3M Company

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 are going to register for a question. As a reminder, this conference is being recorded Tuesday, July 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 second quarter 2020 business review. With me today are Mike Roman, 3M's Chief Executive Officer, along with Nick Gangstead, and Monish Patolawala, our Chief Financial Officers. As you may know, Nick will be retiring at the end of July. Monish joined the 3M team on July 1st, succeeding Nick as CFO. Mike, Nick, and Monish 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. Let me remind you to mark your calendars for our third quarter earnings call, which will take place on Tuesday, October 27th. Please take a moment to read the forward-looking statement on slide three. During today's conference call, we'll 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, 10Q, 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 EBITDA reconciliations for reference in today's press release attachments as part of our non-GAAP 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 staying safe and healthy, and I thank you for joining us. We continue to fight the pandemic from all angles to ensure the safety of our employees, healthcare workers, first responders, and the public. In a highly uncertain environment where economic activity was restricted by global lockdowns, we executed well and delivered another strong operational performance in the second quarter. We posted solid margins and robust cash flow while strengthening our balance sheet, innovating for our customers, investing in the future, and continuing our transformation. Our value model is strong, and we are taking action on a number of fronts to lead through this crisis and emerge even stronger. While there remains a great deal of economic uncertainty, we are seeing an improvement in sales trends in July across all businesses and geographies as we start the third quarter. And Monish will provide additional comments later in the call. I am proud of how our team is leading through these unprecedented times, and I thank all 3Mers for their tireless efforts to serve those who count on us. Please turn to slide 5. Our COVID-19 response starts with a steadfast commitment to the health of our employees. We have robust safety protocols in our manufacturing plants and distribution sites, enabling us to effectively protect our people while maintaining supply chain operations. For remote employees, we have developed a phased approach for their return to the workplace with enhanced safety measures and emphasis on flexibility for individuals. We have had our colleagues return to the workplace in two dozen countries, mainly in Asia and EMEA, along with our global R&D community. And we are adjusting based on government guidelines and the evolution of the pandemic across the world. As we protect employees, we work around the clock to protect the safety of all people, including healthcare workers and first responders. 3M is making and distributing more respirators than ever before, though demand continues to far outpace what the entire industry can supply. In the first half of the year, 3M manufactured 800 million respirators globally, with half distributed in the U.S., primarily to healthcare and FEMA. For the full year, we expect to produce 2 billion respirators globally, more than a three-fold increase versus 2019. We continue to make investments and partner with the US Department of Defense and other governments to bring additional global capacity online. We are also working with federal, state, and local governments to deliver respirators where the need is greatest. At the same time, we remain vigilant in fighting fraud and price gouging. To date, 3M has filed 18 lawsuits and removed over 7,000 counterfeit websites, protecting people from bad actors. Beyond personal protective equipment, 3M science is fighting COVID-19 in other areas as well. Our membrane technologies help improve blood oxygenation procedures, and our biopharma solutions support the development of needed vaccines and therapeutics. Earlier this month, we announced a collaboration with MIT on a diagnostic COVID-19 test that aspires to make testing faster, more broadly available, and less expensive. The project has received approval from the National Institutes of Health, and we are working as fast as we can to develop a low cost, highly accurate device that can be mass produced. I will now turn to our second quarter results on slide six. The financial impact of the pandemic remained mixed across 3M during Q2. We continue to see strong demand in personal safety along with other areas such as home improvement, general cleaning, and biopharma filtration. At the same time, we experienced steep but expected declines in other end markets, including medical and dental elective procedures, automotive OEM and aftermarket, and general industrial. Geographically, while organic sales in Asia Pacific declined 8%, we saw year-over-year improvement in China, up 3% in the quarter versus down 11% in Q1. Organic trends in EMEA and the Americas remained consistent throughout the quarter, both declining in the mid-teens each month. All in, organic sales company-wide was minus 13%, with adjusted earnings of $1.78 per share. While growth conditions were challenging, our operational execution was strong, We expanded adjusted EBITDA margins to 26.5%, up 110 basis points year-on-year. In the second quarter, we delivered $400 million in cost savings versus last year, as we aggressively managed expenses to offset COVID-19 impacts and associated restructurings. This cost discipline, along with effective capital allocation, enabled us to increase our adjusted free cash flow to $1.5 billion in the second quarter. And Nick will walk you through the details. Please turn to slide seven. Importantly, while we manage near-term uncertainty, we continue to advance our four strategic priorities, portfolio, transformation, innovation, and people and culture. to deliver value for our customers and shareholders. We finalized the sale of our drug delivery business in May, enabling us to focus more on our core healthcare portfolio. We are encouraged that the benefits we are seeing from the new global operating model we implemented this year, a significant step in our transformation. This includes our new enterprise operations team, which is enabling us to reduce cycle times and improve the customer experience. Nearly all of our plants and distribution centers are operational, and we have worked with our partners to ensure consistency of supply. Our new structure streamlines decision-making and allows us to adjust faster than ever to the external environment, all of which help our customers. As just one example, one of our U.S. plants recently pivoted to manufacturing hand sanitizer almost overnight, moving from formulation to production in less than 72 hours. In addition, we're accelerating our efforts on automation and robotics and introducing new digital capabilities such as virtual selling tools to deliver on our promises to customers. At the heart of 3M is innovation and our ability to apply science to solve critical customer needs. We continue to invest in R&D and drive innovations to solve big challenges like air quality, automotive electrification, and food safety, just a few of our priority growth platforms, which are outperforming in the markets they serve. For example, our air quality platform grew double digits in the quarter as we introduced new indoor air quality solutions through our innovation and increased investments in capital. We are also finding new ways to engage our people, strengthen our culture, and advance our core values. We continue to step up our leadership and sustainability, and our annual sustainability report, released in May, includes a comprehensive look at our progress. As part of this commitment, we are proactively managing PFAS, guided by the principles of sound science, corporate responsibility, and transparency. For example, in March, we launched a clearinghouse to share research on testing, measurement, and remediation, a commitment we made at our congressional testimony last fall. You can find this clearinghouse and all the latest information on PFAS on our website at 3M.com. In addition, we provide regular updates in our 10-Q filings. We are also fulfilling our commitment to comprehensive reviews of all 3M manufacturing operations to ensure adherence to environmental requirements, company policies, and our values. As we shared previously, We continue to work with communities where we manufacture, along with government officials and regulators, including the EPA, to advance our environmental stewardship. Last week, we announced an agreement with the Alabama Department of Environmental Management to resolve matters related to previously disclosed PFAS discharges at our Decatur facility. This is part of our commitment to address contamination at sites where we manufactured or disposed of PFAS. With respect to PFAS litigation, we anticipate the earliest trial date will now be in 2021. Beyond our environmental responsibility, we know we and others must do more to address injustice and inequality. The death of George Floyd here in Minnesota was jarring for all 3Mers, especially our African American employees. At 3M, we stand for equity, fairness, and social justice. And we will be part of the solution by listening, understanding, and then acting. Based on insights from our employees and communities, we have two focus areas. First, we are identifying the most impactful actions to accelerate inclusion and diversity within 3M. While we've made good progress in recent years, we have much more to do. At the same time, we are working with other companies on actions that will make a difference here in Minnesota. and we've made initial investments as part of these efforts. We are also working with stakeholders to develop a long-term plan to support economic opportunities and development in communities of color, address the education gap, and advance social justice. It is vital that companies step up to lead change, to really make a difference this time. I am personally leading these initiatives, and we will provide you with updates as we move forward. Please turn to slide eight. Before turning the call to Nick, I would like to make a few comments about our CFO transition. First, I want to thank Nick for his many contributions throughout 35 years at 3M. He has been an outstanding leader and a great colleague and has created tremendous value for our company and our shareholders. In six years as CFO, Nick's guidance has been especially valuable as he helped lead our transformation and our work to optimize our portfolio and position 3M for the future. I wish Nick and his family all the best in the future. I'm also excited to welcome Monish to our leadership team. Most recently, Monish was CFO at GE Healthcare, a $17 billion business. His experience leading healthcare and industrial businesses, along with driving operational transformation, is already making an immediate impact for 3M. Monish is an ideal fit for our enterprise and for our culture. And later in the call, he will make a few comments about our perspective on the third quarter. I will now turn the call over to Nick for the details on Q2.