雅虎香港財經 3M Company (NYSE:MMM) Q1 2023 Earnings Call Transcript
3M Company (NYSE:MMM) Q1 2023 Earnings Call Transcript April 25, 2023
3M Company beats earnings expectations. Reported EPS is $1.97, expectations were $1.58.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the 3M First Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Tuesday, April 25, 2023. I would now like to turn the call over to Bruce Jermeland, Senior Vice President of Investor Relations at 3M.
Bruce Jermeland: Thank you, and good morning, everyone, and welcome to our fourth quarter earnings conference call. With me today are Mike Roman, 3M’s Chairman and Chief Executive Officer and Monish Patolawala, our Chief Financial and Transformation Officer. Mike and Monish will make some formal comments then we will take your questions. Please note that today’s earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3m.com. Please turn to Slide 2. Please take a moment to read the forward-looking statement. During today’s conference call, we will be making certain predictive statements that reflect our current views about 3M’s future performance and financial results.
These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note throughout today’s presentation, we will be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today’s press release. With that, please turn to Slide 3. And I will now hand the call off to Mike. Mike?
Mike Roman: Thank you, Bruce. Good morning, everyone, and thank you for joining us. Before I recap our first quarter, I want to discuss actions we are taking to improve our performance. As you recall, over the past few years, we have implemented a new global operating model led by our four business groups, which included moving to a common global supply chain design end-to-end. We have since advanced our digital capabilities, further repositioned our portfolio and continue to invest in growth and productivity. Our experience throughout this journey, including lessons learned during the pandemic, supply chain disruptions, and changing global trends has shown us what is working and what we can do better. As I said last quarter, we are looking at everything we do.
Today, we are announcing additional actions to improve our cost structure, streamline our corporate center, strengthen our supply chain, enhance our go-to-market models and drive greater focus in markets, where 3M science gives us a clear competitive advantage. We will reduce costs at the corporate center by eliminating management layers across the company. We are broadly reducing our corporate shared services like our central design group. We are reducing rooftops worldwide, including exiting our conference center in Northern Minnesota. We are also simplifying and modernizing our technology by moving to the cloud and removing hundreds of legacy systems. This reduces costs and provides us greater agility and flexibility to invest in differentiated digital areas like data, analytics and automation while increasing investments in cybersecurity.
We are simplifying our supply chain structure to better align with our businesses and improve performance in every aspect of plan, source, make and deliver while adding industry expertise to help drive our progress. The actions we are announcing today will help us complete our shift from area to global management, simplifying reporting lines and clarifying accountability. We are also taking out layers of management and duplication of activities across all areas of supply chain. Our progress in digital gives us better tools to use in the areas of planning, sourcing and logistics, removing redundant work and improving productivity. And we will prioritize our continuous improvement efforts in our largest factory operations. We will have a more efficient support structure and operating model to improve service, cost and inventory.
We are streamlining go-to-market models to better align with customers, improve agility and reduce management structure. This is driven by our relentless focus on optimizing the path to our customer. We are not adopting a one-size-fits-all approach. We are customizing an approach for each business that ensures greater focus. In Safety and Industrial and Transportation and Electronics, we will eliminate certain area-based business group leadership and move to a division-led model. In Transportation and Electronics, we will also combine two divisions, further reducing structure. In Consumer, we will simplify how we go-to-market, with each area team aligned around their prioritized product portfolios and leading brands. In addition, we are changing our go-to-market model in approximately 30 countries around the globe, which represent less than 5% of our revenue.
In these countries, we will leverage our digital and export capabilities and move to a model partnering with distributors with deep local knowledge and infrastructure, enabling us to significantly reduce our people, real estate and other related costs. Through our actions, we plan to eliminate approximately 6,000 positions globally in addition to the reduction of 2,500 global manufacturing roles we announced in January. In total, this represents about 10% of our global workforce and senior executive roles. Reductions will span all functions, businesses and geographies and be completed in accordance with local regulations. We expect to take total pre-tax restructuring charges of $700 million to $900 million, with approximately half of the charges to occur in 2023 and the balance to be largely taken in 2024.
We anticipate the actions will drive savings in the range of $700 million to $900 million, expand margins and position 3M for future growth. We estimate that approximately half of the annualized savings will be realized in 2023. At the same time, we are continuing to build 3M for the future, prioritizing high-growth markets like automotive electrification, personal safety, home improvement, semiconductors and healthcare. We are also investing in large emerging markets that demand our material science innovation, including climate technology, industrial automation, next-generation electronics and sustainable packaging. As we move forward, we will drive additional cost reductions through improvements in sourcing, yield, productivity, factory automation and network optimization of our plants and distribution centers.
Today, we are also announcing changes to align our leadership to our future direction. Effective immediately, Mike Vale is appointed Group President and Chief Business and Country Officer, a new role on the company’s corporate operations committee reporting to me. In this new role, he will have responsibility for three of the company’s four business groups: Safety and Industrial; Transportation and Electronics and Consumer; and also Country Governance. Jeff Lavers, who is leading our Consumer and Healthcare business, will now lead our healthcare business and support the company’s progress towards a spin-off and the transition to a new CEO and management team. Jeff continues to report to me. Karina Chavez will become Group President, Consumer.
Chris Goralski will become Group President, Safety and Industrial. Ashish Khandpur will continue as Group President, Transportation and Electronics. All three are experienced leaders at 3M and well-positioned to help drive the actions we announced today to improve our performance. Karina, Chris and Ashish will report to Mike Vale. In total, today’s actions will make 3M more streamlined and competitive. Now please turn to Slide 4 for a summary of our first quarter. In an economic environment that remains challenging, we stayed relentlessly focused on serving customers and aggressively managed costs. We posted adjusted organic growth of minus 5.6% or minus 2.2% excluding our Russia exit and decline in disposable respirator sales. We delivered adjusted margins of nearly 18% and adjusted earnings of $1.97 per share, while expanding our adjusted free cash flow to $900 million.
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Today, we are affirming our full year guidance for organic growth, EPS and cash flow, which is inclusive of the restructuring charges and related savings. End-market trends played out as expected with ongoing weakness in consumer-facing markets. We saw continued strength in certain industrial markets, including automotive, electrical markets and abrasives. Our actions to reduce costs, which included plant spending, external services, travel and hiring, helped drive stronger-than-expected earnings and margins. We also continued to improve inventory levels, enabling us to deliver strong cash flow. At the same time, we are advancing our strategic priorities for long-term value creation as we make progress on the spin of our healthcare business.
Turning to litigation, on Combat Arms, 3M continues to support Aearo Technologies through mediation discussions. We are focused on achieving a resolution that is efficient and equitable for all parties. With respect to PFAS, we continue to address litigation by defending ourselves in court or negotiating resolutions as appropriate. We also have a dedicated team to facilitate an orderly transition as we exit PFAS manufacturing and work to discontinue the use of PFAS in our products by the end of 2025. In summary, we are improving day-to-day operational execution, advancing our strategic priorities and taking necessary actions to move 3M forward. We are dedicated to building on our progress, delivering greater value for our customers and shareholders and exiting 2023 a stronger and more focused 3M.
Monish will now take you through the details of the quarter. Monish?
Monish Patolawala: Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 5. As Mike mentioned, the first quarter macro and end-market trends have played out largely as anticipated. We experienced significant end-market weakness in consumer electronics, shifting consumer spending patterns along with the retailer destocking and mixed industrial end markets. We also continue to navigate COVID-related impacts in China and the ongoing geopolitical challenges in Europe. Given the expected challenging start to the year, we relentlessly focused on serving our customers and took very aggressive actions to manage costs and spending. These actions, coupled with a lower-than-expected foreign currency headwind, enabled us to deliver a first quarter that was better than forecasted.
First quarter total adjusted sales was $7.7 billion or down 9.7% year-on-year. In addition to focusing on serving customers, first quarter sales benefited from a smaller-than-anticipated headwind to sales from foreign currency translation. The first quarter year-on-year translation impact was a minus 2.8% or approximately $230 million versus a forecast of minus 3% to minus 4%. We also experienced a 1.3% sales decline from divestitures or approximately $120 million versus Q1 last year. This decline was largely from the third quarter 2022 divestiture of Food Safety, along with the deconsolidation of Aearo Technologies. On an adjusted organic basis, first quarter sales decreased 5.6% versus last year. This result included an expected year-on-year headwind of approximately $300 million or 3.4 percentage points related to lower disposable respirator demand and the exit of our operations in Russia last year in the third quarter.
Excluding this decline, Q1 adjusted organic sales growth was minus 2.2%. First quarter adjusted operating income was $1.4 billion with operating margins of 17.9% and adjusted earnings of $1.97. Turning to the components that impacted first quarter operating margins and earnings year-on-year performance, our Q1 margin and earnings reflect the previously mentioned lower sales volume. This lower sales volume, combined with our efforts to reduce inventories, resulted in lower manufacturing productivity versus last year’s first quarter. We were able to partially offset these headwinds through pricing performance and aggressive cost management, resulting in a net headwind to margins of 90 basis points and $0.17 to earnings. As mentioned, we faced a challenging Q1 comp from last year’s Omicron-driven disposable respirator demand, along with the exit of operations in Russia.
This sales comp headwind resulted in a negative impact to operating margins of 1.1 percentage points and to earnings of $0.21 per share. We continued our focus on improving our manufacturing and supply chain operations, including executing on restructuring actions to streamline the organization and adjust to slowing end-market demand. Restructuring charges in the quarter were $52 million or a year-on-year headwind of 50 basis points to margin and $0.05 to earnings per share. The carryover impact of higher raw material, logistics and energy cost inflation created a year-on-year headwind of approximately $100 million or a negative 130 basis point impact to operating margins and $0.15 to earnings. As mentioned, foreign currency translation was a negative 2.8% impact to total sales.
This resulted in a headwind of 30 basis points to margins and $0.10 to earnings per share. Divestitures, primarily Food Safety, along with the deconsolidation of Aearo Technologies, resulted in a year-on-year headwind of $0.03 to earnings per share in the quarter. Finally, other financial items increased earnings by a net $0.05 per share year-on-year driven by lower share count, partially offset by higher non-op pension expense. Please turn to Slide 6. First quarter adjusted free cash flow was approximately $950 million, up 24% year-on-year with conversion of 87%, up 37 percentage points versus last year’s Q1. This year-on-year improvement was driven by lower annual incentive cash compensation and a strong focus on working capital management, particularly inventory improvement.
During the quarter, we continued to address manufacturing production levels to better align with end-market trends. Since last August, we have driven an approximately $500 million reduction in inventory levels. As I’ve said before, as supply chains heal and we progress the use of data and data analytics, we will see a reduction in inventory levels. Adjusted capital expenditures were $445 million in the quarter, up 15% year-on-year as we continue to invest in growth, productivity and sustainability. During the quarter, we returned nearly $900 million to shareholders. Net debt at the end of Q1 stood at $12 billion, down 10% year-on-year with net debt-to-EBITDA at 1.5x. Please turn to Slide 8 for our business group performance. I will start with our Safety and Industrial business, which posted sales of $2.8 billion or down 6% organically.
This result included a year-on-year comp headwind of $285 million due to last year’s Omicron-driven disposable respirator demand and exit of Russia. Excluding the impact from disposable respirators and Russia exit, Safety and Industrial sales grew nearly 4% organically in Q1. Organic growth was led by high single-digit increases in automotive aftermarket, electrical markets and abrasives, while the personal safety business declined mid-teens primarily due to the decline in disposable respirator demand. Excluding the impact from disposable respirators, the personal safety business grew low double digits organically. Turning to the rest of Safety and Industrial, organic growth declined high single-digits in industrial adhesives and tapes due to consumer electronic softness.
And closure and masking systems was down low single digits as consumers pull back on discretionary spending, impacting e-commerce shipments. Roofing granules were down low single digits. Adjusted operating income was $562 million or down 19% versus last year. Adjusted operating margins were 20.2%, down 2.4 percentage points year-on-year. Margin headwinds were driven by lower sales volume, manufacturing and supply chain headwinds, carryover raw material, logistics and energy cost inflation, investments in the business and impacts from China COVID-related challenges. These headwinds were partially offset by benefits from pricing, aggressive spending discipline and productivity actions. Moving to Transportation and Electronics on Slide 9, which posted Q1 adjusted sales of $1.7 billion.
Adjusted organic growth declined 11.3% year-on-year, heavily impacted by a significant decline in demand for consumer electronic devices. Our auto OEM business increased approximately 6% year-on-year, in line with global car and light truck builds. We continue to gain penetration on new automotive platforms and expect to outperform build rates over the long run. Our electronics business saw adjusted organic sales declines in the mid-30% range. This business continues to be impacted by significant end-market weakness along with tiers and OEMs aggressively reducing inventories, particularly for smartphones, tablets and TVs. Turning to the rest of Transportation and Electronics. Advanced Materials had adjusted organic growth of high single digits year-on-year, while both transportation safety and commercial solutions declined.
Transportation and Electronics delivered $284 million in adjusted operating income, down 36% year-on-year. Adjusted operating margin was 16.7%, down 5.5 percentage points year-on-year. Margin headwinds were driven by sales volume declines, manufacturing and supply chain headwinds, carryover raw material, logistics and energy cost inflation, investments in the business and impacts from China COVID-related challenges. These headwinds were partially offset by benefits from pricing, aggressive spending discipline and productivity actions. Looking at our Healthcare business on Slide 10. Q1 sales were $2 billion with organic growth of 1.4% versus last year. Excluding the impact on the exit of Russia, Healthcare grew Q1 organic sales by approximately 2%.
Sales in our Medical Solutions business and oral care grew low single digits organically year-on-year, while Health Information Systems was flat due to strained hospital budgets. Separation and purification declined high single digits due to the normalization of post-COVID-related biopharma demand. First quarter elective healthcare procedure volumes were approximately 90% of pre-COVID levels as nurse labor shortages and strained hospital budgets continue to impact the pace of recovery. We continue to expect procedure volumes to improve as we progress through the year. Healthcare’s first quarter operating income was $360 million, down 19% year-on-year. Operating margins were 17.9%, down 3 percentage points. Year-on-year, operating margins were impacted by manufacturing and supply chain headwinds, carryover raw material logistics, and energy cost inflation, and investments in the business.
These headwinds were partially offset by benefits from pricing, aggressive spending discipline, and productivity actions. Lastly on slide 11, our consumer business posted first-quarter sales of $1.2 billion. Organic sales declined 6.8% year-on-year with particular weakness in the U.S., which was down high single digits. Stationery and office grew low single digits organically year-on-year, while the home improvement, home health and auto care business declined organically. Relative to first quarter last year, consumers have shifted their spending patterns to more non-discretionary items and retailers have aggressively reduced their inventory levels. We expect consumers to remain cautious with their discretionary spending as we move forward through the year.
Consumer’s first quarter operating income was $179 million, down 18% compared to last year with operating margins of 15%, down 1.8 percentage points year-on-year. The year-on-year decline in operating margins was driven by lower sales volume, manufacturing and supply chain headwinds and carryover raw material, logistics and energy cost inflation. These headwinds were partially offset by benefits from pricing, aggressive spending discipline and productivity actions. That concludes our remarks on the first quarter. Please turn to Slide 13 for a discussion on our outlook for the year and the second quarter. We are maintaining our full year guidance, reflecting a macroeconomic and end-market environment that remains very fluid and uncertain. Our outlook continues to incorporate the expected second half improvement in macroeconomic forecasts, including in China.
We also anticipate the continued healing of global supply chains, which will help support ongoing product cost improvements in our manufacturing and supply chain operations, along with working capital performance, particularly inventory reductions. As a reminder, our full year adjusted organic sales growth is expected to be in the range of minus 3% to flat. This range includes an estimated 2 percentage point headwind from the ongoing decline in disposable respirator demand, along with the impact of our exit from Russia. Adjusted earnings are expected to be in the range of $8.50 to $9 per share. Full year adjusted free cash flow conversion remains forecasted in the range of 90% to 100%. Turning to our outlook for the second quarter. First, looking at external macroeconomic forecasts, both global GDP and IPI are currently expected to improve year-on-year and sequentially.
The softness we experienced in Q1 in consumer electronics and consumer retail is expected to continue into Q2. We expect both sequential and year-on-year increase in auto bills, while healthcare procedure volumes are anticipated to be similar to Q1 levels and industrial end markets are expected to remain mixed. As discussed, we implemented very aggressive cost controls in the first quarter given the challenging start to the year, including on travel, advertising, external services and head count management. While we will remain disciplined, we expect to increase investments as we progress through the year to support end-market demand improvement in the second half and into the future. Including these factors, our expectations for Q2 are for total adjusted sales to be in the range of $7.7 billion to $7.9 billion versus $8.4 billion last year or down 6% to 8% year-on-year.
Organic sales is expected to be down low to mid-single digits, which includes the forecasted year-on-year headwind of approximately 1.5% from disposable respirators. And finally, foreign currency translation is expected to be approximately a minus 2% headwind to sales versus last year’s Q2 and divestitures a year-on-year headwind of minus 1%. From an EPS perspective, we estimate that second quarter adjusted earnings per share will be in the range of $1.50 to $1.75, including a pretax restructuring charge of $175 million to $250 million or $0.25 to $0.35 per share. This range also incorporates the continued softness in organic sales and expected increase in investments, higher non-op interest costs and an adjusted tax rate of 18.5% to 19.5%.
To wrap up, 2023 is a pivotal year for 3M from an execution perspective. As I mentioned, we aggressively managed cost, focused on serving customers while navigating end-market weakness, particularly in consumer-facing markets as we started the year. We expect organic sales volumes will improve as consumer retail and consumer electronics markets stabilize, China work through its COVID-related challenges as our year-on-year comps ease. The actions we announced today will enable us to exit 2023 stronger than we started and provide for significant margin and cash flow improvement into the future. I want to thank our customers and suppliers for their partnerships and the 3M employees for their hard work and dedication as they continue delivering for our customers.
That concludes my remarks. We will now take your questions.
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