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 turn the call over to Bruce Germeland, 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 two. Before we begin, let me remind you of the dates for our upcoming 2020 quarterly earnings conference calls, which will be held on July 28th and October 27th. 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 10-K 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 gap financial measures. Reconciliations of the non gap measures can be found in the attachments to today's press release. Please note we have provided segment and total company adjusted EBITDA reconciliations for reference in today's press release attachments as part of our non gap measures. Please turn to slide four, and I'll hand it off to Mike. Mike?

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 3Mers 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 healthcare 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 five. 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 six. 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 US, we will be producing N95 respirators at a rate of roughly 50 million per month in June, a 40% 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% 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 US. This plan is enabling us to maximize support for the US and other areas in urgent need, including Europe, Central and Latin America, and Canada. We also continue to aggressively fight fraud, price gouging, 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 seven. 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've 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 eight. 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 3Mers impacted by shutdowns, we have implemented a short-term paid furlough program. In this crisis, I'm 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 end 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% 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're 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%, though 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%, 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.