3M Company (MMM) — Q3 2022 Earnings Call Transcript

Thank you, and good morning, everyone, and welcome to our third quarter earnings conference call. With me today are Mike Roman, 3M’s Chairman and Chief Executive Officer; Monish Patolawala, our Chief Financial and Transformation Officer. Mike and Monish will make some formal comments and then we will take your questions. Please note that today’s earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3M.com. Please turn to slide two. Please take a moment to read the forward-looking statement. During today’s conference call, we will be making 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. Please note 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 appendix to these slides and in the attachments to today’s press release. With that, please turn to slide three, and I will now hand the call off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. We continue to execute our strategies to deliver for our customers, position 3M for long-term growth and manage legal matters. Our team posted organic growth of 2% or more than 3%, excluding the impact of the decline in disposable respirator sales, along with adjusted margins of 21.5%, adjusted EPS of $2.69 and $1.4 billion of adjusted free cash flow. While the global economic outlook is softening, our businesses continue to innovate for customers and capitalize on opportunities. Transportation and Electronics posted 3% organic growth, with Safety and Industrial, Consumer and Healthcare, each growing 2%. All business groups delivered margins above 21%, with notable margin expansion in Safety and Industrial, and Transportation and Electronics. Looking geographically, organic growth was led by APAC up 3%, with China up 8%, benefiting from backlog recovery following the COVID-related lockdowns in the second quarter. The Americas were up 2%, with the U.S. flat, against 6% growth in last year’s Q3. Growth in EMEA was flat, as we navigate the ongoing geopolitical unrest across Europe. At the same time, we drove operational improvements to address inflation and supply chain challenges. We are delivering strong pricing, managing costs and reducing inventory backlogs, while maintaining a relentless focus on serving customers. For example, we recently invested in a new shipping consolidation center in South Carolina, which is reducing average cycle times for exports to Asia by one to two weeks. Some of our actions have impacted near-term margins, but we will continue to do what is necessary to take care of customers. Going forward, we see a significant opportunity to reduce cost of goods sold and working capital as global supply chains improve, which includes leveraging data and data analytics to drive productivity in our plants. With respect to guidance, today we are updating full year expectations to reflect our results through nine months, along with the continued strengthening of the U.S. dollar and ongoing macroeconomic and geopolitical uncertainty. For organic growth, we are lowering the high end of our range to 1.5% to 2%, against the prior range of 1.5% to 3.5%. We anticipate adjusted EPS of $10.10 to $10.35, against the previous expectation of $10.30 to $10.80. We are also updating our range for adjusted free cash flow conversion to 85% to 95% from 90% to 100% previously. To strengthen 3M for the future, we continue to invest in growth, productivity and sustainability. For example, while we see near-term softness in consumer electronics, we are investing in Electronic segments that are seeing strong growth, including new solutions for automotive displays, and virtual and augmented reality. We are rolling out new thermal management solutions to improve electric car batteries, one element of our work to advance more sustainable vehicle designs. And earlier this month, we introduced a new posted app for Microsoft Teams that helps people collaborate in hybrid environments, as we execute our digital strategy and re-imagine our products. We are also innovating to make our operation safer, more efficient and more productive. At our plant in Alexandria, Minnesota, we are leveraging 3M disruptive technologies to transform our abrasive belt converting process through end-to-end automation, improving labor productivity by 32%, eliminating nine high-risk tasks and saving nearly $1 million annually. Many more similar projects are on the way across our global operations, driving safety and savings. In sustainability, we have installed a new state-of-the-art water filtration system in Cordova, Illinois. We now have all three of our largest water using sites in the U.S., utilizing industry-leading filtration technologies following through on the $1 billion sustainability commitment we made last year. At the same time, we are positioning 3M for long-term success by actively managing our portfolio, complementing all we do to strengthen our enterprise organically. Last month, we completed the divestiture of our Food Safety business, which unlocks value and further strengthens our balance sheet. We received approximately $1 billion and reduced our outstanding share count by 16 million. In addition, earlier this month, we divested two of our skin care brands in Southeast Asia, enabling us to prioritize other parts of our consumer portfolio. We have also established a dedicated team to seamlessly execute our healthcare spin-off. We are confident in our plan to create two world-class public companies with greater focus and better able to drive growth and innovation. Before turning the call to Monish, I would like to provide an update on litigation, which I know is top of mind. On Combat Arms, the Aearo Technologies Chapter 11 proceeding is active and progressing and we believe it is the best path to resolving claims in an equitable, efficient, prompt and permanent manner. That continues to be our goal, a resolution that is equitable and more certain for all parties. Aearo is participating in a confidential mediation process focused on reaching a comprehensive settlement and 3M is supporting those efforts. Aearo has also appealed the bankruptcy court’s decision in August not to extend the stay of litigation to 3M and the Seventh Circuit has agreed to hear the appeal. In the MDL, the next trial is scheduled for February of next year. We also continue to actively manage PFAS litigation. Earlier this month, we reached a settlement with the City of Gadsden, Alabama related to carpet manufacturing. The first AFFF MDL trial is now scheduled for June of 2023. In summary, we continue to deliver for customers in an uncertain environment. I thank our employees for their contributions and commitment, especially as we continue to lead through significant change and position 3M for the future. We will stay focused on driving growth, improving operational execution and delivering greater value for customers and shareholders. I will now turn it over to Monish for more details on the quarter.

Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 4. Overall, the 3M team delivered third quarter sales and operating margins that were very much in line with my comments at a conference in mid-September. With some puts and takes, as consumer and consumer electronics demand declined as the quarter progressed, while industrial end markets demand remained steady. Third quarter total sales were $8.6 billion or down 3.6% year-on-year, which included headwinds of 5.1% of $450 million from foreign currency translation and 50 basis points of $50 million from the divestiture of Food Safety, along with the deconsolidation of Aearo Technologies. On an organic basis, third quarter sales increased 2% versus last year. This result includes an anticipated falloff in disposable respirator demand, which negatively impacted organic sales by approximately $130 million or 1.4 percentage points. Excluding this decline, Q3 organic sales growth was 3.4%. On an adjusted basis, third quarter operating income was $1.9 billion, with operating margins of 21.5%, which were up 40 basis points year-on-year and 50 basis points sequentially. Adjusted earnings for the quarter were $2.69 versus $2.58 last year. Turning to the components that impacted third quarter operating margins and earnings year-on-year performance. As you may recall, during our Investor Day this past February, we laid out our operating framework and operating principles that included daily management, data democratization, transparency and accountability. We continue to make progress in the consistency of application of this framework. By embracing these principles, along with taking self-help actions, the team executed well in the quarter as we continue to navigate the fluid and uncertain macro and geopolitical environment. We continue to focus on serving our customers and drive additional actions, including recovering our sales backlog in China from the April and May COVID-related lockdowns, implementing appropriate selling price actions to address ongoing inflation, maintaining strong spending discipline, implementing targeted productivity actions to adjust businesses to end market demand trends while driving simplification and continuing to invest in growth, productivity and sustainability to ensure we are all well positioned for long-term success. These actions helped to more than offset a number of headwinds in the quarter, including the decline in disposable respirator sales, which negatively impacted Q3 operating margins by 30 basis points and earnings by $0.07 a share; incremental end market softness particularly in consumer electronics, along with oral care and consumer retail in the U.S. as persistent inflationary pressures are slowing consumer spending; ongoing global supply chain challenges and raw material constraints; and finally, geopolitical impacts, particularly Russia, which was a year-on-year headwind of $50 million to revenue and $0.03 to earnings per share. In total, our operating framework and self-help actions resulted in an overall net benefit to operating margins of 2.9 percentage points and $0.41 to earnings. Moving to raw material and logistics inflation. As I have noted over the last several quarters, inflationary pressures remain persistent and are broad-based. Therefore, we continue to experience year-on-year headwind with a Q3 cost increase of approximately $225 million or a negative impact of 2.6 percentage points to operating margins and $0.31 to earnings. Our full year raw materials and logistics inflation estimate of $750 million to $850 million remains unchanged. And as we have said before, we continue to expect to offset this through pricing actions. The strength of the U.S. dollar continued to affect total revenue as foreign currency translation was a negative 5% impact. As a result, we had a benefit of 10 basis points to margins; however, incurred a headwind of $0.12 to earnings per share. As Mike mentioned, we have been actively managing our portfolio. On September 1st, we closed the Food Safety divestiture, resulting in approximately $1 billion in consideration received, along with reducing outstanding share count by 16 million via an exchange offer. However, we lost one month of sales and income from Food Safety in the quarter. Therefore, the lost sales and income from food safety, along with the deconsolidation of Aearo Technologies resulted in a year-on-year headwind of $0.02 to earnings per share in the quarter. Finally, other financial items increased earnings by a net $0.15 per share year-on-year, driven equally by benefits from a lower share count, along with a lower-than-expected tax rate. The lower third quarter adjusted tax rate was primarily the result of favorable outcomes from prior year audit settlements and geographic income mix. Looking at the full year, we now expect our adjusted tax rate in the range of 17.5% to 18.5% versus 18.5% to 19.5% previously. Please turn to Slide 5. Third quarter adjusted free cash flow was $1.4 billion, with conversion of 88%, an improvement from first half performance as we drive working capital intensity, including improved inventory levels, while also increasing CapEx for growth and sustainability investments. We remain focused on working capital improvement as we continue to navigate through a fluid supply chain environment. Even though the environment remains challenging, we are realizing benefits from our efforts as we leverage the use of data and data analytics to reduce inventory levels through better demand planning and optimized customer payment terms. We expect to continue to realize benefits from our actions as we move forward. Capital expenditures were $435 million in the quarter and $1.2 billion year-to-date is up 19% year-on-year as we continue to invest in growth, productivity and sustainability. Based upon the current status of supply chains and pace of projects, we now expect full year CapEx investments in the range of $1.75 billion to $1.85 billion. During the quarter, we returned $1 billion to shareholders through the combination of cash dividends of $850 million and share repurchases of $155 million. On a year-to-date basis, we returned $3.5 billion to shareholders, including $2.6 billion in dividends and $900 million in share repurchases. In addition, we reduced our outstanding share count by $16 million via an exchange offer associated with the Food Safety divestiture. Both dividends and share repurchases remain important pillars of our capital allocation strategy. We continue to see the current value of the stock as a very attractive opportunity and have resumed share repurchase activity following the Food Safety divestiture. Having a strong balance sheet and capital structure remains a priority for 3M, because of the flexibility it provides us to continue to invest organically in the business, pursue strategic M&A opportunities, and return cash to shareholders while navigating legal matters. Net debt at the end of Q3 stood at $12.1 billion, down 3% year-on-year and down over 30% since 2019. Please turn to Slide 7 for our business group performance for Q3. I will start with our Safety and Industrial business, which posted sales of $2.9 billion or up 1.7% organically compared to last year’s third quarter. This result included a year-on-year headwind of approximately $130 million due to the ongoing decline in demand for disposable respirators. Excluding disposable respirators, Safety and Industrial posted Q3 organic growth of over 6%, driven by broad-based performance along with the backlog recovery in China from the April and May COVID-related lockdowns. Our Personal Safety business declined low double digits organically, primarily due to the decline in COVID-related disposable respirator demand. Turning to the rest of Safety and Industrial, organic growth was led by low-teen increases in both automotive aftermarket and roofing granules. Electrical markets and abrasives grew high-single digits, while closure and masking systems and industrial adhesives and tapes delivered mid-single-digit growth. Operationally, the Safety and Industrial team drove strong execution during the third quarter, delivering adjusted operating income of $673 million, up 8% versus last year and up 7% sequentially versus Q2. Adjusted operating margins were 23.2%, up 2.5 percentage points as the team managed inflation with price actions that drove yield and efficiency and exercised strong spending discipline. The Safety and Industrial Business Group continues to focus on investing for the future, including in digital platforms such as repair stack for connected automotive body shops and sustainable platforms like thermal barriers for auto electrification. Moving to Transportation and Electronics, which posted sales of $2.2 billion or up 3% organically compared to last year. Overall growth was benefited by COVID-related backlog recovery in the Greater China region, which was partially offset by increased weakness in consumer electronics demand, along with the continued constraints in the semiconductor supply chain. Our electronics-related business declined mid-single digits organically, with decreases across consumer electronics, particularly smartphones, tablets and TVs. These declines were partially offset by continued strong demand for our solutions in semiconductor, factory automation and automotive end markets. Organic sales in our auto OEM business were up 21% year-on-year, as compared to an estimated 27% increase in car and light truck builds. As you may recall, we outperformed last year’s Q3 build rate by nearly 20 percentage points as we benefit from a channel inventory build, which was unwound in Q4 last year. Turning to the rest of Transportation and Electronics. Commercial Solutions grew organically high single digits, while Advanced Materials grew mid-single digits and Transportation Safety was down low single digits. Despite the continued fluid end market environment, the Transportation and Electronics team delivered strong operating performance. Third quarter operating income increased 9% to $474 million, with operating margins of 21.2%, up 2.5 percentage points year-on-year. Operating margins were benefited by price actions as we navigated inflationary pressures along with the strong spending discipline. The Transportation and Electronics business group is investing to solve some of the toughest challenges in the market and executing for future growth. For example, in Q3, we opened a new battery component testing lab to support accelerating opportunities in automotive electrification. Looking at our Healthcare business, which delivered Q3 sales of $2.1 billion, with organic growth of 1.7% versus last year’s strong 8% comparison. Our Medical Solutions, Food Safety, Separation and Purification, and Health Information Systems businesses all increased low-single digits organically. While we did have organic growth in Separation and Purification year-on-year, Biopharma was down in the U.S. due to last year’s strong demand for COVID therapeutics. Third quarter elective medical procedure volumes were approximately 90% of pre-COVID levels as we saw activity dip in July and ramp back up as we went through the quarter. Fourth quarter procedure volumes are currently projected to be 90% to 95% of pre-COVID levels as labor shortages continue to impact the pace of recovery. Oral care was down mid-single digits against low double-digit growth from a year ago. We are also seeing softening due to the ongoing inflationary pressures impacting consumer spending on discretionary oral care and orthodontic procedures. Healthcare’s third quarter operating income was $452 million, down 11% year-on-year. Operating margins were 21.8%, down 1.7 percentage points with adjusted EBITDA margins of over 29%. Year-on-year operating margins were impacted by increased raw materials and logistics costs along with manufacturing productivity headwinds. These impacts were partially offset by price actions and spending discipline. The Healthcare business group is focused on delivering innovation, including investments in the launch of 3M Filtek Matrix, which creates a new and innovative approach for dental restorations, simplifying the procedure and enabling more natural tooth structure to remain. In addition, the team made capital investments to support manufacturing capacity expansion in the Separation and Purification, and Medical Solutions business. Lastly, our Consumer business posted third quarter sales of $1.4 billion or up 1.5% year-on-year on an organic basis versus last year’s 8% comparison. Year-on-year growth in the third quarter was led by Consumer Health and Safety, which was up mid-single digits organically, and Stationery and Office and Home Care, which both grew low single digits. Home improvement growth was down low single digits organically versus last year’s strong comparison; however, increased mid-teens sequentially. The back-to-school season was softer than expected as consumer spending continues to be impacted by ongoing inflationary pressures, along with retailers aggressively addressing elevated inventory levels. Looking ahead, we anticipate these impacts to continue throughout the upcoming holiday season. Consumer’s third quarter operating income was $299 million, down 3% compared to last year with operating margins of 21.3%, down slightly year-on-year. Our Consumer business operating margins benefited from selling price actions, spending discipline, and restructuring actions. These benefits were more than offset by increases in raw materials, logistics and outsourced hardgoods manufacturing costs and manufacturing productivity headwinds. The Consumer business group is executing for future growth, including expanding our Command platform to help consumers hang, organize, and decorate in even more creative ways. Please turn to Slide 9 for a discussion on our 2022 outlook. The macro environment remains uncertain with mixed trends and signals across geographies and end markets. While we are working through these challenges and taking actions, we are updating our full year guidance, reflecting our year-to-date performance, increasing U.S. dollar trend along with the continued fluid environment. Our updated 2022 full year outlook includes; organic growth in the range of 1.5% to 2% versus a prior range of 1.5% to 3.5%; adjusted earnings in the range of $10.10 to $10.35 versus a prior range of $10.30 to $10.80, which includes an additional headwind of $0.15 per share from foreign currency exchange compared to just three months ago; and adjusted free cash flow conversion to be in the range of 85% to 95% versus our prior range of 90% to 100%. Before I wrap up, let me make a few comments regarding the fourth quarter. First, from an end market perspective, GDP and IPI continue to moderate with current Q4 estimates of 1.4% and 2.2%, respectively. We are closely monitoring the geopolitical environment in Europe and the impact on energy inflation and end market demand. Auto build rates are currently estimated to be up 2% year-on-year, while consumer electronics demand is expected to remain soft. Healthcare elective procedure and oral care volumes are expected to be in the range of 90% to 95% of pre-COVID levels. And lastly, we anticipate continued inflationary impacts on consumer spending, along with the inventory reduction actions at retailers. Therefore, looking at the fourth quarter, we expect total sales to be in the range of $7.9 billion to $8.2 billion. This includes organic growth in the range of 1% to 3%, which includes a 2% headwind or $150 million to $200 million from the continued decline in disposable respirator demand and the exit of Russia, which will create a year-on-year headwind of approximately 80 basis points or approximately $70 million. Excluding the impact from these two items, Q4 organic growth is estimated to be nearly 4% to 6%. Increasing U.S. dollar strength is anticipated to be a year-on-year headwind of approximately 7% of sales, or roughly $600 million. The divestiture of Food Safety and deconsolidation of Aearo Technologies will result in a Q4 headwind of approximately $120 million to sales of 1.5%. Turning to raw materials and logistics costs, we anticipate a Q4 year-on-year headwind of approximately $100 million to $150 million, which we expect to be able to navigate and offset the price actions. Operating margins are expected to be in the range of 20% to 21%. And finally, our outstanding share count is currently anticipated to be in the mid-550 million share range, taking into account the $16 million share count reduction that I mentioned earlier. Looking ahead to 2023, while we are in the early stages of working through our plan, we see some items impacting us this year that will continue into next year, while some challenges may ease. We expect the macroeconomic environment to continue to moderate, while geopolitical uncertainties persist, impacting energy costs and end market demand, particularly in Europe. We are also monitoring the impact of the strong U.S. dollar, along with evolving COVID-related impacts, including on government policy response, healthcare elective procedure volumes and disposable respirator demand. Looking at end markets, we expect the pace of secular industry trends to accelerate, particularly in automotive, electronics, safety, digitization and sustainability. Each of these markets have tremendous opportunities for long-term growth, as we continue to innovate and invest in these areas. Raw material, logistics and labor inflation are starting to show some signs of moderation, and we are starting to see some evidence of global supply chain stabilization. As Mike mentioned, we believe manufacturing and supply chain operations are our greatest opportunity to reduce costs and increase productivity to drive improvement in operating margin performance. While significant uncertainty is expected to remain, we are focused on serving customers and executing our operating framework and operating principles. We are prepared and will adjust as warranted, and take necessary self-help actions to deliver long-term value for all our stakeholders. And finally, we are also working on ensuring we execute well on our Healthcare spin to create two leading world-class companies. As always, there is more we can do and will do. To wrap up, I want to thank our customers and suppliers for their partnerships and the 3M employees for their hard work and dedication as they continue delivering for our customers. That concludes my remarks for the third quarter. With that, we will now take your questions.

Hi. Good morning, Mike and Monish and Bruce. Thanks for taking my questions.

Good morning.

Hi, Scott.

Good morning.

You guys were pretty clear about the end market outlook and stuff. Can you just take a step back and walk around the world, just by region on where things are getting kind of better or worse or where are things coming in a little bit better or worse than expectations? And I guess the onus of the question is that some of the results we have seen so far have been a little bit better in Europe and China than expected that you guys noted some cautious comments there. But I will just stop there and let you guys give some color?

Sure. Let me provide an overview of the regions to elaborate on our growth areas beyond my initial comments. Starting with the Americas, we experienced the most significant growth in automotive, as well as in electrical markets, electronics markets, and materials solutions. However, we faced declines in Personal Safety. Monish mentioned that the Separation and Purification segment is coming off a high due to COVID-related demand for vaccines and therapeutics. Additionally, we noted weaker consumer spending in oral care, particularly in Orthodontics and chairside dentistry. In EMEA, we saw a slight increase this quarter after a minor decline in Q2, with automotive also showing strong growth there, reflecting a global trend in Q3. We observed decreases in Personal Safety and oral care, influenced by COVID-related factors. In the APAC region, growth was primarily driven by automotive, and Personal Safety performed well. We also saw robust growth in our broader Industrial portfolios, particularly outside of Personal Safety. However, there were declines in electronics within APAC and in areas such as Transportation Safety. In China, the key narrative centered on recovery from Q2 lockdowns, despite declines in display materials and overall electronics, influenced by the consumer electronics downturn. We did see strengths in Personal Safety, automotive, and broader Industrial sectors. Overall, while the growth dynamics varied across regions, there were common themes. We concluded the quarter with our Industrial business displaying strength and ongoing solid performance in automotive, though consumer electronics weakened. We are also observing an improvement in elective procedures, although they have not yet returned to pre-COVID levels. These are the trends we’re noting across the different regions.

Okay. That’s super helpful. And then just to be clear, Mike, is price where you want it to be right now? Are we kind of at a fairly balanced level or just cost, and that’s no longer a major issue?

Yes, Scott, we have discussed this throughout the year. At the beginning of the year, we expressed confidence that our pricing would help us counter inflation as the year progressed, and that has indeed been the case. Our pricing is just one aspect of our market value. Additionally, we have been effectively managing the inflation we are experiencing globally. Overall, I believe we have successfully balanced our pricing against inflation throughout the year, and we are in a strong position as we approach the end of the year.

Okay. Super helpful. Best of luck. Thank you, guys.

Yeah. Thanks, Scott.

Thanks, Scott.

Hi, guys. Good morning.

Good morning.

Hi, Andrew.

Hey. Just a question sort of longer term question for you guys. How are you guys thinking about inflation into 2023? And specifically, you guys no longer disclose pricing, but just trying to understand how are you thinking about the pricing mechanism at 3M? And how are you adapting to what’s happening? Do you think we are going to get into a less inflationary environment or from what you are seeing inflation is pretty sticky into next year?

Andrew, that’s a great question. As I mentioned earlier, we are still in the early stages of evaluating 2023. We're observing a slight moderation in inflation, but it's not consistent or persistent. Inflation remains relatively broad-based. We have noticed a slowdown in logistics costs, but intermediate finished goods and specialty raw materials continue to be notably high. In the third quarter, inflation impacted us by approximately $225 million, while in the fourth quarter we expect that to be between $100 million and $150 million. This indicates some moderation. Whether we can achieve sustained lower prices in 2023 remains to be seen, but that would certainly be beneficial for everyone. Regarding pricing, as Mike said earlier and I've noted, we take a careful approach. About 70% of our offerings are specialized products, so we assess pricing on a regional and product basis thoughtfully. We will continue to apply this careful approach in 2023, especially considering no one has experienced this level of inflation recently. The market's response will determine how we proceed, but it's important to remember that our pricing strategy is influenced not only by costs but also by the value we provide to our customers.

And just a follow-up question. Sorry.

No. Go ahead.

Okay.

Oh, just a follow-up question, if you look at recent stimulus that has been passed in the U.S., a lot of investment in chipset, a lot of investment on semiconductor, a lot of talk about supply chain for semiconductors, particularly things like upstream like substrate, maybe moving closer to North America. Do you guys need to sort of redo your global electronics supply chain, given what’s happening out there on the regulatory front and stimulus front and just voluntary moves in capacity globally? Thanks.

We are keeping a close eye on the situation. The Inflation Reduction Act and the Chips Act are offering incentives for manufacturers to invest in various regions, including the U.S. We are evaluating how these changes will affect our customers. Our business model focuses on creating resources and capabilities near our customers globally. This regional approach allows us to serve our customers effectively and adapt to shifts in the supply chain, particularly in electronics across Asia. With these new incentives in place, we anticipate some changes, but we do not expect a major impact on our business in the short term. However, since we cater to global customers in the electronics and semiconductor sectors, we will make necessary adjustments as they evolve.

But nothing sort of definitive at this point yet? You are still waiting...

It’s early in the process. There are announcements, there are investments being made and we will stay close to those and we will make adjustments as we go. And if you look at the U.S. in particular, just as a reminder, we are a net exporter out of the U.S. We export $5 billion out of the U.S. So it is a place where we have got a strong manufacturing position and that puts us in a position to adjust as capacity gets invested here.

Thank you.

Thanks. Good morning, everyone.

Hi, Joe.

Good morning, Joe.

So I saw that we kept your inflation numbers intact for the year. I am just curious, like, are you starting to see any of your costs like start to subside at all? And then if you can maybe start to give us a little bit of color on what you are seeing from a manufacturing perspective and energy costs in Europe and how that’s impacting your business?

We are observing some moderation in inflation, which was $225 million in Q3, and we expect it to be between $100 million and $150 million in Q4. The overall range of $750 to $850 million remains unchanged. Inflation continues to be generally broad-based, with notable increases in specialty materials and intermediate finished goods, although logistics is showing slight moderation. Regarding the supply chain, we are noticing signs of stabilization, with raw material flow improving compared to previous quarters. This improvement is why our team managed to achieve decent productivity in Q3. We need to monitor whether the moderation in pricing and raw materials is sustained and if material flow will continue into Q4, as these factors will influence our direction. Once we see stabilization in supply chains and a moderation of raw materials, we believe it presents a significant opportunity, apart from volume, to enhance productivity in our factories and drive margin expansion.

Got it. That’s helpful, Monish. And then I guess my follow-on question would be, obviously, a lot of uncertainty in the market right now as we are heading into 2023. Just maybe talk us through a little bit your recession playbook, how you are preparing yourself for what could be a pretty uncertain year, just any color around that would be helpful?

Sure, Joe. Our operating model has proven to be strong and resilient through various economic cycles, and this has been evident during COVID and the current market uncertainty we are facing. We will continue to implement our strategies that enable us to respond effectively and enhance our performance. Our focus remains on serving our customers, improving productivity and efficiency in our supply chains and factories, and generating strong cash flow, which helps us concentrate on the right actions. We will also keep an eye on our end markets, as we have discussed, noting the differing dynamics within them despite the softening global economic outlook. We are prepared to adapt and take necessary actions. This is our model, and it will guide us well as we navigate the uncertainties ahead.

Okay. Thank you, both.

Thank you. I wanted to ask about the Q4 guidance, which suggests that organic growth is expected to align closely with Q3 levels, even with a slightly greater challenge from respirators. Could you provide some additional insights into the factors influencing each segment as we approach Q4?

Sure, Chris. To recap Q4, last year’s fourth quarter was our most straightforward comparison. You are correct that disposable respirators will be down, leading to a headwind of nearly 180 basis points, and exiting Russia adds another $70 million, contributing an additional 80 basis points of pressure. Excluding these factors would result in a 4% to 6% increase in organic growth year-over-year. Regarding the macroeconomic outlook, GDP and IPI are anticipated to be around 2% for the fourth quarter, with auto sales projected to increase sequentially by 2% or nearly 2.5%, depending on IHS forecasts, and about a 2% year-over-year increase. Elective procedures, which were at 90% in July and saw a slight increase in August and September, are expected to rise to 90% to 95%, providing uplift. However, consumer spending remains weak; in October, we observed lower consumer spending. The trends indicate that inflation continues to affect consumers, which is likely to persist through the holiday season, and we need to monitor how retailers adjust their inventory levels. Consumer electronics are still down year-over-year, although there has been minor sequential improvement. We will need to observe how this develops alongside semiconductor growth, which remains robust in our electronics business. From an industrial perspective, while we have discussed disposable respirators, the rest of the end market in SIBG remains strong.

Thank you for that. Really helpful. And then the second one just on margins, if we kind of look from Q3, margins were up versus Q2 on slightly lower topline. Is it fair to assume that reflects improving price cost or was there some margin impacts from the portfolio changes during the quarter? And if it does reflect improving price cost, I mean, is the expectation that, that should continue to improve from here even if the cost relief might be a little bit down the road?

As we evaluate our performance, I want to highlight the team's excellent work in driving margin expansion. In the third quarter, we've continued to manage our price-cost ratio effectively. We have successfully addressed inflationary pressures through strategic pricing and have experienced better yield and efficiency due to some stabilization in our supply chains compared to the second quarter. Additionally, our team has demonstrated strong spending discipline and proactively adapted to changes in the end market. All of this contributed to a 50 basis points increase in margin. Looking ahead to the fourth quarter, we anticipate revenue between $7.9 billion and $8.2 billion, compared to $8.6 billion in Q3, which is expected to create some margin pressure. Historically, we see a decline from Q3 to Q4 due to lower volume during this period. Regarding long-term expectations, we're aware of various headwinds, including macroeconomic factors, foreign exchange fluctuations, rising energy costs, especially in Europe, and geopolitical challenges. We also need to monitor COVID-related demand influences, which could stem from government policies, elective procedures, or demand for disposable respirators. However, there are also significant tailwinds we expect to leverage, such as trends in auto electrification, sustainability, and digitization. As raw materials and supply chains stabilize, we should have increased opportunities to enhance yield and efficiency, which is one of our main focuses for continued margin improvement. I hope this provides a comprehensive answer to your question.

It does. Thank you. Thank you.

Hey. Good morning, everyone.

Good morning, Andrew.

Good morning, Andrew.

Mike or Monish, maybe just a little more color into Healthcare. I know you have talked about sales growth being a little lower in Q3, oral care turned down a little bit. It seems like the elective procedures have been stuck a little bit and you talked about them improving in Q4, but the issue just sort of staffing shortage in hospitals. What are you seeing in China over there and how concerned are you about oral care given it does tend to be a little more sensitive to the economy?

Yeah, Andy, you’re correct. There are different dynamics at play compared to Q2. When we examine elective procedures and oral care in relation to surgical or medical procedures, it appears to align with our earlier projection that it would reach about 95% by year-end, possibly even 100%. However, we may currently be slightly below that mark. This is indicative of the staffing levels right now, which have had a greater impact than the current quarter’s COVID hospitalizations and the outlook for the rest of the year. This situation is likely preventing us from achieving the levels we initially anticipated at the beginning of the year. In oral care, we experienced a significant recovery in procedures in 2021, and that’s part of the year-over-year comparison we’re looking at. This year, the main factor seems to be reduced consumer discretionary spending, with people opting to spend less on certain elective procedures in oral care. We’ve noticed these trends continuing as we moved out of Q3. Although it’s a bit different from what we expected at the start of the year, we do anticipate improvements as we head into Q4 regarding those medical elective procedures.

I would also just add that the other piece was Biopharma, which had a very strong quarter last year, and we are seeing on a year-on-year lower demand, just driven by the COVID therapeutics that we sold into last year.

Very helpful guys. And then, Monish, maybe you can update us on your work on digitization and I think you have talked in the past about data analytics really helping you in the second half of the year here and especially in 2023. It seems like today, you are talking about you having cost out opportunity. You noticed your Safety and Industrial business margin was up nicely sequentially. So how much of an impact is that coming from digitization or is this that just sort of general execution?

I would like to emphasize that, as I mentioned in February during our Investor Day, digital has the potential to greatly enhance 3M's operations. However, this will take time. We have identified four main pillars: digital customer, digital product, digital operations, and enterprise digital. The last pillar, which includes ERP, is key in simplifying our business. When discussing digital operations from a factory perspective, our team has leveraged data and analytics to boost yield and efficiency in our manufacturing processes. For instance, we developed a digital twin for our respirator production during the pandemic, which is still in use and has been adapted for other production lines. There is significant room for further automation and digitization to enhance yield and efficiency, particularly as supply chains begin to stabilize. This focus will allow us to address root causes more efficiently and implement solutions. Additionally, data analytics plays a crucial role in inventory management. Despite ongoing supply chain inefficiencies, our teams have made progress in managing inventory, evidenced by a decline from August to September. This ability to harness data enables better demand planning. On the topics of digital product and digital customer, e-commerce remains a vital growth area for us. In our Safety and Industrial business, we acquired LeanTec's assets, which enable software solutions for auto body shops, improving parts management. Mike Wale and his team have made significant strides here. As noted in Mike Roman's opening comments, our collaboration with Microsoft on the digital posted note highlights ongoing digital advancements across various sectors. I believe there is substantial potential for further opportunities in this domain moving forward.

Appreciate it guys.

Thanks.

Hey, guys. Good morning.

Good morning, Steve.

Good morning, Steve.

Can you just give some degree of color on whether you were, like, you don’t have to give details on the price, but like just with the spread positive, neutral, negative this quarter, and how do you...

Positive…

…expect that in fourth quarter. It was positive this quarter?

That’s right. And…

Did that accelerate, and did that accelerate from last quarter?

To the extent where we saw more in areas where we saw more inflation, we were able to offset that with more price. So, overall, I would say mid-single digits is where we were, Steve, on pricing.

Okay, I understand. That's helpful information. You've slightly reduced the CapEx number, which has been increasing over the past few years. Are you starting to wrap up these major projects? You mentioned digitization and automation earlier. How should we view the CapEx number as we move into 2023?

Yeah. So, as I said, we are still early planning 2023. But in this case, the guide down, Steve, was just because of where we are with the length of supply chains. We have seen supply chain backlog, or the cycle time of these go up anywhere from 12 weeks to 20 weeks depending on the CapEx equipment that we are buying. And so just based on where we are in the quarter, we thought it was prudent to take it down to $175 million to $185 million. But all good projects and the projects that are falling into next year will continue to get completed because they are great projects. I just wish we would have got them done this year, unfortunately, the supply chain just didn’t help us.

Yeah. Okay. Great. Thanks a lot. Appreciate the color.

Thanks.

Yeah.

Thanks. Good morning. And maybe just the first question around the inventories outlook. So you took down your cash flow conversion guide for the year, even with the CapEx reduction you just discussed. I think also, Monish, you had mentioned inventory is down sort of month-on-month in September. So help us understand kind of where do you think customer inventories and distributor inventories sit right now versus normal and how much kind of destocking lies ahead for your customers and for 3M itself? How quickly should we see that cash flow conversion get back to 100%? Is it sort of late next year, or do you think next year as a whole, you could be there already?

Yeah. Julian, maybe I will just touch on how we see inventory in the channel and with our customers and it’s maybe just a quick walk around the different business segments. Industrial channel inventories, they look like they are in pretty good shape. We saw, as you saw strong broad-based growth and so well aligned with that. Consumer electronics, the OEMs are working through some inventories as the demand weakens. I think automotive inventories continue to be still relatively low with the demand that they are seeing. Our Healthcare, overall, in line with the demand. We saw some softening, obviously, in oral care and the channels reacting there. So we are seeing some inventory pulled on. The big story in inventory probably is what you have heard from many other companies, the retailers working through their elevated inventory levels and navigating the kind of the shift in consumer spending and the impact there. We are seeing that as we come out of Q3. So that’s kind of the external view. Maybe Monish can talk about kind of how we map it internally.

Yeah. Sure. So, Julian, it’s back to the same comments we made that the global supply chain and raw material environment continues to remain fluid and dynamic. And I think that’s what’s driving the inventory level, even though we did take it down August through September, that’s a start. One, we need to see the supply chain stabilize sustainably. And two is, when you look at where we are at the end of Q3, we don’t see those inventory levels coming down to the level we would have liked in a stable environment, and that’s why we felt prudent to get it down to 85% to 95%. The team is continuing to work inventory using data, data analytics, get a better demand planning. At the same time, we also look at better coordination between our demand plans and our supply plans, and that’s what the teams are working on. And I think we will continue doing that in the long run. I would say in the long run, there’s no reason why we can’t be at 100% free cash flow conversion, when you look at the cash flow that we generate and the opportunity that we have to continue to drive inventory down using data and data analytics.

Thank you very much. And then just my follow-up would be around, you mentioned earlier some self-help measures, digitization and better data tracking, just wondered in terms of kind of overall operating margins. I think 3M as a whole has been at that sort of 21%, 22% range for four years or five years now. It’s been a couple of years since the last big kind of restructuring announcement in December 2020. Just wondering what the appetite was for maybe another round of that kind of big fixed cost out, particularly as the macro is a little bit softer or are you feeling pretty confident about operating leverage next year?

Yeah. Julian, as I talked about earlier, we are confident in our ability to respond to the changes in the macro and we are always adjusting our businesses to meet the markets and whether it’s near-term or in the future. And so we are going to continue to focus on productivity. That’s a big part of the self-help for us, leveraging some of the capabilities Monish talked about to drive that as supply chains improve and recover, we expect to be able to drive more self-help. And we will continue to stay close to the end markets and the macro and take actions as needed. We don’t have a big plan to announce today, but our model is to adjust to markets as we go.

Great. Thank you.

Thanks. Good morning and thanks again…

Good morning, Nigel.

Hi, everyone. Regarding exports, I believe you mentioned $5 billion, if I’m correct. Are there specific regions where U.S. exports are more prevalent? It seems like Latin America could be one, along with possibly China. What are your thoughts on market concentrations for those exports? Also, could you elaborate on how you're managing the impact of currency fluctuations?

Nigel, to clarify the exports, they are net exports driven by our investments in the U.S. We cater to various markets including Europe, Latin America, Asia, and China, and I wouldn’t say we are overly focused on any one region. Our strategy is based on our portfolio and production locations. While we have regional capabilities for our businesses globally, we predominantly produce what we sell within each region. There are areas in our portfolio where we don’t need local capacity as there is sufficient demand for every region, which allows us to export from the U.S. Overall, our operations are well-balanced worldwide. You will notice some concentration in electronics manufacturing towards Asia and China, but generally, it is evenly distributed across all regions.

And the pricing, are you able to offset the currency effect?

Yeah. So, Nigel, the way most of these work is they go into intermediate into the production of another factory that’s locally manufacturing the product. So you will see that cost increase. The team takes all of that into account when they get their pricing, they factor in the raw material, they factor in FX and then do what they can in that area to offset it. In total, as we have talked about, currently, we see effects of the strong dollar to continue to have a headwind on 2022 earnings, negative 4.5% on revenue, and it’s nearly $0.50 on EPS for the year. So we do our best to try to manage it. At the end of the day, we can’t eliminate such a strong dollar and we will see how it plays out in 2023.

All right. I will leave it there. Thank you very much.

Thanks.

Thanks, Nigel.

Thank you. Good morning, everyone.

Good morning, Deane.

Hi, Deane.

Hey, Mike. I was hoping you could comment or expand your comments on what you have seen in October, especially on the consumer side. You said softer back-to-school, setting up for softer holiday. I’d also be interested in hearing if you see changes in the consumer purchasing in the mix, like more focused on lower price point products, and might you lose any share in this mix down?

As we finished Q3, we noticed trends similar to those observed by others. Retailers are managing high inventory levels, which has been impactful. Additionally, we observed a softer back-to-school season, which could be attributed to different market dynamics. Consumer spending has shifted away from what we categorize as hard lines—areas where our products are typically found—toward other sectors such as food. This change in consumer purchasing behavior is part of the trend we experienced throughout Q3 and will continue to influence us as we progress into the rest of the year. Inflation is also playing a role in these trends, and we are closely monitoring the situation. We are collaborating with our retail partners to keep an eye on each category and consumer spending as we observe these changes.

Any share change?

No. I think the dynamics in our organic growth in consumer are primarily related to consumer spending and the end markets. It’s not a matter of share change. We are maintaining our share and in some cases gaining share. We’ve seen some of the positions where we invested coming out of the pandemic, particularly in consumer areas like home improvement. Although we notice some softening demand in home improvement in the U.S. during the third quarter, we believe we are well-positioned to continue holding strong share in that segment of the market.

Thank you.

To wrap up, we continue to execute our strategies in a challenging environment, while positioning 3M for the future through investments in growth, productivity, and sustainability, along with active portfolio management. We will stay focused on taking care of our customers, driving growth and improving our operational performance. Thank you for joining us.