3M Company

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 are going to register for a question. As a reminder, this conference is being recorded Tuesday, April 28, 2020. I would now like to currently call over to Bruce Germaland, Vice President of Investor Relations at 3M.

Thank you and good morning, everyone. Welcome to our first quarter 2020 Business Review. With me today are Mike Roman, 3M's Chief Executive Officer, and Nick Gangstead, 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 2. Before we begin, let me remind you of the dates for our upcoming 2020 Quarterly Earnings Conference Calls, which will be held on July 28 and October 27. Also, please note, given the uncertainty related to the COVID-19 pandemic, we have not set a date for an investor meeting later this year. Please take a moment to read the forward-looking statement on slide 3. 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 10K lists some of the most important risk factors that could cause actual results to differ from our predictions. Finally, 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. Please note, we have provided segment and total company adjusted EVA DOT reconciliations for reference in today's press release attachments as part of our non-GAAP measures. Please turn to slide 4 and I'll hand it off to Mike. Mike?

Are you ready? Thank you, Bruce. Good morning, everyone. I hope you and your families are safe and I thank you for joining us. Let me also take this opportunity to say how much we appreciate and admire everything our heroic nurses, doctors, and first responders around the world are doing to fight COVID-19. And I'd like to share this sentiment with our employees. In this unprecedented time, I could not be more proud of how you have stepped up to help protect those on the front lines of this crisis. I would like to also recognize those 3M'ers in our manufacturing and distribution sites who in these most challenging circumstances continue to work around the clock to accelerate production of respirators and other critical supplies. I thank all of our people for your tireless efforts and your incredible work. At 3M, we have a unique and critical responsibility in pandemic preparedness and response. Our response throughout COVID-19 has been guided by our purpose as an enterprise and shaped by these three principles. First, an uncompromising commitment to the safety of our employees. Second, fighting the pandemic with urgency from all angles, including everything we're doing to help protect health care workers and first responders. And third, maintaining business continuity, executing actions to deliver for our customers and shareholders and to lead out of the economic slowdown. Please turn to slide 5. In January, we mobilized 3M's crisis action team to coordinate our response to COVID-19. This team meets daily to ensure we are addressing our highest priorities, which as I mentioned, starts with protecting the safety and well-being of our people. Our learnings from China, which was impacted by the virus first, helped guide our actions worldwide and made a significant difference in our ability to rapidly prepare and respond. We moved quickly to implement remote work where possible across the enterprise. And today, approximately half of our employees are working from home, including myself. In our plants and other facilities where remote work isn't feasible, we have instituted robust safety protocols. These include stringent cleaning and medical screening, along with staggering shifts and reorganizing how we work to increase social distancing. COVID-19 is impacting all of us, both professionally and personally. But for some, it's much more serious than others. For 3Mers personally affected by the virus, we have implemented pandemic support policies to help protect their pay and benefits and allow them to take care of themselves and their families. The situation is changing daily, sometimes hourly, and we will continue to assess the safety of our people and facilities to ensure their well-being and comply with government directives. Please turn to slide 6. As we protect our own employees, we continue to work urgently to protect the public, including healthcare workers and first responders. 3M is a longtime leader in personal safety with a range of science-based solutions for respiratory, face, hearing, and fall protection, which goes to the heart of our vision of improving every life. This includes our N95 respirators, which 3M pioneered nearly 50 years ago and which we have continuously refined and improved ever since. Our largest production of N95 respirators is in the U.S. at two plants in South Dakota and Nebraska, and we also manufacture them in Asia Pacific, Europe, and Latin America. After SARS in the early 2000s, we made the decision to prepare for future crises by investing in significant surge capacity at each of our respirator plants around the world. This additional capacity has largely remained idle for the last two decades, except for emergencies such as H1N1, the Japanese tsunami, and wildfires in California and Australia. As you know, compared to prior emergencies, COVID-19 has caused an unprecedented explosion in demand. When the virus broke out, we were able to immediately activate our surge capacity and maximize production to support the public health response. Beginning in January, 3M doubled our global output of N95 respirators to $1.1 billion per year, or about $100 million per month, including $35 million per month in the U.S. We've made additional investments and are also working with the Department of Defense to double annual production once again to $2 billion by the end of this year, with additional capacity already beginning to come online. In the U.S., we will be producing N95 respirators at a rate of roughly $50 million per month in June, a 40 percent increase from current levels. We are also partnering with other companies on innovative solutions to protect those on the front lines. In collaboration with multiple sterilization companies, we have introduced new methods for hospitals to safely clean and reuse their N95 respirators. We are also working with Ford and Cummins to expand production of 3M's powered air purifying respirators, with a plan to increase capacity by tenfold within the next 60 to 90 days. Protecting people in this crisis is not just a 3M challenge, it's an industry-wide challenge. Even with 3M's accelerated production, the stark reality is that global demand for respirators far outpaces the ability of the entire industry to deliver. That is why, as we urgently expand capacity, we are also prioritizing and triaging our supplies to the most critical needs. We move quickly, within days of regulatory approval, to redirect more than 90 percent of our respirators into healthcare, with the rest deployed to other critical industries such as energy and food. Within individual regions and countries, we are working with government agencies such as FEMA and distribution partners to identify and serve hotspots. In addition, as the pandemic unfolds in different stages globally, we are working with governments to address trade restrictions and regulatory standards so we can redirect supplies around the world. For example, in early April, 3M and the U.S. government announced a plan to import 166 million respirators, primarily from our plant in China. 20 million of these respirators have already shipped via the FEMA air bridge, with a total of 40 million expected by the end of this month. This would not have been possible without the partnership of the White House. I would like to thank the President and his team for their leadership, the FDA for extending its Emergency Use Authorization, and FEMA for their work in expediting the import of product to the U.S. This plan is enabling us to maximize support for the U.S. and other areas in urgent need, including Europe, Central and Latin America, and Canada. We also continue to aggressively fight fraud, price-couging, and other illegal and unethical activity. 3M has not and would never raise prices as a result of this crisis, and we are executing a multi-pronged strategy to pursue and deter unscrupulous behavior that is causing real harm to the public. We created a fraud hotline, published our list prices for N95 respirators, and are collaborating closely with partners to ensure that supply chains are secure. While virtually all of those engaging in predatory practices have no relationship with 3M, we have, in a few instances, terminated distributors in our industrial channel for acting unethically or in violation of their agreements. We have also filed multiple lawsuits and continue to make referrals to law enforcement, take down counterfeit websites, and remove deceptive social media posts. Beyond personal protective equipment, 3M Science is leading the fight against COVID-19 in other significant areas as well. We are providing biopharma filtration and purification solutions to support the development of vaccines and therapeutics, including multiple drugs in current trials. Our advanced membrane technology is being utilized in blood oxygenation procedures and medical devices, vital treatments for some of the sickest patients. We are helping hospitals in New York City and elsewhere quickly connect their temporary facilities and are providing leading software and coding solutions at no cost during this critical period of time, enabling frontline workers to better manage the surge in patient volume. 3M has also donated $20 million to support healthcare workers, vulnerable populations, and scientific research. In summary, I am proud of how 3M is helping lead the fight against COVID-19, and we have launched a comprehensive website on 3M.com with more details on our response and other valuable information. Please turn to slide 7. 3M is leading from a position of strength, and in these challenging times, the benefits of our business model have never been clearer. We are a science and manufacturing powerhouse with strong capabilities and brands across the world, with our greatest capabilities here in the United States. In the U.S., we have nearly 80 manufacturing plants and distribution centers anchoring communities in 29 states across the country. 3M has never left our home country and has continuously expanded our U.S. capabilities. Over half of our research and development and capital investments are in the U.S., and every year we export $5 billion in goods to other nations from our robust U.S. manufacturing base. At the same time, over the decades, we have also built out robust capabilities around the world to be close to customers and better serve the unique needs of regional and local markets. These global capabilities include plants and distribution centers in 54 countries, along with three global R&D centers in Asia and Europe. In this crisis, our model has enabled us to respond with agility and at scale, including the rapid deployment of personal safety equipment that we just talked about. It is also enabling us to maintain business continuity, continue to serve our customers, and ensure the integrity of our supply chain, which brings me to slide 8. I am pleased how our team is managing through the pandemic and adjusting our operations to the realities of this fast-changing situation. This includes working closely with our customers to modify our supply and demand plans. Our critical sites are fully operational, though we have implemented some targeted plant or line shutdowns due to weak customer demand or government mandates. Overall, as of late April, roughly three-quarters of our plants and distribution centers remain fully or partially operational. And to support 3M'ers impacted by shutdowns, we have implemented a short-term paid furlough program. In this crisis, I am especially encouraged at the benefits we are seeing from the new global operating model we rolled out at the start of this year. As part of our new model, we consolidated manufacturing, supply chain, and customer operations into a seamless -to-end enterprise operations organization. This team is enabling us to maintain strong customer service, streamline decision-making, and adjust faster than ever to the external environment. As an example, we have reduced our production planning cycle times by 70 percent across our portfolio of businesses. In addition, our new corporate affairs organization has increased our collaboration with governments around the world, while enhancing our employee and community engagement. Beyond our operations, we are also executing financial actions to deliver 2020 and set us up for success in 2021 and beyond. We are maintaining critical investments in organic growth through R&D, including in personal safety and other priority areas. At the same time, we are aggressively managing costs, a continuation of our relentless focus on efficiency and productivity improvements. We have already implemented sharp spending reductions, including a global hiring freeze, limiting our use of temporary contract workers, and cutting indirect costs across the enterprise. In total, we expect these reductions to result in cost savings of $350 to $400 million in the second quarter. We are also adjusting CAPEX plans as we delay or experience slowdowns in certain projects. And we have suspended our share repurchase programs as of March 20th. Importantly, we remain committed to our dividend as a high priority for capital allocation. Overall, these steps will help protect our company as we manage through this uncertain period. And we are prepared to respond with additional actions as needed. Please turn to slide nine. Given the diversity of our businesses, the financial impact of COVID-19 is mixed across 3M. Some areas of our portfolio are experiencing high demand, while others are facing steep declines. In the first quarter, we saw strong growth in personal safety, as well as in other areas such as home improvement, retail cleaning products, food safety, and biopharma filtration. At the same time, we saw weak demand in several other end markets, with the biggest slowdowns in oral care, automotive, aerospace, and general industrial. The slowdowns in these markets accelerated in the second half of March, as many countries began to shut down their economies. With respect to geographic trends, we saw mixed performance across Asia-Pacific, with significant declines early in the year and gradual improvement in March. The Americas held steady through most of the quarter, with the U.S. up 4 percent. Till beginning in mid-March, we saw significant deceleration in both the Americas and EMEA. All in, we delivered organic growth company-wide of 30 basis points, along with adjusted earnings of $2.16 per share, solid margins of 21 percent, and a double-digit increase in cash flow. In summary, I am confident in our ability to lead through this crisis and emerge even stronger. Our execution against our four strategic priorities – portfolio, transformation, innovation, and people and culture – has positioned us well leading into this downturn. Going forward, a continued focus on these priorities, combined with the actions we are taking, will enable us to deliver even greater value for our customers, shareholders, and all stakeholders as the economy recovers. That wraps up my opening comments. I'll come back to discuss our guidance after Nick takes you through the details of the quarter.

Nick. Thank you, Mike, and good morning, everyone. I will start on slide 10 and review the first quarter P&L highlights. Company-wide, first quarter sales were $8.1 billion, with adjusted operating income of $1.7 billion and adjusted operating margins of 20.8 percent. On the right-hand side of this slide, you see the components of our margin performance in the first quarter. Solid underlying productivity in the quarter, along with benefits from our Q2 2019 restructuring actions, contributed 40 basis points to the margins. This result includes -19-related asset write-downs, which negatively impacted margins by 40 basis points. Acquisitions and divestitures combined reduced margins by 90 basis points. This impact is primarily due to the integration and amortization costs associated with our acquisition of a sell-ity. Higher selling prices, along with lower raw material costs together, contributed 40 basis points to first quarter margins. And finally, foreign currency, net of hedging impacts, reduced margins by 40 basis points. Let's now turn to slide 11 for a closer look at earnings per share. First quarter adjusted earnings were $2.16 per share, down 3 percent year over year. Looking at the components of our -on-year earnings performance, solid productivity and benefits from Q2 2019 restructuring actions increased first quarter per share earnings by 7 cents. This includes a negative 4-cent impact from the asset write-downs related to COVID-19 mentioned on the prior slide. Acquisitions and divestitures reduced first quarter earnings by 5 cents per share versus last year, primarily due to the sell-ity acquisition. Please note that this result includes financing costs associated with the acquisition. Foreign currency, net of hedging, was an 8-cent per share headwind in the quarter. Turning to tax rate, our first quarter adjusted tax rate was 20.6 percent versus 19.5 percent last year, lowering earnings per share by 3 cents. And finally, average diluted shares outstanding declined 1 percent versus Q1 last year, adding 3 cents to per share earnings. Please turn to slide 12 for a discussion of our balance sheet and liquidity. One of the hallmarks of 3M is our strong balance sheet, along with our time-tested business model, which generates strong cash flow through economic cycles. As Mike mentioned, we have taken proactive steps during the first quarter to protect and enhance the company's financial flexibility in this uncertain time. With respect to our balance sheet, we had cash and marketable securities on hand of $4.5 billion as of the end of March. This includes $1.75 billion in additional liquidity from last month's debt issuance. We are well capitalized to meet our two upcoming debt maturities, totaling $1.2 billion this year, one in May and another in August. Additionally, we have multiple sources of liquidity. First and foremost, a business that generates strong free cash flow. In the first quarter, we had adjusted free cash flow of approximately $900 million, with adjusted free cash flow conversion of 74 percent. Also, we continue to expect the drug delivery divestiture to close in the second quarter, providing approximately $400 million in after-tax proceeds. From a capital allocation perspective, our long-term strategy remains unchanged. Our first priority is to invest in our business, and second, maintaining our dividend, and lastly, flexible deployment for M&A and share repurchases. While we continue to invest in the business in the near term, we are taking actions and adjusting our 2020 capital allocation plans. As a result, we are lowering our full-year CAPEX budget to approximately $1.3 billion, from a range of $1.6 to $1.8 billion previously. This expectation includes investing an additional $100 million to continue to expand our output of respirators. In addition, in March, we suspended our share repurchase program. And finally, we are aggressively managing discretionary spending to preserve financial flexibility. That wraps up my prepared remarks. Please turn to slide 13, and I'll hand it back over to Mike. Mike? Thank you, Nick.

I'll start by providing an update on the market trends we're seeing so far in April. On a geographic basis, we're seeing ongoing improvements in Asia Pacific, most notably in China, where the virus first emerged. However, we continue to experience significant downturns in the U.S., Europe, and Latin America, areas that remain in the throes of the crisis. I can share that we are seeing a slowdown in growth during the first several weeks of Q2. With total company organic growth through late April down in the mid-teens, we anticipate continued strong demand for respirators, which we expect to contribute approximately 150 basis points to company-wide Q2 growth. At the same time, we expect ongoing weakness in other end markets through Q2, including oral care, automotive, office supplies, and general industrial. Due to this end market uncertainty, at this time we are unable to adequately quantify the impacts to our business for the remainder of the year. Therefore, we are temporarily withdrawing our 2020 guidance until we have better visibility of the duration and impact of a slowdown. At this time, we believe Q2 results will be especially challenged given the trends we have seen so far in April, with revenue and EPS declines year over year. In lieu of guidance, starting in May, we will provide monthly updates on how our business is performing, and we will continue to provide this until we are better able to forecast future performance. Please turn to slide 14. To wrap up, our strong fundamentals and position with customers across industries provides a firm foundation during this time of uncertainty. We may not know the exact shape of the recovery, but we are well prepared for a wide range of scenarios and are taking actions to prepare us to lead out of this slowdown. Before turning to Q&A, I'd like to once again thank all 3Mers for your tremendous work and for everything you're doing in this unprecedented moment. I'm very proud to represent 3M and our people around the world. Going forward, we'll continue to do all we can to protect our employees, protect our enterprise, and help the world get through this crisis. That concludes our remarks and we'll now take your questions.

Ladies and gentlemen, if you would like to register a question using a landline phone, please press the one followed by the four on your telephone keypad. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your headset 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.

Good morning. It's great to see 3M finally doing what 3M always does. Congratulations.

Thank you.

Just first question, just a big picture question. You know, in terms of your capacity additions in nonwovens and specifically respirators, how do you think the industry will change because you're not the only ones adding capacity, lots of capacity added in China. You know, all of a sudden you have Honeywell showing up in North America and Europe. What does it mean for a competitive environment, you know, two years out?

Yeah, Andrew, it's a little hard to look two years out, but certainly as we think about capacity expansion that we're doing today, a big part of that is in that category of surge capacity for situations like we're facing with COVID-19. There is going to be, we think, a significant tail to demand in this. You can look out, there's demand from governments, from health care, and there's also ongoing demand in industry as industry comes back from economic slowdown. So we're mapping all of that into our capacity and then we're working with governments and the Department of Defense in the U.S. to plan for capacity that would be dedicated to their needs in a COVID-like crisis. So I think it's really lined up well with what we see as ongoing market and industry demand. And we're looking obviously broader than just our capacity. We're looking at the marketplace and the capabilities and it's, you know, and we're focusing here on N95 and, you know, really respiratory solutions that meet those requirements. So I think it's got a view as far as we can see it. You know, as we look out further, you know, beyond, you said, a couple years out, it's going to depend on where we end up in those big end markets, health care and industrial.

And just on an unrelated topic, I think there were some news items. I think Bloomberg reported, you know, some sort of developments in the hearing protection lawsuits. You know, can you just, you know, and it's interesting, I guess, the messages on pricing and disclosure, and I guess in light of you guys actually published lists for N95, but can you just comment where you are in terms of this hearing protection lawsuit and any comment sort of on the Bloomberg article? Thank you.

Yeah, thank you, Andrew. I, you know, let me start here. 3M has great respect for the brave men and women who protect us around the world and we have a long history of partnering with the U.S. military and we continue to be committed to making safe products. We've worked in close coordination with them and 3M did not withhold information from the government about fit and use of this product. The narrative out there is misleading and really lacks context. So I think it's, we will defend ourselves and we deny that our product was defectively designed. So I would just say that that narrative is very misleading. Thank you very much and congratulations. Thanks, Andrew. Thanks, Andrew.

Thank you. Our next question comes from the line of Dean Dre with RBC Capital Markets. Please proceed.

Thank you. Good morning, everyone. Hey, Dean. Morning, Dean. Morning, Dean. Hey, I'd also like to add my appreciation for all that 3M has done to help healthcare workers globally and in my view that's exactly the kind of corporate citizen we'd expect 3M to respond and so congratulations to everybody.

Thanks, Dean.

Thank you.

Hey, a number of companies have in lieu of, you know, considering suspending guidance, they've been offering some scenario analysis or sensitivity in terms of how the year could play out in terms of, you know, decrementals, margins. Can you take a stab at that and how might this all compare to the financial crisis of 2008, 2009 if we use that as kind of a benchmark? Could we start there, please?

Yeah, Dean, I'll take that one. First of all, of course, we, like I think any other company, we're going through a number of scenarios and while I don't plan to share the different scenarios because this is a dynamic situation, a couple things I will share. First of all, we, as Mike noted, as we go through this quarter and until we see a reason to change that, we're going to be providing monthly revenue to give you the insight of what's going on with our businesses in different geographies. In addition, you heard Mike talk about the cost saving actions that we've implemented for Q2 and inclusive of that, we expect in the second quarter that we will be seeing decremental margins between 30 and 40 percent and now that's inclusive of the $350 to $400 million of cost saving actions. So between sharing the revenue each month as we see it and our view on decremental margins, we think that gives you some insight as to what you can be expecting from us from an earnings perspective as we're going forward.

That's a helpful start and then can you also clarify since this is, and we appreciate getting the monthly revenue updates, you just suggested we be getting it by geography. Will you also be sharing, will it be organic and also

by segment? We think organic is the best way to share this and that's our plan right now and we do plan to be providing insights of what's going on by both business and geography.

Okay, that's going to be really helpful, so appreciate it. Just last question, it got cited but not clarified. What were the asset write downs that were COVID related? You sized it but what were the businesses and why?

Within our company we have what we call new ventures where we're investing venture capital in a number of places of emerging technologies that we think will complement the 3M business model. These were some mark to market actions. All or virtually all were felt within the court miscellaneous aspect of our company.

Why were those COVID related?

As a result of changes in triggering events in terms of the value of those companies that we saw that as COVID related.

Okay,

thank you. Good luck

to everyone. Stay healthy.

Yep, same to you.

Thank you. Our next question comes from the line of Steve Tusa with JP Morgan. Please proceed.

Hi guys, good morning. Sorry I missed this busy earnings morning but the $350 to $450 million in cost in the second quarter, that's a pretty big number. Is there a kind of carry forward into the, sorry in the second quarter, does that carry forward into the third and the fourth? How much of that is temporary? How much of that was from last year's restructuring? It's just unclear to me what's included there. Sorry if I missed you detailing it earlier in the call. I'm sure you did but I might have missed that. Thanks.

Yeah, Steve I'll go through a few of those details. First of all it is taking actions on a number of components of cost structure. And the biggest component is things what we internal the 3M called indirect costs, things that are not payroll or raw material cost related. So travel, external services, temporary workers, targeted ad merge, things like that. We are working on bringing that spending down in line with what we're seeing happen in the spring. And in the case of with employees, there's some parts of the world where we have put employees on required mandatory use of vacation. So those are the things that are driving that. In terms of carry forward into future quarters, I'd say Steve it's just volatile now and flexible that some of it or much of it may carry forward depending on what we see but not necessarily depending on the type of recovery that 3M sees in the coming quarters.

Okay so you kind of have yet to take structural action, incremental structural action beyond what you guys did last year which is what most companies are doing just by the way. That is correct Steve. Okay and then one last one just on how you're approaching this environment. The inventories, a lot of companies are keeping a little bit of a buffer stock. Have you guys maintained that buffer stock or have you continued to work down inventories from where they were last year?

Yeah Steve one of the things I highlighted in my prepared remarks was how our enterprise operations, you know bringing together manufacturing supply chain and customer operations together into one organization that we launched the beginning of the year. It's really been benefiting us and this is another area where really we continue to take down days of inventory outstanding. So we do have plans to reduce inventory, some of it in response to slower demand, some of it really taking advantage of that improved performance. So we have targeted significant inventory reductions on both of those drivers.

Okay great thanks a lot guys appreciate the details. Thanks Steve.

Thank you. Our next question comes from the line of Nigel Ko with Wolf Research. Please proceed.

Thanks good morning. By the way great idea, great idea on the monthly sales and please continue that post COVID. It's one of the information I have. I'm sure you won't though. So looking at the April trends and obviously a lot of companies are using April to anchor their stations for TQ and beyond and then using China as a sort of a leading data source to expect elsewhere. So I'm just two part question here. One would be can we use the mid-teens kind of placeholder for April as a guide post for TQ or you've seen sequential deterioration through April which indicates that might get a little bit worse or a bit better. And in China the trends that we've seen in April which is obviously very encouraging, but how much of that is a restock versus the obviously the TQ declines we saw in February?

Nigel maybe I'll take that. When you look at April it's what it is. Our April trends to date. I led with a look description very fast changing a lot of uncertainty. So to look beyond that trend part of the reason we're going to give monthly updates is it's just you can't project April into May or June or any further than what we are seeing right now. And I would, so we'll update you as we go on that and give you a better clarity month by month. When you look at China we are seeing improvements. We're returning to growth in China. It's pretty broad based across our portfolio and for sure there's going to be some restocking, but we're seeing the economy start to show signs of recovery broadly and it's not back to normal yet, but improving as we move through April.

Okay great thanks Mike. And then I think one for Nick. On the pricing 40% points in the quarter, are we confident the pricing will remain positive this year? Are we seeing any signs outside of Asia on pricing? And then can you just mark it on where the more material benefit is right now for FY20?

Yeah Nigel we started the year saying our price growth that we thought would be consistent with past trends and the 40 basis points that we saw in the first quarter is very much in line. As we look forward for the bounce of this year we're not seeing any kind of material change in what we're expecting for price growth for us. We think it'll stay in this zone. In regards to raw materials Nigel, we at the beginning of the year we said that we expected raw materials to be between flat to up to a 10 cent tailwind to us. Right now as we look at it it's going to be better than that. It's going to be a more significant tailwind. I'm not going to quantify it because things are dynamic enough, but we're seeing it beyond that for benefit right now. Okay thank you very much.

Yeah thanks Nigel.

Thank you. Our next question comes from one of Julian Mitchell with Barclays. Please proceed.

Hi good morning. Maybe hey maybe just a first question please around the health care division. Maybe just help us understand within that what you have seen so far as the puts and takes from COVID. It looks like underlying margins excluding the acquisition impacts have been flattish in Q1 and Q4. So just wondering even when health care sales recover alongside say oral care coming back should we expect good incremental margins or is it just that health care is at a higher kind of level of reinvestment for the near or medium term? Thank you.

Yeah Julian maybe I'll comment just on the business trends that we're seeing. So we saw health care grow a little over 1% in first quarter. It was led by medical solutions and food safety. As we got to March we saw a significant slowdown in oral care and we also saw an impact from elective surgeries and a slowdown in health care and in some of our medical solutions areas as well. So those are some of the trends we're seeing behind that overall growth number. Maybe I'll ask Nick to comment on the margin and your question around margins.

Yeah Julian you know of course the biggest thing that we're seeing from margins in health care right now is from our acquisition of a salety and I think you will note in the appendix we're now providing EBITDA margins. We felt that would be helpful given the acquisition of a salety to give one more level of information on that. In terms of the margins that we're seeing it was absent salety pretty close to that and we've seen some mixed impact in the first quarter as we've seen some parts of that business more impacted by COVID. As Mike said as we go into second quarter we will continue to see impacts on elective procedures that will be having an impact both on our growth and on our margin. As those recover and as we see people going back to their oral care professionals and electing procedures we've also seen that have a positive impact on our margin going forward.

That's helpful thank you and then just my second question around the safety and industrial business you know clearly some good tailwinds from all the work being done around respirators but maybe focusing on the margin side very good margin uplift in the first quarter. Do you think we're at a level in that business where you know given the cost cutting action some of the reorganization measures at 3M once we see the sales side improve in the second half or next year in industrial within that division we should see very good operating leverage there as well as good sales growth?

Hey Julian I'll take that one so we have been doing a number of actions within our safety and industrial business to be enhancing the margins the things that we've been doing to make that a more efficient productive operation and part of what we were announcing on our January earnings call. When we look at what in our margins in particular in the first quarter that's been impacting that but I think even more importantly we've had really a good spending control going on in our safety and industrial business and that's been one of the big drivers of what you see in our first quarter margin so yes going forward if there's as when we return to growth we will be seeing some benefits but we also are seeing an impact right now of really good discipline spending control in that business. Great

thank

you.

Thank you. Our next question comes from a line of Jeff Sprague with the Vertical Research Partners. Please proceed.

Thank you good morning everyone. Good morning Jeff. Good morning and just a little more granularity on some of the divisional stuff if I could. Excuse me. You know personal safety was up with like seven percent in the quarter 60 million bucks or so. I guess I would have expected maybe to be even stronger than that. I guess the one and a half percent benefit you're talking about for Q2 I think is relative to total company sales so it looks like you're looking for another kind of 120 million or so kind of lift on a -over-year basis. Is that correct and would that be kind of indicative of what your kind of current run rate production is for that business?

Hey Jeff this is Bruce. Organically personal safety is up 14 percent. What you're seeing for all in sales growth we had divestiture impact from our gas and flame detection divestiture which is impacting obviously total sales growth.

All right that's helpful. Thanks Bruce and then Nick just thinking about the sources and uses of cash and thanks for your color there. What is your view on repo? Should we consider it's off the table for the balance of the year? Is this something that you know you'll be reconsidering as the year progresses and you know is there going to be any requirement in pension as you get towards the end of this year? What are you looking at the next?

Yeah Jeff as I mentioned earlier we continue to look at a number of scenarios and manage accordingly for those. I think it would be fair to say that it's a dynamic situation so I'm not going to put a timeline of when we would be possibly back in the market with a share buyback program but I think it's safe to say that we would want to have enough confidence in the future that we can resume guidance of what we're anticipating for our financial results before we would be resuming our share buyback program. In regards to the pension we started the year with a well-funded pension and we took what I will call a minor hit in our pension funded status in the first quarter and right now we don't foresee any changes in our capital allocation plans to our pension. We've been targeting around 200 million dollars a year to our global defined benefit pension plans and we don't see any required changes required in that pension funding going forward so we don't for the foreseeable future at this point we're not seeing that change Jeff.

Great thank you.

Thank you. Our next question comes from the line of Joe Richu with Goldman Sachs. Please proceed.

Thanks. Good morning everyone. Out there all well. Morning Joe. Just maybe touching on China to start off. It looks like the rebound in April has been pretty strong. Is there any end market specific commentary that you can provide on what's really driving the strength in April?

Yeah Joe when I said it was broad-based we're seeing it across our businesses. Maybe I'd highlight automotive is recovering and remember we had a big decline in Q1 so it's coming off of a low point but starting to see some recovery there. Electronics has been leading the way. Semiconductor manufacturing has been strong demand for us. Consumer electronics off but not as much. We're seeing health care and oral care recovering as we come into April and then broader industrial and consumer as well so it's really broad-based across the market all the markets and businesses for us.

Got it. Mike I may have missed this earlier but as you're kind of thinking about the guidance and clearly we don't have one now for the rest of the year but as you're kind of thinking about the trajectory for the US and Europe how much are you using China as a guidepost from a growth perspective for the rest of the company?

Yeah I would say back to this fast changing and lots of uncertainty. I think it's encouraging what we're seeing in China but it's as good as April to date for us because it's a pretty fast changing dynamic globally. We did see as I mentioned trends in the second half of March in the Americas and EMEA down and some of the businesses that we highlighted that were weaker, oral care, elective procedures in our medical solutions, automotive, general and industrial, those are trends that we saw coming into the quarter. We'll have to see how it plays out and get a little further before we can give you a better projection. Okay good enough.

Thanks.

Our next question comes from a line of Scott Davis with Mellius Research. Please proceed.

Hi good morning guys. Hey Scott. There's a comment in here just says late April 75% plants and distribution centers fully or partially operational. Is there a sense of how do you compare that to past cycles? Is that given that you'd probably be shutting some stuff down or shifts declined and stuff like that, is that materially different than what you saw in late 2008? Is it something you expect to ramp up meaningfully over the summer? Just a little more color

on that please. Scott I think the way to think about it is look at our sales value of production and we you know I talked about some of the benefits of our enterprise operations the way we're operating that we're able to adjust more quickly and track with our demand and make sure our production plans are tracking with it. I remember Q1 last year was one of the things we're working on adjusting to a SVOP is tracking with what you saw in Q1. It's tracking with what we're seeing April year to date. That 75% number is kind of a view over you know a broader portfolio against end demand and just how we're managing the factories in the middle of the COVID crisis. So I think looking at SVOP is the way to look at it and we can adapt quickly and we'll adjust as we see changes in

the understand how that might compare to past recessions if you have it doesn't have to be explicit but if you have a sense of where you were in late 2008 was it 85% or is this?

I think you know the way I would probably think about it Scott is I'd look at the magnitude of the slowdown and it's probably similar there might be a little faster reaction to it and adaption to it now than even then but we and you know living in the in 2009 we we really managed our operations very quickly to in line with what we're seeing in the slowdown and then back up again as the markets recovered even in the second half of the year so I think it's similar and it's one of the strengths of our of our model being vertically integrated with our manufacturing that we can do this so I do give our teams credit for reducing cycle times but this the strategy in the 3M model there the strength is there in 2009 it's here again in in 2020.

Okay super helpful thanks good luck guys and stay safe and we appreciate the monthly data too so thank you. Thanks Scott.

Thank you our next question comes from the line of Andy Kapowicz with Citi please proceed.

Good morning guys hope you're well. Hey Andy. Thanks Andy. So you mentioned like you mentioned the impact from respirators in the business just following up on Jeff's question a little bit 150 base points but given your ramping to two billion respirators a year it would seem like your impact could be more than 150 base points by the end of the year especially for the total PPE business you know you do make surgical mask gowns you've got Scott safety now so could you give us more color on the sizing of overall PPE any more color there would be helpful?

Well I think the 150 basis points is a that's Q2 that's the way we look at it in Q2 and we are adding capacity in the U.S. coming out of Q2 in late June we'll get to 50 million respirators a month that's up 40% from where we've been running you know in coming into the quarter and where we expect to run for for much of the quarter and then our increased capacity that we plan to bring on later in the year and that likely to be a Q4 impact kind of you know kind of on the business results it'll give us additional additional supply into very strong demand so we'll see additional growth impact from I don't have a number for you at this time it's it's not clear the demand and how exactly the timing when that production comes on but you can use that 35 to 50 in the U.S. which you know the 35 was part of 100 million worldwide so you can kind of back into maybe a 15% you know 15% increase on the worldwide N95 piece of that has come out of Q2.

Yeah Andy for reference our disposable business which is largely the N95 pre-crisis was about 2% of our global revenue slightly less than that or around 600 million

dollars. Got it that's helpful guys and then Mike I wanted to follow up on the comments on electronics I mean you mentioned the recovery in China it's obviously more of a China-based business for you guys but is that business been a little more resilient this cycle than I expected you give us more color and what your you know to the extent you can on expectations moving forward between semi-con obviously you know you've got mobile devices in there what are you seeing in that business?

Yeah and Andy even as we came into the year we were starting to feel better about electronics and it was really semiconductor manufacturing demand increasing and that has held up we're seeing that and that's part of that that broader growth and return to growth in China consumer electronics you know has been year over year a bit of a slowdown we continue to see that but overall electronics is seeing a positive uptick as we come into Q2.

So just pushing a little bit is it up you know year over year at this point

in

April? April year to

date or April months to date yes.

Okay thank you Andy I want to just give a little just go one level down that where we are seeing that our most significant growth in electronics in China is around fluids and semiconductor and less so on the consumer electronics side. Got it thanks Nick.

Yep. Thank you. Our next question comes from the line of Nicole DeBlace with Deutsche Bank please proceed.

Yeah thanks good morning guys.

Morning Nicole.

So just following up on some of the questions around the cost cutting activities that you guys are doing this year does that the 30 to 40 percent decriminal margin assumption I assume that also includes the carryover from payback on last year as your structuring actions is that correct?

When we say the 30 to 40 that's also including the the -on-year impact of taking those actions last year so that's that is part of us being able to deliver a 30 to 40 percent decremental in the second quarter yes that's part of it plus the extra 350 to 400 million of cost savings we're initiating in this quarter.

Okay got it thanks Nick and as my follow-up if we think about the health care business is there a way to quantify how much of the health care business is actually being impacted by elective surgeries not taking place? I'm just trying to get a sense of what part of the business you know has the elective surgeries returned?

Well medical solutions Nicole is our is our largest business in health care and that's being impacted by elective procedures we're also seeing that in our facility business which is part of medical solutions. Oral care has been the more sharply impacted in demand slowdown as we come out of March so that's you know our second largest business in health care so it's the bigger part of the impact I would say as we come into the quarter but we would expect as elective procedures come back and demand their increases we'll see the benefit of that in that medical solutions business and and I so I I think it's both is the answer and and it's we expected to recover as as elective procedures come back.

Thanks I'll pass it on.

Thank

you.

Our next question comes from John Walsh with Credit Tweets please please proceed.

Hi good morning John. Hey kind of a specific question here but just want to understand the geography of where something might live looking at slide 22 when you talk about the sales by divisions but it's interesting I think in your prepared remarks you talked about respirator demand, government, industry, health care. I didn't hear consumer and just wonder if we actually start to see some different behavior from consumers where that would show up does that actually hit the consumer segments through some type of health care or would that go through a different segment and then ultimately end up in a consumer's hand?

Yeah and John thank you for catching me on that because consumer is an important part of where we do supply respirator solutions that reaches a broad range of customers some of them in in through our our DIY channel and you know it's a small construction companies are strong customers for that but we do expect to see a demand from consumers as we move forward as well and that will show up in the in the results of our consumer business.

Yeah John the biggest impact we're seeing is in our stationary office business currently as people have gone remote work remotely from home on the negative side along with obviously school shutting down.

Yes no thank you that's helpful and then you know there's kind of a lot of excitement that we might see some manufacturing return to the U.S. obviously highlighted on PP&E there's been some discussion around life sciences just curious what what you're hearing or seeing from some of your folks that are doing pharma filtration you know I'm thinking about you know if they're actually starting to get you know quotes or see an uptake activity for some of those solutions that you sell to that that manufacturing process.

Yeah and John maybe I'll start there we have seen some increased demand in our biopharma filtration I highlighted as one of the the stronger demand stronger growth in in Q1 and even as we come into April. You know when talking about manufacturing and and having supply in the U.S. you know we are you know we're a company that as we took our model overseas we never left the U.S. we continue to manufacture in the U.S. for the demand we have in this marketplace and and then some we have we take advantage of our strong base here and in our technology in the U.S. and we do export as well so our strategy and it's true around the world but especially true in the U.S. our strategy is to is to locate our manufacturing and supply chains close to customers to be able to serve them regionally and that's true of respirators and it's true of of health care products and it's true of pharma.

Great thank you for the color.

Yeah thanks John.

Thank you. That concludes the question answer portion of our conference call I will now turn the call back over to Mike Roman for some closing comments.

To close I am incredibly proud of how our people are helping lead the response to COVID-19 and managing through this uncertain time. Going forward we will continue to be guided by the three principles I laid out at the beginning of my remarks protecting our employees fighting the pandemic from all angles and maintaining business continuity while positioning 3M to lead out of the slowdown and deliver for our employees customers and shareholders. Thank you for joining us.