3M Company (MMM) Earnings Call Transcript & Summary

Welcome to Day 3 of our Global Industrials Conference. I think, so far, this has been the biggest and the best attended event that we've hosted, I think, in the past 2 decades. So thank you to everybody for participating. We had fantastic corporate and investor turnout. And we want to sort of start the day with one of the big guns. So we have the management of 3M here this morning. And we have 2 presenters on stage. We have Monish Patolawala, the company's Executive Vice President, CFO and Transformation Officer. And we also have Bruce Jermeland, Senior Vice President, Investor Relations. Gentlemen, welcome to London. It's always great to have you here.

Thank you.

I think Monish is going to give a few opening remarks, then we're going to go to Q&A. And I just want to stress, as per usual, if folks have questions in the audience, don't hesitate, raise your hand. We will very, very happily incorporate you into our discussion. Thank you, and welcome to London gentlemen.

Thank you. Thanks for having us. So just I thought I'd take a few moments with some opening comments to bring everyone up to speed. 2022 was a pivotal year for 3M. We got a lot done in 2022. From an operating perspective, we continue to drive operating rigor. We controlled our spending well. We were able to manage cost increases through price increases, we exited our business in Russia, but most importantly, we continued to take care of our customers. We made sure that even though it impacted our own efficiencies, we tried not to make sure that their lines went down. On the strategic side, too, we took some really big actions that sets 3M up for long-term success. We closed -- we successfully closed in September, the sale of our Food Safety business, a transaction that delivered $1 billion of cash and we retired 16 million shares. At the same time, we announced the spin of our Health Care business. That spin-off when done will allow both companies to be 2 great world-class companies, both having great margins and cash flow as well as good growth in both the businesses. We also continued to make progress on our litigation exposure. In certain cases, we continue to defend ourselves when it came to PFAS. We also had negotiated settlements when required. But at the same time, after a deep analysis of where the regulatory trends were going, where the market was going, we also decided to exit the manufacture of PFAS, which we will exit out by 2025. And at the same time, we have also committed to remove PFAS from our own products in 2025. And so all put together sets us up to be having 2023 and beyond to be very successful. When you think about 2023, coming into the fourth quarter, we had mentioned that we saw the economy to be quite uncertain. We continue to see the economy quite uncertain. And the first quarter where we had talked about a range of revenue of $7.2 billion to $7.6 billion, which is down 10%, give or take, on a year-on-year basis at the midpoint. And that's impacted by a couple of things. One is the disposable respirator and exit of Russia headwind, which if you'll remember last year same time was the Omicron variant, which increased the sales of disposable respirators. Secondly, in that is also foreign currency, the fourth quarter and the third quarter of last year saw the U.S. dollar being very strong. That has a carryover headwind from a foreign currency perspective. And then we have continued to see softness in some of the markets that we saw in the fourth quarter. Our theme in the fourth quarter that we had talked about during Investor Day was basically consumer-facing businesses were very slow. And then industrial businesses were doing okay. As you have seen how the first quarter has played out in this range that we gave you, the $7.2 billion to $7.6 billion, with the midpoint of $7.4 billion, we're seeing pretty much those same trends play out. You're seeing consumer electronics very soft. You're continuing to see destocking at our retailers, and you're seeing customer sentiment moving away from discretionary goods to essential goods. What we've also seen during the quarter is some slowdown in industrial activity. But in general, industrial activity has remained strong. But you've got pockets of industrial distributors especially in the U.S. saying we're just kind of slowed down a little bit of our buying till we assure that there's no recession coming or is the second half going to be tougher or not. So when you cap that and you look at the total year, we had given a guide of minus 3% to 0%. March is an important month for us. Once we close out March, we will let you know where the year looks like. We have continued to drive progress on operating rigor, continuing to drive rigor on cash. For the first quarter, we have continued to be very prudent in our spending. At the same time, the Health Care spin, where the teams are working on has actually given us an amazing catalyst for us to make sure we are relooking at everything in our company. And Mike mentioned that at earnings call that we are relooking at everything. What we mean by that is you have an event that allows you to look at how you're structured. It allows you to make sure you are always shortening the path to the customer, and at the same time, making sure you're organized to drive the yield and efficiency and the supply chain performance as volumes come back. We are committed to take all the right actions that we're going to do between now and the end of the year to make sure that when the volume comes back in 2024 and beyond, you get the leverage that we have all talked about because 3M is going to be a much lighter company leaving 2023 than coming into 2023. As a part of that, we announced a restructuring of 2,500 manufacturing jobs, driven mainly by volume. So as I mentioned, the fourth quarter came in slower. The team's been agile to understand that we need to rightsize the volume in our factories to make sure that we are not unnecessarily building inventory or having a lot of fixed cost. So when I sum it all up, I would say 2022 was a pivotal year for 3M. 2023 is a big execution for 3M, a year of execution that sets both companies once spun off, in 2024 and beyond, to be very successful. And I know there were some questions on the Health Care spin, so I just thought I'd let you know that, too. We do have dedicated teams that are working this spin. They're making very good progress. It's allowing -- as I said, it's allowing us to look at how we should organize ourselves. But at the end of the day, the spin, as you all know, is all subject to regulatory approvals, final Board approval, making sure we get the right tax rulings and tax opinions and all other government regulations that we have to go through. But I'm very happy with the progress the team has made, they are dedicated teams. We are continuing the carve-out, and we'll keep you posted as we make progress. But overall, I think we are set up for a great long future.

Fantastic. So thank you very much for being here. So my first question was going to be on latest macro read across. I think you did quite a bit of that. Maybe I'll sound the questions, but thank you for that. So let's sort of start with the stimulus, which I think is a big, big theme for 3M. So have you seen any funding coming in or impact from any of the stimulus legislation like the CHIPS Act or the IRA? Is that something you expect to see any impact from? And just to expand a little bit here, generally, you have very broad industrial exposure through your technologies. Are you starting to get orders, conversations with the sort of semiconductor fab manufacturing in the U.S., battery manufacturing, energy efficiency, what kind of conversations are you having right? Because you're so intimately embedded with your customers.

Yes. So as you know, Andrew, both these acts have given a lot of incentives to infrastructure development, manufacturers of infrastructure development as well as renewable energy, et cetera. So as you know, we do have exposure in that space. We are quite confident as the volume comes in and as orders come in, we'll have a chance to play in that space. It's quite early right now, I would say. So we just -- we'll keep you all posted. But have we started having conversations? Yes, but it's quite early right now in just the whole landscape.

And are you guys just as I think your North American manufacturing capacity, how do you think you're positioned longer term to take advantage of probably more industrial build-out in North America over the next several years?

Yes. So the -- one of the tenets that 3M has always had over the years was making sure that they are the closest to the customer and have followed either an in-country, for-country model, in-region, for-region model. That allows you to make sure that you have the shortest path to the customer. But at the same time, the U.S. continues to be a big manufacturing location for 3M. We actually are a net exporter out of the U.S. So we export nearly $5 billion out of the U.S. So for us, any reshoring is always going to help. And because again, we're going to follow where the customer is. And so again, I would go back to if the customer is in the U.S., we're going to be in the U.S. if the customer is somewhere else, we're going to make sure we have capacity somewhere else, too.

So maybe pivot a little bit to China and Asia. You have said you assume China is stronger in second half. Do you have visibility on China? What have you broadly seen so far this year with reopening?

Yes. So as a part of the guide that we gave for the first quarter revenue of $7.2 million to $7.6 million and an EPS of $1.25 to $1.65 at the midpoint of $1.45. We had a few items in there. One was consumer electronics remaining soft. Customer destocking continue to happen, inventory levels being destocked make -- then we'd had semiconductors sequentially down, auto production sequentially down. And then we had said China, as we watch the reopening would be slower coming out of the first quarter, like we saw in the fourth quarter. And then we would start seeing based on external data and increase in the second quarter, but more importantly in the second half. So I would say, to answer your specific question on China, it's pretty much, Andrew, playing out where we had predicted in the first quarter. Now when you talk about the second half, we're looking at a lot of external data, and we are saying the IPI for China is expected to be up 8% in the second half. For us, as you know, transportation electronics is our biggest business in China. And right now, consumer electronics are soft. So that's where we should be able to see as consumer electronics pick up in the second half which we think it will pick up based on what we are hearing. But again, time will tell. And that's why I said I think we should just continue to watch March and update people as we go.

And just to China, just a little bit broaden, I know that you actually spent a lot of time sort of vertically integrating in-China for-China, but how are you thinking about China's impact on supply chains, right, not necessarily end market demand, but China as being this key part of the global supply chain puzzle?

Yes. And I think it will -- so for us, China is a big market. It's nearly 10% of our revenue. Transportation, electronics, safety, industrial, 2 businesses that we believe will continue to remain very strong in China. 50% of our revenue that goes into China actually gets exported out of China because of all the OEMs that are there. For us, our focus in China has been prioritization, making sure we're going to win in markets that we see, which is on the industrial side as well as on consumer electronics. Our belief is that China continues to remain a strong manufacturing hub. Again, it goes down to if our customers decide they're not going to be in China, we're going to be where they are because 50% of our revenue. But if you just look in general about the Chinese economy and you say, ignore the export out, but think about the consumption in China. As industrial activity expands, our personal safety business can benefit a lot. And as you've seen with the car industry as well as the EVs, again, 3M has tremendous strength in those areas that China from a domestic market continues to be a very important marketplace.

And just sort of thinking about how you are because Asia is such a key part of your global operations, how has your Asia strategy evolved post-COVID and have you sort of readjusted your footprint or the way businesses are interconnected in Asia post-COVID?

I would say, quite early, Andrew. We are constantly looking at it. I wouldn't say there's a seismic shift. I think what we look at always is where is the market, do we have the right to win? And to the extent we feel that there is a place we need to invest, whether it's India, China, Vietnam, Indonesia, Japan, we're going to make sure we have put the right feet on the ground at the right resources from that perspective. From a manufacturing perspective, we have continued to have the capacity in there. We ramped up capacity during the industrial -- during COVID for all the disposable respirator production to the extent now that, that volume is not required. So when we gave the guide for the year, we said there's approximately 200 basis points of revenue impact due to disposable respirators, due to the slowdown of disposable respirators and the exit of Russia. We're currently seeing that disposable respirators will be down to pre-pandemic levels. So we have taken the footprint down as required in the U.S., in Asia because the demand is not there. But if demand comes back, we have our lines there. Auto and Electronics right now has been slowed out of Japan. So of course, the teams are working through the supply chain footprint, which is slowing down production, cutting production. So in the fourth quarter, for example, we cut a lot of production in the consumer electronics, driven by the fact that we just didn't see the demand that we didn't see the demand coming in 1Q and so the teams have done that.

And so maybe sort of shifting to consumer, you sort of highlighted that, that's slowing. What is the biggest driver of a downturn here? Can you sort of -- because you do provide some granularity. Maybe just shed a little bit more light there? And also, as we talk about destocking, right? Is it because lead time are coming? Because you definitely sort of highlighted that part of it is because sort of more caution into the second half. But how do improving lead times play into the destocking into the channel.

Yes. So listen, I'll have Bruce also add on because he has a lot more history about inventory levels than I do at 3M over the different economic cycles. But my view is when you look at what's happened, I'm not surprised that you've seen a slowdown in consumer electronics and consumer goods. When you went through the pandemic, people bought ahead, right? People were buying a lot of tablets, a lot of TVs, a lot of phones. And so there was a buy ahead that I think the world is just seeing a stabilization back to what normality. Similarly, on the consumer goods, when you think about our different segments, you saw consumers are spending a lot more at home because they were living in home. You saw them buying a lot of kitchen cleaning products because they were staying at home. But as the economy has opened up, as government policies in different parts of the world have played out, you're seeing a point where there's a lot of inflation going on. That lot of inflation has basically had the consumer moving away from discretionary spending and moving away to consumables or like groceries or they're also experiential, which is they're spending a lot more on travel and visiting friends and family, which has put an impact on discretionary spending. That discretionary spending has also put an impact on retailers who may have misread the signal. So you're seeing the destocking in that, you're seeing consumer electronics who are caught with the same wave, you're seeing the destocking in there. And then on the industrial side, which was my question or a little bit of caution, it could be both. It could be -- they know that lead times may come back to normality, so they don't want to hold it. Interest costs have gone up. So money is not cheap anymore. So again, they're saying as a small distributor, they don't want to be caught holding that inventory, they rather have the manufacturer hold it. And I think we'll see how this plays out and where that equilibrium lands. But everyone is trying to, I won't use the word test, but it is testing a new model, which is how much are manufacturers keeping, how much are distributors keeping. And I think that footing is still going to -- it's going to still find its footing as we see through and I don't know if the banking crisis that just come out has further impact on anyone's funding from a balance sheet perspective. If you're a small distributor, I don't know, and I think -- but that will take 3 to 6 months to play out. So we'll see where we go. I would just tell you my view in general is, as a company, we should always be looking at reducing cycle times. One, it helps you from an inventory perspective that you don't build the inventory and hold, but secondly, it allows you to respond to the market much quicker because you will see these waves up and down. But Bruce, I don't know, your view as you've seen different economic cycles play out.

Yes. If you look at where we are seeing inventories coming down aggressively, in consumer electronics and consumer retail. They tend to -- the OEMs and the retailers tend to adjust very quickly because of the new product introduction cycle that you have in consumer electronics, then also the retailer and the seasonal nature of their business. So when they do have elevated inventories, they do adjust very fast and very hard, and that's what we're seeing right now. And we expect that as we go through the balance of 2023, the inventory dynamics will get behind us and the business will start moving more in line with what we're seeing in the end market. So as Monish mentioned, it's not surprising that we're seeing some of this happen because if you think about everybody work from home, school from home, spending more time at home over the last couple of years, people bought more electronics, spend more on consumer retail goods. And now we're just seeing the other side of that dynamic. So -- and the supply chain dynamics obviously had an impact on that also.

Well, you guys will be glad to know that Obin household is a heavy user of Scotch-Brite products. And I got instructions last night to order more.

Awesome.

Which I did.

That's great.

So we're doing our part.

Please keep doing it. And if someone needs a new filter [indiscernible], that, too.

So maybe just sort of shift a little bit to Health Care. I think supply chain in Health Care has been challenged. You've alluded to doing a lot of heavy lifting in Health Care ahead of the spin. Can you comment specifically on what is happening in Health Care and what -- update on the supply chain? And what steps you're taking specifically?

Yes. So when we talk about the Health Care supply chain, what we mean not just our own products, but more importantly, are there skilled nurses available or skilled labor available to perform surgeries in hospitals. Through the pandemic, what we have seen is a tremendous stress on frontline workers and the health care or the hospitals have struggled to adapt at the speed that they need to do with the protocols to perform the number of surgeries. How that translates is we saw surgeries at 90% of pre-pandemic levels in 2022. We thought coming into 2022, that, that would be up to 95% and closer to 100%, but it didn't play itself out. Coming into this year, we are saying you will see that gradual increase in surgeries going from 90% pre-pandemic levels to 95%. So it's still not 100%, but as the hospitals are working through nursing shortages, as they are starting to figure out their own protocols, deciding what surgeries they want to do I think you're going to see that get better. At some point, Andrew, that has to go above 100%. Otherwise, I think we're going to have a different health crisis in the world. So that we are starting to see. First quarter, we said we would be flat to fourth quarter. Sitting as of right now, I would say, we're in that similar kind of range. So it's very -- pretty much where we predicted. The second thing that's happened with hospitals is they've all had -- they've lost money or hurting from income perspective as they've gone through COVID, which has put some impact on their capital budgets. In our case, the exposure to capital comes from our Health Care IT business, which is not really a capital business in that sense, but as CFOs and hospitals look at their cash flow, they look at IT investment as a capital investment. So that's the second. Third is when you look at oral care, oral care procedures have come back to pre-pandemic levels, subject for consumers in certain cases. And we saw that in the third quarter, we didn't see as much of it in the fourth quarter where consumers were holding on to getting oral care procedures done just because it has an impact on -- it's out-of-pocket expenses for consumers. When I look at the long-term trends and I say there is going to be more demand for health care because of the demographics and type of care available. Hospital procedures are moving out of the hospital and they're moving to ambulatory settings. The impact of digital, which will aid caregivers in giving better care can also help from a skilled labor shortage perspective, which is make it easier for the labor that's doing the job to not have to do all the repetitive tasks that they have to do. And then home health, which is your monitor from home so that you're not staying in a hospital that long, which allows them to move people in and out of the hospital through surgeries are all trends that we look at our Health Care business and say, that's clearly a place that we play well in. Same way biopharma drugs are continuing to grow. People are moving more and more to biologics. It's an industry that grows at 10% plus, again, 3M with its filtration technology plays very well. And we have a world-class leading platform when it comes to health care IT or our IT business, that's a revenue cycle business that's improving the efficiency of caregivers, but also making sure the hospitals earn a lot more money. That means the waste is eliminated because they can bill for the right amount of services that they are provided. So I would say all that put together, the Health Care business is beautifully positioned to continue to take advantage of some of those macro trends.

And operational improvement, you said things seem to be on track right?

So operationally, back to, I think volume gives us the best leverage everywhere at 3M, including Health Care. So as the volumes come back, you're going to start seeing the margin rates continue. But with all that said, the Health Care business still is a 29%, 30% EBITDA. So the team is doing a great job. There's always more we can do in that business. And Jeff Lavers and the team is committed. And back to your question on the spin, the teams are continuing to make progress there. And we'll keep investing the right money in that business to take advantage of some of these macro trends.

And it really does seem that this could be a material value creator for 3M. Can you just remind us of the time line and when should we be thinking about the time line of the spin? And just anything sort of in terms of potential legal challenges to the spin, just those 2 things, how do they interplay?

Yes. So I would start by saying when we announced the spin of Health Care, we wanted to make sure we had a dedicated team that was looking at this and making sure that we are looking at it from the transaction side, so making sure that we're getting the transaction, the financial side, which means making sure all the filings are done, the carve-out financials are done and then, of course, setting up new SpinCo for success, which is continuing to make sure that we are investing in the right spaces. So we got a dedicated team spun up. They are all working through it. We are working through filings. At the end of the day, the timing of that business is going to be -- off the spin is going to be ultimately decided by all the regulatory approvals we have to take, final Board approvals, the tax ruling. Our intent is to make this spin tax-free for shareholders as a part of the spin just for those catching up people. The plan is for ParentCo to put on leverage on to SpinCo for 3 to 3.5x EBITDA, which will give a dividend to parent. And then second is, we will own 20% of equity stake or 19.9% in SpinCo, which we will also monetize within 5 years because our intent is to make sure this transaction is tax-free. And so the teams are working through that. It's good progress. As regards the legal challenges that you mentioned, so there were 2 plaintiffs that had challenged the announcement of the spin. That case was dismissed by the judge in December of last year, and we are not aware of any of the legal challenges right now.

No, excellent. And operating leverage and long-term targets. I think during your Investor Day last February, you said you were targeting 3% to 4% operating leverage over time? I think you stressed that '23 is the big execution year. So, a, how are you thinking about this target? And how does this relate to the current macro conditions. And if we take a longer-term view, right, what are the key levers that you're pushing inside the company to do that?

Yes. So I'll actually start by just again recapping, Andrew. As you said, '23 is a big execution for your -- volume gives us the best leverage. So in our current ratio, our current calculus, we had said minus 3% to 0% of revenue, which includes a headwind of DR of 200 basis points. And we had set a guide of $8.50 to $9 from an EPS perspective, okay? So now as you step back and say, what are the items that make it up? As volumes start coming back -- you're seeing we have a slower first quarter than normal. As volumes start coming back, you're going to get the leverage. So that gives us the best leverage. Secondly is we are going to make more progress on yield and efficiency. We did what was right for our customers through the pandemic and spend more money, shorter runs, dealt with the material availability shortages. As the supply chains heal, you're going to see that come back, which is our belief is that the second half should start ceiling -- seeing more sustained healing of supply chains. That said, I'm not telling you that it's not got better than the past. It's just we want to see it more sustained. And as it comes through, you're going to see that come through. We have also spent a lot more time when it comes to making sure that we are looking at alternate sources of supply so that gives us some value. And then the last piece is when you think about how we are structured, making sure that there is no redundancy between the business groups and supply chain, all of those in an opportunity that we believe will add more to just the benefits of supply chain. So when you put all that calculus together, when I say 30% to 40% leverage when I also look at it and say, just if you elevate yourself all the way up, my gross margin, if you look at my P&L, is somewhere in that 45% to 50%. So as a natural every dollar of revenue that you get, you're putting out $0.45 to $0.50 of margin. You take some of it and you put away towards investments, R&D inflation, there is a path to get to the 30% to 40%. And then you add on all these other things I talked about, all add to it. I just think you haven't seen it in the last couple of years, and that's driven by just everything that went on. You had shorter runs, you had hyperinflation, you had supply chains that were so clogged up. They were so fragile, you had. So I just think you've not been able to see it. You also have seen disposable respirators have gone up. It's a headwind for us this year. That impacts leverage. And then foreign exchange impacts leverage, too. As you know, the U.S. dollar was very strong in the second half, continues to be strong, and that has a carryover headwind there, too. So I would say long term, 30% to 40% is the right number.

Excellent. Well, it makes -- and just on the inventory just to wrap up. I think on the fourth quarter call, you discussed rebalancing inventories by $250 million. Where are we with that?

Yes. So we've made -- as I started -- when I started, I talked about working capital is a lever for 3M, especially inventory. As you make progress on data and data analytics and visibility of inventory, you can find ways to streamline it. Through the pandemic, we did what was right. We made sure we had the right inventory levels, the safety stocks, et cetera. As we started seeing supply chain start to heal, we started making progress. In the third quarter, we took a little bit of inventory down. In the fourth quarter, inventory further came down $250 million. We also have got more agile. As we saw consumer electronics, consumer goods starting to destock, we said we are going to curtail production capacity, so you just don't build that inventory and keep it on. So I would say this is a trend that you will see us continue to make progress in 2023. The second half, of course, should be better as we start seeing supply chains heal. But long term, this is a cash-generating lever for 3M because inventories are an area that I just think are ripe for -- with all the work that we've done with data and data analytics that we can make more progress.

So let's talk about pricing. I mean, I know you've changed your disclosure, but 3M pricing and net cost price in '23. What areas are you seeing price increases being sticky? And any concerns about discounting?

Yes. And I'll have Bruce join me on this because he has a lot of history on this one, too. I'd just start by saying inflation in general is stickier than most people think it is. And what I mean by that is people are saying, people forget that inflation is just if I hold prices, it's still on a year-over-year basis higher. It just may not be at the pace that we saw. So we are seeing the same. So we are seeing inflation a little more sticky. You're seeing it more in specialty goods and labor cost. It's still stickier from an inflation perspective. At the same, so we have talked about in our guide, our carryover is $150 million to $250 million of inflation, which is driven by just the carryover impact plus utility inflation in Europe. So that's the $150 million, $250 million. What the company has been able to do last year and the year before is we were able to manage these inflationary trends by taking prices up. We were able to offset both. In 2023, our guide coming in is a carryover impact, largely carryover impact of nearly 2% of revenue. If there continues to be more inflation, the teams will do what it takes to drive more price up. The teams through all the tools that they have developed, the partnerships that they have, the external data that they have, are much more tuned to watching these inflationary trends come in and then react from a pricing perspective if they need to. Our other -- my other belief is if you start seeing deflationary trends start coming in, I think you are going to have a discussion around price elasticity and making -- and seeing which customer is going to buy what. When we look at 3M, I would tell you in general, Andrew, and you know 3M a lot longer than me. The teams do this product by product, area by area. It's not just a cost formula-based approach. We make sure we are taking into account competitive position. But historically, 3M has always added value to customers. We have had a pricing leverage of 30 to 50 basis points between the price and the cost equation, subject to, of course, the electronics industry, which is a very different price down industry. But Bruce, anything else you want to add just based on history?

Yes. The other thing I'd say is if you think about 3M, about 70% of our revenue is driven by markets that are design in, spec in or are regulated. So therefore, our business model is we lead with science. And we also, therefore, compete with other competitors that have similar business models where they're trying to differentiate their value proposition to the customer through science. So most of the markets we're in, therefore, tend to be very rational relative to price, which provides stability across the portfolio. So the other thing is we have some businesses that are driven by contracts. So you think about Health Care, the majority of that business is more contractually driven, whereas on the other end of the spectrum such as Industrial, you tend to have a little bit -- you're able to adjust prices more quickly as you work with distribution partners on pricing relative to end markets and customers. So it's hard to generalize given the breadth of business that we have. But we generally, over time, it's been -- prior to the pandemic, over the decade before that, we drove positive price/cost differentiation of 30 to 50 basis points a year. And because of that scientific model, I think we'll maintain our pricing position in the markets we're in.

And any short comment on [ raw mats ] because they seem to be coming down. Is that a benefit or too early to tell?

Too early to tell. But I would say we are not seeing the level of inflation increases that we're seeing, but from a carryover perspective is an impact of 150.

And maybe just the last 2 things. So let's hit them. So, a, I think on PFAS divestiture, you have actually indicated or discussed potential ability to repurpose equipment sort of balancing repurposing equipment versus shading the facilities. Any incremental information or discussion there?

Yes. So the teams continue to make progress on the exit of PFAS manufacturer as a part of that, we had said that by the end of 2025, we would exit all of the manufacturing PFAS. It would be a $1.3 billion to $2.3 billion charge. We took $800 million of it in the fourth quarter, mostly all of that was noncash, largely noncash. As we get through that whole impact of $1.3 billion to $2.3 billion. We'll continue to take accelerated depreciation for our announcement. There will be cost from an exit cost perspective. Currently, that range remains $1.3 billion to $2.3 billion. As a part of that, are going to continue relooking at the use of that equipment if we could. To the extent we can, we'll definitely use it to the extent we can. It will be impaired. So we'll keep looking at that as we go through now and 2025.

And just sort of to finish up sort of litigation update. Where are we with Aearo bankruptcy proceedings? And just generally, how should we think about the margin drag from your legal expenses and also the cash drag from the legal expenses? What's the run rate that we should be assuming for '23?

Yes. So on the Aearo bankruptcy, the teams are in confidential mediation right now. So we continue to work that process. There are a couple of cases coming up or hearings coming up that from a date perspective. So early April, you will hear -- the court will hear from both sides, the chapter. Sorry, the Seventh Circuit decision on -- our appeal to Seventh Circuit, which makes 3M a part of the bankruptcy or not. The second one is in mid-April, which is where the plaintiffs have asked that even Aearo should not be afforded bankruptcy protection. And then the third one is early May, which is our appeals to the couple of the 2 MDLs that we lost, which will get heard. So I would say, just make sure you are reading our Ks and Qs not only for combat arms and the updates to this, but for all our litigation matters because we try to make sure we are as comprehensive as we can on that. The second piece on your question on cash. So for the -- for last year, Bruce, correct me if I'm wrong, we had approximately $900 million of charges between PFAS and combat arms and all our litigation matters. For 2023, what we have right now said, Andrew, we can't predict what that number is going to look like. And therefore, guidance that we've given you of EPS of $8.50 to $9 excludes those litigation matters. At the same time, it excludes the impact of PFAS manufacturing from our businesses because we intend to keep that out of our businesses so that it makes it easier for investors to see what 3M looks like without those [indiscernible].

So litigation run rate, you're just basically going to figure it out at the end of the year and tell us what...

Well, I mean every quarter, as we go through the quarter, we'll show you what the actuals are.

We're going to get a live.

You're we're going a live. So our goal, as you know, Andrew, is we are accountable, we are as transparent, and we'll make sure you all know everything that we can share with you what we can give you because at the end, we want you to make the most informed decision that you can. And overall, I just think where we are 2023, big execution year. But we're going to set ourselves both companies up for tremendous success in the future. You will see us continuing to grow. Margins will start expanding as things settle down. Company has always been a strong cash generator. Working capital will be an adder. And then digital is a multiplier for 3M. When you look at data, data analytics and where customers are going, this is an area that we can add a lot of value. And a lot of new trends like Climate Tech, et cetera, that 3M can play very strong in. And so long-term growth at or above macro is a good calculus keep in mind.

We're out of time, and let's finish on that positive note. Thank you very much.

Great. Thanks for having us.

Thanks.

Thank you.