3M Company (MMM) — Q4 2020 Earnings Call Transcript

Thank you and good morning, everyone, and welcome to our fourth quarter earnings conference call. Let me begin today by expressing our sincere hope that you and your families continue to be safe and are doing well. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer; and Monish Patolawala, our Chief Financial Officer. Mike and Monish will make some formal comments, and then we'll open it up for 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, I would like to introduce the dates for 2021 quarterly earnings conference calls, which will be held on April 27, July 27, and October 26. 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-Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Finally, throughout today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments in 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 will hand it off to Mike.

Thank you, Bruce. Good morning, everyone, and thank you for joining us. The 3M team finished the year strong as we continue to execute well, innovate for our customers and fight the pandemic from every angle. In an uncertain economic environment, we delivered organic growth in all business groups and geographic areas, along with margin expansion, a double-digit increase in earnings and strong cash flow during the fourth quarter. Throughout 2020, I am proud of how 3M stepped up to help meet the extraordinary challenges facing the world, which includes our comprehensive response to COVID-19. Last year, we also took actions to transform for the future, advanced our core values and strengthened our balance sheet through robust cash generation. At the same time, we know that more work remains to deliver for our customers, shareholders and all stakeholders. Moving forward, we will build on our progress and continue to prioritize investments in growth, productivity and sustainability. 3M is well positioned as we head into 2021. And today, we are providing guidance for the year, where we expect a return to healthy growth. Overall, I'm confident in our ability to deliver a successful 2021, lead through the economic recovery and capitalize on opportunities from emerging trends that are favorable to 3M and our market-leading businesses. Please turn to Slide 5. Companywide total sales in the fourth quarter increased to $8.6 billion, with organic growth of 6% and earnings of $2.38 per share, up 22% year-on-year on an adjusted basis. Demand remains strong in end markets such as personal safety, home cleaning and semiconductors and we saw a sequential improvement in general industrial and automotive OEM. We also saw ongoing weakness in other end markets, including healthcare and oral care elective procedures, which declined sequentially, as it continued to be impacted by COVID-19. Geographically, organic growth was led by the Americas, up 8%, with the United States up 9%. EMEA grew 6% and Asia Pacific grew 2% with China up 14%. Our team delivered another quarter of good operational performance. We expanded our adjusted EBITDA margins to over 27%, with all business groups above 26% and increased our adjusted cash flow to $2.1 billion. That wraps up my opening comments. I will come back to discuss our full-year performance, along with my perspective on 2021, after Monish takes you through the details of the quarter. Monish?

Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 6. Companywide fourth quarter sales were $8.6 billion, up 5.8% year-on-year. This result was better than we had anticipated. Our personal safety team continued to execute well in expanding respirator production to support pandemic-related demand. We also saw continued end market strength through year-end in automotive OEM, electronics and home improvement. Strong operating rigor and disciplined cost management drove robust adjusted operating income of $1.8 billion, up 20%, with adjusted operating margins of 21.5%, up 250 basis points year-on-year. On the right-hand side of this slide, you can see the components that impacted margins. Organic volume growth, along with our ongoing cost management and productivity efforts, was the biggest contributor to margin improvement, adding 160 basis points. Included in this 160 basis point benefit were two items that I had called out during a conference in early December. First, we exited a product line within our closure, masking and packaging business and sold the related property in Q4. This resulted in a pre-tax gain of $54 million, or 60 basis points margin benefit. Please note that this gain is included in safety and industrial's Q4 operating income. Secondly, we had increased our respirator mask reserve by $107 million in Q4, which resulted in a 90 basis point headwind to margins year-on-year. For the full-year, we increased our respirator mask reserve by roughly $130 million, which is a little higher than the $100 million average over the last few years. This increase in our reserves is reflected in corporate and unallocated. As you may have noticed, adjusting for last year significant litigation charge, our fourth quarter corporate and unallocated expense was up approximately $100 million year-on-year. This increase was primarily driven by our update to our respirator mask reserve, along with impacts from ongoing legal costs, as we continue to manage PFAS and other legal proceedings. Turning to selling prices and raw materials, which was an 80 basis point year-on-year benefit to margins. This benefit was driven by the combination of higher selling prices and lower raw material cost versus last year's fourth quarter. Note, approximately half of our fourth quarter selling price performance was benefited by lower year-on-year volume-related customer rebates and markets that were most impacted by the pandemic. Acquisition and divestitures contributed 10 basis points year-on-year. Foreign currency net of hedging impacts decreased margins by 10 basis points. Lastly, while the fourth quarter pre-tax restructuring charge of $137 million was similar to last year's charge, restructuring provided a 10 basis point benefit to margins year-on-year due to this year's higher sales. Let's now turn to Slide 7 for a closer look at earnings per share. Fourth quarter earnings were $2.38 per share, up 22% from last year on an adjusted basis. First, as discussed on the prior slide, organic growth and ongoing cost management and productivity efforts delivered $0.43 per share to earnings growth. This included a $0.09 benefit from the gain on sale of property and a $0.10 headwind from the increased respirator mask reserve. Acquisitions and divestitures reduced earnings by $0.02 and foreign exchange impacts added $0.02 to per share earnings year-on-year. The strength of the 3M business model, strong cash flow and liquidity position gave us the opportunity in Q4 to retire $1 billion of debt early that was due to mature in 2021. As a result, we incurred higher net interest in the quarter, which combined with higher shares outstanding, reduced earnings by $0.03. Finally, a lower tax rate versus last year provided a $0.03 benefit to earnings per share. The lower tax rate was primarily a function of the mix of pre-tax income around the world. Please turn to Slide 8 for a discussion of our cash flow and balance sheet. We delivered another quarter of robust free cash flow with fourth quarter adjusted free cash flow of $2.1 billion, up 16% year-over-year, with conversion of 151%. Cash flows in the quarter were primarily driven by robust income and daily management of working capital. For the full-year, we generated adjusted free cash flow of $6.7 billion, up 18%. Fourth quarter capital expenditures were $422 million and were $1.5 billion for the year. During the quarter, we returned $848 million to our shareholders via dividends and $3.4 billion for the year. Share repurchases remain suspended throughout the quarter given the continued global economic uncertainty. Our strong fourth quarter cash flow generation and disciplined capital allocation enabled us to continue to strengthen our capital structure. We ended the quarter with $5.1 billion in cash and marketable securities on hand and reduced net debt by $1.3 billion or 9% sequentially. For the year, we improved our net debt position by $4.1 billion, or 23%. As a result, we exited the year with net debt to EBITDA of 1.5 down from 2.3 at the end of 2019. This significant improvement in our net debt position, along with a strong cash flow generation capability provides us increased financial flexibility to invest in our business, pursue strategic opportunities and return cash to shareholders while maintaining a strong capital structure. Please turn to Slide 9 where I will summarize the business group performance for Q4. I will start with the Safety and Industrial business, which posted organic growth of 11.4% year-on-year in the fourth quarter. This result includes an approximate 10 percentage point benefit from pandemic-related respirator mask demand. Overall, general industrial manufacturing activity continued to improve during Q4. However, customers and channel partners continue to remain cautious given ongoing macroeconomic uncertainty. Personal safety posted double-digit organic growth year-on-year driven by continued demand for respirators. Industrial adhesives and tapes grew mid-single digits while the electrical markets business was up low single digits. The strong growth in the residential housing market continued to drive good performance in our roofing granules business which was up double digits organically versus Q4 of last year. The rest of the Safety and Industrial portfolio, namely automotive aftermarket, abrasives and closure and masking declined year-on-year. Safety and Industrial's fourth quarter segment operating margins were 27.7%, up 690 basis points driven by strong leverage on sales growth and continued productivity and spending discipline along with the previously mentioned gain on the sale of real estate. Moving to Transportation and Electronics; after a challenging last two years, fourth quarter organic sales growth turned positive, up 1.4% as compared to last year. Our electronics-related business was up 2% with continued strong growth in semiconductor, factory automation and data centers, which was partially offset by year-on-year softness in consumer electronics. Our auto OEM business was up 18% year-on-year compared to the 3% increase in global car and light truck builds. For the full year, our automotive business outperformed global builds by approximately 700 basis points. Advanced Materials and transportation safety returned to growth year-on-year, driven by improving end market trends in automotive and highway infrastructure. Commercial solutions continued to be down year-on-year due to negative pandemic-related impacts on advertising spend, and demand for workplace cleaning and safety products and solutions. Transportation and Electronics' fourth quarter operating margins were 21.8%, up 100 basis points on positive sales growth and continued cost discipline. Turning to Health Care; some parts of the world were challenged with rising COVID-19 cases throughout Q4. As a result, those health care providers experienced sequential declines in the elective procedure volumes, which negatively impacted parts of our business. At the same time, we continue to experience strong pandemic-related demand for respirators to protect frontline health care workers, which more than offset the headwinds from the decline in elective procedure volumes. As a result, our Health Care business delivered fourth quarter organic sales growth of 6.6% versus last year. The medical solutions business grew low double digits, driven by continued strong respiratory demand. Excluding respirators organic growth in this business was flat. Our oral care business organic sales were flat year-over-year, as it dealt with rising COVID cases. The separation and purification business increased low double digits year-on-year. This business continues to experience solid demand for biopharma filtration solutions in support of the pharmaceutical industry's research and manufacturing efforts to develop vaccines and therapeutic treatments for COVID. Turning to Health Information Systems, which declined mid-single digits organically, as hospitals continued to remain cautious relative to the information technology investments. Finally, food safety was up low single digits organically versus last year. Health Care's fourth quarter operating margins were 24.7%, up 340 basis points year-on-year with adjusted EBITDA margins of 31.7%. Fourth quarter margins were driven by continued strong execution and cost management, which was partially offset by the higher year-on-year restructuring costs. Lastly, fourth quarter organic growth for our Consumer business was up 10% as retailers saw continued strong customer demand throughout the holiday season. Growth in this business continues to be driven by strong consumer demand for category-leading brands namely Filtrete, Scotch, Scotch blue, Scotch Brite, Command and McGuire's. We also continue to see very strong growth in e-commerce channels, as the pandemic has accelerated years' worth of changes in consumer shopping behavior. Organic sales growth within consumer continued to be led by home improvement and home care businesses each up double digits organically. Stationery and office declined low single digits as many business offices and schools remain partially or fully closed due to the ongoing impact of the pandemic. Consumer's operating margins were 23.5%, similar to last year. As we previously mentioned, we have been stepping up investments in advertising and merchandising and new product innovation to address changing consumer demand trends. Lastly, similar to Health Care, operating margins were impacted by higher year-on-year restructuring costs. That wraps up the review of fourth quarter results. Please turn to Slide 10. And I will hand it back over to Mike.

Thank you, Monish. Looking at our 2020 performance, we posted an organic sales decline of 2% and adjusted earnings of $8.74 per share. We increased adjusted free cash flow by 18% to $6.7 billion with a conversion rate of 132%, which demonstrates the strength of our business model, and our continued ability to perform across economic cycles. Additionally, we posted a good return on invested capital of 18% and expanded our adjusted EBITDA margins to over 27%, up 100 basis points year-on-year. Our strong cash flow along with disciplined capital allocation helped us reduce net debt by over $4 billion in the year. During the year, we strengthened our Health Care portfolio with a successful integration of Acelity and the completion of the divestiture of drug delivery. We returned $3.8 billion to our shareholders through cash dividends and share repurchases. Last year marked our 62nd consecutive year of dividend increases. Beyond financial results, 2020 was a year where 3M stepped up when we were needed the most. Please turn to Slide 11. Throughout the pandemic, 3Mers have been relentless in applying science to improve lives and make the world a better place. Our COVID-19 response has been guided by three priorities, protecting our employees, fighting the pandemic from every angle, and delivering for our customers and shareholders. Beginning last January, we immediately activated our surge capacity and doubled our production of respirators to help protect nurses, doctors, and first responders. We have since worked tirelessly to bring on more capacity, which includes additional investments from 3M and partnerships with governments at all levels. In total last year, we produced and delivered 2 billion respirators globally, with approximately half in the United States. Today, we are at an annual run rate of 2.5 billion respirators, a fourfold increase versus 2019. At the same time, we've worked closely with governments, law enforcement and retailers to fight fraud. To date, we have helped identify more than 8 million counterfeit respirators, protecting health care workers from bad actors. Beyond providing respirators and other important personal protective equipment, we have helped the world recover in other ways. For example, our biopharma filtration solutions have enabled the development and manufacture of critical vaccines and therapeutics. We also took significant actions throughout the year to position ourselves for long-term growth and value creation. We continue to strengthen our innovation, which remains at the center of our 3M model. Last year, we invested $3.4 billion in the combination of research and development and CapEx. Our team also found ways to innovate differently and faster in response to the pandemic and to serve growing market trends. We formed partnerships with other companies to expand respirator production. We introduced new daily face coverings, and we quickly adapted our cleaning product lines to serve new customers. We created new products to improve indoor air quality, biopharma filtration, and automotive electrification, just a few of our priority growth platforms. We rolled out cutting-edge solutions to improve the performance of electric car batteries, one element of our work to enable more sustainable vehicle designs. For the full year, our priority growth platforms grew 7%, outperforming the markets they serve. We also continue to see benefits from the global operating model we implemented last January. Our model enabled us to respond to the pandemic, with agility and resilience from our significant expansion of PPE production to our ability to maintain business continuity, serve our customers, and ensure the integrity of our supply chain. Our enterprise operations team is applying learnings from our expansion of respirator production into other areas of 3M. For example, we are deploying new technology and using our analytic platforms to double our Filtrete capacity. We also took steps to optimize our model and further streamline our organization, initiating a restructuring in December that will reduce annual operating costs by $250 million to $300 million. In summary, as I look across 2020, I am proud of our accomplishments and our people from the 50,000 3Mers in our factories to our colleagues who volunteered to relocate and help scale up new respirator lines. To the retirees who came back to staff our hotline answering calls from home, people across 3M have stepped up to make a difference. And I thank our entire team for their incredible contributions in 2020. Please turn to Slide 12. We expect to deliver a strong performance in 2021 with organic growth of 3% to 6%; improved earnings, margin expansion and strong cash flow, and Monish will take you through the details shortly. We have aggressively prioritized investments throughout the pandemic, and we will accelerate our efforts in 2021. With ongoing focus on growth, productivity, and sustainability, we will increase investments in areas with strong growth opportunities such as personal safety, home improvement, and health care, with continued emphasis on our priority growth platforms. The rapid movement to an even more digital-first world also opens additional opportunities for 3M. We are pioneering innovations that improve the performance of data centers, and semiconductor manufacturing, which will be more relevant moving forward. We will also do more to leverage e-commerce along with digital technologies to better serve our customers. Ultimately, we have big opportunities to unleash 3M science and drive sustainable, long-term growth. We will ensure that our teams have the resources to capitalize. We continue to advance the digitization of 3M, while also accelerating our use of data and analytics in everything we do. Further strengthening our supply chain is a priority in 2021. With a focus on highly sustainable, disruptive, and safe manufacturing technology, which will help us deliver on our promises to customers and shareholders. To that end, I want to close by talking about the commitments we will keep in 2021 and beyond, leading our industry in science, society, and sustainability. 3M science drives our business forward; we leverage and combine our technologies in unique ways across the company, creating new products and new lines of business. And we are positioned to do even more to deliver differentiated value for our customers into the future. In a similar way, 3M is partnering with our communities to improve society. In 2020, we took steps to advance our core values, including diversity, equity, and inclusion. And in the coming year, we will hold ourselves accountable to new goals to support underrepresented groups at 3M, building on our recent progress. We will also be releasing a new Global Diversity, Equity, and Inclusion report with details on our metrics. We remain committed to sustainability, which includes using science to proactively manage PFAS, and to enable success in our ongoing work with communities and governments to advance our environmental stewardship. We will continue to increase investments to make our factories more sustainable, including $100 million in investments this year, which is included in our 2021 CapEx guidance, to further reduce water usage and improve water quality around our manufacturing sites. To help address questions you have been asking, I would also like to touch on our strong history of working with governments and leveraging science to solve big challenges around the world. We have had productive conversations with President Biden's transition team and now the administration about their COVID-19 response. And we have open lines of communication. We will continue to do all we can to get respirators and other personal protective equipment to frontline workers and help America in the world beat the pandemic. On environmental stewardship, we share a common goal with governments of improving water quality, and doing so in a way that is based on sound science, established regulatory processes, and collaboration with a broad range of stakeholders. We look forward to working with President Biden's administration and congressional leaders to pursue these shared goals, including through the remediation of PFAS where appropriate. And we aim to build on the successful public-private partnerships that 3M has led globally throughout our history as a company. To wrap up, we are confident about what's ahead in 2021 and in our ability to create more value from the 3M model and build an even more competitive and sustainable enterprise. I will now turn the call over to Monish to cover the details of our guidance.

Thanks, Mike, please turn to Slide 13. As Mike mentioned, we are initiating full year 2021 guidance as end market visibility has continued to improve despite ongoing macroeconomic uncertainty. As a result, we will no longer be reporting monthly sales updates as we had in 2020. Looking at sales; we are forecasting total sales growth of 5% to 8% with organic growth in the range of 3% to 6%. Earnings per share is projected to be between $9.20 and $9.70, or up 5% to 11% on an adjusted basis. The primary contributors to earnings growth in 2021 include organic sales growth, productivity as we continue to increase our focus on operating rigor through daily management and leveraging the use of data and data analytics, and our ongoing efforts to advance and streamline our global operating model. Lastly, we anticipate benefits from foreign currency due to the weaker US dollar. Partially offsetting these benefits are anticipated year-on-year headwinds from the Q4 2020 gain on sale of real estate and expected increases in areas such as travel, variable incentive compensation, and advertising and merchandising investments. Turning to cash, we expect another year of robust cash flow, with free cash flow conversion in the range of 95% to 105%. From a capital allocation perspective, our first priority remains investing organically in our business, including R&D and CapEx. As we have noted, we are increasing investments in growth, productivity and sustainability in 2021. As a result, CapEx for the year is expected to be in the range of $1.8 billion to $2 billion. Returning cash to shareholders remains a high priority for 3M, including both dividends along with a disciplined approach to share repurchases, which we plan to restart in 2021. Please see the appendix in today's slide presentation for additional details regarding our 2021 full-year guidance. Please turn to Slide 14. Here you see a breakdown of our expectations for organic growth by business group along with some of the key macroeconomic and market indicators we incorporated into our planning. Overall, the pace and success of the COVID-19 vaccine deployment and adoption will be critical for the global economy. The two broadest macroeconomic indicators, Global GDP and IPI are both expected to grow mid-single digits. The overall electronics market is expected to be up mid-single digits. In addition, global car and light truck builds are expected to grow 14% versus 2020. Also, while health care and oral care elective procedure volumes have improved off the Q2 lows of 2020, they are currently not expected to return to pre-COVID levels until the later part of 2021. We are also monitoring the ability and pace for people to return to the workplace and students to return to school. Finally, consumer spending, particularly retail sales and home improvement demand, and e-commerce also are factors in our planning. Taking these factors into account, we expect the following organic growth expectations for our business groups in 2021. Starting with safety and industrial, where we anticipate organic local currency growth to be up mid-single digits, transportation and electronics is expected to be up low to high single digits. This vital range contemplates the potential for end market variability, particularly in automotive and electronics. Finally, both our health care and consumer businesses are projected to grow in the low to mid-single digits this year. In 2021, we will prioritize capital to our greatest market opportunities, deliver for our customers, drive commercial intensity, improve operating rigor, enhance daily management, leverage data and data analytics and continue to streamline our organization. As a result, we expect solid revenue growth; improved margins and earnings, robust free cash flow, and a continued strong capital structure and financial flexibility. To wrap up; in the spirit of continuous improvement, there's always more we can do and will do. I would like to thank all 3Mers for the hard work and the progress that we have made in an unprecedented year. With that, I thank you for your attention. And we will now take your questions.

Thank you. Good morning, everyone.

Hey, Deane.

Good morning, Deane.

Hey, it's nice to see you guys back in the guidance business. But I have to admit I'm going to miss those monthly sales updates. First question for Monish. Can you comment on the – how the company has been benefiting from lowered temporary costs, no travel or less travel trade shows and so forth? And for 2021, what assumptions are you making about how do these temporary costs start to get feathered back in?

Yes, so I would just say, Dean, thanks for the question. As you know, we've done a great job as a team trying to keep costs under control. You can see that in Q3 results. You can see that in Q4. How it will bounce back will actually all depend on where we see the recovery of the pandemic and how the vaccine plays itself out. Currently, as you can see from the guidance that we've given you, there is headwind that we're planning on the bounce back of $0.35 to $0.45 that was put in there. And there are two or three things in there, Dean. One is, as you think about the property sales that are year-over-year, that are non-repeat. Secondly, all these indirect costs, travel is a big piece of that that comes back. The third one is the variable compensation that gets reset for 2021. And from 4Q to 1Q, also there will be a reset and an increase in cost. So those are the factors we're looking at. I would just say from a quarter perspective, it's all going to depend on how revenue comes across, how growth happens, how the economy recovers. The other piece, just to keep in mind, as Mike mentioned, our plan is to invest more in opportunities on growth, productivity, and sustainability. That also will have an impact on each quarter, depending on how the economy recovers.

That's helpful. And then as a follow-up, and just broadly, I really appreciate all the work that 3M has done with regard to wrapping up the respirator mask capacity and how you've responded, that's been terrific. Just want to express my appreciation. Can you comment on any updates on the MIT collaboration and the rapid test system that you have in development?

Yes. Sure, Dean, thanks for that question. Our team has been working with MIT researchers, as we've talked about, really focused on developing a low-cost rapid detection capability for COVID-19. Over the past nine months, we've made some very significant technical advances in the design. We're bringing our expertise in manufacturing and scaling up working with MIT with their capabilities and technology around the assay, the measurement development. We've been focused on some of the challenges that are inherent in this kind of development, which are the stability of the tests and the robustness of the device, and improving sensibility, sensitivity in the detection. We're in the middle of the development phase. We're working to address those challenges. We've made very good progress. We'll continue to update as we go along and we're encouraged by the partnership with MIT.

What would be the optimistic view on a rollout?

Well, we're in development. We’ve got to resolve some of the requirements that are here around sensitivity and stability of the device. So we're in the middle of that. As soon as we get further along, I would say, in the development phase, we will give you a better view of timelines.

Appreciate it. Best of luck to everyone.

Thanks, Deane.

Thanks, Deane.

Good morning, guys.

Hey, Scott.

Good morning, Scott.

I want to dig in on the T&E guide a little bit. I mean, it's a kind of drive a truck through that low to high range. And when I look at it at least and based on what we've seen this quarter, it seems like the bias could be a little bit more to the higher side of that. Is there something that concerns you? Perhaps maybe emerging market recovery or something like that that concerns you that make you a little bit more conservative on that specific segment?

Well, Scott, I'll start with something Monish said, it's great to see this business turn positive in Q4. It's a very good business that faces into markets that have very innovative customers and segments. It's a good opportunity for us to continue to grow and leverage our innovation. As we look into 2021, we see some positive outlooks. We saw and highlighted some of the strength in semiconductor and in automotive build rates turning positive in Q4, that's expected to continue to get better in 2021. I would say there's some uncertainty on how that's going to play out as we start the year. COVID is still the driving factor here, what is the visibility through that. I think we get better clarity on the plans of our customers and how they're thinking about it. There's still that uncertainty around the pandemic and how that plays out even in those areas. You see some of that, and I'll look of maybe some softness in consumer electronics, as we start the year. We also, as a reminder in this business, we have exposure to oil and gas as well as highway infrastructure and commercial solutions, which really depends on people in the office working in the office and in commercial settings. So there's a balance across those businesses with the view of the uncertainty in how the pandemic is going to play out and we'll get better clarity as we go through the year.

I would just add Scott to everything Mike said. I would just add the supply chain stability in the electronics and the auto OEM market, also something that we are watching. So as that plays out and that gets more stable, I think it'd give us more stability and certainty on how we're going to deliver against it.

Okay. And then just a quick follow-up. I mean are there tangible PFAS milestones in 2021 that you guys can remind us of?

Well, Scott, we continue to...

Anything at all where we can get some more color?

Yes, I would say, for us, we continue to focus on proactively managing PFAS. We've got three principles, and one of those is providing transparency to you and our investors. Right now, there had been scheduled some initial bellwether case in Michigan that's been postponed, it's still to be determined when that'll be scheduled. We'll update as we go. We do continue to keep our 3m.com site updated with all recent PFAS information. We'll continue to update on whether it's litigation, our work or our support of regulatory standards. Any of those categories we will update there and we’ll update in these calls as well.

Okay. Thank you. Good luck, guys.

Thank you.

Thanks, Scott.

Thanks. Good morning, everybody.

Hey, Joe.

Hey, Joe.

Maybe my first question, just trying to understand, obviously, great ending to the year from an organic growth standpoint. I'm trying to understand, I guess, like, what's embedded from a cadence perspective, as we progress through 2021? And then secondly, is it - there was some pandemic-related benefits that you received in 2020? I'm just wondering what your base case expectation is for 2021? Is there - is it a headwind? Is it neutral, just trying to understand that better?

So I'll try again, Joe, I think you're asking what our cadence is and how we're going to look at 2021. So what we're going to, we're going to be as helpful as we can, as you know, Joe, we have initiated annual guidance, and based on where we see some of the end markets that I mentioned about in my prepared remarks. Based on that we'll see where - how those end markets play out that will determine how our quarterly things play out. Our guidance is right now organic 3% to 6% with 5% to 8% growth in total, including FX. One of the things that we have seen over the pandemic, Joe, is our normal trends that historically you would see don't seem to play itself out. For example, in December, the company usually sees deceleration we didn't see the deceleration. Similarly, on a month-to-month trend, sometimes what you see in variability in the months was higher due to COVID and therefore, my personal belief is I think you're going to see more variability throughout the year depending how different parts of the world play itself out. We are also aggressively prioritizing our investments throughout all three items Mike mentioned growth, productivity, and sustainability. Again, that will have an impact based on how revenue plays itself out. We would love to go heavy and invest early so that we can capture the growth that's coming. But we'll have to see how the world recovers. So we'll have to just walk through that. And then just another piece for you to keep in mind, as you're thinking about the quarters is from a restructuring charge perspective, we had announced the charge in the fourth quarter, you're going to see the balance of that charge somewhere between $110 million to $160 million in the second half of this year. We'll tighten that as we go through the quarter. Our goal is to be as helpful as we can throughout and through the various interactions we have with all of you is to tell you what's going on in the world. But that's the way we see it right now. So hopefully I answered your question, Joe.

Yes, Monish, that's helpful, and maybe just my follow-on question, since you mentioned the restructuring, you did announce the call it $75 million to $100 million in benefits, that we're going to impact 2021. I guess how do we think about that in the context of some of the temporary cost actions that are reversing fully recognizing that the investments that you've just laid out are likely going to be dependent on how the volume shakeout?

Yes, it's a great one, Joe. The same thing we keep thinking about all the time of how do we do it. So we have tried on our, on one of the presentation pages, there's a guide out there, where we show you headwinds is $0.35 to $0.45, and the benefit from restructuring is anywhere between $0.20 to $0.30. If you think about the headwinds, as I mentioned before, there's property sales that don't repeat some of the indirect costs that was snapped back. Example, travel and variable compensation is in that range of $0.35 to $0.45. On the restructuring side, the $0.20 to $0.30, I would ask you to think about two pieces. One is for all the other actions that the companies had taken other than the fourth quarter, there's a carryover benefit of give or take $100 million. The benefits of the restructuring that we announced in the fourth quarter are another $75 million of benefits $75 million to $100 million. Of course, it's offset by the charge that we're going to take of $110 million to $160 million. So that's why we have called out the restructuring benefits in the guide of $0.20 to $0.30.

Hi, good morning. Maybe, hey, maybe just the first question on just the firm wide adjusted sort of operating margin expansion for 2021 that's dialed in. So I see all those moving parts on Slide 21, which is very helpful. So maybe thinking about it just differently from a sort of P&L standpoint, I think your adjusted EBIT margin in 2020 was around sort of between 21% and 21.5% maybe, if you could just confirm that. And then of that base, what level of margin expansion you dialing in for 3M in 2021 at the midpoint of the guidance, let's say.

Sure, Julian. I would say a couple of things. So first, just answer your question to give you the 20% to 21.5%. That's correct. So it's 21.3 is the perfect number. If you think about 2021, and how we look at margin, I'll just elevate first to say our general view over the long term is growth at or about macro, sustainable margin improvement; strong cash that ultimately helps us have a very strong capital structure. Keeping that in mind, we would say that's basically how we are thinking about long term, things to factor in from a margin guide perspective, as Mike mentioned, we are going to invest properly in growth, productivity, and sustainability. So that's going to have one factor. The second factor is going to be the amount of productivity that we are generating. We've got a lot of proprietary technologies that we are rolling out in supply chain. Mike mentioned that the stability of our supply chain is one of our priorities for 2021. We're going to continue that path. You should see benefit from the productivity actions that the supply chain team is driving. The third piece is making sure that we have factored in correctly the snap back of 2020 costs. We have shown you that it's $0.35 to $0.45 of headwind again on the three items that I mentioned before, and the last one to think about this is thinking about what revenue is going to be and what growth looks like quarter-to-quarter. That's going to also have a pretty big impact on where we end up from a margin perspective. So those are all the factors that we are putting in here as we think about but long-term growth at or about macro, sustainable margin improvements, and then strong cash.

I see. So, Monish, is around the sort of plus 30, 40 basis points margin expansion is that the rough ballpark then putting in all of those different pieces?

So I go back again, Julian, I would say it all depends on where revenue ends up being and where - how much we invest. So it all depends on how fast the world recovers.

Fair enough. And then just the second topic quickly, you'd alluded in the prepared remarks to the buyback perhaps resuming clearly the balance sheet starting to look under-levered and very good free cash flow last year. You're not dialing in much in the way of share count reduction on that Slide 21. So maybe help us understand what scale of buybacks you might be contemplating for the year?

Sure. The way that we look at it, Julian, is our first step in all of this is to make sure that we are investing organically R&D and CapEx, you're seeing us increase capital expenditure at $1.8 billion to $2 billion because we see some growth opportunities, some productivity opportunities, as well as sustainability. Our second priority is dividends and making sure that our shareholders think that's important. We acknowledge that our third priority is M&A. And then our last priority share buyback. We at 3M understand returning cash to shareholders is important. So we have both, we're going to dividend as well, as we have always supported a reasonable amount of share buyback. That's our current plan. How much and how that plays out from a timing perspective is again goes back to where we see the economic recovery is going to look like. Based on that, we'll work it with the board, and we'll keep y'all posted as we announced.

Thanks. Good morning. Hi, I just wanted to go back to the increase investments comments. So just go into your 2021 EPS Bridge; the $0.47 of organic growth, I think that kind of recap. It's down to like a sub 30% of in gross margin. So it feels like this investment spending gains that. Just want to confirm that. And are we thinking about R&D to kind of get back to that 5.5% - 6% of sales kind of range in 2021?

Is a question, Nigel, are we getting back to 5.5% to 6% of sales R&D? Is that the question?

That's part and then would that investment spent be against your organic growth bucket?

Yes, so I would say, listen, R&D right now is I would say is in that range. But it always goes back to the point Mike made, which is our plan is to keep investing in growth, productivity and sustainability. On the growth side, we have so many good opportunities, whether it's home care, personal safety, digital, health care, data analytics, as well as auto OEM. From an electrification perspective, we have tremendous opportunities of growth. Depending on how we see 2021 and then 2022 and beyond play out, we won't be shy to invest in those areas, we won't be shy to invest in advertising and merchandising too as required in our businesses to make sure that we capture for the long-term growth. So I would say that yes, but I would also ask us to start thinking to be four great businesses and depending on how the end markets play out in those four businesses, we're going to flex up or down. I don't know if I answered your question, Nigel, but that's the way I look at it from an R&D perspective.

Yes, I believe that's a solid response. Regarding pricing, we have indeed noticed an increase, particularly in T&E, and it seems the EMEA region performed similarly this quarter. You mentioned less discounting due to COVID, which is understandable. I would like to discuss raw pricing. Are you adjusting prices in response to raw material inflation? Any additional insights on that would be appreciated.

Sure. We are seeing inflation. One of the things about 3M is we buy so many diverse products, so there's not one product that's greater than $200 million to $300 million that has a big impact. But we are seeing, I would say, inflation in three areas. Area number one is just raw material and feed. A couple of them we look at is polypropylene, wood pulp, and ethylenes, are areas that we look at and say all of them are showing inflation. The second is, as you're seeing from different industrials is logistics cost is higher, whether it's air or truck; the logistics costs are higher. So we're seeing inflation there. The third piece, even though the economies are still not that very strong from a labor shortage perspective, that's another area where we're seeing inflation and manpower cost. So those are the three areas that we are seeing, and we have a great sourcing team that's working to minimize that as much as they can. Your specific question on pricing, our aim is to have prices that will go up year-over-year to take into account the inflation that we're seeing.

Hi guys. Good morning. I had just sort of a softer question. I think 3M is going through a period where there are a lot of changes happening below the surface, which are sort of less than apparent to us looking from the outside. But you have new systems; you have sort of this new structure where organization is much more globally focused. Can you just talk to us, as 2020 evolved how did it change your planning process? And how did it impact your planning process going into 2021?

Yes, Andrew, thanks for the question. We have even in the middle of the pandemic we've continued to make very good progress on some of what you outline there. Part of it is the digitization of 3M, transforming our company deploying new ERP and ecosystem around it that continues to move forward. We are also now operating for one year, our new operating model that we launched in January of 2020. We moved ahead in the middle of the pandemic, we benefited from it, we saw the benefits come in our ability to respond to just the dynamics that we hit. It's on our markets as we went through the year. I would say we benefited from it, it validated where we are going with the 3M model, it validated the strengths of the 3M model and how we apply our innovation in our markets. I would say it encouraged us to continue to really press ahead, and I talked about that in my prepared remarks about the digitization, improving our operations. I see it in terms of more agility, shorter cycle times, improved response. And ultimately, it's really at the foundation of how we drive productivity, operational improvements as we go. So that's becoming the way we take advantage of it. That's how we focus it. Planning broadly, as part of that we're getting better in terms of cycle times. I think we're better at using the greater visibility on data and the analytics that go with it. So I'm encouraged with the progress we've made and I believe there's more to come as we go through 2021.

Andrew, I would just add, I've been here only six months. Just to tell you the changes that I've seen in the six months I've been here. There's a lot more focus on daily management, are we winning daily? Are we not winning daily, much more tied into what external market trends that we are seeing, so we can quickly react as needed? You can see the work the supply chain teams have done to keep our supply chain lines running despite supply chains in general being broken. I look at the ability to see visibility of data. There’s also data democratization, where we can see stuff that is happening much faster on a daily basis. It's all about driving the operating rigor getting the daily management quickly going into root cause and then finding sustainable improvements. We're using that, so I think there's much more transparency on issues that we are facing, and the team is going in eyes wide open and trying to find solutions as quickly as we can.

And just follow-up question; you're sort of highlighted the procedure slowdown. But if I look at medical solutions that were probably driven by Acelity I guess on oral care, you said it down organically, but I think reported number is still up. Can you just talk about where is organic growth for product lines like Acelity and Tegaderm and how do you expect them to sort of evolve into the second half of the year?

Sure. Acelity I would say is one of the divisions that does get impacted, the highest due to hospitalization rate and elective surgeries but overall when you step back and say what Acelity has done, I would say as the volumes came up in Q2, off Q2 lows the business has continued to grow tremendously through those Q2 lows, the reason why Acelity is so good for 3M, I think there are a couple of things. One is it's in a market that is growing based on where our demographics are. Secondly, it gives 3M a lot more relevance when it comes to talking to caregivers. Third is it gets us into a post-acute space and a home care space, which I think post-COVID is going to be a trend from a home care perspective. What 3M brings to Acelity is the synergies that it can bring one is its brand, its global reach, and its ability to do global and high-speed manufacturing. It brings it to that and 3M did already have an advanced wound care business. So when you put this together, it basically makes it a very good acquisition for 3M. We have seen growth in both. We have made positive income in third and fourth quarter. We are very encouraged with all the work that the health care team is doing that this business will keep growing. But of course, it will be partially dependent on how the world recovers from electives.

And is Tegaderm, are they comp positive or still negative?

Andrew, I think we have to get back to you.

Unfortunately, I don't have that handy. Sorry.

Hey, guys, good morning. I'm going to disagree with Dean for once and say I'm glad we're not getting the monthly sales. Just it's I'm in favor of less work, less work these days. Given the industry trends, that's negative productivity for us. On that side, that productivity bucket for you guys, the $0.20 to $0.35 for this year. Where did that end up for? I know this is kind of a messy bridge for 2020. But where did that number end up for 2020?

You are saying the full year 2020?

Yes, the full year 2020 kind of productivity bucket.

The leverage, I think if my memory is right was landed up somewhere. Again, it's so messy with all the indirect snapbacks and in and out of 2020 and what we did by quarter-to-quarter timing, etc. But I would just say, Steve, in general, you should just think about the leverage range for 3M in the range of 30% to 40% from an incremental volume perspective.

Okay, that's helpful. And then within the organic growth assumption, what are you assuming for price?

So as I said before on the earlier question that was there. We expect prices to be positive based on all the inflation that we are seeing. Historically, when you think about what 3M has been able to do, they have been able to get price just because of the value that they add to customers. I don't expect that to change.

So like 50 to 100 bps something in that range.

Well, historically, if my memory is right and Bruce can correct me, it has been in the range of 30 to 50 basis points excluding electronics, which is an industry that definitely sees price decrease. But we'll have to see where inflation ends up here. We'll do the best we can.

Hi guys. Good morning. I had just sort of a softer question. I think 3M is going through a period where there are a lot of changes happening below the surface, which are sort of less than apparent to us looking from the outside. But you have new systems; you have sort of this new structure where organization is much more globally focused. Can you just talk to us, as 2020 evolved how did it change your planning process? And how did it impact your planning process going into 2021?

Yes, Andrew, thanks for the question. We have even in the middle of the pandemic we've continued to make very good progress on some of what you outline there. Part of it is the digitization of 3M, transforming our company deploying new ERP and ecosystem around it that continues to move forward. We are also now operating for one year, our new operating model that we launched in January of 2020. We moved ahead in the middle of the pandemic, we benefited from it, we saw the benefits come in our ability to respond to just the dynamics that we hit. It's on our markets as we went through the year. I would say we benefited from it, it validated where we are going with the 3M model, it validated the strengths of the 3M model and how we apply our innovation in our markets. I would say it encouraged us to continue to really press ahead, and I talked about that in my prepared remarks about the digitization, improving our operations. I see it in terms of more agility, shorter cycle times, improved response. And ultimately, it's really at the foundation of how we drive productivity, operational improvements as we go. So that's becoming the way we take advantage of it. That's how we focus it. Planning broadly, as part of that we're getting better in terms of cycle times. I'm better at using the greater visibility on data and the analytics that go with it. So I'm encouraged with the progress we've made and I believe there's more to come as we go through 2021.

Andrew, I would just add, I've been here only six months. Just to tell you the changes that I've seen in the six months I've been here. There's a lot more focus on daily management, are we winning daily? Are we not winning daily, much more tied into what external market trends that we are seeing, so we can quickly react as needed? You can see the work the supply chain teams have done to keep our supply chain lines running despite supply chains in general being broken. I look at the ability to see visibility of data. There’s also data democratization, where we can see stuff that is happening much faster on a daily basis. It's all about driving the operating rigor getting the daily management quickly going into root cause and then finding sustainable improvements. That's becoming the way we take advantage of it. That's how we focus it. Planning broadly, as part of that we're getting better in terms of cycle times. We're better at using the greater visibility on data and the analytics that goes with it. So it's, I'm encouraged with the progress we've made and I believe there's more to come as we go through 2021.

And just follow-up question; you're sort of highlighted the procedure slowdown. But if I look at medical solutions that were probably driven by Acelity I guess on oral care, you said it down organically, but I think reported number is still up. Can you just talk about where is organic growth for product lines like Acelity and Tegaderm and how do you expect them to sort of evolve into the second half of the year?

Sure. Acelity I would say is one of the divisions that does get impacted, the highest due to hospitalization rate and elective surgeries but overall when you step back and say what Acelity has done, I would say as the volumes came up in Q2, the business has continued to grow tremendously through those Q2 lows. The reason why Acelity is so good for 3M, I think there are a couple of things. One is it's in a market that is growing based on where our demographics are. Secondly, it gives 3M a lot more relevance when it comes to talking to caregivers. Third it gets us into a post-acute space and a home care space, which I think post-COVID is going to be a trend from a home care perspective. What 3M brings to Acelity is the synergies that it can bring one is its brand, its global reach, and its ability to do global and high-speed manufacturing. It brings it to that and 3M did already have an advanced wound care business. So when you put this together, it basically makes it a very good acquisition for 3M. We have made positive income in the third and fourth quarter. We are encouraged with the work that the health care team is doing that this business will keep growing. Of course, it will be partially dependent on how the world recovers from electives.

And is Tegaderm, are they comp positive or still negative?

Andrew, I think we have to get back to you.

Unfortunately, I don't have that handy. Sorry.