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Solventum Corp (SOLV)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 revenue was $2.074B (+1.9% reported, +2.3% organic); adjusted EPS was $1.41, while GAAP EPS was $0.17, reflecting higher non‑operating expense and separation-related costs .
  • Margins compressed YoY and sequentially: GAAP operating margin fell to 6.6% (vs. 19.9% in Q4’23 and 13.2% in Q3), adjusted operating margin to 20.4% (vs. 25.9% in Q4’23 and 22.8% in Q3) as 3M supply agreement mark‑ups and stand‑up/growth investments weighed on profitability .
  • FY2025 guidance initiated: organic sales +1.0% to +2.0% (+1.5% to +2.5% excluding ~50bps SKU exits), adjusted EPS $5.45–$5.65, free cash flow $450M–$550M; operating margin expected 20–21% with FX headwind ~150bps and SKU Wave 2 exits (~2,000 SKUs) .
  • Strategic catalyst: sale of Purification & Filtration to Thermo Fisher for $4.1B; management expects net proceeds ~$3.4B used for deleveraging and EPS neutrality in 2025, sharpening portfolio focus and enabling tuck-in M&A from early 2026 .
  • Stock reaction drivers: execution on ERP cutovers and TSA exits in 2025–2026, delivery against FY25 margin ramp (Q1 likely trough), progress on MedSurg NPWT Peel & Place adoption and HIS autonomous coding commercialization .

What Went Well and What Went Wrong

What Went Well

  • Segment growth: Organic growth led by MedSurg (+1.8%) and Dental Solutions (+4.2%) in Q4, with HIS up +1.1%; P&F up +3.5% on bioprocessing/industrial filtration strength .
  • Product momentum: Strong adoption of V.A.C. Peel & Place (MedSurg), single‑use NPWT, and new dental launches (Clarity Precision Grip; Clinpro Clear) with capacity ramp underway; “Q4 marked another positive quarter of volume growth, making it 3 consecutive quarters of improvement” (CEO) .
  • Balance sheet and FCF: Year-end cash $762M; Q4 cash from ops $219M and FCF $92M; FY24 FCF $805M—above initial FY24 guide .

What Went Wrong

  • Margin compression: GAAP gross margin fell to 54.0% (−290bps YoY) and GAAP operating margin to 6.6% (−1,330bps YoY) due to 3M supply agreement mark‑ups and elevated stand‑up/growth costs .
  • Sequential step-down: Adjusted operating margin down to 20.4% from 22.8% in Q3; adjusted EPS fell to $1.41 from $1.64, consistent with Q3 one‑time GM tailwinds reversing and higher OpEx .
  • Dental underlying softness: Q4 dental outperformed on easier comps, but management characterized underlying demand as “kind of flattish” when blended with Q3, highlighting market headwinds and capacity constraints on Clinpro .

Financial Results

Consolidated Quarterly Performance

MetricQ2 2024Q3 2024Q4 2024
Revenue ($USD Billions)$2.081 $2.082 $2.074
GAAP Diluted EPS ($)$0.51 $0.70 $0.17
Adjusted EPS ($)$1.56 $1.64 $1.41
GAAP Gross Margin %54.6% 56.0% 54.0%
Adjusted Gross Margin %55.8% 57.3% 56.2%
GAAP Operating Margin %11.7% 13.2% 6.6%
Adjusted Operating Margin %20.7% 22.8% 20.4%

Q4 Year-over-Year Comparison

MetricQ4 2023Q4 2024YoY Change
Revenue ($USD Billions)$2.036 $2.074 +1.9%
GAAP Diluted EPS ($)$1.57 $0.17 −$1.40
Adjusted EPS ($)$2.17 $1.41 −$0.76
GAAP Gross Margin %56.9% 54.0% −290 bps
Adjusted Gross Margin %57.2% 56.2% −100 bps
GAAP Operating Margin %19.9% 6.6% −1,330 bps
Adjusted Operating Margin %25.9% 20.4% −550 bps

Segment Breakdown – Q4

SegmentNet Sales Q4 2023 ($M)Net Sales Q4 2024 ($M)Organic Growth %Operating Margin Q4 2023Operating Margin Q4 2024
MedSurg$1,168 $1,174 +1.8% 23.8% 17.8%
Dental Solutions$306 $315 +4.2% 30.4% 23.3%
Health Information Systems$332 $336 +1.1% 35.8% 34.1%
Purification & Filtration$230 $235 +3.5% 12.2% 6.9%
Total$2,036 $2,074 +2.3% 19.9% 6.6%

KPIs

KPIQ2 2024Q3 2024Q4 2024
Cash from Operations ($M)$355 $169 $219
Free Cash Flow ($M)$297 $76 $92
Cash & Equivalents ($M)$897 $772 $762
Net Non-Operating Expense ($M)$148 $108 $123
Effective Tax Rate (Adjusted)12.2% 22.3% 17.4%

Estimates vs Actuals

Wall Street consensus from S&P Global was unavailable at the time of retrieval; estimates comparison could not be provided. S&P Global consensus data not available.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Organic Sales GrowthFY 2025N/A+1.0% to +2.0% (+1.5% to +2.5% ex-~50bps SKU exits) Initiated
Adjusted EPSFY 2025N/A$5.45 – $5.65 Initiated
Free Cash FlowFY 2025N/A$450M – $550M Initiated
Operating MarginFY 2025N/A20% – 21% (management outlook) Initiated
FX Impact (reported growth)FY 2025N/A~150bps headwind; largest in Q1 Initiated
SKU RationalizationFY 2025N/AWave 2 exits (~2,000 SKUs), ~50bps headwind FY25; ~100bps FY26 Initiated
Organic Sales GrowthFY 2024−2% to 0% Upper half of 0% to +1% Raised
Adjusted EPSFY 2024$6.30 – $6.50 $6.50 – $6.65 Raised
Free Cash FlowFY 2024$700M – $800M $750M – $850M Raised

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3)Current Period (Q4)Trend
AI/Technology in HISIntroduced AI-driven Revenue Integrity solution with Sift; 360 Encompass adoption steady Autonomous coding potential to automate 50%–90% of cases; focus on proving accuracy and scaling commercialization Expanding scope; commercialization focus
Separation & ERP/Supply ChainComplex spin; 1,000+ systems, 70+ platforms; early ERP rollout in 4 countries; DC/plant transitions planned 6 ERPs live; exiting ~25% of ~200 TSAs; new Brazil plant; new EU DC cutover in 2025; biggest work ahead 2025–2026 Steady progress; major cutovers ahead
Tariffs/Macro & FXFX neutral in Q3 but headwind expected Q4; China exposure ~5% sales, tariff risk monitored FY25 reported growth headwind ~150bps from FX; tariff assumptions limited to small China impact; no broad tariff baked into guide FX headwind; tariff risk monitored
MedSurg NPWT & Peel & PlaceLaunch momentum; NPWT consumables strong; single-use NPWT resilient Peel & Place adoption strong; capacity ramp; OEM/advanced wound care led segment growth Adoption improving; capacity scaling
Dental Market DynamicsQ2/Q3 softness; −3.9% in Q3 on tough comps Q4 +4.2% organic on easier comps and launches; blended with Q3 “flattish” underlying demand; Clinpro capacity constraints Recovering off comps; underlying flat
Purification & FiltrationMixed in Q2/Q3; bioprocessing strength Q4 +3.5% organic; sale to Thermo Fisher announced; EPS neutral 2025; proceeds to deleverage Divestment; deleveraging catalyst

Management Commentary

  • “Q4 marked another positive quarter of volume growth, making it 3 consecutive quarters of improvement…a significant milestone” (CEO) .
  • On MedSurg/Dental momentum: “Strong demand for V.A.C. Peel & Place…early customer response to our 3D‑printed Clarity Precision Grip attachment has been very positive” .
  • On HIS autonomous coding: “Between 50% and 90% of cases have the potential to be automated…saving time and money for customers” .
  • On portfolio optimization and P&F sale: “This decision will streamline our focus, reduce our leverage and improve key metrics…EPS impact to 2025 neutral” .
  • On FY25 execution risk and upside drivers: ERP cutovers are a key swing factor; commercial excellence and focused growth drivers can push results to top of guidance range .

Q&A Highlights

  • Segment outlook granularity: Management expects improvement across all four segments but did not provide segment-level guidance; further detail expected at Investor Day .
  • FY25 FCF guide below some expectations: Driven by separation costs; Q4 exit rate of just over $130M non‑GAAP separation costs can be run‑rated higher in 2025 before stepping down in 2026–2027 .
  • SKU rationalization: FY26 ~100bps organic headwind offset by modest 10–20bps margin benefit; FY25 ~50bps headwind from Wave 2 .
  • P&F sale EPS neutrality in 2025: Timing of close (2H), debt tender costs, and stranded cost reductions drive neutral outcome; accretive on annualized basis but timing matters .
  • M&A readiness: Portfolio simplification accelerates the timeframe; organizational capacity built for tuck‑ins; earliest likely in 2026 post deleveraging .
  • Tariffs: Limited exposure to China; two plants in Mexico and one in Canada; HIS has no manufacturing exposure; no broad tariff impact in FY25 guide .

Estimates Context

  • Street estimates from S&P Global were unavailable at time of retrieval; we could not compare Q4 revenue or EPS to consensus. S&P Global consensus data not available.
  • Management noted Q4 adjusted EPS and operating margin came in slightly ahead of internal expectations, but we cannot validate versus Street without S&P data .

Key Takeaways for Investors

  • Expect FY25 margin ramp back half-weighted: Q1 is the trough given FX headwinds and timing of spend; restructuring savings build through the year toward 20–21% operating margin .
  • SKU exits are deliberate simplification: ~50bps organic headwind in FY25 and ~100bps in FY26, with modest margin benefits—watch volume offsets from MedSurg and HIS .
  • Deleveraging catalyst: ~$3.4B net proceeds from P&F sale can materially reduce leverage; EPS neutral in 2025 but positions for tuck‑in M&A in 2026 .
  • Execution watchpoints: ERP/DC cutovers (two major in 2025), TSA exits, and capacity ramps for Peel & Place and Clinpro—operational hiccups could swing results within guidance ranges .
  • Growth drivers: Commercial excellence and targeted R&D/innovation (NPWT, dental, HIS autonomous coding & revenue integrity) underpin volume recovery; monitor adoption metrics and capacity additions .
  • FX/tariff sensitivity: ~150bps reported growth headwind from FX in FY25, largest in Q1; tariff assumptions limited—headline risk remains but exposure appears contained .
  • Narrative moving the stock: Clear path to margin stabilization, deleveraging, and focused growth investments; Investor Day should refine long-range plan and segment strategies .