3M Company (MMM) — Q4 2024 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to our fourth quarter earnings conference call. With me today are Bill Brown, 3M's Chief Executive Officer; and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag 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 homepage of our Investor Relations website at 3m.com. Please turn to Slide 2, and take a moment to read the forward-looking statements. During today's conference call, we will be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-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 will be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to Slide 3, and I will hand the call off to Bill.

Thank you, Chinmay, and good morning, everyone. Before I start, I'd like to welcome Chinmay to his first earnings call as the Head of Investor Relations. He has been with 3M for three years, leading the FP&A function, and was with GE before joining 3M. He's replacing Bruce Jermeland who retired on January 1. Bruce led IR for the last six years and was with 3M for more than two decades, and we wish him well in his retirement. 2024 was a pivotal year for 3M. Earlier in the year, we spun off our Healthcare Business Group as Solventum and we settled two significant legal matters. We also substantially completed the largest restructuring program in company history, which focused on reducing complexity and improving margins. These changes weren't easy, but the team has done a terrific job executing the programs and the results are showing up in our financial performance. This relentless focus on operational execution drove a strong finish to the year. Fourth quarter adjusted earnings per share was $1.68 on 2.1% organic revenue growth. The company generated free cash flow of $1.3 billion with a conversion of 145%. During the quarter, we returned $1.1 billion to shareholders via dividends and share repurchases. These results capped a strong year for the company where we delivered $7.30 in adjusted earnings per share at the high end of our guidance and up 21% year-over-year. Organic sales grew 1.2% and we generated $4.9 billion in free cash flow with a conversion rate of 111%. Turning to Slide 4. The fourth quarter results reflect our focus on the fundamentals. Each business group drove positive adjusted organic growth. This was the first time in nine quarters that all business groups grew together and it was broad-based. 12 of our 16 divisions posted positive growth compared to only seven in the first quarter. One of the fundamentals is commercial execution, and we're beginning to make progress in this area. For example, in Safety & Industrial, we launched a campaign to drive cross-selling at our channel partners with some encouraging early results. This year, we pulled forward the quota-setting process for our sales force to ensure we get out of the gates quickly, and we instituted standard work for our sales managers and area leaders who support our frontline sales reps. Reinvigorating the innovation engine is critical to sustaining this top-line momentum. In 2024, we launched 169 new products, up 32% over the prior year. This was above expectations, due in part to the rigor and governance we've put in place around new product introductions, but more importantly, to the enthusiasm of the team to get back to innovating for our customers. One launch we're particularly excited about is our LCD 2.0 platform program that enables LCD displays for tablets, notebooks, and monitors to achieve brightness and contrast similar to OLED, combining our multilayer optical film technology with our micro-replication technology. Another one is our Expanded Beam Optics or EBO connector, which is an optical interconnect designed for data centers that reduces installation time, cleaning, and maintenance while delivering exceptional performance. We're still in the early days of our R&D turnaround effort. NPI is clearly an important metric. In 2025, we expect to see a double-digit increase in the number of launches on top of the higher performance in '24, but it's just one of several metrics we're tracking. Over time, we need to work to shorten the development cycle time to increase launch cadence, focus investment dollars on higher octane programs, and see NPI translate into higher sales and margins. Also critical to driving growth is improving service, and a key metric for us is on-time, in-full or OTIF. OTIF was 88% for the year, up 3 percentage points versus last year and 8 points versus 2022. Our team has made solid progress, but we have more work to do. While Consumer and Transportation & Electronics are now consistently delivering to their customers over 90% on time, our performance in Safety & Industrial remains well below expectations in the low 80s. It will take a fundamental shift in our approach to raise service levels to where they need to be. We're doing this by standardizing the demand planning process, using new algorithms to improve forecast accuracy, improving supplier delivery performance, and driving consistency and reliability in logistics. These are key elements of our broader operational excellence program which continues to mature but is still in the early innings. Our goal remains to deliver 2% net productivity through sourcing efficiency, quality improvement, lean manufacturing, and asset utilization, which I described last time as Operating Equipment Efficiency or OEE. These efforts are starting to take hold and will support further gross margin expansion toward our goal of high 40s. We also made progress on inventory days, which was down 2 days versus last year and 8 sequentially, ending the year at 94 days. This is just the start, as our goal is to get to 75 days, freeing up cash for our capital deployment priorities, which include returning cash to shareholders. Last year, we returned $3.8 billion to shareholders, $2 billion in dividends, and $1.8 billion in share repurchases. Lastly, we continue to assess our portfolio, and we have several small actions underway. We'll update you on progress as deals are signed. Moving to guidance on Slide 5. Our strong finish in the fourth quarter gives us confidence in our ability to deliver in 2025. For the year, we expect organic sales growth in the range of 2% to 3%, adjusted earnings per share in the range of $7.60 to $7.90, and free cash flow conversion of approximately 100%. Our back-to-basics approach and focus on our three top priorities underpin our ability to deliver on these commitments as the macro recovery continues to be uneven. Currently, IPI is forecasted to be 1.9% in 2025. But as you may recall, the forecast for IPI in 2024, 12 months ago, was also about 2%, and we ended the year at about 1%. We'll see how that evolves, but we'll be looking to take advantage of this acceleration as it materializes. Other key data points to watch include auto builds, which are expected to be slightly negative, but down 3% to 4% in Europe and the U.S., where we have better penetration, and flat in China and up across Asia, where our content per vehicle is lower. Consumer electronics are expected to be up low to mid-single digits and consumer discretionary spending remains soft, especially in the U.S., where retail sales are expected to be relatively flat. As we navigate the ups and downs of the macro environment, we'll focus as always on what we can control, servicing our customers at higher levels, improving commercial excellence at the customer interface, filling up the innovation pipeline to support future growth, and driving productivity and efficiency throughout the organization. We look forward to sharing more details on each of these priorities as well as our medium-term outlook during our Investor Day in St. Paul on February 26. You'll hear from our leaders in R&D, supply chain, and the business groups about their execution plans that will turn our priorities into results. I hope to see you there. With that, I'll turn it over to Anurag to walk through the details of the quarter.

Thank you, Bill. Turning to Slide 6. We had a strong finish to the year with Q4 performance coming in better than expected. Total adjusted sales were $5.8 billion, with organic growth up 2.1%. All three business groups had positive adjusted organic growth in the quarter and performed better than our end markets. In the fourth quarter, global IPI was up 1.4% year-on-year and the markets we serve trended in line with expectations. Consumer electronics remained stable, automotive OEM builds were flat, and consumer retail discretionary spending was soft. Geographically, our growth was led by China, up high-single-digits, driven by our electronics business where we continue to gain share and saw modest front-loading from an anticipated change in tariffs. The U.S. was up low-single digits despite the challenging macro backdrop with growth in Aerospace and general industrial. EMEA was down low-single digits due to the continued weak environment, including a high single-digit decline in auto builds. Adjusted operating margins were 19.7%, down 20 basis points year-over-year, and adjusted EPS was $1.68 or $0.05 better than the midpoint of our guidance. The better performance was driven by $0.09 of volume leverage, higher productivity, and lower restructuring charges, more than offsetting the unexpected $0.04 headwind from FX due to the significant recent U.S. dollar strength. I will provide a quick overview of our growth performance for each business group on Slide 7. Safety & Industrial organic sales grew for the third consecutive quarter with 2.4% growth in the fourth quarter. This growth was broad-based with six out of seven divisions posting positive growth. We saw particularly strong demand for eBonding in electronics and hearing and body protection in personal safety. Additionally, growth was driven from a few large power grid orders as anticipated in Asia and the U.S. for aluminum high-capacity conductors and power cable accessories for data centers. For the year, Safety & Industrial sales were approximately $11 billion with organic sales growth of 0.7%, led by strength in eBonding, cable accessories, and auto body repair. Roofing granules had another year of mid-single-digit growth as we continue to capitalize on the multi-year roof replacement cycle. Transportation & Electronics adjusted sales were up 2% organically in the fourth quarter. The consumer electronics business showed continued strength, growing high-single-digits, driven by solid volumes through the holiday season and continued share gains. Aerospace was again up double-digits in the quarter, while the auto OEM business was down mid-single digits, reflecting continued weakness in global car and light truck builds. For the year, Transportation & Electronics had adjusted organic growth of 3.4%, driven by electronics, aerospace, and auto. Our electronics sales were up approximately 12% from strong market demand, combined with new product introductions and specification wins that drove share gains. Despite a challenging Q4, our auto OEM business was up 2% versus a 1% decline in auto build rates. The Aerospace business grew double-digits again for the year and 50% over the past two years, reflecting our focus on growth portfolios. Finally, the Consumer business returned to growth in the fourth quarter, up 1.2% organically. Home improvement led the way, up low-single digits, driven by strength during the holiday season for Command, Scotch Tapes, and Paint Protection products. For the year, our Consumer business was down 1.2% with low single-digit growth in home improvement sales, mainly Command, more than offset by low to mid-single-digit declines in the other divisions. Let me summarize our full year 2024 financial performance on Slide 8. On the back of strong fourth quarter performance, we finished the year with total adjusted sales of $23.6 billion and organic growth of 1.2%. All of our business groups were in line with our guidance, and from a geographic perspective, we saw solid organic growth in Asia Pacific, up 4.4%, driven by consistent strength in our electronics business. In the U.S., despite IPI being down 0.3%, our business was up 0.7% driven by electrical markets, aerospace, cable accessories, and home improvement. EMEA was down 1.3% due to the decline in auto builds and the weak industrial and manufacturing environment. Our adjusted operating margins expanded 280 basis points, above the high end of our guidance range of 250 to 275 basis points, to 21.4%. This performance was driven by benefits from volume leverage, productivity, Solventum transition service agreement, cost reimbursements, and restructuring, partially offset by FX and investments to drive growth in the business. We delivered $7.30 of EPS for the year, up 21% and at the high end of our guidance range. Over 80% of our year-on-year performance was driven by strong operational execution. Finally, we delivered free cash flow of $4.9 billion or 111% conversion which included net working capital improvement of 8 days and returned $3.8 billion to shareholders in 2024. Please turn to Slide 9 as we look into our 2025 guidance. As Bill indicated, we expect organic sales growth of 2% to 3%, earnings per share of $7.60 to $7.90, representing growth of 4% to 8%, and free cash flow conversion of approximately 100%, all on an adjusted basis. We expect all business groups to grow low-single digits, which is in line with or above macro. We expect this higher-growth trajectory to be supported by a focus on commercial excellence, improvement in service levels, and new product launches. We have largely moved past product portfolio prioritization headwinds, and the small amount that remains is incorporated into our guidance and won't be specifically called out going forward. Our EPS growth is anchored by margin expansion in the range of 130 to 190 basis points, which reflects our relentless focus on operational excellence. Adjusted free cash flow conversion is expected to be approximately 100%, driven by strong operating income growth and a focus on working capital management. Adjusted CapEx of approximately $1 billion will be in line with depreciation and amortization. Let me take a minute to walk through the EPS drivers for 2025 on Slide 10. We expect EPS growth of 4% to 8%, driven by operational performance that is partially offset by non-operational headwinds. We are confident that our focus on operational excellence will contribute $0.70 to $1 or 10% to 14% to adjusted EPS growth. This growth will come from volume, restructuring, and net productivity, more than offsetting growth investments and stranded costs. We expect non-op headwinds of approximately $0.40, half from FX due to recent strengthening of the U.S. dollar and the other half from below the line items, including pension expense, net interest, and tax, partially offset by share buyback. We plan for our gross share repurchase program in '25 to be approximately $1.5 billion. Putting all this together, we expect strong operating performance and capital deployment to drive EPS growth. As we think about the cadence through the year, we expect sales and EPS to be split equally between the first and second half, in line with historical trends. Within the first half, we expect Q1 sales growth to be similar to Q4 and earnings will reflect the annual equity grants, which last year were deferred to Q2. This will result in Q1 earnings being similar to that of last year, and we expect sequential improvement into Q2 as we lap the Solventum spin items, with earnings being approximately equal between the two halves. I want to take a moment to thank the 3M team for the strong finish to the year, and I'm confident in our ability to deliver another strong year in 2025 with growth acceleration, strong margin expansion, and return cash to our shareholders in excess of $3 billion. With that, let's open the call for questions.

Thank you. Good morning, Bill and Anurag. I would like to understand how much operational execution and product development have already affected the top line compared to what you anticipate for 2025. Some of these product launches occurred later in the year, so perhaps we could begin the discussion there.

Good morning, Jeff. Thank you for your question. We were very pleased with the acceleration of new product introductions, which exceeded our expectations significantly. However, it's still early days. Many of the products we're launching are considered Class III, meaning they will have initial sales that are on the lighter side but are expected to grow over the coming years. More importantly, as we expand our new product introductions next year by double digits, we will begin shifting toward higher octane or Class IV products, which are expected to have greater sales potential. This will likely result in a more noticeable impact on our top line from these launches. It's a critical aspect of our strategy, and I believe the team has gained momentum through this governance process, boosted by team enthusiasm and some resource reallocations. In Q4 alone, we added 50 personnel and moved approximately 100 people into R&D development. We're moving in the right direction, and while we need to translate this momentum into substantial margins and income over time, the launches we've executed are already accounted for in our two to three-year guidance for next year.

Great. I have a question for Anurag. There was a lot of discussion last year as we worked on refining our models regarding restructuring and stranded costs. Can you provide us with more details on the restructuring investments and stranded costs within that $0.70 to $1 range?

Okay. Good morning, Jeff. Sure, let me explain that. I will break down the components for you. At the midpoint of our EPS guidance, we are seeing a growth of 10% to 14%, excluding non-operational items, which is quite strong compared to our organic growth midpoint. There are three main factors contributing to this. First, sales volume is creating significant leverage, with a 2.5% volume growth at the guidance midpoint and 35% incrementals, totaling about $200 million. Second, the reduction in restructuring costs is about a $200 million benefit heading into '25. Lastly, we have net productivity contributing around $150 million as well. There are various elements within that. The negative impact from PFAS stranded costs is about $100 million. We are also making some growth investments, but these are offset by overall net productivity gains from our factories and SG&A functions. When we combine these three areas, we estimate about $550 million of margin improvement, with foreign exchange affecting approximately $125 million of that, resulting in a net of $425 million. This translates to about 160 basis points of margin expansion at the midpoint, with those being the three primary drivers behind the operational growth of $0.70 to $1.

Great. Thank you for that. I'll pass the line.

Hi, good morning. Good morning, guys.

Good morning, Scott.

Thank you for the shorter presentation. Hi, Bill, you mentioned the quota pull forward and some changes in the sales organization. Could you provide more details on what you're aiming to change within the sales organization and explain what you mean by a quota pull forward in relation to driving growth?

Yes. So it's a great question. Thank you for that. When I laid out the original plan around driving top-line growth, the basis is around driving more innovation, and that's going to take time. I commented on that a little while before. Growth in the near term is going to come from selling more of what we have on the market today. And that's an important dimension to this, which is just a more aggressive approach from our frontline sales and marketing resources. They're currently dealing with not a lot of new things to say to the customers because we haven't been innovating as much. Our on-time, in-full performance out of the factories has not been that great. It's improving, but it has not been that great. So the sales force is challenged in some ways to sell, and they've been somewhat on the back foot. What Chris and the team at SIBG and others across the company are doing is really leaning into this. So we are pushing for making sure that the sales leaders and the sales reps out in the field know what they're expected to do in 2025 early in the year. That's why they're getting out the gates January 1 with our quota and their targets around closed wins. Typically, that would have been in early April when it rolls out, creating a little bit of a lag. So that's why Q1 might not have had some momentum. There's a little more structure around how the sales managers and area leaders are working in terms of their cadence and reviewing progress with their sales reps. That's quite important. Some of the other dimensions that we're pushing on is around cross-selling. It's a pilot; it's six combination pairs that we've done with six or eight different distributors. So it's small pieces here. We saw some pretty good momentum building in December. I'm optimistic that over this year and next, there will be some benefits from cross-selling. We're working on pricing and reinstituting some price corridors and changing our governance process on pricing. So when you step back, I think all of this gets back to the original premise that we've got to get better at selling what we have today on the marketplace. That will be the focus for the back-end of '24 and then most of '25, which is why I think it's important for investors to understand that piece. The NPI will come over time. I'm confident about that, but we've got to get better at selling what we have on the market today.

That makes sense, Bill. When you mention on-time, in-full, it seems very fundamental. If you were to achieve 100% on-time, in-full, would your growth rate improve by 100 basis points, 200 basis points? Is there any way to quantify that?

Yes, it’s challenging to provide a precise figure, Scott. That’s a valid question. Clearly, operating at 88% isn’t where we need to be. Currently, we’re running slightly above 93% in the Consumer sector, and we should be in the high 90s to meet the expectations of major retailers. We're improving in that area. Our Transportation business is performing over 90%, which is good but could still be better. The primary concern lies in the Safety & Industrial sector, which is in the low 80s. We are definitely losing business there. When a customer needs something urgently and we cannot provide it, they tend to look elsewhere, despite us having a superior brand, sometimes even a better product, and competitive pricing. This situation is impacting our sales. I recognize that enhancing our supply chain and meeting customer expectations is essential for driving revenue growth.

Okay. Best of luck. Thank you, guys.

You bet. Thank you.

Thanks. Good morning, everyone.

Good morning, Nigel.

Good morning. Bill, it seems you have some doubts regarding the 1.9% IPI forecast, particularly because of last year's figures. I'm curious about the planning process you followed. When you considered the detailed projections from the businesses and combined that with the broader outlook, what adjustments did you make to the 1.9% forecast? This leads to my main question. What pricing assumptions have you included for 2025? Additionally, as we look ahead, what framework are you using? Is it an IPI plus price model, or is it IPI adjusted by a factor plus price? I’m looking for insights on how you're structuring that growth expectation moving forward.

That's a great question. We are not planning to break down the factors of growth regarding price, volume, market share, and other aspects. We entered 2024 expecting IPI to perform somewhat better, but it has decreased as the year progressed. The anticipated auto builds also fell off considerably towards the end of the year. Three months ago, our outlook for IPI in 2025 was more optimistic than where we stand now, approximately 2.4%. Back then, our expectations for auto builds for 2025 were also higher than what we currently project. These indicators serve as potential signals, and while we utilize them, they are just a starting point. We have conducted a thorough review of our business and are confident that a growth rate of 2% to 3% is appropriate. When we consider the average macroeconomic relationship between IPI and GDP, with an 80% emphasis on IPI and 20% on GDP, it lands around 2.1%. Thus, a central estimate of 2.5% is slightly above the macro level. We understand that our ongoing initiatives in commercial execution, new product development, and improving factory operations are crucial. However, it's only a few weeks into the year, and we have a new administration in Washington with various discussions about tariffs. As the year unfolds, we will observe the progress and impact of our internal initiatives alongside macroeconomic developments, and we will keep our investors informed. Currently, we are optimistic about starting 2025 with a growth expectation of 2% to 3%.

Great. Thanks, Bill. Anurag, I appreciate the details on the margin bridge. The $150 million in net productivity seems to primarily reflect the payback from restructuring actions in 2024. I'm curious if there are any more structural drivers, such as improvements in our footprint or supply chain, that we should consider.

There is. So let me break up the $150 million in a little bit more detail, yes. So first, just on the headwinds over there. I said it was $100 million of stranded costs. The incremental investments we are making as well, which is about $225 million, some we did in '24, some in '25. It's both a carryover as well as in-year. So if add the two together, it's about $325-ish, $350 million. Now offsetting that, you're correct, there is probably $70 million of restructuring benefits, about $280 million. But then to get to the positive $150 million, we're driving about more than $400 million of net productivity. And that is coming through again through supply chain, be it procurement, more on the G&A efficiency and a few of the other areas that Bill has spoken about. So overall, I would say the productivity driving is $450 million, just being offset by all these other line items to get us to $150 million.

Okay. That's helpful. Thanks.

Hi, good morning, everyone.

Good morning.

Bill, you had mentioned in the Conference Circuit in December that you saw a bit of an uptick in industrial demand in Q4. Did that continue into January? Do you think it was just related to pre-buy ahead of tariffs? Or could it have been a reflection of maybe some modest recovery in short-cycle markets? How would you characterize it?

We observed that in the industrial segment of our portfolio, excluding the consumer side, order rates remained steady throughout the quarter, which is a positive sign. They were slightly higher than in Q3 and outpaced the organic growth rate for the quarter, resulting in a small backlog heading into 2025. While we operate as a shorter-cycle business and primarily depend on a book-and-ship model, the indicators are encouraging and widespread, without any specific region or business driving them. This is a contrast to Q4 of 2023 when there was a significant drop in orders towards the end of December, which unsettled the team. This time, we did not experience that decline. Thus, we believe that the projected organic growth of 2% to 2.1% in Q4 serves as a solid baseline for 2025. Overall, the situation is stable, reflecting some modest improvements in the industrial markets, although it is still early to draw definitive conclusions.

Helpful. And then Anurag, can you give more color into '25 margin guidance by segment? And then also comment on T&E margin particularly in Q4 '24 as it seemed a little weak in Q4 versus the other segments.

First, let me discuss Q4 before moving on to 2025. Overall, our Q4 performance exceeded expectations across all three segments. It was approximately $0.05 above the midpoint of our guidance due to increased volume and productivity, although foreign exchange served as a significant headwind during the quarter, which was unexpected. Regarding TEBG, we anticipated lower margins in Q4, which is typical between Q3 and Q4 due to under-absorption as we work through inventory. This was a major factor as we improved inventory turnover by 8 days, indicating absorption challenges. Additionally, we began making growth investments that are currently reflecting in our revenue, contributing to the performance. Since TEBG has a considerable amount of business outside the U.S., foreign exchange impacts it too. Combining these factors led to lower margins, yet we exceeded our expectations. Overall, for all three business groups in 2024, margins were slightly better than anticipated. As we look toward 2025, we are not providing specific guidance for each segment at this time. However, we anticipate margin expansion in the range of 130 to 190 basis points, with expectations of substantial growth across all three business groups. TEBG might lag a bit behind the other two due to PFAS stranded costs, which are primarily associated with TEBG. Nevertheless, we do expect strong margin expansion across all segments.

Very helpful, guys. Thank you.

Thank you.

Hi, good morning. Maybe just the first question, trying to understand the sort of operating margin expansion framework. So you talked about, I think, Anurag, $450 million of overall productivity improvement in 2025. In the past or recent past, let's say, Bill, you've talked about that sort of $250 million, $260 million COGS productivity number as a sort of annual placeholder. Just trying to understand the kind of delta between that. I'm guessing $450 million is not a medium-term placeholder because you have some extra savings this year from the 2023 plan. But maybe just help us understand sort of how to think about productivity on top of that 35% core leverage placeholder.

Sure. So, Julian, you're right. We mentioned that on the cost of goods sold line, we expect a 2% net productivity, which amounts to approximately $250 million. This productivity figure applies to the entire company and includes selling, general and administrative expenses, as well as other business areas. Additionally, it includes one quarter of the TSA reimbursement, which is relevant. These components lead us to the $450 million figure. We will share more details on our Investor Day regarding our forward-looking framework. However, our aim remains to achieve 2% net productivity in both COGS and SG&A to counterbalance inflation and other investments we are undertaking.

Thanks a lot. And I'll leave other medium-term questions for that event. So maybe just on the very short-term, Anurag. I think you had mentioned sort of 1.70-ish of EPS adjusted in Q1. The first half is just under $4, though I think based on that 50% comment. So you got a decent sequential step-up in the second quarter in EPS. Maybe just any very large puts and takes. It seems like organic growth is pretty steady year-on-year, but anything you're calling out the sort of Q1 to Q2 delta?

Yes. Thanks for the question. So let me break it on the two parts. One is some discrete items in the first quarter. And then second is on the recurring operational performance and non-op impact, which you should see through the year. On the discrete items, as I mentioned in my prepared comments, due to the Solventum spin, there were a few pieces, but a large part of it was the equity-based compensation, which I called out last year. We accrued in the second quarter. And as this year, as we're returning back to historical trends, we'll be accruing it in the first quarter. This is about a $0.15 headwind in the first quarter, which becomes a tailwind in the second quarter. On the operational side, we'll see good flow-through from volume, lower restructuring costs, TSA absorption, all the productivity that we spoke about, which will offset PFAS stranded and mix headwind, and all the growth investment. So there should be about $0.20 to $0.25 of EPS growth in the quarter. On the non-op, we have $0.40 for the year. So the first quarter is probably going to be closer to $0.08 to $0.10. So if you put all these items together, Julian, you've got $0.20, $0.25 of operational EPS growth. You minus the $0.08 to $0.10 of non-op and the $0.15 of equity-based compensation, so the earnings are flat to Q1 of last year. Now as you move into the second quarter, if we continue the similar trajectory on operating performance and the non-op headwind, it will be $0.10, $0.15 of EPS growth. And then you add back the $0.15 of the equity-based compensation. So the growth in Q2 would be closer to $0.25 to $0.30. So that's the bridge between Q1 and Q2. And then to your math, the first half and second half should be fairly equal in terms of EPS.

That's great. Thank you.

Hi, good morning.

Hi, good morning, Steve.

Can you talk a little bit about the price assumption for this year?

No, we've not talked about that. I don't think we're going to disaggregate organic growth. It's embedded in the 2% to 3%. I think as we've said before in the past, we do get price increases. The price increases cover material cost inflation, and I expect it to be in a similar magnitude in '25. But we're not going to sort of give that specific number here today.

Is that a net positive or are you just covering it?

No, it will be a net positive in this year. Yes.

Okay. I have a follow-up on the T&E segment in the fourth quarter. The margin was a bit weaker than we anticipated. Is there anything specific happening there in the fourth?

No, in fact, as I mentioned earlier, Steve, it's probably a little better than expected, nothing unusual. This is a combination of seasonality as you bring inventory down, and some growth investments we made. But as you move into 2025, you should see margin expansion again in TEBG. TEBG was actually our highest-margin expansion segment in 2024, growing over 220 basis points. I would say nothing unusual in the fourth quarter, just timing of different things.

And then sorry, one more. Just on the corporate side, a little bit lower in expenses this year. How does that look going forward? Is that a sustainable number in the model going into '26, '27 on the corporate side?

Yes, we'll discuss 2025 now, Steve. For 2025, there are two key components, each around $60 million. One involves reallocating funds between corporate and the business group, which accounts for one last quarter of overlap since we've been doing it for nine months this year. The second component is related to covering the TSA absorption costs, also about $60 million. Those are the only two elements in corporate.

Great. All right. Thanks a lot.

Thank you.

Hi, guys. Good morning. How are you?

Good, Andrew. Good morning.

Yes, can we just talk about free cash flow? Good improvement in free cash flow conversion this year. As we think about next year, this squiggler line 100% free cash flow conversion. What kind of working capital benefit do you have dialed in? And what are their offsets in terms of cash flow or cash flow to keep it at 100%? Because you do have a working capital release program, and I would have expected that you could deliver over 100% quite sustainably for a number of years.

Yes, thank you for the question. We performed very well in 2024 with a 111% conversion rate, and we also made significant improvements in our working capital by reducing the cash conversion cycle by 8 days. It's still early in 2025. We are aiming for a 100% conversion rate because our capital expenditures align with depreciation. We will continue to invest in both growth and sustainability. As our revenue increases, we will see higher consumption on the receivables side, but we plan to offset that with inventory. Our target is to reach 75 days. We made good progress in 2024, and we intend to carry that momentum into 2025. We aim to exceed that target if we can improve inventory management to counterbalance the impact of days sales outstanding. However, for now, we will start with that 100% target and adjust as necessary.

Great. I have a question regarding Abrasives and Industrial Specialties. It appears to be experiencing a consistent decline in the short-cycle business. While you seem more optimistic, the numbers over the past four to six quarters have remained relatively flat. Can you provide any insight into when these might start to improve? What trends are you observing in the channel and at OEM inventory levels? I understand the automotive market is likely a decent area, but I'd appreciate any additional context on when you expect these businesses to turn around. Thank you.

So, good question. Both businesses in the year were down low-single digits. They're very different. Industrial Specialties is a grouping of lots of different pieces; some are growing, some are not. Overall, it's been declining, but we see that flattening out and starting to grow over time. On the Abrasives side, we should see a better '25 than '24. Part of it is because of the industrial economy, part of it is because of the launch of a new product offering called Cubitron 3 that we launched over the last year. It's now moving into a variety of different instantiations of different Abrasive products. It's growing. It's got tremendous differentiation versus competitors so we feel very positive about that. We see that getting a little bit better here in '25 because of the new products being introduced. So we think it's going to both turn the corner here in '25.

But there are no specific commitments for Q1 or Q2.

It's a little bit granular. We'll come out. We can probably say more about this at the Investor Day when Chris talks about the individual components of his business, but nothing more today. You asked about the inventory in the channel, that's been pretty normalized. There's not any significant concerns one way or the other about inventory in the industrial channel. So that's not really the big driver here.

Great. I appreciate it. See you in February. Thank you.

Thank you.

Thanks. Morning, everybody. Anurag, one of the things that obviously stood out to me is the expectation for profit growth to be well in excess of revenue growth for this year. You obviously provided a very helpful walk around how we get there. But as we're coming up in kind of late February, we think about the multi-year outlook, do we expect a high level of incrementals to be sustainable? It doesn't have to be over 100%, but can we expect a higher level of incrementals kind of on a sustainable basis as some of these cost initiatives have leg? And I also assume cash flow is going to grow in excess of earnings growth over the next several years. And if you could just talk about that, and I'm trying to square that with a 2025 buyback guide that's a little bit lower than what you kind of exited at from a run rate perspective.

Good morning, Amit. Thank you for the question. At Investor Day, we will outline a framework for medium-term sales growth and the potential for gross margin expansion that will benefit our bottom line. You are correct that we will present this framework by the end of February. Regarding cash flow, as we continue to grow, it may impact receivables, but we have set an inventory goal of 75 days and believe we are on track to achieve that. Historically, 3M has performed around this level, but as we look ahead, revenue will be a significant factor, while inventory remains within our control. Our goal is to exceed 100% conversion.

Okay. And just maybe a bigger-picture question for Bill. Love to get it. You mentioned earlier about industrial OTIF kind of stubbornly remaining in that low 80% level. Obviously, that's a big deal given the size of that business. Can you talk about when you expect to see more progress on that and talk a little bit about the manufacturing DC footprint and when you expect to make more progress on that as well?

I anticipate more progress on SIBG OTIF in January, with expectations set for February. We did not foresee the decline we experienced in November and December, which stemmed from specific quality issues with a few assets within SIBG. People have reminded me that the portfolio is much more complex, comprising about 35% more SKUs than TEBG and more than double the number in CBG. Despite this complexity, we aim for that business to approach 90% this year, possibly by the end of the year, but we need to make steady improvements throughout the year on SIBG OTIF. Chris is relying on this progress, as is his sales team, and most importantly, our customers are as well. We are actively addressing this issue and are focused on making improvements, which have drawn significant attention within the company. The team is dedicated to ensuring we meet these goals. Additionally, the complexity of the network is part of a broader plan for operational excellence. The first step is to establish improvement targets and plans for all our factories regarding their four-wall spending. We will also evaluate how to operate our current network more efficiently. As we develop the Operating Equipment Efficiency metric, which measures asset utilization, we can begin to assess the network more comprehensively. For now, our emphasis is on executing effectively within the factories, and I believe we have ample opportunity to improve in these areas.

Yes. Thank you very much.

I appreciate it. Thanks, Amit.

Yes, thanks, guys. Good morning.

Good morning, Nicole.

Maybe just starting with China. I think you're expecting a little bit of a slowdown to mid-single digits in 2025, but definitely not too shabby. I guess, can you talk a little bit more about what you're seeing on the ground there?

Yes. From a macro perspective, China is expected to experience a slight slowdown in both GDP and industrial production. However, this depends on the accuracy of forecasts and the associated data. I believe that tariffs could impact activities in China, particularly regarding exports, so we are monitoring this closely. China accounts for about 10% of our global revenue. Last year, revenue from China grew by approximately 10%, and it increased by about 13% in the first half of the year before slowing down. A significant portion of the business involves exports, which has been a key factor, while domestic business in China saw a growth of around 3% last year. We observed strong activity in December and continued momentum in January. This could be due to anticipatory buying ahead of the Chinese New Year at the end of January. We anticipate that our revenue in China will slow down in 2025 compared to 2024, likely remaining in the low single-digit growth range for revenue at 3M in China.

Got it. That's really helpful. Thanks, Bill. And then any update on insurance recovery as I think you promised us an update each quarter. Thank you.

We are making progress on insurance, and we're actively engaged in arbitration, negotiations in some places, and litigation with insurance carriers for both PWS and Combat Arms. In Q4, we recovered about $170 million. So to date, through last year, it was about $340 million, mostly in the Combat Arms area. We're pushing this to legal teams to drive this pretty hard, and we expect our insurers to honor the commitments they have to us and in their policies.

Thanks so much. See you in February.

Thank you.

Hi, good morning.

Good morning, Joe.

Just wanted to ask one on cash and just what you think the right amount of cash to carry is. So you ended the year with cash and marketable securities at about $7.7 billion. Where do you expect to end 2025, and then think maybe a little bit further out, just what you think the right amount of cash to have is, whether that's a percent of sales or dollar amount?

Hi, Joe, it's Anurag here. We ended the year with $7.7 billion, which is about twice the working capital needed for the business. For 2025, we plan to buy back $1.5 billion in shares. At the current dividend rate, we are paying around $1.5 billion to $1.6 billion in dividends. We also have $3 billion to address with Combat Arms and PWS. These are the major items for the year. Our goal is to refinance most of our debt, and when we put all of this together, we expect to end 2025 with over $6 billion in cash.

And then also, Bill, just on industrial production, what are you watching most closely there, whether it's a region or end-market in terms of how you're thinking about where the best potential sits for this accelerating industrial production that we're kind of all waiting for?

We are looking at all the different pieces. We are pretty levered to the manufacturing economy within IPI, which is an important one. We're a little bit heavier weighted in U.S. and probably Europe and others after that. Clearly, the U.S. is an important focus for us in watching IPI. The current forecast is it does turn positive from minus 0.3% to plus 0.5%, I think is what it was in 2025. Europe, we have to watch. We have a pretty good presence in Europe as well. It's a pretty big turnaround in Europe from down 60 basis points to up 130 basis points next year. Those are the key things we’re looking at, along with the industrial side. On auto, I'm a little bit concerned about that only because we had some deterioration last year. The auto-build forecast for this year has weakened a little bit, down 60 basis points. When you disaggregate that, the U.S. and Europe are down 3 points to 4 points; China is flat, and the rest of Asia is up a little bit. We have to watch that and look at our content per vehicle. Obviously, the team is very focused on gaining share in those automakers that are growing faster. It's a very important strategic focus for Wendy and her team. Those are some of the things we're looking at from a macro perspective.

I appreciate the color. Thank you.

You bet. Thank you.

Thank you. Good morning, everyone.

Good morning, Deane.

I wanted to circle back on the strategies for reinvigorating new product introductions, specifically reinvigorating innovation. I know we're going to start off the analyst event at the technology center. I think there's art and science here when it comes to innovation and just be interested in your thoughts. You can't just dump cash at the front door and say innovate, but I know you're adding some headcount. Are there any other thoughts there in terms of ramping up innovation? And how do you feel about that longstanding policy at 3M R&D where the senior scientists get 15% of unbudgeted time? Does that still fit into the equation? Thanks.

Yes. The 15% time allocation is a defining characteristic of the company. I often joke that it's actually 115%, as we transition from 85% to 100%, but everyone needs to utilize that 15%. This is crucial as it allows individuals the opportunity to reflect and consider. I do the same by spending time in my office contemplating the challenges within the company. We're all required to do this. It's important to note that we're not lacking in ideas and concepts for innovation. We have an excellent list of products as our scientists and engineers engage in product development and interact with customers; the ideas are plentiful. The pipeline is quite robust, but we need to ensure we continue to replenish it. It's about activating and harnessing the energy of those involved in innovation. Part of this involves addressing certain bottlenecks in our processes. We are reallocating more funds within our capital budget towards R&D for lab and prototype equipment, which will accelerate prototyping and scaling of innovations. We're also increasing our resources in this area. By establishing the right framework and effectively motivating our teams, while focusing on the high-priority growth sectors where we intend to invest our time and resources, I believe this approach will yield positive results over time. This is something that Wendy in TEBG is going to lay out pretty clearly at the end of February during our Investor Day. How do we get closer to those innovation partners so that we're really tied with them very closely? Their ideas need to translate back to us, and we're working with them in a strategic way rather than a transactional way. If you do all of these things, this machine will turn on. We saw good progress over the last six months. It's early days. I think we'll have another good year in '25. Ultimately, this is going to come down to, are we growing faster than the market? Therefore, we're gaining share, and are we driving margin and margin expansion because the product we're offering to the marketplace is better than what the competition is putting out. That's the end objective. We have a good start.

That's great to hear, especially that support of that 15% unbudgeted time. That's I'm sure a lot of people would like hearing that. And just a second question, a quick follow-up on the plan for reducing inventory days. I know there's an immediate benefit for free cash flow, but is there any pressure on service levels once you start to reduce the level of inventory? Is there any kind of trade-off there? Thanks.

Look, that's something that we're watching very, very carefully. We came down 2 days year-over-year and I think it was 8 days sequentially in Q4. In SIBG, we saw sort of OTIF come back. We're watching this very carefully. Our intention is to prioritize OTIF over inventory. That's what we think is really important. That being said, there are opportunities to eliminate the waste in inventory. Not all the inventory we have is good inventory. We have a lot that's stuck on the water. We have a lot of components in warehouses and factories. We have to ensure we have the right inventory. That's why I believe this is the and not the or; we can get to 75 days and over 90% OTIF. I think we can get there; that's our goal. That's what we ought to be shooting for. It's not going to be linear and we saw in Q4, it wasn't linear. We had better inventory, not as good on OTIF, at least in one segment, but that's the objective. We're going to prioritize OTIF over inventory knowing that we'll get the inventory over time.

Very helpful. Thank you.

Okay.

Thank you. I appreciate everyone's time and attention today. I know we're running top of the hour here, but I want to thank all of the 3Mers for their continued hard work and dedication to our customers and shareholders. I look forward to introducing you all analysts and investors to the senior leadership team at 3M at our Investor Day coming up on February 26 in St. Paul. It's going to be brisk today; it's minus 18, so dress warmly. We look forward to seeing you on the 26th. Thank you very much and have a good day.