3M Company (MMM) — Q1 2020 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our first quarter 2020 business review. With me today are Mike Roman, 3M's Chief Executive Officer; and Nick Gangestad our Chief Financial Officer. Mike and Nick will make some formal comments and then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3M.com under the heading Quarterly Earnings. Please turn to slide 2. Before we begin let me remind you of the dates for our upcoming 2020 quarterly earnings conference calls, which will be held on July 28 and October 27. Also please note given the uncertainty related to the COVID-19 pandemic, we have not set a date for an investor meeting later this year. Please take a moment to read the forward-looking statement on slide 3. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. Finally, throughout today's presentation, we will be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. Please note, we have provided segment and total company adjusted EBITDA reconciliations for reference in today's press release attachments as part of our non-GAAP measures. Please turn to slide 4, and I'll hand it off to Mike.

Thank you, Bruce. Good morning everyone. I hope you and your families are safe, and I thank you for joining us. Let me also take this opportunity to say how much we appreciate and admire everything our heroic nurses, doctors and first responders around the world are doing to fight COVID-19. And I'd like to share this sentiment with our employees. In this unprecedented time, I could not be more proud of how you have stepped up to help protect those on the front lines of this crisis. I would like to also recognize those 3Mers in our manufacturing and distribution sites who in these most challenging circumstances continue to work around the clock to accelerate production of respirators and other critical supplies. I thank all of our people for your tireless efforts and your incredible work. At 3M, we have a unique and critical responsibility in pandemic preparedness and response. Our response throughout COVID-19 has been guided by our purpose as an enterprise and shaped by these three principles. First, an uncompromising commitment to the safety of our employees; second, fighting the pandemic with urgency from all angles, including everything we're doing to help protect health care workers and first responders; and third, maintaining business continuity, executing actions to deliver for our customers and shareholders and to lead out of the economic slowdown. Please turn to slide 5. In January, we mobilized 3M's crisis action team to coordinate our response to COVID-19. This team meets daily to ensure we are addressing our highest priorities, which as I mentioned start with protecting the safety and well-being of our people. Our learnings from China which was impacted by the virus first helped guide our actions worldwide and made a significant difference in our ability to rapidly prepare and respond. We moved quickly to implement remote work, where possible across the enterprise. And today approximately half of our employees are working from home including myself. In our plants and other facilities where remote work isn't feasible we have instituted robust safety protocols. These include stringent cleaning and medical screening, along with staggering shifts and reorganizing how we work to increase social distancing. COVID-19 is impacting all of us, both professionally and personally. But for some it's much more serious than others. For 3Mers personally affected by the virus, we have implemented pandemic support policies to help protect their pay and benefits and allow them to take care of themselves and their families. The situation is changing daily sometimes hourly, and we will continue to assess the safety of our people and facilities to ensure their well-being and comply with government directives. Please turn to Slide 6. As we protect our own employees, we continue to work urgently to protect the public, including health care workers and first responders. 3M is a longtime leader in personal safety with a range of science-based solutions for respiratory, face, hearing and fall protection, which goes to the heart of our vision of improving every life. This includes our N95 respirators, which 3M pioneered nearly 50 years ago and which we have continuously refined and improved ever since. Our largest production of N95 respirators is in the U.S. at two plants in South Dakota and Nebraska. And we also manufacture them in Asia Pacific, Europe and Latin America. After SARS in the early 2000s, we made the decision to prepare for future crises by investing in significant surge capacity at each of our respirator plants around the world. This additional capacity has largely remained idle for the last two decades, except for emergencies such as H1N1, the Japanese tsunami and wildfires in California and Australia. As you know, compared to prior emergencies, COVID-19 has caused an unprecedented explosion in demand. When the virus broke out, we were able to immediately activate our surge capacity and maximize production to support the public health response. Beginning in January, 3M doubled our global output of N95 respirators to 1.1 billion per year or about 100 million per month, including 35 million per month in the U.S. We've made additional investments and are also working with the Department of Defense to double annual production once again to two billion by the end of this year with additional capacity already beginning to come online. In the U.S., we will be producing N95 respirators at a rate of roughly 50 million per month in June, a 40% increase from current levels. We are also partnering with other companies on innovative solutions to protect those on the front lines. In collaboration with multiple sterilization companies, we have introduced new methods for hospitals to safely clean and reuse their N95 respirators. We are also working with Ford and Cummins to expand production of 3M's powered air purifying respirators with a plan to increase capacity by tenfold within the next 60 to 90 days. Protecting people in this crisis is not just a 3M challenge; it's an industry-wide challenge. Even with 3M's accelerated production the stark reality is that global demand for respirators far outpaces the ability of the entire industry to deliver. That is why as we urgently expand capacity, we are also prioritizing and triaging our supplies to the most critical needs. We moved quickly within days of regulatory approval to redirect more than 90% of our respirators into health care with the rest deployed to other critical industries such as energy and food. Within individual regions and countries, we are working with government agencies such as FEMA and distribution partners to identify and serve hotspots. In addition as the pandemic unfolds in different stages globally, we are working with governments to address trade restrictions and regulatory standards, so we can redirect supplies around the world. For example, in early April, 3M and the U.S. government announced a plan to import 166 million respirators, primarily from our plant in China. 20 million of these respirators have already shipped via the FEMA airbridge, with a total of 40 million expected by the end of this month. This would not have been possible without the partnership of the White House. I would like to thank the President and his team for their leadership, the FDA for extending its emergency use authorization and FEMA for their work in expediting the import of product to the U.S. This plan is enabling us to maximize support for the U.S. and other areas in urgent need including Europe, Central and Latin America and Canada. We also continue to aggressively fight fraud, price gouging and other illegal and unethical activity. 3M has not and would never raise prices as a result of this crisis. And we are executing a multi-pronged strategy to pursue and deter unscrupulous behavior that is causing real harm to the public. We created a fraud hotline, published our list prices for N95 respirators and are collaborating closely with partners to ensure that supply chains are secure. While virtually all of those engaging in predatory practices have no relationship with 3M, we have in a few instances terminated distributors in our industrial channel for acting unethically or in violation of their agreements. We have also filed multiple lawsuits and continue to make referrals to law enforcement, take down counterfeit websites and remove deceptive social media posts. Beyond personal protective equipment, 3M Science is leading the fight against COVID-19 in other significant areas as well. We are providing biopharma filtration and purification solutions to support the development of vaccines and therapeutics, including multiple drugs in current trials. Our advanced membrane technology is being utilized in blood oxygenation procedures and medical devices, vital treatments for some of the sickest patients. We are helping hospitals in New York City and elsewhere quickly connect their temporary facilities and are providing leading software and coding solutions at no cost during this critical period of time, enabling frontline workers to better manage the surge in patient volume. 3M has also donated $20 million to support health care workers, vulnerable populations and scientific research. In summary, I am proud of how 3M is helping lead the fight against COVID-19 and we have launched a comprehensive website on 3M.com with more details on our response and other valuable information. Please turn to Slide 7. 3M is leading from a position of strength. And in these challenging times the benefits of our business model have never been clearer. We are a science and manufacturing powerhouse with strong capabilities and brands across the world with our greatest capabilities here in the United States. In the U.S., we have nearly 80 manufacturing plants and distribution centers, anchoring communities in 29 states across the country. 3M has never left our home country and has continuously expanded our U.S. capabilities. Over half of our research and development and capital investments are in the U.S. And every year we export $5 billion in goods to other nations from our robust U.S. manufacturing base. At the same time over the decades we have also built out robust capabilities around the world, to be close to customers and better serve the unique needs of regional and local markets. These global capabilities include plants and distribution centers in 54 countries along with three global R&D centers in Asia and Europe. In this crisis, our model has enabled us to respond with agility and add scale including the rapid deployment of personal safety equipment that we just talked about. It is also enabling us to maintain business continuity, continue to serve our customers and ensure the integrity of our supply chain, which brings me to Slide 8. I am pleased how our team is managing through the pandemic and adjusting our operations to the realities of this fast-changing situation. This includes working closely with our customers to modify our supply and demand plans. Our critical sites are fully operational, though we have implemented some targeted plant or line shutdowns due to weak customer demand or government mandates. Overall, as of late April, roughly three-quarters of our plants and distribution centers remain fully or partially operational. And to support 3Mers impacted by shutdowns, we have implemented a short-term paid furlough program. In this crisis, I'm especially encouraged about the benefits we are seeing from the new global operating model we rolled out at the start of this year. As part of our new model, we consolidated manufacturing, supply chain and customer operations into a seamless end-to-end enterprise operations organization. This team is enabling us to maintain strong customer service, streamlined decision-making and adjust faster than ever to the external environment. As an example, we have reduced our production planning cycle times by 70% across our portfolio of businesses. In addition, our new corporate affairs organization has increased our collaboration with governments around the world while enhancing our employee and community engagement. Beyond our operations, we are also executing financial actions to deliver 2020 and set us up for success in 2021 and beyond. We are maintaining critical investments in organic growth through R&D, including in personal safety and other priority areas. At the same time, we are aggressively managing costs, a continuation of our relentless focus on efficiency and productivity improvements. We have already implemented sharp spending reductions, including a global hiring freeze, limiting our use of temporary contract workers and cutting indirect costs across the enterprise. In total, we expect these reductions to result in cost savings of $350 million to $400 million in the second quarter. We're also adjusting CapEx plans as we delay or experience slowdowns in certain projects. And we have suspended our share repurchase programs as of March 20. Importantly, we remain committed to our dividend as a high priority for capital allocation. Overall, these steps will help protect our company as we manage through this uncertain period and we are prepared to respond with additional actions as needed. Please turn to Slide 9. Given the diversity of our businesses, the financial impact of COVID-19 is mixed across 3M. Some areas of our portfolio are experiencing high demand while others are facing steep declines. In the first quarter we saw strong growth in personal safety, as well as in other areas such as home improvement, retail cleaning products, food safety and biopharma filtration. At the same time, we saw weak demand in several other end markets with the biggest slowdowns in oral care, automotive, aerospace and general industrial. The slowdowns in these markets accelerated in the second half of March, as many countries began to shut down their economies. With respect to geographic trends, we saw mixed performance across Asia Pacific, with significant declines early in the year and gradual improvement in March. The Americas held steady through most of the quarter with the U.S. up 4%. Though beginning in mid-March, we saw a significant deceleration in both the Americas and EMEA. All in, we delivered organic growth company-wide of 30 basis points, along with adjusted earnings of $2.16 per share, solid margins of 21% and a double-digit increase in cash flow. In summary, I'm confident in our ability to lead through this crisis and emerge even stronger. Our execution against our four strategic priorities: portfolio, transformation, innovation, and people and culture, has positioned us well leading into this downturn. Going forward, a continued focus on these priorities combined with the actions we are taking will enable us to deliver even greater value for our customers, shareholders, and all stakeholders as the economy recovers. That wraps up my opening comments. I'll come back to discuss our guidance after Nick takes you through the details of the quarter.

Thank you, Mike, and good morning, everyone. I will start on slide 10 and review the first quarter P&L highlights. Company-wide first quarter sales were $8.1 billion with adjusted operating income of $1.7 billion and adjusted operating margins of 20.8%. On the right-hand side of this slide, you see the components of our margin performance in the first quarter. Solid underlying productivity in the quarter along with benefits from our Q2, 2019 restructuring actions contributed 40 basis points to the margins. This result includes COVID-19-related asset write-downs, which negatively impacted margins by 40 basis points. Acquisitions and divestitures combined reduced margins by 90 basis points. This impact is primarily due to the integration and amortization costs associated with our acquisition of Acelity. Higher selling prices along with lower raw material costs together contributed 40 basis points to first quarter margins. And finally, foreign currency net of hedging impacts reduced margins by 40 basis points. Let's now turn to slide 11 for a closer look at earnings per share. First quarter adjusted earnings were $2.16 per share down 3% year-over-year. Looking at the components of our year-on-year earnings performance, solid productivity and benefits from Q2 2019 restructuring actions increased first quarter per share earnings by $0.07. This includes a negative $0.04 impact from the asset write-downs related to COVID-19 mentioned on the prior slide. Acquisitions and divestitures reduced first quarter earnings by $0.05 per share versus last year, primarily due to the Acelity acquisition. Please note that this result includes financing costs associated with the acquisition. Foreign currency net of hedging was an $0.08 per share headwind in the quarter. Turning to tax rate, our first quarter adjusted tax rate was 20.6% versus 19.5% last year, lowering earnings per share by $0.03. And finally, average diluted shares outstanding declined 1% versus Q1 last year adding $0.03 to per share earnings. Please turn to slide 12 for a discussion of our balance sheet and liquidity. One of the hallmarks of 3M is our strong balance sheet along with our time-tested business model which generates strong cash flow through economic cycles. As Mike mentioned we have taken proactive steps during the first quarter to protect and enhance the company's financial flexibility in this uncertain time. With respect to our balance sheet, we had cash and marketable securities on hand of $4.5 billion as of the end of March. This includes $1.75 billion in additional liquidity from last month's debt issuance. We are well capitalized to meet our two upcoming debt maturities, totaling $1.2 billion this year, one in May and another in August. Additionally, we have multiple sources of liquidity. First and foremost a business that generates strong free cash flow. In the first quarter, we had adjusted free cash flow of approximately $900 million with adjusted free cash flow conversion of 74%. Also we continue to expect the drug delivery divestiture to close in the second quarter, providing approximately $400 million in after-tax proceeds. From a capital allocation perspective, our long-term strategy remains unchanged. Our first priority is to invest in our business; and second, maintaining our dividend; and lastly, flexible deployment for M&A and share repurchases. While we continue to invest in the business in the near term, we are taking actions and adjusting our 2020 capital allocation plans. As a result, we are lowering our full year CapEx budget to approximately $1.3 billion from a range of $1.6 billion to $1.8 billion previously. This expectation includes investing an additional $100 million to continue to expand our output of respirators. In addition, in March we suspended our share repurchase program. And finally, we are aggressively managing discretionary spending to preserve financial flexibility.

That wraps up my prepared remarks. Please turn to Slide 13 and I'll hand it back over to Mike. Thank you, Nick. I'll start by providing an update on the market trends we're seeing so far in April. On a geographic basis, we're seeing ongoing improvements in Asia Pacific, most notably in China where the virus first emerged. However, we continue to experience significant downturns in the U. S., Europe and Latin America, areas that remain in the throes of the crisis. I can share that we are seeing a slowdown in growth during the first several weeks of Q2, with total company organic growth through late April down in the mid-teens. We anticipate continued strong demand for respirators, which we expect to contribute approximately 150 basis points to company-wide Q2 growth. At the same time, we expect ongoing weakness in other end markets through Q2, including oral care, automotive, office supplies and general industrial. Due to this end market uncertainty, at this time, we are unable to adequately quantify the impacts to our business for the remainder of the year. Therefore, we are temporarily withdrawing our 2020 guidance, until we have better visibility of the duration and impact of the slowdown. At this time, we believe Q2 results will be especially challenged, given the trends we have seen so far in April, with revenue and EPS declines year-over-year. In lieu of guidance, starting in May, we will provide monthly updates on how our business is performing and we will continue to provide this until we are better able to forecast future performance. Please turn to slide 14. To wrap up, our strong fundamentals and position with customers across industries provides a firm foundation during this time of uncertainty. We may not know the exact shape of the recovery, but we are well prepared for a wide range of scenarios and are taking actions to prepare us to lead out of this slowdown. Before turning to Q&A, I'd like to once again thank all 3Mers for your tremendous work and for everything you're doing in this unprecedented moment. I'm very proud to represent 3M and our people around the world. Going forward, we'll continue to do all we can to protect our employees, protect our enterprise and help the world get through this crisis. That concludes our remarks and we'll now take your questions.

Good morning.

Hey, Andrew.

Good morning, Andrew.

It's great to see 3M finally doing what 3M always does. Congratulations.

Thank you.

Just first question, just a big picture question. In terms of your capacity additions in nonwovens and specifically respirators, how do you think the industry will change, because you're not the only ones adding capacity? Lots of capacity added in China. All of a sudden you have Honeywell showing up in North America and Europe. What does it mean for competitive environment two years out?

Yes. Andrew, it's a little hard to look two years out. But, certainly, as we think about capacity expansion that we're doing today, a big part of that is in that category of surge capacity for situations like we're facing with COVID-19, there is going to be, we think, a significant tail to demand in this. You can look out. There's demand from governments from healthcare and there's also ongoing demand in the industry as industry comes back from economic slowdown. So we're mapping all of that into our capacity and then we're working with governments and the Department of Defense in the U. S. to plan for capacity that would be dedicated to their needs in a COVID-like crisis. So I think it's really lined up well with what we see as ongoing market and industry demand. And we're looking obviously broader than just our capacity. We're looking at the marketplace and the capabilities. And we're focusing here on N95 and just really respiratory solutions that meet those requirements. So I think it's got a view as far as we can see it. As we look out further beyond, you said a couple of years out, it’s going to depend on where we end up in those big end markets, healthcare and industrial.

Regarding a different topic, I noticed some news reports about developments in the hearing protection lawsuits, particularly from Bloomberg. Can you provide an update on the status of the hearing protection lawsuit and share your thoughts on the Bloomberg article? Thank you.

Yes, thank you, Andrew. Let me begin by saying that 3M holds great respect for the courageous individuals who protect us globally. We have a longstanding relationship with the U.S. military and are dedicated to producing safe products. We have collaborated closely with them, and 3M did not withhold any information from the government regarding the fit and use of this product. The narrative being circulated is misleading and lacks proper context. Therefore, we will defend ourselves and deny that our product was defectively designed. I just want to emphasize that this narrative is very misleading.

Thank you very much and congratulations on a great quarter.

Thanks, Andrew.

Thank you. Good morning, everyone.

Hi, Deane.

Good morning, Deane.

I'd also like to add my appreciation for all the 3M has done to help health care workers globally. And in my view that's exactly the kind of corporate citizen we'd expect 3M to respond and so, congratulations to everybody.

Yeah. Thanks, Deane.

Thank you.

Many companies, instead of completely halting their guidance, have been providing some scenario analysis or sensitivity regarding potential outcomes for the year, particularly concerning decrementals and margins. Can you address that? Also, how does this situation compare to the financial crisis of 2008 and 2009, using that as a reference point? Let's begin with that, please.

Sure, Deane, I'll address that. First, like any other company, we're evaluating various scenarios. Although I won't detail specific scenarios due to the varying circumstances, there are a few key points I can share. As Mike mentioned, throughout this quarter, we will provide monthly revenue updates to give you visibility into how our business is performing across different regions. Additionally, Mike spoke about the cost-saving measures we've put in place for Q2. We anticipate that in the second quarter, our decremental margins will range between 30% and 40%, which factors in the $350 million to $400 million in cost-saving initiatives. By sharing our monthly revenue and our outlook on decremental margins, we hope to provide you with meaningful insights into our earnings expectations moving forward.

That's a helpful start. Could you clarify if the monthly revenue updates will be provided by geography? Will you also be sharing information on whether it will be organic and by segment?

We think organic is the best way to share this. And that's our plan right now. And we do plan to be providing insights of what's going on by both, business and geography.

Okay. That's going to be really helpful, so I appreciate it. Just last question, it got cited but not clarified. What were the asset write-downs that were COVID-related? You sized it. But what were the businesses and why?

Within our company, we have new ventures where we are investing in various areas of emerging technologies that we believe will complement the 3M business model. These actions were some mark-to-market adjustments. Almost all of them impacted the miscellaneous segment of our company.

But why were those COVID-related?

As a result of changes in triggering events, in terms of the value of those companies that, we saw that as COVID-related.

Okay. Thank you. Good luck to everyone. Stay healthy. Thank you.

Hi guys. Good morning.

Good morning, Steve.

Hi Steve.

Hey, I apologize if I missed this busy earnings morning. The $350 million to $450 million in costs for the second quarter is a significant figure. Does that extend into the third and fourth quarters? Also, how much of that is temporary, and how much is related to last year's restructuring? I'm just unclear about what's included in that amount. I'm sorry if you covered this earlier in the call; I may have missed it. Thank you.

Sure, I'll go over a few details. First, we are making adjustments to various aspects of our cost structure. The largest component is what we refer to internally at 3M as indirect costs, which are not related to payroll or raw materials. We're focusing on reducing spending in areas like travel, external services, temporary staff, and targeted advertising. We've also implemented a hiring freeze and, in certain regions, we've required employees to take mandatory vacation. These are the factors influencing our current situation. Regarding the potential impact on future quarters, it's difficult to predict what will carry over as it is somewhat volatile and flexible. Much of it may depend on the recovery trajectory that 3M experiences in the upcoming quarters.

It seems that you have not taken significant structural actions beyond what was done last year, which is what most companies are currently doing.

That is correct Steve.

Okay. And then one last one just on how you're approaching this environment. The inventories, a lot of companies are keeping a little bit of a buffer stock. Have you guys maintained that buffer stock, or have you continued to work down inventories from where they were last year?

Yeah, Steve one of the things I highlighted in my prepared remarks was how our enterprise operations bringing together manufacturing supply chain and customer operations together into one organization that we launched at the beginning of the year. It's really been benefiting us and this is another area where we continue to take down days of inventory outstanding. So we do have plans to reduce inventory, some of it in response to slower demand, some of it really taking advantage of that improved performance. So we have targeted significant inventory reductions on both of those drivers.

Okay, great. Thanks a lot guys. Appreciate all the details.

Thanks, Steve.

Thank you.

Thanks, good morning.

Good morning, Nigel.

By the way great idea. Good morning. Great idea on the multi sales and please continue that post COVID. It's one of the information I have. I'm sure you want to. So looking at the April trends, and obviously a lot of companies are using April to anchor their expectations for 2Q and beyond and then using China as a sort of the lead indicator for what to expect elsewhere. So just two-part question here; one, would be can we use the mid-teens kind of placeholder for April as a guide particularly, or are you seeing sequential deterioration through April, which indicates that might get a little bit worse or get better? And then in China the strength that we've seen in April, which is obviously very encouraging. But how much of that is a sort of restock versus the obviously the severe declines we saw in February?

Yes, Nigel, I can take that. Regarding April, it is what it is. Our trends for April so far reflect a very dynamic situation with a lot of uncertainty. Therefore, we plan to provide monthly updates since projecting April into May or further out is challenging based on what we see now. We'll keep you informed with clearer updates each month. As for China, we are noticing improvements and a return to growth across our portfolio. There will certainly be some restocking, but the economy is beginning to show signs of broad recovery. We're not back to normal yet, but things are getting better as we progress through April.

Okay, great. Thanks, Mike. And then I think one for Nick. On the pricing 40 basis points in the quarter, are we confident that pricing will remain positive this year? Are we seeing any warning signs outside of Asia on pricing? And then can you just mark-to-market on where the raw material benefit is right now for FY 2020?

We started the year expecting our price growth to align with past trends, and the 40 basis points we observed in the first quarter reflects that expectation. As we look ahead for the remainder of the year, we do not anticipate any significant changes in our outlook for price growth; we believe it will remain stable in this range. Regarding raw materials, at the start of the year, we projected that they would provide a benefit of flat to up to a $0.10 tailwind. Currently, it appears that the situation is even more favorable than that, offering a more substantial tailwind. While I won't provide specific figures as conditions are fluctuating, we are seeing greater benefits than initially anticipated.

Okay. Thanks very much.

Hi, good morning. Maybe…

Hi, Julian.

Hi. Maybe just a first question please around the Health Care division. Maybe just help us understand within that what you've seen so far as the puts and takes from COVID? And it looks like underlying margins, excluding the acquisition impacts have been flattish in Q1 and Q4. So just wondering if and when health care sales recover alongside say oral care coming back, should we expect good incremental margins, or is it just that Health Care is at a higher level of reinvestment for the near or medium-term? Thank you.

Yeah, Julian maybe I'll comment just on the business trends that we're seeing. So we saw Health Care grow by a little over 1% in first quarter. It was led by medical solutions and food safety. As we got to March, we saw a significant slowdown in oral care. And we also saw an impact from elective surgeries and a slowdown in Health Care in some of our medical solutions areas as well. So those are some of the trends we're seeing behind that overall growth number. Maybe I'll ask Nick to comment on the margin and your question around margins.

Yes. Julian, of course, the biggest thing that we're seeing from margins in Health Care right now is from our acquisition of Acelity. And I think you will note in the appendix we're now providing EBITDA margins. We felt that would be helpful given the acquisition of Acelity to give one more level of information on that. In terms of the margins that we're seeing, it was absent Acelity pretty close to flat. And we've seen some mix impact in the first quarter as we've seen some parts of that business more impacted by COVID. And as Mike said, as we go into second quarter, we will continue to see impacts on elective procedures that will be having an impact both on our growth and on our margin. As those recover and as we see people going back to their oral care professionals and electing to do elective procedures, we've also seen that have a positive impact on our margin going forward.

That's helpful. And then just my second question around the Safety and Industrial business. Clearly, some good tailwinds from all the work being done around respirators, but maybe focusing on the margin side, very good margin uplift in the first quarter. Do you think we're now at a level in that business where, given the cost-cutting actions, some of the reorganization measures at 3M, once we see the sales side improve in the second half or next year in industrial within that division we should see very good operating leverage there as well as good sales growth?

We have been taking several steps to improve the margins in our Safety and Industrial business, aiming to make it a more efficient and productive operation. Some of these initiatives were shared during our January earnings call. In the first quarter, we've seen some impacts on our margins, but more importantly, we have exercised strong spending control in the Safety and Industrial business, which has significantly contributed to our margin performance this quarter. Looking ahead, as we begin to grow again, we expect to see additional benefits. Currently, we are experiencing the positive effects of disciplined spending control in that business.

Great. Thank you.

Thank you. Good morning, everyone.

Hey, Jeff.

Good morning.

Good morning. And just a little more granularity on some of the divisional stuff if I could. Excuse me. Personal safety was up looks like 7% in the quarter $60 million or so. I guess, I would have expected maybe it to be even stronger than that. I guess the 1.5% benefit you're talking about for Q2 I think is relative to total company sales. So it looks like you're looking for another kind of $120 million or so, kind of, lift on a year-over-year basis. Is that correct? And would that be kind of indicative of what your kind of current run rate production is for that business?

Hey, Jeff. This is Bruce. Organically, personal safety is up 14%. What you're seeing for all-in sales growth we had divestiture impact from our gas and flame detection divestiture which is impacting obviously total sales growth.

All right. That's helpful. Thanks, Bruce. And then Nick just thinking about the sources and uses of cash and thanks for your color there what is your view on repo? Should we consider it's off the table for the balance of the year? Is this something that you'll be reconsidering as the year progresses? And is there going to be any requirement in pension as you get towards the end of this year looking into next?

Yes, we are examining several scenarios and managing them as needed. It's a dynamic situation, so I won't provide a timeline for when we might return to the market with a share buyback program. However, we would want to have sufficient confidence in our future outlook and be able to resume guidance on our financial results before proceeding with the share buyback program. Regarding the pension, we began the year with a solidly funded pension. We experienced a minor setback in our pension-funded status in the first quarter, but currently, we do not anticipate any changes to our capital allocation plans concerning our pension. We aim to contribute around $200 million annually to our global defined benefit pension plans, and we don’t foresee any required adjustments to that pension funding in the near future. So, for the foreseeable future, we don’t expect any changes.

Right. Thank you.

Thanks. Good morning, everyone. Hope you're all well.

Good morning, Joe.

Just maybe touching on China to start-off. It looks like the rebound in April has been pretty strong. Is there any end market-specific commentary that you can provide on what's really driving the strength in April?

Yes, Joe, when I mentioned it was broad-based, we're observing it across our businesses. I would highlight that the automotive sector is recovering. We had a significant decline in the first quarter, so we are coming off a low point, but we are starting to see some improvement there. Electronics has been leading the growth. We are experiencing strong demand in semiconductor manufacturing. Consumer electronics is down, but not as much. Health care and oral care are also recovering as we head into April. Additionally, we see broader improvements in industrial and consumer markets. Overall, the market is showing broad-based growth across all our sectors.

Got it. And Mike, I may have missed this earlier, but as you're kind of thinking about the guidance and clearly, we don't have one now for the rest of the year. But like as you're kind of thinking about the trajectory for the U.S. and Europe, how much are you using China as like a guidepost from a growth perspective for the rest of the company?

Yes. I would say, back to this fast-changing and lots of uncertainty, I think it's encouraging what we're seeing in China. But it's as good as April to date for us, because it's a pretty fast-changing dynamic globally. We did see as I mentioned trends in the second half of March in the Americas and EMEA down. And in some of the businesses that we highlighted that were weaker oral care elective procedures in our medical solutions, automotive general industrial, those are trends that we saw coming into the quarter. We'll have to see how it plays out and get a little further before we can give you a better projection.

Okay. Good enough. Thanks guys.

Thanks, Joe.

Good morning guys.

Hey, Scott.

Hi, Scott.

Just to clarify, as of late April, 75% of our plants and distribution centers are either fully or partially operational. How does that compare to previous cycles? Given that you might be shutting down some operations or experiencing declines in shifts, is this significantly different from what occurred in late 2008? Do you anticipate a meaningful ramp-up over the summer? I would appreciate more insight on this.

Scott, to understand this, it's important to focus on our sales value of production. As I mentioned, there are benefits to our enterprise operations that allow us to adjust quickly in response to demand and ensure that our production plans align accordingly. Last year in Q1, we were working on adapting to a slowdown in the end markets, and we are now shortening our cycle times to address that. Our sales value of production is consistent with what we experienced in Q1 and matches what we're seeing year-to-date in April. The 75% figure reflects a broader perspective on our portfolio relative to end demand, along with how we are managing our factories during the COVID crisis. Therefore, analyzing our sales value of production is crucial, and we are prepared to adapt quickly as market conditions change.

Okay, Mike. Can you help us understand how that might compare to past recessions? It doesn't need to be explicit, but if you have a sense of where you were in late 2008, was it around 80% or 85%, or something else?

I think when considering this situation, it's important to recognize the scale of the slowdown, which seems comparable to past experiences. There may be a slightly quicker response and adaptation this time around. Back in 2009, we managed our operations swiftly in response to the slowdown, and then adjusted as the markets began to recover in the latter half of that year. I believe the current circumstances are similar, and one of our strengths is our vertically integrated manufacturing model, which allows us to respond effectively. I commend our teams for their ability to shorten cycle times, and the strength of our strategy and the 3M model that proved effective in 2009 is also relevant today in 2020.

Okay. Super helpful. Thanks. Good luck guys and stay safe and we appreciate the monthly data too. So thank you.

Thank you.

Thanks, Scott.

Good morning, guys. Hope, you're well.

Hey, Andy.

Thanks, Andy.

You mentioned the impact of respirators on the business. Following up on Jeff's question, it sounds like the impact could exceed 150 basis points by the end of the year, especially considering your plan to produce 2 billion respirators annually. Additionally, since you also manufacture surgical masks and gowns, could you provide more details on the overall size of the PPE market? Any additional insights would be appreciated.

The 150 basis points refers to Q2. That's how we are viewing it for that quarter. We are increasing our capacity in the U.S. as we move out of Q2. By late June, we will produce 50 million respirators per month, which is a 40% increase from our previous production levels leading into the quarter and what we expect for much of it. Additionally, we plan to enhance our capacity later in the year, which will likely have an impact in Q4. This increase will help us meet the strong demand, contributing to further growth. I don't have a specific number at this moment, as it's uncertain how demand will unfold and when production will ramp up. However, you can consider the increase from 35 million to 50 million respirators in the U.S. The 35 million was part of the 100 million total worldwide, suggesting a potential 15% increase in the global N95 market from Q2.

And Andy for reference our disposable respirator business which is largely the N95, pre-crisis was about 2% of our global revenue, slightly less than that or around $600 million.

Got it. That's helpful. Mike, I wanted to follow-up on your comments about electronics. You mentioned the recovery in China. Since your business is primarily based there, is it proving to be more resilient this cycle than expected? Can you provide more insights on your expectations moving forward, particularly regarding semiconductors? You obviously have mobile devices included there. What trends are you observing in that sector?

Yes. And Andy even as we came into the year, we were starting to feel better about electronics and it was really semiconductor manufacturing demand increasing. And that has held up. We're seeing that and that's part of that broader growth and return to growth in China. Consumer Electronics has been year-over-year a bit of a slowdown. We continue to see that. But overall, electronics is seeing a positive uptick as we come into Q2.

So just pushing you a little bit, is it up year-over-year at this point in April?

April year-to-date, or April month-to-date, yes.

Okay. Thanks guys.

Andy, I want to point out that our most significant growth in electronics in China is happening in fluids and semiconductors, while the consumer electronics sector is growing less.

Got it. Thanks Nick.

Yes, thanks. Good morning.

Good morning, Nicole.

Good morning, Nicole.

So, just following up on some of the questions regarding the cost-cutting activities you're implementing this year, does the 30% to 40% decrease in margin assumption also factor in the ongoing effects from the payback on last year's restructuring actions? Is that correct?

When we mention the $30 million to $40 million, that also encompasses the year-on-year impact of the actions taken last year, which contributes to our ability to achieve a 30% to 40% decremental in the second quarter. Yes, that's part of it, along with the additional $350 million to $400 million in cost savings we are initiating this quarter.

Okay. Got it. Thanks Nick. And as my follow-up, if we think about the Health Care business, is there a way to quantify how much of the Health Care business is actually being impacted by elective surgeries not taking place? I'm just trying to get a sense of what part of the business has the potential to come back as COVID cases die down and elective surgeries return?

Medical solutions, led by Nicole, is our largest segment within Health Care, and it is currently affected by the decline in elective procedures. This trend is also evident in our Acelity business, which falls under medical solutions. The oral care segment has experienced a more significant slowdown in demand since March, making it our second largest sector in Health Care. Therefore, I would consider it the primary contributor to our challenges as we progress into the quarter. However, we anticipate that as elective procedures resume and demand rises, we will benefit from that recovery in our medical solutions segment. So, to summarize, both segments are impacted, but we expect a rebound as elective procedures return.

Thanks. I'll pass it on.

Thanks, Nicole.

Hi, good morning. Kind of a specific question here, but just want to understand the geography of where something might live looking at slide 22 when you talk about the sales by divisions. But it was interesting. I think in your prepared remarks you talked about respirator demand government industry health care I didn't hear consumer. Just wondering if we actually start to see some different behavior from consumers. Where that would show up? Does that actually hit the consumer segment through some type of health care, or would that go through a different segment and then ultimately end up in a consumer's home?

Yes. And John, thank you for pointing that out because consumers play a crucial role in our supply of respirator solutions. We cater to a wide range of customers, including those through our DIY channel and small construction businesses, which are key customers for us. We also anticipate growing demand from consumers as we move forward, and this will be reflected in the results of our consumer business.

Yes. John, the biggest impact we're seeing is in our stationery and office business. Currently, as people have gone or work remotely from home on the negative side along with obviously schools shutting down.

Yes. No, thank you. That's helpful. And then there's kind of a lot of excitement that we might see some manufacturing return to the U.S. Obviously you highlighted on PP&E. There's been some discussion around life sciences. Just curious, what you're hearing or seeing from some of your folks that are doing pharma filtration. I'm thinking about, if they're actually starting to get quotes or see an uptick activity for some of those solutions that you sell to that manufacturing front?

Yes. John, I'll start there. We have observed an increase in demand for our biopharma filtration. I mentioned it as one of the stronger growth areas in Q1 and continuing into April. In terms of manufacturing and supply in the U.S., we have maintained our operations here even as we expanded overseas. We continue to produce in the U.S. to meet the demand in this market and more. We leverage our strong foundation and technology in the U.S. while also exporting. Our strategy, which applies globally but is particularly relevant in the U.S., is to position our manufacturing and supply chains close to customers to better serve them regionally. This applies to respirators, health care products, and biopharma.

Great. Thank you for the color.

Thanks, John.

To close, I am incredibly proud of how our people are helping lead the response to COVID-19 and managing through this uncertain time. Going forward, we will continue to be guided by the three principles I laid out at the beginning of my remarks, protecting our employees; fighting the pandemic from all angles; and maintaining business continuity while positioning 3M to lead out of the slowdown and deliver for our employees, customers and shareholders. Thank you for joining us.