3M Company (MMM) — Q3 2023 Earnings Call Transcript

Thank you and good morning, everyone and welcome to our second quarter earnings conference call. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer; and Monish Patolawala, our President and Chief Financial 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'll 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-Q 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'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to Slide three and I'll now hand the call off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. In the third quarter, we built momentum through strong operational execution as we again delivered for our customers, positioning us for a solid close to 2023. On an adjusted basis, we delivered earnings ahead of our expectations, expanded margins sequentially across all four businesses, and achieved our third consecutive quarter of double-digit year-on-year growth in free cash flow. As we make progress and deliver improved financial results, we are increasing our full-year adjusted earnings per share guidance to $8.95 to $9.15, up from a previous range of $8.60 to $9.10, and our adjusted free cash flow conversion range to 100% to 110%, up from 90% to 100% previously. We continue to deliver against our priorities. We are driving performance throughout 3M with strong operational execution, restructuring actions, and spending discipline. We are progressing the spin of the healthcare business, which we expect to be completed during the first half of 2024. And we are reducing risk and uncertainty by reaching significant settlements to address combat arms and PFAS litigation. I will now provide some additional context around how we are advancing these priorities. Next slide, please. Our margin expansion clearly demonstrates the performance our team is driving throughout 3M. We delivered 240 basis points of year-over-year adjusted operating income margin expansion, excluding 80 basis points of restructuring-related charges. We are strengthening our business in several important ways. We are progressing with our restructuring actions to streamline our organization, reduce structural costs, and get us closer to customers. We have leaned out the center of our company, simplified our global supply chain organization, and optimized our global go-to-market models. At the same time, we are advancing supply chain performance to improve service, drive productivity and yield, expand gross margins, and increase cash conversion. These results are being supported by initiatives that use our continuous improvement toolkit and leverage data and data analytics. For example, we have benefited from more than 60 Kaizen events this year to improve existing processes in our largest plants. We are also progressing the spin of our healthcare business, building the leadership team as we work toward completing the spin in the first half of 2024. During the quarter, we added two experienced leaders, naming Bryan Hanson as the CEO of the Standalone Healthcare Business and Kerry Cox as the Board Chair. Finally, we continue to manage risk and uncertainty by proactively and effectively managing litigation. We announced the combat arms settlement, and we are working with all parties and the courts to implement it. The settlement administration process has been established and funded. The bellwether trial verdicts have been settled, and the process for notifying and settling with claimants has begun. With respect to PFAS, the public water supplier settlement we announced last quarter has received preliminary court approval. We successfully resolved objections from state attorneys general and are working toward approval with the final hearing set for early February next year. In closing, I want to share a few thoughts about our future. Our momentum accelerates our ability to define where we go next at 3M. As we prioritize attractive markets, where we have the right to win, and the opportunity to differentiate ourselves through our unique capabilities and strengths; a good example is our automotive OEM business, where we continue to outperform the market with double-digit growth this quarter. Auto electrification is on track to be a $600 million business this year and has delivered organic growth of 30% year to date. Our material science expertise has led us to build a new business, and we see similar opportunities in other core platforms such as safety, home improvement, and consumer electronics. We are also prioritizing emerging global trends that have attractive growth rates and customer needs that match up well with 3M capabilities. We are building new platforms in areas like climate technology, industrial automation, and next-generation electronics. Before I hand it over to Monish for additional insight into our performance, a few closing thoughts. I am pleased with the way our teams are executing. They delivered third-quarter results that build on the momentum we saw in the second quarter, setting us up for a solid close to 2023. We are advancing our priorities, driving performance, progressing our healthcare spin, and reducing risk and uncertainty. 3M is delivering today lower costs, better margins, and greater cash generation, and building for tomorrow, prioritizing growth platforms, innovating with impact, and empowering our teams. I will now turn it over to Monish for more details on the third quarter and our outlook for the rest of the year. Monish?

Thank you, Mike, and I wish you all a very good morning. Please turn to slide five. As Mike mentioned, we are seeing significant traction from the actions we are taking to strengthen the business. Through a focus on customers, effective adjustment of production, benefits from efficiency and productivity initiatives, ongoing proactive spending discipline, and the relentless focus on managing inventory, we were able to deliver solid adjusted third-quarter results, including sales of $8 billion at the high end of our guidance range of $7.9 billion to $8 billion, operating margins of 23.2%, an increase of 160 basis points year-on-year and 390 basis points sequentially; earnings per share of $2.68, a year-on-year increase of 3%, and free cash flow of $1.9 billion, up 39% year-on-year with a conversion of 130%. Organic sales on an adjusted basis declined 3.1% versus last year. This included an expected year-on-year headwind of approximately $140 million, or 1.7 percentage points related to lower disposable respirator demand and last year's exit of our operations in Russia. Excluding this, Q3 adjusted organic sales were down 1.4%. Consumer and electronics end markets continue to be soft. Our adjusted organic sales declined year-on-year mid-single digits in our electronics business and high-single digits in consumer. This softness was partially offset by strength in our automotive OEM business. Regionally, the U.S. was up slightly despite continued challenges in retail. Europe remained soft, and China was down mid-teens year-on-year organically due to continued end-market softness along with lapping strong sales backlog recovery in the prior year. Our strong adjusted EPS of $2.68 exceeded our expectations of $2.25 to $2.40. Roughly two-thirds of the beat was driven by operational execution in our supply chain and proactive spending discipline, and a balance driven by restructuring timing. The restructuring actions we announced earlier this year are largely on track and we are seeing favorable margin impact in our results. We continue to expect full year pre-tax restructuring benefits of $400 million to $450 million with offsetting charges. Turning to slide six for the components that drove our year-on-year operating margin and earnings performance, manufacturing productivity and restructuring actions, strong spending discipline, and selling prices partially offset by lower sales volume, investments in the business, and the previously mentioned headwind from disposable respirator and last year's exit of Russia, resulted in an improvement to operating margins of 260 basis points and to earnings of $0.22 per share. Pre-tax restructuring and related charges in the quarter were $68 million or a negative impact to margins of 80 basis points and $0.10 to earnings. This charge was lower than our anticipated range of $125 million to $175 million in Q3 due to factors that impacted the timing of actions that are being pushed into Q4. The carryover impact of higher raw material logistics and energy cost inflation created a year-on-year headwind of approximately $25 million, or a negative 30 basis points impact to operating margins and $0.03 to earnings. Foreign currency translation was a positive 0.6% impact to total adjusted sales. This resulted in a $0.01 tailwind to earnings per share. Last year's food safety divestiture and the reconsolidation of aero technologies resulted in a net year-on-year tailwind of 10 basis points to margins and no impact to earnings. Finally, other financial items decreased earnings by a net $0.02 per share year-on-year. In summary, our team's focus on driving productivity, executing restructuring actions, and controlling spending continues to yield results. These actions drove meaningful year-on-year and sequential improvement in adjusted operating margins. Please turn to slide seven. Third quarter adjusted free cash flow was $1.9 billion, up 39% year-on-year, with a conversion of 130%, up 360 basis points versus last year's Q3. This year-on-year improvement was driven by an ongoing focus on working capital management, especially inventory. Inventory was down over $200 million sequentially and $550 million year-on-year as we benefit from the power of daily management and data analytics to speed up inventory terms. As always, there is more we can do and will do to continue to realize benefits from our actions as we move forward. Adjusted capital expenditures were $367 million in the quarter as we continue to invest in growth, productivity, and sustainability. During the quarter, we returned $828 million to shareholders via dividends. Net debt at the end of Q3 stood at $10.8 billion, a reduction of 11% year-on-year. Our business segments continue their long history of robust cash flow generation. In addition, our proven access to capital markets, along with the anticipated one-time dividend from the spin of health care at leverage of three to three and a half times EBITDA and 19.9% retained stake will provide additional financial flexibility. This, combined with our existing strong capital structure, provides us with the ability to continue to invest in the business, return capital to shareholders, and meet the cash flow needs related to ongoing legal matters. Now, please turn to slide nine for our business group performance. Starting with our safety and industrial business, which posted sales of $2.8 billion or down 5.8% organically, this result included a year-on-year headwind of approximately $130 million, or 4.3 percentage points, due to last year's COVID-related disposable respirator decline and exit of our operations in Russia. Excluding this, Q3 adjusted organic sales were down 1.5%. Personal safety was down high single digits due to last year's COVID-related disposable respirator comp. Excluding disposable respirators, personal safety was up high single digits organically. Closure and masking continued to be impacted by lower packaging and shipping activity, and industrial adhesive and tapes by end-market softness in electronics. Abrasives, electrical markets, and automotive aftermarket declined versus last year's strong comparisons. And finally, organic growth in our roofing granules business was up high single digits. Adjusted operating income was $708 million or up 5% versus last year. Adjusted operating margins were 25.7%, up 250 basis points year-on-year and up 350 basis points sequentially. The year-on-year improvement in margins was mainly driven by ongoing productivity actions, restructuring benefits, strong spending discipline, and price. Partially offsetting these benefits were headwinds from lower sales volume and restructuring costs. Moving to Transportation and Electronics on Slide 10, which posted Q3 adjusted sales of $1.9 billion. Adjusted organic growth declined 1.8% year-on-year, largely due to expected weakness in electronics. Our electronics business experienced a year-on-year mid-single-digit decline in adjusted organic sales as semiconductor and data center end market demand continues to remain soft. We are starting to see signs of stabilization in consumer electronics end market. However, we are closely monitoring demand trends as we head into the upcoming holiday season. Our auto OEM business had a strong quarter, increasing approximately 16% year-on-year versus a low single-digit global car and light truck build, as we continue to gain penetration on automotive platforms. Turning to the rest of Transportation and Electronics, commercial solutions and transportation safety both declined mid-single digits year-on-year, mainly driven by weakness in China, while Advanced Materials grew low single digits. Transportation and Electronics delivered $494 million in adjusted operating income, up 21% year-on-year. Adjusted operating margins were 26.3%, up 460 basis points year-on-year and up 650 basis points sequentially. The year-on-year improvement in margins was driven by productivity actions, restructuring benefits, strong spending discipline, and price. Partially offsetting these benefits were headwinds from lower sales volumes and restructuring costs. Looking at our health care business on Slide 11, Q3 sales were $2.1 billion, with organic growth up 2.4% versus last year. Organic sales in oral care were up high single digits year-on-year and medical solutions grew low single digits organically, including continued impact from lower post-COVID-related bio-pharma demand. Health Information Systems declined low single digits due to tighter hospital budgets. As procedure volumes continue to improve and hospital budgets stabilize, we are confident in the long-term outlook of this business. Health Care's third-quarter operating income was $460 million or up 2% year-on-year. Operating margins were 22.2%, up 50 basis points year-on-year and up sequentially 240 basis points. The year-on-year improvement in margins was driven by productivity actions, restructuring benefits, strong spending discipline, and price. These benefits were partially offset by restructuring costs. Finally, on Slide 12, our Consumer business posted third-quarter sales of $1.3 billion. Organic sales declined 7.2% year-on-year as discretionary spending trends on hard-line categories remain subdued. The back-to-school season was soft and rising interest rates continue to impact the housing market and related spending. Consumers' third-quarter operating income was $269 million, down 10% compared to last year, with operating margins of 20.5%, down 70 basis points year-on-year, however, were up 230 basis points sequentially. The year-on-year decline in margins was driven by headwinds from lower sales volumes and restructuring costs. These headwinds were partially offset by benefits from productivity actions, restructuring, strong spending discipline, and price. That concludes our remarks on the third quarter. Please turn to Slide 14 for an update on our full year's expectations. Our strong third-quarter performance shows the results of the significant actions we have put in place this year to generate better productivity yield and efficiency from our supply chain, drive simplification, manage costs, and deliver for our customers in an uncertain macro environment. As a result, we are raising our full year 2023 adjusted earnings per share and free cash flow conversion guidance. We now expect full-year adjusted earnings in the range of $8.95 to $9.15 versus our prior range of $8.60 to $9.10. We are also updating our full-year adjusted free cash flow conversion to be in a forecasted range of 100% to 110% versus 90% to 100% previously. Based on our year-to-date performance, we expect full year adjusted organic growth to be down approximately 3% versus our prior guidance to be at the lower end of flat to minus 3%. This updated expectation includes an incremental headwind of $50 million from continued softness in disposable respirator demand. We now estimate a full-year sales decline for disposable respirators of approximately $600 million versus $550 million previously. Looking ahead to the implied fourth quarter, we expect end market trends to be consistent with Q3. Hence, we anticipate fourth-quarter adjusted sales to be in the range of $7.6 billion to $7.7 billion, taking into consideration normal seasonality with fewer sales days due to holidays. Fourth-quarter pre-tax restructuring charges are expected to be in the range of $70 million to $120 million, incorporating the timing impact I mentioned earlier, with pre-tax benefits of $145 million to $195 million. Taken together, we expect fourth-quarter adjusted earnings per share will be in the range of $2.13 to $2.33. To wrap up, we are very focused on our priorities by driving improved performance through strong operational execution, progressing on our restructuring actions, and spending discipline, successfully spinning off health care, and reducing risk by managing litigation exposures. At the same time, we are positioning 3M for the future as we prioritize the most attractive markets, invest to support continued innovation and capitalize on emerging opportunities. We expect our actions will continue to build momentum and drive long-term improvement in our organic growth, margins, and cash flow performance into the future. As we exit 2023, we will be a stronger, leaner, and more focused 3M, and I remain confident in our future. Our solid third quarter is a direct result of the hard work of 3M employees. I want to thank them for their dedication and focus as they continue to deliver in partnership with our suppliers for customers and shareholders. That concludes my remarks. We will now take your questions.

Good morning, Mike, Monish, and Bruce. I haven't been able to say this in a while, but a pretty solid, complete quarter overall, so some progress there. But, guys, I want to back up a little bit. What are the remaining steps to get the health care spin complete? Any big hurdles still remaining?

The team is making significant progress, and we don't anticipate any obstacles ahead. There's a considerable amount of work to prepare for the spin, and we are focusing on each step of that process. As mentioned, we have appointed a CEO and are expanding the leadership team, which is a crucial foundation. We have also named the Board Chair and are working on finalizing the Board. These are key advancements. The team has instilled confidence that we will continue to move forward, and we are on schedule for the timeline discussed in early 2024, expecting to reach our goals successfully. Our efforts are centered on preparing for the health care spin, as well as establishing 3M as an independent company post-spin. We are prioritizing this focus, and our operational execution is an essential part of our preparations for 3M, showing good progress as you've observed.

Just process-wise to add to Mike's comments, the teams are working through system changes, standing up legal entities and as well as all the regulatory filings, Scott, that we need to do, and that's what everyone is focused on from the health care side.

That's helpful. So Mike, just taking your comments a little further, at the new 3M, do you envision a new 3M where you can run at lower levels of CapEx, lower levels of even potentially R&D as a percent of sales? And the knock on 3M was always that it costs a lot of money to drive a point of growth and sometimes with the incrementals that worked out well. But in down cycles, that certainly did not work out well. But is there a new vision in 3M, I should say, that you can run at kind of more productive, efficient levels of CapEx and R&D?

Yes, Scott, there are several aspects to consider in response to your question. It begins with the restructuring we announced in Q1, which was informed by our operational experiences and our assessment of supply chain challenges globally. The aim behind this restructuring was to enhance productivity, improve execution, strengthen performance, and increase margins. This served as the basis for our decisions to simplify our company structure, streamline our supply chain, and refine our go-to-market strategies. These changes are intended to lay a strong foundation for 3M's future, demonstrating our capability to improve financial performance. As this momentum builds, we can adopt a more optimistic outlook for the future. Additionally, we are committed to investing in growth, innovation, productivity, and sustainability. Our top priority in capital allocation will remain focused on facilitating organic growth through research and development and capital expenditures. We will strategically target high-growth markets where we can leverage our innovative strengths and align with emerging market trends. Thus, our investment priorities will reflect our ability to make a significant impact, which is essential for our future.

Yes, good morning. I have a question regarding electronics. It has been a challenge for some time. What key performance indicators are you focusing on? When do you anticipate improvement? It seems that your expectations are generally in line, but when do you think this business will hit its lowest point? What will it take for this situation to stabilize?

Yes, Andrew, I would say we came through the third quarter. We continued to experience soft end markets for electronics, including consumer electronics and semiconductors, which are key areas of focus for us and our customers. Looking ahead, there is some uncertainty, but as Monish mentioned, we are starting to see stabilization in the electronics sector. This indicates that the decline may be over, and there are companies expressing optimism about future improvements. We are monitoring the situation closely and expect the fourth quarter to be similar to the third in terms of our end markets, including electronics. We remain vigilant about the trends in our large electronics customer base, which includes consumer electronics and semiconductor sectors tied to data centers. Our strategy will be guided by the demand and performance we observe from the market.

Just another data point for you, Andrew, at the end of the second quarter, we had said that the way we predicted electronics was the amount of negative Vs quarter-on-quarter would get better. So if you compare us to the first half and the amount we were down year-on-year versus the third quarter, we are less down. It doesn't mean we are not down, but that's another point that Mike was trying to make is that's where we are starting to see some signs of stabilization. But as I said in my prepared remarks, I think we'll have to just watch how the holiday season plays out.

Got you. And just a follow-up question on health care. I appreciate that you guys are doing a lot of sort of accounting, etc. But you have done the separations in the past. And I guess the question I have, any thoughts, as Bryan has joined the Company, I know in the past, there's been headlines about Health Information System being separated. I know there are other sort of businesses inside health care. Any thought about sort of maybe repositioning the portfolio, particularly as Bryan came on board, repositioned the portfolio for sort of future as a stand-alone company?

Yes, Andrew, when we considered the strategy to spin out health care, we asked ourselves if we view health care as a leading technology company that would appeal to shareholders and have a strong future. We concluded that the answer is yes. We believe the best way to unlock that value is to establish it as a separate entity, and the work we've done over time as part of 3M has positioned it well for success as an independent company. Each business within the portfolio plays a vital role. It will now operate as its own company, with a new CEO and Board who will formulate strategies to maximize value and drive growth. They will focus on managing the portfolio of businesses going forward. We are confident in their leadership and believe the company is ready to emerge as a leader in the industry.

Thanks. Good morning, everyone. Can we start with the restructuring, the benefits, and the postponement of some expenses? It seems like you're ahead of schedule regarding the benefits. I would appreciate any insights on this progress and what areas are performing better than anticipated. Additionally, could you explain why some costs are being deferred from Q3 to Q4?

Yes. So I'll just start again, as a reminder, Joe, the total benefits for this program over the period of the program is $700 million to $900 million, with costs approximately of $700 million to $900 million. And coming into the year, we had said for 2023, we would see benefits in the ranges of $400 million to $450 million of benefits and equal offsetting charges. So when you look year-to-date, we are, I would say largely on track for the year, we still believe will be in the $400 million to $450 million of benefits, which will get offset by the cost of $400 million to $450 million. So the teams have done a really nice job of continuing to execute. There are multiple pieces to this program. One was corporate simplification. The second was streamlining our supply chain. And third was making sure that we are closer to our customers in our business group units. And all three of these programs are running well on track. As regards to just timing from Q3 to Q4, I would say nothing big. We operate in multiple countries, as you know, and we wanted to make sure we follow all rules and regulations in those countries. And so some items dropped from Q3 to Q4, and we had a couple of other small investments that we had to make in Q3. They're just based on all the work the teams are doing, we just felt better to do it in Q4, so nothing major. So still pretty much largely on track, $400 million to $450 million of benefits for the year and $700 million to $900 million for the program.

Got it. Okay. Great. That's helpful, Monish. I know it might be too early to discuss 2024, but if you consider the price and cost relationship moving forward, it appears that raw materials are becoming less of an obstacle for you. Can you provide any framework for 2024 and your outlook on both pricing and raw material trends?

I'll start by saying that our primary focus right now is to finish Q4 and keep the teams aligned with our priorities. We've delivered a strong Q3 and raised our guidance for the entire year. We're gaining momentum, and it's important for the team to maintain this focus as we wrap up 2023. When we move into 2024 and hold our Q4 2023 earnings call, we'll provide an update on the next year. Regarding pricing and deflation, the headwinds we're experiencing are about $25 million this quarter, similar to Q2. In the market, we're noticing more disinflation than true deflation. Energy costs remain inflationary, as do certain downstream materials, and labor costs are still sticky. We have seen some benefits in upstream chemicals and logistics, which the teams have leveraged effectively. More than just material costs, the teams are focused on reducing overall costs in our factories through various strategies like improving yield and efficiency and exploring dual sourcing and alternative materials. The efforts of Peter Gibbons and his team are reflected in the strong results. As for pricing, we initially aimed for low single-digit price increases this year, and we are currently on track within that range. It’s important to note that our pricing strategy isn't formulaic; we take a thoughtful approach, considering market dynamics and product specifics to ensure pricing reflects the value we provide to our customers. Long-term, 3M has maintained a strong price/cost relationship due to the value we deliver, and I expect that will continue with our focus on innovation and customer commitment.

Thank you. One thing that has really stood out to us over the last couple of quarters is the underlying margin improvement of the business. If we exclude restructuring spend and savings, we see an operating margin on the underlying business of roughly 22% this quarter, first, less than 21% in Q2 and like a mid-'18 in Q1. So a very strong ramp here. Can you just talk about what's driving that outside of the restructuring, and why is the underlying business seeing so much margin momentum?

I want to start by expressing gratitude to the 3M team who have been dedicated to their priorities. As Mike noted, we're focused on enhancing performance across all areas of 3M, separating the health care division, and managing litigation risks, and we're beginning to see positive results from these efforts. Even when excluding restructuring costs and benefits, we've experienced a notable increase in our margin rate. This improvement can be attributed to a few key factors. First, we've made significant strides in our supply chain execution, which has become more agile due to our restructuring efforts. We've also leveraged data and analytics effectively, learning valuable lessons about supply chain operations from the pandemic. Consequently, the benefits of improved yield and efficiency are becoming apparent as material quality improves. Secondly, our team has been proactive in managing costs, making strategic investments where necessary while controlling expenses in areas with lower volumes. Thirdly, we've maintained a strong focus on working capital, particularly with inventory, which is reflected in our cash conversion metrics. Overall, we are witnessing solid operating performance improvements. As we implement the restructuring and the associated costs decrease—expected to take around two years—we anticipate long-term advantages in our margin rate derived from enhanced operating performance and restructuring benefits. However, we remain vigilant about monitoring this situation in the fourth quarter, especially given the uncertain macroeconomic environment. Nonetheless, I am confident in our execution and acknowledge that there is always room for further improvement, and we will continue our efforts to enhance performance.

I appreciate that. And maybe kind of taking that and bridging to the Q4 guide. It seems to us by our math that you're kind of guiding underlying operating margins ex restructuring to something like 19% down from the almost 22% this quarter. I know revenue is down, but it seems to suggest a very sharp decremental. Can you just maybe talk about what's causing that margin step down? Because it feels like a lot of the improvements, whether it's supply chain or price/cost are sustainable. Thank you.

Yes, Chris, it really depends on the numbers. To begin with, our overall margin rates at the start of the year were projected to be around 19%. By the end of Q2, we had revised that estimate to between 19.5% and 20% for the year. Now, based on our current guidance, we expect our margin rate to be approximately 20%. If we break it down further, the fourth quarter is anticipated to exceed the 19.5% mark, likely ranging from 20.5% to 21%. It's important to note that one reason for this decline is the increased restructuring costs in Q4 compared to Q3, with estimated restructuring expenses of $95 million to $100 million year-over-year. Additionally, historically, revenue at 3M tends to decrease from Q3 to Q4 due to fewer billing or business days in Q4. This is reflected in our revenue guidance, which drops from $8 billion to between $7.6 billion and $7.7 billion. Overall, the underlying macro trends remain consistent; the reduction is primarily due to fewer business days, which affects the margin rates as well. Looking back at our history, you will see a significant decline in margin rates from Q3 to Q4 driven largely by lower volumes associated with fewer business days in Q4. I hope this clarifies your question.

Good morning, everyone. Monish, at a conference a month ago, you adjusted your revenue guidance slightly to $8 billion, which you projected as being in the range of $7.9 billion to $8 billion. Could you discuss the revenue trends for the quarter? Did any of your businesses see an uptick in September or October? Are you being cautious at this point? Additionally, how do you perceive the effect of rising rates on your businesses?

I want to start by reiterating that we initially projected revenue to be in the range of $7.9 billion to $8 billion. We experienced some uncertainty in the electronics sector, consumer spending, and the Chinese market. However, due to our team's commitment to serving customers, we managed to achieve the higher end of that projection at $8 billion. The trends we observed continued throughout the quarter. Electronics performed as we anticipated, while China and consumer retail remained weak. As Mike mentioned and as I noted earlier, we are seeing some stabilization in electronics. We will monitor the holiday trends for consumer retail as we approach the fourth quarter. The back-to-school season was softer than expected, and the trends in China have aligned with our expectations. For the fourth quarter, we are forecasting revenue of $7.6 billion to $7.7 billion, primarily due to fewer business days. On the margin side, our teams have excelled in their operational execution and have maintained effective cost control in Q3, which we plan to continue into Q4. This discipline has allowed us to exceed our previous earnings per share guidance of $2.25 to $2.40. Additionally, we have raised our full-year guidance for adjusted free cash flow conversion from 200% to 110% and from 90% to 100%. Overall, our focus remains on strong operational execution.

Monish, if I can follow up on that, the cash conversion target raise. Maybe talk about your efforts. I know you talked about improving digitization at the Company, it seems like you're focused on digitization inventories having impact. So maybe you can talk about the confidence in generating higher cash conversion going forward, sort of the duration of these improvements as you go forward in '24 and beyond.

Yes. Since my arrival here, I have highlighted that working capital presents a significant opportunity for 3M. During the pandemic, we unfortunately had to increase our inventory levels to ensure we could serve our customers effectively, which has always been our top priority. As supply chains stabilize, our teams are leveraging data and analytics to improve inventory management. They can visualize data effectively, which allows for enhanced demand signals, improved manufacturing signals, and better communication with suppliers. Furthermore, the restructuring efforts we've undertaken have made our supply chain more agile. All these factors are reflected in our current inventory situation. As I mentioned earlier, we still have more potential for improvement in this area. We will continue to focus on this because it's an excellent opportunity for generating strong cash flow for 3M.

Thank you. Good morning, everyone. What are you planning and assuming for the auto strike impact for 4Q?

Yes, Deane, we are monitoring the situation closely. We maintain a strong relationship with the automotive OEMs, our key customers. So far, we haven't experienced a significant impact on our business, and we will continue to keep a close eye on developments that could affect our demand week-to-week. The automotive segment, which is a crucial part of our global business, performed well this quarter, achieving 16% growth that surpassed build rates. Our auto electrification business is expanding even more rapidly. While there have been some impacts, they have been relatively minor to this point. We will keep monitoring as we move forward.

Got it. And then you mentioned earlier in the prepared remarks, the back-to-school sales were weak. Can you quantify that just maybe year-over-year? And then how does this set up for holiday sales with consumer being weak, higher rates? What's the assumption there as well?

Yes, Dean, I would refer you to some of the data regarding the year-over-year decrease in back-to-school spending per student. There are various metrics available. Our category in consumer is subject to changes in discretionary spending, which remains a part of the consumer narrative. The back-to-school period was not strong, and we did not witness the robust replenishment cycles typically associated with a healthier back-to-school season. Therefore, we validated the existing data. Looking ahead, we are cautious about the uncertainty surrounding the upcoming holiday season, which we will continue to monitor. Additionally, there is a broader narrative about consumer behavior and retail, where spending is shifting from discretionary items to necessities like food and experiential expenditures. This trend has persisted and influences the consumer performance we experienced this quarter as well as our outlook for Q4.

Hi, good morning. Could you just give just an update total expected now inflation kind of carryover for the year? I know you mentioned it in the second quarter. Is that unchanged relative to what you had said before? I think it was like $150 million? Maybe that changed?

No change, Steve.

Okay. And then I guess, low single digits for the year on pricing. So that's kind of like a mid-single-digit volume decline. That kind of feels already recessionary. Things seem like very stable for you guys revenue-wise. How much of that negative 5% do you think is a function of destocking versus trend line on demand? And then just one last one for the fourth quarter. How much of that sequential sales decline are you expecting from electronics seasonality?

Yes. So Steve, let’s first discuss the channel dynamics. We're observing some destocking in industrial channels, which we mentioned last quarter as supply chain performance has improved and stabilized. The industrial channels are shortening their replenishment cycles and are adjusting their inventory levels back to more normal amounts after experiencing supply chain disruptions. This is one aspect of the destocking effect. In the consumer sector, there was some destocking as well, primarily over the past year, as retailers focused on reducing inventory. This trend seems to have settled, although there is still some softness in demand. Overall, the situation seems quite stable globally, with perhaps a few adjustments in China in similar markets as we continue to monitor the macroeconomic environment moving forward. Looking ahead, we discussed the stabilization in electronics, which is partly due to year-over-year comparisons. Last year in the third and fourth quarters, there was a decline in the electronics markets, which affected our businesses. So, as we look to Q4, there will be a stabilization in this year-over-year comparison as we move past earlier declines from the first half. We will be closely monitoring the holiday season, which is a critical time for electronics, as we enter the upcoming quarter.

Steve, I want to mention that disposable respirators have decreased by $600 million compared to last year. This equates to roughly 200 basis points of growth.

Hi, good morning everyone. I'm noticing significant sequential growth in Electronics from Q1 to Q3. Q1 was around 680, and I estimate Q3 to be about 750. While some of this is due to seasonality, it should provide a good level of confidence as we enter 2024, particularly in the first half of the year, which should be a positive influence on the business. Any thoughts on that?

Well, Nigel, I would say it's going to depend on the outlook as we approach 2024 for electronics and those key end markets you mentioned. We may have seen some stabilization reflected in the quarterly trend in electronics, and the year-over-year comparisons are stabilizing in the second half. The demand we observe will really determine our performance in the first quarter or first half of next year. Some of that will be influenced by the holiday season. We'll provide an update on how we're looking in the first half of next year during our Q4 earnings call.

Okay. That's great. I don't want to repeat the same macro questions, but your approach is very focused on channels. The flash PMI for the U.S. was at 50 in October. Are you noticing more stabilization or perhaps some sequential improvement in the U.S. compared to Europe and China?

Yes. Monish mentioned that the performance in the U.S. was slightly up, and I would describe the performance of our industrial businesses in the U.S. as mixed, reflecting some areas of strength alongside caution and uncertainty regarding the broader economy. Overall, the U.S. is performing a bit better, with a slight increase. This is noteworthy given the challenges we've been discussing in consumer retail. The Safety and Industrial segment reported mid-single-digit growth in the U.S. for the quarter, which is a positive indicator of the broader trends we are observing. Additionally, the PMI aligns with this, representing a moderate expectation from purchasing managers.

Just only other thing Nigel I will add to Mike's comments is just in certain pockets, we are seeing customers managing inventory channel. And part of it is supply chains are definitely far more stable. So customers have lower lead times, so they're managing that in pockets.

Hi, good morning, thank you very much. One quick question. I just wanted to circle back on your sort of pricing outlook as you see it because volumes have been soft for some time. Headline inflation in theory is easing. Traditionally, you do have price pressure in areas like electronics, just through the nature of the industry. So I just wondered sort of what the comfort level was as you look into Q4 and early next year, that you can hold price kind of firm-wide at least flat at 3M? And whether there's been any change in how you sort of go to market to push price just given the experience of inflation in the last couple of years?

Yes, Julian, I would just say the same thing that I said with another question before. The way I would just say long-term, 3M has always been able to add value to its customers, and that is reflected in the pricing that it charges. We look at this not based on just a formula, but we look at it market by market, look at our competitive position and market by market, look at the value we add, and that's how we come up with our pricing that we go with. And I would say, based on the innovation and the value that we add to our customers, long term, I don't see that changing. In the short run, as you have seen, the Company has been able to manage inflation through price. And if needed, we'll continue doing that. But overall, right now, the teams are quite focused on delivering the fourth quarter, and then we'll see where long term goes this topic. It will be a function of demand, a function of inflation. So that's the way I look at it.

Understood. And then just to focus on a couple of markets within Safety and Industrial, but I guess had been pretty strong, and most of the sort of rhetoric is fairly strong around them. But organically, you had a little bit of pressure at least or less growth in and that's the electrical markets and also automotive aftermarket. So I just wondered any color around those in terms of is it just kind of accelerated destocking, distributors just holding off on orders for some reason? Any color at all on auto aftermarket and electrical?

Yes, Julian, we observed some destocking in the electrical markets, which impacted that sector within industrial. Additionally, our automotive aftermarket likely experienced some adjustments as we've discussed, with improvements in supply chains, distribution, and inventory management leading to more stable safety stock levels. Overall, both sectors have shown good market performance throughout the year. We are closely monitoring the trends as we approach year-end, but in summary, the situation reflects a combination of destocking and end market demand.

To wrap up, we continue to execute our strategies, delivering results in a challenging environment while positioning 3M for the future, prioritizing high-growth markets and geographies where 3M innovation can deliver the most impact. Thank you for joining us.