3M Company (MMM) Earnings Call Transcript & Summary

Good morning. Thank you for joining us at Bernstein Strategic Decisions Conference. We are very lucky today to be joined by Mike Roman, CEO and Chairman of 3M, and looking forward to a conversation on the business. I'll keep the introduction short and let -- move to your opening remarks, and we can jump into Q&A.

Well, thank you, Brendan. It's great to be here, and yes, a few opening remarks. First of all, we continue to build a stronger 3M and focus on improving our performance. And if you look at 2021, it's a good reflection on this. We had strong growth across our businesses, 9% organically, outgrowing the economies that we're part of. Delivered strong margins, EPS and cash flow. We retired and improved our net debt by about $1 billion. We returned $5.6 billion to our shareholders. So a strong year. And as we come into 2022, we continue to drive progress, good growth in Q1. Again, improving margins sequentially, strong EPS and cash flow. And we marked our 64th consecutive year of increasing our dividends. And all of this, while we're facing into the challenges of the world, the supply chain challenges, continuing inflation, the dynamics from COVID and the impact there and the war in Ukraine. So I think a testament to 3Mers is, they continue to focus, we continue to focus on our customers as we work through those challenges. And that's really helping us drive that improvement, that strengthening of the company. I thought I'd give you a little walk around the macro. So the -- as you look at the macro and you've seen kind of the view for GDP and industrial production index, it started the year about 4%. It's now around 3%. You continue to see disruptions in the supply chain continuing for the foreseeable future. Beginning of the year, we were hopeful we'd start to see improvements in the second half. Right now, we see the challenges continuing. We see inflation continuing. Though, I would say, we are confident that we can manage that with price, our sourcing strategies, and driving improvements in yield and productivity as we work through the supply chain disruptions. If I look at some challenges out there, I'll talk more about this in a minute, but the impact from China and the lockdowns, the COVID impact on China having some impact on the second quarter outlook for that region of the world. We are seeing the ongoing impact from semiconductor supply chain challenges. We're seeing it in our end markets, automotive and electronics, see it in the build rate for automotive. Right now, I think the outlook for automotive build rates is about 4% year-over-year improvement. We started the year at 9%. So you see the impact there. We talked about in our outlook meeting back in February that we expect a headwind from our disposable respirator sales coming off the peak year, the peak actually in 2021 coming through COVID. And we talked about up $700 million of headwinds as we looked at the total year. First quarter was favorable to that. We had some positive impacts in the revenue for disposable respirators in the response to Omicron variant. At second quarter, we expect it to be in line with what we had laid out at the beginning of the year, probably a $100 million to $200 million kind of headwind for the quarter. We are seeing some areas that we're getting some improvement. We're seeing our oral care and our medical elective procedures getting better in the quarter, getting back closer to 2019 pre-pandemic levels. We expected that to continue to improve throughout the year, getting back to kind of pre-pandemic levels by the end of the year, but we're seeing some improvements near term. And we continue to see strong consumer demand. We're watching retail spending closely, like everybody else, but we're seeing still, I would say, continued demand in our consumer end markets. So when you look through the challenges and managing through those challenges and you look at some of the macro and how we're performing, we still expect to deliver organic growth for the year in the range of 2% to 5%. So we'll continue to see an opportunity to manage through much of that. Maybe a few words about Q2. And I would say upfront, we don't guide quarterly, but I wanted to give you a view of what we're seeing in the quarter. So back to the challenge from China. We talked about a deceleration at the end of Q1 and a slow start to Q2. We are seeing about 3 percentage points of headwind in the quarter from China, about $300 million impact on revenue. We're also seeing increased volatility around FX, and that's having an impact, maybe 3% to 4% headwinds from FX versus 2% in our plan. So if you take those 2 together, as we sit here at this point in the quarter, we're seeing about a $0.30 EPS headwind in Q2. And our teams are continuing to stay focused on delivering for customers, driving cost and productivity performance, continuing to work through the quarter. June is an important month, but that's where we're sitting as we come through the quarter. Again, back to -- we still -- when we look through it, we see outlook for 2% to 5% organic growth through the year. And we're off to a good start with first quarter. We're executing well, and I'm confident that we'll continue to improve as we go through the year. So Brendan, with that, I'll turn it back to you.

Outstanding. Well, thank you for the overview. I very much look forward to hearing more. So I mean, at SDC, we always try to take the long view. It's been a year since we last sat down virtually, now in person. That's much better this way. I guess, the question here is, as you look back over what has been an undoubtedly a tumultuous year, where have you been the most surprised across the business, across your customers, the upside or the downside? And where have you seen the greatest learnings?

Well, I talked about what we're doing to build a stronger 3M. And I just reflect thinking about upside, downside, think back on some of the changes that we've driven in the company. We realigned our company around our businesses, our go-to-market models globally, our Safety and Industrial B2B industrial model, our Transportation and Electronics OEM direct model, our Health Care business going into health care markets around the world. And in our Retail, our consumer packaged goods, Consumer Business Group, that realignment, along with our operations, really put us in a strong foundation for the future. And I would say, one of the upsides we've seen is the benefit of that and managing through the supply chain challenges. It's a -- we're implementing those changes as we came into COVID, and we have benefited as we've come into the supply chain channel. I think, certainly, I would say, not so much surprised, but I would say, gratified that we were getting that kind of benefit. The surprise is still the ongoing challenges from COVID and the impact it's having, the supply chain disruptions. We're in the middle of it. We've been managing it. So it's kind of normal right now. But it is -- it was certainly was a surprise as we came out, as demand came back coming through the pandemic, and we saw that impact on supply chains and delivering for customers and on the end market demand. So I think that's the biggest surprise. We continue to manage that. We'll -- we see opportunities in the middle of that. We see markets where there are strong growth drivers, where we can have a differentiated opportunity. And that's really what drives our focus on organic growth in the long run is where can we -- attractive markets where we have the right to win, where we can leverage our technologies, our manufacturing capabilities to deliver differentiated value for our customers and, ultimately, returns for our shareholders. And that -- I think that the operational model and the changes we've made have positioned us well with those 4 leading businesses to be able to execute against that. So challenges, continue to be surprised by the persistence of those challenges, but I think -- I feel like we're well positioned to manage through it.

Excellent. And I guess, when you think about the management team today, what are the top issues that you're really focused on? And as investors, what should we be focused on to sort of follow your progress as you navigate this, undoubtedly, a very challenging environment?

Well, the current situation really focuses a leadership team, managing to execute for your customers. So you take the kinds of things that our leadership is focused on: delivering for customers. It starts with operations and driving the greatest efficiency, productivity in our operations. It's also around taking extraordinary measures to get product to your customers, managing through some of the logistics challenges. I would say, even navigating some of the labor challenges. We're -- more than half of our employees are in factories around the world, and so we've been working through that. We saw at the beginning of the year absenteeism because of Omicron, in particular in the U.S. and Europe. Now we're in a much better place relative to absenteeism. Our factories are in a good place. We've been able to hire talent into it. So we focus a lot on all the dimensions of successfully managing the current environment. At the same time, we are -- we see an opportunity to invest for the future: growth, productivity, sustainability. And our leadership team plays a big role in kind of getting that balance right, executing in the near term and driving investment in the opportunities that we see the growth. So our team is focused on both sides of that. And then one of the dynamics that we're facing in 2022 is the changing workplace. So we are -- we, like many companies, our factories -- everyone continue to work in the factories. Nobody went to a virtual model. We worked all the way through the pandemic, nearly 100% of our operations running at any given time. The other half of our employee base went to a virtual workplace and -- around the world. And we're now returning and have returned most places around the world to what we call Work Your Way, which is a new work model, where we leverage virtual, but we are coming back together in person as well and leveraging individual teams and roles to drive how that hybrid work plays out. So our teams are, I think, very much focused on our people from that standpoint as we work through then the return to the workplace and the dynamics related to that.

Excellent. Turning to China. So -- and you mentioned that it was $300 million on the quarter. Two questions there. So one, do you -- what's your view on reopening in terms of time lines? Most folks were thinking May a couple of months ago. I'm curious to hear what you're thinking now. And then by extension, do you have a view for the impact as it may play out for the full year?

Yes. It's all top-of-mind questions. Maybe I'll set it up this way. I'll talk a little bit about who we are in China, too. So we -- like every region in the world, we manufacture a majority of what we sell in China, in factories in China. We don't export much of anything out of China, a small amount intercompany between our -- mostly Asia subsidiaries. We do import some goods with the U.S. being the largest source into China. But most of what we sell in China -- and we sell to customers about a 50-50 split. About half of our customers in China are domestic consumption, economy-facing kinds of businesses. The other half are export. Think of it as electronics companies is a good example. And so -- but we do have a large growing health care business in China. We have a broad-based industrial business. So that's our China market. We've got a maybe not unique, but a little bit unusual kind of model in that respect. And so we were impacted by the COVID shutdowns in China. It impacted our manufacturing operations in the country. And now -- and we -- that's what was really part of that headwinds that we're seeing in Q2 was the impact on our ability to produce and, importantly, get product. Even as we were able to use some of the closed-loop models that were in place to start production and ramp up production, we had to manage through some of the logistics challenges with the lockdown. So big part of the answer for us is how fast does all of that come back online. We're seeing good signs right now. You're seeing Shanghai reopen. We have a significant footprint in and around Shanghai. And it's how fast do we recover near term and through the year will probably depend on a couple of factors. One is how fast do we get our operations back online. I think we have a good control over that. How fast does logistics come back online? Trucking, air cargo, we've all seen the port congestion challenges that everyone is facing now. So I think those are -- that's a big part of the answer. We're expecting some recovery in June. So that's why I say June is an important month. We'll see how much, how fast. It's early, and we'll get a better view in the coming days. The rest of the year will really depend on, more broadly, the demand and any further impact from COVID. So what happens to the macro, what happens from COVID as we go through the year. But I think, if we continue to see COVID lockdowns not having a big impact, we would expect to be able to continue that recovery as we go past June.

Excellent. I have a good audience question here, I mean, is there a flip side to that in the respirator business? Do you see tailwinds there with COVID mitigation measures?

Well, I mentioned we saw some, I would say, favorable. We still saw a decline year-over-year, so that's why we use the word favorable. It was less of a decline than we thought we would see in Q1. That was, I would say, Omicron. We didn't see a huge increase. You didn't -- it was a shorter impact, and we do see respiratory sales when COVID comes back. Right now, I would say, the range that I gave you, $100 million to $200 million, which is, I think, that covers some upside from potential COVID impact, but it's still in the range of what we would expect it coming into the year. I think the -- just -- unless there is some more severe impact from COVID in terms of hospitalization, in addition to the variant [ help ] rates, we wouldn't -- we would still expect to see that decline year-over-year. Because we were at peak in -- the first quarter of 2021 was our peak sales of respirators.

That makes sense. Great. Let's turn to supply chain real briefly. So where are you seeing the biggest constraints or the biggest improvements across your businesses? And I guess, even more interesting in my mind would be, beyond your own sourcing, are you running into challenges as your customers downstream have their own supply chain challenges, if you're an input into their processes?

Well, I would say, first of all, the supply chain disruption and challenges are broad-based. Most companies are seeing them. So our customers are seeing them. Other suppliers are seeing them. It's hard to call a lot of strong trends right now. We're certainly seeing some areas get a little better. I would say, as we went through the second half of last year, an important part of the supply chain disruption for us were raw materials that were coming out of South Texas, for example, and they were impacted by Storm Uri and Hurricane Ida. We're seeing that getting better. I would say, we still are seeing disruptions in supply. And I think some of that is because it's broader than one factor. It's labor. It's logistics. It's raw material. It's the snapback in demand that put the pressure on the supply chain in the first place. And so you're seeing all that still playing out. So I use the phrase we see it persisting for the foreseeable future, mainly to differentiate from the beginning of the year, where I thought first half would be challenging. We expected supply chain challenges to continue through the first half. We thought we might start to see things get better as we got into the second half, but it really does look like it's persisting. And we see it in our customers' value chains. We see it in other suppliers, too.

So I mean, if you look towards this, and it almost feels like a new normal, at least for the foreseeable future, when you look at the business and how you're running it today, are there things that you would do differently, assuming this is kind of a status quo? Or have you made the big changes you're going to make to manage on an ongoing basis?

Well, I think the inflection points are always a challenge for companies. And I would say, inflation coming on last year, we called it earlier. Our CFO was out in February a year ago saying we're seeing inflation and it looks like it's going to be persistent, and we saw it showing up more broad-based across our portfolio. We started to take actions. If we look back on -- and I wish we would have gone sooner on actions we're taking, whether it's price or sourcing. Now we've made good progress. We -- price in Q1, we offset inflation with price, and we're -- I think we're executing well. We've built up the capabilities to manage price strategy in an inflationary time in our businesses. So I think our businesses broadly have developed that capability. We continue to make adjustments in our production operations to -- adjust to the supply chain disruptions. We are broadening out our actions in logistics. We talked a bit about those even at the Q1 earnings call. We -- we're using more rail than before. We're using more chartered aircraft than before. That model that I talked about in China, where we produce a majority of what we sell in every region of the world in that region, maybe one notable exception is the U.S., we actually are an exporter out of the U.S. So we produce over 50% of our sales value production globally in the U.S., and so we export about $5 billion out of the U.S. So one of the logistics challenges that we face is getting product from the U.S. to customers around the world. And so that's what we're using more of the charter aircraft, for example. So there -- I would say, there's -- I wouldn't call it a new normal. It's certainly something that we have to execute now as we work through. I don't think -- when I say persists for the foreseeable future, I don't think it's forever. I think it's -- we just have more work to do to get through it.

Okay. Excellent. And then, I guess, turning to inflation. I mean looking over the past couple of weeks or even the last quarter or 2, are there areas where you've seen increased sort of pressure sort of across your caustic? You guys have a pretty significant exposure to raws within your COGS at least for the multi-use universe.

Yes, maybe a couple of points to make there. First of all, we are seeing inflation higher than we expected at the beginning of the year. We've already -- at the high end of our range that we laid out at the beginning of the year, so we're seeing inflation continuing. Again, we're able to offset it with price and sourcing actions and productivity and yield, and that's how we're managing it. The other aspect, I would say, we've seen it broaden out. We're seeing it in more of our supply. We saw raw material inflation. We saw inflation in capital equipment. We were -- as we went through last year, we are, I would say, seeing broader inflation. Labor costs, logistics, I think, services, you're seeing inflation more broad-based, and that's part of taking us higher than our original range. And so we -- even in the second quarter, I think we're $25 million to $50 million above what we had thought we would be facing. Again, it's driving actions on our part, but it is continuing to persist as well.

Have you seen it diminish anywhere?

I haven't. There's some price fluctuations in some raw materials. We have a pretty broad basket of raw materials that we buy. So we do see some dynamics there. You're seeing there -- we were talking about it earlier this morning, even in normal times, there's maybe some simpler rules of thumb. If the price of oil goes up by so much, then raw materials are going to go up by so much. A lot of that is more complicated now. There's capacity and constraints in different parts of the supply chain, and that dynamic is playing out a little differently aside. It's hard to see that there's really strong trends. I probably made the mistake at the Q1 earnings call. I said we were starting to see the rate of inflation, the rate decrease as we went through Q4. And that can be an indication that we're getting maybe somewhere towards a peak, and that wasn't true. We're obviously seeing higher than our estimate for this year. So I think you have to be careful about calling a couple of data points early, but we do see some fluctuations in some raw material.

That's great color, thank you. On the price side, I mean, you guys have had a great track record over the last couple of quarters, just building price through the business. You hit 3%, I believe, it was a comment in Q1. Do you feel like that's a sustainable rate? And I'm sure there's a lot of variability because this is a very broad portfolio. Is that a sustainable rate for price take for 3M? And as you push the boundaries there, I mean, do you see it impacting demand across any of your end markets?

Yes, a couple of things to unpack there. First of all, I would set it up this way. Our 4 businesses have very different pricing environments that they face. So we have a Health Care business that has largely a large number of contracts. So taking price in the face of those contracts is a longer cycle dynamic. In our OEM direct kind of business, Transportation and Electronics, automotive, those tend to be long-term agreements. They are typically -- get spec-ed in and priced down over time. And so we're managing the inflationary impacts on that priced down model, hopefully, slowing some of the price down and thinking about that as we get new specifications. I think our portfolio, our revenue, a majority of our revenue is either specified by our customers, our end use customers, or regulated. And so that dynamic is an important part of our pricing. Our B2B Industrial model that we work with distribution and we manage price changes, we've been executing broader price increases across that and working with the channel partners to do that. In Retail, also working with the retail channel partners to execute improving price there. So each of them has a little different dynamic. We've built up strong capabilities in the face of the inflation to execute price well. Regarding the elasticity question, there is a significant portion of our price. I think, historically, our innovation drives our price value in the marketplace. And we -- as we drive innovation, we take price. We've had a consistent track record of being able to take price over time. This has also got the inflationary aspect of it. So we're taking price from inflation, and that will be elastic with inflation. If inflation subsides and deflation comes back into certain markets, you'll see price adjust to that. So I think that -- again, it will depend on what happens with inflation over time. I think we are confident at this point that we can continue to use price as one of the ways to offset inflation. So we expect to be able to continue to take price. If inflation persists, we'll be able to continue to leverage price as part of that. And with kind of those dynamics across our portfolio in terms of the time line to execute some of those prices changes. But we're in a -- as you said, we're in a good position now. We got through the kind of the work to execute those pricing agreements and now we're continuing to follow through.

Excellent. So it sounds like you've got a bit more flex on the S&I and Consumer side of the business, and things are a little stickier in Health Care and T&E?

Yes, I think the contracts are another dynamic you've got to work through. It's just -- I would say, they aren't immune from inflation over time, but they will -- the contracts will dictate some of the timing when you take price.

Okay. And I'd love to pull on that thread timing because it's a complex portfolio. And it feels like you took about 3 quarters for the price playbook to really start firing on all cylinders this last time around. Is that a reasonable approximation for a lag? Or do you think you'd be able to go faster if things picked up again or if it slowed down?

Yes. There's probably -- the 3 quarters means we got the neutral kind of Q4, right?

Exactly.

And we were a little bit behind the curve in Q3 and behind the curve of -- in Q2. Q2, I would say, was certainly reflective of the time it takes to implement price changes in that broader portfolio, even some of Q3. As we got to Q4, the price had been in the market since. The prices that -- the changes that we're making have been executed well. I think there is another dynamic, which is how much is inflation going to be and how much price do you take? And if you look at us and other companies, we've taken multiple price increases. So I think we've probably been better at now understanding what we're really facing in inflation. And therefore, we are not only executing price more directly, but we're taking sufficient price to help offset that inflation. And early on, we -- even the price changes we were taking, we weren't taking enough soon enough. And so now we're doing both. We're taking in a timely fashion, and we're executing against a better view of what we see in inflation.

Okay. Excellent. And I guess, taking a longer view, I mean, if I look at the P&L rollback maybe 5 years, both on a gross margin level and an operating profit, where you're down about 300 bps, give or take, what would need to happen for 3M to recover those historical sort of watermarks?

Yes. There's a -- I would say, first of all, volume is the driver of margin improvement. We get strong leverage from volume. And so the focus on growing above macro is really an important part of that. We're confident we can leverage that to improving margins, gross margins, operating margins as we go. I would say, the COVID dynamic and some of the, I would say, challenges in that have been part of the operating margin trend over the last few years. We also -- in Q1, we came out with a change in our adjusted EPS to reflect what our legal costs are in some of our litigation matters. And really, to help -- and this came out of discussions with investors and analysts that would like to get better transparency on the underlying performance of the business. And the underlying performance of the business is when you exclude the cost of the legal matters that we were taking as part of our operating costs, you get a better view that there are improvements as we get volume. We're seeing some improvements in operating margins and EPS. So I think that's -- those are 2 factors. One is continue to drive the growth, and we are confident we'll drive the leverage with the focus we have on operational execution. And the other is continue to manage the legal costs and manage the litigation, but give visibility to the underlying business performance that we are seeing that's improving.

Okay. Excellent. And then one other question here on channel. So across the multi-use world, and we see a lot of investor questions around double ordering or pull-in, given sort of the broader environment of scarcity. As you look across your businesses, how do you think about the condition of the channel or inventories at your customers? Do you see build there?

Well, it is a dynamic we watch closely. Even in normal times, we watch the channel inventory, make sure we're understanding the end demand, the sell-out, as we'll talk about. And Health Care has a component of this. Our Retail business has, as our B2B Industrial business. And even in our OEM direct models, you're looking at the value chain of the customers, trying to understand where the inventory is relative to the end customer demand. And so we watch that closely. It's really an important concept. In these times, there are some challenges. Are you -- do you see -- and we work closely with our channel partners to make sure we have good visibility on real order demand. And so that's part of what -- and we watch sellout very closely. And so I think we have a pretty good view of that. There are areas that have had, I would say, some elevated inventory. I talked about disposable respirators as we came off the peak. There was elevated inventory in the channel, broadly from masks and respirators. I think there's other segments that we watch closely at times to see. As you look at both sellout in Retail and Industrial channels where you see inventory weeks going up or down, we're watching those flows. So there's another dynamic that I would add to it, which is backlogs. Because you have elevated backlogs across the channels right now because of the disruptions in the supply chain and the work to catch up on the constraints, the constraints that we're seeing. So we're looking at both of those. I don't have -- I think they're pretty well in balance with what we're seeing in the end markets. If they're elevated, it's probably more a reflection on what happens in the end market demand. I think if they're elevated, it will be because end market demand softens, but otherwise, I think they're in pretty good balance. So we did call out one other example, and I don't see it right now. But last year, in the third quarter, we saw Automotive -- the builds not reflecting the demand because they were semi-finished goods sitting there waiting for semiconductors, for example. And so we saw a strong Q3, and we recognize that, that would have an impact on Q4 because we saw it as inventory sitting there waiting for semiconductor. So there are times where we'll see it, and we'll make sure we call it all it is.

Any comment on Transportation and Electronics today? I mean that is the segment where I would expect to see some improvement more than anything. You're effectively selling to other folks' COGS most of the time, yes?

Yes. I think the adjustment in build rates is a reflection on still ongoing semiconductor challenges in automotive. That's probably the best visibility I can give you of that reduction in the outlook for build rates. I don't think it reflects as much the end market demand as it does the supply chain challenges.

Okay. Excellent. So I'd love to turn the portfolio a little bit, so longer view here. I mean 3M is distinguished by an innovation-led business model, and you invest heavily in order to sustain that flywheel, both the R&D and CapEx. When you look at the pipeline of opportunities here, how do you think about managing those returns? And when you think about where you could be investing, are you constrained by an innovation runway across portfolio of products? Or you're constrained by the financials?

Yes. It's fundamental to how we create value as a company. I think of it, there's 2 big things that we're always focused on in the company to create value for our customers and grow -- drive revenue growth for the company, it's our innovation model, it's investing in innovation close to customers. We focus on where we have differentiated value, attractive markets. And really, that comes over to our portfolio strategy. Our portfolio strategy: being an active portfolio manager, continuously reviewing our portfolio and really thinking about 3 big strategies. So first is, where do we invest organically? What are the most attractive markets where we have a strong right to win, where we can leverage the strengths of 3M? Our technologies, our manufacturing capabilities, our global reach. Where can we create differentiated value? And we want to overweight those. We talk about our R&D investment, for example, at an enterprise level, 5% to 6%, first priority in capital allocation. CapEx, also organically thinking about where do we invest. We use that lens. Where -- what are the most attractive markets that can leverage the strengths of 3M? And that -- we'll overweight there, right? We don't invest 5% to 6% R&D across every part of our portfolio. We have more attractive spaces. Electronics is an attractive space. We've identified a number of strong growth trends that we're facing into right now: so Automotive, Electronics, Health Care, our Safety portfolio, broadly. And we've got -- we're working through the COVID dynamics. But we think that's -- those are spaces that have long-term trends. Home improvement has been a strong trend. And those are significant commercial opportunities that can leverage the strengths of 3M, the technologies and capabilities. And we can create differentiated value and drive outsized growth. So that's the organic side. The other aspects of portfolio are inorganic. So M&A. And we think about it the same way. What are attractive markets that can leverage the strengths of 3M when it's integrated into the company? And we see opportunities to create value through that. We can get -- bring in, integrate in like Acelity, an acquisition, and create greater than the sum of the parts by leveraging those synergies, those strengths of 3M. And then we look broadly at our portfolio over time. Are we in the right portfolio? And what's going on in our markets? If markets can change over time, and you decide it's less attractive. Maybe it's changing in ways that you can see it's going to be a different value creation model. And you also look at where you leverage your fundamental strengths. And we're looking to really optimize, maximize our value across our portfolio, and that comes in the form of parts of our portfolio where we can't differentiate as much value or we won't get as strong a return. We measure that return across the portfolio as a way to really drive accountability for those organic investments and inorganic investments. But where we don't see this return we'll take action. And we'll divest or we'll change how we manage the business as we go forward. We also look at where are we maybe not the optimal owner and where can we unlock value. And our Food Safety business that we announced, the spin out of that business and the combination with NEOGEN is a good example. There's a unlocking value, a much higher multiple space that, in order to win in that marketplace, you need to do things inorganically. And combining with NEOGEN gives a much stronger platform for that than as an organic strategy or even as an acquisition strategy inside of 3M. So we will take action. We've divested our Drug Delivery business in 2020, and that was part of our -- looking at where did we not leverage our fundamental strengths longer term, and there's a better owner out there. So those are -- it's critical to how we create value from our innovation long term. It's critical to how we drive growth and shift to more attractive markets and higher growth opportunities. And it's -- I would say, innovation helps us drive growth above macro, above the economies we serve. It also helps to choose good markets. If you're in markets that are growing slower than the macro, it gets a lot tougher. So it's an important part of our portfolio, all 3 of those strategies.

Excellent. So I'd like to double-click on 2 of those. So first off, the innovation side, and then second, we'll circle back to M&A. But on innovation, a couple of years ago, we heard about the priority growth platforms. Could you share a bit of an update on how those investments have played out, high points, low points, everything in between?

Yes. It is a focus we put on platforms, just talk about priority growth platforms. So we have 11 platforms that we highlighted several years ago, where we said these are going to be longer-term opportunities to build new growth platforms for the company. Some of them smaller, some of them more significant. Automotive electrification, for example, was one of those priority growth platforms. At the time we announced it, I think it was approaching $200 million in revenue. Now it's over $450 million in revenue, for example. And as a group, they're performing well. Double-digit growth as we went through the last year in those priority growth platforms. Coming through the pandemic, we also saw markets and trends that created a -- in some cases, connected to priority growth platforms, but other cases, commercial platforms that also represented high-impact areas to invest organically. And so we talked about prioritizing investments in those as well. And those are commercial platforms that are already significant. So automotive electrification, I would say, is a good example of that, where we can go into not only electric powertrain vehicles, but more broadly, the electronics that are going into transportation in general that really can leverage our broader capabilities and give us a stronger outsized growth opportunity in that marketplace. Even as build rates don't necessarily continue to drive high growth rates themselves, we can outgrow those build rates. Something we've been doing for a number of years, and we expect to continue to be able to outgrow the build rates because of those opportunities. So there's a -- it's a little bit of a subtle shift. We had priority growth platforms. We still are very focused on those as important platforms for the future. We're also looking at the commercial platforms that have come through the last couple of years, where we see significant opportunity. Home improvement is another good example. Wound care started as a priority growth platform. Now with the acquisition of Acelity, it's a large commercial platform that has broad innovation -- broader innovation opportunity. So if anything, the priority growth platforms in a few areas have broadened out. And then we put a focus on some of these significant commercial trends, where our innovation also plays strong. So I think we're trying to give a better view. And I've been talking about them in my prepared remarks, in particular, at earnings calls about sizable opportunities -- significant sizable opportunities, $0.5 billion kind of franchises, where we also have significant opportunities to leverage our innovation to build out the platforms and drive outsized growth.

Excellent. And then on M&A, on your both divestments and acquisitions, coming off of a -- the [ Food Safety ] with NEOGEN. It's a great home. How are you thinking about further divestments from the portfolio given the down market? And then on the flip side, are you expecting to do more deals in the near future as valuations have come down?

Yes. Both are -- as I said, critical to our portfolio strategy and, importantly, critical to our ability to continue to grow the enterprise and drive revenue growth longer term. Complementary M&A. We have an active pipeline. We have a strong balance sheet. We're well positioned to make acquisitions. The market dynamics and opportunities will kind of dictate the timing of that, but I think it's certainly something we are active around. The other part of the portfolio, as I said, we continuously evaluate our portfolio. We're looking at how to unlock value, how to maximize value, and we'll take action. It's an active process and a continuous process. And you've seen, on an annual basis, we're taking action. Food safety is -- we expect to close that in the third quarter. So that's the next step in front of us that we're focused on.

Excellent. And are folks coming to the table on deals yet? Or just still a lot of reticence around selling with a down market?

Well, I think you do face into some of those dynamics, right? I see opportunity. We had a similar discussion on the other side of it a year ago. The market was frothy, right? So how do you look at the value that you're getting at...

Pick your poison.

Yes. So it's -- yes, it's probably easier and more nominal times to execute more broadly. You see it in the statistics, I suppose. But I would say, ours comes back to -- our focus is on the strategy drives. Our action drives our pipeline and then executing it. It has some of those dynamics in it, but that's -- we first are focused on where can we create that additional value, that increased value.

Excellent. Great. I'd like to turn briefly to legal liabilities. So it's quite topical for you guys. So I mean, between the shutdown of your Belgian plant and some high-profile awards on the military side of the business and, of course, PFAS, liabilities are -- it's the headline item. I guess, 2 questions for you here. One, can you just give us an update on the current status for litigation across the various fronts? And then two, specifically around the adjustments, more transparency is, of course, welcome. But the fact that you're guiding for the full year raises the question, should we be expecting an additional guide for '23? Is this a run rate expense? Or is it more of a one and done?

Yes. So I'll take both of them. And so -- just on litigation matters, i.e., the 2 that you highlighted are PFAS matters and our Combat Arms, Multidistrict Litigation. So where are we in those 2? Take PFAS, it's a broader, more complicated landscape with litigation than a Combat Arms, which is an MDL. We have an MDL on PFAS, but there are other litigation matters that are part of PFAS as well. There are a couple of trials this year in PFAS, one in August, one in October, related to some of the non-MDL matters. So there are some cases that -- where we expect to come into trial. The MDL, which is the reminder, it's the Aqueous Film Forming Foam. There's more companies involved in this MDL. This -- the first trial -- first quarter actions -- trial actions will be early next year. That's the indication we have at this point. The uncertainty around all this is something that we continue to try to help our investors. And I would say, our employees and our customers, everyone is interested in how we're managing it. So we'll continue to keep you updated, as appropriate, as we see the matters unfolding and as we work through the processes related to this, whether it's the MDL or other court matters, or our Belgian operations, which is not a litigation matter, but it's related to the PFAS portfolio. Combat Arms, visible publicly. We've been working through the bellwether cases for the MDL. Those are now complete. So there's 16 trials. We won 6, lost 10. There was also 8 cases -- 8 of our picks dismissed by the plaintiff. So a broader view of what's in the -- currently in the active docket. There's another aspect of that. There's a large administrative docket, which we don't have visibility on the claims at this point. There's been some claims that have been dismissed out of the administrative docket for various reasons. And so that's being worked. And then what comes to the active docket will eventually dictate trials going forward. At this point, there are no trials -- additional trials scheduled in the Combat Arms MDL. So we'll continue to work through that process and keep our investors and our broader stakeholders updated as appropriate.

On the PFAS side, are there any key milestones on the regulatory side of things that would sort of help clear the air? I understand civil litigation can still continue, but national settlement, some sort of half.

Well, and now it goes all the way back to the end of 2019, the EPA announced the management action plan, and we came out immediately following it. So we support it, as it will be a science-based approach to the regulatory environment for PFAS in general. And just as a reminder, I mean, there's 2 parts to how you think about PFAS. Part of it is the historical PFOA, PFOS chemistries that we exited 20 years ago. And so we have -- ongoing basis, we're working through remediation activities, taking responsibility for what we're responsible for, executing remediation around that. We're working around the 5 manufacturing sites that we've had historically. And then there's an ongoing PFAS as a broad range of chemistries, not very different properties that are critical to key industries: health care, electronics, automotive. You don't get the semiconductor production without some of those chemistries, and core chemicals being part of it. And so ongoing management operating that, there's a focus on the regulatory side of that. There's a focus on the regulations related to PFOA, PFOS. That's part of the management action plan from EPA. They're considering maximum contamination levels in the environment. They're looking at, is it a hazardous material in their designation? And so there's things that they're looking at. I don't have any insight into where they are in that. That isn't public already. They're working through the process. We see that as -- I think a broader approach of a federal regulatory approach versus state by state is, it would be helpful in being able to manage this longer-term. And there are other regulatory approaches in Europe, for example, where they're looking at how do they regulate PFAS longer term. So we'll -- we continue to monitor those, and we'll update investors as we see progress. That will be public as well, but we'll make sure that we're updating it as well.

Is there any way that the liability could be ring-fenced? Or is it simply too old?

Yes. The uncertainty around the liability is one of the big challenges, and we continue to work to manage it kind of step by step in the process of the MDL, as I mentioned, for Aqueous Film Forming Foam is part of that. Other litigation is part of that. We have, where it's probable and estimable what we are facing, and that's primarily been the -- where we manufactured historically, PFOA, PFOS. We are -- we've taken reserves, and we have been executing, working with the communities that we're part of. It's really important that our employees are valuable. And 3M has always been a valuable member of communities, where we've manufactured in 29 states in the U.S. and important member of the community. And so managing that, we have some of that in our reserves, [ probable and estimate ]. But beyond that, the uncertainty we have to work further through the process to get better visibility on that. And so it's time -- it's going to take some time to get to where we have a clearer view.

Excellent. And I've got a couple of incoming questions from the audience here. Let's touch on them briefly before we wrap. So first off, the stock price for 3M has sort of been in a funk for a couple of years now. In your view, what would it take for you guys to sort of break free and rerate back to where you traded historically?

Yes. I'll tell you how we think about it. First, you take on and manage the challenges that we face as part of the stock price, what will help drive us to stronger returns -- total shareholder return. And so as I said, we continue to focus on driving continuous improvement, stronger 3M, operating better, delivering more consistent performance, growing above the macro, delivering strong margins, margin expansion, cash flow. That's in our control. We execute. So that's -- I think, over time, executing that consistently will help drive the shareholder returns and the stock price as part of that. Also, what we've just been talking about is helping to manage through the litigation matter. So that uncertainty is certainly having a weight on the stock. And so that's -- both of those are focused, one that we have more control over, executing day-to-day and driving our innovation model and managing our portfolio, managing the litigation matters, working through the processes there, working to be proactive where we can and taking actions where we can. I do think about it at a high level, taking responsibility for what we're responsible for, proactively managing the litigation matters to try to drive resolution, certainty around that. And importantly, leveraging our 3M innovation to make a difference: what we're doing in our portfolio, what we're doing in our sustainability. We've made a commitment to not only drive compliance in our factories, but be a leader and, as a manufacturer, in reducing carbon and reducing our water use, improving quality of water. So those are all important parts of the commitment. I think those are important parts of how we drive performance, certainly, also important parts of how we're going to be viewed as we work through this. And all of those will help contribute to, I think, the confidence in shareholders and being able to drive improvements in returns longer term.

Excellent. And then one more for you.

Sure.

When you look at capital allocation, what would you say the top 1 or 2 areas where you see the greatest potential?

Yes. I'm probably very consistent on that. So the #1 priority for us in capital allocation is organic, R&D and CapEx, driving -- as we talked earlier, where we invest that for the returns. It's a very big responsibility. And then dividend has been a high priority for us. 64 years of consecutive increases in our dividend, important to our shareholders, important to us. And then it's M&A. As an acquirer, we can create value from M&A. We will also -- our flexible capital, we'll return to our shareholders as we have -- we've had a dividend and share repurchases in '21. We talked about stepped-up share repurchases in light of our share value and attractive share value in Q1. We're in a period now where we aren't in the market because of the Food Safety spend, but our plan is to continue to return value to our shareholders in those ways as well.

Very good. And I guess, to wrap it up, key messages for investors. What would you like to leave folks?

Well, I would say -- as I said, we're focused on building a stronger 3M. And that a strong start to the year has me confident that we will continue to do that as we go through '22, even as we face into the challenges that are out there. I'm very confident in our team, the strategies we have and our ability to continue to drive improvements in our performance as we go.

Excellent. Well, thank you Mike. It's been a pleasure.

All right. Thank you.