3M Company (MMM) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Day 3 of the conference. We're in the second session today. My name is Joe Ritchie. I cover the multi-industry sector. Really excited today to have 3M with us. We have Monish Patolawala and Bruce Jermeland with 3M today. Before we get into the Q&A session, I do want to quickly read the safe harbor statement. Just a reminder to the audience regarding company's forward-looking statements. Through today's fireside chat, 3M may make certain predictive statements that reflect their current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of their most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from their predictions. With that, Monish and Bruce, thanks so much for joining us today.

Thanks for having us, Joe.

Yes, thanks, Joe.

So Monish, maybe just kind of starting off with you, I want to talk a little bit about strategy. It's been -- when you first joined 3M, I know there was a real big emphasis on what you thought -- where you thought you can add value in really leveraging data science. I'd love to maybe just talk a little bit about, like, what you've done to improve productivity within the organization. I know that you guys have called out roughly a $0.20 to $0.35 benefit for this year. Just -- maybe, just talk us through a little bit about what you're doing to improve productivity and how you're utilizing data science.

Sure. That's a great topic. As you know, digital data, data science is a hot topic. And for 3M too, it can add a lot of value. Prior to my time, as you're aware, 3M started down a journey of ERP implementation. We are partway through it. 2/3 of our revenue is approximately on 1 ERP. In conjunction with that, too, again, prior to my time, and sometime in 2019, Mike Roman had realigned the business into 4 business facing units, each one of them global winning units by themselves. And then they've taken all of the supply chain and called it Enterprise Ops and put it under one pipe that supports all the 4 business units. The benefit of that, plus the ERP, allows us to have much more seamless experience with the customer. So it's a much more intimate customer experience. It's digitizing all our operations. But it also allows us to streamline the organization, get it more effective and efficient, as you can see from one of the announcements we made in December of last year of the actions we took to help streamline the organization. The benefit of having it all under one pipe is the ability for us to use data and data analytics across the company to drive productivity. An example, I would just say, Joe, is over the last few months, you can watch through the pandemic to the ability for the team to visualize a value stream across by sitting in one place versus having each individual country go ahead and look at their inventory position, or look at where the products are in the water allows us to drive much more productivity, helps us to do better planning. And so that's just one example of how we're using visualization and data and data science to help us not only look at it but also predict where inventory levels should be or where customer demand could go. It's just one example. I would say if I elevate all the way to the top, the company has said 30% to 40% is the approximate leverage they get from volume. In the first quarter, as you know, Joe, we delivered to the higher end of that range. But in the long run, I would say 30% to 40% is a good number to use. But it will all come down to ultimately what I've also said in multiple earnings calls, volume is the biggest driver of leverage. So how much volume can we drive? How do we go offset the inflation that we are seeing in raw materials and logistics, with price and all the other actions we are taking. And then ultimately, how much do we invest in growth, productivity and sustainability is all going to have an impact on productivity. But there's a lot more we can do with data and data analytics here that keep driving the productivity.

Yes. Monish, that was very helpful. And I think it's not always, I guess, apparent from where we sit exactly how that's coming through in the organization. And your comment there around like there's a lot more you can do. So fully understand the 30% to 40% incrementals in volumes being an important piece, but I guess, where do you think you stand in terms of having that visibility, I guess, even just from an inventory level perspective, where you are today and where that -- what that could look like in the next couple of years?

So as you can see, we have done a nice job of managing working capital, and you can see that even in our leverage ratio. So net debt to EBITDA, which was like 2.2 has already come down to 1.4. So it was 2.2, same time last year, we're down to 1.4. And a lot of that isn't driven by part by the working capital improvement that the teams have done. I would say, in general, in the long term, our goal is to improve inventory velocity because there's stuff we can do there. Again, back to the visualization comment I made, the ability for us to be able to see the inventory through a value stream versus looking at it country-by-country itself allows you to see where you have excess waste or not. We also have triggers that can tell us where we have excess inventory and where we have short inventory, which also allows us to do better prediction, but most importantly, help the customers too, because where you have short inventory, we quickly got to beef back up so that we don't impact customer response time. So I would say, long term, you will see us continuing to improve velocity. In the short run, I think we've got to navigate the pandemic. A lot of the trends have changed. You have written about the supply chain shortages across the world. We are working through that ourselves. And I would say, just count on us in the long term to keep improving inventory velocity.

Yes, I know. And look, I think the first quarter is a good example of that, right, where you had a lot of supply chain issues, not just yourselves, but clearly across the industry, and it seems like you guys were able to manage that incredibly well. So kudos there. I'm sure we'll talk about supply chain more and inflation more as we kind of head through this discussion. But maybe just shifting gears a little bit and focusing on some of the priority growth investments that you're making. I know that you're excited about that opportunity and your digital strategy. So maybe talk a little bit about the growth investments that you're making, that you're excited about, that's going to help you longer term, drive stronger growth across the company.

Sure. So I'll break this up, Joe, if you don't mind, in 2 questions. One is digital, as well as, second is our growth platform. So just going through the pandemic, there are certain trends that we have seen as 3M that we feel that the strength 3M brings, the globalization, the material science capabilities are in areas that we can continue to play very well, and we are investing in. So some of them are personal safety, home improvement, biopharma, healthcare, auto electrification, and then digital. And when we mean digital, we mean semiconductors, we mean data centers and we also mean e-commerce. So put all that together, these are areas that we have continued to invest through the pandemic. We have talked about it that in 2021, we're going to keep investing in these growth areas because we just believe that this is where the world is going to evolve to and where 3M can play strength -- has strength. To answer your question specifically on priority growth platforms, even through the pandemic, the priority growth platforms, some of them are in the areas I just mentioned, grew at 7% for the year. And for first quarter of 2021, they grew at 10%. So it's very clear that these investments are paying off from a revenue perspective. If I take you back to your second question, which is digital. As I mentioned, this is -- can be a big player for us in the long run. I think digital trends have accelerated through the pandemic. They haven't slowed down. So it's many years of possible trends have got crammed in the last 12, 14 months. So when we think of digital, we think of 4 different areas. One is our digital customer, which is the customer has a much more intimate and seamless experience. Some of it I've talked about through the ERP that's allowing us to do it. This digital product, which is offerings that are digital in nature, whether it is sold with a product or it's sold as a standalone. The third one is digital operations, which is using data and data analytics to drive operating efficiency. I talked about the visualization as an example of that. And then the last one is digital enterprise, which is using data, using the ERP to drive efficiency in our operations. So as you roll out the ERP, the standardization of data, the standardization of processes, because it's not just a system rollout, it's a process improvement rollout too, are all of those items that we feel that we can -- that is our digital strategy. My view is we are still in our early stages here. We've made great progress on the digital operations side. There's much more we can do here, and we're going to keep building on this as we go.

No, that's super helpful, Monish. I guess, maybe just sticking with the priority growth platform for a second. I know that you guys have highlighted, I think, it's roughly 5% of your business today. What's it going to take to really, kind of, move the needle there? You mentioned the 10% growth rate in the first quarter. So that's really great to hear. And why not have a larger portion of your business considered part of like priority growth?

Yes. So, as I mentioned, Joe, the areas that we're going to continue to invest in are the ones I've talked about, which is, personal safety, home filtration, auto electrification, et cetera. Our view is that these priority growth platforms are a method to focus the -- focus our investment. As time goes on, the priority growth platforms become a part of our normal mainstream and then we'll find the next priority growth platform. So it's just a part of our mainstream. In the long run, our plan is, all these investments that we're doing, the realignment of the business should allow us in the long run to grow at or above the macro as well as give us better margin as well as strong cash flow. So that's how we think about these priorities growth. We call them priority growth because it's a focus area for a period of time, then they become mainstream, then you're going to get the next priority growth platform that you're going to keep investing in. And that's the power of innovation that 3M has driven for years and years, and that's the way they've run.

Monish, that makes a lot of sense. That was a great segue also into, kind of like, your long-term framework. Right? The -- I don't think -- correct me if I'm wrong, but I don't think that's been really changed since the 2018 Investor Day. But obviously, a lot has changed since then. I'd be curious, how do we think about the right long-term growth, margin, free cash flow framework for the company going forward?

Yes. As you can imagine, Joe, I can't comment on what the company said in 2018 and so much has changed since 2018. But I would tell you a couple of things that you're starting to see from us and what we believe is continued investment in growth, productivity and sustainability. You've seen, we've made an announcement that we're going to invest over $1 billion in 20 years to continue our leadership on sustainability. We also announced at earnings day, a few weeks ago, that we're going to help reduce the usage of plastic. So we are committed to that. So first, I would say is we're continuing to invest in growth in areas we believe we can win, drive the productivity and also have our leadership in sustainability. When you put all that together and the way the overall 3M machine works, you can count on us long-term growth at or our macro, continued margin expansion as well as strong cash flow. A strong balance sheet, a strong capital structure has always been a hallmark of 3M when we continue -- we intend to continue in that journey. We have driven leverage down from 2.2 to 1.4, and that gives us a lot of flexibility at the point where we are, and we are ready to move on [indiscernible] .

That's fair enough. Monish, we'll expect those long-term targets to be updated in the next time we have Investor Day. I guess shifting gears a little bit to trends. It's interesting. You guys reported a few weeks ago, Mike talked a little bit about an uneven environment, but you got off to a great start, right? 8% organic growth, as I looked across your end markets, it looked like the recovery was very broad-based. I guess, are there any end markets you kind of want to highlight where the inflection was stronger than you expected and you are continuing to see the growth?

Sure. I would say, first of all, you said it, Joe, that team is off to a great start. It was a broad-based recovery across all geographies and segments of our business. We also believe that overall end markets will continue to keep growing as we are seeing across the world. But I think we believe it's still going to be uneven. And part of it is driven by, how does COVID play itself out? What is the adoption of vaccine? What's government response? How are we going to deal with all the supply chain issues the world is facing with the extra demand? Inflation is rampant. You're seeing it across all sectors right now. As well as figuring out how COVID and its impact on how it plays out as on elective procedures, oral care procedures, semiconductor shortage. So that's why we feel it's still going to be uneven. But long term, the end markets that 3M plays and we feel will keep growing in their strong end markets to play. I would say areas in 1Q that came in better than we thought they would come in. One is just on consumer electronics, tablets, and TVs continue to be stronger than we thought. Stationery and office supplies came in much stronger because of -- as things -- as offices and schools starting to open up, was the second sector, that I would say, came in much stronger than we thought. And then overall, industrial activity pockets were good growth and pockets in certain countries were still smaller, but they came in stronger than we thought. So that's why that gives us confidence that the end markets are going to keep getting better in the long run, but it's going to be uneven.

Yes. It's an interesting comment on stationery and office supplies because that's been an end market that, for the last few years, has been -- has been hampered. And so -- but could be a really good opportunity over the course of the next 12 months as offices open. Goldman's basically opening up in about a month. And then -- and clearly, kids are getting back to school. So nice to hear there. I guess maybe going back to -- I'm actually curious, as you kind of think about your portfolio and maybe some of the end markets that lagged, right? Like you mentioned, I think, transportation safety, commercial solutions were a couple of areas where things lagged a little bit. It also seems reasonable to me that these 2 businesses could be stimulus beneficiaries. So I'm just curious, like do you agree with that? And then where else would you potentially benefit from stimulus across your portfolio?

Yes. So I think it's a great question. I think, first of all, it's too early right now to talk about where the infrastructure bill goes, where stimulus and where people are spending money and how it's going to play out. But if the answer is we are going to invest in more roadways, our transportation and safety division will definitely benefit from it. But it's going to take time as these roadways are built, but that can definitely benefit. To answer your specific question on Commercial Solutions division, the Commercial Solutions business is actually impacted by 2 different trends. One is the Commercial Solutions business has our office cleaning product. So that's going to get impacted by how offices open up, how cleaning. Now Goldman's back in, so maybe that's an opportunity for us. But I would say that's where I would say, is the office cleaning. The second part of that business is graphics and our film business for outdoor advertising. So how do people invest in outdoor advertising, there's commercial real estate -- commercial advertising pick back up is going to have an impact on that business. But I would say, overall, anything that drives growth, that drives job creation keeps America more competitive. We absolutely support, and I think that will help 3M in the long term, too.

Yes. And Monish, we do get the question a lot around respirators. You guys have laid out your expectation and how the revenue came through last year? I think you called out about $290 million business in Q1. If that run rate, kind of, holds through the rest of the year, it seems like that's about 35% to 40% growth versus last year. So one, do I have those numbers right? And then secondly, are you still continuing to see the strength from frontline healthcare providers in that business?

Yes. So I would say we are continuing to fight the pandemic at all levels, making sure that we keep our employees safe, making sure we are partnering with governments to public-private partnerships, for whether it is current demand or stockpiling demand, making sure that we are supplying as much as we can to the frontline workers so that we keep them safe. The company has grown. So we have had nearly 2 billion respirators that were distributed in 2020. Half of it was in the United States. It's fourfold -- from a production perspective, we ended 2020 at a capacity of 2.4 million, 2.5 billion respirators. So that's the capacity we'll have in 2021. That is a fourfold than what it used to be pre pandemic. So the team has done a marvelous job of ramping up disposable respirator capacity. To answer your question on the $290 million, that's -- it's $290 million on a growth perspective, Joe. So last year, at the same time, first quarter of 2020, we had approximately $100 million of incremental respirator sales. That in 2021 versus 2020, there was another $190 million. That's how you get to the $290 million, but it's growth. The actual business is around $1.4 billion on an annualized basis in 2020. So that's the size of our respirator business as of 2020. What you have to remember is, as you go into 2021 and beyond, you're going to start lapping the comps that came in through the pandemic. So you're not going to see the same level of growth that you saw in 1Q '21 versus 1Q '20 just because you're going to lap. And if you remember, for 2020, our total impact on growth was nearly 240 basis points for disposable respirators. That was the growth rate that we got out of disposals. So just keep that in mind as you think 2Q to 4Q. And Bruce, anything else you would add on this, if I've got any other facts confused here. I would just love for you also to give your ...

Yes. Joe, just -- it's -- just as you remember, as Monish called out, we had about $100 million in Q1 last year. That went to $225 million in Q2 to $235 million in Q3 and then roughly about $280 million in Q4. So as we start to lap in those comparisons, obviously, the growth [ from that ] is going to decline. And then obviously, the end market demand is going to be a big factor, too.

Yes. No, that's helpful. I appreciate the clarification there. That makes a lot of sense. I guess, maybe shifting gears. We haven't talked about supply chain or raw mats really that much. I know you mentioned it a little bit in your comments earlier, Monish. It seems like supply chain really didn't impact 1Q as much as we thought it potentially could. And maybe -- maybe volume is a great equalizer, but I'm just curious like how much of an impact did it have on the quarter, either to volumes or margins? Is there a way to potentially quantify that?

Yes. So first, I'll just say, the teams -- the supply chain teams have done a marvelous job, keeping the factories running in the background. It's -- they get paid to do it, and the teams do a phenomenal job with the relationship we have with suppliers to keep the factories up and running. It did have an impact in 1Q. You can see inflation versus price was a headwind for us. So we had 70 basis points of price, but we had inflation. And so it actually was a headwind for us on a year-over-year basis. On a volume perspective, as one, we were already hampered across the globe with the overall demand. So supply chains were under constraint. Then comes winter storm Uri, which had a further impact where a lot of the chemical manufacturing supply in the U.S. went offline for a few days. So that exasperated it. We have worked through it in 1Q. We are continuing to work through it in 2Q. As I've said before, during earnings, too, we will see the pressure of raw materials and inflation showing up. We'll have a 75 to 125 points basis -- 125 basis points impact, inflation versus net of price in 2Q because inflation has come in much stronger. We are continuing to see that logistics costs and logistics capacity is quite tight across all types of transportation, whether you talk ground transportation or air transportation. But we are working through it. We have a great relationship with our suppliers. We are closely in touch with our customers, trying to make sure that we can do the best we can to get both sides, getting material in and then satisfy customer demand as it comes through.

That's helpful. How do you think that equation looks like in the second half of the year? You mentioned that 75 to 125 basis points. Is that more neutralized than 2H? And then I also want you to maybe touch on labor. Since you reported, we got a jobs number that disappointed. And we're hearing more companies talk about availability of labor. I got this anecdote today that was interesting about a McDonald's manager offering $50 for folks to come in to interview, which is just incredible, right? And so just what are you seeing from a labor perspective as well?

Yes. So I'll start with the labor. So we are seeing inflation [ raver ] for our hard goods that we get from an outsourced perspective. We see tremendous inflation on the labor side. Inflation for us is coming from 3 areas: raw material labor, where we outsource it for hardgoods and then logistics costs. So that, I would say, is we are seeing that labor shortage and it's coming through from an inflation perspective. To answer your question on price, historically, 3M has always had a good history of being able to raise price, 30 to 50 basis points ex electronics. It clearly shows the value of innovation that we drive as well as the value we drive to our customers. Inflation has come in faster than we could. We're doing multiple things. We are raising pricing across segments and geographies, we are going after a lot of sourcing actions, we're improving yield in our factories to negate to some extent that we can, the impact of inflation. I would say raising prices will take a little bit of time because we have a lot of end markets. We have a lot of geographies and customers to work through. Our goal is to have more price than we did in the first half, and we'll see where we are. It's a little too early to say where we'll be, but we are raising prices, and it should be better than the first half.

Okay. Got it. That's super helpful. And maybe since you mentioned electronics, maybe going into that segment for a second and just thinking about like your auto OEM business doing incredibly well this quarter. Yes, I think it was up 21%. I just -- maybe just talk a little bit about what's describing the performance in that business. Is it sustainable? And how do you think about your own exposure to EVs?

Yes, so 3M has had a long history of having innovation in the auto sectors, an 80-plus year partnership with the OEMs that have helped us drive innovation. We are seeing broad-based wins across both the internal combustion engine cars as well as EVs. We are seeing -- we can add a lot of value, whether it is lightweighting, thermal management, [ films ], touch technology. So there's a lot we can play in this space, and we have, and that's why we are seeing these broad-based wins. You're right, Joe. The overall auto market grew 14%. We grew approximately 20%. In the long run, I would say 3M continues to beat the -- beat auto growth rate rates just because of the innovation that we drive. When you think about auto electrification, again, that's an area that 3M has played well. You're seeing us have broad-based wins. That business grew, if my memory is right, mid-single digits in 2020 despite the whole auto industry coming down on a year-over-year basis. Again, there, we are seeing broad based. We can play a lot in thermal management. We're doing a lot with [ films ] and graphic displays, et cetera. And we continue -- we believe that this is a good growth segment for us. It's one of our priority growth platforms, and the teams are doing a nice job working with the auto OEMs to get these wins and partner with them well.

So it's great to hear. And Monish, you mentioned earlier, tablets and TVs being really strong to start the year. I mean is there -- your electronics business was up high teens in the first quarter. Is there a way to kind of parse out the work from home benefit that you potentially got in 1Q and whether that's continuing?

Yes. So I'll break up tablets and TVs, and I'll have Bruce add any more to it, too. On tablets, the growth that you saw in 1Q, partly was also driven by the fact that you had a negative comp in 1Q of 2020. So I think that's one piece of it. But definitely, tablets have been -- the sales of tablets have been benefited by people continuing to work from home, some of the COVID measures that are being implemented. The impact of that will, again, will lap itself as we get through the remaining of the year. And it looks like the current projections that we get. Our tablets are going to be up low single digits for the whole year, as you see, 2Q to 4Q. But again, it's very uneven, Joe. So who knows what happens with COVID, how do these work from home measures continue. Our hope is that we all can start going back and working from a hybrid environment, but we'll see what plays itself out there. But that's benefited from tablets. I would say TVs has also seen a benefit. TVs has seen a benefit again in North America, driven by some of the COVID measures, there's also stimulus. You're going to see the lap of that again when you go into the second half. TVs, right now based on the data that we get, says it's going to be negative growth in the second half of 2021 versus 2020 because of the comps that you were dealing with in 2020 and the demand you saw in 2020 second half. Bruce, anything else you would add on this topic?

Yes, Joe, just to put our business in perspective, our total electronics business is about $4 billion in revenue. About half of that would go into the consumer electronics space. So -- and I know that $2 billion, about half of it is smartphone and the balance would be tablets, TVs and notebook PCs. So -- and as Monish appropriately highlighted, we started seeing these trends as everybody went to work from home, school from home, starting in the second quarter last year. So we'll be starting to lap into those stronger comps on a year-on-year basis.

Yes. Bruce or Monish, maybe on that point, are there any other specific businesses that you guys want to call out for the second half of the year, where you did maybe get a benefit at the end of last year. I know you mentioned respirators and the growth rates starting to come down. But are there any others that you'd like to call out across the portfolio?

So all the 4 segments have done a great job, whether you think about consumer, which has continued to have a strong growth in Q1. I think it has come down to what happens with home cleaning, stationery and office supplies. And -- but we have a strong position in home filtration. We have a strong position in our command business. So great job by the team in 1Q. We'll see how it plays out. Healthcare will come down to the impact of electives, the impact of oral care procedures and the impact of disposable respirators because we have sold a lot into that channel. It's going to come down to COVID vaccine, adoption of vaccine, government response, stockpiling response will be the healthcare business. Transportation and electronics, semiconductor continues to be under tremendous uncertainty. It's impacting our customers, like auto OEMs and consumer electronics to make finished goods. I think auto builds came up to plus 14% in the first quarter versus it was planned to be 15%. For the year, they are now saying auto builds are going to be up 12% on a year-over-year basis. It was plus 14% when we started the year. That was a prediction. So we'll see how supply chain plays itself out in that sector. And then, of course, consumer electronics. We talked about tablets and TVs and the impact of there. And SIBG, again, off to a great start too, up 10%, 6.5% of it is disposable respirators. But as industrial activity comes back up, the hope is that we keep growing. So I look at it and say, overall, great start to 2021, up plus 8%. Uncertainty in the market, we believe there's unevenness. So we'll see how this plays itself off. But end markets are starting to have positive momentum, and we'll see where it goes.

Yes. And maybe on that point, that was very helpful, Monish. But maybe on the point that we were trying to talk about earlier, which was inventories and your line of sight on inventories. Perhaps you can provide a little bit more color there on where you have seen -- what are you seeing on inventory levels across the portfolio?

Yes, Joe, many of you have written about it, and we agree with you that inventory levels -- the pandemic has changed the trends of inventory. Inventory levels, in general, in certain pockets of costs, are full, and in certain cases, are low. On the industrial side, which is where you normally have the most visibility, we are still seeing industrial inventory levels low, but customers are remaining cautious.

The team is really bullish, right? It's almost like -- and I've heard that from a few different executives at our conference in that if the growth rate turns out to be pretty robust and the inflection is robust from an industrial standpoint, there might be a catch-up, right, but you may not catch up for several quarters. Is that kind of the sense that you're feeling as well?

Yes, we do, Joe. But what we don't know is if the pandemic has changed trends completely. That's what we'll have to watch. That's why I think everyone's a little cautious here, I think customers are remaining cautious too. It's -- we'll have to see how these trends play itself out. But if you just believe the path, then you would say, yes, there's a catch-up. But have trends changed. For example, we have seen trends change in our own business, between quarters, between months. So we'll have to see how this plays itself out, and we'll keep you posted.

No, that's helpful. And we've got a couple of minutes left. So maybe turning the final set of questions towards the balance sheet and free cash flow. On the balance sheet side of things, you guys are in a great spot. Right? Net leverage position is now -- has come down a lot over the past year, by our calculations, like, sub 1.5x at this point. What's the optimal capital structure for the business at this point for you? And how are you thinking about this over the next few years?

Yes. I would start, Joe, with the hallmark of 3M, and what we want to continue doing is a strong balance sheet and a strong capital structure. So the team's done a really nice job bringing down leverage down from 2.2 to 1.4, as you said, sub 1.5. I would say, at this point, this gives us a lot of flexibility, Joe, and it gives us a lot of strategic optionality. And we are ready to move either way depending on what happens in the environment. So we could go up or down depending on what the environment brings. From a capital allocation priority perspective, our goal is always to invest first in our business organically. We believe, organically, R&D investments as well as some of the investments that we are doing in growth productivity and sustainability give the best return in the long run for shareholders. Our second priority is dividend. As you have seen, we have increased dividend 63rd year in a row. So we are continuing to do that. The third piece is M&A and where we believe that there's complementary to 3M where we can add, we would do it. We don't see acquisitions the size of facility right now, but M&A still continues to be a priority. And the last one for us is share buyback is the fourth priority. And there, you've seen in the first quarter, we bought back $230 million of shares -- million dollars worth of shares in the first quarter.

Yes. And Monish, I mean, the question that comes up with investors a lot, just in terms of your flexibility with the balance sheet, is really just around some of the litigation that's out there as well. And obviously, there's a lot of stuff that's pending and unknown. How does that perhaps, maybe, either constrain your ability to really put your balance sheet to work, and how do you think about it in that context?

Yes. Our goal, as I said, Joe, is always to have a strong balance sheet and a strong capital structure. So we factor multiple things into our thinking as we think about structure, capital structure as well as balance sheet. Again, from a net debt-to-EBITDA leverage, the team's done a nice job to get it down to 1.4. To answer your specific question on litigation, we are continuing to work on multiple fronts. Our SEC filings have all the latest status of all the cases that are going on. As I've also mentioned during the earnings call, we will have more legal fees being spent on PFAS combat arms and the other litigation, and we'll do what's appropriate for us.

Okay. Great. Maybe one last question for me. When I think about your business from a free cash flow perspective, I typically think of you, kind of, like a mid-teens type free cash flow margin business. But historically, you have a very stable business, good pricing power, good gross margins. Is there an opportunity for this to be -- for 3M to be, kind of, like a high teens, low 20s type free cash flow margin business? And if so, how do we get there?

Yes. So I would go back to the whole discussion on working capital, Joe. My belief is based on -- by using data, data analytics, operating rigor, good root cause analysis, that we can do a lot more in working capital. Our goal in the long run is to improve working capital velocity, whether it is driving better inventory planning that helps improve inventory velocity, whether it is working with our suppliers to get to what globally accepted terms are on all areas that we can keep driving working capital. The enablement of the ERP, the ability of the team, which has now created a central team called Enterprise Ops has enhanced our ability to drive working capital velocity. You saw that in the fourth quarter. You've seen that in the first quarter. And our goal is to continue driving that journey of better working capital velocity. But in this pandemic environment with the way the supply chains are constrained, you're going to see ups and downs by quarter as all of them are trying to align themselves to better demand patterns, better supply patterns. But long-term working capital velocity is where we believe we can add a lot of value by using data, analytics and visualization tools.

Okay. Great. Monish, Bruce, as always, great to see you. Thanks for spending time with us today. Hopefully, this will be in-person next year. And really hope you have a great rest of your week.

You too, Joe. Thanks for having us and stay safe.

All right.

Yes, great seeing you, Joe. Take care.