Gross margins decreased sequentially as expected. However, they were partially mitigated by favorable product mix benefits.

Wade: Operating expenses increased versus the prior year and sequentially from Q3. As we shared before, the added spend reflects public company stand-up costs and growth investments to support our business transformation.

Q4 spend also included purification and filtration divestiture costs.

Wade: All together, our operating expenses were in line with our expectations, excluding divestiture-related spend.

Wade: Note, we'll start to benefit from savings of our recently announced restructuring in Q1.

Wade: We'll touch more on future spending levels as part of 2025 guidance.

Wade: In total, we delivered adjusted operating income of $422 million, which translates to operating margin of 20.4%.

slightly ahead of our expectations.

Wade: Moving down the P&L to non-operating items, our net interest expense remained consistent.

Wade: We also absorbed some one-time expenses associated with the write-down of legacy 3M investments.

Wade: Lastly, our effective tax rate of 17.4% puts our full-year tax rate of 18.1% toward the low end of our full-year guidance range of 18 to 19 percent.

Wade: All in, we delivered earnings per share of $1.41 ahead of our expectations.

Wade: Before providing our 2025 guidance, let's recap our first fiscal year as a public company.

Wade: We delivered 1.2% organic sales growth as we navigated business continuity challenges associated with the separation.

eliminated 3,500 SKUs without material revenue impact.

and began to drive volume back in a positive direction.

Wade: As a result, we generated organic sales growth ahead of our initial expectations.

Wade: On the bottom line, we generated non-GAAP earnings per share of $6.70, also ahead of our initial earnings per share guidance, driven by the better sales performance.

Wade: Turning to the balance sheet, we ended the year with $762 million in cash and equivalents, with no outstanding borrowings on our credit facility, and we made cumulative repayments of $300 million on our $1.5 billion prepayable term loans.

Wade: This includes an additional $100 million debt pay down during Q4.

Wade: We also generated $92 million of free cash flow in Q4, bringing our year-to-date total free cash flow to $805 million, just above the initial guide range for the year.

Wade: Regarding the purification and filtration divestiture, it is a major milestone for our portfolio transformation strategy.

When the transaction closes, we expect margins will improve.

Wade: And it enables us to accelerate our timeline to deleverage the balance sheet and positions us to begin executing our strategy to augment sales growth with tuck-in acquisitions.

Wade: We anticipate net proceeds will be used primarily to pay down debt and are committed to achieving solid investment grade ratings.

Wade: With an expected close by the end of 2025, we anticipate the impact to Earnings Per Share to be neutral in 2025.

Now, turning to our initial 2025 guidance and outlook.

Wade: Similar to our approach to guidance for 2024, we'll continue to provide our organic sales growth, earnings per share, and free cash flow metrics.

Wade: Given we are still a new company, we are also providing some additional considerations at the outset of the year.

Wade: Keep in mind, this guidance is for the total company, including the purification and filtration business. We will provide updated guidance when the transaction closes.

Wade: Reported sales growth will be impacted by recent strengthening of the U.S. dollar, which we estimate will create an expected 150 basis point headwind with the biggest impact on Q1.

We expect organic sales growth of one to two percent.

Wade: which is net of an estimated 50 basis point impact related to skew exits.

Wade: Excluding the 50 basis point impact, our normalized annual growth outlook is one and a half to two and a half percent.

Wade: This reflects the expected underlying improvement for volume across our business segments as we execute against the phased approach to reposition for growth.

Wade: Regarding our SKU rationalization program, we are exiting an additional 2,000 SKUs in a wave two, bringing our total exits to over 5,000 or 8% and completes the program.

Wade: This will have a 50 basis point impact on 2025 and a 100 basis point impact on 2026.

Wade: Executing this initiative simplifies our supply chain, saves our branding dollars, and also improves our operating metrics over time.

Wade: Looking down the P&L, we expect operating margin between 20 and 21 percent.

Wade: This outlook includes annualizing the roughly 100 basis point headwind associated with the higher cost of sales from the 3M supply agreement in the first half.

Wade: Additionally, we expect savings from our solvent and weight restructuring program will more than offset the annualization of stand-up costs and growth investments in 2025.

Wade: We expect the net savings of the restructuring will increase through the year, resulting in an expected ramp for operating margins from Q1 into the second half of the year.

Wade: Moving now to earnings per share. We are guiding to a range of $5.45 to $5.65.

Wade: This includes an additional quarter of interest expense in Q1 2025.

Wade: And, as mentioned earlier, we expect the divestiture of our purification and filtration business to be neutral to earnings per share when closed later this year.

Before we move on, regarding tariffs.

Wade: Our guidance does not assume any tariff impact at this time, given the current dynamic environment and an inability to predict potential financial impact.

Wade: We are also providing free cash flow guidance in the range of $450 to $550 million, which contemplates capital expenditures between $350 and $450 million.

Wade: as well as annualizing higher interest expense and one-time separation expense.

Wade: Before closing out, I also want to remind you that we anticipate Q1 results will be the quarter most impacted by both foreign exchange headwinds and timing of spend.

Wade: When coupled with the expected pace of increased restructuring savings through 2025, Q1 is the expected low point for both operating margins and earnings per share, with improvement through the balance of the year.

Wade: In conclusion, we wrapped up an incredibly busy and eventful inaugural year following the completion of The Spin and are progressing on our journey as a new public company, delivering three consecutive quarters of better-than-expected performance, which is particularly encouraging given the complex and highly entangled separation.

Wade: We've consistently delivered on our near-term financial objectives while executing on our separation activities and focusing on turning around the business.

Wade: Looking ahead, we'll continue to execute on our three-phased approach to transform our business, and we'll use our collective expertise in health, material, and data science to deliver on our mission.

Wade: While we know this turnaround will take time and focused investment, we are encouraged by the early, meaningful progress and remain well positioned to execute our value creation plan.

Wade: We look forward to our upcoming Investor Day when we plan to share more about the path ahead, including our long-range financial guidance.

Wade: With that, I'll now hand it back to the operator for the Q&A portion of the call.

Wade: Your first question comes from Jason Bednar from Piper Sandler. Your line is now open.

Good afternoon. Thanks for taking the questions.

Speaker Change: I don't think I heard Bryan or Wade a build-up or a construction of

Speaker Change: the organic growth by segment. So just as we're thinking about modeling out the business, not just on a sequential basis, but also across the various segments, is there any other color you can give like, you know, med-surg kind of at or above the range, dental below the range, anything like that would be very helpful.

Hey Jason, it's Wade.

Speaker Change: As you mentioned, we're not providing guidance at the segment level, but what we would say is the initiatives that we have underway cuts across all four segments.

Speaker Change: So you know we've made structural changes in the business. We've been investing in talent, and all that is designed to improve the commercial efforts within our business. And those are going to be more short-term improvements in nature, and then of course looking at new products and our innovation pipeline and looking to accelerate that as well.

Speaker Change: And so those are both of those are taking root in all four of our segments. And so we would expect all of our businesses to continue to improve. We're just not giving specific guidance on the segment level. Yeah, one other thing I'll just add to is in the upcoming investor day on March 20.

Speaker Change: We'll have an opportunity for the president of each of the businesses to get up, talk about their business, and that will give you some more color of what they would expect. Again, we're not even at that meeting going to give guidance by business, but you'll get a better feel for what they're thinking.

All right, looking forward to that. Thank you.

Speaker Change: The free cash flow guidance was a little bit lighter than we were thinking.

Speaker Change: I think you mentioned some things in there not just around CapEx but interest payments. Is that a free cash flow after interest payments or sorry is there or I guess is there anything else at one time in there and maybe I asked that wrong in a wrong way but just what's explaining that lighter guide at least relative to what what we're modeling and how others are probably modeling it as well.

I'm mixing up my voice.

Jason Bednar: Yeah, we are just a little bit below consensus there and we were keeping an eye on that one because one of the things that we've been building up over time here is total cost of separation. So I think that's probably what you're getting at, Jason.

Jason Bednar: So we've given the CapEx piece and of course we've got our earnings per share guidance out there.

Jason Bednar: and and so the piece really I think is separation that I would point people to and the best way to really forecast that or model that would be to look at our Q4 exit rate of just over a hundred and thirty million of non-gap separation related costs

Jason Bednar: And you can run rate that into 2025, just a little step up would be a good place to have it for 2025, because that's where our biggest spend is going to be.

Jason Bednar: And then the good news from there is that we'll be stepping it down in 2026 and then another step down in 2027 when we complete most of the separation-related work. So, 2025 is the year that we've got a lot of separation costs to transition out of our TSAs and then, as I mentioned, a good-sized step down in 2026 and then again in 2027.

All right, very helpful. Thank you guys.

Thanks, Jason.

Speaker Change: Your next question comes from the line of Patrick Woods from Morgan Stanley. Your line is now open.

Patrick Woods: Beautiful. Thanks, guys. I had one kind of fun-ass question and then a quick follow-up.

Speaker Change: The 2026 skew rationalization, I'm sure on the 20th you guys will get into this a little bit more, but just conceptually...

Speaker Change: Is it fair to assume that while you're going to have 100 points of organic growth headwind on that side, that we should see something on the operating margin as those efficiencies from running that through the year are there? Is that just fair that there will be some kind of an offset from the efficiencies below at the P&L?

Speaker Change: Yeah, I'm glad you brought that one up Patrick as we mentioned our prepared remarks We will see some Revenue as well as margin improvement, but it's really small. I don't think you know

10, 20 basis point type of improvements.

Speaker Change: So it's really about simplification of the business, that's really why we run that process and be able to get 8% of our SKUs out of the supply chain as big. And we also wanted to get in front of all the rebranding efforts that we have to do across all of our products.

Speaker Change: but at the same time we do get a small benefit in sales growth and a small benefit in gross and operating margins and that'll be included in our long-range guide that we provided investor day coming up but it's not the main reason for doing it.

That's really helpful. And then just as a quick follow-up...

Speaker Change: Appreciate the comments on M&A. If I dial my mind back to about a year ago or so when we were originally chatting, you know, you guys are running way ahead in terms of restructuring the group, you know, with the P&F sale and that side. You're talking about M&A. I mean, I guess it's one thing financially to be in a place where you can execute.

Speaker Change: But how ready is the organization, you know, because there's lots of work to do internally, to bolt in new business without it being too disruptive? I'm just trying to understand how much that timeline on adding new assets has been pulled forward or not.

Speaker Change: Yeah, it's a great question. I would say one of the nicest things about the PNF transaction is it does pull in the timeframe.

Speaker Change: where we would be able to transact from an M.A. perspective. It doesn't really change the strategy, but it definitely moves up our timeline. And we've been building capacity for that. You know, we've been adding people that are capable in the area.

Speaker Change: from a scouting perspective, from a deal negotiation standpoint, integration, you name it. And we really want to make sure that capacity wouldn't be a reason why we couldn't move forward with tuck-in M&A.

Speaker Change: The nice thing about this is that we're talking about smaller transactions here. We're in great markets, we don't have to do anything large, we don't have to do anything risky. We can just look at picking up innovation, dropping into the commercial channel that we have and then getting more out of the markets that we're in.

Speaker Change: So, so it does move our time frame up. I believe we have the capacity to do it. I'd be thinking about early 2026 as the time frame because there's a, you know, we want to make sure that we pay down debt and we're on top of that for a period of time with it with a really nice leverage ratio and then we'll start moving in that direction.

Super helpful. Thanks so much, guys.

Thank you.

Operator: Your next question comes from the line of David Roman from Goldman Sachs. Your line is now open.

David Roman: Thank you, good evening everybody. I wanted to maybe just to start with the top-line performance that has improved as we've gone through the course of 2024 and I think you know it's pretty clear on the volume side that that's driving the turnaround here and the pricing has been folding as you have communicated but maybe you could just sort of unpack for us

Speaker Change: What are the factors influencing the top-line performance as you exit 2024, and how you kind of thought about those key underlying drivers as you put together the 2025 outlook?

Speaker Change: Maybe I'll start with that one, David, and then Wade, if you want to add in color. You know, I've been talking about the improvement that we need in.

Speaker Change: What I just defined is three vectors. It's really not rocket science, right? There's only three ways that you start to collect growth in a business. That's either one, commercial excellence.

Speaker Change: I'm going to call it organic or R&D innovation and then M&A, right? Those are the three vectors. I would just say on a commercial excellence, that's the fastest. It can almost be immediate.

Speaker Change: and I'll talk a little bit more about that in a second. The second is R&D, and that takes a little bit longer, usually 18 months to three years in the space that we're in from ideation to launch. Of course, M&A depends on your balance sheet, your readiness from a capacity standpoint, and then very obviously, attractive assets that would need to be available.

Speaker Change: I'd just say that out of the eight here, we're very much focused on leveraging commercial excellence. That's the primary vector of improvement and then, of course, some of the existing R&D pipeline that I talked about in my prepared remarks.

Speaker Change: But a lot of what we're focusing on now is commercial excellence. We've made significant changes in talent.

We've shifted the compensation towards growth.

Speaker Change: We've upscaled in our accountability culture, you've got to be urgent and accountable and deliver results in this organization now.

You know, not delivering results is not acceptable.

Speaker Change: We've increased the sophistication of our commercial operations. That's really important to be able to point the team in the right direction and give them the tools needed to be successful.

Speaker Change: and then we've started the specialization of our teams as well. So that's the big push so far. But then again, we're taking advantage of some of those R&D gems that we found in a bit of an anemic pipeline.

Speaker Change: and we're going to be leveraging those in the short term. But here's the thing, Maitland was like, we are going to be building a stronger innovation pipeline.

Speaker Change: It is going to be driven off of the focus strategy that we're going to talk about coming in March 20th And we will use the PNF sale proceeds after we digest it for a period of time to move quicker into that M&A as well But right now just out of the gate what you're seeing mainly is just traction on the commercial side of things

Speaker Change: So Bryan covered that obviously really well. We've got a lot of good work going on there. David, I'll just affirm your comment around what we saw throughout 2024 and how that leads into 2025 outlook.

Speaker Change: So you're right, volume has continued to improve. So in the first half of the year, our growth was more than all price, meaning volume was declining.

Speaker Change: In the second half of the year, we saw that reverse, and we saw our price come into more of a normalized range, and we see volume now more than all the growth, and so we're seeing a nice momentum and build of volume improvement across our businesses.

Speaker Change: And it's that momentum through Q4 that gives us the confidence to guide up like we are for 2025. And so just to highlight that in this...

Speaker Change: vein of thinking, in 2025 we've got a one to two percent guide but that now includes the 50 basis point of skew headwind.

Speaker Change: So you normalize, that's one and a half to two and a half percent. That's coming off of a year of 1.2 percent where price was a good size.

Speaker Change: for the first half of the year, and we're not assuming that for 2025. We think price will continue in this normalized range. And so we really are counting on the things that Bryan just mentioned, those improvements across the business.

Speaker Change: and that's what gives us confidence to guide in that 1.5% to 2.5% on a normalized basis for 2025.

Speaker Change: That's helpful and I feel here to tell me that you're gonna cover this next topic at the analyst meeting, but I'm hoping to get a little bit of color here, which is.

Speaker Change: just on what's happening in your end markets. Because as I look at your performance and then...

Speaker Change: the peers that we were able to track, both on the public and private side. I'm having trouble finding what peers are growing at a rate that averages your growth back to 4 to 6 percent.

Speaker Change: So as you've gone through the separation here, is there maybe you could just update us on your on your thoughts and what's what's happening in these end markets and Where where is the competition doing better than you and maybe help us provide a little bit more color on? On the confidence you have in that market outlook

Speaker Change: Maybe, so yes, I hate to punt to the Investor Day, but we'll talk more about the Investor Day for sure, but I will talk about dental because it's kind of a standout growth rate in the fourth quarter and it's just incongruent with what I think everybody sees happening in the dental market.

So if I just talk about that one.

Speaker Change: You know, it's important to look at the fourth quarter as a good quarter, no question, for the team, but it was an easy cop. And so the best way to think about our dental performance is to blend it with Q3, because that's why the easy cop occurred. And if you do that, you're going to see it's kind of flattish, which is probably more indicative of what's happening in the market right now.

Speaker Change: That said, we are seeing some good performance in the new products that they're launching. And Kareem, who's our leader of that business, will talk more about it on March 20th. But that one is the one that probably stands out as most incongruent in the quarter with the market and the other performance of other players in dental.

Speaker Change: Okay, we'll look forward to more on the 20th. Thank you.

Okay ma'am, thanks so much.

Speaker Change: Your next question comes from the line of Travis Steed from Bank of America. Your line is now open.

Travis Steed: Hey, thanks for the question. Wade, I wanted to touch on the Operating Margin Guide, the 20-21% in 2025.

Travis Steed: looks like you're already kind of at 21.3% since you've been

Travis Steed: post-spend. I know there's a lot of moving parts between that and 25, so just trying to...if there's a way to think about...

Travis Steed: and I will be talking about the puts and takes on that 25 op margin guidance, if there's a way to evaluate the underlying performance of your margin expansion and progression over the course of the year and how to think about the puts and takes there.

Speaker Change: Sure, yeah, and it certainly has been a journey. You know, our first quarter when we went public in Q2, which is really before any changes were made to the business, we had 20.7% operating margins. And then, as you've seen from there, we've continued to make investments in our critical functions to stand up our public company, as well as growth investments throughout the year. As you mentioned, Travis, many puts and takes across the separation and spin. But the way that I would...

Thank you.

Speaker Change: have people look at it the way we're looking at it is after three quarters.

Speaker Change: We've really settled in to our business model. We've made those critical investments we needed to make in functions.

Speaker Change: And when we talk about that, we mean areas like cybersecurity, our controllership accounting teams, our legal compliance teams. So we made the investments that we felt necessary to stand up this public company.

We've also layered in growth investments.

Speaker Change: And so, as we exit the year, Q4, at 20.4%, we think that is the run rate that will now carry into 2025.

Speaker Change: but I would remind people that we also have the additional 50 basis point headwind in 2025 as we annualize the costs from the 3M separation related agreement where they can step up costs. And so we had 50 basis points this year, we'll have an additional 50 basis points

Speaker Change: next year as we annualize it. So we're starting with that 20-21% operating margin, and that's, as you all know, 2025 will be the first year of four quarters for the business, and then we'll go to work on improving operating margins from there.

Speaker Change: Okay, thank you and then congrats on the the PNF, the messenger, but I did want to ask, you know, first of all is that

Speaker Change: When you think about the divestiture of the business and the potential to simplify the portfolio, is the P&F divestiture kind of the one big one, or is this going to be other things coming potentially over the course of the next few years? And then on the P&F divestiture, it's a little hard for us to get the models to EPS neutral, so I'm curious how you were thinking about the conservatism built into the EPS impact of that divestiture.

Speaker Change: Anyway, why don't you start with the neutral view on 2025 specifically.

Travis Steed: Maybe talk about the annualized version of it first and then I'll talk about the other part of the question. Sure. Yeah I'm glad you brought that one up Travis because I see a lot of people looking at this on an annualized basis And that's you know, that's not obviously how it's going to play out this year So on an annualized basis, I would agree. It's accretive

Travis Steed: However, we're planning to close this divestiture sometime in the second half as we progress to the end of the year. And so, you know, keep in mind the EPS impact is dependent upon the timing of the close

Travis Steed: the timing and the cost of the tender of the debt, and then obviously timing of stranded cost reductions.

Travis Steed: So we don't know what month specifically the deal will close. It'll be in the second half. But how fast we can tender the debt post-close and at what cost has to be factored in as well. So there'll be a shorter period of time of interest savings than EBITDA savings.

Travis Steed: So it's not just a simple 12-month bath, as some people may be thinking. So altogether, we're planning for the deal to be neutral here in 2025.

Travis Steed: Hopefully that helps. I think some people are looking at it on an annualized basis and that math obviously makes sense.

Jesus created, but

Travis Steed: just given the timing of 25 it's going to be neutral.

Travis Steed: Just on the other part of your question, Travis, I guess the way I would answer it, you know, it's that

Travis Steed: non-answer that you're going to get these situations, I suppose, but maybe I'll give you some color. You know, I think it's pretty obvious that portfolio optimization is an ongoing process. I think the best leadership teams look at this in a perpetual way and are always looking at the value of their portfolio.

Travis Steed: And we're going to continue to do that. We're going to assess the value of our businesses. We're going to make thoughtful decisions on where we're going to invest and where we're not, just like we've said from the beginning.

Travis Steed: and if, and I probably want to make sure that I underline, if

Travis Steed: We determine at some point in the future that a business is more highly valued elsewhere.

Travis Steed: then we'll consider all the appropriate variables to determine whether we should do a transaction.

Travis Steed: We're going to do the normal stuff that everybody does, which is, does it make sense for shareholders? Is it strategic and financial benefit to the company?

Travis Steed: do we have the organizational capacity, but very importantly for us.

We need to make sure that we're always considering.

Travis Steed: tax considerations, tax implications. Do we do anything that could disrupt the tax free nature of the spin? And then obviously, if we're still connected with 3M, when we do a transaction, that TSA bridging is another variable that we have to, we have to consider. But I guess the short story is, it's a never ending process when you look at portfolio optimization.

Great, thanks for that.

Chairman.

Speaker Change: Again, if you'd like to ask a question, press star and then 1 on your telephone keypad. Your next question comes from the line of Vic Chopra from Wells Fargo. Your line is now open.

Vic Chopra: Good afternoon and thanks for taking the questions too for me. I appreciate the situation with tariffs is dynamic but can you help us understand how much of your manufacturing is coming from from Mexico, how much flexibility you have to move production elsewhere and to take price to offset any tariff impact and then I had a follow-up please.

Vic Chopra: Sure, I can take that one and it is certainly the topic of the day, Vic, and so, you know, like others, we're obviously concerned and we're monitoring this very closely.

Vic Chopra: All we know at this point really is that China has had the 10% tariff put on it from the U.S. And given that that's implemented, we are including that small piece in our guide, but it's very small, relatively, given our limited imports from China.

Vic Chopra: But it's really too early to speculate, and that's why we're not including any large tariff impact or potential speculative impact in our guide. Because we really don't know where this is going to land, and there's certainly timing dynamics where it seems to be very fluid and changing a lot.

you know,

Vic Chopra: and we have less manufacturing in China, we have one plant there, two in Mexico.

Vic Chopra: and one in Canada. And so, relative to others, we do think we probably have less exposure. But having said that, we do have plants and businesses in these regions, and depending on where this lands, there may be an impact from terrorists. But at this point, we're not going to speculate on what it is.

Vic Chopra: Maybe the last thing I would just add is one of our segments, HIS, does not have manufacturing production, so it does not have any exposure. So in addition to a lot of our manufacturing being within the U.S.

Vic Chopra: one of our segments doesn't have any exposure at all. So relative to others, we're probably going to have less exposure. And then to your specific question on Mexico, I mentioned we have two plants there. You know, a small percentage of our sales is in those three countries, China, Mexico, Canada, and a pretty relatively small percentage of our production as well.

Speaker Change: Great, thanks for that helpful color. And my follow-up question is, you know, you've sold the purification and filtration business. The majority of the proceeds will be used to repay debt, but are there any plans to initiate a dividend or buy back any stocks? Thank you.

Thank you.

Speaker Change: You probably don't want me answering that question. Yeah, I can certainly take this one.

Vic Chopra: Yeah, as you mentioned, Vic, and we've had in our prepared remarks there, primarily all the proceeds are going to go down to paying debt. Regarding a share repurchase and dividend, we are not planning those.

Vic Chopra: One of the reasons is related to our 3M agreements. So in our tax matters agreement, the 3M...

Vic Chopra: There are certain restrictions with respect to asset sales, and so based on those restrictions, we can't use proceeds for things like share repurchases. So I'll just back up and remind everybody about our capital plan priorities that we've been communicating since our first Investor Day and the spin.

Vic Chopra: where first priority is funding the operations of the business and paying down debt. And that's exactly what we're doing here. And then it also positions us for tuck-in acquisitions, as we've mentioned a couple times here, and that hasn't changed.

Vic Chopra: So the good news is we're now in a position with a delevered and stronger balance sheet to go on offense with M&A

Great, thank you.

Thanks. Thanks, Luke.

Vic Chopra: Your last question comes from the line of Rick Weiss from Stiefel. Your line is now open.

Thank you, and good evening, Bryan. Hi, Wade. Maybe

Rick Weiss: I'll ask another guidance question. I would expect nothing less than from Wade. I would expect more from you, Bryan. I'm sure this is thoughtfully and balanced guidance when we look at the top-line growth and the EPS outlook. Maybe you could...

Rick Weiss: Help us understand that upper end of the guidance range and the things that you're counting on to go right. What gets you to that top end? What could do even help you?

Rick Weiss: do even better and and maybe there's color around commercial execution or or some of the new products in med-surg just help us better understand you know the upper end of things.

Yeah, no, it's a great question.

Rick Weiss: You know, the way that I look at it is, one, and probably one of the most important ones, is not necessarily commercially based, at least not from a performance standpoint, it's the ERP cutovers. You know, if we can get through the ERP cutovers, we've got two pretty material ones.

coming up this year in 25.

Rick Weiss: We've got serious mitigation plans in place to make sure that we don't have any any disruption, but but you know those things can be

Rick Weiss: that can be fickle. And so that's one of the things we're looking at that would, if it goes really well, it helps us get to the top end of that range. You know, if it doesn't go well, then that can push us down to the bottom part of the range. That's probably the biggest variable that's to some extent under our control, but even the best laid plans.

Rick Weiss: don't typically survive first contact with the enemy, right? So that's one. The second one is that, you know, this commercial piece that I talked about. We have hired some really, really good talent.

Rick Weiss: We have a completely new disciplined model in the way that we're going to market. We're specializing the sales organization. We've picked our growth drivers and we're gonna be doubling down in those areas. So if we've picked the right growth drivers and we deliver with that execution model, that helps us get to the top end of the range. No question about it. There's not much we can do to add incremental R&D at this point. That ideation process takes a while, like I mentioned, but we are gonna try to find the gems in the portfolio.

Rick Weiss: We're going to get more aggressive on the prediction of growth in those areas, and then we're going to build the capacity around them. Right now, perfect example, appeal in place in ClinPro, two great products, we way under-clubbed.

Rick Weiss: Because of conservatism, what we thought those products could do, we don't have the capacity to sell them. So we've got to do a better job of that in 25 for those products already in the queue. But those are the two biggest things, the three biggest things actually, that I believe can help us get to the top end of the range.

Rick Weiss: The one that, you know, is going to keep you up at night is the ERP cutover. We've got to do our job to mitigate that.

Speaker Change: Gotcha. That's great, Bryan. And maybe just last for me, just a more focused one. We haven't talked much about HIS.

Speaker Change: and I just wanted to, you know, not knowing much about this space.

Speaker Change: coding, just where are we and where are you in realizing this opportunity? What are you expecting? What are you assuming for this year? It's now going to be, you know, post this sale.

Speaker Change: a bigger piece and more important piece of the business. So just help update us. I know we'll talk more about it at the analyst day too, but thank you, Bryan.

Speaker Change: Yeah, yeah, so they were again So I will never do it the same justice that Gary will do when she gets up on stage and she presents her business But I'll give you the importance of autonomous coding

Speaker Change: from a layman's perspective, and here's what you've got to know about revenue cycle management. It is a very

labor-intensive process.

Speaker Change: with a lot of things that change and what you typically find is it's hard to find the people that know how to do the coding.

Speaker Change: And so you're always pressed on being able to get people to do this well, and they make mistakes. It's just human error. You can make mistakes. And so what we're trying to do is to take the pressure on the FTE side of the equation out of the equation by doing autonomous coding. I would say we're early in the phases of this. We've got to prove it out.

Speaker Change: But but we do believe that the technology could apply to 50 to 90 percent of cases. That's that's significant that that's important Now we got to prove that it works and we've got to be able to validate that our autonomous coding can do it as Well as people can if not better, but the idea would be you take that labor

Speaker Change: challenge out of the picture. You also reduce mistakes because you've got an AI system that's going to be able to do it likely better without the mistakes that a human would do.

Speaker Change: and you bring down the cost and the efficiency as a result of it. It's pretty exciting, you know, for us, because we're so highly penetrated within Compass 360, which is our software package for RCM, this is the next potential area of growth. That and data integrity, which is another interesting area that you'll hear more about on March 20th.

Speaker Change: But I like what I'm hearing we just got to prove it out

Thank you so much.

Absolutely.

Amy Wakeham: I will now turn the call back over to Amy for closing remarks.

Amy Wakeham: Great. Thank you, Ellie, and thank you to everyone who joined us. Thank you for listening and for your questions. We appreciate your interest in Solventum. If you have follow-up questions or need anything else, please don't hesitate to reach out directly. This concludes our fourth quarter 2024 earnings call. Ellie, you can now close us out.

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