3M Company (MMM) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to day 2 of our conference. We are very excited to have 3M Corporation with us today. We're very excited to have Mike Roman, who is the Chairman and CEO. Mike joined 3M in 1988, so it's been a little while. And then we've got Monish Patolawala, who is the President and CFO, and joined 3M in July 2020. I know Mike has some prepared remarks. He wants to make some. I'm going to turn it over to you, and then we'll get into questions.

All right. Well, thank you, Andy, and it's great to be here with you today. Great to be back in Florida. So maybe I'll just start with a view of 2023. It was very important and pivotal year for us. And we focused on progressing with 3 priorities that we continue to focus on here in 2024. The first is improving performance through the 3M model; the second is progressing with our spin of Health Care; and the third is to reduce risk and uncertainty related to legal matters that we face. So maybe just related to the first one. We delivered a strong performance in 2023 results that were better than expectation for earnings per share and for cash flow, with organic growth coming in at the low end of our range. We delivered improvements in how we execute and operate. Our margins were up 60 basis points, adjusted margins, excluding the restructuring charges that we took, and I'll come back to those restructuring actions in a minute. That helped drive that EPS, $9.24, which was above our original guidance of $8.50 to $9. We also grew free cash flow 30% to $6.3 billion in adjusted free cash flow and free cash flow conversion of 123%, up 37 percentage points. So very strong execution in operations and our performance. And we did execute the largest restructuring in the history of 3M Company, and it was focused on really positioning us for the future. It was about streamlining our operations across the company, our organization company-wide. It was about leaning out the center of the company, and it was about really aligning our businesses closer to our customers. And it really enabled us to help us drive some of those margin improvements. It's also positioning ourselves to execute better. And it's -- it comes with a focus on driving operational execution and improvements of that across the company. We're seeing that progress. We're seeing improvements quarter-by-quarter, and we're bringing momentum into 2024 as we start the new year. It also enabled us to be able to invest in growth opportunities in some emerging technology areas and high-priority markets. So we continue to prioritize investments in growth, and we continue to see opportunities to invest in productivity and sustainability as well. So turning to the spin. So we are making great progress on the spin of a company, Solventum, is the name of the new stand-alone health care company. We have a very strong team that has been assembled under the leadership of Bryan Hanson. This is a very strong, diverse med tech, health technology company, a leader in the marketplace and well positioned for success as a stand-alone company. We made the Form 10 public yesterday, and we are now focused on a spin date of April 1. We also -- you'll see in the Form 10 that as we had laid out from the beginning, Solventum will leverage to 3.5x -- in their -- as they go out as a stand-alone company. And that means that they will -- are expecting to borrow $8.4 billion. They'll keep $600 million in cash. And if you look at net of -- depending on fees, we expect approximately $7.7 billion in proceeds coming back to 3M Company. At the same time, we'll follow through the other part of what we talked about when we spin out Solventum, is to hold a 19.9% minority stake. We expect to monetize that, as we said, over the first 5 years of operations for the company. So the company is well positioned to go out as an independent company. And from the beginning, we are excited about the spin because we are creating 2 world-class public companies. And then the third priority, resolving and reducing uncertainty related to legal matters, really focused on Combat Arms and public water suppliers. And starting with Combat Arms, we made good progress in executing against the settlement agreement. So we resolved the bellwether trial verdicts. We resolved some early release cases. We resolved trials that were being prepared as part of the MDL. So stepping forward in that part of the agreement. We also announced in late January that 3M and the plaintiffs have agreed to settle all of the settlement costs in cash as we go through. We also had an early registration date that gave us good confidence that we're making good progress, said we're on track to hit the 98% level in the agreement. And that will be something that will be finalized as of March 25 when they do the final settlement date for that. So continue to make very good progress in the Combat Arms settlement. Public water supplier, we also are progressing, working with all parties on the settlement there. We had the final approval hearing on February 2, where we continue to await the ruling from the court on that. In the meantime, we're working with all parties to progress the settlement. There was one other thing of note, the judge did extend the date to March 1, which allows any public water suppliers who have opted out to opt back in. So that was one of the other changes. So we continue to work to move forward there. And then importantly, it's not a litigation matter, but we made an announcement back in December of 2022 to exit manufacturing of PFAS by the end of 2025, and continue to make very good progress there as well. Our volumes are down 20%, which is actually a little ahead of what we had been planning as we manage that exit to the end of 2025. So continue to move forward on those priorities. As we look into 2024, talked about it in the earnings call in Q4, Q1 looks similar to what we're seeing in Q4, the end market dynamics. If you look at some of our end markets, consumer electronics and semiconductors. Consumer electronics really stabilizing year-over-year, consumer -- semiconductor, maybe a little soft. Both are expecting to improve as we go through the year. We see mixed market dynamics for our industrial businesses globally. And then if you look at our consumer retail business, we are -- we participate in what's called hardlines or discretionary product purchases, and that continues to be soft. The retail spend in that category continues to be soft as we start the year. Looking geographically, the U.S. is relatively strong against the rest of the world. Europe, Asia, China are relatively muted. China is something that we're focused on as we start the year to -- it continues to sequentially be similar to Q4, and we're watching it closely. If you look at the overall macro, expect China to improve as the year goes on, and we're watching that closely as we start the year. Then back to guidance. We guided for the full year, and we'll revisit guidance after the hard spin. So I won't update anything on the total year. But just coming back to Q1, again, similar to my comments about the end markets, we see Q1 in line with what we had said at the Q4 earnings call. So revenue, approximately $7.6 billion; EPS in the range of $2 to $2.15; and importantly, margins improving year-over-year in a range of 19.5% to 20%, up 250 basis points year-over-year. So all that continue to focus on those priorities, have good momentum coming into the year. We really see ourselves well positioned to have another successful year in 2024. And we do plan to have Investor Day after the hard spin. So we'll go in more detail as we look at where we go with 3M Company with Health Care spun out as an independent company. So with that, Andy, I'll turn it back to you and go into your questions.

All right, Michael. I think you took half of my questions, but...

I always try.

I understand. I understand. It's like you know them in advance. Anyway, so let me just respond to one thing on the short term, like you guys have talked about like maybe a little bit of a weaker December. Did things sort of stabilize after that? I know you sort of reiterated the guidance just now for Q1. But was January and February like a little bit better and it was more of an air pocket there somewhere? How would you describe that?

I would say the same Mike said, which is pretty much what we expected, Andy. If you look, consumer is starting to stabilize. We are watching discretionary spending. People are still spending a lot more in necessities than hardline goods. Consumer electronics stabilizing, but we got to watch what demand looks like. Auto bills are supposed to be down 10.5% sequentially quarter-on-quarter. It's pretty much running in that same range. And then industrial activity is mixed, just like we predicted would be in the first quarter. And then the last piece is, of course, Mike mentioned, we're watching China. We're watching the unfortunate events in Europe and EMEA and just making sure we're watching demand trends out of there. I would say on margin, this is going to be another quarter of good execution. The team continues to make good progress as we left Q3 and Q4, as you've seen that in our margin rate expansion. Mike mentioned, 19.5% to 20%, that's 250 basis points up, excluding approximately 100 basis points of headwind due to restructuring charges that we continue to take. And so I would say, overall, the team continues to execute well. We are watching how demand plays itself out, and confident that 2024 will be another big year for 3M, and that's what we're working on.

It's helpful, Monish. And then it kind of leads into my next question, which I think you guys have talked about one of your big priorities is to report above-market growth, right? And so you've got 1% to 3% is your guide for this year. Is that above-market growth? Would you say it's worse than macro? Like what's sort of holding you back, if anything, would you say?

Andy, the 1% to 3%, it's 1% to 3%, and our guide flat to 2% includes some headwinds from portfolio actions, our geographic prioritization, focus we're putting on our consumer business. And actually, in Q1, we have a bit of a headwind still from the disposable respirators. So that 1% to 3% macro GDP, IPI are about in the middle of that, about 2%. So you look at our outlook for the year, we expect to improve growth coming out of 2023. We -- as I said in my opening comments, with the restructuring, with all the actions we're taking to drive improvement in performance of the 3M model, we continue to invest in growth. We see significant opportunities across our businesses. We see and are introducing new products in our safety business. We introduced with some splash, a new solar-powered headset for personal protective equipment at CES. But we continue to see safety as an important market for us and continue to see that as an area of investment growth. We see opportunities in automotive electrification and mobility. Even as you look at the outlook for auto bills being flat but slightly down for 2024, we see that as an opportunity. We continue to outgrow the build rates and leverage our investments in innovation. We are making indispensable products for the automotive industry. We're doing the same in the next-generation electronics. We're doing the same in areas of industrial automation. We've got some exciting new opportunities and are launching products in areas like finishing, automated robotic finishing, working with GrayMatter as a partner on AI and how we can leverage our precision engineered abrasives and their technology to bring new opportunities. So investing in growth areas, and these are large commercial operations for us today. These are opportunities to continue to drive growth in what our large commercial positions and importantly, attractive markets where we have a strong right to win based on our innovation, our manufacturing capabilities, the things that our customers really rely on from us.

I just wanted to follow up on a couple of your regional comments. So North America, you mentioned strong, like what's driving versus China and Europe? So first of all, does China get better throughout the year? Do you see it turning to positive growth this year? And then in North America, is it fiscal stimulus, onshoring, like what's driving the relative strength in North America?

Yes. If you maybe click down a little bit on the -- around the world, you look at the macro, 2% IPI, GDP. But around the world, most of the geographies really are low single digits with China, mid-single digits. That's kind of the projection that you look at. As we started the year, I talked about Q1. We're seeing a similar dynamic to Q4. So those macro projections are total year. They take into account some improvements in electronics and other things as you go through the year. So we're seeing that dynamic. We're watching it closely. We see that we built that into our plans. China, in particular, as we start the year, it's still -- the dynamics that we see in the market are muted, similar to Q4. China has been going sequentially relatively flat for us as a business. We talked about that in 2023, and we see, as we start the year, that dynamic. Now we're coming out of Lunar New Year, we're all watching closely what happens to the dynamics in the marketplace there. Even this morning, they're announcing some stimulus, new stimulus for the China economy. So we're going to be watching that closely. It's an important market for us. We continue to see really opportunities to prioritize our growth, that differentiated growth we can bring in the China market, still a very important market for us. So that's true. If you look at other parts of the world, I mentioned Europe, we've talked about the uncertainty in the geopolitics driving that, some of the dynamics in the economy there. Automotive build rates are expected to be down in Europe. That was one of the things that was a strength in 2023. So we're watching specific end markets as we start the year and kind of see how that plays out against some of those projections for the macro.

The only thought I'd ask you there, Mike, is I always think of you as very early cycle, so you shouldn't see improvement first. Like would you characterize it as a normal cycle where you are starting to see improvement first? So this is kind of a strained cycle where you're not...

Yes. That dynamic plays out in different ways, Andy. Certainly, in something like the Great Recession, we saw early cycle recovery. Now everything was synced. All markets were synced. The down and up was dramatic. And so you saw something very powerful. In other markets, we've seen it as electronics has had some ups and downs. Normal cycles, not even taking the pandemic aside, we would see dynamics play out there, too. We would see increased demand, of course. You see the value chain demand increase, and you see adjustments on the other side of it. So those dynamics do play out, where if you see economic recovery, if you see China, for example, start to see the benefit of some of that stimulus, we would expect to see that directly from our customers, where majority of what we sell out of 3M's portfolio is either specified or designed in by our customers. So we see that dynamic, even in short cycle flow of our goods, you'll see that dynamic play out. So in this case, it's more market by market. We're watching it. This isn't a recovery from a Great Recession. This is about what's going to happen in each of those markets that I've been highlighting, what's going to happen in the geographies as we play out. And so we'll be watching that closely, and we're well positioned. In addition to improving our execution and delivering stronger performance and margins and cash flow, we are well positioned to serve our customers, improving our service capabilities where we are getting more efficient. Our productivity is coming up. So all those things have us well positioned to take advantage of those opportunities.

So I'll definitely get into that. Like I know portfolio optimization is a big deal for you guys, too. We're going to talk about the Health Care spin in a second. But just can you remind me like -- because you talked about the 1% headwind from getting out of some product lines and consumer. Like what exactly are you doing there and why?

Yes. Portfolio optimization is a continuous process for us. The spin of Health Care is a big example of us leveraging that strategy. It really complements what we do with innovation to manage our portfolio, to make sure we're focused on the most attractive markets where we can make a difference. And we're thinking about our portfolio and how we can optimize it, strong results in the long run. And there's 2 things that are part of that portfolio, the headwinds on portfolio in 2024. But the actions that we're taking, the first is geographic prioritization, something we talked about during the restructuring, taking 30 countries where we had operated a similar model to the other 40 countries in the world that we really are invested in heavily in as in terms of resources. And we have moved those to an export model. So that has a headwind on revenue, the margins. We continue to see strong margins, and the margin performance will continue from those geographies. But it will have, as we switch to an export model, it will have an impact on the revenue as we go through 2024. And then the other one that we called out during the earnings call is a focus on consumer, to really look at the portfolios that we want to prioritize where we have the right to win, where we can leverage 3M invention and innovation and be differentiated in the consumer packaged goods model. And so we've identified about 5% of the portfolio where it's not a priority for us and our brands, it's not a priority for us and where we can differentiate ourselves. And the net of that is you'll see some headwinds in revenue now, but we are driving to improvements in margin and cash. And also the focus that comes, it will enable us to focus our advertising and merchandising spend. It will be where we really are differentiated. So it's going to have a very positive effect on our performance as we go forward. We've got to execute it well in '24.

So Mike, it seems like a lot of this is focused on execution and margin, right? So this is probably going to be a question for you or Monish. Like I'm trying to understand the sort of medium-term impact, let's say, because we know what the guidance is for this year, Monish, I think it's 75 to 100 basis points of margin expansion, right, including restructuring, and that's only on 1% growth, right? But you said restructuring with sort of benefits would flow into '25. So my question is your algorithm is 30% to 40% normal incrementals. But should we be improving even more in '25 versus '24, that 75 to 100 basis points, especially if organic growth is a little bit better?

Yes. So I'd hit on the same points Mike said, which is, first, the team is focused on 3 priorities in the organic side, which is grow the business, get the margin expansion and create strong cash. If you talk about just margin expansion, that's going to come from operational excellence, running the company well. And that, I would say, 2 big pillars. One is supply chain efficiency and agility, and the second is completion of the restructuring program. And then, of course, comes with that is the cash that comes with it because the minute you run your supply chain well, you'll see that in inventory, in AP. If you take restructuring, and I've said this before to Andy, it's -- you can easily look at that as one item and just say in isolation, but it's actually the way we work. So we've changed the way we work. The benefit of the program not only gave us margin expansion, but it allowed us to actually get more agility, closer to the customer, reduce some of the cost of the center and eat into some of the stranded costs that would have been existed, so a portion of stranded cost when we spin out Health Care. So if you look at just that line item in isolation, you would say, "Okay, how much is it giving me or not," but you have to look at it in total. And so I would ask all of you, look at it from a margin expansion perspective because ultimately, all of these actions show up in margin. And when you look at that second half of 2023, we improved margins [ 280 ] basis points versus year-on-year. And this year, we are seeing another 75 to 100 basis points. So you're starting to see all of this in margin. The next piece, as you think about this is to keep in mind is, back to your leverage question. So I'm still confident between getting volume, which gives us good leverage; completion of this program restructuring; getting the supply chain efficiency to where it can be; plus included in that is investing in all the items in growth, productivity and sustainability; investing in our people and our workforce, when you net all that together, you will see operating leverage continue to go up. So I'm very confident that the work that the teams are doing is showing up in margin and will continue to show up in margin. But just as a word of hygiene, the $700 million to $900 million that you referenced was based on a no-spin scenario, assuming Health Care remains there, which is what I've said before. As we complete the spin of Health Care, we'll come back and give you the exact numbers so that you'll have a baseline. But again, I would just look at it in total. Am I generating cash and am I generating margin rate? And I think those 2 is a combination of multiple factors and restructuring is one piece, but that enabled us to change the way we work. And I think that's the biggest change we've done.

Monish, just to be clear though, you're saying that all the stuff, right, like you've got 30% to 40% that you've told us before, you could theoretically do better than that with all this stuff on a more ongoing basis.

Well, of course, as I said, there are so many factors that go into that 30% to 40%. Again, I go back, it's volume, it's restructuring, it's how much do we invest in growth, productivity and sustainability and how much investment workflows. The net of that, I'm still saying, is we should get good operating leverage as we go forward.

I want to open up to the audience in a second, but let me ask you one follow-up on sort of the whole debate around margins is price versus cost, right? Sometimes I get the question like, well, what's going on with 3M's margins in the past? Is pricing power an issue? Like maybe talk about price versus cost as you see it going forward. Like you're getting out of some of these consumer business, as you talked about, maybe that's because those were more commoditized businesses or so. So core pricing power at 3M, how strong is it? And then if you look at the cost side, has inflation continue to sort of die down? Should I worry about the Red Sea or things like that?

So I'll just -- Andy, you followed 3M more than I -- longer than I've been here. I would tell you, the company has always been able to get good pricing power. And that's driven by the value that they create for customers and consumers. And I don't think that, that changes in the long run either. So I'll start with that. Then if I go further into price discussions for 2023 and prior to 2022, you have seen that we have been able to manage the inflation that all of us saw in every industry by managing price. Secondly, I don't think we follow just a formulaic approach at 3M, which is every product has a certain formula and price goes. You have to go market by market, product by product. When I look at 2024, our current belief is that we have price that will offset the inflation. We are still seeing inflation in certain commodities and raw materials, and labor inflation continues to be sticky. But again, as we have told you, we know how to manage this. We are watching these trends. We will take price as necessary. But more importantly, again, I go back to the teams learned so much over the last few years about driving cost out too at the same time, whether it's dual sourcing, running your factories better. All of that equation comes in at the end to look at how do you manage the inflation that we see. But overall, long term, I'm confident that the value equation will continue to be in 3M's favor because of all the work that we do for our customers and the value that we create for them.

Questions from the audience?

During the phase leading up to the restructuring, I assume you did some due diligence and some of the things we're talking about now about streamlining the operations, aligning better to customers and executing better. They're usually a byproduct of how people have now become accustomed to how to do work inside the company. What did you learn about what was going on inside the company about how people were approaching work? And then the second thing is most of what we're talking about are sort of the lagging indicators margin. What are you looking at for the leading indicators that are -- things are changing before we get to the lagging indicator?

Yes. It's important questions. And I would say first of all, the restructuring that we took was not a top-down 10% of the company kind of restructuring. This was something that really came out of a lot of work over time coming through the pandemic as we operate. If you go back to the beginning of the pandemic, we realigned around 4 go-to-market models. We also took our supply chains from around the world. We had different supply chain models we operate around the world, control tower in Europe. We had -- ran by business in the U.S. We ran by country the rest of the world, and we integrated it all together. And we made the decision to take advantage of digital and data and analytics capabilities that we've built in the company and said we can operate this differently. We can do -- we can get closer to customers, we can drive greater performance across our enterprise, and we align that way as we operated that. Even as we came through the pandemic and the supply chain disruptions, we learned how to optimize that. And that was really the basis for that restructuring. So streamlining the organization, streamlining the company was taking advantage of how we're operating that global supply chain, for example, plan, source, make, deliver. You can actually commercialize, plan, source, make, deliver. End to end, how do we operate that more efficiently? And that was part of the restructuring. That was a big part of that restructuring. Monish mentioned, we also stepped into leaning out the center of the company ahead of the spin of Health Care. That was an important -- and how we did that was very -- I think, very focused on positioning 3M Company for the long term to be successful. We also were operating those go-to-market models during that time and learning how to optimize that, and that went into the restructuring as well. So the focus was on -- as your question pointed at leading indicators, we want to drive service cost cash coming through our supply chain. For example, we expected to drive our innovation model with our customers, closer to our customers. They value what we do for them that's indispensable. They value the quality and the performance that we deliver to them from our products. So positioning ourselves to be able to be responsive to them, that was the focus. So we watch those leading indicators, customer-facing metrics, supply chain performance, our business performance, our portfolio performance, those are the leading indicators. And as we drive the momentum that we've been talking about, we're getting improvements broadly. We're seeing the -- what's showing up in our $9.24 versus guide is margin improvements that come from restructuring, but also come from improving performance in those leading indicators. So it is positioning us, when we talk about being well positioned for the future, what we can do based on those changes to get better. There's more to do, and we see that continuing as we go through this year.

Can I just add one more thing, Mike, if you don't mind? So I think Mike touched on digitization. We are able to see more metrics faster than we had ever seen, whether it's your factory yield, efficiency, customer service metrics, where is inventory, all of that, I would say, the teams hyper-focused on that. And we use a term inside 3M, which is embrace the red, so admit you have an issue. And I think the teams are getting far better. Now we need to continue to do that consistently across the company to say I have a problem. And I think if you think about managing a good operating system, it would always tell you admit you know where your issue is, so then you can go get somebody to go fix it so your cycle time to fix it is quicker. And so we've got a lot more daily metrics that the teams look at to make sure that the ship is moving in the right direction.

Other question?

Can you maybe just clarify the volume cadence underneath the guide for 2024? Just give us a sense for H1 versus H2? What is embedded in the guide?

Yes. So listen, I'll tell you, we gave you the guide for the whole year, which is flat to 2%, which includes approximately 100 basis points of headwind with the geographic and portfolio. So it's 1% to 3%, excluding that. I would say, as we went into the year, we said electronics would, at some point, bottom up and stabilize and start growing. Watching China, as Mike mentioned, China GDP was approximately 5% for the year, but that, again, is the year. You've got auto builds, which were approximately flat to slightly negative for the year. If you look at the data that IHS publishes, which is the same data that we get to see, it says the first half is going to be a little lower than the second half. And then if you look at just general GDP, IPI across the world, the prediction says that the second half is going to get better. And again, that's -- as you've got to remember, we had a short-cycle business. So we are looking at the same macro trends that many of you all are. So sitting into Q1, we said Q1 is looking very similar to Q4. But we think as time goes on, hopefully, the economies will improve. And it's the same trends Mike mentioned before and I mentioned before, that we are watching to make sure this plays itself out. And as things evolve, either positive or negative, we'll definitely keep you in the loop.

Anything else? So I have 2 questions for you on Health Care. Form 10, congratulations. So first, Health Care has been a good grower over a long period of time, as you guys know. It seems to have settled more sort of low to mid-single digits to mid-single digits. So how do you think about it sort of going forward? And then the other question is really around the stranded costs, you mentioned TSAs, like all that stuff that is not in guidance. Is there a way now that the Form 10 is out to sort of quantify costs associated with the deal? Because I think that was something that maybe held down your [indiscernible].

Yes. Of course, I'm going to take the privilege of asking Monish to manage the model question.

Help us manage the model, Monish.

So just taking a look at our Health Care business, Solventum, I'm going to leave it to Bryan and his team. They're going to come out here shortly and talk about where they're going in the future. And so I'm going to leave it to him to talk more about '24 and beyond. I would just go back to '23 for a moment. Our Health Care business, we had total year growth about 1% for the business. I would say that reflected some lingering impacts from COVID, and you saw the hospital still a very stressed budgets. And you saw that in our portfolio, we had both medical solutions and our oral care business were up low single digits and saw a little better growth. We had Health Information Systems [ phasing in ] those stressed hospital budgets. And I would say our separation and purification sciences business, our biopharma filtration is part of that, seeing some overhang from COVID. They were down low single digits. So the performance reflected some of that, and Bryan is going to come out and talk about it. I would just say we have a diverse -- a very strong, diverse, leading med tech portfolio, and we expect a great future for it as a stand-alone company.

Monish?

Yes. I would say, Andy, we've mentioned it even at earnings day. We're going to have an investor event post the spin to get you all up to date, give you all the math behind how you look at all of this. I would just say from an overall restructuring stranded costs and more importantly, how the teams have managed the process of spin, we had a dedicated team that was responsible for helping the carve-out. They've done a fantastic job. And at the same time, some of the restructuring actions that we have taken allow us to eat into some of that portion of that stranded costs that would have existed if we -- when we lost 25% of the revenue from Health Care as we spun out that company. So we'll keep you posted. I would say on the TSA side, considering the size of the carve-out, there will be certain TSAs and supply agreements that will exist for a period of time. ranging from a month to 2 to 3 years for some of our IT systems, and then we'll have a supply agreement where we will sell certain materials to Solventum and vice versa. They'll do it as we continue to separate the 2 companies out. But I would say the teams have done a marvelous job getting us to where we are, and we are excited to see where both companies can go with the benefit of the spin allows both companies to follow their own growth agendas, tailor their capital allocation priorities and then allow to then as a result, create value for shareholders. So we'll definitely keep you all posted on all the details.

All right. Thanks for that, Monish. And then it's good to hear you get $7.7 billion from Health Care. So how does that make you feel then because the balance sheet was already in pretty good shape? But obviously, I'm going to ask you a question about liabilities in a second. But the question I get all the time is about the dividend. So any updated thoughts about the dividend given the Form 10 is out?

Yes. I would say the $7.7 billion comment on top of a strong balance sheet position today, it really reflects the strong cash generation capabilities of 3M Company. We had very strong robust cash flow in '23, up 30%. That was another reflection of that. So it positions us well between our -- where we are today with a strong balance sheet and the cash flow capabilities as 3M Company, and also the $7.7 billion and the 19.9% stake are going to make that a stronger balance sheet. So as we look forward, Monish said it, both companies will be well positioned to manage tailored capital allocation strategies. For 3M Company, that means investing in the business, continues to be the priority to invest in our business. We'll be well positioned to do that. We'll be well positioned to return cash to shareholders and value to shareholders, including through a dividend, paying an attractive dividend. And then we also, we continue to be well positioned to manage the requirements of cash for the litigation matter. So it positions us well for the future.

And I think you've done a good job of controlling what you can control when it comes to the liabilities. But maybe I can ask you what's next after Combat Arms and after the public water utilities. Like when I read the -- some financial disclosures, I think you've got AFFF personal injury MDL. There's circular RCRA designation. So like what do we tell investors about how you're -- what are you focused on to kind of continue to control what you can control on the liability side?

Yes. I would start with just emphasizing that we are managing the litigation matters with Combat Arms and public water supplier, I talked about in my opening comments. So public water supplier settlement is an important step in the PFAS matters, legal matters. And we'll continue to manage those as we go forward. That includes personal injury, attorneys general, international claims that we see as we go forward. And I would say we'll continue to execute the strategy the way we've talked about it. Well, we're going to proactively manage it. We'll defend ourselves in court and resolve it through settlements as appropriate, and we'll keep everyone updated as we go.

And then, Mike, I ask this question of every company, I've asked you at last year. Like what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

Well, there's 2 perspectives that I would talk about today, and we have talked about them quite a bit, but I think it frames it up well. And I would say it starts with, we focus on where we have the best opportunity to leverage the strengths of 3M, attractive markets where we have the right to win, where our innovation can solve our customers' needs. Our innovation model starts with the customer back. We innovate to give them the next improvements they're looking for. We create new opportunities where they have needs. Maybe sometimes they don't even articulate at this point, and then we build new businesses off of it. And those 2 kind of lineup, we have opportunities in where we have large commercial presence today, and we prioritize markets that are on trend. So safety, areas of industrial, consumer electronics and automotive, these are all areas, large commercial presence, home improvement. Even though it's -- consumer spending is soft in those segments, in those categories, that's a long-term trend that's durable. And those are areas where we really can differentiate ourselves and are. We've introduced new products as we've come through '23 and we'll introduce new products in '24 in those areas. Those are opportunities for us. At the same time, there are emerging technology trends, climate technology, industrial automation, the next generation of electronics, data centers and AR/VR. These are all areas that have opportunities for us and our innovation. So we're investing in those areas. Our pipeline of innovation is strong, and we see that opportunity. And again, it remains our first priority in capital allocation to invest in our business. And those are -- that confidence that we can create, that differentiated value is why we prioritize that.

Awesome. Well, we very much appreciate your time. Mike, Monish, Bruce, thank you very much.

All right. Thanks, Andy.