3M Company (MMM) Earnings Call Transcript & Summary

Great. So thank you, everyone, for joining. My name is Julian Mitchell, and it's my pleasure to have next for our fireside chat now, 3M. We have Mike Roman, Chairman and CEO; and also Monish Patolawala, CFO. Please feel free to e-mail me, anyone who's dialed in, your questions, and I'll endeavor to ask them. And with that, I'll hand over to Mike for some introductory remarks.

Well, thank you, Julian, and good morning. It's good to be with you today. Maybe let me start here. We finished 2020 strong. We continued to execute well while keeping a focus on the priorities we had throughout 2020 and the pandemic. That is, protecting our employees, first and foremost; fighting the pandemic from every angle; and importantly, continuing to deliver for our customers and shareholders. And as we came into 2021, I would say improved end market visibility coming off of that strong close to the year. While we're still cautious about the impact of the pandemic, we start to get better visibility into 2021 and we reinstated our guidance. We expect to deliver strong performance for 2021: organic growth of 3% to 6%, improved earnings, margin expansion and strong cash flow. So while there is uncertainty in the end markets and related to the pandemic, we start to see a reason for a strong outlook for the year. I would say, as we came through the pandemic, we have been aggressively prioritizing investments, investments that we continue to talk about focusing on growth, focused on productivity, focused on sustainability. And at the same time we focus on growing our businesses, we are stepping up our commitment and our leadership in ESG. And we've taken important actions as we came through 2020 on diversity, equity and inclusion. We, in fact, published our first global diversity, equity and inclusion report February 1, a big step forward in transparency about everything that we're doing. And yesterday, importantly, we announced significant initiatives from 3M to take leadership and improve air, the impact on climate and water quality. And specifically, just to share that, we'll invest approximately $1 billion over the next 20 years through a combination of CapEx and OpEx investments, to help accelerate environmental goals, bringing 3M expertise, our innovation to bear on some of the biggest challenges we face. First and foremost is achieving carbon neutrality by 2050. It also includes reducing our water use 25% in the next decade and improving the quality of water leaving 3M facilities. True to 3M, leveraging our expertise, also our focus on really having a clear plan about this. While we'll be focused on carbon neutral by 2050, we are rapidly bending the curve with actions already underway. And we called out, we expect to be 50% reduction by 2030 and 80% reduction by 2040 and then 100% carbon neutral by 2050. Similarly, in water, we'll reduce our water use by 25% over the next decade. 2.5 billion gallons per year is what the impact is there. And leveraging state-of-the-art technology and already underway, actions underway to help move our facilities forward, improve our facilities to return higher-quality water to the environment. This is something we're doing as part of our plant by plant, how do we take our operations forward in a more sustainable manufacturing. And all of these, like the carbon, the water focus, we're focused on bending the curve in the next few years, reducing our water usage by 10% by the end of 2022, bringing our water purification technologies online in 2023, having them fully optimized in 2024. So longer-term goals important as well, but bending that curve also important to us. And these actions, they build on a record of strong leadership in sustainability. We've reduced our greenhouse gas emissions by over 60% over the last 2 decades. We also focus on waste reduction. We have a long history of Pollution Prevention Pays as a manufacturer, taking it out at the source. We have more than 200 manufacturing sites around the world. 1/3 of those are now 0 landfill waste sites. And that's been an important goal and very good progress of continuing to take more of our plants to 0 landfill waste. And at the same time, we innovate in our products to help our customers reduce their environmental impact, avoiding millions of tons of greenhouse gas emissions on an annual basis. So we see it as something that's important to certainly our employees, but also our customers, our shareholders, the communities that we're part of, and we have a responsibility to do more. We're excited to make the announcements. We're already on it, and we really look forward to continuing to lead forward in these areas. So maybe just to wrap up. I would say we're well positioned as we come into 2021. I'm confident in the strength of the 3M business model. We have deep competitive advantages, unique technology platforms, advanced manufacturing capabilities and leading brands. And maybe that's the setup for the fireside chat. And with that, let me turn it back to you, Julian, for questions that you might have for Monish and I.

Thanks, Mike. Yes. So one would perhaps be on the near-term environment. I think there's a lot of tailwinds at 3M's back at the moment, revenue-wise. I know you had a strong finish to 2020 on that score. Maybe help us understand how this year has started out for you. I know you stopped publishing monthly sales, but any sort of color you could give on customer activity, any degree of sort of inventory restocking perhaps in different channels.

Yes. I would say, as I said, we're confident in our ability to execute and deliver in 2021. That said, we came into the year, it's still pretty fluid, uncertain environment. The pandemic has us all watching end markets very closely. We haven't seen too many surprises to this point. Our own business globally playing out as expected. There are things that we're watching closely in the middle of the pandemic. The elevated hospitalizations related to COVID as we came into the year, what's the impact on elective procedures, for example. Maybe not directly related to COVID, the chip shortage that's impacting automotive, something that we're watching, important to our businesses. So we continue to remain a little bit cautious on how health care, elective procedures are going to come back due to the ongoing pandemic and the impact on both our medical solutions and oral care, although oral care has held up a little better as we went through the holiday season. We're seeing some constraints in the supply chain on semiconductors impacting both electronics and automotive ourselves. But other than that, overall, our business as expected at this point.

Perfect. And is it fair to say that some of the areas of strength on the top line now should also carry a margin sort of mix benefit? If I think about that trident of China and automotive and electronics and also, of course, that PPE tailwind, I think still very, very strong at present.

That's maybe a good one to bring Monish into the Q&A. So Monish, why don't you take that.

Yes. I would say, Julian, in general our margin, volume is a big driver of our margin and margin rate. So that's volume leverage. I would just say, as you think about 2021 for the shorter term, you have a couple of things. We expect to get leverage in the 30% to 40% range, which we have got historically, too. So we expect that to continue at the high volume. The offset to that is a couple of things that I had mentioned at earnings call. There was a big land sale or property sale in Q4. There is a snapback of indirect expenses, especially travel and living as well, as our compensation or variable compensation gets reset. And then we've talked about the investments that we want to make in productivity, in growth as well as sustainability, and therefore, the ongoing piece of that. And that will also depend ultimately on what volume looks like and how we believe the world is shaping back up. So those are all the factors that we are putting into our guide that we've given in the range of $9.20 to $9.70 of EPS. And our general belief is, ultimately, depending on where volume is, we will end up from a margin perspective.

Perfect. And then maybe stepping back from sort of the very near term on margins. 3M announced a new sort of global operating model and more streamlined structure around 1 year ago. We also heard about some accelerated restructuring measures more recently, in early December. So maybe help us understand, Mike and Monish, how satisfied you are with the changes that those moves made a year ago have wrought. And on the restructuring more recently, is that something we could see sort of continuously every few quarters or so, as you try and hit that margin improvement ambition for 2023?

Yes. Julian, I would say, and I characterized it this way when we talked about the realignment of our business groups and business model. This was the natural next step in our transformation efforts to really build out end-to-end our improving business capabilities, the digitization of 3M, the optimized way that we can go to market. And we aligned around 4 go-to-market models: our safety and industrial business through distribution; transportation and electronics, direct to OEMs; health care model, of course, and consumer retail. We also, as part of that, established a global enterprise operations organization, managing end-to-end supply chain, manufacturing, customer operations. And since we've implemented that, we've seen additional opportunities to further streamline our operations, really optimize what we're doing, position ourselves for greater growth and productivity and take advantage of that as markets emerge from the pandemic. And part of that you saw in our announcement in December where we -- the restructuring that we talked about. These are actions that will have an impact. We talked about the reduction in annual costs of $250 million to $300 million. Importantly, it's about optimizing around this new model. In the new model, we've seen clear benefits to both 3M and our customers. It's driving better visibility and accountability for our business groups to our global and local customers alike. It's optimizing our supply chain, manufacturing, customer operations end-to-end, as I talked about. We see the performance coming through in a number of areas. One of the things you've seen is better, I would say, cash cycle times. It's been an improvement that we've seen and a benefit from having that operations in place. And finally, it's making it more efficient for us to really execute well globally. And you see that showing up in our margin management as we went through the year. This is about streamlining how we do things, how we bring innovation to customers, how we execute in our manufacturing and supply chain. So we're seeing the benefit. There's more to do. We have more to do for sure. And the world is changing and taking advantage of those digital capabilities, all of that is presenting additional opportunities. We expect, as we move forward, this is going to be a way for us to continue to focus on operational improvements and making 3M a better version of itself, continuously improving as we go forward. Monish, any thoughts from you?

Yes. So Julian, I'm sure all of you all know this, but I just want to reiterate. When we announced the fourth quarter charge, we had said it's a $250 million to $300 million charge that will give us approximately annual benefit of $200 million to $250 million. We took the first piece of that charge of $140 million, give or take, in the fourth quarter. So you will see the second half of that -- in the second half of '21, you will see the remaining charge, which is in the range of $110 million to $160 million. The benefits are 2 sides. One is for all the other restructurings that the company had done even prior to the fourth quarter charge. There was a $100 million benefit carryover that is in our guide as well as off the restructuring charges that we have taken in the fourth quarter. There's $75 million to $100 million of benefit. The annualized is again $200 million to $250 million. That's the benefit for '21. All of that was in our guide in the $9.20 to $9.70 EPS, but I just wanted to make sure that it was a reminder to everybody.

Yes. And as you look out, Mike and Monish, beyond this year and some of those organizational changes that have made -- and I think, Monish, you've also mentioned a sort of greater rigor on day-to-day forecasting and the process of understanding how the markets are moving at high speed. As you have that more streamlined execution, is -- that 30% to 40% incremental margin, is that a -- that's a good placeholder people can sort of rely on in the out-years wrapping together all of these different initiatives, is it?

Yes. The 30% to 40%, I would say, is a good guide, Julian, to go with. The key will become, what is the offset of that, which is what are our investment opportunities? And as you know, we have 4 great businesses, and we will invest as we see fit in the areas that we've already mentioned because we are actually seeing a lot of good opportunities post the pandemic that we will continue to invest that makes 3M stronger in the future. But that's a good guide to use.

On that point on growth, priority growth platforms is something that's received a lot of focus in recent years at 3M. Maybe help us understand, Mike, how you felt or how satisfied you were with the performance of the priority growth platforms during the recent downturn, and how comfortable you are that they can hit that maybe low double-digit sales CAGR aspiration medium term that you've talked about?

Yes. And I would just go back to the top. First and foremost, growth for us is a top priority. It's our first priority for capital allocation, R&D, commercial investments, CapEx to drive growth. And we expect to grow at or above the macro as we move forward in the economic environment that even as we see in 2021. And leveraging that investment is our top priority. We've talked about some of those prioritized investments as we've gone along. Priority growth platform is an important focus for us. We also accelerated some investments even in the middle of 2020 where we saw opportunities. Clearly, very publicly, personal safety and N95 respirators was one of those. Also maybe important to note, there were other areas. Our Filtrete brand filters, air quality, as people invested in their home, spent more time in their homes, a very important area, accelerated growth opportunity. So in addition to what we have been focused on in those priority growth platforms, it's where do we see the market opportunities? Where should we aggressively prioritize additional growth? And so home improvement and even health care as we come into 2021, those are areas that we've emphasized in the priority growth platforms. We also see those as trends that are important to invest in. And coming back to the priority growth platforms, they are about $1.6 billion in revenue they represent as a group. They grew even as we went through 2020. They grew 7%. So we saw, although the rest of the portfolio impacted on average by the pandemic, we saw stronger performance there. And some of the 2 that I highlighted are part of those priority growth platforms also on trend. Biopharma filtrations was also part of our priority growth platform, something that we saw demand for. And automotive electrification, if anything, that accelerated under the pandemic. You see announcements almost every week from OEMs about their shift, greater and greater shift of their plans and production to electric powertrains or hybrid electric powertrains. And we see additional opportunities there. Those are all contributing to that performance that I talked to. So overall, they continue to do well as a group. They outperform in the markets they serve. We expect them to continue to do that as we go forward. And we see that, combined with some of the trends that have accelerated, as a place that we can prioritize investments and really drive that success around that strategy to organically grow at or above the macro.

And I suppose there's different approaches. One aspect is investing in the growth areas. They're just the sort of gross dollars you can put into R&D and CapEx, and obviously inorganically. But how are you making sure that the rigor around the returns you're getting on that R&D and CapEx organic investment, that 3M is getting the most payback out of those organic investments?

Yes, it's -- over time, our growth is going to be driven by these investments and building the technology capabilities, building these priority growth platforms, stepping up with the growth investments in those markets that have the better-than-average dynamics, the more attractive markets out there. And as I said, these platforms grew 7% in 2020. So how they perform based on those investments, that's an important measure of the return on investment. And we will aggressively shift priorities as we see better performance or better opportunities as we move ahead. And that's true for both R&D and CapEx. I would also say for commercial investments as well. And looking ahead, we see a number of the trends that accelerated under the pandemic, how people live and work and communicate. Those are having an impact on how we think about these priorities as well. We're seeing the digital-first world acceleration show up in our electronics businesses. It's also impacting our go-to-market models. And e-commerce, the digital impacts there is accelerating opportunities. So it's still very much focused on our businesses, our portfolio, priority growth platforms. It also is areas in the commercial side where we can invest in. And we really do look at it, as your question kind of points out, we look at moving to where we see our highest return on those organic investments.