3M Company (MMM) Earnings Call Transcript & Summary

Good morning and welcome, everyone, to the first day here of the UBS Global Industrials and Transportation Conference. My name is Markus Mittermaier, and I am the multi-industry analyst here at UBS. And I'm delighted to have the 3M team with us this morning. Before I get started, it's -- I try to make this as interactive as possible. So each of you has a little chat window on the screen, and please feel free to put your questions in there, and I try to get to as many of those as possible during the session. And with that, I'm delighted to welcome Monish Patolawala, the CFO, EVP at 3M; and Bruce Jermeland, SVP and Head of Investor Relations. And great to have you back. Before we get started, I think, Bruce, you have to read a disclaimer, and then I'll kick it off with my first question.

Sounds great, Markus, and it's great to be with you today. Just want to remind the audience today about our forward-looking statements. During today's discussion, we may make certain predictive statements that reflect our current views about our 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 our most recent Form 10-K lists some of the most important risk factors that could cause our actual results to differ from our predictions. With that, I'll turn it back to you, Markus, and we can get started.

Great. Thanks so much. And Monish, last year at this conference, I remember an hour before we got the news report that you'd be joining us as CFO. So almost a year into your role, can you reflect on the experience so far, the opportunities you solved when you took the role? To what extent have these opportunities changed or evolved? Maybe let's start there.

Sure. First, Markus, thanks for having us. We're excited to be here, talk a little bit about our story at 3M. And you're right, it's a year that has gone by now or close to a year, and I'm absolutely thrilled to be at 3M. It's an amazing team, and I couldn't thank them enough for the warm welcome that they've given me. Despite working remote, I've got a chance also to go visit some of the factories virtually. So they've been able to use drones and other electronic technologies and cameras to allow me to go see a lot of the factories. So the excitement coming in continues to stay very strong, and I think there's tremendous opportunity. So with that said, I'll just start first with I -- Mike and I are aligned on Mike's priorities, which is portfolio transformation, innovation, people and culture. At the same time, prior to my time, Mike had realigned the businesses into the 4 go-to-market businesses -- business units: Safety and Industrial goes through distribution; Transportation and Electronics goes through -- it's a spec business, goes through OEM; the health care goes to the Health Care segment; and the Consumer is pretty much the retail business. And then they also -- he also created a pipe that's horizontal called enterprise operations. Think about supply chain, customer experience all end to end. And I'm fully aligned with that, too, because at the stage of where 3M is, I think this is a great way to drive growth, to drive efficiency and also drive strong cash. But with that said, the way I look at it is, and I've always said this multiple times, Markus, my belief is that every company, however good they are, has an opportunity to do more. I believe in driving operating rigor through daily management, continuous improvement. You know you followed 3M for a long time. They've used Lean Six Sigma. And my belief is whether you use Lean, you use Six Sigma, you use Agile, at the end of the day, what you're trying to do is visualize the outcome using data and data analytics to do better root cause. And then through better root cause, you get to sustainable improvement. So if you measure and control the X, you're going to get the Y if it's an equation. And here is where I see in 3M is the opportunity is that there are pockets that we do a very nice job of controlling and managing the X that gets us to the Y, and there are pockets that there's much more opportunity. The digital front of using data and data analytics is taking root. There's a lot more we can do in this place. The ERP rollout that we have done, the different kinds of data aggregation tools that we have are not fully deployed everywhere. That's an opportunity also across the factories. And the richer we can get our algorithms to keep working, and some of them are proprietary in nature, some of it we use partnerships, there's even more opportunity. The whole other piece of this is identifying external signals better, and the team is starting to work on that is what are we seeing in the external environment that we need to factor in to manage our business better And. All of that then rotates into what we call daily management is we've got to win your day every day, and that's what the team is continuing to work on. So again, as I said, there are pockets that do it well. There's more opportunity. So when I sum it all up, I'm thrilled to be here. There's tremendous opportunity to continue to drive operating rigor through daily management, keep driving the continuous improvement, get the growth at or above macro, get margin expansion and strong cash. It's not only the investors are going to see all the stuff that we're doing, but the daily management trigger will also help customers because at the end of the day, that's a big stakeholder of ours. So customers, regulators and shareholders, all great stakeholders. We want to make sure that our customers truly love what we are doing, and this daily management rigor will continue to make the experience better.

Great. And actually, maybe I'll follow up right here because I think there was a lot in here. If you think about like getting from that X to Y, right, and I think about the whole portfolio of opportunities, speaking in baseball language maybe with the German accent here, but what inning are we in here, right? I mean you say that there are some areas that -- where you're kind of comfortable with where things are. But what's the opportunity? And how far down the road are we if we think about that incremental margin, right, opportunity?

Yes. So Markus, I would tell you, I'm a cricket fan, but I follow baseball, too. So I'll start with that. But using baseball analogy, I would say there are some businesses that are in the sixth innings. There are some, I would still say, in the third innings. So there's a long way to go here. Back to your incrementals, the company historically has generated 30% to 40% incrementals. The way I look at it based on everything I've seen, I think that's a good number to think about as 30% to 40% incremental. But you also got to keep in mind that the way we look at growth, there's a lot of opportunity for growth. So we have said we are going to keep investing in growth, productivity and sustainability. So some piece of this leverage is the hope is that we can go invest it back because it's all for the long run at the end of the day. The organization change that was made prior to me coming in here has helped us modernize our business. Our infrastructure has helped us modernize the way we come to work. But as we -- the purpose of that organization was to cut down redundancies and reduce the path to the customer. And as we have gone through this, we have lived through this now for the last 15, 18 months, we continue to see that the opportunity exists. If you -- as you recall, we took it -- we announced the restructuring in the fourth quarter. Part of it was -- or most of it was driven by the fact that we saw the efficiency. We are continuing to work through that execution. The execution's on track. But that's how I think about the leverage. I think about the reinvestment opportunity, and there are tremendous opportunities of growth that even the pandemic or through the pandemic trends that have come through that we can invest in. Goal at the end is you've got to grow at or above macro, consistent margin expansion and strong cash. And also -- so therefore, I would also ask you to -- ask everyone to think through the cash side of the organization change that's helping to drive working capital, which you're seeing us make tremendous progress in the last few quarters.

Yes. Yes. I'll come back to that point, growth at or above macro in a few minutes, if I may, maybe focus initially on the more short term.

Sure.

But I think that growth aspect is obviously an important topic. So maybe if you look at Q1 and the trends into Q2, Q1 was strong, right? 8% organic growth, broad based, all geographies, all business groups, really what you mentioned on free cash flow. I think free cash flow to sales in the high teens or that 16% range. So maybe can I start with inventory? Because if I look at my sector-level data analysis outside in, it seems that inventories are still relatively depressed in some markets in sort of historical context. Then if you look at all your channels, your geographies, to what extent is there a propensity for some sort of restocking? And how material -- if there is, how material could that be for 3M at some point?

It's a great question and something I would say we keep debating as often as we can when we get external data. What I'll start with is I think the pandemic has pretty much changed some of the patterns that we have seen in the past, number one. Number two, it's uneven depending on which part of the world you are. And when I say it's uneven, it's related -- or quite correlated to vaccine rollout, correlated to the amount of COVID infection. So with that said, I'll just go business by business, and hopefully, I'll answer your question. So on the Safety and Industrial side, inventory levels are pretty much in line with what, Markus, you and others have written about that inventory levels are low. The pandemic has hurt supply chains in general. And so U.S. distributors are struggling to fill up their shelves. What you are starting to see is that they are starting to fill up respirator demand -- or respirator stock as demand from health care has started coming down. And therefore, they're able to go and buy some of the respirators they wanted. The second one I would say on the Safety and Industrial is all the other commodities are pretty much -- I would still say customers are being conservative or in -- so we are not seeing a lot of inventory build right now. The question is, has the pandemic changed a trend that people can live with a shorter cycle? But that's something we'll have to watch as thing goes on. If I go to Transportation and Electronics, I think that's well understood right now with all the issues that are going on with semiconductor, the chip shortage. And you're seeing pockets where inventory is being bought. You're seeing pockets where inventory is low. People are trying -- the OEMs are trying to adjust their inventory levels as they are managing production. Health Care, I would say, pretty much they're back to pre-pandemic levels. N95 or your respirators in general, end markets that you're seeing are starting to come down. Part of it is because the demand is coming down because of the high per capita rate of vaccination in the U.S. And I think what you're seeing right now is more stockpiling and management going on in those levels. Consumer is pretty much back at pre-pandemic level. And then on Health Care, I forgot oral care, my apologies. Oral care also, we have seen -- has seen a good rebound, and we are starting to see inventory levels back at pre-pandemic levels. But overall, I would say, Markus, I summarize, it's uneven in different parts of the world. We'll have to see how COVID plays out, how the vaccination rollout plays out in different parts of the world. And then post pandemic, I think we'll have to reflect on the trends and has something changed drastically in how people use inventory as a way to serve customers.

Yes. Yes. No, very interesting. And then maybe the flip side, and that's more, again, this quarter, Q2, Q1, kind of -- was there some prebuying that you saw in that growth, right? So it's kind of the flip side question that people said ahead of all the supply chain concerns, et cetera, how do you think about that?

Yes. So we haven't actually come across a lot of conversation around it. And even if it is layer, it's quite immaterial for 3M. So there hasn't been anything massive we have heard of. But again, as I said, I think we'll have to wait out for these change to all stabilize to really understand was there a prebuy or not a prebuy. But nothing material as of right now.

Okay. No, that's helpful. And then if you look at specifically maybe some of the elements where we had obviously pandemic impacts, right, so the respirators, you touched upon it, consumer electronics. Can you just help us to make sure that we are all aligned here on Q2, Q3, Q4? And maybe start with respirators. So if I remember this right, I think in Q1, you commented incremental $190 million on top of last year. Last year was $100 million. How should we think about that for the rest of the year?

Sure. So I'll start with respirator first. On respirator, one of the things that I'm proud of all the 3Mers is we are continuing to fight the pandemic at all levels. Whether it is to keep our employees safe, whether it is for health care workers, whether it's for keeping the general population safe, the company continues to go down this path. From a respirator capacity perspective, we more than doubled our capacity in 2020. We exited 2020 with a capacity of 2.4 billion respirators. We sold 2 billion respirators in 2020 in the world. Half of it was distributed in the United States. We invested in the capacity as required. We had great public/private partnerships that helped invest, too. So we exited at 2.4 billion. In the first quarter, we sold 630 million respirators. So if you multiply that out, you get to that approximately 2.4 billion. The way the $190 million came was last year as the pandemic was starting up, we had $100 million of incremental respirator sales versus 2019. In Q1 of 2021, we ended up with $290 million. So that's the $190 million incremental, which is similarly in line to fourth quarter where we had approximately $280 million of incremental respirator sales in 2020. That is 240 basis points of revenue growth that we got. I would say what will happen in Q2 to Q4, I'll start by saying we will have capacity ready for 2.4 billion units and that we are not going to shy away from that. I think what we are seeing is demand starting to move in different parts of the world, depending on where the pandemic is. In the U.S., as we have got the highest vaccine per capita rate, forward cases are coming down. You're seeing that health care channels starting to ease up on the demand. But at the same time, you're also having hospitals, et cetera, still working through stockpiling. They're still working through managing their inventory levels. What we are seeing is that demand is then moving to the industrial and the consumer side, and that's what we are going to do, is go back to the industrial and consumer side and make sure that people know that those respirators are available because we had moved a lot of our respirator production to help health care workers. If I go to Europe, you're seeing pretty similar kind of trends. We believe that stockpiling will start more in Europe. I think it will go through 2022 as right now, most of the European company -- countries are focused on vaccine deployment and making sure the citizens are vaccinated. In Asia as well as LatAm, so in areas where COVID cases are still very strong, you're still seeing low inventory levels. You're seeing high demand for respirators. At the end of the day, we'll have to see how all of this plays out. I go back to -- it's going to come down to vaccine deployment, COVID cases, government response, stockpiling. And that's going to ultimately decide what inventory -- what demand is going to be. But again, this is -- X factors are not new to 3M. We will do what is required depending on what the demand is. Obviously, this will have an impact on growth and it will have an impact on margin, but we'll deal with it as we go. But right now, we have the capacity of 2.4 billion, and we are going to continue making sure that it's available, depending on how the world -- how pandemic plays out in the world.

Got it. Okay. Maybe just one very quick follow-up. You said the shift from -- in the U.S. maybe from health care back into industrial and consumer, does that in and of itself within the respirator top line have a margin impact? Or is this sort of more respirator in aggregate kind of maybe get smaller and that has an impact?

Yes. There's always a mix impact, Markus, on this. So depending on the channel, depending on where you sell to, there could be a mix impact on this.

Okay. Okay. And maybe the second one, electronics. So that's -- if my numbers are right, roughly a $4 billion, if I add it all together, business for you. Can you give us a bit more granularity how much of that is consumer electronics versus nonconsumer, and again, sort of like from a comparables perspective?

Sure. So the electronics business is approximately $4 billion, as you said. $2 billion is consumer electronics, $2 billion is -- supports the electronics industry. So on the consumer electronics side, whether it's our display technology, films, et cetera, is approximately $2 billion. So there, think about phones, tablets, TVs and the use of 3M products that go into that, including our adhesives. The electronics side or the remaining part that supports the industry is semiconductor, data centers, factory automation is the other $2 billion. What we saw in the first Q, and you saw it also second half of last year, you saw tremendous trends in semiconductor data centers, factory automation. We believe that, that trend continues irrespective of where we are. So the world, I think, has seen a different point in time where these industries continue to grow. What you will see is as you get into the second half of this year, you're going to start comping the strong from last year. So therefore, those comparisons are going to hurt. But overall, we believe that the end market is very strong and will keep growing. When you get to consumer electronics, and I'll break that up into tablets, TVs and then phones. On tablets, we have seen -- you saw first quarter was very strong, but that was mainly driven by the negative comps from last year. Tablets, the end-market projection right now is that you start hitting the comps from next year. And therefore, the second half of this year will have negative amount of tablet sales. TVs have been buoyed by people working from home, government stimulus, and there is -- that also is projected to be negative for the year. While tablets is low single digits to mid-single digits for the year, the industry is supposed to grow. While TVs, the projection is that it will be negative from a year-over-year perspective. Consumer electronics from a phone perspective, the projection coming into 2021 would be a 6% growth for the year. The current projection is a 5% growth for the year. So we're seeing a little bit of slowdown in the phone market. But again, there, the projection for the second half is that it's going to be negative from a year-over-year basis because of the comps of 2020. So that's the split. But overall, I would say that this industry, we continue to play big in. You've seen the growth we've got in semiconductor. You've seen the leadership position we also have on consumer electronics, and it's a great segment for us and we'll keep investing.

Great. Okay. No, that's very helpful, the detail. And any other sort of like subsegments you want to flag, maybe office supplies, home improvement? And anything else that sticks out also on the positive side maybe?

Yes. So we have a diverse basket of our portfolio. So we touch a lot of markets. So I'll just start first with just, when you think about what 3M has gone through in 2020 from a comp perspective, we were down 13% in 2Q of 2020, up 1% in 2021 -- sorry, 2020 and up 5-ish percent in the fourth quarter. So Q2, Q3, Q4, you saw sequentially get better. So keep that as you think about comps. The comps are going to get tougher on a year-over-year basis. If I further break that up and look at -- just analyze, you would say 80% of my business was -- had negative growth -- or businesses, sub-businesses had negative growth in Q2. That number changed approximately 2/3 in Q3, and that number changed to approximately 1/3 in Q4. So you saw that sequential starting to get better last year, but that also, therefore, makes the comps a little harder. When you think about things that have impacted other than electronics, the things that we are watching through this remaining part of 2021 is how does auto builds go. You all know about the semiconductor shortage. The current projection is still a 14% auto build growth on a year basis. But when you look -- so first quarter was up 15%. Second quarter sequentially is actually a lower production of 1 million units of auto, and then there's a build back up Q3, Q4. So we're watching that to see what's going to happen. We are also watching elective procedures, both health care and medical. So I'd say overall medical, so oral as well as hospital, because that has an impact on not only our disposable respirator business, but it also has an impact on all the medical businesses that we have. So those are the things we are watching from a trend perspective. I would say you're going to start getting into comps of things that were very strong through the pandemic, so whether it's respirators, biopharma, home filtration, home cleaning, were all extremely strong. And then on the flip side, the opportunity to continue to grow is as the auto industry keeps growing, as elective procedures keep growing as well as the hospitality industry keeps growing as people start traveling, people start getting out there are all, I would say, tailwinds that should see us continue to grow as we go through the rest of the year. But again, it's uneven geography by geography. It's playing itself out. But I would summarize, Markus, overall, we are seeing the end markets get better. We're going to have uneven recovery, and that's why at the end of 1Q, we felt it prudent to still hold to a range of 3% to 6%. But we'll see how the rest of the year plays out, and we'll update everyone as we get through.

Great. Okay. No, I really appreciate the detail. Then maybe let's move on to price/cost, and you provided a lot of detail here in the quarter. So just a quick follow-up, really, to what you said in the quarter around the $0.30 to $0.50 headwind for the year and the Q2 at midpoint 100 bps headwind. Is there any update to that now that we are a good way through the quarter? Or are these still sort of fair numbers?

Yes. So just as a reminder, we are seeing inflation on all sides. We're seeing inflation in raw material, labor and logistics. So on raw material side, the good thing is that 3M does not have one specific commodity. We have a basket of commodities, each in the range of $200 million to $300 million. Some of the indices that we watch are the price of polypropylene, wood pulp, ethylene, linerboard. We are seeing broad-based price increases there, including chemicals and resins. Again, you're seeing polypropylene came down in April, went back up in May. So we'll see how that trend plays out. We'll see how crude prices play out. But that's end markets that we are watching from a cost perspective. Labor, we are continuing to see cost increases from labor shortages from outsourced goods that we buy from third parties. So we continue to see there. And then logistics inflation continues to be pretty high. And you pick the mode of transportation, and logistics inflation continues to be pretty high. But again, our belief is that Q2 may be the worst, and you're going to start seeing inflation come down to some extent. It's still inflationary. 1 month into it, which is April, we would say we are currently trending to the high end of the 75 to the 125 basis points headwinds. So it will be 125 basis of headwind. But Markus, we are working on a lot of other self-help things, too. So we are continuing to push back on suppliers. We're looking at dual sourcing. We're making sure that our cost continues to remain in line as a way to help some of the pain that is currently going on. We are working to raise prices across all geographies, all businesses. It takes a little bit of time with the number of end markets that we play in, but that's where we'll see -- that's what we're working towards our second half, is going to be a much better price for our story.

Great. Is there a rule of thumb? I mean, again, realizing that there's so many end markets, right, but a rough rule of thumb that's X percent of the portfolio takes 1/4 for prices to adjust X -- Y percent in 0.5 year. Anything that you can help us with just on the dynamics?

Yes. So unfortunately, I would not use the root ties back to all the end markets and making sure that we're working with our customers to raise prices as some of this inflation is coming through. Historically, 3M has had an ability to raise prices 30 to 50 basis points each year excluding the electronics segment. But that's because of all the value that 3M adds from an innovation perspective for the value it adds to its customers. And I would say that paradigm hasn't changed right now either. So as I said, we are working through the geographies. In certain cases, it's quicker; in certain cases, takes longer. But I -- we believe that the second half, with all the actions that we are taking, will have a better price number as these prices get implemented.

Okay. Great. Last short-term question on the challenge, not only for you guys but everybody on supply chain, is there anything that you see kind of on the labor side, you touched upon it earlier, that kind of restricts growth even sort of on these dollar numbers that you referred to or not really at this point?

Yes. So I would say, as of right now, nothing. All cycle times have got longer. You've seen that we have more inventory on the water too as we're working through these challenges. The good thing is 3M has tremendous relationship with our suppliers. So they're doing -- we are working very closely. It's a very dynamic situation, working on a day-to-day basis to minimize the impact to our factories. At the same time, we are blessed to have customers who are great partners to us, and we are making sure that we are trying to minimize the impact to them as we go through this journey. And so it's a dynamic day-to-day fight. But overall, I would say, as of right now, Markus, there's nothing that prevents us from fulfilling demand that is coming.

Okay. Great. Now let's maybe zoom out a little bit and more longer term. I heard you say recently, growth aspirations is going to grow at or above macro. I remember -- and granted this was, I think, before your time, sort of previously got to look 1.5x IP. So I'm just trying to think what's the aspiration. Is that sort of still to significantly outgrow IP, grow at or above GDP? Or what's the growth that you see for the portfolio here?

Yes. So I would say the following, Markus. I mean, as you know, the world has evolved so much. 3M's portfolios evolved so much that there is not one perfect index that you can use. I would say there are -- we have businesses now that are pretty significant, whether you take Health Care and Consumer that are more correlated to GDP kind of businesses. And then you've got the industrial and the transportation businesses that are a little more IPI-related. But even those are very macro metrics or indicators to use. But -- so I would say IPI may not be the perfect, but that's -- that's why we keep saying we'll grow at or above macro, and it depends on which macro you decide to measure 3M against. Secondly, I would just say on growth, there are tremendous opportunities that we have seen through the pandemic. Whether you talk about personal safety, where people are still concerned about their personal safety, so you could still have pretty good consumer sales on disposable respirators. People are worried about their air quality. So the home improvement area where we play with our Filtrete brand is a growth opportunity. We have seen digital evolve faster, semiconductors, the need for more data centers, the need for e-commerce and fulfilling through e-commerce are again areas from our electronics segment, from our Consumer segment and even our industrial segment to start using e-commerce as a method to deliver product is growth opportunities for us. Health Care, whether you just take the whole industry as a health care, which looks like it would be a GDP/GDP-plus industry once the pandemic is over; as well as biopharma and the development of vaccines, COVID vaccines, our filtration solutions are being used in the manufacture of vaccines. And then our wound -- negative wound therapy or our wound care business is also right in line as elective procedures go up health care, that's an industry that we are -- we keep investing in. And so there are tremendous trends in the auto electrification or electrification is here to stay, in our view. It's a business that is approximately $300 million, grew mid-single digits in 2020 despite the whole auto build being negative. And that's another area that we feel we can add a lot of value. So when we think about the opportunity for growth, we believe that there is a lot we can do here to grow at or above.

Okay. Got it. So if I come back to the earlier point and maybe connect it to what you said around pricing, the 30 to 50 bps, we should consider that, that model basically continues, right, and you get pricing? Or is there some sort of like offset between, okay, I have great margins. There's price elasticity, but I do some trade-off between growth and pricing and margin. Is that something that you consider or -- given that you have relatively high margin levels? Or should we more consider margin stable and GDP really type growth?

Yes. So I would break this up a little bit. I would say the first thing that gives us leverage is volume. And so growing the business is first priority because that gives us the best leverage. And I've mentioned that we should get 30 to 40 basis points of leverage based on just the history and how our structure is laid out. The second piece of this is how much of that do we invest in growth, productivity and sustainability. You also saw we announced that we would spend over $1 billion within the next 20 years -- over the next 20 years to drive some of our sustainability goals. So therefore, I say keep that in mind as you're thinking short term versus long term is we're going to continue to invest in these areas. So in summary, I would say you should see margin expansion. The question is, how much of that leverage do we invest back to get growth? But our first priority is to continue to grow at or above macro because that gives us the best leverage.

Okay. Great. And then if -- I want to come back to some of these growth areas that you mentioned, auto EV in a second. But generally, your priority growth platforms, they've grown nicely, right? Q1, I think, 10%. It's still a relatively small part of the business, right? So how do you think about, as you allocate internal capital, be it CapEx, be it R&D, between these growth platforms, which I think is sort of roughly in the mid-single digits range, right, of total exposure in the rest of the business? And the background of the question really is, it's like, okay, if there's so much focus on these growth elements, is there some sense of commoditization in the rest of the business, right? Or is that a wrong narrative really?

Yes. I -- the way I look at this is these are vectors that the company believes in that if we invest in can accelerate growth. And as you correctly pointed out that those businesses grew 7% despite the rest of the businesses not growing as much. We continue to see opportunities in those areas. And to recap some of them, whether you pick biopharma, you pick auto electrification, our home improvement business, we believe that, that market is there. So therefore, we're going to continue to invest in these. The way I look at it, Markus, is I look at portfolio in total. So our first step is do we have a market, number one. We test that. Number two is, do we have a right to win in that market? Which is, does it take advantage of our global reach? Does it take advantage of brand? Can we benefit from the synergies that we get with the R&D that we do, et cetera? So that is do we have a right to win? And then the third one is, are we bidding on it? So we look at each of these product lines, sub-businesses at -- and look at all of these when we decide investment. We pick on some of the vectors, so we make sure that we protect it. We focus on it. But at the same time, every sub-piece of the portfolio is also looking at, are we driving growth? Are we driving margin? Are we driving cash? And so I would say it's a holistic view of how we manage our investment. And it's not just that if these get funded, everyone else does get refund.

Okay. Okay. So it's -- is there a particular metric or something like ROIC on R&D, or what have you, that you track internally? Or how do you do that?

Yes. So I would say, listen, there are multiple metrics, but I think the first metric is whether your R&D is working as growth. And as long as the growth is there, I think that's our first measure of success. We also look at NPVI, which is an NPI -- or new product introduction vitality. The way we calculate it is revenue from new products over the last 5 years. That has been in the mid-20s, so 20% to 25%. So think about it, every 4 to 5 years, your portfolio is pretty much refreshed. That's another metric. We also look at other metrics like ROIC. Are you going to get the investment? What's the payback? But my first metric always is, what's the growth? Are you getting the growth? Because if you're not getting the growth, then you got a question whether your R&D is focused in the right places or not. We also have a piece of R&D that's very focused on making sure we're meeting all the regulatory needs, making sure we're doing line extensions. And through line extensions, you pretty much get the prices that you've seen that we get as well as the premium margins. So all of that is factored into as we think about where we invest and how much.

Very helpful. And then maybe specifically -- because you mentioned that this auto electrification opportunity, $300 million at the moment. I mean if I look at an EV, right, you have the challenge of lightweighting. So that should touch a lot of parts that 3M is active in. You seem to look at newer cars, EVs or ICEs, that doesn't really matter, there's a lot more electronics than sort of like screen footprint in a car. So can you help me, how much content is there sort of like in a traditional car versus an EV? And then no matter if it's an EV or an ICE car really in these newer models with more screen footprint, what's that a dollar per car basis really for you guys?

Yes. So auto has been a great segment for 3M. We've had an 80-plus year of -- 80-plus years of partnership with the auto industry to provide solutions. Our material science capabilities are right in the middle of what auto OEM are looking for. And we are actively engaged with most OEMs on not just the electrification side but the internal combustion engines. We are also winning across, I would say, all platforms, whether -- you've already mentioned some of them, which is thermal management, lightweighting, sensors, displays, our adhesives -- our structural adhesives business, all of those are helping both the electrified cars as well as internal combustion engines. Especially in auto electrification, I would say, back to thermal management, is an area of our expertise. We are winning a lot more in there, we expect, into a few cars. We've got lightweighting that you talked about and then sensors in the space. So we continue to see this is a segment that we want to keep investing in it and a segment that we believe is strong. End-market growth over the next few years, it will play out uneven, depending on different parts of the world. But overall, I think the partnerships we have with the OEMs has so far been very successful. We've had some good spec-ins into these cars as they are designing these new cars. I would say, on an average right now, to answer your specific question, $15 to $20 is approximately the amount of content on a car. We believe that, that continues to grow both on internal combustion engines and auto electrifications as we continue to innovate on thermal management, lightweighting, acoustics, display material as well as our sensor technology.

Do you venture, I guess, but it's probably hard, but...

It's quite hard depending on which model and et cetera. So -- and then it also will depend on which car gets produced when. So for us, it's making sure that we're getting penetrate -- we're making penetration into being spec-ed in with the OEMs.

And I think -- I mean you've seen that in the first quarter, right? We can outgrow auto builds already. So that's probably something for us to kind of track if that continues. And over time, maybe that's a good indicator for us.

Yes. Auto builds -- auto was up 21%. So a great start to 2021. The overall build rate was up 15%. Historically, 3M has always been for -- over time, been able to beat auto builds. Our assumption and our plans right now that auto build continues.

Right. Okay. Got it. Then maybe bubbling up to kind of capital allocation questions. You've delevered the balance sheet a lot since you joined, right? And obviously, the big elephant in the room is these various litigations, be it PFAS, [indiscernible], et cetera. At what point do you think we'll get to a point where you can ring-fence this, right? Is that playing into your considerations on capital allocations? And how do you think about ring-fencing?

Yes. So I'll start with capital allocation, and I'll give you a quick update on your second piece, on ring-fencing. So capital allocation are 4 priorities. First priority is always invest organically. I think we get the best return. Second priority, dividend has been an important piece for our shareholders. We have increased dividend 63 years in a row. Third is M&A. We are looking for M&A in areas that we believe can add value and can add value to 3M and we can add value to the target to make sure that it's the best return for shareholders. I don't see us doing deal the size of Acelity in the near future. Part of it is we want -- Mike and I want to make sure we can absorb that business, grow the business, deliver on the synergy case that existed with Acelity. And then the last piece is share buyback. To your point, the team has done a tremendous job of driving cash. We've got the leverage down from 2.2 to 1.4 at the end of Q1. Our goal is to continue to have strong free cash flow generation. There's opportunities -- continued opportunities in working capital that we're going to go after. And we want to make sure that shareholders know we want to have a strong balance sheet. So at this leverage of 1.4, it gives me a lot of strategic optionality to move either direction, depending on what the economy plays out and depending on any events that play out. As regards litigation, ring-fencing it, as you know that we are managing PFAS based on 3 principles, which is sound science, corporate responsibility and transparency. So as we know, we will make sure that everyone is informed. I would encourage people to also go on to the website and see all the documents filed with the SEC that give an update on all the cases. There is not much to give you an update on, Markus, from since our earnings call earlier in the year. The next PFAS MDL is scheduled for the fall of 2021. We'll see how that plays itself out. Our belief is these cases will play out over a period of time. We continue to partner with the EPA on making sure that we are solving some of the issues that we -- our commitments on our factories and making sure our factories are compliant. We continue to partner closely with the EPA. We're making progress on that. At the same time, we believe that regulation that's based on sound science, on federal standard, will be helpful because it will shut down a lot of patchwork state standards and bring more clarity. But that's where we are on PFAS and ring-fencing it, but we think it'll take a few years. We'll see how these cases play out. From an estimable and probable, we always work with our advisers and our auditors to make sure that as we know more, we are -- and it's estimable and probable, we'll take the right reserves, and we'll keep people informed.

Got it. Okay. So the signpost is really the MDL probably in the second half of the year at some point. Okay.

Yes.

Okay. Great. And on the earplugs, I guess it's similar with the current MDL ongoing. I think there were 2 cases already, and the third one is starting. It's probably similar.

Yes. Yes. So we've got 3 cases in total, 2 are done. The second one was announced in our favor. The first one, we are disheartened and disagree with the verdict. We believe that there wasn't enough burden of proof shown that being responsible. Our plan is to appeal that litigation -- or that judgment, and we are continuing to work it. The third case is on right now. So we'll see what happens there. But as I mentioned in my earnings call, we are continuing to spend the right amount of money or we'll spend higher money on legal fees to defend our position as required.

Got it. Okay. And I know we only have a minute left here. So we'll have former Secretary Chao later in our keynote and talk about U.S. infrastructure spending. So I was wondering, obviously, again, the breadth of 3M and who knows what the ultimate number will be, but could this be a material benefit in some of your businesses here?

Listen, I think it's premature to comment on what the total impact is going to be. Certainly, there are areas of 3M that would benefit. In a simple direct method, our investment in road infrastructure and good modernization is definitely going to help our transportation safety business. It's going to help our electrical business. So with that said, in general, we are supporting or investing in U.S. infrastructure. Anything that drives the competitiveness of the country, anything that spurs jobs and infrastructure build should do that. And anything that strengthens the domestic supply chain is always a big positive for 3M and positive for the world. So we support it, and we look forward to seeing what the final outcomes.

Okay. Great. I actually got one investor question, one additional one. Can I just squeeze that in? You mentioned labor costs earlier, sort of like the question is, do you anticipate the severe labor cost increase from your suppliers when you provided the cost -- price/cost outlook? Sort of what's kind of in the outlook?

Yes. So listen, it's a great question, right? We take multiple factors into account when we gave the $0.30 to $0.50 inflation guidance. We took into account prices of raw. We took into account what the labor shortage. We took on our logistics. Some of them are playing out positive. Some of them are playing worse. But overall, when we put it all together, sitting as of right now, we still believe the range is pretty good. However, this is so dynamic. It's changing every day. And as we come to know more, we'll definitely keep you all posted. But more importantly, we are also making sure that we are working hard to minimize the pain as much as we can. Whether it is driving yield in our own factories, raising prices, making sure that we are pushing back on suppliers where we can, finding dual sources that help us get a reduced cost are all things that we are also working to and committed to keep working on to reduce the pain of inflation.

Excellent. Very clear. With that, Monish, Bruce, thank you so much for joining us. And yes, we look forward to hopefully seeing you soon. And all the best.

Thanks for having us. Stay safe, Markus. Hope to see you in person.

Take care, Markus.

Yes. Bye.

Bye-bye.