3M Co (MMM) Bank of America Global Industrials Conference Call Transcript

3M Co (MMM)

Bank of America Global Industrials Conference

March 23, 2023, 04:00 ET

Company Participants

Monish Patolawala - EVP & Chief Financial & Transformation Officer

Michael Roman - Chairman & CEO

Bruce Jermeland - VP, IR

Conference Call Participants

Andrew Obin - Bank of America Merrill Lynch


Andrew Obin

Welcome to Day Three of our Global Industrials Conference. I think, so far, this has been the biggest and the best attended event that we've hosted, I think, in the past two decades. So thank you to everybody for participating. We had fantastic corporate and investor turnout. And we want to sort of start the day with one of the big guns.

So we have the management of 3M here this morning. And we have two presenters on stage. We have Monish Patolawala, the company's Executive Vice President, CFO and Transformation Officer. And we also have Bruce Jermeland, Senior Vice President, Investor Relations.

Gentlemen, welcome to London. It's always great to have you here.

Monish Patolawala

Thank you.

Andrew Obin

I think Monish is going to give a few opening remarks, then we're going to go to Q&A. And I just want to stress, as per usual, if folks have questions in the audience, don't hesitate, raise your hand. We will very, very happily incorporate you into our discussion. Thank you, and welcome to London gentlemen.

Monish Patolawala

Thank you. Thanks for having us. So just I thought I'd take a few moments with some opening comments to bring everyone up to speed. 2022 was a pivotal year for 3M. We got a lot done in 2022.

From an operating perspective, we continue to drive operating rigor. We controlled our spending well. We were able to manage cost increases through price increases, we exited our business in Russia, but most importantly, we continued to take care of our customers. We made sure that even though it impacted our own efficiencies, we tried not to make sure that their lines went down.

On the strategic side, too, we took some really big actions that sets 3M up for long-term success. We closed -- we successfully closed in September, the sale of our Food Safety business, a transaction that delivered $1 billion of cash and we retired 16 million shares. At the same time, we announced the spin of our Health Care business. That spin-off when done will allow both companies to be 2 great world-class companies, both having great margins and cash flow as well as good growth in both the businesses.

We also continued to make progress on our litigation exposure. In certain cases, we continue to defend ourselves when it came to PFAS. We also had negotiated settlements when required.

But at the same time, after a deep analysis of where the regulatory trends were going, where the market was going, we also decided to exit the manufacture of PFAS, which we will exit out by 2025. And at the same time, we have also committed to remove PFAS from our own products in 2025.

And so all put together sets us up to be having 2023 and beyond to be very successful. When you think about 2023, coming into the fourth quarter, we had mentioned that we saw the economy to be quite uncertain. We continue to see the economy quite uncertain.

And the first quarter where we had talked about a range of revenue of $7.2 billion to $7.6 billion, which is down 10%, give or take, on a year-on-year basis at the midpoint. And that's impacted by a couple of things. One is the disposable respirator and exit of Russia headwind, which if you'll remember last year same time was the Omicron variant, which increased the sales of disposable respirators.

Secondly, in that is also foreign currency, the fourth quarter and the third quarter of last year saw the U.S. dollar being very strong. That has a carryover headwind from a foreign currency perspective.

And then we have continued to see softness in some of the markets that we saw in the fourth quarter. Our theme in the fourth quarter that we had talked about during Investor Day was basically consumer-facing businesses were very slow. And then industrial businesses were doing okay.

As you have seen how the first quarter has played out in this range that we gave you, the $7.2 billion to $7.6 billion, with the midpoint of $7.4 billion, we're seeing pretty much those same trends play out.

You're seeing consumer electronics very soft. You're continuing to see destocking at our retailers, and you're seeing customer sentiment moving away from discretionary goods to essential goods.

What we've also seen during the quarter is some slowdown in industrial activity. But in general, industrial activity has remained strong. But you've got pockets of industrial distributors especially in the U.S. saying we're just kind of slowed down a little bit of our buying till we assure that there's no recession coming or is the second half going to be tougher or not.

So when you cap that and you look at the total year, we had given a guide of minus 3% to 0%. March is an important month for us. Once we close out March, we will let you know where the year looks like. We have continued to drive progress on operating rigor, continuing to drive rigor on cash.

For the first quarter, we have continued to be very prudent in our spending. At the same time, the Health Care spin, where the teams are working on has actually given us an amazing catalyst for us to make sure we are relooking at everything in our company.

And Mike mentioned that at earnings call that we are relooking at everything. What we mean by that is you have an event that allows you to look at how you're structured. It allows you to make sure you are always shortening the path to the customer, and at the same time, making sure you're organized to drive the yield and efficiency and the supply chain performance as volumes come back.

We are committed to take all the right actions that we're going to do between now and the end of the year to make sure that when the volume comes back in 2024 and beyond, you get the leverage that we have all talked about because 3M is going to be a much lighter company leaving 2023 than coming into 2023.

As a part of that, we announced a restructuring of 2,500 manufacturing jobs, driven mainly by volume. So as I mentioned, the fourth quarter came in slower. The team's been agile to understand that we need to rightsize the volume in our factories to make sure that we are not unnecessarily building inventory or having a lot of fixed cost.

So when I sum it all up, I would say 2022 was a pivotal year for 3M. 2023 is a big execution for 3M, a year of execution that sets both companies once spun off, in 2024 and beyond, to be very successful.

And I know there were some questions on the Health Care spin, so I just thought I'd let you know that, too. We do have dedicated teams that are working this spin. They're making very good progress. It's allowing -- as I said, it's allowing us to look at how we should organize ourselves.

But at the end of the day, the spin, as you all know, is all subject to regulatory approvals, final Board approval, making sure we get the right tax rulings and tax opinions and all other government regulations that we have to go through.

But I'm very happy with the progress the team has made, they are dedicated teams. We are continuing the carve-out, and we'll keep you posted as we make progress. But overall, I think we are set up for a great long future.

Question-and-Answer Session

Q - Andrew Obin

Fantastic. So thank you very much for being here. So my first question was going to be on latest macro read across. I think you did quite a bit of that.

Maybe I'll sound the questions, but thank you for that. So let's sort of start with the stimulus, which I think is a big, big theme for 3M. So have you seen any funding coming in or impact from any of the stimulus legislation like the CHIPS Act or the IRA? Is that something you expect to see any impact from?

And just to expand a little bit here, generally, you have very broad industrial exposure through your technologies. Are you starting to get orders, conversations with the sort of semiconductor fab manufacturing in the U.S., battery manufacturing, energy efficiency, what kind of conversations are you having right? Because you're so intimately embedded with your customers.

Monish Patolawala

Yes. So as you know, Andrew, both these acts have given a lot of incentives to infrastructure development, manufacturers of infrastructure development as well as renewable energy, et cetera. So as you know, we do have exposure in that space.

We are quite confident as the volume comes in and as orders come in, we'll have a chance to play in that space. It's quite early right now, I would say. So we just -- we'll keep you all posted. But have we started having conversations? Yes, but it's quite early right now in just the whole landscape.

Andrew Obin

And are you guys just as I think your North American manufacturing capacity, how do you think you're positioned longer term to take advantage of probably more industrial build-out in North America over the next several years?

Monish Patolawala

Yes. So the -- one of the tenets that 3M has always had over the years was making sure that they are the closest to the customer and have followed either an in-country, for-country model, in-region, for-region model. That allows you to make sure that you have the shortest path to the customer.

But at the same time, the U.S. continues to be a big manufacturing location for 3M. We actually are a net exporter out of the U.S. So we export nearly $5 billion out of the U.S. So for us, any reshoring is always going to help. And because again, we're going to follow where the customer is. ...

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