3M Company (MMM) Earnings Call Transcript & Summary

Hey, everyone. My name is Steve Tusa. I'm the Electrical Equipment and Multi-industry analyst here at JPMorgan. Welcome to day 2 of the JPMorgan Industrials Conference. We're very pleased to kick it off today with 3M and Monish Patolawala, who is the CFO at 3M. Monish has a few opening remarks, then we'll jump right into Q&A.

Great. Thanks for having us, Steve. I just thought I'd get -- I'll just give a few opening remarks to get everybody caught up on generally what's been going on with 3M over the last couple of years. 2022 was a pivotal year for 3M. And when you just think about a couple of things. On the operating side, we continue to manage inflation through price actions. We made sure that we took care of our customers shorten cycle times, and we focused on making sure that we kept their factories running and their shops running versus ours. And then we also made sure that we've made progress on just driving operating rigor. We made -- we reached an agreement with the Flemish government to restart our Zwijndrecht operations in Belgium and at the same time, we exited our Russia facility -- our Russia business. Also, when you think of it on the actions we've taken on the strategic side, we have set up 3M for a lot of success. The goal is to have 2 world-class companies as we announced the spin of our Health Care business which right now is on track. The teams are making tremendous progress on that. As always, all those transactions are subject to regulatory approvals. They are subject to tax opinions, tax letters, final board approval and other customary regulatory items that we have to work through, but the teams are doing a really nice job. But that's also giving us a chance to look at 3M, Mike, in the earnings call, I talked about we're relooking at everything. The split of Health Care of 25% of our revenue allows us to relook at our structure, we look at how we go to market. So there's a lot of positive momentum as regards to that. We also closed the Food Safety transaction in September of last year. It was an RMT with a company called NEOGEN. It was $1 billion of cash that we got. We also retired 16 million shares. We also announced the exit of PFAS manufacturing at the end of last year. We have continued to manage our litigation liabilities. We are supporting Aearo and its bankruptcy filing for the Combat Arms. And at the same time, when it comes to PFAS, we have either defended ourselves in court or had negotiated resolutions as appropriate. So all the work that we have done sets us up to have 2 great companies going forward. But when I come to 2023, 2023, as we have said in the fourth quarter and during earnings is still fluid and uncertain. We saw coming into the fourth quarter, we saw significant destocking at our retailers. We saw consumer electronics being very slow. We saw customer -- consumer discretionary spend also very low. And all of that is continuing to play out in the first quarter of 2023, pretty much what we have predicted. You've still got China working through its challenges in COVID. You've got the uncertainty that remains in Europe, even though they had a warmer winter. So we are cautious. All the trends or at least third-party external data tell us that life should get better in the second half, both IPI, GDP, all of them turned positive, China grow positive. So we are very hopeful that as the second half comes through, you're going to see supply chains also starting to ease. What we are seeing is pretty much what we told you at earnings that we are still seeing material shortages, but not as much as we saw a year ago. We are still seeing inflation, though at a lower level, and we'll continue to work price as a lever to manage inflation as we have done over the last few years. And overall, when you just look at what operating rigor is doing, they're using a lot more data, data analytics to drive operating rigor. We are making sure we are focused on being agile. Some of the actions that we have taken in the fourth quarter, we -- as we saw the volume starting to soften, we decided to reduce output, got tighter on cost control. We're doing the same in 1Q. We have been very thoughtful about our hiring. We've been very thoughtful about our spending. We also announced a restructuring of 2,500 jobs in the factories, all driven due to lower volume. And we'll continue doing more of that. I think as you see us going through the second half and as things start stabilizing, supply chain is our biggest opportunity, and we'll continue to take necessary actions to make sure we are always closer to the customer and making sure we continue to drive the operating rigor that I know we as 3M can do. So as I said, 2022 was a big year for us. 2023 is another big year of execution for us. Some of the strategies we have announced play itself out in 2023. And as you leave 2023, we believe 3M is going to be stronger and lighter. So as the volume comes back, you're going to see the leverage start coming through. So with that, Steve, I'll turn it back to you.

So you're effectively reaffirming your guidance today for the year?

So when we went into the year, Steve, we had said our range was on revenue minus 3 to 0, which includes 200 basis points of headwind due to DR and Russia with an EPS of $8.50 to $9. We had talked about the first quarter being in the range of $7.2 billion to $7.6 billion on revenue with a midpoint of $7.4 billion. And EPS of $1.25 to $1.65 with the midpoint of $1.45. What we have seen in the first quarter has pretty much played out as of right now to where we thought it was going to be. So the same headwinds we talked about slower consumer, slower customer, consumer electronics being very soft, China off to a slow sluggish start in 1Q. So what I would tell you is let's get through 1Q. March is a big month for us, 2 months in. We see ourselves in the $7.2 billion to $7.6 billion and the $1.25 to $1.65 and then we'll come back and relook at it. And hopefully, all the trends that we had thought coming into when we gave you guidance remain and we'll see where we are.

So I guess is that a comment that like -- that sounds like it's -- things are still a little bit mixed. Let's talk about China maybe. There is certainly more positive sentiment around some pickup following the lockdowns. What are you seeing there? And you sound a little bit more cautious on that recovery than maybe others?

Yes. So if you look at what the prediction was, the prediction was that China would have a slower start in the first half and then have a much stronger second half. All the external third-party data says it's pretty much -- that's what they are saying is going to happen. So I'm optimistic and but always cautiously optimistic that things will play out the way third-party data tells you it's going to play out.

Yes, the third-party data is always right -- JPMorgan it is.

What we're seeing right now is pretty much what we told you in the first quarter. We are off to a slower start in China that's playing itself out exactly what we predicted. So I would say nothing new news on that, other than what we had seen and what we thought coming into the first quarter.

And obviously, your China business has a pretty heavy flavor of electronics exposure. So there's an element there that is maybe also not just China opening up?

Absolutely.

On the electronics front, what are you seeing in the various verticals there? And how do you see that playing out over the next couple of quarters?

Yes. So again, we saw a pretty steep roll down in the fourth quarter with consumer electronics. We felt that would continue into the first quarter. It's pretty much played itself out, at least what we are seeing 2 months in. What we are seeing is smartphones down somewhere between 10%, TVs as high as down 30%. Sequentially, you've also seen semiconductors down mid-single digits. Auto, our auto business, which also has an impact of electronics because of our display and other electronic components we supply also down mid-single digits. Pretty much -- so I would say, again, Steve, pretty much playing out in that same range that we told you we are seeing consumer electronics destocking happening in the first quarter. There is -- we think there will be a recovery as you hit the bottom, starting in the second half. So we should see consumer electronics come its way up. But at the same time, the great thing about 3M is as consumer electronics have evolved, the technologies that we have allow us to use the micro replication technology that 3M has into devices and use them into nano technology applications. So for example, we are able to reinvent our business and start playing in the space of AR and VR. At the same time, we are allowed -- we are using electronics in display technologies in cars as your cars are becoming the next computer on wheels. We also have tremendous opportunity with life management. So the strength of 3M has been the life management technology that we have that allowed us to make displays like TVs and tablets and phones better. And as the world has evolved and as there are more demanding applications for that, we can continue using light management technology. So this electronics is a space that 3M has played in a long period of time. We understand the cycles that it goes through and sometimes you'll have a down cycle and an up cycle. But this is where 3M's technology comes heavy into play. And I think this is a segment that will continue to be long-term growth. Yes, there's some short-term weakness but I think long term growth.

And then what is the expectation of a pickup in the second half there? Like where do those comps go from what you're assuming in the first half to the second half on the electronics side?

Yes. So I think if you look at last year's fourth quarter, first, you're going to get easier comps coming in because you saw fourth quarter being down significantly in that space, but it started sometime in the third quarter. So our hope is, first China comes back, which is what the predictions are. Secondly, you start getting into easier comps and you work through some of the pre-buy that people had with TVs and phones during the pandemic and you get to the right spot. At the same time, there is technology transfer happening between LED and OLED, or LCD and OLED that we have talked about, I think we see that journey continuing through the next few years. But again, that's where 3M invents itself and starts bringing products that impact other spaces too.

And price there, are you seeing any kind of the normal type of pricing pressure? Or is that with inflation maybe a little bit less than it's been historically in this type of volume environment?

Yes. So in the last 2 years, most of us at the industrial side have faced unprecedented inflation, so as consumers. We have managed price through -- we have managed inflation through taking price. I think our customers understand it. I think what we are watching to see is as demand slows down and you start seeing deflation, you're going to start seeing elasticity of demand and price start playing itself or not just for us, but the broader market. For us, we have always been able to create value for our customers. So historically, we have had price raws benefit. It's different segment by segment. Historically, electronics is always a down market. But so far, we have managed it the best we can. And but we go market by market, product by product. So it's not a cost-based formula only...

So do you think the electronics business will have a negative price this year?

I don't know as of right now. We don't know. We'll see what the second half plays itself out, but our hope is we add a lot of value to our customers, so.

On auto, maybe talk about what you're seeing on inventory situation there in both the traditional ICE side and then what kind of growth you're seeing on the EV front? And just clarify your exposure to both of those.

Yes. So auto, if my memory is right, IHS right now is saying it's approximately a 4% to 4.5% build for the year. It's going to be down sequentially fourth quarter 1Q, which is quite normal for that industry, and then it picks itself up. China has been slower in the pickup as they went through 1Q, partly driven to the COVID exposure. Europe still continues to be strong, but I think there's risk there, and that's what's been highlighted even by IHS. Our growth for our auto electrification business is now a $0.5 billion business. It grew 30% last year. Overall, historically, 3M has always been able to beat auto build rates by 300 to 500 basis points. We did that last year too. So I think we're quite bullish. For us, the E versus the I, so internal combustion engine versus electrification -- to some extent, we are agnostic. And we're agnostic because some of the solutions that we offer in the internal combustion engines can be used in the auto electrification space, and it is being used. So for example, our display technologies are the same, whether you're using it for 1 car that's auto or not. On the other hand, we also have a front-row seat with a lot of the auto OEMs because we've been in this business for a long, long time. And we are -- we -- our OEMs call us with solutions. So we introduce new products like thermal management and batteries, et cetera, which will help only the auto E side of it. So overall, we -- I think we're quite bullish on auto electrification. I think that's an area of long-term investment and growth. It's an area of 3M strength. And to answer your specific exposure question, we are around $20 to $25 a car on an average, depending on which car you pick.

And so that -- the EV stuff continues to grow at a strong double-digit rate? Does the non-EV stuff -- is it flat to down? Is it just growing in line with a little bit better than build? Like how do you see the trend there?

So the trend there is again, it's all -- it's a penetration game, which is how many applications that you get on to a car. The team is continuing to do a great job of driving penetration even in internal combustion engine. So again, it goes back to be quite agnostic between the 2. And as long as the teams can keep driving penetration, you're going to keep seeing us get to the 300 to 500 basis points of growth of our build rate.

So effectively, you've embedded this year like a high single-digit type of growth rate for that?

So we have embedded pretty much what I've told you is historically 300 to 500 basis points uplift. So that's what we're trying to do. I think what it will play out is to see where the regional [ bills ] come because you have a range, you have some cars that have lower penetration, some cars that have higher penetration. So it will also come down ultimately to what cars get made and what type of cars getting made.

And then just on the general industrial side, you guys are pretty broad-based in your exposure. There's some MRO-related exposure. There's aerospace, there's some energy. What are you guys seeing on the general industrial side?

So I would say, coming into the fourth quarter with general industrial, we saw general industrials pretty much being stable. So it was a dichotomy of consumer-facing businesses were harder hit than industrial-facing businesses. Coming into the first quarter, we had -- we continue to see, I would say, consumer business is much heavier hit than industrial. We saw inventory levels at industrial, pretty steady in the fourth quarter with industrial deeper and consumer. We have continued to see consumer have destocking in the first quarter, both consumer goods and consumer electronics. But we've also seen pockets of industrial where we have seen some destocking going on. We don't know if it's cautionary because people do tell us that they're being cautionary right now. We don't know if it's a deeper trend. So that's why I said, let's play out March and see where we are. But we have seen certain areas of industrial destocking.

And any particular verticals there or regions that you've seen that?

So Asia and China, definitely, we have seen more. Part of it, of course, is what they've gone through. Part of it is electronics. So the industrial side also impacts electronics. But also in the U.S., we are seeing certain distributors telling us, we're just being cautious. It doesn't mean demand has collapsed, but they're being cautious. So we'll see where it goes. Our goal is to make sure our cycle times are as short as possible so that when there is demand, we continue to supply.

Right. On the consumer side itself, what are you seeing in retail or home improvement or any verticals like that?

Yes. So as you reflect and you'll have -- I'm sure, read a lot of what's going on with most of the retailers. You're finding that consumers have moved away from discretionary goods and spending more money on groceries, et cetera, because of the inflation. And I think that's having an impact on our business. It's pretty much in the same guide that we had told you, so it's no new news. But that trend continues, which is consumer discretionary spending is lower. And secondly, destocking, which is the other big piece that happened in the fourth quarter, and we predicted in the first quarter has continued to be at rapid levels. We believe the destocking continues until the second half and then you start seeing stabilization.

Into the second half?

Into the second half.

And that's embedded in your guide, obviously.

Yes, as of. Yes, up to a point, right? None of us know what they're going to do, but we believe there's a point where you won't be able to serve customers.

And then just lastly, on the Health Care side, some staffing issues, elective procedures. At some point, they're going to get back to 100% COVID levels. What are you guys seeing on that -- in that channel, both globally and in the U.S.?

So first, I'll start, Steve, by saying Health Care is a business we believe or a market that's GDP plus in the long run. Just when you look at demographics and you look at health across the world, this is a market or an industry that has to grow if the world becomes a better place. So I'll start with that. What has happened through the pandemic for everyone's benefit is the -- there was tremendous pressure on frontline workers, tremendous pressure on cleaning protocols, et cetera, which have slowed down the pace of recoveries. Secondly, you're seeing through the pandemic that hospitals operating margins have been hurt quite a bit. Many of our U.S. hospitals actually run on negative operating margin. Thirdly, you're seeing care move out of the hospital space and start moving into out-of-hospital space. Part of it is just in general, reimbursement rules, part of it is the advent of surgical innovations that allow you to do those procedures outside. And then we are seeing recovery of happening more at home. So the connected being at home and you being monitored at home is another trend. And the last trend is digital. And when you talk about that is assisting physicians, existing caregivers to have better quality of care. So when you put all that together, you have seen the pace of recoveries go down. When we came into the fourth quarter, we thought we were at 90% of pre-pandemic levels. In the first quarter, we said it's going to be somewhere in that range. It is playing out somewhere in that range right now. We believe you will start seeing sequential increases in electric procedures as the quarters go on and as the hospitals work through some of their staffing shortages, et cetera. 3M is well placed to be in the hospital. It's well placed to be outside the hospital. You all know we have a world-class Health Care digital business. And then when you think about drug and drug delivery and biopharma. We have a great business there that continues to grow very strong. So I would say, long term, we are very well positioned to continue to grow in that business. And I think short term, you're going to take some -- the hospitals are going to take some time to go figure out how they get their procedure volumes back up, whether it is extra quantity of hospitals being built, whether it is digitization that helps in some way, I think all of those will play itself out. And then emerging markets, I think, is another tremendous opportunity for Health Care growth. When we came into the year, we had said 90% would go to 95% by the end of the year for pre-pandemic levels. Sitting 2 months into the year, I think that's doable. I think the world will have a different crisis that at some point, we don't get ourselves -- get surgeries back above pre-pandemic levels.

Right. On price, you had mentioned that there will be -- there's the risk of some deflation. First of all, where on the raw material side and from a supply perspective, where are still the most acute pinch points? And then how do you see pricing evolving? Will you exit the year at a flattish level? Or can you grow price exiting this year as well? I think 2% is roughly what we have in our model for price this year.

And 2% is pretty much what we told you in our embedded guide. When you think about the inflation side of things, as I mentioned, our carryover impact plus energy inflation is in the $150 million to $250 million range, which is what we had disclosed even on earnings day. We are continuing to manage that through price actions. If there's more inflation, we'll definitely do more. We have seen, we have been able to do that last year. The team's got a very good pricing playbook. We look at it market by market. We look at it competitively. We make sure we're looking at it product by product. We've got a lot of analytics that tell us about where inflation is coming. We've got analytics that tell us where we have opportunity for price or not. So the team has done a really nice job using data and data analytics in this area. I would say on the inflation side, you continue to -- you have seen inflation, but at a slower rate, so that's a positive news. You still are seeing inflations in resins. You're seeing inflations in finished goods. So goods that we ask third parties to make for us. Labor inflation is still pretty strong in their world. So that gets passed on to us. But this is a playbook we've seen before. The team has done a nice job of looking at dual sourcing. Making sure we're expanding our vendor base. We are relooking at chemistries that allow us to do material substitution that helps us drive yield and efficiency. And so I would say in the long run, I've always said this before. And so as Mike supply chain is our biggest opportunity. And as you start seeing supply chains heal, which we hope will start healing in the second half, you should be able to get much efficiency out of those factories and help from a margin perspective, and cash.

And will you be exiting the year with positive price? Or should we think about exiting at kind of a more stable, more stable rate?

I think we'll have to see what deflation plays itself out, Steve. I think it's again, it's market by market, product by product. So it's too early 2 months into it to start predicting what the second half or what the exist rate will...

And is that energy price relatively fixed now for the year? I mean I would assume that bounces around a bit. No, it doesn't -- it's relatively fixed -- headwinds.

Yes. So it's -- I would say it's Europe energy, which I talked about. It's relatively fixed. There's some variable piece of it. The reason is with the relationship we have with some of the utilities in Europe, we were able to get a certain amount of fixed pricing, that also gives us access to demand if needed. So I would say relatively fixed. We have a little bit of a [ variable ] portion.

On the margins, what is the -- it's tough to discern what the core margin is this year? I mean especially when a company is trending around the flat line up or down, incremental margins are tough to count. I mean, what is -- talk about that algorithm. I mean, what is the core incremental that you would expect as you grow? And it seems to us that there has been more of a decremental when you decline, there's like a higher rate of deleveraging. How do you -- what -- are we wrong about that? And if we're not, what is that? What's driving that?

So mathematically, you're not wrong, right? The deleverage is heavier than what you've seen. But I would also say with a number of things that happened through the pandemic, whether it was hyperinflation, whether it is raw material availability, shorter runs, logistics cost, availability of carriers, air freighting for making sure our customers, there's a lot that happened in the pandemic that doesn't allow you to really get a clean look at what it is because each one of them has a different X that plays itself out. But when you step back and you always ask me the question, do you feel you can get to the 30% to 40%? Here's the simple math. On an average, if you take gross margin for our products, if you just look at our own P&L statement, pick it's in that 40%, 45%, 50% range. So as a start, every dollar that you put in gives you $0.50 of revenue. Second, you take some of that and say I reinvest it back in the business for R&D, for SG&A, that's why that 30% to 40% in the long run place itself out. And that's why I keep saying volume gives us the best leverage. When you have low volume, it's very hard to get that leverage because there are certain fixed costs that you just can't take up. To that, then you start adding the yield and efficiency benefits you start getting, whether you use data, data analytics, whether you start seeing supply chains starting to heal themselves, materials start flowing, you can get longer production runs, you add to that. Then third piece you add to that is all the work we're doing on dual sourcing, et cetera, opens you up to get to the 30% to 40%, take some of that saving and continue to invest it back in the business as you see [ fit ] in the area. So that's why the longer term when people ask the 30% to 40%, that's the calculus that you get to. I fully admit that in the short term, with the pandemic, it is very hard for anybody to exactly figure out what is really causing some of the pain. We do root cause, but that root cause is good to know, but it doesn't solve the issue that we said we will take care of our customers first. And I think that's the right thing for us to do. At the end, if you don't have our customers, we don't have a business. And so that's something Mike and I said we are going to take care of them, and they've -- so that's what we've done, and that's hurt us from an efficiency perspective.

Right. So it's expediting something here. It's a little bit that of extra cost to make sure your customers are happy. Inefficiencies, if you will.

A lot. Like, for example, you would have a material that is supposed to land up tomorrow morning, and you're saying, okay, I'm going to run. And now suddenly, you said, okay, it won't land up. The supplier couldn't deliver it, they didn't have the labor force. So now you have to recycle yourselves and change your production run for a period of time. That's why you've also seen us having more inventory levels because as we are learning through this algorithm, we are saying, let's keep the buffer stock so that we can keep our factories running. Because at the end of the day, if our customers have lined down. It's quite expensive for them, too. And our goal has always been to make sure we try to do the best we can. It doesn't mean we have been able to avoid every line down, but we do our best to make sure we're taking care of that.

So when all -- when this kind of normalizes, I would expect you guys will be taking the inventory levels down? Is that a target? So are these inefficiencies? Usually, you have some utilization headwinds when you do that. Is this time different from that perspective? And should we think about the utilization headwinds being offset by more effectively a more efficient cost to serve, if you will?

Yes. So you're right on. First, I'll start by inventory levels coming down. In the fourth quarter itself, we took inventory levels down, which is a start. So you can see a change is starting to heal, we are seeing there's an opportunity to take level down. We also reduced production in the fourth quarter as we started seeing volumes starting to come down, and that did hurt us from an efficiency perspective. To the extent that it's not a raw material buy, but it's a finished goods, we will reduce production. And to your point, you will get hurt. But as supply chains heal, yield and efficiency and all of that coming in should start helping to offset that. In the long run, I don't know if it is a shutdown. I don't know if it's a slowdown in manufacturing. I think in the long run, it's more you buy less because you just don't need it.

Got it. That makes sense. If we go into a period where you get some deflation and there's opportunity to drive, obviously, you said highly -- high incremental leverage on the volume growth. If you had an opportunity to trade off volume for a little bit of price. Would you make that trade? Like if I told you could get 4% of volume and price was negative 1%, but you kind of maintained a little bit of spread on raws. Is that a favorable scenario from your perspective?

So the businesses do that every day, Steve. This is not a cost-based formula. It appears like at the top, it's all 1 number. But businesses do that every day. They're looking at their competitive position. They're seeing what value they add it to customers. They look at what it costs us and all of that calculus goes into their pricing. So it's not new. This is -- the last 2 year is just has been unprecedented with this amount of inflation, but we've always had products that are inflationary, and we've always had products that are deflation and the teams do a nice job.

Well, I guess just going back to like 2014 and '15 when oil prices went down, 3M booked like a cumulative $2 in price/cost spread. That seems excessive to me, that maybe it could have been $1 and they could have driven more volume and market share. That's why I'm asking the question.

Yes. So if that's the question that historically, we just look at a long period, it's been a 30 to 50 basis points of margin expansion due to price raw subject to electronics, which is a very different industry. But I would say that the value and innovation we drive that should -- why can't we do the 30 to 50? My view is we can.

Right. Okay. Any questions on fundamentals before we get into the liability discussion? There was some news out around the EPA proposing some levels on PFAS, the 4 million parts -- can you maybe talk about how that influences you guys at all? And what's your -- what that news means?

Yes. So 3M was the first company that exited PFOA, PFOS, 20 years ago, which are 2 substances of the announcement that was made yesterday. I would say 3M continues to -- continue its cleanup in its factories that is committed at the same time, manage litigation through either defending ourselves in court or negotiated agreements or resolutions as appropriate. You saw us exiting PFAS manufacturing in -- we announced that in December of 2023 that by 2025, we're going to exit PFAS manufacturer. We are also going to remove -- we are trying to remove all PFAS from our product. So at the end of the day, we are aware of the announcement that came out yesterday, but 3M is committed to continuing down the path that we've announced in the...

What are the next big gating factors here? And how do we look at the news flow? What are you watching for the next, call it, 6 months, 6, 9 months?

So from a litigation perspective, our AFFF MDL the first case is early June of this year, and the teams are working hard to prepare for that. At the same time, we are continuing our commitment to keep cleaning up our factories, continuing to work through the agreement we had with the Flemish government to make sure that we are continuing down the path of the cleanup commitment that we have or remediation that we had. But at the same time, as I said, we are managing litigation by defending ourselves in court or getting to a negotiated resolution as appropriate.

What's the feedback from customers on your decision to end the manufacturing of this material for them?

So I think customers understand and the reason we decided to exit PFAS manufacturer was when we looked at the changing regulatory landscape, requirement from customers. And also, we just felt in that environment, we could not have a viable business that's profitable. We just felt that it was the right time to exit. So I would say customers are -- they understand why we made the decision. We have committed to them that we will work with them on an orderly transition out by the end of 2025. And that's what the teams are working on is with the supply chain teams of our customers working through that right now.

So this is still somewhat open-ended with not a lot of visibility on the PFAS and related liabilities seems still pretty open ended?

I don't know.

From a time line perspective?

From a time line perspective, I would say, again, we think this will play out over many years. We will continue what we have said we would do, which is continuing to remediate our facilities and defend ourselves in court as well as find negotiated resolutions where appropriate. And I would say the AFFF MDL is the first one that you'll see in June.

On Combat Arms, there's definitely been more movement there, some numbers, and you guys have taken action, I'd say, a little bit more aggressively on that one. Where do we stand in your view on Combat Arms?

Yes. So the teams are -- we are supporting Aearo and the confidential mediation that's going on with the plaintiffs right now on Combat Arms. You've also seen the co-mediators put out a release or a note that says we are actively engaged. So that's what we're continuing to do. A couple of dates for you all to keep in mind other than, of course, what we're going on with the mediation is our first appeal for the bellwether's or the MDL will now get held in May or June of -- I think it's May or June, I can't remember. One of the two, we clarify that in -- of this year. We've got early April, our first appeal on where we were -- where 3M was not allowed to be a party to the filing with Aearo. And then we've got notice of dismissal or requests for dismissals on the plaintiffs, which will also get heard. I think it's April 19 as of date. So those are 3 from a litigation date perspective. We also, as you saw, Aearo put out what we call is information about audiograms of 210,000 plaintiffs, which were as a part of the MDL, the Department of Defense released that. Charlie Mullen, who's the expert from Bakers White (sic) [ Bates White ] ran that analysis and tested functional hearing loss using both the American Medical Association and the World Health Organization has checked for that. Majority of those plaintiffs don't show that they are functional hearing loss. So Aearo filed a motion to ask the court to take that into fact -- into account when they decide the size of the trust. And the way it will work is once that trust is established, people who are harmed can go in and appeal and get money from the trust based on how they think their functional hearing losses. As we've said this before, Steve, our goal always here has been to find an effective, efficient and expedited resolution to this issue. And that's what the team been working.

And I guess when you look at managing these issues, your stock currently reflects tens of billions of dollars probably of risk around these liabilities. I mean do you judge how you're going to approach this by shareholder value? Or is it more of a, hey, start with the science first and we're going to get to an answer on the science. So because obviously, there's if your stock is undervalued by $60 billion and you settled for $20 billion, that's positive even if you don't think it's $20 billion using round numbers. I mean what's the mindset on how you're going about this? And does where the stock is trading and the implicit discount come into play when you're thinking about how to manage this stuff?

So I'll just start first by 3M will always stand by 2 or 3 principles. One is we'll always be transparent and let you know what's going on. So I would request all of you to read our Ks and Qs disclosures. Second is responsibility. To the extent that we have done something wrong, we will definitely stand by it. And third is we will use a science-based approach to solve some of the issues. But with that said, as I told you with Combat Arms and PFAS, we believe that we can -- we believe that from a PFAS perspective, the product is safe to make in use. Same thing. Secondly, on Combat Arms, we don't believe we have done anything wrong or Aearo hasn't done anything wrong. But we take all these factors into account, including what you just mentioned, Steve, as we come to decisions. But I reiterate to the extent that if 3M has done something, we will always stand by it. What it takes to...

But it seems like Combat Arms is much more front burner when it comes to some sort of a definitive resolution, whether it's positive or negative?

Yes. So I think if you break out Combat Arms with the PFAS, Combat Arms is 1 product, 1 segment. So it's a different resolution mechanism or time frame than PFAS, which has AFFF, it has our own factories that have got impacted, and then it has got just the general impact on PFAS on human health, et cetera. And each one of them have a different time dimension that you have...

Right. Okay. Any other questions out there? One more? Right here?

Just a question on capital allocation. You have some bonds maturing this year. You have hypothetically some nice proceeds coming in from the Health Care sales. Is the plan to deleverage the balance sheet to buy back some shares? Or maybe does it make sense to build some cash? We're talking about this liability discussion.

Yes. So I think your question was what's my capital allocation priorities? I didn't hear the first few pieces of it. So I think that's your question. So I would just -- I would tell you, first, I would always invest in R&D, first because that gives me the best organic investment is the best leverage that we get. Number two has been dividend, which is important for our shareholders. Third is M&A and fourth is share buyback. So that's our method of capital allocation. What we'll do is, as you have seen, our net debt-to-EBITDA leverage, which was 2.3 a few years ago, is already down to 1.4. So the company is in very good financial position. And to the extent that we will pay back debt or buy shares will all depend on the capital allocation policy. It will also depend on the cash flow that gets generated in the company. In an environment like this, we have a slow start, which we had predicted in the first quarter. And our hope is that we'll recover in the second half. So we'll keep you posted as we make decisions. But deleveraging, we have already done, we're down to 2.3 to 1.4. And I would tell you in the long term, the ability for 3M to keep generating cash using data and data analytics, especially coming from inventory, the question Steve asked, I think, is an opportunity for us to continue driving cash flow generation. We have good margins, good EBITDA will continue to increase as we hopefully, supply chains stabilize. So all that actually puts itself in a great place for us to be able to take the cash, do our capital allocation. And then to your point, where you correctly said when we spin out Health Care, you end up getting a dividend as you lever up the balance sheet for 3M Health Care, which is somewhere between the 3 to 3.5x leverage, which we have said. Plus we'll own 20% equity stake in that entity that we can also liquidate, which we will, over the 5 years for it because our goal is to make it a tax-free transaction for shareholders. So there's tremendous opportunity for us to keep driving growth, margin and cash and deploying that in the capital framework that I just mentioned.

Do you expect the combined companies, Health Care and 3M to pay the same dividend as 3M is paying today?

So we'll have to see as that plays itself out, Steve. I think at the end of the day, the capital allocation priorities for 3M don't change. There will still be R&D, dividend, M&A and share buyback. At the same time, the dividend for SpinCo will get decided by SpinCo management and SpinCo Board. So a little too early right now to talk about it, but I would say capital priorities don't change.

Great. Thanks, Monish.

Thank you.