3M Company

Ladies and gentlemen, thank you for standing by. 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. 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 Thursday, April 25th, 2019. I would now like to turn the call over to Bruce Germelin, Vice President of Investor Relations at 3M.

Thank you and good morning, everyone. Welcome to our first quarter 2019 business review. With me today are Mike Roman, 3M's chief executive officer, and Nick Gangstad, our chief financial officer. Mike and Nick will make some formal comments, and then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on our investor relations website at 3M.com under the heading quarterly earnings. Please turn to slide two. Before we begin, let me remind you to mark your calendars for our upcoming earnings calls on July 25th and October 24th. Please take a moment to read the forward-looking statement on slide three. During today's conference call, we will make 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. Finally, please note that throughout today's presentation, we will be making references to certain non-GAAP financial measures. In particular, measures which exclude the impact of the Tax Cuts and Jobs Act and significant litigation-related charges. Reconciliations of the non-GAAP measures can be found in the appendix of today's presentation and press release. Please turn to slide four, and I'll hand it off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. The first quarter was a disappointing start to the year for 3M. We continued to face slowing in several key end markets, which impacted both growth and margins. and our operational execution fell short of the expectations we have for ourselves. Today I will lay out a number of aggressive actions we are taking to drive productivity, reduce costs, and improve cash flow as we manage through challenges in some of our end markets. In addition, I will provide an update on two litigation issues that affected our results and provide updated guidance for the full year. I will also discuss the realignment of our business groups that we announced last month, which will enable even greater growth and operational efficiency. Please turn to slide 5 for a summary of our first quarter numbers. Organic growth company-wide was minus 1%, lower than we anticipated. We saw end market softness in China, automotive, and electronics, which we have discussed throughout the quarter. We also faced channel inventory adjustments, which negatively impacted several of our businesses. With respect to EPS, we posted adjusted earnings of $2.23 per share, down 11% year over year. This excludes significant litigation charges related to PFAS and respirators, which I will discuss later in my remarks. Underlying margins were 21% in the quarter, down 160 basis points, with adjusted income of $1.7 billion. Our earnings and margin shortfall was due to a combination of two things. First, negative organic growth in the quarter, and second, weak productivity, especially in our industrial-related businesses within Asia Pacific and the United States, as the actions we took were not sufficient to offset the broad-based softening we faced in those markets as the quarter progressed. Please turn to slide six. We are moving quickly to strengthen our performance and address the challenges we face, and the actions on this slide are underway. First, we are reducing approximately 2,000 positions, through both voluntary and involuntary actions. Reductions will span all business groups, functions, and geographies, with emphasis on corporate structure and underperforming areas of the portfolio. On a pre-tax basis, we will take a charge of approximately $150 million in 2019, and we expect annual savings of approximately $225 to $250 million, with $100 million this year. Job reductions are never easy, but they are necessary to make us stronger and a more competitive enterprise as we move forward. Beyond restructuring, we are also driving cash flow by reducing inventory levels and accelerating actions on indirect costs. Importantly, while we take these actions, we remain focused on our customers and balancing short-term pressures with the long-term success of 3M. That is why we will continue our investments in growth, which includes research and development and our priority growth programs. This is a playbook we know how to execute, and we are confident it will enable us to maximize value for shareholders as we work through the market slowdowns and our related actions, positioning us for strong growth as our markets recover. Please turn to slide seven. As I mentioned earlier, two significant litigation matters related to PFAS and respirators impacted our quarter. and resulted in a total charge of $548 million, or 72 cents per share. We increased our respiratory reserve by $313 million to address the costs of resolving all current and expected coal mine dust lawsuits in Kentucky and West Virginia. We also established a PFAS reserve of $235 million to cover certain environmental matters and litigation related to the manufacture and disposal of PFAS at five 3M facilities, including three in the United States and two in Europe. This reserve does not include any product claims related to PFAS. We continue to work closely with the EPA and other regulatory bodies to support science-based regulations of these chemistries. We also continue to work with the communities we serve to ensure they can have confidence in the quality of their drinking water. Additional details will be available in our upcoming 10Q filing. Please turn to slide 8 for an update on our 2019 guidance. While we remain positive on the global macroeconomic environment, growth conditions in certain markets have been slower than anticipated going into the year. As a result, today we are updating our range for organic growth to minus 1 to plus 2%. against a prior range of 1% to 4%. In addition, we anticipate adjusted earnings of $9.25 to $9.75 per share, which includes the restructuring impact, versus the previous range of $10.45 to $10.90. We now expect a return on invested capital of 20% to 22% against the prior range of 22% to 25%. we continue to anticipate a free cash flow conversion rate of 95% to 105%. I'll come back to make some comments on our new business group alignment after Nick takes you through the details of the quarter.