Solventum Corp Q4 FY2024 Earnings Call

Good afternoon. My name is Ellie, and I will be your conference call operator today. I would like to welcome everyone to Solventum's Fourth Quarter 2024 Earnings Call. As a reminder, this conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. 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.

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 Wayde McMillan, our Chief Financial Officer. A replay of today's earnings call will be available later today on the Investor Relations section of our corporate website. The earnings press release and the presentation are both available there now. During today's call, our discussion and any comments will be on a non-GAAP basis, unless they are specifically called out as GAAP. The non-GAAP information discussed is not intended to be considered in isolation or as a substitute for the reported GAAP financial information. You are encouraged to review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers. Additionally, our discussion on today's call will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions. However, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. Following our prepared remarks, we'll hold a Q&A session. For the Q&A portion of today's call, please limit yourself to one question and one related follow-up. 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.

All right. Great. Thanks, Amy. And to all of our shareholders and everyone interested in our company story, I want to say thanks for joining us today as we review our fourth quarter and full-year results for fiscal year 2024. 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 & Filtration business to Thermo Fisher. 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 closed out fiscal year 2024 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, I must say that I'm even more excited about the opportunities ahead. For those of you who 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. And the second is that we are 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 transformation activities have taken root 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. 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 could pose real risks 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 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, 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, we're 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 V.A.C. Peel and Place dressing. This product gives us three advantages: it simplifies the procedure; it reduces procedure time; and 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. We remain very focused on increasing capacity to meet the strong demand for this product. 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. This solution focuses on ensuring predictable aligner therapy and is designed to simplify the procedure, thus boosting practice efficiency. The products we discussed back in Q3 or the launch in Q3, Clinpro Clear Fluoride Treatment and Filtek Easy Match, continue to resonate with our customers as well. In the case of Clinpro, as I mentioned before, this is another launch where we are rapidly increasing our manufacturing capacity to meet strong demand. Moving to our Health Information Systems business, we continue to focus on our new autonomous coding payment models. The team now believes that between 50% and 90% of cases have the potential to be automated, thanks to our AI-driven autonomous coding technology, which is focused on saving time and money for our customers when they look at revenue cycle management. Medical coding is incredibly complex, and our technologies—both computer-assisted and the emerging autonomous coding—can account for regulatory changes, quality demands, and local, state, and organizational-specific guidance. Of course, that brings us to our Purification & Filtration business, where we saw another quarter of robust demand for our bioprocessing solutions business, giving us confidence in the end markets' strength and the value of our differentiated technology and recurring revenue model. Moving on to our transformation phases, I want to take a few minutes to discuss our progress across the three phases we presented at our initial Investor Day last year. Phase 1 is all about laying the foundation for success. We have been focused on driving and inspiring our mission while enhancing talent and building a new culture that values decentralized decision-making, speed, and accountability. It includes many separation activities. We've met with teams globally to directly engage our team members and share our new mission and values. The reception has been incredibly positive, helping us build a unified Solventum mindset, which is instrumental in driving improved performance. Regarding talent, we've moved aggressively to address capability gaps, building a leadership team where 80% of our leaders are new to the company, bringing deep sector and transformation experience. We've also made meaningful progress in filling critical positions for our performance transformation. The organization is also trickling down with talent, raising the bar for excellence at every level. In terms of culture, we've selected leaders who embody our values and culture to help model new behaviors, implemented a global restructuring through our Solventum Way program, and ensured that our structure supports this culture. Moving to Phase 2, we've been focusing on establishing a long-term strategic plan to unlock profitable growth in attractive markets. A key part of this phase is analyzing the markets, submarkets, and businesses to shape our long-range strategy. We said we would share our long-range plan during this call. After receiving feedback from many of you, we realized it would be better to separate the strategic discussion from this earnings call, particularly given the pending sale of our P&F business. We'll unveil our long-term strategy at our Investor Day on March 20 in New York City, where we'll provide more details on each segment and our progress. Finally, Phase 3 is about optimizing our portfolio. This phase involves assessing the value and strategic alignment of our businesses, and the divestiture of our Purification & Filtration segment is a direct result of our Phase 3 review. This decision will streamline our focus, reduce our leverage, and improve key metrics. We're confident that P&F, with its highly motivated and innovative team, will thrive under Thermo Fisher. I want to personally thank the P&F team for their contributions to this point. In closing, we're progressing steadily on our transformation. Through analysis and leveraging both internal and external perspectives, we understand why the 3M Healthcare business has underperformed in the past. Our primary focus at the upcoming Investor Day will be to share our findings, discuss improvements, and reveal key elements of our long-term strategy and financial plan. As a preview, we have an incredible value creation story ahead. We're confident that the changes made, combined with our forward-looking strategy, will accelerate sustainable volume growth and deliver significant shareholder value. I'll now turn it over to Wayde to walk us through the financial results in more detail and provide our guidance for 2025.

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. 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, and we're executing against our milestones while delivering on our financial goals. To date, we have exited roughly one-quarter of over 200 transition service agreements and plan to exit all transition service agreements over the next two years. We've 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 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, and I want to thank our global team for their efforts in this large-scale separation. Now turning to our Q4 results. Starting with sales. Fourth quarter 2024 sales of $2.1 billion increased 2.3% compared to the prior year on an organic basis and increased 1.9% on a reported basis, reflecting 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 $1.2 billion 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 million of revenue, an increase of 4.2% on an organic basis. 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 million of revenue, an increase of 1.1% on an organic basis, benefiting from adoption of our revenue cycle management platform solution. Strength in revenue cycle management was partially offset by a decline in clinician productivity solutions. Finally, the Purification & Filtration segment 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. Looking down the P&L, gross margin was 56.2% in the quarter, slightly ahead of our expectations and down 100 basis points versus the prior year. Results include approximately 100 basis points of increased costs paid to 3M 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've shared before, the added spend reflects public company stand-up costs and growth investments to support our transformation. Q4 spending also included Purification & Filtration divestiture costs. Altogether, our operating expenses were in line with our expectations, excluding divestiture-related spending. Note that we will start to benefit from savings of our recently announced restructuring in Q1, and we'll discuss future spending levels as part of our 2025 guidance. In total, we delivered adjusted operating income of $422 million, which translates to an operating margin of 20.4%, slightly ahead of our expectations. Moving down the P&L to non-operating items, our net interest expense remained consistent. We also absorbed one-time expenses associated with the write-down of legacy 3M 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 a 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 expectations. 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 better sales performance. Turning to the balance sheet, we ended the year with $762 million in cash and equivalents with no outstanding borrowings on our credit facility. We made cumulative repayments of $300 million on our $1.5 billion pre-payable term loans, including an additional $100 million debt pay down during Q4. 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 guidance range for the year. Regarding the Purification & Filtration divestiture, it is a major milestone for our portfolio transformation strategy. When the transaction closes, we expect margins will improve, enabling us to accelerate our timeline to deleverage the balance sheet and positions us to begin executing our strategy for 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 2025. We anticipate the impact on earnings per share to be neutral in 2025. Now turning to our initial 2025 guidance and outlook. Similar to our approach to guidance for 2024, we will continue to provide our organic sales growth, earnings per share, and free cash flow metrics. We're also providing some additional considerations at the outset of the year. Keep in mind, this guidance is for the total company, including the Purification & Filtration business. We will provide updated guidance when the transaction closes. Reported sales growth will be impacted by the 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 1% to 2%, which is net of an estimated 50 basis point impact related to SKU exits. Excluding the 50 basis point impact, 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 our 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%. Executing this initiative simplifies our supply chain, saves rebranding dollars, and also improves our operating metrics over time. Looking down the P&L, we expect operating margin between 20% and 21%. 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. Additionally, we expect the savings from our Solventum Way restructuring program will more than offset the annualization of stand-up costs and growth investments in 2025. We expect the net savings of the restructuring to increase through the year, resulting in an expected ramp for operating margins from Q1 into the second half. 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 2025, and as mentioned earlier, we expect the divestiture of our Purification & Filtration business to be neutral to earnings per share when closed later this year. 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 are also providing free cash flow guidance in the range of $450 million to $550 million, which contemplates capital expenditures between $350 million and $450 million, as well as annualizing higher interest expense and one-time separation expense. 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 we 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 will continue to execute on our three-phased approach to transform our business, leveraging 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, where we plan to share more about the path ahead, including our long-range financial guidance.

Thank you. Your first question comes from Jason Bednar from Piper Sandler. Your line is now open.

Hi. Good afternoon. Thanks for taking the questions. I don't think I heard, Bryan or Wayde, 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 kind of at or above the range, Dental below the range? Anything like that would be very helpful.

Jason, it's Wayde. As you mentioned, we're not providing guidance at the segment level. But I would say that the initiatives we have underway cut across all four segments. 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. These will be more short-term improvements in nature, looking at new products, and our innovation pipeline to accelerate growth as well. So both of those are taking root in all four of our segments. We would expect all segments to continue to improve, but we're not giving specific segment guidance.

One other thing I'll just add, too, is in the coming 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. That will give you some more color on what they would expect. Again, we're not even going to give guidance by business at the meeting, but you'll get a better feel for 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 free cash flow after interest payments? Or is there anything else of one-time in there?

Yes, we're just a little below consensus there, and we were keeping an eye on that one because one of the things we've been building up over time is total cost of separation. I think that's probably what you're getting at, Jason. We've given the CapEx piece, and of course, we've got our earnings per share guidance out there. The piece really, I think, is separation that I would point people to. The best way to forecast that or model that would be to look at our Q4 exit rate of just over $130 million of non-GAAP separation-related costs and run rate that into 2025. Just a little step up would be a good place to have it for 2025. That's where our biggest spend is going to be. 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 will be the year with a lot of separation costs to transition out of our TSAs. After that, there will be a good-sized step down in 2026 and again in 2027.

All right. Very helpful. Thank you, guys.

Thanks, Jason.

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

Beautiful. I had one kind of financial question and then a quick follow-up. The 2026 SKU rationalization—I’m sure on the 20th you guys will get into this more—but just conceptually, is it fair to assume that while you're going to have a 100-point organic growth headwind that we should see some kind of an offset from the efficiencies below in the P&L?

Yes, 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 10 to 20 basis points type of improvements. It's really about simplification of the business. That's why we run the process and get 8% of our SKUs out of the supply chain. We also want to get in front of all the rebranding efforts across our products. But, we do get a small benefit in sales growth and gross and operating margins, and that will be included in our long-range guide 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. I appreciate the comments on M&A. If I dial my mind back to about a year ago or so, when we were chatting, you guys were running way ahead in terms of restructuring the group with the P&F sale on that side. You're talking about M&A. 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 a lot 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. One of the nice things about the P&F transaction is it does pull in the timeframe 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. We've been building capacity for that, adding people capable in the area from scouting, deal negotiation, integration, you name it. We want to ensure that capacity wouldn't be a reason we couldn't move forward with tuck-in M&A. The nice aspect is that we're discussing smaller transactions here. We're in great markets. We don't have to do anything large or risky; we can look at picking up innovation, driving into the commercial channel that we have, and getting more out of markets that we're in. So it does move our timeframe up, and I believe we have the capacity to do it. I'd be thinking about early 2026 as the timeframe, as we want to pay down debt and remain on top of that for a period with a solid leverage ratio before moving in that direction.

Super helpful. Thanks so much, guys.

Yes.

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 start with the topline performance that has improved as we've gone through the course of 2024. It seems pretty clear that volume is driving the turnaround here, and pricing is unfolding as you have communicated. Could you unpack for us what are the factors influencing the topline performance as you exit 2024? And how you thought about those key underlying drivers as you put together the 2025 outlook?

Maybe I'll start with that one, David, and then Wayde, if you want to add any color. I've been talking about the improvement we need through what I defined as three vectors. It's really not rocket science; there are three ways to start to collect growth in the businesses: one, commercial excellence; two, organic or R&D innovation; and three, M&A. Those are the three vectors. I would just say on commercial excellence, that's the fastest and can almost be immediate, and I'll talk more about that in a second. The second is R&D, which takes longer—usually 18 months to three years from ideation to launch. M&A depends on your balance sheet readiness from capacity and attractive assets being available. Right now, our focus is on leveraging commercial excellence as the primary vector of improvement, along with some existing R&D from our pipeline. We're making significant changes in talent, shifted compensation towards growth, and increased accountability culture. You've got to be urgent and accountable to deliver results now—failure to do so isn't acceptable. We've also enhanced the sophistication of our commercial operations, which is vital to support our team's success. We're specializing our teams as well. So this push is happening now, and alongside some R&D gems we found in the pipeline, we plan on building a stronger innovation pipeline next. We will leverage the P&F sale proceeds to move quicker into M&A too, but right now, we're mostly focused on commercial traction.

So I think Bryan covered that well. David, I'll affirm your comment about what we saw throughout 2024 and how that leads into the 2025 outlook. You're right; volume continued to improve. In the first half, growth was entirely driven by price, meaning volume was declining. In the second half, we saw that reverse, and we saw price come back into a normalized range while volume took the lead in growth. This momentum through Q4 gives us confidence to guide up like we are for 2025. To highlight that, we've got a 1% to 2% guide for 2025, which includes the 50 basis point headwind from SKU exit. So on a normalized basis, that's actually 1.5% to 2.5%, coming off a year of 1.2%, where price played a significant role earlier in the year. We don't expect price to be significant for 2025; thus, we're counting on improvements across the business.

That's helpful. I’d also like some color on your end markets. As I look at your performance and the peers I’ve tracked on the public and private side, it seems challenging to find peers growing at a rate averaging your growth back to 4% to 6%. As you churn through the separation here, could you provide updates on your thoughts about the end markets and your competition?

I hate to punt to the Investor Day, but we will talk more there. However, I will touch on Dental, which is a standout growth rate in Q4. It's somewhat incongruent with what's happening in the dental market overall. Our Dental performance is better seen when blended with Q3 as the easy comp occurred. If you do that, you'll see it's kind of flattish, which more accurately reflects the market's situation. We are seeing good performance from new product launches. Karim, as the leader of that business, will get into this during the March 20 meeting. But it stands out as incongruent with the market and the performance of others in dental right now, primarily due to the comp difference.

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

Hey, thanks for the question. Wayde, I wanted to touch on the operating margin guidance of 20% to 21% in 2025. It looks like you're around 21.3% post-spin. I know there are a lot of moving parts between that and 2025. How should we think about the underlying margin expansion and how to consider the puts and takes?

Sure. Yes, it certainly has been a journey. Our first quarter as a public company in Q2 was 20.7% operating margins. Since then, we’ve continued to make investments in our critical functions for setting up our public company and growth investments. We've settled into our business model after three quarters. We think the Q4 run rate of 20.4% will carry into 2025, then we'll build from that. So our guidance for 2025 is 20% to 21%, but there’s an additional 50 basis point headwind in 2025 as we annualize costs from the 3M separation agreement. We expect that operating margin will improve throughout 2025 as we enhance cost efficiencies and see the full benefit from our growth investments.

Okay, thank you. And congratulations on the P&F divestiture. When considering the divestiture of this business, do you see this as the main transaction, or is there more on the horizon over the next few years? And how are you assessing the EPS neutrality around the divestiture?

Wayde, why don’t you start with the view on 2025 and the annualization first?

Sure. I'll clarify that, Travis, as many look at this on an annualized basis, which isn't how it plays this year. It will be accretive on an annualized basis. However, we expect to close the divestiture in the second half of the year. The EPS impact depends on the timing of the deal close, the tender of the debt, and timing of stranded cost reductions. Since it will close in the second half, it won't simply be a 12-month math calculation for EPS. So we're planning for the deal to be neutral in 2025.

Just to the other part of the question, portfolio optimization is an ongoing process. The best leadership teams assess their portfolio continuously and consider their values. We're committed to making thoughtful decisions regarding investments, looking at whether a business is more highly valued elsewhere, and taking all variables into account for potential transactions. We need to evaluate everything—shareholder benefits, strategic financial benefits, organizational capacity, and of course, the tax implications to ensure no disruptions to the tax-free nature of the spin. Portfolio optimization is a never-ending process.

Great. Thanks for that.

Your next question comes from the line of Vik Chopra from Wells Fargo. Your line is now open.

Good afternoon, and thanks for taking the questions. I have two questions. Can you help us understand how much of your manufacturing comes from Mexico and how flexible you are to move production elsewhere to offset tariffs? And then I have a follow-up.

Sure. I could take that one. It’s certainly a major topic today, Vik. Like others, we are concerned and monitoring this closely. All we know now is that China had the 10% tariff imposed by the U.S. We're including that minor piece in our guide, but relatively small given our limited imports from China. It's too early to speculate on the broader implications. We believe our global footprint has less exposure than many others, as we have less manufacturing in China. Specifically, we have one plant there and two in Mexico, as well as one in Canada. The percentage of our sales from these regions is small compared to overall production. It's essential to note that one of our segments, HIS, doesn’t have manufacturing production, so it doesn't hold any exposure. Relative to others, our exposure appears to be limited.

Great, thanks for that. Helpful color. With the sale of the Purification & Filtration business, while the majority of proceeds will be used for debt repayment, are there any plans to initiate a dividend or buy back stock?

You probably don't want me answering that.

Yes, I can certainly take this one. As mentioned, Vik, the majority of proceeds will go to debt repayment. We are not planning for dividends or stock repurchase at this time due to restrictions related to our agreements with 3M. In our tax matters agreement, there are specific restrictions with respect to asset sales. We cannot use proceeds for repurchase. Our capital plan priorities, communicated since our first Investor Day and spin, include funding operations and paying down debt. This positions us to pursue tuck-in acquisitions, as we've mentioned. We are now better positioned with a stronger balance sheet to consider M&A.

Great. Thank you.

Thanks, Vik.

Your last question comes from the line of Rick Wise from Stifel. Your line is now open.

Thank you and good evening, Bryan. Hi, Wayde. Maybe I'll add another guidance question. I would expect nothing less than from Wayde; I would expect more from you, Bryan. I'm sure this is thoughtfully balanced guidance when we see topline growth and EPS outlook. Could you articulate what we're counting on to reach the top end of the range? How do you view things like commercial execution and new product performance in MedSurg?

Yes, that's a great question. The way I view it, one of the most important variables isn't commercially based, at least not from a performance standpoint; it’s the ERP cutovers. If we navigate through the upcoming ERP cutovers well, that's material in terms of potential upside. If we don’t, it could push us to the range's bottom. That’s the biggest variable. The second piece is what I'm calling commercial focusing. We’ve hired impressive talent and shifted compensation towards growth, establishing a disciplined approach to marketing. Picking the correct growth drivers and executing effectively will help us reach the top end of the range. R&D contributions are limited at this point, but we’re consistently trying to identify the gems in our pipeline. As for MedSurg, we have Peel and Place and Clinpro, both excellent products. We have historically underclubbed their potential; thus, we'll need to ramp up our selling capacity. We aim to improve our 2025 performance significantly, so these three factors primarily drive our top-end potential.

Got you. That’s great, Bryan. A more focused inquiry, we haven't heard much about HIS, and I’d like to better understand the automation opportunity there. When you mention 50% to 90% of cases being automated, where do we stand, and how are you thinking about this realization moving forward? Post-sale, it seems like HIS would play a larger and more critical role. Any insights you can share?

Yes, absolutely, Rick. I will never do the same justice that Garri will do when she presents her business, but here’s the importance of autonomous coding from a layman's perspective. Revenue cycle management is a labor-intensive process with many changes. It's challenging to find skilled coding professionals, and mistakes happen. We're trying to alleviate the pressure of talent shortages by using autonomous coding, potentially applicable to 50% to 90% of cases—this is significant. Our challenge now is validating that our coding is as effective, if not better than human coding. This technology could help reduce costs and improve efficiency. HIS is a crucial area; we penetrate quite well with our Encompass 360 software package for revenue cycle management. This is our next growth potential, along with data integrity, which you'll hear about on March 20. We're optimistic about the process, and we must prove it out.

Thank you so much.

Absolutely.

Great. Thank you, Ellie, and everyone who joined us today. 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.