3M Company (MMM) — Q1 2024 Earnings Call Transcript

Thank you, and good morning, everyone, and welcome to our first 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, then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the home page of our Investor Relations website at 3m.com. Please turn to Slide 2. 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-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'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. Please turn to Slide 3. During today's presentation, Mike and Monish will discuss our total company Q1 2024 results, which are inclusive of the Health Care business and are on the same basis on which 3M provided first quarter guidance back in January. As we have mentioned, it is important to note that Solventum Corporation's separate financial reporting will differ from the basis of presentation used by 3M for the Health Care segment. 3M's full year 2024 earnings guidance initiated today is on a continuing operations basis, reflecting Solventum as discontinued operations for the full year, including the first quarter of 2024. In addition, we will be treating changes in the value of our 19.9% equity interest in Solventum as a special item in arriving at non-GAAP results adjusted for special items. And finally, we are providing additional financial information this quarter in our press release and slide presentation given the impact of the Solventum spin. We hope that you find the information useful in understanding our Q1 performance and outlook for 2024.

Thank you, Bruce. Good morning, everyone, and thank you for joining us. In the first quarter, we delivered strong results that were better than our expectations as we returned to adjusted organic growth and achieved double-digit adjusted earnings growth. We improved performance across our businesses and in our operational execution. We also completed the spin-off of Solventum and finalized two major legal settlements. Our results demonstrate the positive impact of the changes we have made over the last several years. We've also made significant progress in executing our strategic priorities, which has positioned the company for long-term shareholder value creation. In the first quarter, on an adjusted basis, we delivered revenue of $7.7 billion, including improved organic growth, operating margins of 22%, up 400 basis points; and earnings of $2.39 per share, up 21%. On April 1, we successfully completed the spin-off of our Health Care business, Solventum, creating two world-class companies well positioned to deliver greater shareholder returns through distinct and compelling investment profiles. As independent companies, both 3M and Solventum are better able to tailor their capital allocation and investment priorities to win in their respective markets. I want to thank and congratulate the teams whose dedication made this major accomplishment possible and wish the entire Solventum team, led by CEO, Bryan Hanson, great success in the future. In Q1, we also finalized two major legal settlements. First, our settlement agreement with U.S.-based Public Water Suppliers received widespread support and participation. It was granted final approval by the court on March 29. We anticipate making total payments with a pretax present value of up to $10.3 billion over the next 13 years. The first payment is expected in the third quarter of 2024. It is important to note our agreement with Public Water Suppliers addresses the detection of any type of PFAS at any level. This includes PFAS that have already been detected or may be detected in the future, including those that are the subject of the U.S. EPA's recently announced limits in drinking water. Second is our settlement of the Combat Arms multi-district litigation. As of today, more than 99% of claimants have chosen to participate. This provides us the certainty and finality the settlement was intended to achieve. We anticipate making total payments up to a pretax present value of $5.3 billion through 2029. We also continue to make good progress on our exit of all PFAS manufacturing. We are on track to meet our commitment by the end of 2025 and are working closely with each of our customers to complete an orderly transition. In summary, the progress across all three of our strategic priorities has helped make 3M stronger, leaner, and more focused on what we do best: utilize 3M science to make indispensable products for our customers. I will now turn the call over to Monish for more details regarding our performance in Q1 and to discuss our guidance for 2024.

Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 6. We continue to build upon the strong foundation we laid in 2023. We remain focused on our priorities, and the team continues to deliver improving results. We posted strong adjusted results in the quarter, including sales of $7.7 billion, operating margin of 21.9%, earnings per share of $2.39 and free cash flow of over $800 million. These results were better than our expectations as we continue to drive strong operational execution and spending discipline. We also benefited from significant operating leverage, particularly in Transportation and Electronics, which was driven by strong organic volume growth in electronics and automotive. Our results also benefited from the acceleration of certain nonrecurring actions, which I will go through in more detail on the next slide. Our first quarter adjusted sales of $7.7 billion exceeded our expectations of $7.6 billion as we delivered improved organic growth, which was partially offset by a headwind from foreign currency translation. We delivered adjusted organic growth of nearly 1% or up 2.4% excluding geographic prioritization, product portfolio initiatives, and last year's disposable respirator comp. Organic growth was driven by our Transportation and Electronics business as the team won share gains from spec-in wins and new product introductions with automotive and consumer electronics OEMs. This drove strong organic growth as the OEMs ramp production for new launches for end customers. Geographically, year-on-year strength in China and EMEA was driven by our strength in electronics and automotive. Sales in the U.S. were flat year-on-year with industrial and health care end markets showing relative strength, offset by consumer retail softness. Please turn to Slide 7 for details of the components that drove our year-on-year operating margin and earnings performance. As mentioned, on an adjusted basis, we delivered operating margins of 21.9%, up 400 basis points; and earnings of $2.39 per share, up 21% versus last year's first quarter. Our first quarter performance was driven by improved organic growth, particularly in Transportation and Electronics, along with a continued focus on operations, restructuring actions, and spending discipline, which drove better-than-expected improvements in operating margins of 340 basis points and earnings of $0.42 per share. As disclosed in our Form 10-K and as factored into our Q1 guidance that we provided in January, our year-on-year margins and earnings benefited from the delay of our stock-based compensation grants from a normal timing in the first quarter to the second quarter due to the Solventum spin. This timing adjustment added 140 basis points to margins and $0.15 to earnings per share as compared to last year's first quarter. We also accelerated certain nonrecurring benefits, including property sales as we progress on our asset-light strategy. This benefited first quarter year-on-year operating margins by approximately 70 basis points and earnings by $0.08 per share. We accelerated restructuring actions in the quarter, incurring pretax charges of $122 million, which was higher than our guidance of $75 million to $100 million. This compared to last year's restructuring charge of $52 million, resulting in a negative year-on-year impact to margins of 90 basis points and $0.10 to earnings. Foreign currency negatively impacted adjusted margins by 60 basis points or a negative $0.09 per share as a result of the strong U.S. dollar. This headwind was larger than we had expected. The reconsolidation of Aearo Technologies in Q2 2023 resulted in a $0.01 benefit year-on-year to earnings per share and was neutral to margins. As expected, our adjusted tax rate was 20.5% this year, which was higher when compared to 17.7% in last year's first quarter, resulting in a $0.09 headwind to earnings. And finally, other financial items and shares outstanding netted to a positive $0.04 per share year-on-year impact. This benefit was primarily driven by interest income on proceeds from Solventum's issuance of $8.4 billion in debt prior to the separation, partially offset by a non-op pension headwind. Please turn to Slide 8. First quarter adjusted free cash flow was over $800 million. Adjusted free cash flow conversion was 63%, in line with our historical first quarter trends. We continue to focus on driving working capital efficiency, including improved cash conversion cycle times. I am pleased with the progress we have made, yet there remains significant opportunity to further improve performance in all aspects of working capital. Adjusted capital expenditures were $355 million in the quarter, down 20% year-on-year. The lower year-on-year spend is primarily due to nearing completion on water filtration investments at our manufacturing facilities. And finally, we returned $835 million to shareholders via dividends. Turning to the balance sheet. Net debt at the end of Q1 stood at $10.4 billion, a decline of 13% year-on-year, driven by strong free cash flow generation of our businesses. Also of note, in late February, Solventum issued debt of $8.4 billion for which the repayment obligation went with Solventum, while 3M kept approximately $7.7 billion in proceeds upon spin on April 1. These proceeds, combined with our business's strong and reliable cash generation, have further strengthened our balance sheet. In addition, the retained 19.9% equity stake in Solventum will provide additional future liquidity. Also, during the quarter, we retired $2.9 billion of debt. Our strong capital structure and robust cash generation provide us with the financial flexibility to continue to invest in our business, return capital to shareholders, and meet the cash flow needs related to legal matters. Now please turn to Slide 10 for a discussion on our business group performance, starting with our Safety and Industrial business, which posted sales of $2.7 billion, down 1.4% organically. Industrial end-market demand remained mixed in the quarter. We delivered strong double-digit growth in roofing granules, driven by replacement demand and storm repair. Industrial Adhesives and Tapes posted low single-digit organic growth, driven by spec-in wins in new bonding solutions for consumer electronics devices. The Personal Safety business declined by low single digits as strong demand for self-contained breathing apparatus for the first responder market was more than offset by year-on-year comp headwind from disposable respirators. And finally, we experienced year-on-year organic sales declines in electrical markets, abrasives, automotive aftermarket, and industrial specialties. Geographically, industrial markets in the United States were up 1%, while China remained challenged. Adjusted operating income was $664 million, up 18% versus last year. Adjusted operating margins were 24.3%, up 410 basis points year-on-year. This performance was driven by benefits from ongoing productivity actions, timing of stock-based compensation, and strong spending discipline. These benefits more than offset headwinds from lower sales volume and higher restructuring costs. Moving to Transportation and Electronics on Slide 11, which posted adjusted sales of $1.8 billion or up 6.7% organically. Consumer electronics end markets were stable in the quarter, while the semiconductor market remains soft. Our electronics business outperformed the market, up mid-teens organically year-on-year. The introduction of new products continues to be well received in the market, as evidenced by recent spec-in wins. In addition, we also experienced continued channel inventory normalization as electronics demand stabilizes. Our auto OEM business increased 13% in Q1 versus a 1% decline in global car and light truck builds. We continue to win increased penetration, including strong momentum in automotive electrification, which was up over 30% year-on-year in Q1. We also saw an increase in channel inventory at tier suppliers during the quarter given the forecasted 8% sequential increase in the auto OEM builds from Q1 to Q2. Looking at the rest of Transportation and Electronics, commercial branding and transportation grew low single digits organically, and advanced materials was flat year-on-year. While our Transportation and Electronics business is off to a good start to the year, we estimate that approximately 2/3 of the strong first quarter organic growth was driven by initial buy ahead by customers as they ramp production and introduce new products, along with channel inventory normalization. Transportation and Electronics delivered $479 million in adjusted operating income, up 68% year-on-year. Adjusted operating margins were 26.3%, up 960 basis points versus Q1 last year. The team achieved this result through strong leverage on improved electronics volumes, ongoing productivity actions, strong spending discipline, and the previously mentioned timing of stock-based compensation grants. Partially offsetting these benefits were headwinds from restructuring costs. Turning to Slide 12. The Consumer business posted first quarter sales of $1.1 billion. Organic sales declined 3.9% year-on-year with continued softness in consumer discretionary spending, which included a 2.4 percentage point impact from portfolio and geographic prioritization. Home Improvement and Consumer Safety and Well-Being declined low single digits. And Home and Auto care declined mid-single digits, while Packaging and Expression declined high single digits organically. We continue to invest in the business, including supporting successful new product launches, such as Command Heavyweight hanging products and sustainably focused Scotch-Brite cleaning tools and Scotch Home and Office tapes. Organic growth declined across all geographies. The U.S. was down low single digits, Asia Pacific mid-single digits, and EMEA high single digits. Consumer's first quarter operating income was $216 million, up 21% compared to last year with operating margins of 19%, up 400 basis points year-on-year. The improvement in operating margins was driven by benefits from productivity actions, portfolio initiatives, strong spending discipline, and the previously mentioned timing of stock-based compensation grants. Partially offsetting these benefits were headwinds from lower sales volume and higher restructuring costs. Finally, included in the appendix is a slide in the first quarter performance for Health Care. The business delivered results within our expectations with organic growth of 1% and operating margins of 17.5%. Now turning to guidance for the year on Slide 14. As Bruce mentioned at the beginning of the call, our full year 2024 outlook initiated today is on a continuing operations basis, reflecting Health Care as discontinued operations for the full year, including the first quarter. We have confidence in the momentum we have built throughout 2023. We continue to deliver strong results, including the first quarter, which was better than expectations. The guidance initiated today represents a return to growth, adjusted margins up 200 to 275 basis points year-on-year versus the illustrative midpoint of 18.7% for 2023, and over 15% earnings per share growth at the midpoint. We anticipate full year adjusted organic growth of flat to up 2% or up 1% to 3% excluding the impact from geographic prioritization and product portfolio initiatives we are taking. This estimated organic growth rate incorporates full year external forecast for major end markets, including an expectation of continued mix growth in industrial end markets. Automotive OEM build rates are currently forecasted to be down slightly. Consumer electronics are expected to grow low single digits for the year, while the semiconductor market is currently forecasted to start the year slow and improve as the year progresses. And finally, consumer retail discretionary spending is expected to remain muted for the year. As mentioned, we expect a strong expansion in adjusted operating margins of approximately 200 to 275 basis points year-on-year, up from an estimated midpoint of 18.7% in 2023. With respect to adjusted EPS, we anticipate full year 2024 earnings in the range of $6.80 to $7.30 per share on a continuing operations basis or over 15% year-on-year growth at the midpoint. Turning to cash. Our businesses continue to deliver strong and consistent free cash flow. Our expectation is that adjusted free cash flow conversion performance post spin will remain in the range of 90% to 110%. Please turn to Slide 15 for more details on our full year guidance. Included in our outlook is for normal sequential patterns through the year coupled with the end-market trends just discussed. As a result, we anticipate that our second half of the year sales will be slightly stronger than the first half. Our expectations also include a 1% foreign currency headwind to sales given the strength of the U.S. dollar at current spot rates or a negative $0.20 to earnings per share. We also anticipate an approximately 75 basis point benefit to sales from the commercial agreement with Solventum. Please note that this benefit will be reflected within acquisition and divestitures from an external reporting perspective. We expect adjusted operating income and earnings per share to show relative strength in the second half of the year. This is primarily due to the impact from the timing of the Solventum spin on April 1, along with our pretax restructuring charges of $250 million to $300 million that are weighted 70% to the first half of the year. We will continue to benefit from productivity and restructuring actions, partially offset by increased investments in the business as we progress through the year. Looking at below-the-line items, we estimate full year other expense net will be in the range of $75 million to $100 million, mostly weighted to the second half of the year. And our 2024 adjusted tax rate is expected to be in the range of 19% to 20% with the first half of the year coming in at the high end of the range. As Bruce mentioned earlier and detailed further on Slide 26 in the appendix, the new operating category named Other is forecasted to have a net operating loss of approximately neutral to $25 million. This range includes first quarter net operating loss of approximately $65 million on a continuing operations basis. Beginning in April, transition service agreements costs plus a markup will be reimbursed to 3M, and therefore, we will generate modest income in the remaining three quarters of the year. Finally, Corporate and Unallocated includes full year 2024 sales in the range of $225 million to $275 million for commercial agreements with Solventum beginning in April. We expect full year Corporate and Unallocated net operating loss in the range of $125 million to $175 million. These ranges include first quarter revenue of approximately $25 million and net operating loss of approximately $75 million. As we have previously discussed, we estimate annualized dis-synergies of approximately $150 million to $175 million. These costs were previously associated with Solventum and will now be allocated to Safety and Industrial, Transportation and Electronics, and Consumer starting in April. Specific to Q2, we expect continued strong execution to drive operating performance. As disclosed in our Form 10-K, stock-based compensation grants were delayed to Q2. As a result, we expect to incur $125 million to $150 million in expense in Q2. We will also increase investments to support end-market demand and drive growth and productivity. Please turn to Slide 16 for more details by business group. Taking into account my earlier comments regarding current full year macroeconomic and major end-market forecasts, we estimate organic sales growth in Safety and Industrial to be flat to up low single digits. Adjusted organic sales growth for Transportation and Electronics is forecasted to be up low single digits. This is better than our estimated range of flat to up low single digits provided in January, recognizing our strong Q1 growth performance. And in Consumer, we estimate organic sales to be down low single digits, which includes our ongoing product portfolio initiatives. These actions are estimated to create a year-on-year organic growth headwind for the Consumer business of approximately 2 percentage points. I want to take a moment to thank our team for the work they have done in successfully executing across our three strategic priorities. Their disciplined work has created value and returned capital to shareholders with the successful spinout of our Health Care business. They have also helped reduce risk by reaching two large settlements while making progress on the exit of PFAS manufacturing. Most importantly, our teams have made tremendous progress on fundamentally improving how we work, which is driving better performance across the business. In closing, we delivered a strong start to the year. As we look ahead, we are focused on building on our momentum, supporting expectations for a return to organic top line growth, margin expansion, investments in high-growth and attractive end markets, and continued strong cash generation. This leaves us well positioned for long-term success and consistent value creation for our customers and shareholders. Please turn to Slide 17, and I will turn it back over to Mike.

Thanks, Monish. Paying a competitive dividend has been a priority for 3M for more than 100 years. This will continue to be true following the spin-off of Solventum. As part of the spin, we distributed 80.1% of Solventum's outstanding shares to our shareholders and post-spin have made the decision to reset 3M's dividend. As a result, we anticipate a dividend of approximately 40% of adjusted free cash flow. This represents a dividend that is in line with our industrial peers and well above the S&P 500 median with the potential to increase over time. We expect to seek Board approval to declare the second quarter dividend in May with payments anticipated in June. In addition, post spin, we have stepped back into the market for share repurchases. Before I conclude, let me emphasize some important points from the quarter. Q1 was a strong start to the year, driven by significant improvements in operational execution as well as the achievement of several major milestones toward our strategic goals, including the successful spin-off of Solventum and the settlement of two major legal matters. I would like to thank our people for their dedication and continued focus on delivering value for our customers and shareholders. Through their efforts, we are well positioned to deliver a strong 2024. Tomorrow, May 1, I transition into the role of Executive Chairman. I look forward to working with Bill Brown as he assumes the role of CEO. That concludes our formal remarks, and we will now take your questions.

Congratulations, Mike, on the transition. And obviously, you'll stay very involved in the Executive Chairman role. Maybe just to start off with, Monish, you packed a lot of clarification on the moving parts into the prepared remarks. Maybe just to try and understand a little bit better the quarterly sort of cadence here. So it sounds like second quarter EPS, down slightly maybe versus the sort of comp ops number for Q1, and that's really because of the stock comp and the one-timers that you talked about. So do we think about sort of second quarter revenue being similar to first quarter margins down a bit because of the stock comp and one-timers? And then as we step into the second half, you've got higher revenues half-on-half and then sort of good operating leverage of the stepped-up revenue. Maybe just any thoughts around that.

Yes. I would say, Julian, so you summarized it. I would go back and say there's so many moving pieces that I would really say first look at first half, second half. And then when you do that, we would also show you that on revenue, we are starting to hit normal seasonality trends. So on revenue, the first half, second half is 49-51. And then the margin split first half, second half is 47-53. And the reason for that is some of the items that you've mentioned. Part of the biggest item there is the Solventum's first quarter, where we don't get reimbursed for TSAs, and that's driving the 47 to 53. If you now go into the important factors just into Q2 to make sure that I cover all the points, restructuring charges are between $250 million to $300 million for the year. 70% is weighted to the first half. Similarly, you mentioned it too and I said that in my prepared remarks, we will incur stock-based compensation headwind around $120 million to $150 million. FX, the stronger dollar continues to remain in the second quarter. So we got to factor all that in. And I would say that's why we've given you first half, second half guidance, there are more details. I know Bruce and the team can walk you through it. But if you start with that, I think you'll get directionally in the zone that we are talking about.

That's very helpful. And then maybe a second question, perhaps more for Mike, but on capital allocation. So clearly, you and the Board spent a lot of time thinking about balance sheet leverage of 3M to settle on that sort of 40% dividend payout ratio. You also mentioned, though, on the buyback some step-up since the Solventum spin. So maybe help us understand kind of how you and the Board are thinking about 3M's leverage requirements from here. How meaningful could a buyback be? And then tied to that, Monish, any clarification on interest expense guide for this year based on that balance sheet?

Sure, Julian. I want to emphasize that we remain a strong cash generator and are well positioned to invest in our business, which will continue to be our top priority for capital allocation. We also aim to return capital to shareholders through dividends and share repurchases. While we are back in the market, the pace will depend on our assessment of the macro environment, our performance, and the intrinsic value of our stock. We haven't finalized our approach moving forward, but we are well positioned to invest and execute on our capital allocation priorities.

Julian, I'll answer your second question. When we talk about below-the-line items, we talk about two things: mainly it's pension and it's interest expense/income. So I'll combine the two. So our guide is net expense of $75 million to $100 million or $0.10 to $0.15 per share. Q2, as I mentioned, will continue to benefit from the interest income that we receive from the dividend that we receive from Solventum of $7.7 billion. And so therefore, the $75 million to the $100 million guide for the year will mostly be weighted to the second half of the year.

Mike, I hope the role of Exec Chairman is a bit less stressful than being Chairman and CEO. Congratulations on that. I would like to get a few more details on the second quarter, Monish. Regarding the restructuring, I understand it's 70% for the first half and 30% for the second half. How does this break down between the first and second quarter? I'm trying to figure out if it is evenly spread or if there's more to expect in the second quarter. Also, concerning the restructuring, I see the total charges, but what kind of payback are we anticipating? And are we still aiming for $700 million to $900 million in savings by 2025 on a 3M RemainCo basis?

I’ll begin with the first part, Nigel. As I mentioned, 70% of the projected $250 million to $300 million is focused on the first half. In the first quarter, we recorded $122 million in restructuring at a holdco level, and about $20 million of that came from Health Care. This leaves $100 million on a RemainCo basis. Regarding your question about payback, it’s important to consider restructuring as a whole. When we initiated this program, we aimed to achieve several objectives. The main goal was to transform our operations by optimizing our supply chain, enhancing our delivery to customers, and minimizing stranded costs, thereby allowing us to invest back into the business. This program included holdco, and now that we’ve separated Health Care, we are beginning to see improvements reflected in our margins, thanks to better supply chain management and our increased proximity to customers. We’ve also managed to cut stranded costs. When we announced the Health Care spin-off, we stated that industry benchmarks suggested a range of dis-synergies of approximately $400 million to $450 million, translating to 1% to 1.5% of sales. Our current dis-synergies from the Health Care spin-out are estimated at $150 million to $175 million, and we will continue to address this, potentially scaling it down. Simultaneously, we’ve created opportunities to invest in the business. Mike highlighted some of the successful initiatives in TEBG, and we have continued to invest in CBG and SIBG despite the downmarket, launching over 30 new products across the company in the first quarter. In terms of payback, we are experiencing strong returns. Additionally, we were able to expedite some restructuring efforts and realize one-time gains, such as property sales in Q1. Overall, we are looking at a year-over-year total margin improvement of 200 to 275 basis points, reflecting all the actions our team has initiated.

Great. My follow-up question is on the dividend. There's been a huge sort of discussion about the potential dividend scenarios, but hopefully, that's now behind us. But the 40% payout ratio on adjusted free cash flow, is the intent, Mike, to keep that 40% relatively stable going forward so as you grow earnings and free cash flow going forward, the dividend should increase as well?

Yes, I would consider it a guide for our thinking. The approximately 40% of adjusted free cash flow is what the Board is using as a reference as we move forward. That is where we begin as we continue operations. That's the best way to think about it, Nigel.

Mike, I appreciate your support over the years. Congratulations. Can you provide an update on your industrial channels within Safety and Industrial? Are they generally in a position where you have better visibility and the destocking process is mostly complete? It seems that Industrial Adhesives and Tapes has been making progress over the last few quarters. Does this indicate positive trends in the short-cycle industrial businesses you manage?

Yes, Andy. If you examine inventory in the channels as a measure, it has been decreasing due to improvements in supply chains. We discussed this last quarter. As supply chains enhance, our distributors are benefiting from shorter-cycle times and are reducing some of their inventory. There is also a cautious perspective, as Monish mentioned a mixed outlook for industrial markets. Looking at our Q1 results, both Industrial Adhesives and Tapes and Personal Safety, when adjusted for the year-over-year respiratory change, were slightly up in the quarter, indicating varying conditions across their markets. Some of our market-focused businesses, like Industrial Mineral, are experiencing strong demand, while others in sectors like automotive aftermarket and industrial specialties, which supply products for shipping, are facing challenges. The shipping dynamics and the mild winter's impact on auto repairs are contributing to down trends in some of those markets. Overall, the channel is adjusting to improving supply chains while remaining somewhat cautious about the diverse nature of those end markets.

That's helpful, Mike. And then, Monish, obviously, you mentioned the relatively good T&E start. You did have a pretty easy comparison in Q1. But 7% growth, you're still guiding of low single digits. I know it's up a little bit. You mentioned the buy ahead was a big part of the Q1 improvement. But is there any reason why your improved spec-ins wouldn't continue in electronics? And then are you seeing any improvement at all yet in semiconductors and those kinds of end markets?

Yes. First, we are excited about our spec-ins, which is a significant positive. Approximately two-thirds of the total is around 6.7%. While we don't have the exact number, we believe this has been influenced by inventory normalization in both the auto and electronics sectors, along with customers starting to purchase ahead as they prepare for end markets or consumer markets. The second half will be crucial for the consumer electronics business, and we are monitoring that trend closely. If there is a significant increase in consumer electronics, we will certainly benefit because we're now integrated into many more devices than before. Therefore, the second half is what we're focusing on, so that's our current outlook. Regarding semiconductors, we observed a slowdown in the first quarter, but we anticipate a recovery in the second half. We're keeping an eye on those trends as well, with all indications suggesting it will improve.

Best of luck to you, Mike, in your next endeavors, et cetera.

Thanks, Scott. I have a couple of questions. I'll start with a quick observation and then move to a specific question. I'm looking at Slide 27 and wondering why there is a dip in the 2026 payment. Could you explain a bit about how these payments were negotiated annually?

Yes. So there were so many facts that were put together, Scott. This is one of them on how these profiles were scheduled. So there's no particular reason to give it out to you. This was a lot of factors, pluses and minuses that put the whole agreement together.

Okay. So there's nothing specific in there that 2026, you'd...

No.

I can take it off-line.

Yes.

Okay. More importantly, Mike, if you look back at the long-term growth rate ex Health Care of 3M, it's been kind of sub-2%, so below GDP. And that includes some price inevitably, I would assume. What do you think the entitlement growth rate of this business is longer term? I mean just go back 10 years, so I think that's a full cycle for sure. But when you think about the next 3 or 5 years, what do you think that the business should be able to grow at? Obviously, Bill is going to have his own initiatives. But what is your view on that?

Yes. Scott, I won't get ahead of Bill and kind of how he's going to think about going forward. You saw our guidance for this year, it's in line with macro. Importantly, when you look at what drives our growth, it's really investing in the business. The organic investments have been the dominant driver of growth for us as a company, and we expect that to continue as we move forward. Like I said in my speech, making indispensable products for our customers, and that means leveraging our innovation, our technologies, our manufacturing capabilities to come up with differentiated solutions for our customers and do that more and more prioritizing our investments. As we've talked a lot about, where do we prioritize investments? In attractive markets, markets that have growth dynamics that are better than the macro. That's kind of the way to really drive this growth strategy forward, and that's how we think about it. That's how we focus. It's important that we really do prioritize leveraging our innovation so that we create not only the growth, but the differentiated value leader in a way we deliver value to shareholders in terms of margins and cash. And so that's the way I think about the formula for growth, and it's been the foundation for building the company, and it's a foundation for success as we go forward as well.

That's completely understandable. I will communicate this, but congratulations on all the work you accomplished last year. I know it must have required a lot of effort. Wishing you the best of luck this year.

Thanks, Scott.

Thank you.

It's Andrew Obin. Mike, congratulations, and great job getting all this legal stuff out of the way.

Thanks, Andrew.

I would like to address Scott's comments regarding the lack of growth at 3M. I'm unsure where he obtained his figures because prior to COVID, the company experienced an average organic growth rate of 3.7% based on my analysis. My question is actually the opposite. For instance, regarding safety and growth, you mention that industrial production is growing at 2%, while your guidance is between 0% and 2%. There appears to be a 100 basis point drag from the portfolio geography. Can we explore what you believe are the obstacles to growth as we emerge from COVID? It seems that the situation has evolved since then. I expected your performance to exceed that of industrial production, yet each year presents new challenges that, while rational, seem to arise unexpectedly. Why does the company's growth seem to fall below the average?

Yes, Andrew, building on my response to Scott, the macroeconomic environment is significant for us. For 3M, this includes GDP related to our Consumer business, as well as broader industrial production in sectors like transportation and electronics. Importantly, we focus on the specific markets we participate in. To achieve growth that either surpasses or aligns with the macro trends, we need to select markets where we can effectively utilize our innovation, set ourselves apart, and drive growth in those appealing areas. The key to this strategy lies in prioritizing those attractive markets where we can provide unique 3M solutions. This approach is what will propel us forward.

Right. And then maybe just a follow-up. I know you guys are tweaking your global distribution, exiting some, right, direct distribution. You are starting to utilize distributors. Can you just talk about sort of what you've experienced so far with these changes to the models? What are the pros and cons? Because some of the commentary referred is that 3M is leaving money on the table with its distributor, some sort of legal risk associated. How do you mitigate those? And what has the experience been so far?

Yes, Andrew, regarding the changes, this was part of the restructuring and the model adjustments we have been implementing. We are focusing on leading our global businesses and prioritizing the most significant aspects of their operations while determining the best model to implement. We refer to this as geographic prioritization. We have identified around 30 smaller countries in which we operate, and we have launched this initiative in 27 of them. Our goal is to shift towards an export model. This transition requires more than what we have previously communicated; establishing a successful model is essential. We need to develop a framework to support our distributors, moving from the traditional 3M approach in those countries to an export-driven model. It is crucial that we have the necessary capabilities both regionally and globally to support this model. Additionally, solid governance in all operational areas worldwide is vital. We are committed to enhancing our governance framework as we implement these changes. There are multiple dimensions to this transition. We are off to a good start and are seeing success. We anticipate a revenue impact this year as we shift to the export model, which will influence how we price our products with distributors. I believe that as this model succeeds, it will contribute positively to our future performance.

It also adds to Mike's comments about the advantages, as it simplifies our operations in those countries, which has positively impacted our margins. Additionally, it allows us to streamline our portfolio and determine what products we will sell. As a result, we are rationalizing our SKUs, and once we complete this process, we will have a new inventory profile that better supports those smaller countries. They remain significant to us, and we are not abandoning them; rather, we are adopting a new approach to engage with them.

Mike, I wish you all the best and congratulations. I'll begin with a quick clarification. I apologize if I missed it, but on Slide 15, where it mentions the operating income of $1.2 billion, I want to confirm that the performance this quarter accounts for the Health Care stranded cost of approximately $100 million to $150 million attributed to the segment. I just want to ensure that's accurate. Additionally, regarding the restructuring charges, Monish, in relation to your earlier comments, should we consider around $100 million in the first quarter excluding the Health Care figure as the apples-to-apples comparison to the restructuring charges projected at $250 million to $300 million for the year?

So try me again on the first piece of the question because I didn't follow exactly. But I'll answer your second one. So the $250 million to the $300 million is embedded in here, and that's on a continuing ops basis. So that does not include Health Care.

Okay. All right. Great. Yes. So just on the operating income quickly, I think you guys have roughly $1.7 billion this quarter. I think we had like roughly, call it, $350 million or so in Health Care profit. So you back that out, that's above the $1.2 billion number. So I was just basically trying to understand how much the Health Care stranded costs go into the other segments.

Yes. I believe there are two components to consider. First, the dis-synergies in Health Care, which we estimate to be between $150 million and $175 million on an annualized basis. The second component is the $250 million in costs we incur on behalf of Solventum, for which reimbursement begins on April 1. Therefore, we will absorb those costs in the first quarter without reimbursement. In our Other category, you will notice a loss of $65 million for Q1, as we do not receive reimbursement for that amount in the first quarter.

Got it. Okay. No, I think I've got it and can follow up afterward...

Yes, Bruce can follow up off-line with you.

Yes, I have a quick follow-up on the electronics business. I understand the statistics you provided about demand and inventory normalization. Can you clarify the inventory benefit you are experiencing? I'm curious how much of that 15% increase is due to the normalization of inventories, as I may not be as familiar with it anymore. I'm also interested in knowing what other products are currently driving end-market demand for electronics.

Yes, Joe, in the first quarter results for TEBG in electronics, we experienced some wins related to specifications on mobile platforms. The inventory is being prepared to meet the demand that is expected in the second quarter. At this stage, that's the main focus. Additionally, part of the inventory is filling the value chain for those OEMs. However, the primary factor for us is the success in the specification wins.

And Mike, that's smartphone demand?

Mike, congrats again, and thanks for all the help over the years and the effort.

Yes. Thanks, Steve. Thanks.

Just to be clear, you said 40% of adjusted free cash flow. Can you just help us with what the construct of that is? What is adjusted free cash flow?

You're referring to the dividend, Steve, I presume?

Yes, just the construct. I don't need a number for cash. Just how do you define that adjusted free cash?

Yes. If you review all our submitted materials, you will see that we have historically broken out certain items from our GAAP results to arrive at adjusted results. The first item is litigation expenses. The second is PFAS, which we have been treating as an exit. The third involves the costs associated with spinning out Solventum or the Health Care business. The same structure applies here. As always, if we decide to make any changes, we will keep you updated on adjustments. Those are the main points, and you can see the separation by category in our press release statements or schedules.

Yes. Steve, it's all detailed in our press release attachments.

Right. So whatever you're paying out in cash for these liabilities, that is adjusted out of free cash. So for example, the $4.3 billion or whatever in this year will be adjusted out, and then you take whatever we want to assume for free cash flow and then take 40% of that?

Correct.

Correct.

Thanks for clarifying that on the dividend. That was a key question. Also, I just wonder, to any degree, has Bill Brown been involved in the formulation of the updated guidance here, whether explicitly or tacitly? And I know he's formally starting tomorrow, but just any color on that would be interesting and helpful.

Sure, Jeff. Bill is preparing to take on the role. He has been involved with me, senior management, and the Board since the announcement. His focus now is on being informed and ready to start tomorrow. He hasn’t been part of the decisions discussed in today's earnings call. Bill starts tomorrow, and I look forward to collaborating with him.

Great. And then just thinking about, again, the cash flows as it relates to the liability outflow that we're looking at here. What guidance, if any, could you provide on what you're thinking on insurance recoveries? And if you're successful in those claims, when those might start flowing as potential offsets to the liability schedule?

Yes. We believe we qualify for insurance payments. We have informed our insurance providers regarding PWS and Combat Arms. Specifically, for Combat Arms, we are currently in arbitration to recover those costs. As you know, these processes can take time, and that is what our teams are focused on. We will update you as soon as we have more information about what that recovery amount may be.

Congrats to Mike.

Thanks, Brett.

Yes. I want to come back to the portfolio and the geographic prioritization. So you called out the 100 basis points headwind in '24. Should we think of the first quarter as the starting point and just simply anniversary that headwind for the balance of the year and it's complete? Or is this more of a multiyear initiative with some top line drag?

There will be some minor challenges next year, but they won’t be significant. I would say the first half of this year will experience somewhat more pressure than the second half. However, you can use the first quarter as a reference point to project across the four quarters.

Okay. Great. I guess the follow-up, you called out some contribution from those initiatives in each of the segments. Are you able to size what that benefit is? And I would imagine it's sort of structural, but any color would be great.

Yes. I would just say when we look at it in total is why are we doing these portfolio moves or geographic moves. It comes down to it allows us to do better focus, better prioritization. So at the end of the day, you're going to see it in multiple places. You're going to see better sales growth in other products because we're exiting these and the teams can focus, whether it's ad, merch, et cetera. You will see it in inventory because, again, we'll be able to focus our inventory on the products that we want to focus on. And you're going to see it a little bit in margin. That margin will take a little bit of time to come through. But some of these products that we are exiting are below our average margin. So it does help us lift the average margin. And then as I said on the geographic prioritization side, you get a lot of structure out, which is already embedded in our margin that we are seeing. And we are getting some one-time benefits on property sales that we disclosed this quarter.

I wanted to ask on PFAS, and you've talked about the exits there, kind of progressing to plan, if not a little bit ahead of plan. But just how do we think about alternatives? I think there's been press over the years on different applications across a number of different end markets when we think about semiconductors or military or auto. Do you expect to participate in that? I mean, where are you on the sort of product innovation pipeline and being able to sort of provide alternative products to what you're exiting?

Yes. As I mentioned earlier, we collaborate with each of our customers during this transition. There are essentially three options available to them. The first is sourcing PFAS from another supplier. Many significant applications are struggling to find such alternatives. The second option is exploring different chemistries that have similar properties but are not PFAS, although we are exiting PFAS and will not be transitioning to other chemistries. These alternatives must still be durable and persistent to meet the demands of various applications. Our primary focus is to eliminate PFAS from our products. We are actively engineering and designing our products to achieve this goal, but we recognize that many of our customers face challenges in finding solutions for certain applications. However, the vast majority of our own solutions have already been developed. We are assisting our customers in exploring alternative ways to design and engineer their processes and products.

That's helpful. And then second question is just related to CERCLA designation and really just trying to understand what the designation versus not getting the designation means at a high level. I think when you first announced this being proposed, you talked about how 3M's view was this would not lead to a timely or appropriate kind of remediation. But just to try to understand, having the designation versus not having it at the end of the day, kind of what that means.

Yes. There are certain EPA responsibilities that would come with CERCLA designation. At this point, we don't expect it to affect our ability to serve customers. As we gain a clearer understanding of the requirements, we are committed to meeting and complying with the obligations under CERCLA and EPA guidelines.

My congrats to Mike and also to the team on orchestrating all these moving parts.

Yes. Thanks, Deane.

Thank you, Deane.

And just a quick follow-up on that last PFAS question. So the enforcement actions by the EPA, they set PFAS as hazardous. So that's a milestone and then in the process of setting up the Superfund. So would either of these actions put you closer to being able to set a reserve? I know you couldn't before for accounting purposes. It was not estimable or the probable, but now we're closer to that. So are you closer to where you could be setting reserves for these remaining unaddressed PFAS liabilities?

Yes, Deane, we are proactively managing all aspects of the PFAS situation. As soon as we can determine that the liabilities are probable and estimable, we will set aside the necessary reserves. We will keep you updated, and I suggest checking our SEC filings for more information.

That's really helpful. And just one other one, I'm sorry. Is there any scenario where 3M would continue to manufacture PFAS after the year-end 2025 target?

No, Deane, we're committed to that exit. We're on track, and we're committed to follow through.

This concludes my last earnings call as 3M's CEO. I would like to thank the investors, shareholders, analysts, employees, and family who join these calls each quarter. I greatly appreciate your questions and diligence in working to better understand our company. I'm confident that under Bill's leadership, our people will continue to build on the momentum from our strong start to the year. Thank you for joining us, and have a great day.