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spk12: Ladies and gentlemen, thank you for standing by. Welcome to the 3M Second 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. At that time, if you have a question, please press the 1 followed by the 4 on your telephone keypad. It is recommended that you use a landline phone if you're going to register for a question. As a reminder, this conference is being recorded Tuesday, July 25th, 2023. I would now like to turn the call over to Bruce Germeland, Senior Vice President of Investor Relations at 3M.
spk03: Thank you and good morning, everyone, and welcome to our second quarter earnings conference call. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer, Monish Patalawala, our Chief Financial and Transformation Officer, and Kevin Rhodes, our Chief Legal Officer. Mike, Kevin, 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 two. Please take a moment to read the forward-looking statements. During today's conference call, we'll 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'll 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 three, and I'll now hand the call off to Mike. Mike? Thank you, Bruce.
spk04: Good morning, everyone, and thank you for joining us. In the second quarter, we made significant progress on the important actions we have been taking to improve our performance and shape the future of 3M. We posted adjusted organic growth of negative 2.5%, which includes a negative 1.7% headwind from the expected decline in disposable respirator sales. Revenue for the quarter was at the high end of our guidance range. Our adjusted operating margin was 19.3%. impacted by restructuring charges of $212 million, or a headwind to adjusted operating margin of 2.7 percentage points. Excluding these charges, we increased operating margin year over year. We delivered adjusted earnings per share of $2.17 and adjusted free cash flow of $1.5 billion, driven by continued improvements in inventory management. Today we are updating our full year earnings per share guidance to $8.60 to $9.10, up from a previous range of $8.50 to $9.00. We remain confident in our ability to deliver on our commitments, realize additional benefits from our restructuring actions, and position 3M for the future. In the quarter, we maintained a strong focus on serving customers, driving operational execution, and maintaining spending discipline. All business segments delivered sequential improvement and adjusted operating margins. Our restructuring actions and strong focus on cost management drove these margin improvements. Looking at our markets, trends played out as expected. We saw strength in automotive, both OEM and aftermarket, as well as highway infrastructure and personal safety, excluding disposable respirators. Healthcare, which was up slightly, continues to be impacted by lower post-COVID-related demand, notably in our biopharma, health information, and medical solutions businesses. We also saw continued weakness in electronics, consumer retail, and China. Please turn to slide four. As we focus on improving our performance and managing a dynamic external environment, our teams are driving three strategic priorities, improving operational execution, successfully spinning off our healthcare business, and addressing litigation. We are on track with our restructuring actions and have made significant progress in leaning out the center of the company, simplifying our management structure, and streamlining our supply chain. The changes to our enterprise supply chain organization are enabling improvements in service, cost, and inventory, which help drive our second quarter results. We are also taking advantage of the continued healing in supply chains to reduce logistics costs and improve production yield. We've also made progress in advancing our go-to-market models to bring our innovation closer to customers. In support of these changes, to date, we have initiated the transition to a new export model in 24 countries. I am pleased with how these changes are helping drive performance. We've made good progress on our planned spin of our healthcare business, including regulatory filings and system updates in preparation for soft spin. We are also in the final steps of naming a CEO. We continue to work towards closing the transaction by year-end 2023 or early 2024, subject to the required conditions and additional factors we have disclosed in our SEC filings. Last month, we announced an agreement subject to court approval to resolve public water systems claims nationwide in the AFFF multi-district litigation. This agreement will benefit us based public water systems that provide drinking water to a vast majority of Americans. The settlement covers all forms of PFAS. As we announced, we have taken a Q2 related charge of $10.3 billion payable over 13 years. Also related to litigation, we continue to participate in the confidential mediation process as part of the combat arms MDL. and we'll provide updates as appropriate. To provide additional details on our PFAS settlement agreement, I will now turn the call over to Kevin. Please turn to slide five.
spk02: Kevin. Thank you, Mike, and good morning. This is an important step forward for 3M. As Mike said, we have entered into a broad class resolution with public water systems that provide drinking water to the vast majority of Americans. We are taking a proactive approach to managing PFAS by establishing a more certain path forward for public water systems, communities, and 3M. Subject to court approval, 3M has agreed to support PFAS remediation for public water systems that detect PFAS at any level. And our agreement addresses all PFAS, not just those compounds that have been the primary focus of litigation to date. Our agreement also provides funding for eligible public water systems that may detect PFAS into the future, and we have agreed to fund additional testing by public water systems as well. As Mike shared, the agreement terms entail a present value commitment of $10.3 billion paid over 13 years. Additional details regarding the payment schedule are available in our Form 8K filed in June. While this agreement provides an alternative to continued litigation for class members and for 3M, we remain prepared to defend ourselves in litigation should the agreement not receive court approval or should public water systems choose to litigate instead. We are building on actions 3M has taken and continues to take. We were the first company to exit the manufacturing of two forms of PFAS, namely PFOA and PFOS, which we announced more than 20 years ago. We have invested in state-of-the-art water filtration technology in our chemical manufacturing operations, and we have announced that 3M will exit all PFAS manufacturing by the end of 2025. We will continue to build on this important progress as we focus on the future and work to proactively manage PFAS. Now, let me turn it over to Monish to provide more details regarding our performance in the quarter. Monish.
spk06: Thank you, Kevin, and I wish you all a very good morning. Please turn to slide six. Our second quarter performance was driven by a continued focus on serving our customers, improving manufacturing and supply chain productivity, while also maintaining strong spending discipline. Also, during the quarter, we initiated a large part of our restructuring program to simplify and streamline the organization. We are aggressively reducing management layers and rooftops while also streamlining our go-to-market models and supply chain, bringing us closer to our customers. End market trends continue to play out as anticipated with ongoing weakness in electronics, soft discretionary spending patterns in consumer retail, and mixed trends in industrial end markets. Regionally, China's recovery has been slow. impacted by electronics and soft export trends. Europe remains challenged as the uncertain geopolitical situation persists, while end markets in the U.S. largely remain steady. Second quarter total adjusted sales were $8 billion, or down 4.7% year-on-year. This result was a little better than forecasted as we experienced a smaller-than-anticipated headwind from foreign currency translation of minus 0.9% versus a forecast of minus 2%. On an adjusted basis, organic sales declined 2.5% versus last year. This result included an expected year-on-year headwind of approximately $140 million, or 1.7 percentage points, related to lower disposable respirator demand. Excluding this impact, Q2 adjusted organic sales declined 0.8 percent. On an adjusted basis, second quarter operating income was $1.5 billion, with operating margins of 19.3 percent and earnings of $2.17 per share. These results included pre-tax restructuring charges of $212 million, which negatively impacted adjusted operating margins by 2.7 percentage points and earnings by 31 cents per share. Without the impact of restructuring, second quarter adjusted operating margins were 22% or up 40 basis points versus last year, and earnings were $2.48, up 3 cents year-on-year. Turning to other components that impacted results year-on-year. We were able to more than offset the impact of lower sales volumes and inflation impacts through improved manufacturing productivity, benefits from restructuring, strong spending discipline, and selling prices, while continuing to invest in the business. The net result was an increase to margins of 1.4 percentage points and 15 cents to earnings. The previously mentioned headwind from disposable respirators resulted in a negative impact to operating margins of 50 basis points and to earnings of $0.09 per share. The carrier impact of higher raw material, logistics, and energy cost inflation created a year-on-year headwind of approximately $30 million or a negative 30 basis points impact to operating margins and $0.04 to earnings. As mentioned, foreign currency translation was a negative 0.9 percent impact to total sales. This resulted in a headwind of 20 basis points to margins and two cents to earnings per share. Divestitures, primarily food safety, did not impact margins but resulted in a year-on-year headwind of three cents to earnings per share. Finally, Other financial items increased earnings by a net $0.06 per share year-on-year, primarily driven by a lower share count, which was partially offset by a lower non-op pension benefit. In summary, our teams focus on driving productivity, executing restructuring actions, and controlling spending is starting to yield results. These actions include coupled with improvement in global supply chains drove sequential improvement in adjusted operating margins across all of our business groups. Excluding restructuring charges, adjusted operating margins improved 3.6 percentage points sequentially. Please turn to slide seven. Second quarter adjusted free cash flow was approximately $1.5 billion, up 44% year-on-year, with conversion of 122%, up 50 percentage points, versus last year's Q2. This year-on-year improvement was driven by an ongoing focus on working capital management, especially inventory, and the timing impact related to restructuring charges. Inventory was flat sequentially versus a typical historical build from Q1 to Q2. We continue to adjust production output to end markets and leverage the power of daily management and data and data analytics to increase the velocity of inventory turns. Adjusted capital expenditures were $328 million in the quarter. or similar year-on-year as we continue to invest in growth, productivity, and sustainability. During the quarter, we returned $828 million to shareholders via dividend. Net debt at the end of Q2 stood at $11.7 billion, or down 12% year-on-year. Our business segments continue their long history of robust cash flow generation. In addition, a proven access to capital markets, along with the anticipated one-time dividend from the spin of healthcare at 3 to 3.5 times EBITDA and 19.9% retained stake, will provide additional financial flexibility. This, combined with our existing strong capital structure, provides us the flexibility to continue to invest in the business return capital to shareholders, and meet the cash flow needs related to ongoing legal matters. Now, please turn to slide nine for our business group performance. Starting with our safety and industrial business, which posted sales of $2.8 billion or down 4.6% organically. This result included a year-on-year headwind of approximately $140 million, or 4.8 percentage points, due to last year's COVID-related disposable respirator decline. Excluding disposable respirators, safety and industrial sales grew 0.2% organically in Q2. Organic growth was led by mid-single-digit increases in roofing granules and automotive aftermarket, while personal safety declined due to last year's disposable respirator comp. Excluding disposable respirators, personal safety was up high single digits organically. Closure and masking declined due to slowdown in packaging and shipping activity, while industrial adhesives and tapes continue to be impacted by in-market softness in electronics. Adjusted operating income was $614 million, or down 2.4% versus last year. Adjusted operating margins were 22.2%, up 70 basis points year-on-year, and up 2 percentage points sequentially. The year-on-year improvement in margins was driven by productivity action, strong spending discipline, and price. Partially offsetting these benefits were headwinds from lower sales volumes restructuring costs, and inflation impacts. Moving to transportation and electronics on slide 10, which posted Q2 adjusted sales of $1.9 billion. Adjusted organic growth declined 2.4% year on year, largely due to the continued decline in demand for electronics. Our auto OEM business increased approximately 21% year on year, approximately 600 basis points higher than global car and light truck bills. Our electronics business continues to be impacted by soft end market demand for electronics. As a result, this business experienced a year-on-year decline in adjusted organic sales of approximately 22%. Electronic end markets continue to remain highly uncertain. We expect our year-on-year organic growth rates in electronics to remain negative in the second half. However, improve versus down nearly 30% in the first half as we start to lap easier comps. Turning to the rest of transportation and electronics, transportation safety grew high single digits organically, while commercial solutions and advanced materials were up low single digits year-on-year. Transportation and electronics delivered $369 million in adjusted operating income, down 19% year-on-year. Adjusted operating margins were 19.8%, down 3.6 percentage points year-on-year, however, increased 3.1 percentage points sequentially. Margin headwinds were driven by sales volume declines, restructuring costs, and inflation impacts. These headwinds were partially offset by benefits from strong spending discipline, productivity action, and pricing. Looking at our healthcare business on slide 11, Q2 sales were $2.1 billion, with organic growth up slightly versus last year. Organic sales in oral care were up low single digits year on year, and medical solutions business grew slightly. Separation and purification and health information systems declined mid-single digits and low-single digits, respectively. These businesses continue to be impacted by lower post-COVID-related biopharma demand and ongoing stress on hospital budgets. As procedure volumes continue to improve, hospital budgets stabilize, and we work through post-COVID-related impacts to We are confident in the long-term outlook of this business. Healthcare's second quarter operating income was $411 million, down 16% year-on-year. Operating margins were 19.8%, down 2.8 percentage points year-on-year. However, increased sequentially 1.9 percentage points. Year-on-year operating margins were impacted by lower sales volumes, restructuring costs, and inflation impacts. These headwinds were partially offset by benefits from strong spending discipline, productivity actions, and pricing. Finally, on slide 12, our consumer business posted second quarter sales of $1.3 billion. Organic sales declined 2.2% year-on-year as discretionary spending on hardline categories remains soft. We expect this trend to continue into the second half of the year. Organic sales grew slightly in home, health, and auto care, while home improvement and stationary and office businesses both declined. Consumer second quarter operating income was $235 million, down 5% compared to last year, with operating margins of 18.2%. down 40 basis points year-on-year, but up 3.2 percentage points sequentially. The year-on-year decline in operating margins was driven by lower sales volumes, restructuring costs, and inflation impacts. These headwinds were partially offset by benefits from strong spending discipline, productivity actions, and pricing. That concludes our remarks on the second quarter. please turn to slide 14 for an update on our full year expectations. During a January earnings call, we highlighted that we expected macroeconomic and end market uncertainties to continue to persist into the year. In addition, we noted that we were starting to see the healing of supply chains. However, we expected to continue to see headwinds from raw material availability and inflation, although at a lower level than 2022. We also stated that we were not satisfied with our performance, and we would be taking a deeper look at everything we do as we continue to prepare for the spin of healthcare. As a result, we noted that as we move through the year, we would be taking additional actions to improve supply chain performance, drive simplification, and bring us closer to our customers. While we have more work to do, Let me take a moment to provide a few examples on the progress we have made through the first half of the year, starting with our sales performance. While end markets continue to play out as expected, Q1 and Q2 revenue was slightly above our expectations. Our teams continue to relentlessly focus on serving our customers, work down backlogs, and leverage the use of data and data analytics to drive improvements in demand planning. Next, as we have mentioned, we are aggressively addressing structure. We are on track with our actions to reduce structure across the company, including at corporate, in our business segments, and in manufacturing supply chain. We have initiated the transition of 24 countries to an export model partnering with local distribution to serve those customers and markets. In addition, we have made good progress in reducing corporate structure including the exit of our aviation operations and our conference center in northern Minnesota. And finally, we continue to adjust our production levels to end-market trends, manage inventory, and aggressively control spending. As a result of our actions, along with improvements in global supply chains and raw material availability, we are able to deliver first-half performance better than anticipated particularly for margins, earnings, and cash flow. In the first half of the year, on an adjusted basis, we delivered sales of $15.7 billion, operating margins of 18.6%, and earnings per share of $4.14. These results included $264 million in pre-tax restructuring charges, or a headwind to margins of 1.7 percentage points and to earnings of 38 cents per share. In addition, a strong operational execution and working capital management, particularly inventories, helped us to deliver $2.3 billion of adjusted free cash flow with a conversion rate of 105%. Turning to guidance, we are raising our full-year adjusted earnings expectation as a result of our strong first half operational execution as evidenced by an improving margin rate. We now expect full-year earnings in the range of $8.60 to $9.10 versus a prior range of $8.50 to $9.00. We continue to closely monitor end market trends across all our businesses particularly in electronics, consumer retail, industrial, and China, and have yet to see signs of improvement in trends. Therefore, we currently see organic growth tracking to the lower end of our range of flat to minus 3%. This reflects our performance to date, along with our year-on-year headwind from disposable respirators tracking to the high end of our anticipated range, are down approximately $550 million, along with continued macro and end-market uncertainty. And finally, a full-year adjusted free cash flow conversion expectation remains unchanged in a forecasted range of 90% to 100%. Looking ahead to the third quarter, we expect end-market trends to be very similar to Q2. Hence, we anticipate third-quarter adjusted sales to be approximately $8 billion. The impact from the COVID-related decline in disposable respirators and last year's exit of Russia is anticipated to be a year-on-year handwritten sales of approximately $130 million, or 1.5 percentage points. Third quarter pre-tax restructuring costs are expected to be in the range of $125 million to $175 million, with pre-tax benefits of $125 million to $150 million. Taken together, we expect third quarter adjusted earnings per share will be in the range of $2.25 to $2.40. To wrap up, we continue to have a strong focus on serving our customers improving the execution in our supply chain, making progress in our restructuring actions, managing costs, and investing in the business while navigating ongoing end market weakness. We expect our actions will continue to build momentum and improve our organic growth, margins, and cash flow performance into the future. I want to thank our customers and suppliers for their partnership. and the 3M employees for their hard work and dedication as they continue to deliver for our customers and shareholders. I am confident in our future. As we have said, as we exit 2023, we will be a stronger, leaner, and more focused 3M. That concludes my remarks. We will now take your questions.
spk12: Ladies and gentlemen, if you would like to register a question using a landline phone, please press the 1 followed by the 4 on your keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. Please limit your participation to one question and one follow-up. One moment, please, while we compile the Q&A roster. Our first question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.
spk09: Yes, good morning. Can you hear me? Morning, Andrew.
spk12: Morning, Andrew.
spk09: Yeah, just a question on the outlook. You know, I think operationally second quarter was quite strong, and I appreciate your commentary on organic growth. But, you know, where is the caution in terms of operational results in the second half? You know, what segments, what verticals are you particularly sort of concerned about, as I said, not to raise guidance more given strength in the second quarter? Thank you.
spk06: Thanks, Andrew. So as I mentioned in my prepared remarks, when we came into the year, we thought we would have end markets would remain uncertain as well as economic uncertainty would exist. Looking at where we are in the first half, as I've called out, electronics continue to remain soft. We were nearly down 30% in the first half. We had consumer spending continue to remain soft, or consumer discretionary spending continue to remain soft. China remained soft in the first half. And then when you put all that together, you look at it and say, what are the trends we are looking for in the second half? And so what we are watching is electronics and see whether it's at its bottom or not. We believe that electronic softness will remain. It's still going to be negative for the year, but less negative in the second half. Consumer spending has remained soft in the first half. We believe it will remain soft in the second half. So we are watching back to school season and holiday season. Industrial activity has remained mixed. There are certain markets that continue to remain strong. There are certain markets that we are seeing a little bit of destocking in there. Healthcare elective procedures, we believe, will continue to go up on a sequential basis. At the same time, biopharma and health information systems are still constrained. Biopharma is going through COVID-related demand, and HISS, or health information systems, is impacted by stressed hospital budgets. As I've also mentioned in my prepared remarks, DR right now looks like it's going to be at the worst end of our range of down 550 million versus we thought it was going to be 450 to 550 coming into the year. And in China, we have second quarter was weak, down 4% on lower comps. And we currently have not seen much of the recovery show up in China. Plus, as a reminder, it was a tough comp in through 3Q of last year as China was coming out of COVID. So when you put all that together, Q3 is very similar to 2Q. And overall, the trends that we see make us feel that where we are right now in the first half and where we see trends going in the second half, we feel that from a revenue guide basis, we'll be at the lower end of our guide that we had given, which was flat to minus three coming into the year. But with that said, Andrew, if markets change, we will definitely be there to serve it. The teams are executing well, as you've seen in the results that we have announced. We've got momentum on supply chain and supply chain execution. The team's doing a great job on restructuring and driving the cost, as well as the team has hyper-focused on making sure we're continuing to be prudent on our cost spending. But as we see these markets start to evolve in the second half and into 2024 and beyond, we won't hesitate to invest in growth in the high-growth markets because ultimately we are in for the long run. Hope I answered your question, Andrew.
spk09: Yeah, no, I mean, it's still sort of margin was pretty solid. But let me drill down on consumer electronics, maybe a little bit more. What would it take for this business to finally turn positive? Or is it just sometime early next year, the comms get so easy that it can't decline anymore? But what KPIs in terms of end markets are you watching? Thank you.
spk04: Yeah, Andrew, maybe I'll pick up on Monisha's description of what we're looking at in the second half. And if you look you know, a little further at the consumer electronics, you know, we saw a soft first half in across all consumer electronics categories, smartphones, TVs, notebooks, tablets. You just saw, you know, and it was impacting our results as Monish outlined. And as we look into the second half, maybe there starts to be projected recovery in the markets in fourth quarter. But really, third quarter looks like the first half. And I would say, picking up on inventory in the channel, we see destocking in a slowdown like this. And so we expect some destocking to continue in the electronics channel. So as we go into third quarter, that's kind of forming the view that we have. Now, what would we need to see? We would need to see a turnaround in demand in in those particular build rates and those end markets. And we'll see, I think, confidence show up in the inventory and the channel as well. So we're watching each of those categories closely in consumer electronics, and we also keep an eye on semiconductor capacity as well and how that's being, you know, how production is changing there. That gives you an indication of demand as well.
spk03: Thanks, Claude. Yep, thanks, Andrew.
spk12: Our next question is from the line of Andy Kapowitz with Citigroup. Please proceed with your question.
spk10: Good morning, everyone. Hi, Andy. Good morning, Andy. So I just want to delve in a little more into your margin performance in Q2 and what it means for your second half. I mean, obviously, you had a nice step up in sequential margin despite absorbing the 2.7% of pre-tax charges. So how do we think about the durability of the productivity actions and the positive price versus cost that it looked like, you know, was going on in the quarter. And how do you think about margin performance in bed in Q3, Manish, in the second half? It still looks like you're forecasting margin below Q2 and Q3.
spk06: Yeah, Andy, I'll just start first with your question on sustainability, et cetera. There have been a few questions on cadence of restructuring charges and benefits. And we have attached an appendix that shows you by quarter where we expect to be for 2023, which is charges in the range of $400 to $450 million and benefits in the range of $400 to $450 million of self-funding. The total program, as a reminder, is between $700 to $900 million of charge and $700 to $900 million of benefits. From a cadence perspective, depending on how the restructuring announcements play itself out, we've given you 2023. We expect 2024 charges by the end of 2024 to have pretty much taken most of the restructuring charges. The benefits, of course, show up in 2025 and beyond. And once all these charges come to an end, the benefit is between $700 to $900 million. Okay. Your second piece on where are we starting to see margin, as you have seen coming into the second quarter, one of the reasons for us able to beat expectations in the second quarter was driving supply chain efficiency. So factories started to heal better, raw materials started to flow better, which allowed us to have longer runs. But at the same time, the work that the supply chain team has done under Peter Gibbons is starting to drive the execution, and we are starting to see that in the results. And then, of course, the team's hyper-focused on cost control. So to answer the question on second half and how this plays out, one is you do have to adjust for the restructuring cost by quarter, and you will see that the margin rate is climbing. Secondly, when we came into the year, we had said OI or operating margin would be somewhere in that 18.5% to 19% range. Sitting right now with a lower revenue number, with a higher EPS number, we believe that we'll be somewhere in that 19.5% to 20% range, which includes all the charges and all the benefits. What we are watching also is, to answer some other of your points, Raw material and energy cost inflation coming into the year was $150 to $250. We have now changed that to $150 to $200 million. So we are starting to see the benefit there. What we have seen so far, Andy, is disinflation, which is lower inflation than last year. We are seeing the benefit in logistics, but however, some of our commodities still continue to be inflationary, and labor, frankly, is sticky from an inflation perspective in those commodities. But that also will play itself out as events play out through this year and into 2024 and beyond. And then we will continue to be focused on cost. Another item for us in the second quarter, second half, is As we are getting ready for the spin of healthcare, we'll be, of course, standing up the new management team. Mike already talked about that in his prepared remarks. There will be some cost incurred as we have management teams appointed that start getting ready to have healthcare be a standalone company. And then I would just say on another housekeeping item is other financial issues. When we came into the year, we had said it would be minus 10 to flat on a year-over-year basis. We are updating that to minus 5 to plus 5, which on the midpoint is zero. First half, we got benefited by 11 cents. Second half, it will be a negative 11, but that's on a year-over-year basis. So I gave you a lot, Andy, just to make sure that you have enough information as you build your models out and you look at us in totality.
spk10: No, it's very helpful, Manish. And then just for the next question, maybe just a little more color into industrial businesses within safety and industrial. I think you'd got it to down low single digits for the year, and you continue to be down mid-single digits in Q2. I know last quarter you described industrial markets as mixed, same description this quarter. But maybe you could characterize markets for us. Do you still see low single digits decline for the year in industrial markets?
spk04: Yeah, Andy, the quarter down mid-single digits, that was also impacted by disposable respirators down as we talked about. So about flat for the quarter outside of disposable respirators. And as Monish outlined, we're going to see more to the high end of our range of what we expected for disposable respirator declines in the year, which means in third quarter we'll see an impact from that as well. And when we talk about mixed, it's really across the portfolio. We're seeing some strengths in our roofing granules, our automotive aftermarket business. You know, the demand for car repair and around that business is strong. We saw some softness in electrical markets and abrasives. Our industrial adhesives and tapes business is impacted by electronics, so that's feeding into the industrial business as well. Personal safety... excluding disposable respirators has been showing strength, up high single digits in the quarter. So that's kind of the mixed picture. We're also in the channel, we're seeing some caution from distributors. They're cautious about the outlook for industrial markets. They're also seeing the benefit of improving and healing supply chains. So cycle times are improving and they're pulling back on some inventory. So that's having some impact on our businesses as we come through the quarter and our outlook for the second half. So it's a mix. And, you know, the The impact from China is part of that as well. We're seeing the slowdown in the markets there or the slow first half and not yet seeing an upturn in that and looking for that as we go into the second half. So that kind of gives you a view across what we mean by mixed markets.
spk10: Appreciate the color, guys.
spk04: Good.
spk12: Our next question is from the line of Scott Davis with Melius Research. Please go ahead.
spk13: Good morning, Mike and Monation, Bruce and Kevin. Good morning, Scott. Good morning, Scott. I'm curious just overall, are you seeing areas or particular, you know, products or markets where you're getting some pressure to drop your prices, particularly given some of the weaker demand, or do you feel like you can hold on to some of those price increases that you've got in the last couple of years?
spk04: So, yeah, Scott, I would say, you know, as you see, Monish called it disinflation, moderating of inflation, you're going to start to have discussions around impact on price. I would say when we look at it, our price value is in the right place where we are, where we face our markets. I would say the area where you have the most discussion typically are retail markets. It's an ongoing discussion, always is, even in the times of high inflation. It's a strong discussion, but price is a topic everywhere. We're confident that we're priced in the right place as we come through this market dynamic broadly. So we're not looking at pressure specific in one segment or other, but I would say the the conversation is something that we anticipate as we see disinflation and eventually we see deflation, then we would expect it to ramp up.
spk13: Okay, that's helpful. And guys, a little bit bigger picture question. When you talk about supply chain streamlining, what do you mean exactly? I mean, how do you balance kind of the, I'm assuming that means kind of localization, but between balancing between resiliency and not being relying on any particular supply partner, but sometimes there's added costs that come into resiliency. So how do you think about streamlining and the cost-benefit of streamlining? And maybe you can give us a more concrete example of that to help us understand what that means specifically.
spk04: Yeah, Scott, maybe I'll step back for a second. As we came through the pandemic – we saw a lot of factors impacting our supply chains. Inflation, labor shortages, raw material availability, all that was impacting our production runs and really creating inefficiency in our factories, impacting yields. And as we came into this year, we started to see supply chains healing. We're seeing labor availability improving. Monish highlighted we're still seeing inflation in labor. raw material availability has improved. And we put a lot of focus during the most difficult times in the supply chain disruptions on multiple sources for raw materials. And we were engaging with many suppliers, hundreds of suppliers on a monthly basis to try to manage those raw material interruptions. As they've healed, that's become much more focused on a few raw materials. We're seeing much better availability. All this is helping us run our factories a little more efficiently. We're seeing improvements in yield. We're seeing improvements in logistics as supply chains heal more broadly. And so as we stepped into the restructuring, we were taking stock of what we learned during the pandemic, what we learned during restructuring, also what we learned as we moved to our global operating model. And so streamlining is really taking advantage of all those learnings. And I would say also taking advantage of investments in data and data analytics, our digital strategies and investing in productivity more broadly in our manufacturing models. And so streamlining is focused broadly across our supply chain. I talked about we're working to improve every aspect of it, better, more disciplined planning, taking advantage of data and analytics, stronger focus on sourcing, that dual sourcing, taking advantage of that strategy. what we can learn in the plants about running more efficiently, and how we can manage logistics more efficiently. So plan, source, make, deliver. We're streamlining across that, really taking advantage of the learnings. And I would also say stepping into aligning to customers and our business models. And it's going to continue to be an opportunity for improvement. We'll continue to evolve this. But the restructuring actions really try to incorporate those learnings. And it wasn't a top-down, we're going to take out so much headcount. It was how do we restructure, realign, streamline our supply chain plan source make-deliver to take advantage of all that and position us in the markets that we're in, but also position us to be ready for a stronger performance as we go forward in the future.
spk13: Very helpful. Best of luck the rest of the year, guys. Thank you. Thank you.
spk12: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
spk11: Thanks. Good morning, everybody, and I appreciate the additional details on the restructuring, Modish. Just my first question really just around that deflationary point or things are getting a little bit better or better than you originally expected. You know, it seems like most of the inflationary headwinds have already occurred for the year, and so do you expect that to turn positive, I guess, by 4Q, or is that something that could turn positive in the 3Q numbers?
spk06: Yeah, so, Joe, I think you have to break this up into multiple pieces. What I've said before is what we are seeing is lower inflation than a year-over-year rate, Our headwinds are somewhere in the range of 150 to 200 between electricity and carryover of raw material inflation. We have done 100 in the first quarter, and we have done, I would say, between 25 in the second. So we've still got a little to go on carryover. But when you talk about new inflation, I'll break this up into logistics costs are seeing in lower costs. partly driven by we are also reducing the amount of premium freight that we use during the pandemic because raw materials are flowing better. You are still seeing inflationary items in downstream. So upstream materials have started to show signs of moderation of inflation. But from a downstream perspective, labor cost is still pretty sticky in inflation. So what I would say is we'll have to look commodity by commodity, market by market, and as things evolve in the third and fourth quarter, you should start seeing some of the costs on a year-over-year basis get better. If you recall last year, it was, I would say, October, November was when you started hitting peak of inflation, and then you saw markets starting to moderate. It'll also, of course, depend on ultimately what happens with monetary policy. It'll also impact, depends on demand. that you're going to get from China and the rest of the end markets that we play in. So all put together, our current view is that things have gotten better, especially logistics. Material is flowing better, which is definitely helping us run our factories better. We are seeing cost out, and the teams are doing a nice job of driving it, but it will take a little bit of time. for it to show up depending on a year-over-year comp and how much of that material we actually consume based on the volume we produce. Long answer to your question, but it's multiple materials, so it's not one that we buy, unfortunately.
spk11: Yeah, that's super helpful. Thank you for that. I guess my following question, I know we talked a little bit about the weakness in electronics, but I want to go back to it for a second. Is there a way to maybe just kind of parse out exactly what you're seeing in that end market. And then specifically, I know that, you know, Apple's considering rolling out like an all OLED iPad next year. And I know when we went through that transition a few years ago on smartphones, that was a hot topic for your company. Any thoughts just around that specifically and how that impacts your business?
spk04: Yeah, Joe, I will go back to my earlier comments. You know, the decline that we've seen in the first half has really been driven by reduced demand in smartphones, tablets, TVs, you know, those different categories. There is an ongoing shift in the display technology from LCD to OLED, and that's something we had talked about, as you noted. We talked about it a number of years ago, anticipating it. We continue to innovate on the OLED platforms, but we do see some impact from that shift as we see the continued, you know, movement away from LCD to OLED in a few of those categories. So there's some impact from that. The bigger impact, again, is the demand in the end market, smartphones, TVs, tablets, and laptops, if you will, as categories.
spk11: Okay, thank you. Mm-hmm.
spk12: Our next question comes from the line of Chris Snyder with UBS. Please proceed with your question.
spk08: Thank you. I wanted to ask on the restructuring program. So for Q3, if we just annualize the expected savings, it's about $500 million to $600 million, which isn't far off the full $700 million to $900 million range, which Sounds like we shouldn't expect in 2025. So, you know, this is another $400 million to $500 million of spend coming post Q423. You know, is there any reason that the savings are maybe tracking a little bit ahead? You know, is there anything that's front-weighted that we should be aware about here? Thank you.
spk06: Yeah, Chris, a great question. So your math is right. I would also look at fourth quarter where they have said $185 million to $235 million. You take that midpoint and you annualize that, you'll get closer to the overall annual range. But when you look at the way our charges are, some of it is rooftops, some of this is non-cash charges, and some of it is restructuring people. All that put together in the first half, we've done 262 charges. What is left to go, which is I think your question in 24 and beyond, what happens with the cost, there are a couple of things. Geography by geography, we go through negotiations, make sure we are following all the regulations in there so there will be a cost for that. And then we've got some other rooftops, et cetera, that take a little longer for us to exit that also happen in 2024 and beyond. So that's why you're seeing this the way it is right now.
spk08: Okay. Yeah, I appreciate that. And then, you know, it certainly feels like the savings here are coming in a bit quicker maybe than previously thought. I do not think there's anything in the guide for Q2 restructuring savings, which obviously came through. Does that change the way you think about the plan over the next couple years into 2025, just seeing the savings come through faster than you thought? Thank you.
spk06: Yeah, I would say, listen, on Q2, the teams knew that we had to execute well and early, and they've done a nice job. Some of the benefit came from headcount, but a lot of the other benefits that we've got is, as Mike mentioned about streamlining the corporate, we were able to go after a lot of indirect costs in those areas, including exiting some of the rooftops that we wanted to that we were planning to early. So, again, it goes back to a lot of focus on cost control, making sure that where we are spending our money on an indirect perspective also is well focused on, and that's where we were able to get Q2 to be off to a better start than we expected. So I give the team a lot of credit. They're going through very granular level of detail, making sure that we are doing the right amount of spend and focusing in the right places we get the best return. So my credit to the team. Thank you.
spk12: Our next question comes from the line of Nicole DePlace with Deutsche Bank. Please proceed with your question.
spk01: Good morning, guys. Morning, Nicole. Maybe just starting with biopharma. So this is an area where, you know, we've seen weakness post-COVID for some time now. Has there been any green shoots there? I don't know if you think about orders or what customers are saying about spend to the second half.
spk04: Nicole, our highlight of biopharma as being one of the impacts on solar growth in healthcare is really a reflection of the post-COVID dynamic. So we saw a strong demand in biopharma for vaccines and therapeutics and we ramped up to serve that and the industry did broadly. And what you're seeing is kind of the other side of that demand and also the inventory, working off the inventory that was built up and trying to respond to that demand. So we're seeing both aspects of that. The space, the opportunity that we see for innovation and for us growing the business, we see this as a long-term growth driver. We have New solutions that, and one of the reasons we had value as we came through the opportunity of vaccines and therapeutics is we could combine steps in the processing, you know, multiple steps into one. And so that demand is going to be there as we look forward to, you know, recombinant protein therapeutics are an opportunity going forward. We're just near term working through that post-COVID dynamic, both in market demand and inventory in the broader channel.
spk06: Nicole, I'll add one more is we are very confident and bullish about this business. In fact, we've added capacity to continue to have more production output out there as the demand comes back.
spk01: Got it. And just to clarify, in your second half outlook, like what's baked into the healthcare business, have you embedded any improvement in biopharma or is the expectation that that's more of a 2024 dynamic?
spk06: So as I've mentioned, there is slight improvement that you're going to see overall in health care. One is elective procedures should go up. Biopharma demand should start settling down. Hospital budgets are hopefully starting to bottom, but we don't know that. So we'll have to see what happens with elective procedures. procedures. But overall, I would say there is improvement from a first half to second half in the market in general, in healthcare that we have embedded into our guide. On the other hand, the thing we are watching also is oral care, Nicole, or orthodontics. Because as you know, if the economy slows down, that's an area that people will control their spending on. And so that's the other thing we're watching. And, of course, China and seeing how the recovery in China plays itself out. But as I mentioned in my prepared remarks, Mike has said it multiple times too, this is a great business. In the long term, this will continue to have very good growth. We are working through some comps from last year, which is COVID, as well as capital budgets and hospitals. But all those trends in the long term will turn themselves around.
spk01: Thanks, Manish. I'll pass it on.
spk12: Our next question comes from the line of Steve Tusa with JP Morgan. Please proceed with your question.
spk07: Hey, good morning. Good morning, Steve. Thanks for taking the call here late. Can we just calibrate because there's a lot of moving parts around, you know, the adjusted sales numbers. I think your guidance implies roughly like $7.9 billion in sales, like a modest sequential step down from the third quarter just on an absolute basis. Is that right?
spk06: It's $8 billion for Q3. Is that your question? I'm sorry.
spk07: No, Q4. Q4. Q4.
spk06: What's implied? Yeah, it would be around that range. It's somewhere in that range. You're right.
spk07: Yeah, okay. And can you just give us an idea of the range of the absolute margin? I mean, we could probably do a lot of backing into it, but what you now expect for the year from just a range on an absolute margin basis? Yes.
spk06: Between 19.5% to 20%, Steve, versus the 19% that we had told you coming into the year.
spk07: That's great. Thanks. And just one last one on these liabilities. So what was the change in the mindset from, you know, really drawing a bit of a hard line and talking about, you know, how the science, you know, made you guys look at this stuff, and then, you know, taking what is still a pretty sizable perspective $10 to $12 billion charge. That's a pretty significant change in mindset. What drove that internally?
spk04: Yeah, I think over the last several years, we've been talking about taking a proactive approach to managing our litigation, and that includes the whole PFAS docket. And it's been part of our strategy, and we talk about it kind of in short form, that we're going to practically manage it, defend ourselves in court, and work to resolve through mediation as appropriate. And that's been really the guiding strategy and how we've looked at it. So as things evolve, we are making decisions around that frame.
spk07: Does it matter where the stock price is and what that's reflecting when it comes to how you think about this stuff?
spk04: Addressing litigation, our strategy there is independent of what the share price is doing. I mean, certainly... there's an overhang in the stock price and the uncertainty around that. And we're, you know, we are focused on doing what we can to address litigation, help address that uncertainty. That's something, you know, we've been discussing with investors, you know, over multiple years. And so that certainly plays into it from that standpoint. We don't like the overhang on the stock and and we want to manage it. But we've got to, as we move forward, we've got to do what's in the best interest of the company for the long term. And so that gets back to we're going to defend ourselves in court, and we're going to work to resolve as appropriate.
spk07: Yeah, absolutely. Makes sense. All right. Thanks a lot. Thanks, Steve.
spk12: Our next question is from the line of Lawrence Alexander with Jefferies. Please proceed with your question.
spk00: This is Dan Rizwan for Lawrence, and thanks for fitting me in. Just a quick question on inventories that you've managed so well. How should we think about inventory turnover in the long run, I mean, over the next few years? What is kind of the go-forward thought process?
spk06: Yeah, you know, as I've said before, as supply chains start to heal, one of our big opportunities or opportunities to continue driving cash flow is inventories. The teams have done a really nice job of starting to use data and data analytics. We're getting better at doing demand planning. So I would say in the long term, you should see trends continue to improve from an inventory terms perspective because as supply chains heal, as we get better on demand planning, that's where you're going to see it. So you will see it get better in the long run.
spk12: Thank you very much. That does conclude the question and answer portion for our conference call. I will now turn the call back over to Mike Roman for some closing remarks.
spk04: To wrap up, we continue to execute in a dynamic environment. While we see progress and positive momentum, we have more work to do. And we'll continue to advance our restructuring actions, control costs, strengthen our supply chain. At the same time, we'll drive our strategic priorities, improving operational execution, successfully spinning off our healthcare business, and addressing litigation. I thank 3Mers for their contributions and commitment, especially as we continue to lead through significant change. We'll stay focused on driving growth, improving operational performance, and delivering value to customers and shareholders. Thank you for joining us.
spk12: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
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