3M Company (MMM) Earnings Call Transcript & Summary

Yes. And this one, I would say the volatility that has created, and I think it got exasperated. So I'll just start with the volatility of disruption in the supply chain. As the pandemic hit, there was a general belief that volumes will come down. So most companies, end markets, everyone thought volume would come down. You had a reshaped recovery starting sometime in Q3. So supply, which had been taken off the system was constantly chasing demand with a V-shape recovery. Once that V-shape recovery happens, you have the next piece, which is the winter storm, Uri that came in, in February that knocked out most chemical manufacturing in the Gulf area of the United States. So that added more pressure. The third piece that added more pressure was the blockage of the Suez Canal, which didn't have a big impact on 3M. But it did have a ripple effect on other suppliers. So when you put all that together, that gave all the volatility. Through this process, but I'll tell you the things that have got validated for 3M are the things that we have learned through. One is our model of in country for country, in region for region manufacturing has got validated, but that's a good model. We are closer to the customer. We have a shorter cycle to the customer. And frankly, it de-risks the platform because you're not relying on one plant or one country for all your production needs. So I would say that's a validation. Things that we have learned through this period is we don't have all the answers. Partnerships matter, being agile matters. So for example, the ramp-up that we have done of our respirator production in the short time frame to get to $2.4 billion capacity, which is a fourfold increase could not have happened with amazing partners that we have had, but it also taught us the power of being agile and saying the world can change fast. And how do you convert. And same way, when volume goes the other direction, how do you make sure you're quicker at taking out the capacity. So that's something we got to work through. The second piece, I would say, is the customer landscape has also changed. When you think about the work that customers are doing, and I would use digital as an example, again, the focus was the transformation model want us to get 3M to have 4 board business models and then create this horizontal type call enterprise operations and digitize the overall. I think that trend has accelerated tremendously. And our digital strategy is based on 4 different pillars. One is digital customer, but customers are saying, "I want to connect with you differently than I've done in the past. You can take e-commerce as an example. One, you could also take inventory management that we are doing with some of our customers because it makes it more efficient for them. Two, is digital product. Think about whether it's our information systems or selling software that allows you to get productivity better because we have seen that the cycle time for all customers is needed to be shorter, and they're all looking for efficiency as they're battling the inflation and all the other cost increases that are coming. Three, is digital operations. And that's one, Laurence, I would say, something that was the premise of doing the transformation simplification, but it's got amplified. Using data and data analytics that allow us to do better inventory management, making sure that we have connected factories. So what I learn in one factory, I can go into another factory. For example, what we have learned through the pandemic for disposable respirators, we are now using on our filtrate production lines because it's allowing us to increase throughput, making sure we have better yield and efficiency. And then the last one, a lot of people talk about is digital enterprise, which is using ERP, using data warehouses that allow you to simplify your business. So for us, that's the other learning is that the power of data, data analytics, making sure that we are providing a digital offering to customers because customers are looking for that I would say, is the other learning. So even though all of this was done by Mike, which was before my time on the pre-pandemic of going to 4 core business models, I think it's played itself out through the pandemic. And then the last piece of the code of business models what we have liked is we have got closer to the customer. We are getting voices that we can now horizontally connect. So if I'm in healthcare, I can see what's going on in China, India, U.S., Europe, and it's easier for me to see trends. Same thing in consumer, same thing in our spec OEM businesses. So you're right on that it's a heart of transformation. But I would tell you there's a lot more we can do in this space. I believe there's more opportunity, I'm a big believer of continuous improvement. And I just see that there's a lot more opportunity to drive growth, margin and cash. Because of the transformation that we've done.

So then that ties into -- there have been interesting back and forth about working capital and what the restock cycle actually looks like. If we get back to normal at some point in 2022, 2023. And there seems to be 3 camps now. There's the companies who are -- see a very strong restock cycle because the customers can't sell what they don't have. There's the ones who have taken the opposite lesson and said, why don't we keep inventory low, so we can charge more and be -- do slower shipments and be more frustrating to the customer, but they will value us for the experience. And then there's a third group who say, well, we're going to have ample inventory to take share, but everyone else is going to run lean, so the restock cycle is going to be muted. Where do you come down on that? Because you have a pretty unique vantage point on the supply chain?

Well, I think we're having the same 3 debates, actually, to be honest with you, on where do you think it's going to land, I don't know what new normal looks like. I don't know, in general, if the cycle has reduced at the distributors, where they're saying, we can just keep a shorter inventory I don't know if the answer is we've got to deploy more cash with working capital at the distributor balance sheets. So that's something that I think is playing itself out. So I think we'll have to see -- until your demand patterns actually start normalizing. I think it's going to be really hard to debate what the cycle is. What we do know of and we are seeing it every day, you're seeing it, too, is on semiconductors. There's a shortage of semiconductor chips. It's impacting auto, it's impacting consumer electronics. I'm sure it will impact a lot of industries. And I think you're seeing volatility in that chain, where, in some cases, you're shutting down supply. In some cases, you're trying to say whatever I have, let me go build. That's the volatility. The second volatility is something we've already talked about as disposable respirators. I think there's enough in the chain right now that you're not seeing a lot more need. And we have called that out that we think we have hit Q1 21 peak. And you're seeing sequential declines. But even then, Laurence, I don't know what it means. With the Delta variant out there, I don't know what it means. We are seeing pockets where the Delta variant is more active, that the demand for disposable respirators is up, but it's less, we are seeing that. So I think time will tell what it will play. We are ready to go either way. We can ramp up or down. In general, these would say customers are being cautious, there are pockets where we are seeing a lot more inventory. There are pockets where people are still saying it's low inventory. But I don't know if that is just because they don't want to hold more or the demand cannot be met. So time will tell, but we are having the same discussions.

And so can we get into the demand side a little bit in terms of what you're seeing is, are you seeing markets where demand is so strong that 3M is surprised by how fast it can implement pricing. And on the other hand, is there significant areas where or consistent areas where you're starting to see customer fatigue? I mean we're hearing about customers getting four, 6, 8 price increases in a year. And so are you seeing actual demand destruction in some areas?

Yes. So as you know, inflation has hit everyone faster and harder than they thought. When we came into the year, we said $0.30 to $0.50 of inflation. We are now at $0.65 to $0.80 of EPS on inflation. Pricing-wise, we -- in the first quarter at 70 basis points of price increase. In the second quarter, it was 10 basis points, partly driven by rebate activity due to volume. But in the third and fourth quarter, we are going with broad-based price increases. We are taking a very coordinated approach to price increases. We take it very seriously, we approach our customers in a very methodical fashion. And that's why you're seeing that it's taking us longer to get some of those price increases because we are working through contracts, we're working through end customers. We are working through making sure we are being methodical in our thinking to approach our channels with price increases. In the third quarter, you're going to see us have still a headwind like we had in the second quarter, but it's going to be less. Right now, it's 50 to 100 basis points of OI percent headwind due to price raw delta. And in the fourth quarter, our current plan is to be neutral to positive between a price raw. So hopefully, that's how the second half plays itself out. On your question specifically on have we seen demand destruction, we haven't yet seen demand destruction on due to pricing. I think -- I don't know if this high level of inflation in general, has slowed down the economy or will slow down the economy or is inflation transitory and it will come back to normal. But time will tell on that. As of right now, we haven't seen demand deceleration because of inflation in the industry.

And then just lastly, then if we take that inflationary environment, your pricing catching up to raws or even getting a little bit ahead next year. You have the sort of pent-up demand from this year because of the supply chain interruptions. And then you have what looks to be, at least in Europe and the U.S., a fairly strong demand environment as the government stimulus. What factors, if any, could lead 3M to have a normal year, next year or even below trend? I mean it seems like you're pretty much -- it's a question of how much above trend you are as opposed to sort of -- you're being below trend? Or do you see countervailing forces that we should be worried about?

Yes. So I think -- I would say, in general, we are bullish about the long-term view of the end markets. We believe that the end markets are strong. So if I just quickly take a spin as long as industrial activity continues, you should see IPI keep growing, but time will tell. I would say healthcare elective procedures, the general view is we should be at 95% pre-pandemic by Q4. We should be at 100%. The discussion that happens in the outer years is there's pent-up electives that didn't get happened. Have they been lost forever? Are you going to see even greater than 100% pre-pandemic? Oral care, Laurence, I think, is already at pre-pandemic levels or close to it. So I'm not sure you're going to see that growth. Auto and auto production, you're seeing tremendous demand in '21. The question is whether '22 goes on. And that's going to have an impact on us as we have decent exposure to auto, but the countervailing to that is auto electrification. The work that we are doing over a long period of time, which is not just a 1 year, but how do you play in that space, it is a growth. I think return to workplace, return to school, I think, will all have its impacts n the future, which is as the pandemic changed how we all come to work. Do we need to have all the return to work? Are people going to travel as much because we do get impacted with outdoor signage. We do get impacted by stationary. And then the last one is consumer spending. Very strong right now. As stimulus money comes to an end, is that consumer spending continuing to go up. You're seeing tablet TVs were very strong in the fourth quarter. They're projected to be down in the second half. Smartphones, I expect to be down in the second half, does that trend continue. So you got the pluses and the minuses all playing itself out. I think it's a little too early to call '22 right now. But our belief is that based on everything we're doing, the investments we're doing, we should be able to get growth at or about macro. And again, macro, you have to define how you define macro, but we believe we can get to grow that or about macro with all the work that we're doing. And we have -- Mike and I and the whole company are pretty bullish with some of the trends that we have seen through the pandemic, whether it's digital, auto electrification, healthcare, personal safety, air quality, all vectors that we believe we can play a big role and continue investing in that area.

Okay. And that's a great point to sort of wrap up. So thank you very, very much for the discussion today. Good to see you both. If everybody has any questions, of course, please feel free to reach out to Bruce or myself. Thank you, everybody.

Thanks for having us, Laurence. Bye.