3M Company (MMM) Earnings Call Transcript & Summary

Good morning. And welcome to Wolfe Research Global Transports and Industrials Conference. This is the 3M fireside chat hosted by Wolfe's Managing Director covering multi-industry, Nigel Coe. [Operator Instructions] And now, I hand the call over to Nigel.

Thanks, Tatiana. So wrapping up the fireside chats of this year's conference is 3M. We're very pleased to welcome 3M to the Wolfe Conference. And also very pleased to be hosting Chairman and CEO, Mike Roman. Also, we have Investor Relations, Bruce Jermeland. Mike's been CEO for almost 2 years now. And I think it comes with the ranks. Right, Mike? You've been in the company for I think for almost 30 years -- 32 years now, so really a long time. So Mike, thanks for being here. We really appreciate it. The format is going to be a fireside chat. I will direct the questions, but we will take some questions from the audience. Just punch in the questions in your questions in your text box and/or e-mail [email protected]. So Mike, let me hand it over to you for some opening remarks.

Yes. Thank you, Nigel. And thank you for inviting me to the fireside chat. I'll open with just a few remarks about how we're managing in these unprecedented times in the middle of the pandemic. And I want to start with something that we're really focused on and how much we appreciate and admire the heroic work of the nurses, doctors and first responders out there. And I say this often, I'm very proud of the way our 3Mers around the world have stepped up to help in this fight, including to help protect those first responders and health care workers on the front lines, and especially our people in the factories and distribution centers around the world who are working around the clock to deliver critical supplies like personal protective equipment. And I -- just a comment, we -- at the beginning of this global pandemic, we set out 3 principles that we focused on throughout, which has really helped us to manage effectively. The first is -- first priority is the safety of our employees and making sure we put that paramount in everything that we do. The second is to fight this pandemic from every angle, including what we've done to step up our production and supply of N95 respirators in the middle of this fight. And the third one is we call it business continuity, but it's really putting a focus on customers and shareholders, make sure that we continue to deliver for them, that we are focusing on executing as we work through this pandemic. So maybe with that as a frame, I'll turn it back to you, Nigel, for Q&A.

Thanks, Mike. And I think you've quadrupled the production capacity of N95 masks, which is quite a feat in this current environment. So congratulations on production capacity that supports the frontline workers. So I thought you could kickstart with the trading environment. You released April sales last week. And we're all trying to get back the grip on the shape and duration of the recovery. You reported 12% decline in sales in April, and that was actually a little bit better than the mid-teens placeholder you put out as of mid-May -- mid-April. Just wondering where -- what got better for you as April went on? Clearly, masks was an area of [indiscernible], but where else do you see the good news?

Yes. I would say the 12% played out pretty well in line with that mid-teens that we were looking at, at the time of the earnings call and the shape of that across the portfolio. We had strength in respiratory protection, our personal safety business. We saw strength -- some returning strengths in electronics, in cleaning supplies, in a number of areas like food safety and biopharma, which are also part of what we're doing to support in the COVID fight. We saw weaknesses where we had talked about in the earnings call. So we saw weaknesses in oral care. I would say, general elective procedures in health care, we saw that continue to be weak as we go through the quarter. You saw a bit of an adjustment, 15% to 12%, is -- everything was a little better as we entered the month but it was pretty much the same shape of the curve and continue to see some challenges in areas like stationary and office supplies. And I would say automotive continues to be soft. So the trends that we saw coming through March into April continued as we went through the month.

So nothing changes. That's the message that's clear. But as we go into May, have you maybe seen the tempo start to improve a little bit and I guess what I'm trying to get at is, is there any reason to believe that April won't be the worst month of the quarter, if not the year?

Yes. It's probably early to really call May, and we'll come out and report that as we've talked about. In general, it's trending similar to what we saw in April. I think it's early signs in a few areas. There's some signs that elective procedures might start to come back, but it's too early to say that we see that in our numbers. We'll come back with the May results and give you a better view.

Yes, absolutely. And then on to China, it was up, I think, 7% in April, very consistent with what we've seen with some of your industrial peers. China hopes to come back and be sharp here. I think we're all sort of guarded about whether this is some restocking activity we're seeing in China, trying to sense the sustainability of that trend. What's your view on what you're seeing right now in China? Do you think this is a durable recovery?

Well, it's the early stages of a durable recovery. I think we're tracking with what the economic activity that we're seeing broadly. And this is broad based for us. It's not one segment and a channel restocking in a key area. I think it's been a broader base. So I think the indication is that it's representative of the economy recovery, and we're seeing sequential return to growth, at least this far in the quarter.

Yes. Nigel, one thing to pay attention to also relative to China is export activity. So we believe the export activity is a good indicator of how our business is generally trending. So that's going to be something to watch as we move forward. Certainly, there are some early signs of that starting to pick up. But it's going to be heavily influenced by what's happening across other countries in Asia, and then importantly also how is EMEA trending.

Great. And then maybe some more, Mike, before we move on to some of the longer-term strategic questions I've got here. Obviously, you talked about from the elective stuff, your oral care, I think, was down [ 7% ] in April; obviously, office and stationery supply is down pretty heavy as well; and from of the elective stuff, procedures within health care as well, you said there are some early signs of that coming back. But as we see -- how quickly should we expect some of those electives -- I usually call elective, but nobody elects to go to doctor, dentist, and nobody elects to have knee surgeries. So how quickly do you think this comes back? And are we creating just a huge pent-up demand that could spring back pretty quickly?

Yes. We ask the same question. Our health care team is very well connected to multiple segments. So oral care, as you highlighted, I think that's -- you're starting to see in the U.S., a reopening of dental practices, and that's going to come back. I don't know how fast it will come back. We think it's going to progress in the coming months. More and more of it coming back. I don't think it's -- there's a general economic scenario out there that is a [indiscernible] a slow recovery out. And I think the elective procedures in areas like dental will follow a path like that. That's our view. There's other areas where the demand is there. Wound care, for us, you see a slowing of that and as we came into second quarter, there is demand there. We expect that demand to come back as we go through the year. So it's going to vary a little bit, but truly elective procedures will be a little more step by step coming back.

Okay. Great. And then, obviously, a major effect on the N95, phenomenal job on ramping up capacity. I think you've said 2 billion production capacities by the end of the year. This is shaping up to be a business that's going to comping north $1 billion for you going into 2021. How do you see this market evolving maybe over the medium term? Clearly, the demand is there today. You probably can't satisfy all your customers, very confident on that. But as we get a vaccine, how do you see this market evolving beyond the vaccine?

Yes, and you highlighted it. We came into the year producing about 50 million N95s a month. And when we saw the pandemic, early stages of it, we turned on our surge capacity, the capacity we keep in reserve for these kinds of situations. We doubled to 100 million respirators a month, N95 respirators, the largest in the U.S., with 35 million in the U.S. And then we added capacity into that, so we will get to the U.S. about 50 million in June. So we are ramping up to that 2 billion number by the end of the year. We -- in that process, we shifted from what is normally 90% going into industrial applications to 90% into health care and first responders. So it's a big shift, and the demand there continues to be very high. So we are still working to add capacity to meet that demand. So the near term is defined by health care demand. As the economies reopen, we are going to see other areas of demand emerging. We're already seeing dental offices in the U.S. requiring N95 respirators. So that is going to create a demand for a period of time, for sure, through the next -- if we see it into 2021 and beyond. There's also additional demand coming from industrial as we reopen the economy and people go back to work, and you have a fundamental shift in consumers. They're looking to buy protection. Now how long those and how strong that demand remains will be something that we'll continue to track with. I think the health care industrial, those demands are going to be pretty strong as we go into year-end and into 2021. And then there's -- longer term, there's a question on governments and how do they react as well. There's already plans to meet stockpile requirements in the U.S., and that's part of our production plan. So all that means we'll see strong demand well into the 2021 and beyond.

Okay. Great. Maybe taking a step back now, just for the second half of the year, where you've been in the hot seat of the CEO seat. You haven't had a lot of luck on the macro front. There's been a number of headwinds and challenges you faced there. So maybe just step back and review what are your major -- what do you view as your major accomplishments in terms of moving the path forward at 3M?

Yes. It's been a challenging couple of years, Nigel. The macroeconomic environment, some of our key markets, I would say, has not played out exactly in line with the 5-year plan that we talked about back in November of 2018. That said, we have accomplished a lot. And I'm very proud to lead this company. I'm very proud of the way 3Mers have responded, not only in the middle of COVID, although it's amazing, it's also what they did in the face of some of those other challenges. And we continue to transform the company. We deployed our ERP and ecosystem into the U.S. in 2018 and really took advantage of that in 2019 to transform and digitize the company, start to build a platform for how we're going to continue to improve and drive competitive advantages for our operations as we move ahead. At the beginning of this year, we launched a new operating model. We realigned around 4 go-to-market models. Our businesses really leveraged commercial excellence from all of our innovation into all those different markets: retail, health care, industrial, direct OEMs. And we put in place a global operating model, business group led to take advantage of that. In the process, we added an end-to-end one organization around what we call enterprise operations: manufacturing, supply chain, customer service. That one, in particular, has really helped give us a tailwind into COVID. Our ability to take advantage of those ERP and ecosystem capabilities, the digitalization of 3M, reducing cycle times, we're responding more quickly in the middle of COVID than ever before. It's been a big advantage for us to manage the demand, this uncertainty in demand and to be able to manage our working capital, to be able to manage priorities in the middle of that, respond to incredible demand in respiratory and a big decline in oral care. All of that has been the foundation of that transformation. So that has really been very valuable to us. I would say we also continue to focus on our growth priorities. So our priority growth platforms has -- even as you saw some of the challenges in end markets, we saw strong results from our innovation in those priority growth platforms. And we delivered 10% growth across what we call our top priority growth platforms in 2019, continue to focus on that. And then we were active in portfolio. We made a couple of divestitures, communication markets, drug delivery businesses that don't align long term with the fundamental strengths of 3M. And we made acquisitions, adding Acelity and M*Modal in health care and higher-growth market spaces, places where we can leverage fundamental strengths. So it isn't -- we didn't hit everything, but I think we have a strong foundation, not only to lead through COVID but to lead out on the other side with a focus on growth and improved operational excellence.

And how does COVID [indiscernible] with all working from home now, working remotely. And it feels like a lot of companies are being surprised with the upside, just how protected and kind of like how things really haven't changed that much in terms of getting stuff done. So how are you thinking about -- you've changed structure, the back-end structure of the company. You changed, obviously, the way you go to market. But essentially, how do you think that what we're doing right now is going to change the way 3M does going forward? And I'm thinking about that massive campus that you have in St. Paul. Is that going to be necessary going forward to have these monolithic, call it, headquarters going forward?

Well, I think there's a couple of aspects of that I'll make comments on. The first is what I already talked about enterprise operations and digitalization of 3M. We accelerated that. We're taking advantage of that in the middle of COVID. We have now about half of our employees worldwide working from home. And so it's been a big change for us. It's been amazing on how effective we've been and how quickly we've adapted to the capabilities to be able to do that. And it's not just executing our manufacturing supply chain, planning and delivering for customers, it's also about our innovation model. It's one of the things that as we work to work globally and more remotely, how do you do that in innovation? I've been really impressed with the creativity and the way we've been able to work together collaboratively around the world. So there's -- there are things that we've accelerated under COVID that we won't go back from. These are new capabilities that we'll take advantage. I talked to a lot of CEOs, and everybody looks at this as an acceleration of the changes that we were going through in our companies. And it will be the capabilities that we take advantage of and really become part of us as we go forward and even as we emerge from COVID. Now the other side for us is we have over half of our employees work in factories or distribution centers, and they've continued to work throughout this COVID pandemic. We are essential, and we continue to run our operations around the world. And we've been modifying how we do that. So new safety protocols, new procedures ensure that we can manage safely in those -- in this environment.

Okay. I think we've got some background noise, not sure if that's with Michael. Yes. I think -- that's better. So I just wanted to kind of maybe just dig a little bit deeper there because, obviously, a lot of the R&D functions and development work is collaborative in nature. How well are you -- especially in the R&D functions but other areas in terms of collaborations, in terms of innovating, how did the R&D function change? Do you need to have a bunch of people in the room together to kind of drive innovation? Or can this be done remotely as well?

Yes. And I think that's something that, historically, has been getting our teams together. And we have a big base of our R&D investment in the U.S. We have 4 global labs in Europe and in Asia. And so we leverage those to really bring critical mass into innovation R&D capabilities. We do remote work historically, but we really depend on that in-person collaboration really at various stages in the process. This experience, the remote work and the work-from-home experiences has shown we can do a lot more. Even -- one of the examples we highlighted is with external partners. We worked with Ford on bringing new capabilities and really expanding our capabilities in powered air purifying respirators. It was amazing how we could work together effectively and the speed at which we moved. So I think it's been eye opening to how effective we can be remotely in that innovation process. So I think that's one of the areas I'm excited about being able to take advantage of as we go forward.

Great. And then let me go back to the 2018 outlook with the 5-year view. I mean, clearly, a lot has changed as a backdrop. But in terms of what you can control on the operations and the manufacturing footprints and some of the automation and robotics that you're planning, maybe just review in terms of the manufacture footprint, what you've accomplished so far? And what needs to be accomplished there?

All right. You're talking about our -- more of our global manufacturing and supply chain, so I would say this is an area that the COVID has validated our model. Our model is to put the capacity and capabilities, manufacturing, innovation capabilities close to our customers. So we have a regional model around the world, local for local. So we manufacture in China for customers in China, not for export out of China. We manufacture in the U.S. for what we sell to customers in the U.S. And while many companies have moved their supply chains around the world to reimport or to gain efficiencies on a global scale, we are a regional model. And that model has really served us well in the middle of COVID. It's reaffirmed what we've been doing. And we have been, I would say, within that model, taking advantage of more efficient ways to operate that. Part of it is business transformation and digitization capabilities that really enable us to manage from control towers the supply chain more efficiently end-to-end. The other part of it is really looking at our factory floor operations. And over the years, we've really, I would say, managed that to move from more distributed smaller sites into large, more efficient regional sites. And then it's a strategy that has served us well. And part of that regional strategy is not moving away from local for local. It's really centering on the most efficient models, taking advantage of the new capabilities that we're putting in place end-to-end.

And do you think you're getting -- I don't remember the exact number now, I think it's in the range of $175 million in terms of the direct benefits from the manufacturing footprint side. Do you feel that you've gotten those benefits or portion of those benefits to date? Or would they come more towards the back end of that kind of period?

I would say we've gotten that we've already achieved a majority of it. We've taken a majority of the actions. We still have more work to do. This is an ongoing process. And it really becomes -- even as we make acquisitions as part of our acquisition strategy, too, to bring -- integrate into 3M and take advantage of what we know how to do globally in our supply chain. So it will be an ongoing process. There's still more to do. And as we actively manage our portfolio, that creates opportunities for us to think about it differently as well. So we -- the plan that we laid out now or -- well, 5 years ago, we have executed a majority of that investment and have achieved the majority of the gains from additive. It really delivered the return on investment that we had been expecting. It was very consistent and delivered more than we had laid out in that original plan in terms of plant by plant. We were very consistent being able to deliver on those gains. So it's something that hasn't been -- I would say, again, another thing has been validated in our model, and we will continue to take advantage of that as we manage the portfolio and make acquisitions.

And I think [indiscernible] a second, but I do want to just ask one more question on operations, and that's the ERP rollout. I mean, it's been a huge effort, real [ model care ] efforts. And we're now in the late stages of that rollout. How has it changed the way you are able to manage the business and monitor the pricing? And really, I hate these words, centralized control, but [indiscernible] how has it changed your day-to-day management of the business?

Well, it's an overused word in business transformation. That's what it has been for us, transformational. It's transformed how we manage end-to-end our operations. It gives us visibility end-to-end in ways that we never had. It enables us to be able to, I would say, continue to improve how we operate as a company. We can execute more effectively. I highlighted what the enterprise operations' capability in that model and plays on top of our business transformation, we are seeing cycle times reduce. And it's not just cycle times in our raw materials to finished goods, it's cycle times on how we interact with customers, how we serve customers, how we plan. We can make adjustments in our planning. We're managing more than 200 factories around the world in that supply chain. And being able to do that and respond to demand on shorter cycle times is really a capability that we're building on top of it. So the transformation has given us the visibility, it's given us a platform to make the business process changes that we needed to do. So our transformation is not just moving to a new ERP. We have transformed our business processes. We put a new ecosystem around it. We put digital capabilities end-to-end in our supply chain. We are building out data and analytics in a way that we never used them before. And all of that is leading to improvements in our operations today, and you can see that even in our Q1 results, and put us on the platform where this becomes now not a big project, a transformation project, but a way we continuously improve the company. We continue to evolve and gain advantages, and cycle times is one of the measures that you could see that. We also use Net Promoter Score, both internally and externally with customers, and we're seeing significant improvements there based on the capabilities and how we're taking advantage of that transformation investment.

Great. Thanks. Portfolio. Is there a portfolio 2.0 process underway here? And obviously there's a lot of work done under Inge. You mentioned the acquisition of M*Modal and Acelity under your tenet. There's been a couple of disposals. But what's your ambition on the portfolio over the next 3 to 5 years?

Well, portfolio is 1 of our 4 priorities. It's being an active portfolio manager and 3M is critical, and we do that around our view of where do we create unique and differentiated value. Where do our fundamental strengths really make a difference in our ability to win in the marketplace and serve our customers? And that starts, first and foremost, with organic investments. Our first priority for capital allocation is organic investments, R&D, CapEx. And we use the portfolio to prioritize where we do that. It's one of the ways we actively manage. We've pushed forward in certain areas, and we manage our portfolio to maximize value organically for our customers and shareholders. We also use it to make acquisitions. And it's around attractive marketplaces that can leverage our fundamental strengths. So Acelity is a great example. Here you've got an attractive end market. It can leverage our technologies. It can leverage our manufacturing capabilities. It can leverage our global reach and brand. They've got a tremendous brand as well. Together, it's more than the sum of the parts. And we also use it to think about divestitures. And I highlighted that earlier with communication markets and drug delivery businesses that don't leverage those fundamental strengths as effectively. And that can change over time. It's something that we continuously manage. We have an active M&A and divestiture pipeline that we look at. We are constantly assessing on how do we maximize value. And as we've shown, we'll take action where we see it as the best way to maximize value.

Of course, Acelity was a bit of a -- I mean, sort of like a shot away from $1 billion plus sales. I mean, Capital Safety is obviously a reasonably big deal as is Scott Safety. But Acelity was clearly your biggest deal in history, I think. Do you think there's potential for 3M to do more transformational deals in order to shift up the growth curve going forward?

Well, Acelity was our largest deal and we had talked about it ahead of time, and M&A was a priority for what we call our flexible capital. So after we prioritized organic growth and dividends, M&A and share buybacks, we saw M&A with these fundamental strengths as we view markets the way we have it, as a way to create more value in Acelity. And we have signaled that this is an area where we could leverage up to make a larger acquisition for us, and Acelity was a good example of that. Now coming on to Acelity, we're focused on integrating successfully. Acelity is our largest deal ever. We're going to make sure that it gets full advantage of 3M's capabilities and we're successful. So as we came into 2020, we said this is our priority. Don't expect us to make another large acquisition in the near term. We'll continue to be active. We'll continue to look at it. We do see that as a long-term strategy to create value. But in 2020, and now with COVID, I would say our focus was integrate successfully Acelity, take our leverage on the balance sheet back to our more longer-term range around 2x net debt to EBITDA, and we're on track to do that. We'll see a little bit of a lag with COVID, but it's -- that's the focus in the near term. So not a focus on another large acquisition near term. But M&A to create value long term, absolutely.

I think Nick mentioned last week when he was on stage that Acelity is tracking on its revenue goals. It's exceeding on its margin goals, obviously, pre-COVID. But what steps have you taken to globalize that business? I think globalization of that business was a key part of the thesis.

It is, absolutely. And one of the first things we did as we -- like, maybe I'll step back. One of the things that we've built up in portfolio management over the last 6, 7 years has been a capability to integrate acquisitions very effectively. And that's a playbook we leveraged big time with Acelity. And one of the first things you do is get your teams together to leverage those fundamental strengths. Of course, we're focused on integrating the business and getting operations up and running, but you really want to hit the ground running on leveraging those fundamental strengths. And one of those, as your question points out, is geographic capabilities. And we have ability to take the Acelity capabilities global in a bigger way than they've been able to do as a stand-alone company. And our teams, that's one of the areas of biggest excitement, and we've brought together our business teams early days and continue to work on that. And that has just -- I would say, if nothing else encouraged us, if there are significant opportunities and we're already on top of those. That's what we think is one of the best ways to leverage the other fundamental strengths, technology, for example, into a bigger opportunity. Get that global capability working as well. So I think that's certainly one of the areas that we see the upside greater-than-the-sum-of-parts combination between Acelity and 3M.

And then, obviously, there's many good things about the story. And I think we have to acknowledge that we turned around some of the PFAS issues. I mean, maybe just touch on how you see the time line evolving for the next 12, 18 months. And I guess what we're looking for is some way to try and ring-fence this issue. Do you think there's going to be a way that we can -- more Street investors can actually ring-fence this issue over the next several years?

Well, we are proactively managing this. One of the things I share with investors almost every earnings call is we continue to proactively manage PFAS. This is not something we're sitting back and waiting for it to occur. We're managing and we're doing that based on sound science. We're doing that based on corporate responsibility and transparency, so we are being transparent with our investors on what we know. And one of the areas that we've focused on is the things that we can do to make a difference. And we're working with the EPA as they move forward on their management plan, where we made commitments last fall in front of the House Oversight Committee that we would help manage a clearinghouse of information and data. We're one of the sources for a lot of data that can be helpful in this situation. So how can we help get a broader clearinghouse? So we're following through on those commitments as part of that proactive management. And then we put a reserve in place, and we're managing where we historically manufacture the disposed of PFAS chemistries. And that continues to move forward, where we're working in partnership with the communities we're part of to follow through on that. So that's the near term the things that we can focus on. The litigation front, and there's a couple of different areas of litigation that are a focus. This is just too early to be able to give you a time line and a better model for it. It's -- that uncertainty can be -- it's a challenge for us, but it's just too early. I try to keep in front of investors what we know are coming lawsuit time lines. And so, for example, there's bellwether cases in Michigan that are likely to come to trial later this year. So that's the next step in litigation, and that's -- we'll continue to keep that in front of, well, really, our customers and shareholders and employees alike. We have a website that we put out on 3M.com, our PFAS website that we keep updated with this information. And we've tried to make it a very useful site and to help with that transparency. So I would encourage people to connect to that periodically. You'll get the updates there.

Thanks, Mike, I appreciate that detailed answer and you certainly have been transparent about this as CEO. I think we're just past the 12:00 mark. So I think we'll draw a line there. But Mike, do you have any closing remarks to leave us with?

No. I just -- I would say we -- again, in the middle of this fight with COVID, it's never been clear that the 3M business model is very strong. And it's helping us to lead through for our customers, for those health care workers, first responders, for all our stakeholders, deliver for our shareholders, and it will enable us to lead out of these crisis in a stronger way. So as I said about -- thinking about the last couple of years, we have a very strong foundation based on our fundamental strengths, the capabilities we've put in place, the transformation we're doing, and most importantly, the people at 3M. So I'm very confident that we'll lead out of this in a very strong fashion.

Well, thanks, Mike. Thanks for your time. I appreciate it. Bruce, thank you very much for your time as well. [indiscernible] you there. Good luck and stay safe.

All right. Thank you, Nigel.

Take care, Nigel.