3M Company (MMM) Earnings Call Transcript & Summary

Yes. Well, it showed up in the bottom line and it's early days. So it's -- you don't want to extrapolate on one data point when it comes to sales or something like that. But you can see it when the teams are coming together, integrating together and exceeding their milestones and you're seeing it show up in more efficiency, less costs, just -- there's multiple dimensions, some of them very quantitative, some of them qualitative. But we are very encouraged by the coming together of those businesses, the way they start to integrate, the way the sales forces are coming together. It's very encouraging. And the performance has been better than expected in terms of our bottom line.

Got it. Questions from the audience. Any questions? All right. I will continue. So one of the things that you've also done a lot of in the last year is a couple of restructurings, a realignment. You talked on the call about what you're doing around the realignment. So it's very interesting, right? Like, maybe talk about how it's contributing to whether it's a 50 to 100 basis points of margin expansion in 2020? Or what are the initial returns you're getting on the business unit realignment, in particular, but also the restructuring?

Yes, there -- we did announce 2 restructurings over the last year. The first one was coming out of Q1 and it was really focused on the actions we needed to take to realign ourselves to the outlook for growth for 2019. We -- and we do that broader than just the restructurings. We eliminated jobs to realign our cost structure. We changed our production plans. We took cost down in our factories. We manufacture nearly everything ourselves, so it was all of that. And within the cycle, we got on top of that. You see that show up in cash flow. You saw it come out in inventory. We got on top of it. So that was a market reality kind of set of actions and executed well. What we talked about at the end of the year is a restructuring charge to move more quickly to this alignment of the businesses around the transformation capabilities that we've been building. And we announced part of that last year in April, too. We realigned from 5 to 4 business groups and you get questions why this, why now, what does it mean, is this just something that's just reshuffling kind of the portfolio for one reason or another. And it really was the first step in the next phase of transformation for us. And it was aligning our businesses around customers and go-to-market models. We've been building capabilities to manage our entire customer experience, manufacturing, supply chain, customer operations end-to-end with more of a digital framework and new models. And to take full advantage of that, you want to line up on the go-to-market models. You serve customers differently through retail, health care, OEM direct and B2B through channel, through distributors and so it's really important to get that in line. So we announced it in April and then we worked all year to get not only the businesses aligned to that globally, but to have our enterprise operations, that manufacturing, supply chain, customer operations as well. And then we put as part of the focus streamlining the enterprise. It was about optimizing 3M's model and what we do in our growth with our customers, but it's about streamlining the enterprise. And so you get -- in the end, you get businesses that are better aligned to their customers globally, more accountable globally to them. There is streamlining through the country leadership. The businesses now are responsible for strategy, portfolio, resource prioritization globally. There's not a separate country-based organization to make those decisions. It's going to be the businesses globally. They're better connected to customers with insights and innovation globally, leveraging the R&D investments we're making, the capital investments. We've empowered our people to make decisions in clearer ways. And so there's -- those are things that we've been working on throughout 2019. We announced them at the earnings call. It was more of this is now launched. We have this in place. We're not -- this is not forward-looking statements and we didn't want to come out with forward-looking statements. We want to be operating this. So we hit the ground running January with these in place. And so it's -- think of it as taking advantage of a lot of what we've invested through our transformation work and now adding to that and really taking full advantage of it. You see some of that in what I've been talking about with Europe, but it's a global benefit.

Right. And so now you have the systems to track all those stuff, right? So do you see like anecdotes of success in terms of higher growth as you realigned? Or like how do you sort of monitor your success?

Yes, it's encouraging what we do see. And it's early to kind of take all of it and extrapolate on it, but we see our ability. One of the areas that we saw it was in the inventory reduction. We have been putting in place this capability to really end-to-end better manage our supply chain across our businesses, and that enabled us to really get after that inventory. And we saw it through the second half of the year as taking out inventory. So that's a good anecdote. More than an anecdote, it was really important to cash flow for us and to getting us prepared to really succeed as we came into 2020. We see other benefits in service. Our service to our customers is at all-time performance levels. There are still things to work through. We made a big change in how customers experience 3M looking at this, but it has, net-net, provided better service and -- which is important because everybody's expectations around service continues to go up. So you have to change to create a competitive advantage and meet those expectations. And that's been more than an anecdote because it was pretty broad-based in the company. So those are a couple of big areas where we saw it. We're seeing benefits in now how we go to market as we've really launched this more effectively. So more to come as we go through the year. Ultimately, the test is does it show up in the results? Does it show up top line, bottom line, and that's what I'll come back to.

Yes. Yes. Of course, of course. And I want to step back and ask you maybe 1 or 2 more markets questions and feel free to tell me whatever. But like when I hear companies that are big customers like Apple talk about issues with their supply chain and what have you, like, how do I think about that for you, guys? I mean one of the sort of parts of the bull case on 3M is the electronics can get better in 2020. And I know you have a wide range of guidance and I think that's because who knows what's going to happen. But how do you -- electronics sequentially got better for you, right, in Q4. But it's a big question mark as you go into 2020, is that fair?

Yes, there's -- your comment's right. There are question marks out there. You see companies announcing their impact on their outlook for the quarter or the year. Ultimately, you add those up, they're going to impact us, the customers that are talking about that. Those that are customers of 3M will see that as well. It's hard to know right now how much of the impact will come and how much of it will come early, what does it mean longer term. If you step back and look at electronics, unless there's a consumer demand reduction over the total year, it'll -- it might move around and where the demand is. A lot of it depends on how the COVID-19 coronavirus plays out, what's the impact ultimately on activity. It's early to be able to see that. A, you can read what I read on how it's progressing versus other outbreaks, SARS or H1N1, and it's really day to day in the marketplace. And that's -- we are working with our customers day-to-day, week-to-week to try to better understand that. Ultimately, if it has a demand impact on our customers, it will show up for us. And some of that will be short term. Now for us, there's the other side, which is we will have increased demand on other parts of our portfolio like safety and health care. So we'll give you updates as we go on, how that comes together.

Got it. So let me step back and ask about the other topic that I always get asked about and that is PFAS as I'm sure you get asked about a lot. So look, a couple of quarters ago, this was, like, I guess, middle of last year, you suggested that scientific evidence doesn't show that PFAS causes harm to people. But I guess just stepping back, Mike, like what is 3M doing now given all the noise that we hear about PFAS? What's your strategy around defending yourself or giving more knowledge to people around PFAS? Like, what are we doing in 2020 as a company?

Yes. And thanks for the question. And it's -- I want to frame it up a little differently. Actually, I've talked a bit about this in the earnings call, too. There's -- it's how we approach it, who we are. We approach it from our core values around sustainability, environmental stewardship. It's what led us to exit these chemistries more than 15 years ago. We were -- we led the exit. We -- it was our science. It was our understanding and said, this is a decision we have to take. That's still fundamental to what we do. We have a culture around sustainability that's pervasive on science for circular, taking waste out in everything we do. And that's pollution prevention pays as a manufacturer. We are -- we've now taken 30% of our factories worldwide, and we're a material science manufacturer, to zero landfill waste. That is part of that culture. Science for climate, which is reducing greenhouse gas emissions, and we've taken our own greenhouse gas emissions down significantly over the last 2 decades and continue to do so. We help our customers do the same thing. So it's pervasive in what we do. Every one of our new products has a sustainability goal with a tangible impact. Otherwise, it's not really innovation. If you solve the problem with a less-than-sustainable solution, it used to be we were doing that kind of core to what we do, customers are demanding that more and more. So it is an important thing that we do. And then we have what we call science for community, which is around building up science and STEM education and state of science around the world. But it's also about how do we take responsibility, what do we need to do? And so that led to what we shared in the earnings call when we lean into PFAS. We have a strong cross-functional team managing PFAS. I understand the uncertainty and the challenges of that. It's something that we focus on all the time. But we have to manage this and we have a strong team in place to do that, cross-functional capabilities. And we have guided them around the principles of sound science. I mean we're going to leverage that corporate responsibility and transparency. And so we've been trying to -- the uncertainties, a challenge and frustrating for investors. We are being as transparent as we can every step of the way, what we know, what we are facing, whether it's in our own manufacturing and disposal sites and how we're addressing those and resolving and remediating those areas, what we're doing with the litigation that we face, what we're doing in the regulatory space to help support EPA and other regulatory bodies to really move this forward, advance this. And so it's a -- those are all the dimensions of how we're managing it. And I've committed to be as transparent as we can. What do we face, what are the next steps, how is it coming. We took a reserve in Q4 related to a couple of areas that we -- we're now at a point where we can give more transparency. It's probable, estimable, we can lay it out and we continue to commit to do that as we go. It is multiple dimensions that we're managing and commit to do that.

I mean without getting political, what do you want to see happen from the EPA? Or what would help with certainty?

Well, we were public. When they come out with their management plan, we supported and we continue to support it. We made commitments. We testified in front of the House Oversight Committee back in September and we made several commitments there to support this, clearinghouse of data and research and contributing everything we know and helping to support that, investing our own R&D and better testing and measurement. The testing of PFAS in the environment, we've been a leader of establishing those methods. So helping to continue to advance that, support the EPA and its management plan, which includes maximum contamination level, which that will be -- those are -- that's a regulatory structure that will help move things forward, and so we support that and we'll continue to support that.

And then to your point on you taking a reserve in Q4, I guess the concern that some people have is that if you look at the last 2 years, Inge, a couple of years ago on this stage, talked about the Minnesota reserve. And so it's been about $1.350 billion in reserves here over the last 2 years, like how much are you concerned that it just kind of keeps dribbling out every couple of quarters? Or is that something realistic that we need to be worried about?

Well, it's part of the uncertainty. And it is -- and it's part of what is likely to be some time that it's going to take to work through these different areas. And we've been able to take the steps we've taken. And then also is that -- the one that we announced last year, Q1, was where we manufacture and dispose them. It's just us. It's us and our communities and regulatory agencies and we can work on resolving that. In other areas, it gets more complicated. There are more companies involved and more get...

Community numbers involved.

So it's going to take time to work through the rest of it. And I would like to address some of the uncertainty sooner rather than later, but we're -- it's going to take time to work through it.

Right. So I'm going to shift gears to get any questions before I do. Anybody have got...

Just real quick on your portfolio management. Can you give any disclosure on the percentage of revenue that you feel like is CapEx growth in your portfolio? How much do you still have...

Let me repeat the question. So just within the portfolio, how much of the business is not growing, is that basically the question? And what would you do?

Well, we report by business and by geography so you don't get -- and we give our division performance. So you can see at 23 operating units what we do year-to-year in those businesses, we don't go down below that in how we talk about it. Now we manage our portfolio more broadly than just those business groups and portfolios. We're looking at markets. We're looking at leverage of the fundamental strengths. We've divested smaller than division-sized businesses in the past. We've changed how we operate those businesses. We had an example I highlighted at the Investor Day where we took long-lived tape -- industrial tape businesses, put them together to manage them for cash flow, basically. We look at masking tape, box-sealing tape, we've innovated an incredible amount since 1925 when we invented masking tape. But going forward, how should we manage it, and we decided we should manage it optimize cash flow, leverage the 3M brand, our go-to-market models. We can create more shareholder value that way than other ways, divestitures and so on. So we are always looking at that. So there's a growth component. There's a historical growth. There's a projected growth. There's a market attractiveness and how do we leverage those synergies of 3M, those fundamental strengths. And that comes together at a market level, at a business level, at different levels within that. And so how much? It's an ongoing process and we are -- we continue to reshape it. And market dynamics and other things will change and continue to contribute to how we think about it.

Other questions?

On the priority growth platforms, you mentioned that there are certain levels of scale. You said some of the Health Care ones. But outside Health Care, which ones do you think could be needle mover in the near term?

Priority growth platforms, which one could be a needle mover in the near term?

Well, we talked a lot about automotive electrification, which is an interesting one because you see build rates negative. And so you look at if you're in a market with that kind of dynamic, how attractive is it. Automotive industry is innovating at a rapid rate. And everybody sees electrification, the powertrain electrification, but it's broader than that. Electronics are penetrating the automobile like never before. And it's a big opportunity for us. It requires a lot of solutions that we've innovated around in the electronics world now coming into automotive and marrying that with the demand in an automotive environment. And so it's -- these are places where -- I talked about it, we've been in automotive industry for more than 100 years and we've built our way up to $15 to $20 per automobile in the build materials in 3M -- in 3M innovation. The electrification -- the electronification of the automobile is creating a much bigger denominator for us to innovate. So while build rates may be muted, we see an opportunity for growth, and that's one of our platforms and it's been growing. It grew 9% last year with build rates down as a platform, for example. And it's getting to be sizable. It's over 250 million. And it's future growth opportunities. So that's one. We do see in some of our core industrial portfolios, our precision engineered abrasives, we still see significant growth opportunity for that portfolio as we look forward. We have game-changing performance in our technologies. And scaling that is -- it's largely a spec-in business. You have to work with customers to specify it in their processes and in their drawings. And so we see an opportunity to accelerate that with that innovation that we have and more to come. So those are a couple of examples that are a little more in other spaces outside of Health Care. Five of our 12 are in Health Care. We have our own material science innovation going into clear tray aligners, and we see that as a growth opportunity. We -- biopharma filtration, we made an acquisition a few years ago of Membrana technology, but we had a considerable organic innovation going on in the company. Bringing that together in biopharma is another part of that Health Care portfolio platform. So those are some of the exciting ones that the markets are significant and growing, and we have now a pretty strong platform of product and additional innovation runway that will be exciting.

So maybe we have time for one more quick one. So like, just on that topic, like you came in -- when you came in, Mike, it seemed like you wanted to do a little bit more portfolio transformation, like, that's my opinion, right? And you've been doing it. You add Acelity, you're divesting some things. I mean could we see an acceleration of portfolio transformation of 3M as you try to pursue a higher growth platform?

It's been interesting. You look back over the last 7 years, when Inge came in, he put a focus on portfolio. It was a big priority. I was the strategic planning Senior VP at the time in corp dev, so I worked with them on it. And I would say, since then, we've continued to increase our focus and what we know how to do and can see as the right strategies. And it comes through visibly in acquisitions. It comes through visibly in divestitures outside the company. It's also shaping how we prioritize organically inside the company. So I would say we've continued to step into it over time. So to continue that under my leadership was the expected course, I think, based on what we've learned and how we've been able to benefit. And it's still 1 of the 4 priorities for me as I lead forward and it'll continue to be a big value driver.

Great. Thank you very much. Appreciate your time.

Okay. Thanks, Andy.