3M Firm (NYSE:MMM) Barclays forty first Annual Industrial Choose Convention February 22, 2024 8:00 AM ET

Firm Contributors

Mike Roman – Chairman & Chief Government Officer

Monish Patolawala – President & Chief Monetary Officer

Convention Name Contributors

Julian Mitchell – Barclays

Julian Mitchell

Welcome, everybody, to this morning’s Industrial Choose Convention. It is my pleasure to begin as we speak with 3M. We now have Mike Roman, Chairman and CEO; and in addition Monish Patolawala, Chief Monetary Officer.

So welcome, Mike and Monish.

Possibly first query, we’ll simply begin with form of present demand developments, specifically, a few of these areas like industrial, destock, China, electronics, these appear most topical for buyers. So any up to date ideas on type of what you are seeing there?

Mike Roman

Sure. Julian, to begin with, thanks for having us right here as we speak. It is nice to be right here. I assumed I would perhaps simply body up just a little bit. I do not wish to attempt to pre-answer all of your questions, however I wished to simply present a body, and I will get to that as a part of it.

I might say 2023 was an essential and pivotal yr for us as an organization. I do know, actually, got here from what we did with our deal with 3 priorities, the primary was actually enhancing the efficiency of the 3M mannequin and what we did to execute there. It is about what we did to progress the spin of our well being care enterprise, an organization that is now going to be named Solventum. And it was additionally about lowering danger and uncertainty for the corporate.

After which first one, we delivered a powerful efficiency in 2023 due to our deal with enhancing efficiency. We delivered above our expectations from the start of the yr on EPS and money. We expanded margins. While you exclude restructuring, we expanded margins 60 foundation factors.

EPS was $9.24 towards preliminary information of $8.50 to $9. We grew adjusted free money circulation 30% to $6.3 billion. And free money circulation conversion, 123%, up 37 foundation factors. Only a reflection on the sturdy, dependable money generator that we’re as an organization.

We took the largest restructuring within the historical past of the corporate, and that was in a top-down remove 10% of the headcount. It was to actually accomplish some methods we’re driving, streamline the group finish to finish and — with a giant deal with provide chain and what — the place we had been going to drive improved efficiency in provide chain. And that concentrate on following by an improved efficiency is a giant a part of this.

It was about leaning out the middle of the corporate in anticipation of the spin of well being care to begin to tackle a few of these stranded prices. It was about aligning our companies nearer to prospects, and we’re leveraging that into the margin efficiency that we noticed in the course of the yr. We are also creating house to take a position, and spend money on progress and sustainability and productiveness. So crucial progress there. And it brings momentum into 2024. These 3 priorities are what we’re targeted on this yr. That is why I spent a second on these.

Turning to the spin of well being care, Solventum. We made nice progress. Our groups have carried out an incredible job. We have assembled a powerful group underneath Brian Hanson for Solventum, as they turn out to be a public firm. Our Type 10 was made public on Tuesday. That highlighted now a focused date of April 1 for the onerous spin. And that is topic to Board approval, after all, and different situations that we have specified by our SEC filings.

We’re going out with the leverage that was a part of our steerage initially, so 3.5x. We had an funding grade for Solventum. Which means they’re going to be seeking to borrow $8.4 billion. They will retain $600 million in money. Web of charges, roughly $7.7 million in proceeds coming again to the 3M firm.

And on the similar, we adopted by on the steerage that we’ve got firstly that we’ll maintain a 19.9% stake and turn out to be monetized over the primary 5 years. So we’re excited. We’re within the last phases right here of standing up 2 world-class public corporations. So nice progress there.

After which the third one, lowering danger uncertainty, we had 2 essential settlements introduced final yr, public water suppliers in June and Fight Arms in August, making excellent progress on each of these.

Fight Arms, we introduced in January that 3M and the plaintiffs are reaching an settlement to settle all of the settlement necessities in money, and that was step for us. We additionally had an preliminary settlement, really the evaluation of the settlement come at — on January 5. And that — we got here out of that speaking about we’re on observe for the 98%. There will likely be a last settlement settlement or finalization on March 25. So making good progress on that. All events are working collectively in the direction of profitable conclusion of the settlement.

Public water provider, we proceed making good progress within the settlement. We had a last approval assembly on February 2. We’re nonetheless awaiting court docket ruling on that. And one factor to notice is the Court docket of Decide prolonged the decide again in. So that is for any public water suppliers that opted out, they’ve a chance to decide again in between now and March 1. In order that’s step by way of progressing by this and attending to that last ruling from the court docket.

After which the opposite one to notice on danger and uncertainty, we proceed to make excellent progress on exiting PFAS manufacturing, one thing we introduced on the finish of ’22 for completion by the top of ’25. And we’re making good progress. Our volumes are down 20%, which displays working with prospects to transition them and be on observe for that exit.

So then again to your query, how are we taking a look at 2024? What are we seeing? We stated that by This fall earnings name, Q1 appears to be like rather a lot like This fall, and it is actually concerning the dynamics. We see shopper electronics stabilizing, which we referred to as in This fall type of flattening out towards year-over-year comparisons. Semiconductors, nonetheless smooth. Each are anticipated to enhance as we undergo the yr. However in Q1, we’re nonetheless seeing those self same dynamics.

We’re seeing blended finish market dynamics in industrial. Shopper retail remains to be, I might say, muted and smooth in — as we begin the yr, so much like what we noticed in This fall. Geographically, the U.S. is comparatively sturdy for us. Europe, Asia, China, additionally, I might say, smooth, muted as we begin the yr.

Simply watching these carefully, China, specifically, we’re watching carefully as we come out of Lunar New 12 months. While you have a look at the macro all over the world, it is low single digits for GDP, IPI. China is mid-single digits. So we’re watching to see how that progresses.

We’ll replace the whole yr steerage after the onerous spin, however simply — I might simply affirm what we’ve got stated about Q1. We’re nonetheless seeing at roughly $7.6 billion and we have ha no — we’re nonetheless taking a look at EPS at $2.15, in that vary.

After which our working margin remains to be trying on the similar type of vary, 19.5% to twenty%, up 250 foundation factors over yr, reflecting continued enhancements in our execution operations. So we’re excited concerning the yr. We dedicated to what we have laid out, and we’re assured we’ll have one other profitable yr in ’24.

So I will give it to you for all the remainder of the questions that I’ve not been answered.

Query-and-Reply Session

Q – Julian Mitchell

Thanks very a lot, Mike. I believe perhaps on that natural gross sales level, any ideas round form of stock ranges at prospects, notably in markets like electronics or in security and industrial? Do you get the sense that these could possibly be poised for some restock later this yr or pick-up in last demand? How do you assess type of the place we at the moment are after what’s been 5, 6 quarters of form of muted demand?

Mike Roman

Sure. I might say, broadly talking, stock within the channel is fairly steady towards that dynamic that I simply talked about, after which partially due to that dynamic is type of transferring sideways. Not each market is doing that. However I might say, normally, it is steady. A few issues which might be notable. This time final yr, we had been speaking about vital stock reductions in retail, and that performed out for the yr, and that is comparatively steady at this level.

Electronics has restarted the downturn on the finish of ’22, actually. And they also’ve stabilized, comparatively talking. And I — earlier than you see an inflection level, in a restoration, you bought to see an inflection level in demand, in order that restoration in electronics must be there.

The one space that we referred to as out in This fall is a few destocking in industrial channels, and a few of it was definitely on account of the truth that provide chain’s efficiency was getting higher, they usually had been taking over security inventory. A few of it appears to be like prefer it’s warning — cautious outlook for — and it is onerous to inform what’s demand and what’s stock administration.

That — it is not one thing that we have been quantifying as one thing large and materials, however it’s a dynamic. And I might attribute numerous it to the — simply the enhancing provide chain. Up so far, you may see they’re going to react to no matter they assume the demand goes to be as they appear.

Julian Mitchell

Good. And when you concentrate on form of worth versus quantity, I do know 3M would not break it out explicitly form of by quarter anymore. However any ideas round form of how a lot you anticipate the worth tailwind to slender simply the type of broader inflation and the form of internet of worth versus raws in your market as we see it?

Monish Patolawala

So I might simply begin first, Julian. As we went by the previous couple of years, the group has carried out a unbelievable job of beginning to monitor inflation from a number of sources. We have additionally had good success in elevating costs to offset inflation, which we have carried out final yr and the yr earlier than.

We might additionally — as I have a look at inflation, we’re seeing sure commodities proceed to be inflationary. And then you definately’ve acquired labor that also has inflation. In 2024, the group is planning to boost costs to offset that. So we must always be capable to offset these 2, and that is our present plan.

I might additionally let you know, the group is doing rather a lot round gasoline sourcing, driving yields and efficiencies within the factories, other ways you can handle the price of items bought. And as you already know, you have adopted 3M for a very long time, our costs usually are not formulaic in each market. We undergo a number of channels. We undergo markets. We undergo aggressive place. And we have a look at all of that and issue that in.

In the long run, and even when you have a look at this chain, you have a look at the long run going ahead, 3M has all the time been capable of get good worth, and a part of it’s due to the worth that they create for purchasers. And I do not see that altering.

So ’24, the plan is to have worth that can offset inflation. And we all the time really feel like — we all the time really feel that the work that we do, that there is all the time alternative for us to maintain doing that equation to stay constructive.

Julian Mitchell

Good. After which once we take into consideration type of medium-term natural progress for the corporate, up to now, you have talked about perhaps one thing relative to IPI or there was a 3% to five% kind of ambition from 6 years in the past. How do you see the form of approximate through-cycle progress price of the corporate as soon as Solventum comes out?

Mike Roman

Sure. Simply to border up, that 3% to five% was a view of IPI being greater than it’s as we speak, for positive. That was a part of it. The best way we’re taking a look at it proper now, medium time period is 2024. So once we guided 2024, when you have a look at it, we stated flat to 2% natural progress, which incorporates portfolio actions that we’re taking and about 100 foundation factors of portfolio motion.

So it is 1% to three% natural progress throughout the enterprise, ex portfolio actions, which IPI GDP is concerning the center of that. So it is — and I do not — we definitely take into consideration the macro and the outlook for the macro as we information for the yr. However we’re taking a look at markets. We’re taking a look at the place we’re invested, the place we’re rising, the place we’re near prospects. And I might say that is what’s driving the steerage within the close to time period and medium time period is how will we have a look at these markets.

There’s been different occasions like popping out of a Nice Recession, the place all markets had been synched collectively. Even popping out of pandemic, all markets had been synched for perhaps a comparatively quick time period. That is not true.

The markets are diverging. Simply have a look at how shopper spending has shifted within the final 18 months. So it is a — it is one thing that is very market particular. So that you have a look at our main markets, shopper electronics, we have talked a bit about already. Automotive had sturdy progress final yr.

Starting of the yr, we had been taking a look at construct charges of three.4%, 3.5%, would double that by the top of the yr. So we had a powerful yr in construct charges, and we proceed to outgrow these construct charges. And as we have a look at 2024, it is flat to barely down in construct charges projections. We anticipate to outgrow these construct charges.

So we’re type of constructing our view of medium time period off of that. And we have a look at multi-industrial — the economic markets and the way are these markets. I would say it is blended. There are some markets geographically and in any other case which might be performing higher and others that are not.

And so that you’re — we’re taking inventory of that on a regular basis. It is what went into that. It occurs to type of have GDP, IPI on the middle of it due to the projection there, but it surely’s actually constructed up by these markets.

Julian Mitchell

Bought it. And once we take into consideration that form of 2% or so underlying natural progress price this yr, is that form of cut up — is there a minimal type of quantity progress, it is principally worth pushed? Is that the best way to consider that?

Mike Roman

Properly, we see quantity progress coming again as a part of this. And it will get — it is — that is the vary just a little bit, it relies on the top markets. In order that goes into it.

We proceed to — our natural progress is pushed by our funding in innovation. And to a level, the — once I talked concerning the starting driving enchancment in our efficiency, that’s an enabler for natural progress, too. You are enhancing your margins, your gross margins. You are driving larger money effectivity. You are enabling your self to carry out higher to your prospects, enhancing service, and that provides to it as properly.

However the place we’re investing in vital business sized alternatives that we’ve got as we speak, the place our innovation can play that in engaging markets, that is what’s going to actually drive that natural quantity progress enchancment as we go.

Julian Mitchell

And once we take into consideration form of pruning parts, is that one thing that buyers ought to anticipate and form of perhaps a number of years, you may have that 100 foundation level headwind on the highest line?

After which on the opposite aspect of it, there some areas the place perhaps you are taking share that would offset the pruning side. I believe you talked about outgrowing international auto builds, for instance. Some other areas the place you assume over 3 to five years, 3M may pay share in these areas? After which any ideas on the size of that pruning after this yr?

Mike Roman

Sure. I believe perhaps I will begin with share. It is an essential technique. We’re — we should be aggressive in our markets and take share. And we try this partly with our innovation. What I stated firstly, aligning our enterprise nearer to our prospects. That is about being aggressive and successful share within the market, and that is an essential a part of the technique.

We additionally have a look at the place can we leverage our innovation, responding to prospects. Our innovation mannequin begins with the shopper. It is buyer backed. We’re near them. We perceive their companies. We now have shut relationships.

Nearly all of what — our income is specified. That is solely been a daily with our prospects. So there is a very shut relationship. And so successful out there and driving progress, focusing, and I might say we prioritize our investments, capital and R&D to probably the most engaging markets.

So we wish to be targeted on successful in markets which might be engaging, rising higher than macro, if you’ll, and in addition the place we’ve got a powerful proper to win. In order that positions us to attempt to take share in these markets broadly. So I believe that is — that would be the driver for us of natural progress as we transfer forward.

We are also investing in the place we are able to construct new companies. So there’s areas of energy commercially, security, house enchancment, electronics, automotive, the place we’re properly positioned, and we see alternative for our materials science. And in order that’s extra about new penetration than it’s about share in a way.

After which we’ve got rising expertise areas which might be going to be about constructing new companies, and that is an essential contributor to our progress. And we have referred to as out local weather expertise. For instance, we have got alternatives broadly throughout local weather expertise, emission discount, vitality transition, adaptation, numerous areas of local weather expertise.

So there’s a variety of methods there, near prospects, new penetration and constructing new companies, that may also be a part of how we drive quantity progress as we go.

Julian Mitchell

Proper. And the purpose on pruning, is that 100 bps a yr for a number of years? Or do you assume numerous it’s carried out now as a type of cleanup?

Mike Roman

So the opposite technique that actually enhances innovation on the portfolio administration, and we talked rather a lot about this, it is a steady course of. There may be — actually, at a easy degree, there’s 3 issues that we do.

We prioritize the place we make investments organically, like I’ve simply described. We have a look at complementary M&A to our portfolio the place we are able to drive alternatives into extra engaging markets, leverage our synergies of 3M, get larger than the sum of the elements from acquisitions. After which optimizing the worth from our portfolio.

And the motion that we talked about on the This fall earnings name, geographic prioritization and in addition what we’re doing within the shopper enterprise, that is about actually specializing in how you can optimize worth out of that portfolio. So geographically, transferring to an export mannequin in 30 international locations all over the world, enabling us to prioritize sources for different elements of the world the place we are able to drive sturdy returns.

So it is — there is a near-term headwind in income, but it surely positions us for stronger margins, stronger money circulation. And I imagine it’ll focus us on the areas that we are able to drive progress, and it’ll give us a chance to enhance progress as properly.

So it is a technique. What we’ve got in entrance of us proper now’s the two actions that we talked about, however we will be constantly taking a look at our portfolio and saying, “The place else can we assist ourselves close to time period by way of efficiency, the returns, if you’ll, after which long run and positioning us for higher progress as an general firm?”

And shopper is an effective instance of that. About 5% of the patron enterprise, we checked out portfolio in classes, we did not have the sturdy proper to win. It wasn’t being differentiated. We now have different elements of these classes and different classes the place we’ve got sturdy proper to win, sturdy differentiation.

By taking these actions, not solely will we enhance margin and money circulation, we create house to shopper investments, promoting, merchandising, different investments, to these areas the place we do have a powerful alternative to develop. So that you get — you’ll be able to construct momentum on.

Julian Mitchell

Nice. After which on the margin entrance, I believe you have talked about as much as 100 foundation factors of whole margin growth this yr. After we take into consideration 2025, for instance, you have acquired comparable tailwinds from financial savings, much less of a headwind from restructuring and doubtlessly extra quantity leverage.

And so we must always anticipate 2025 to be, in concept, a really sturdy margin yr. After which after that, we might settle again into that 30%, 40% incremental margin form of placeholders.

Monish Patolawala

Sure. So Julian, we have not given steerage for 2025. I additionally would say, numerous the restructuring advantages, we are going to rebaseline as soon as the onerous spin is completed, so you may have the correct math to go up.

What I might begin by saying is simply the place Mike stated. Three issues that the groups targeted on: goal progress; margin growth; and money. How do you get margin growth? You are going to get it from provide chain efficiencies, and also you’re getting it from restructuring program.

The restructuring program is a special method of working. So it is a new method of platform. So it is in every little thing we do. For instance, geographic prioritization, you are seeing the saving within the restructuring program. You have seen a few of it present up as a unfavourable in income as a result of now you are going by distributor margins. So distributor margin is completely different from what we’d have seen the fee.

So whenever you have a look at all of that put collectively, our equation in our heads are you have acquired provide chain efficiencies, quantity leverage, restructuring advantages, much less headwinds that you just stated — as you referred to as out, offset by the favorable quantity of investments in progress, productiveness, sustainability and investments in our workforce, which is regular wages, et cetera.

While you put that entire equation collectively is the place you get good leverage. And the groups are targeted on persevering with to drive working leverage and its margin growth as a result of that not solely provides us extra cash, but it surely additionally permits us to be extra aggressive, return capital to shareholders, et cetera.

So large deal with that. And once we come again on the investor occasion after the spin, I believe we’ll simply stroll you thru that and provide the outlook. However as you stated, for 2024, with the no spin situation, the plan was 75 to 100 foundation factors of margin growth, which is along with the 280 foundation factors year-on-year final yr within the second half. So you’ll be able to see — you can begin seeing these actions going up in our margin price.

Julian Mitchell

How will we take into consideration type of stranded prices now that there is a agency date form of the spin?

Monish Patolawala

So we’re working by that. Once more, as we meet you all publish spin, we’ll stroll you thru that and offer you readability. The phrase stranded prices on our definition, as a result of everybody’s acquired just a little definition, is when you may have prices you can’t commensurate, cut back with quantity, in our view, that is stranded price, a unfavourable leverage, which you keep away from and do not wish to take care of.

So a number of the restructuring actions that we’ve got taken allowed us to eat into a few of that portion of that stranded price that will not have existed, that we’d have had if we had not taken these actions.

So we’re working by that. Now that we have got a date locked in, we simply set to work by all the maths on who goes the place and what the prices appear like. We get a clear quarter on, what all of the transferring items are, and we’ll come again and provide the large image.

Julian Mitchell

On the stability sheet, as you stated, a number of the large liabilities, there’s been excellent progress made the final 12 months. You will get the $7.7 billion of money from Solventum.

How ought to buyers take into consideration the capital deployment alternative at 3M publish spin, dividends, buybacks? Is M&A prone to keep very low, what, a yr or 2 due to the cash-out for the settlement? Any ideas round that?

Mike Roman

Sure. I might begin with the place I began firstly. We had a powerful money technology in ’23. And so I believe that begins — we’re a powerful and dependable money generator as an organization. That is actually essential. We now have a powerful stability sheet, sturdy money generator. We’re, once we acquired $7.7 billion — roughly $7.7 billion in proceeds, and we have got the 19.9% stake to monetize over time, too.

So it’ll take a powerful stability sheet and make it stronger. The technique behind the spin is to create worth for shareholders. The spin of our well being care enterprise, Solventum, will create worth. And the worth they will — the best way they create worth is having tailor-made completely different technique for a med tech firm.

Similar for us. We will have a capital allocation technique, and it’ll proceed to be first precedence, spend money on our enterprise. It may be returning capital to shareholders, together with paying a gorgeous dividend. And it’ll be being positioned to handle the necessities of the capital for these settlements.

Now these settlements, only a reminder, the funds, they’re unfold over 7 years. Then all of the quarters, they’re unfold over 13 years. So there is a time line to that as properly. So I believe we’re positioning each corporations to achieve success in tailor-made capital allocation methods. .

Julian Mitchell

Bought it. And once we take into consideration that money circulation technology of RemainCo, when you like, with out Solventum, any sense of type of how — what that free money circulation type of base is {dollars} or margin charges or conversion price?

Monish Patolawala

So Solventum is money circulation accretive to 3M, as most med tech corporations are. So that they have a really sturdy money profile. I might let you know, whenever you have a look at us and have a look at 2023, we generated 123% of general free money circulation conversion, as Mike talked about.

The chance for us to go ahead continues to be driving stock and accounts payable, working capital. The groups have taken stock right down to 14.8% of gross sales in ’23, however my view is there’s nonetheless much more we are able to do.

The work that the groups have carried out over the — by the pandemic on knowledge, knowledge analytic, the flexibility to visualise the place the stock is, ensuring that you just’re utilizing twin sourcing, you are getting higher phrases, there’s rather a lot the groups have carried out, however there’s much more we are able to do.

So in our view, as I have a look at margin growth, which permits us to get money, plus working capital, and then you definately make investments a few of that again in CapEx and R&D, we are going to proceed to be money generator that we’ve got carried out up to now. And we’ll stay, I might say, fiscally prudent on the place we make investments to verify we’re getting these returns, as Mike stated, organically.

So general, I might simply say it is — we see the chance that we are able to get particularly to maintain producing money.

Julian Mitchell

Good. After which with that, we’ll change to the viewers response for the questions.

Firstly, do you personal 3M as we speak? So typically, numerous alternative there.

Quantity two is round basic bias in the direction of 3M in the mean time, so very balanced.

Third one is round through-cycle earnings progress versus the form of multi-industry common, barely under.

Fourth query is round extra money utilization, so buybacks and debt discount.

Subsequent is absolutely round valuation, yr 1 PE, so form of excessive teenagers.

After which the final query is round what is the largest purpose to not personal 3M proper now. These are normal questions. Okay. So natural progress, leaving apart liabilities.

Unbelievable. Properly, thanks a lot, Mike and in addition Monish.

Mike Roman

Thanks.

Monish Patolawala

Thanks.

Julian Mitchell

Thanks very a lot.