Solventum Corporation Price & Performance (SOLV)

You are encouraged to review the supporting schedules in today's earnings press release to reconcile the non GAAP measures with the GAAP reported numbers. Additionally, our discussion on today's call will include forward looking statements including, but not limited to, expectations about our future financial and operating performance, make these statements based on reasonable assumptions However, our actual results could differ.

Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward looking statements made today.

Following our prepared remarks, we'll hold a Q and A session. For the Q and A portion of today's call, please limit yourself to one question and one related follow-up. 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 Brian. All right, great. Thanks, Amy, and to all of our shareholders and everyone interested in our company story, want to say thanks for joining us today as we review our fourth quarter and full year results for fiscal year twenty twenty four. 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. But first, I just want to take a minute to acknowledge that the team has done a a really good job progressing over the past three quarters post our separation. And we closed out fiscal year twenty twenty four with solid performance across our businesses, which positions us well for 2025. 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, got to say that I'm even more excited about the opportunities ahead. 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 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. And our fourth quarter results demonstrate that our separation and and point to the improving results that we expect as we go forward. 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. 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. Looking back before our spin, 3M Healthcare saw seven quarters of negative volume growth. Now stopping that decline and reversing it, especially amid a complex separation global restructuring, a talent and cultural transformation and a significant divestiture process any of which pose 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.

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 is your dedication and you're the reason why we're ahead of plan. 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. 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, MedSurg. We continue to focus on driving the adoption of our recently launched and as I've shared before, this product gives us really three advantages. [indiscernible] it simplifies the procedure 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 We remain very focused on increasing capacity to meet the strong demand for this product. And in our Dental Solutions business, early customer response to the Q4 launch of our first to market three d printed clarity precision grip attachment has been very positive.

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

The products we discussed back in Q3 or the launch in Q3 Clinpro Clear Fluoride treatment and Filtek Easy Match are continuing to resonate with our customers as well. And in the case of Klimpro, as I mentioned before, this is another launch where we are rapidly increasing our manufacturing capacity to meet the strong demand. Okay, moving to our Health Information Systems business We continue to focus on our new autonomous coding payment models. And the team now believes that between fifty percent and ninety percent of cases have the potential to be automated. And that's thanks to our AI driven autonomous coding technology, which 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 and our technologies both computer assisted and the emerging autonomous coding, quality demands and local, state and organizational specific guidance. 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. The value of our differentiated technology and reoccurring revenue model.

We'll provide more details obviously shortly, but I want to emphasize this business is well positioned for growth under its new owner, offers a strong fit strategically. 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 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. In this phase, we've been focused on driving an inspiring mission, enhancing talent building a new culture, we one that values decentralized decision making speed and accountability. And of course, it includes all of our many separation activities. On the mission front, we've met with teams around the globe and 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 I can tell you that the reception has been incredibly positive and it's helping us build a unified once all Benton mindset, which is absolutely instrumental in driving improved performance, particularly when you're looking at sustained improved performance. In terms of talent, we've moved aggressively to address capability gaps. Within just a few quarters post spin, we've built a leadership team where 8080% of our leaders are new to the company bringing deep sector and transformation experience with many of them having specific spin experience as well. We've also made meaningful progress enhancing key positions that are critical to our performance transformation. Of these positions, 60% against 60% were filled by current employees and 40% by external hires. Both groups chosen for their relevant experience and capabilities for this transformation. This shift is happening throughout the organization with what I call trickle down talent, raising the bar for excellence at every level of the company. And in terms of culture, we Solventum leaders who embody our values and culture. Also supports this culture. Okay. And finally, on the separation front, Our ability to execute and deliver on our strategic and financial objectives does not make the deep and unique entanglement between three ms and Solventum any less complex.

It is a very complex separation. And there clearly remains risk to the separation work ahead. With key milestones that will be happening in 2025, and 2026. 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. Okay, moving on to Phase two. In Phase two, we've been focusing on a establishing a long term strategic plan to unlock profitable growth and capture the value of the attractive markets where we play. A key part of this phase has been analyzing the markets, the submarkets 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. And as a result, we said we'd be ready to share our long range plan during this call. Separate the strategic discussion from this earnings call. Particularly in light of the pending sale of our P and F business. And as a result, we'll unveil our long term strategy at our Investor Day on March 20, New York City, 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.

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. And the recently announced divestiture of our Purification and Filtration segment a direct result of our Phase three review. This decision will streamline our focus, reduce our leverage and improve key metrics. We are confident confident that PNF with its highly motivated and innovative team will thrive under Thermo Fisher. And I just want to take a minute to personally thank the PNF team. For getting us to this point and I have every confidence and deliver innovative solutions to your customers. So in closing, 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 three ms Healthcare business is under performed its markets in the past. 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. 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 are confident that the changes we've already made combined with our forward looking strategy will continue to accelerate sustainable volume growth and ultimately deliver significant shareholder value.

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 separation and of course the divestiture. [indiscernible] Thanks, and thank you to everyone at Solventum for delivering on a As you heard from Brian, we've made significant progress in a relatively short time since our spin last March.

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.

Overall, the separation is on track we are executing against separation milestones.

While delivering on our financial goals.

To date, we have exited roughly one quarter of over 200 transition service agreements and we are planning to exit all transition service agreements over the next two years.

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

While we've made significant progress separating, 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, Our progress to date is encouraging, 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. Starting with sales, fourth quarter twenty twenty four sales of $2,100,000,000 increased 2.3% compared to prior year an increase 1.9% on a reported basis. Which reflects positive momentum and an easier year over year comparison. During the quarter, foreign exchange was a 60 basis point headwind as the U. S. Dollar strengthened considerably against most major currencies. Sales performance benefited from favorable volumes, with pricing back to a normalized range consistent with our expectations. While there remains significant work to sustainably elevate our growth, we are encouraged by the initial volume improvements post spin. Moving to the segments. Our largest segment, MedSurg, delivered $1,200,000,000 of sales, an increase of 1.8% on an organic basis. Growth was led by higher OEM and advanced wound care Within Advanced Wound Care, growth was driven by negative pressure wound therapy consumables, and continued market adoption of single use negative pressure wound therapy.

Our Dental segment delivered $315,000,000 of revenue, an increase of 4.2% on an organic basis.

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, Our Health Information Systems segment contributed $336,000,000 of revenue an increase of 1.1% on an organic basis which benefited from adoption our revenue cycle management platform solution. Strength in revenue cycle management was partially offset by a decline in clinician productivity solutions. Finally, the Purification and Filtration segment delivered $235,000,000 of sales, an increase of 3.5% on an organic basis fueled by continued strength our bioprocessing filtration and industrial filtration, Performance in these areas was partially offset by declines in membranes. Looking down the P and 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 three ms as part of the supply agreement. Gross margins decreased sequentially as expected However, they were partially mitigated by favorable product mix benefits. 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, Altogether, our operating expenses were in line with our expectations excluding divestiture related spend. Note, we will start to benefit from savings of our recently announced restructuring in Q1. We'll touch more on future spending levels as part of 2025 guidance. In total, we delivered adjusted operating income of $422,000,000 which translates to operating margin of 20.4%. Slightly ahead of our expectations. Moving down the P and L to non operating items, our net interest expense remained consistent We also absorbed some one time expenses associated with the write down of legacy three ms investments. 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%. All in, we delivered earnings per share of $1.41 ahead of our expectations. Before providing our 2025 guidance, let's recap our first fiscal year as a public company. 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. As a result, we generated organic sales growth ahead of our initial On the bottom line, generated non GAAP earnings per share of $6.7 Also ahead of our initial earnings per share guidance, driven by the better sales performance.

Turning to the balance sheet. We ended the year with $762,000,000 in cash and equivalents with no outstanding borrowings on our credit facility and we made cumulative repayments of 300,000,000 on our $1,500,000,000 prepayable term loans. This includes an additional $100,000,000 debt pay down during Q4. We also generated $92,000,000 of free cash flow in Q4 bringing our year to date total free cash flow to $8.00 $5,000,000 just above the initial guide range for the year. 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. 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. We anticipate net proceeds will be used primarily to pay down debt and are committed to achieving solid investment grade ratings. With an expected close by the end of twenty twenty five, we anticipate the impact to earnings per share be neutral 2025. Now turning to our initial 2025 guidance and outlook. Similar to our approach to guidance for 2024, we'll continue to provide our organic sales growth, earnings per share free cash flow metrics.

Given we are still a new company, we are also providing some additional considerations at the outset of the year. Keep in mind, this guidance is for the total company. Including the Purification and Filtration business. We will provide updated guidance the transaction closes. Reported sales growth will be impacted by recent strengthening of the U. S. Dollar which we estimate will create an expected 150 basis with the biggest impact on Q1. We expect organic sales growth of 1% to 2% which is net of an estimated 50 basis point impact related to exits. Excluding the 50 basis point impact, our normalized annual growth outlook is 1.5% to 1.5%. Our normalized annual growth outlook is 1.5% to 1.5%. Our normalized annual growth outlook is 1.5 to 2.5% This reflects the expected underlying improvement for volume across our business segments as we execute against the phased approach to reposition for growth. 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. This will have a 50 basis point impact on 2025 and a 100 basis point impact on 2026. Executing this initiative simplifies our supply chain, saves rebranding dollars and also improves our operating metrics over time.

Looking down the P and L, we expect operating margin between 2021%, This outlook includes annualizing the roughly 100 basis point headwind associated with the higher cost of sales, from the three ms supply agreement in the first half. Additionally, we expect savings from our Solventum and weigh restructuring program will more than offset the annualization of stand up costs and growth 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. Moving now to earnings per share. We are guiding to a range of $5.45 to $5.65 This includes an additional quarter of interest expense in Q1 twenty twenty five. 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, our guidance does not assume any tariff impact at this time given the current dynamic environment and an inability to predict potential financial impact, We're also providing free cash flow guidance in the range of $450,000,000 to $550,000,000 which contemplates capital expenditures between $350,000,000 and $450,000,000 as well as annualizing higher interest expense and one time separation expense.

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 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. 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. We've consistently delivered on our near term financial objectives, while executing on our separation activities and focusing on turning around the business. Looking ahead, we'll continue to execute on our three phased approach [indiscernible] and we use our collective expertise in health, material and data science to deliver on our mission. 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. We look forward to our upcoming Investor Day when we plan to share more about the path ahead.

Including our long range financial guidance. With that, I'll now hand it back to the operator for the Q and A portion of the call. Thank you. We'll pause for a brief moment to compile the Q and A roster. Your first question comes from Jason Bednar from Piper Sandler Your line is now open.

Hey, good afternoon. Thanks for taking the questions. I don't think I heard Brian or Wade a buildup or a construction of 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 MedSurg at or above the range, dental below the range, anything like that would be Hey, Jason, it's Wade. As you've mentioned, we're not providing guidance at the segment level. But what we would say is initiatives that we have underway cuts across all four segments. You've 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. 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. And so those are all 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.

One other thing I'll just add too is in the upcoming investor Day on March 20, 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 You ain't gonna give guidance by business, but you'll get a better feel of what they're thinking.

All right. Looking forward to that. Thank you. And then just the free cash flow guidance was a little bit lighter than we were thinking. 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 on one time in there And maybe I asked that if I had wrong in a wrong way, but just what's explaining that lighter guide, at least relative to what we're modeling and how others are probably modeling it as well?

Yes. 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. So we've given the CapEx piece and of course we've got our earnings per share guidance out there. 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 just over $130,000,000 of non GAAP separation related costs. 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. 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 $25,000,000 is the year that we've got a lot of separation costs to transition out of our TSAs and then as I mentioned good sized step down in '26 and then again in '27.

All right.

Very helpful. Thanks, Jason.

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

Beautiful. Thanks, guys. I had one kind of financial question and then a quick follow-up. The 2026 Q rationalization I'm sure on the 2020, you guys will get into this a little bit more. But just conceptually, is it fair to assume that while you're going to have 100 points of organic growth headwind on that side, but we should see something on the operating margin as there's efficient [indiscernible] there? Is that just fair that there will be some kind of an offset from the efficiencies below in the P and L?

Yeah, I'm glad you brought that one up Patrick. As we mentioned in our prepared remarks, we will see some revenue as well as margin improvement, but it's really small. I think ten, twenty basis point type of improvements. 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 is big. And we also wanted to get in front of all the rebranding efforts that we have to do across all of our products. 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 will be included in our long range guide that we provided at the 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, appreciate the comments on M and A. If I dial my mind back to about a year ago or so when we were originally chatting, you guys are running way ahead in terms of restructuring the group with the P and S sale and that side. You're talking about M and A. I mean, I guess it's one thing financially to be in a place where you can execute. But how ready is the organization, 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?

Yes, it's a great question. I would say one of the nicest things about the PNF transaction is it does pull in the time we would be able to transact from an M and A perspective. It doesn't really change the strategy, but it definitely moves up our timeline And we've been building capacity for that We've been adding people that are capable in the area. From a scouting perspective, from a deal negotiation standpoint, point, integration, you name it. I think we really want to make sure that capacity wouldn't be a reason why we couldn't move forward with tuck in M and A. 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 park that we're in. So it does move our timeframe up. I believe we have the [indiscernible] I'd be thinking about early twenty twenty six as the time frame. Because there's a, we want to make sure that we pay down debt.

And we're on top of that for a period of time with a really nice leverage ratio and then we'll start moving in that direction.

Super helpful. Thanks so much guys. Thank you.

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

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 it's pretty clear on the volume side that that's driving the turnaround here and the pricing of unfolding as you have communicated But maybe you could just sort of unpack for us 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?

Maybe I'll start with that one, David, and then Wade, do you want to add any color? I've been talking about the improvement that we need [indiscernible] what I just defined as three vectors. It's really not rocket science, right? There's only three ways that you start to collect growth in the business. That's either one, commercial excellence, I want to call it organic or R and D innovation and then M and A, right? Those are the three vectors. I would just say on the commercial excellence, that's the fastest It can almost be immediate and I'll talk a little bit more about that in a second. The second is R and D and that takes a little bit longer, usually eighteen months to three years in the space that we're in from ideation to launch. And of course, M and A depends on your balance sheet your readiness from a capacity standpoint and then very obviously, attractive assets that would need to be available. I'd just say that out of the gate here, we're very much focused on leveraging commercial excellence. That's the primary factor of improvement. Then of course, some of the existing R and D pipeline that I talked about in my prepared remarks.

But a lot of what we're focusing on now is commercial excellence. We've made significant changes in shifted the compensation towards growth We've upscaled in our accountability culture. You've got to be urgent and accountable and deliver results in this organization now. Not delivering results is not acceptable 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 given the tools needed to be successful. And then we 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 and D gems that we found in a bit of an anemic pipeline and we're going to be leveraging those in the short term. But here's the thing, maintenance, we are going to be building a stronger innovation pipeline. It is going to be driven off of the focus strategy that we're going to talk about coming in March 20, And we will use the PNF sale proceeds after we digest it for a period of time to move quicker into that M and 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.

So I think Brian covered that obviously really well. We've got a lot of 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. 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 In the second half of the year, we saw that reverse and we saw our price come into more of a normalized range We see volume now more than all the growth. And so we're seeing a nice momentum in bill of volume improvement across our businesses. 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 vein of thinking, in 2025, we've got a 1% to 2% guide but that now includes the 50 basis point of SKU headwind. So normalized, that's 1.5% to 2.5% That's coming off of a year of 1.2% where price was a a good size 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 Brian just mentioned. Those improvements across the business and that's what gives us confidence to guide in that 1.5 to 2.5% on a normalized basis for 2025.

That's helpful. And I feel here tell me that you're going to cover this next topic at the Analyst Meeting. I'm hoping to get a little bit of color which is just on what's happening in your end markets, because as I look at your performance and then the peers that we're 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% So you've gone through the separation here, is there maybe you could just update us on your on your thoughts on what's happening in these end markets and where is the competition doing better than you? And maybe help us provide a little bit more color on the confidence you have in that market outlook? [indiscernible] 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. 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 comp. And so the best way to think about our dental performance is to blend it with Q3. Because that's why the easy comp 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.

That said, we are seeing some good performance in many products at the launching and Karim, who's our leader of that business, will talk more about it on March 20. 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. But it's mainly because of a comp difference. Okay. We'll look forward to more on the twentieth. Thank you.

Okay, Matt. Thanks so much.

Your next question comes from the line of Travis Steve from Bank of America. Your line is now open.

Hey, thanks for the question. Wade, I wanted to touch on the operating margin guide, the 20% to 21% in 2025. Looks like you're already kind of at 21.3% since you've been post spend. I know there's a lot of moving parts between that and 2025. So just trying to if there's a way to think about kind of the puts and takes on that 25% off margin guidance there's a way to kind of evaluate the underlying performance of of your margin expansion and progression over the course of the year and how to think about kind of the puts and takes there?

Sure. Yes. And it certainly has been a journey. Our first quarter when we went public in Q2, [indiscernible] 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 have people look at it and so the way we're looking at it is after three quarters, we've really settled in to our business model. We've made those critical investments we needed to make in functions When we talk about that, we mean areas like cybersecurity, our controllership accounting teams, our legal compliance teams, we made the investments that we felt necessary to stand up this public company. We've also layered in growth investments. And so as we exit the year, Q4 at 20.4%, we think that is the run rate that will now carry into 2025. Then we'll start to build upon it. And so we've got a guidance range of 20% to 21% But I would remind people that we also have the additional 50 basis point headwind in 2025 as we annualize the costs from the three ms 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 next year as we annualize it So we're starting with that 20% to 21% operating margin and that's as you all know 2025 will be the first year of four quarters the business and then we'll go to work on improving operating margins from there. Okay.

Thank you. And then congrats on the P and L divestiture.

But I did want to ask, first of all, is that when you think about that kind of the divestiture of the business and the potential to to simplify the portfolio, is the PNF 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 and F divestitures, a little hard for us to get the models to EPS neutral. Curious how you're thinking about the conservatism built into the the EPS impact of that divestiture?

Hey, wait, why don't you start with the with the neutral view on 2025 specifically?

Maybe talk about the annualized version of it first and then I'll talk about other part of the question.

Sure. Yeah. I'm glad you brought that one up, Travis, because I see a lot people looking at this on an annualized basis and that's not obviously how it's going to play out this year. So on an annualized basis, I would agree it's accretive. However, we're planning to close this divestiture sometime in the second half as we progress to the end of the year.

And so keep in mind, the EPS impact is dependent upon the timing of the close the timing and the cost of the tender of the debt obviously, timing of stranded cost reductions. 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. So it's not just a simple twelve month path, as some people may be thinking. So altogether, we're planning for the deal to be neutral here in 2025.

Hopefully, that helps. I think some people are looking at it on an annualized basis and that's obviously makes sense to you to just create it, but just given the timing of '25, it's going to be neutral. Just on the other part of your question, Travis, I guess the way I would answer it It's that non answer that you're going to get these situations, I suppose, but maybe I'll give you some color. I think it's pretty obvious that portfolio optimization is a 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. And we're going to continue to do that. We're going to assess the value of our business as 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.

And if and I probably want to make sure that I underline if we determine at some point in the future that a business is more highly valued elsewhere, then we'll consider all the appropriate variables to determine whether we should do a transaction. And 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, we have the organizational capacity? But very importantly for us, we need to make sure that we're always considering tax consideration, 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 three ms when we do a transaction, that TSA bridging is another variable that we have to consider. But I guess the short story is it's a never ending process you look at portfolio optimization. [indiscernible] Your next question comes from the line of Vic Chopra from Wells Fargo. Your line is now open.

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

Sure. I can take that one and it is certainly the topic of the day, Vic. And so Like others, we're obviously concerned and we're monitoring this very close 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 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 with it. It seems to be very fluid and changing a lot. Having said that, we do believe our global footprint likely has less exposure than many other countries. We have less manufacturing in China. We have one plant there, two in Mexico. And one in Canada. And so relative to others, we do think we probably have less exposure having said that, we do have plants and businesses in these regions and depending on where this lands, there may be an impact from tariffs.

But at this point, we're not going to speculate on what it is. 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 in addition to a lot of our manufacturing being within The U. S, 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. A small percentage of our sales is in those three countries, China, Mexico, Canada and pretty relatively small percentage of our production as well.

Great. Thanks for that helpful color. And my follow-up question is, you sold the purification and filtration business The majority of the proceeds will be used to repay debt. Are there any plans to initiate a dividend or buyback any stock? You probably don't want me answering that question. Yeah. I can certainly take this one.

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. One of the reasons is related to our three ms agreements. So in our tax matters agreement, the three ms, there are certain restrictions with respect to asset sales. 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. 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 of times here that hasn't changed. So the good news is we're now at a position with a delevered and stronger balance sheet to go on offense with M and A. Great. Thank you.

Your last question comes from the line of Rick Wise from Stifel. Your line is now open. Thank you and good evening, Brian, Hi Wade.

Maybe I'll ask another guidance question. I would expect nothing less than from Wade expect more from you, Brian.

I'm sure this is thoughtfully and balanced guidance. When we look at the top line growth and the EPS outlook. Maybe you could help us better understand. We've heard a lot of the headwinds in the incremental the SKU exit impacts. But 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 do even better and maybe there's color around commercial execution or some of the new products in MedSurg, just help us better understand the upper end of things.

Yes. No, it's a great question. 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 from a performance standpoint, it's the ERP cutovers. If we can get through the ERP cutovers, you've got two pretty material ones. Coming up this year in 2025. We've got serious mitigation plans in place to make sure that we don't have any disruption, but those things can be they 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. If it doesn't go well, then that pushes 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. Don't typically survive first contact with the enemy, right? So that's one. Second one is that this commercial piece that I talked about, we have hired some really really good talent. We have a completely new model in the way that going to market. We're specializing the sales organization. We've picked our growth drivers and we're going to be doubling down in those areas.

So if we pick 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 and D at this point. That ideation process takes a while like I mentioned. But we are going to try to find the gems in the portfolio. Going to get more aggressive on the prediction of growth in those areas and then we're going to build the capacity around them. But right now, perfect example, a film place in Clinpro, two great products we're way under clubbed. Because of conservatism, what we felt 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 2025 because 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.

The one that just going to keep you up at night is the European cutover.

We got to do our job to mitigate that. Got you. That's great, Brian. And maybe just last for me, just a more focused on, we haven't talked much about HIS. And I just wanted to not knowing much about this space, really, I just wanted to better understand when you talk about 50% to 90% of cases could be automated in the autonomous coding. Just where are we in where are you in realizing this opportunity?

What are you expecting? What are you assuming for this year? It's now going to be post this sale. 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, Brian.

Yeah.

Yeah. Absolutely. Very good. So 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. From a layman's perspective. And here's what got to know about revenue cycle management. It is a very labor intensive process 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. So you're always pressed on being able to get people to do this well and they make mistakes, it's just human error, it's going to 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. But we do believe that the technology could apply to 50% to 90% of cases. That's significant. That's important. Now we got to prove that it works, and we 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 to take that labor 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 lightly better without the mistakes than a human would do.

And you bring down the cost and the efficiency as a result of it.

It's pretty exciting for us because we're so highly penetrated within Compass three sixty, 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 hear more about in March 20, But but I like what I'm hearing. Just got to prove it out. Thank you so much.

Absolutely. I'll now turn the call back over to Amy.

For closing remarks.

Great. Thank you, Ali, 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 followed follow-up questions or need anything else, please don't hesitate to reach out directly. This concludes our fourth quarter twenty twenty four earnings call. LAU can now close us out.

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