3M Company (MMM) Earnings Call Transcript & Summary

Welcome back to Citigroup Global Industrial Conference. Again, I'm Andy Kaplowitz. I cover multi-industry and E&C for Citigroup. We're really excited to have 3M Corporation with us today. Mike Roman, who is the Chairman and CEO of 3M; and Monish Patolawala, who recently joined 3M. Now it's been several months already, Monish, SVP and CFO. So you're an old pan now at 3M. But I'm very happy to have you guys. Mike, I want to turn it over to you in case if you have any prepared remarks, and then we'll get right into the fireside chat. For investors, just as a reminder, you can type in a question to the chat function. And the e-mail will go right to me, and I can ask the question. So Mike, over to you.

Yes. Thank you, Andy. Good morning, and it's good to be with you today. I think I'll start where we finished 2020, and that's with our strong performance in Q4. And 2020 was a year where we had 3 very clear priorities: Keeping our employees safe, fighting the pandemic from every angle and continuing to deliver for our customers and shareholders. And Q4 was a good example. Our teams executed well, and we invested for the future, continuing to innovate with our customers as they -- as the economies recovered and their businesses strengthened. We started to see improvement in end-market visibility as we went through Q4. It gave us confidence to bring guidance back in 2021. And I would say, we remain cautious in the -- with the pandemic and the uncertainty around that. But we have come back with our guidance of 3% to 6% in organic growth, improving our earnings, our -- expanding our margins, again, delivering strong cash flow. We are also focused on aggressively prioritizing investments as we did through the pandemic; accelerating that in 2021; putting a focus on organic growth, productivity and sustainability in those investments. And we are stepping up our commitment and leadership in ESG. We've took really important actions in diversity equity inclusion in 2020. We also issued our first-ever global DE&I inclusion report on February 1, providing much more expanded transparency in our progress and our plans and priorities. And then on Tuesday, we announced a significant initiative to improve air and water quality, an announcement where we talked about investing approximately $1 billion, combination of CapEx and OpEx, over the next 20 years to accelerate environmental goals, bringing 3M expertise, technology and capabilities to bear on some of the biggest challenges we all face. And that includes carbon-neutrality by 2050 and a reduction in water use and an improvement of quality of water that comes out of our factories around the world. Going carbon-neutral by 2050, I'm really proud of the work we've done to lay out a plan that will rapidly bend the curve, actions that are underway, driving 50% reduction in our carbon emissions by 2030, 80% by 2040 and then carbon-neutral by 2050. The same with water. We are bending the curve, where we're going to reduce our water use in our factories by 25% over the next decade, 2.5 billion gallons less per year that we'll use. And we are already installing state-of-the-art technology at our largest water-using factories to not only drive a use -- reduction in use but also improve the quality of water that we return to the environment. So we're reviewing all of our operations plant by plant. We have a legacy of being strong environmental leaders, environmental stewards. We are committed to optimizing with safe manufacturing, sustainable manufacturing, building on a record that we've been proud of over the last couple of decades. We've reduced greenhouse gas emissions, for example, over the last 2 decades by more than 60%. We have put a big focus on waste, pollution prevention at its source. We now have 1/3 of our factories, more than 200 factories around the world, that are 0 landfill waste, and we're going to continue to make progress there. So this is -- this latest announcement, this is another step forward in what is fundamentally a value of 3M, taking the leadership, leadership that's really expected and looked for from our customers; from our shareholders; from our employees, maybe most of all; and also from the communities that we're part of around the world. So to wrap up my opening comments, as we come into 2021, we are well positioned. I'm confident in the 3M business model coming through the pandemic. We have deep competitive advantages, unique technology capabilities and platforms, advanced manufacturing, global reach and leading brands. And with that, I'll turn it back over to you, Andy, to take questions that you'll have for me and Monish as well.

Mike, so a lot of great initiatives, very much appreciate that. Let me start with something you said around investments, sort of dialing up investments in 2021. When you came on as CEO, you really sort of focused on organic growth. You talked about priority growth platforms. And I think you said during the earnings call that they grew 7% last year. Obviously, you've had good growth from sort of the mask ramp-up that you've had as well. So maybe update us on sort of where you are in 3M's sort of quest for higher growth versus peers. So like again, it seems like ages ago, but you had talked about a longer-term growth rate of 3% to 5% over a cycle. How do you feel about that sort of goal now as we move forward?

Yes. Andy, you've hit one of the most important topics for us to talk about. Growth is a critical priority for us. And it's a reflection on the strength of the 3M model to deliver on that growth. It's vital to our long-term success. And our growth over time -- as I've talked about with you over a number of times, our growth over time is -- comes from us driving new opportunities through our innovation, our investment in innovation to deliver new applications, new penetration, new businesses working with our customers, prioritizing investments where we can build those new platforms and priority growth platforms that we talk about. We also drive growth by focusing on, in our portfolio, our investment priorities where the markets are most attractive, the markets that are growing, the markets that really are driving innovation that create opportunities for us and then aligning our businesses and our business models to be able to best serve customers in those markets, bringing that innovation to really make a difference for them. And we've highlighted a number of areas of focus for us, priority growth platforms. Even before coming into COVID, we were highlighting areas like air quality. We were highlighting areas like automotive electrification and new platforms in electronics. And in 2020, while we saw economic impact from the pandemic, of course, these platforms together, representing about $1.6 billion in revenue, grew 7%, outgrew their markets. And we expect that to continue as we move ahead into the new year. The other area that we -- where we stepped up, I would say, in 2020 is we saw trends. Trends that, in some cases, were there as we came into the pandemic and accelerated. A good example is air quality, where we saw a bigger investment in people making in their homes and indoor air quality, something that we had prioritized, but we, I would say, stepped in more aggressively to our investments as we went through 2020. And safety for sure is an investment platform for us as we move ahead out of the pandemic. Another area that represents maybe one of those markets that saw impact -- negative impact from the pandemic in 2020, health care, elective procedures in medical and oral care, those will recover. They'll recover as we go through 2021. This is an area that continues to be a priority for us in our growth investments. So in addition to the priority growth platforms stepping up into those market and market opportunities that we saw as we came through the pandemic.

So Mike, I'm sure you don't want to set some new long-term guidance today with me. You can if you want. But like basically stepping back to that sort of 3% to 5% guide that you gave us a few years ago, do you feel more confident about it, though, in the sense that -- so I feel like sometimes 3M doesn't get credit for mass production going up as much as it did, and then it's going to go away or something like that or that air quality is going to fade into the background when we all have vaccines. But it seems like this is due just adjusting to so wherever the demand is. So shouldn't I think that some of the stuff could be more enduring, and obviously, you're a pretty diversified business. So do you have more confidence that you've made the changes to get that higher sort of mid-single-digit growth moving forward?

Andy, I would start with some of the things that I am building confidence around as we've changed how we operate and even how we're prioritizing, as I've been talking about. So we launched a new operating model at the beginning of 2020. And at the foundation of that was realigning our businesses around go-to-market models. We have 4 market-leading businesses. We have a leader in health care in our Health Care Business. We have a strong leading business in retail in our Consumer Business. Safety and Industrial, as you highlighted, with our respiratory business, but broader than that, we are a leader in those industries. And our Transportation and Electronics, critical to those marketplaces. So we start with a strong foundation and then a confidence in those leading businesses. And then it's -- then it's about our opportunities as we come through. Our expectation is we manage our portfolio. We make the right priority investments in innovation. We prioritize the markets that can give us the strongest performance, as I've just been talking about. We do that well, and we're well positioned to continue that as we come into 2021. That -- we expect that to deliver growth at or above the macro, deliver consistent margins. And as you saw even through the last couple of years, strong cash flow from the 3M model. So I'm confident, as we come into the year, that we're well positioned to do just that. So it's -- that's, I would say, in line with how we look at the expectations for us going in -- for sure as we go through 2021.

So I want to get into business transformation. But like you really worked hard, I think, on sort of front-end commercialization to reaching the customer better, faster, all that kind of stuff. So like maybe sort of update us on sort of that aspect of it. Has that -- again, because you've been through this for the last several years in terms of business transformation. Has that also been sort of successful in helping you sort of come out of this growth that's turned for you guys pretty fast. Again, some of it is obviously strong mass demand, but it's definitely more than that. So maybe talk about the front-end commercialization that you've done.

Yes. And it starts with the transformation that we've been doing, deploying new capabilities, digitizing 3M. It really led to the -- I would say, the next step that made great sense, which is optimizing how we operate our global businesses. And that was the changes we made in the operating model as we came into 2020. And that really does drive a business-led focus end to end to the customers, really connecting globally and locally to our customers, taking innovation throughout those industry-leading businesses to our customers. And we've done a lot to optimize that as we work through the year, operating that model, taking advantage of those capabilities we've put in place. Another important aspect is we brought together our manufacturing supply chain and customer operations in an end-to-end seamless operational capability globally consistent around the world to be able to also better serve those commercial markets and those customers. And I would say we saw, while we were fighting the pandemic from every angle through 2020, we were making progress on that new model. And we saw it in our operational model, we -- the way we responded to the challenges in the middle of pandemic, maybe especially something like the respirators, we were scaling up production at levels we've never done before in record times. And that's something now we're -- it's a capability that we've not only taken advantage of the new model, but we're building that capability. We're looking to leverage that in other areas. We're applying it in areas like air quality, where we can take some of the lessons and take advantage of it as well. So I would say the model, that commercial end of it, the first year, we made very good progress. That said, as we got to the end of the year, we were looking at it, the lessons learned. We could see further optimization opportunities and more that we could do. It was really the primary driver of the restructuring that we announced in December is to step further into this. So I tell that part of the story. It's another step in the journey. There's more to do. We see this as something that can continue to drive improvement for us. So I believe we'll continue to get better at the commercial part of the model and end-to-end there will get better at the operational side of it as well. So I'm pleased with the progress we made in 2020. I'm excited about where we can take it next as we go through 2021.

So Mike, I'll take you off the spot, and I'll ask Monish a question. Like what -- when you came in, Monish, what seemed like the -- I mean, to the extent that there is any low-hanging fruit in a job of being the CFO of 3M, what was the low-hanging fruit for you coming in? We know where you were before. So like where have you been able to impact on the sort of improvement of 3M the most and the quickest, if you may?

Well, listen, I'll first say, Andy, I'm thrilled to be here, and I can't thank the 3Mers enough for their warm welcome over the last 6, 7 months. And more importantly, we're putting up with my million questions as I asked everything I quote, and I've still a lot more to learn. So I'll start with that. I would just give you generally a few philosophies that I believe in when you look about any large industry or any company. I've always believed that all companies can do better. And a big piece of that is having this mindset of continuous improvement. You try to get to this Holy Grail of daily management. You learn to embrace the red, which is basically admitting when you have a problem and saying, how can I do things better. The second piece, 3M has a big history of Lean Six Sigma, but I've also believed that Lean Six Sigma, you can debate which one is better or worse. At the end of the day, it's a toolkit that it gives you that makes you look at 3 fundamental things: Good problem identification, strong root cause analysis and then sustainable improvement. You apply that and you say, "Now I'm going to start visualizing better every day of what's going on. It allows me to get signals better. It allows me to tie that to customers and end markets and therefore, identify signals better and then how do I go fix the issue." And so 3M is in that journey of saying how do we get better at identifying these signals, getting best better at customer end markets and then using that insight, applying data and data analytics to start saying, "Okay, how do I predict what I got to do better?" The company has made a lot of investments in ERP. You've seen us make progress. My 6 months in the -- that we have seen in the fourth quarter, I saw even more progress on using data, data analytics, getting end-market trends and basically questioning everything and saying there's someone out there who's best in class. How do we go achieve that? So it's a little bit of entitlement mindset that I've seen happen accelerate in 3M. It doesn't mean it wasn't there, but I've seen the acceleration. And then I look at all of this and say, "When I put all of this together, the customers at the center, why else are we in the business? It's the customers at the center." And 3M actually has had a phenomenal relationship with its customers. It wouldn't have been this successful if it didn't. But I think the work that we do around daily management, driving the operating rigor, will allow us to give better outcomes to our customers, delight our customers, which you will see in growth, you will see it in margin, and you'll see it in cash flow. So I would say that's the areas that we can continue to keep doing more. We have just started this journey. This journey continues, but I'm so thrilled with the progress that we are making as a company, and it's all because of the great team that exists at 3M.

Now it's very helpful. So Monish or Mike, what's a little hard, right, is there's all this noise from the global economy, right? And so how do you want us to sort of judge your progress in the sense that like if I -- again, the last Analyst Day that we had for you guys was a while ago now. And you talked about 200 to 300 basis points of margin improvement by '23. Like it's hard for me to tell where you are on that journey. Are you going to reach that or not? Do we need to reset the bar? So any sort of more color you can give us towards sort of that goal, if you may, the 200 to 300 basis points of margin improvement that you expected over that sort of 5-year period, I guess, it was?

Yes. Andy, maybe I'll -- I was there in 2018. Monish wasn't. I'll start first and...

I knew it wasn't fair to ask Monish that question.

Then I'll hand it over to them. I would say a couple of things haven't played out as expected, for sure. And we didn't deliver the margin expansion. We didn't deliver the growth. The markets didn't play out the way we expected them. So it's a lot of things changed since that Investor Day. I would say, as we look forward, the expectations that I talked about earlier, grow at or above the macro; deliver on the promise of our innovation; prioritize in our portfolio, in our markets to deliver value and growth. And that delivers not only growth, that delivers margin. To take advantage of what we were just talking about, our transformation, our business model, the optimization around that, that was -- back in 2018, that was one of the things I highlighted that was going to help enable us to drive margin. That's part of getting better. The restructuring that we announced in December, that is part of taking advantage of the models and the transformation to drive greater productivity and cost benefits as part of that margin improvement. So I would say we're well positioned as we come into 2021 to step forward along those same lines, drive growth at or above macro, sustainable margins, improving those margins as we go through '21. And something we talked about wasn't highlighted as often as the top line and the margin but strong cash flow. And we -- even as the markets didn't play out as expected in the last couple of years, and I would go back, 2019, we saw a significant impact from large end markets that were negative in their year-over-year market growth, we were still delivering strong cash flow. And we did that again in the middle of the pandemic. And so those are demonstrating some of the benefit from what the levers were, the things that were going to drive both the top line and the growth. And now we're well positioned, I would say, with the guidance that we laid out for this year to start to step into that. And we have -- as Monish just talked about, there's always more to do. We see opportunities to do more as we go forward. So Monish, I -- he's been with us a little over 7 months. I told him it gets a year to be completely an outsider view and be very candid with us. I'd like him to keep doing that always. I think he brings very strong experience in these areas, how to really take advantage of this kind of transformation that we're going through. So I'll tee him up with that objective -- get that objective view from him on your question as well.

Sure. Thanks, Mike. Andy, I think it goes back to the prior question, too. In my view, there's a lot more opportunity that we can keep doing to drive the growth, which Mike's already talked about, but being better at prioritizing where we invest continue to be making sure we are aggressively prioritizing the areas that we believe we have, one, there's a market; and two, there's a right to win. So both of them combined will tell you, you should get better organic growth. Talking about driving operating rigor, which will show up in multiple places, but margin expansion is where you see it. The opportunities are in yield and efficiency, using the data, data analytics and all the work the company is doing investing in disruptive technologies in the factories will also help us drive yield and efficiency. The new operating model should drive operating efficiencies, too. It's helping to streamline the org structure, make sure we are closer to the customer. And so those are the areas I see. And I think the other side of it, I know we talk about growth and margin, but cash is another place. 3M has always been a strong generator of cash. But there's more we can do in working capital. The work the team has already done, you saw it in the fourth quarter. You saw that we generated $6.7 billion of cash, reduced debt by $4 billion in 2020. A large part of it is the work that the supply chain teams have done on inventory management. Helping to drive the velocity of working capital is something I see that we can do more in the long run. So when you put all that together in an envelope, I think there's great opportunity. I've done virtual gembas in 3M, which is I can't travel with where we are, but the teams have been able to use drones and camera technology. So I've got a chance to go visit quite a few of the large plants sitting at my home. And I think there's more opportunity there that we can do to drive yield and efficiency. So the envelop is grow at or above macro, consistent margin expansion and strong cash over the long run is the 3 things both Mike and I believe 3M can achieve.

Yes. No, that's great to hear, guys. So let me get out of the long term maybe and focus a little bit more short term for a second. And just, Mike, you sort of said it in the beginning, 3M usually has sort of a seasonal slowdown in December, really didn't have it. You mentioned on the last call, January is strong. You're very global in nature, as you know. And so you've seen pretty strong markets in places like China. But I would say like what would help us is any sort of recent changes that you've seen in sort of the global environment. One other sort of specific question I'd ask you is, again, you've seen strong growth in China, but not as strong in Japan, right? So like maybe talk about some of the regional differences that you see out there.

Yes. Let me maybe start with the walk-around view. And as I talked about in my opening remarks, we got better visibility in our end markets. I would say we were aligned with a lot of the projections for improving macro performance as we go into 2021, coming out of 2020, recognizing there's still a lot of uncertainty around the pandemic. There's still -- as we started the new year, hospitalization rates were up to record levels in the middle of pandemic. So we saw some things change even as we started January. Elective procedures fell back off a little bit. They were improving in fourth quarter, and then they were impacted by those COVID hospitalizations. Now In the last couple of weeks, we've seen those hospitalization rates drop and elective procedures are recovering. I would say oral care kind of stayed, held steady even through that. So when you look at changes from where we started the year, that better visibility into end markets, the outlook for the macro, I would say the uncertainty is still there. Specific examples of what has changed significantly since then, it's really the COVID kind of dynamics that I just highlighted. Maybe the chip shortage in automotive is a notable one. I would say the IHS projections, the revised projections, taking a couple of steps down in Q1 outlook for build rates. When we work with our customers, we're pretty well aligned with what they've laid out. They've also talked about the total year still being pretty much the same, so that there'll be a recovery as we go through the year. I think it's something that we'll get better visibility on as we go. But I would say, at least for first quarter, we seem to be pretty well aligned. Beyond that, not a lot has changed fundamentally in how we were looking at the markets coming into the year. The quarter has been playing out as expected and some of these dynamics, having those impacts that I highlighted. Back to your question on Japan. Japan, I would say the economy was impacted longer as we went through 2020. We started to see some sequential improvement as we get in -- got into Q4. Now we had an earthquake recently. I'm not sure how that will impact it. And we have the weather issue in the United States. I don't know that, that will be a long impact. That's -- we're seeing some impact in our factories, but very minimal in terms of materiality for 3M. It's -- we were off-line for a couple of days in distribution, but we expect to be able to make it up over the weekend out of our facility in Texas. So I think that the things that have changed have been kind of local and near term. We do have an outlook that Japan will continue to -- the economy there will recover, and we'll see greater opportunities. China improved well as it went through 2020. We expect that to be a contributor to our growth as we come into 2021. So I don't know that I have a lot to update you on other than those local and maybe that chip shortage kind of update in automotive.