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're going to register for a question. As a reminder, this conference is being recorded Tuesday, April 27, 2021. I would now like to turn the call over to Bruce Germelan, Senior Vice President of Investor Relations at 3M.

Thank you and good morning, everyone, and welcome to our first quarter earnings conference call. With me today are Mike Roman, 3M's chairman and chief executive officer, Monish Patalawala, our chief financial officer, along with John Banovitz, our chief technology officer. John is joining us today to discuss our new sustainability goals, which we introduced in February. Mike, Monish, and John will make some formal comments, 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 2021 quarterly earnings conference calls, which will be held on July 27th and October 26th. 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. Please note, 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. And finally, as previously disclosed in our Form 8-K, dated March 22nd, 2021, 3M changed its accounting principle for pension and post-retirement plan costs in our measure of segment operating performance. The information provided herein reflects the impact of these changes for all time periods presented. Please turn to slide four, and I'll now hand it off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. The first quarter was strong for 3M, with broad-based organic growth across all business groups and geographic areas. Our team executed well and posted record sales, robust cash flow, and expanded margins, along with a double-digit increase in earnings per share. We saw encouraging improvement in many of our end markets, while others remained well below pre-pandemic levels. We also faced and addressed ongoing supply chain disruptions due to COVID-19, exacerbated by improving macroeconomic trends and winter storm URI, all of which are increasing the cost of doing business. I am proud of the way 3Mers have stepped up to manage and overcome these challenges, keeping our factories running, expanding our manufacturing capacity, and driving innovation for our customers across our businesses. We have found new ways to engage with customers and create solutions no matter where we are around the world, learnings we will take forward as we come out of the pandemic. Looking ahead, we expect continued strengthening of the global economy, but we anticipate the recovery to be uneven as the trajectory of the pandemic rollout of vaccines, and government policies evolve in different stages around the world. We are confident in our business as we navigate COVID-19 uncertainty. And with one quarter behind us, we are maintaining our full year guidance for organic growth, earnings per share, and cash flow. Our team remains focused on driving growth, improving operational performance, and delivering for our customers and shareholders. Please turn to slide five. Company-wide, total sales increased to $8.9 billion, with organic growth of 8% and earnings of $2.77 per share, up 27% year-on-year on an adjusted basis. Geographically, organic growth was led by Asia-Pacific, up 13%, with China up 32%. Growth in the Americas was 6%, with the United States up 7%, while EMEA grew 6%. We expanded our adjusted EBITDA margins to nearly 28%, with all business groups above 23%, and increased free cash flow to $1.4 billion, with a conversion rate of 86%. 3M increased our dividend in the first quarter, marking our 63rd straight year of increases. We also continue to build 3M for the long term and prioritize investments in growth, productivity, and sustainability. While we manage end market challenges related to COVID-19, we are investing to capitalize on global growth opportunities in healthcare, electronics, home improvement, personal safety, and other favorable market trends. This includes our priority growth platforms, which grew 10% in the quarter as we apply science to advance growing areas like automotive electrification and biopharma filtration. The fundamental strengths of 3M, our unique technology platforms, advanced manufacturing, global capabilities, and leading brands position us well to win in these markets into the future. We are accelerating digital strategies across three m and expanding our use of data and data analytics to better serve our customers and improve performance. For example, we are using new cloud based technologies to provide better insights into our global workflows from raw material purchase through product delivery. Which is helping us navigate the current supply chain challenges. We are stepping up our leadership and sustainability with significant new commitments that will bend the curve on carbon emissions water use and improving water quality. In a similar way, we are implementing a long term plan to advance equity and inclusion as we launch new scholarship programs and a new goal to create 5 million opportunities in stem education with initial efforts focused here in the twin cities. At the same time, 3M continues to help lead the fight against COVID-19 with 630 million respirators distributed in the first quarter. We're also providing our expertise as we engage with the Biden administration and governments around the world on how to better prepare for future pandemics. Overall, I am pleased with our performance in the first quarter as we remain focused on driving growth, improving productivity, and advancing sustainability. To provide additional insight on that last point, sustainability, I will now turn it over to 3M's Chief Technology Officer, John Banovitz.

John. Thank you, Mike. Good morning, everyone, and please turn to slide six. I'm proud to lead 3M's research and development and sustainability teams. Every day, we bring our innovation to bear on tough challenges which includes applying 3M science to create a more efficient company in a more sustainable world. As you may have seen, in February, we announced expanded sustainability goals. We plan to commit approximately $1 billion over the next 20 years through both capital and operating investments to make our operations more efficient and effective with a focus on air, water, and waste. We are committing to become carbon neutral across our global operations. We expect to rapidly bend our curve of emissions with 2019 as our baseline and aggressive milestones along the way. A 50% reduction by 2030, 80% by 2040, and 100% by 2050. Second, 3M plans to reduce water use at our facilities by 25% over the next decade. targeting a 10% reduction by 2022 and 20% reduction by 2025. Third, at our largest locations, we are taking action and installing advanced filtration technology that will return even higher quality water to the environment after its use in our operations. These goals are driven by science and a clearly defined path. We have identified the investments and technologies that will enable our success, from thermal oxidizers to reverse osmosis, and work is already underway. At 3M's facility in Antwerp, for example, we have expanded our thermal oxidizer system and reduced our carbon emissions by 1 million tons per year. Overall, our thermal oxidizers reduce our carbon footprint by more than 90% when fully installed. And in Decatur, Alabama, we have implemented a water treatment system with granular activated carbon, also known as a GAC system. that has improved the quality of water we return to the environment by 90%. We intend to add complementary technology that will further improve water quality by 2024. We will continue to advance new state-of-the-art technologies, including through partnerships with customers, governments, communities, and others to further accelerate our progress. Our actions demonstrate 3M's commitment to continuous improvement and our ongoing work to advance our environmental stewardship. Over the last two decades, 3M has reduced our emissions by 70% while doubling revenues. Our headquarters is fully powered by renewable electricity, and 40% of 3M's global electricity use is now renewable, on our way to 100%. Every new 3M product includes a sustainability value commitment. And over the last five years, our innovations have helped customers avoid 75 million tons of emissions. And just last week, we committed to reduce our use of new plastic made from petroleum, also known as virgin fossil-based plastic, by 125 million pounds by 2025 through new packaging and innovative product design in our consumer business. We recognize the urgency of the world's climate and environmental challenges, and are focused on making a difference both today and in future generations. I encourage you to read our annual sustainability report to be released in early May for more details on our progress and priorities. Please turn to slide seven, and I'll turn it over to Monish. Monish?

Thank you, John, and I wish you all a very good morning. Companywide first quarter sales were $8.9 billion, up 9.6% year-on-year, or an increase of 8% on an organic basis. Sales growth combined with operating rigor and disciplined cost management drove adjusted operating income of $2 billion, up 19%, with adjusted operating margins of 22.5%, up 170 basis points year-on-year. First quarter gap and adjusted earnings per share were $2.77, up 27 percent compared to last year's adjusted results. On this slide, you can see the components that impacted both margins and earnings per share. Organic volume growth, along with our ongoing cost management and productivity efforts, were the biggest contributors to first quarter operating margins and earnings. adding 150 basis points to margins and 34 cents to earnings per share year on year. Turning to selling prices and raw materials. As Mike mentioned, we experienced increasing costs, particularly for raw materials and logistics, due to the impact from the strengthening end markets, ongoing COVID pandemic, along with winter storm URI. As a result, First quarter net selling price and raw materials performance reduced both operating margins and earnings per share by 20 basis points and one cent, respectively. In our view, we expect global supply chain dynamics to remain fluid and for raw material and logistics headwinds to persist. Therefore, we now anticipate a full year raw materials and logistics headwinds of 30 to 50 cents per share versus a prior expectation of flat to a 10-cent headwind at the start of the year. Looking at the second quarter, we currently anticipate a net selling price and raw materials headwinds to operating margins in the range of 75 to 125 basis points. We are taking multiple actions to address these increased headwinds, including selling price increases, global sourcing efforts, improving yields in our factories, and ongoing demand planning, given the dynamic environment. We expect these actions will gain traction as we move through the year, particularly in the second half. Moving to divestiture impacts. The lost income from the drug delivery divestiture in May of last year was neutral to margins. However, was a 3-cent headwind year-on-year to earnings. Foreign currency net of hedging impacts added 40 basis points to margins and 13 cents to earnings per share as the U.S. dollar weakened against most major currencies year on year. We continue to expect foreign exchange to be an earnings benefit of 15 cents per share for the full year. Three other non-operating items impacted our year-on-year earnings per share performance. First, our continued strong cash flow and liquidity position gave us the opportunity in Q1 to redeem an additional $450 million of debt early that was due to mature in 2022. As a result, we incurred higher net interest expense of approximately 2 cents per share versus Q1 last year. This impact was more than offset by year-on-year non-operating pension benefit of 5 cents per share. Combined, these items resulted in lower net non-operating expense of 3 cents per share versus last year's first quarter. Secondly, a lower tax rate versus last year provided a 14-cent benefit to earnings per share. The lower tax rate was primarily a function of non-repeating favorable adjustments related to U.S. tax treatment of international income. along with regional income mix and equity-based compensation. Our full-year 2021 tax rate expectations remained unchanged in the range of 20 to 21 percent. Finally, average diluted shares were up 1 percent year-on-year, which reduced per-share earnings by two cents. Please turn to slide eight for a discussion of our cash flow and balance sheet. We delivered another quarter of robust free cash flow, with first quarter adjusted free cash flow of $1.4 billion, up 49% year on year, with conversion of 86%. Cash flows in the quarter were primarily driven by robust growth in cash flow from operations, along with our ongoing daily management of working capital. First quarter capital expenditures were $310 million. For the full year, we continue to expect CapEx to be in the range of $1.8 to $2 billion. During the quarter, we returned $1.1 billion to shareholders through the combination of cash dividends of $858 million and share repurchases of $231 million. Our strong cash flow generation and disciplined capital allocation enabled us to continue to strengthen our capital structure. We ended the quarter with $13 billion in net debt, a reduction of nearly $5 billion since the end of Q1 last year. As a result, our net debt to EBITDA ratio has declined significantly from 2.2 a year ago to 1.4 at the end of Q1. Our net debt position, along with our strong cash flow generation capability, continues to provide us financial flexibility to invest in our business, pursue strategic opportunities, and return cash to shareholders while maintaining a strong capital structure. Please turn to slide 9, where I will summarize the business group performance for Q1. I will start with our safety and industrial business. which posted organic growth of 10.3% year-on-year in the first quarter. This result includes a 6.4 percentage point benefit from pandemic-related respirator demand. Looking ahead, we continue to anticipate strong pandemic-related respirator mass demand. However, the year-on-year contribution to sales growth will decline as we lap last year's quarterly comparisons. Overall, General industrial manufacturing activity continued to improve during Q1, resulting in a pickup in growth across the portfolio. Personal safety posted double-digit organic growth year on year, driven by ongoing demand for respirators. Industrial adhesives and tapes grew low double digits primarily due to strong demand across industrial and electronics end markets. The continued strength in the residential housing market drove good performance in our roofings granules business, which was up double digits organically versus Q1 of last year. Turning to the rest of the safety and industrial businesses, automotive aftermarket grew high single digits organically, the electrical markets business was up mid-single digits, and abrasives grew low single digits, while our closure and masking business declined year on year. Safety and industrials first quarter segment operating margins were 24.4%, up 70 basis points year-on-year. Operating margins were driven by leverage on sales growth, which was partially offset by increase in raw materials, logistics, and legal costs. Moving to transportation and electronics, which delivered a strong start to the year, with first quarter organic sales growth of 9.8%. despite the well-known semiconductor supply chain constraints. Our electronics-related business was up high teens organically, with continued strength in semiconductor, factory automation, and data centers, along with strong demand for consumer electronic devices, namely tablets and TVs. Our auto OEM business was up 21% year-on-year, compared to the 14% increase in global car and light truck bills. Looking ahead, we continue to monitor the global semiconductor supply chain and its potential impact on the electronics and automotive industries. Turning to advanced materials, which increased mid-single digits, largely as a result of the year-on-year increase in automotive bills. And finally, our transportation safety business was flat year-on-year, while commercial solutions declined slightly. Transportation and electronics first quarter operating margins were 23.3%, up 260 basis points year on year, benefiting from strong leverage on sales growth and prior year COVID-related asset write-downs, which were partially offset by increases in raw materials and logistics costs. Turning to our healthcare business, Healthcare providers continue to be challenged from the ebbs and flows of COVID-19 cases as elective procedure volumes still remain significantly below pre-pandemic levels. At the same time, we continue to experience strong pandemic-related demand for respirators to protect frontline healthcare workers, which more than offset the headwinds from the decline in elective procedure volumes. As a result, our healthcare business delivered first quarter organic sales growth of 9.3% versus last year. The medical solutions business grew high single digits, driven by continued strong respirator demand. Excluding respirators, organic growth in this business was down low single digits due to the ongoing year-on-year impact of low procedure volumes. Organic sales for our oral care business increased double digits year on year. This result is primarily due to last year's COVID-related comp as dental offices started closing their doors during Q1 last year. The separation and purification business increased low teens year on year. This business continues to experience solid demand for biopharma filtration solutions for COVID-related vaccines and therapeutics development and manufacturing, along with improving demand trends for water filtration solutions. Health information systems returned to positive organic growth up mid-single digits, while food safety declined mid-single digits organically versus last year's strong comparison. Healthcare's first quarter operating margins were 22.7%, up 120 basis points year-on-year. First quarter margins were driven by leverage on sales growth, which was partially offset by supply chain disruption and increasing raw materials and logistics costs. Lastly, first quarter organic growth for our consumer business was 7.8% year-on-year, with strength across most retail channels led by e-commerce. Organic sales growth continued to be led by a home improvement business. Up double digits organically, driven by strong demand for commanded eases, filtrate air quality solutions, and scotch blue painter's tape. Stationery and office returned to positive organic growth in Q1, up mid-single digits, with ongoing strength in consumer demand for packaging and shipping products. This business also delivered improved growth in scotch brand office tapes, as we start to lap the COVID-related impacts from remote work and school trends. And finally, our home care business was up low single digits organically versus last year's strong comparison. Consumers' operating margins were 21.1 percent, or similar to last year, as leverage on sales growth was offset by increasing costs for raw materials, logistics, outsourced hard goods manufacturing, and increased investments in advertising and merchandising. Please turn to slide 10 for a discussion of our full year 2021 guidance. As you can see from our Q1 results, we are off to a good start to the year. Looking ahead, as Mike mentioned, we expect continued strengthening of the global economy along with increasing opportunities in end markets with favorable trends. However, we foresee that the improvement will remain fluid and uneven as we go through 2021, given the ongoing impact of the pandemic. As a result, we anticipate a number of items that will need to be navigated as we go through the year. For example, starting with the evolving impacts from COVID, including respirator demand, healthcare elective procedures, supply chains, shutdowns, and government response. Next, the continued constrained supply of semiconductor chips and related impacts to consumer electronics and automotive OEM production. In addition, the expected increase in cost for raw materials and logistics, and in some cases, constrained availability. And finally, we expect to increase investments through the year in growth, productivity, and sustainability, along with managing ongoing legal costs as PFAS and other legal proceedings progress. Thus, taking these items into account, along with it being early in the year, we think it prudent to maintain a full year guidance of 3% to 6% for organic growth, earnings per share of $9.20 to $9.70, and free cash flow conversion of 95% to 105%. Turning to the second quarter, let me highlight a few items of note. First, we expect continued strong execution by the 3M team in the face of a very fluid and uncertain environment. As I mentioned during my remarks, we have increased the expected headwind from raw materials and logistics costs for the full year. We are taking several actions, including increasing selling prices, to address these headwinds as we go through the year. These actions will take a little time to gain traction. Therefore, we anticipate a second quarter year-on-year operating margin headwind of 75 to 125 basis points from selling prices net of higher raw materials and logistics costs. And finally, we expect a pre-tax restructuring charge in the range of $25 million to $50 million as we continue our actions related to our December 2020 announcement. To wrap up, we are off to a good start for the year, delivering broad-based growth strong operational execution, and robust cash flows. We are prioritizing capital to our greatest opportunities for growth, productivity, and sustainability, while focused on delivering for our customers, improving operating rigor, and enhancing daily management. With that, I thank you for your attention, and we will now take your questions.

Ladies and gentlemen, If you would like to register your question using a landline phone, please press the 1 followed by the 4 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 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 Scott Davis with Milius Research. Please proceed with your question.

Thank you, operator. Good morning, everyone. Thanks for coming. for letting me in here. Are you guys seeing any strange order patterns as far as double ordering or any kind of panic, inventory rebuild, anything? I would imagine you'd probably see it in transportation electronics, perhaps equally in transportation and electronics of all the segments. But I'll just leave it at that. Anything on the ordering patterns that's unusual?

Scott, so I would say we see certainly a pickup in orders when we see markets recovering and improving. Transportation electronics are strong and markets for us in Q1. I wouldn't say we see anything unusual there. It's what comes with a normal pickup in the marketplace. When you look at it, a good measure for us is what's happening with channel inventories. And I would say we see them very much in line with what you have written about in your reports that we see you know the changes due to growth trends uh overall inventory in our industrial channels remains still relatively low uh transportation electronics with the supply chain impacts from the semiconductor shortage we're seeing some challenges there and it's just responding with that with the disruption from the semiconductor shortage healthcare is pretty steady uh reacting to the trend still elective procedures well below pre-pandemic levels, so that's impacting there. And in consumer, it's a mixed case. We have high demand and home improvements, so we're seeing lower levels there. So I would say you see a little lower levels when you see the pickup, but it's responding to the marketplace. Otherwise, I would say the trends in the quarter were, you know, the ordering trends were pretty much in line with what we expected, a little better than we expected in in March, which was really reflected in our broad-based growth. But otherwise, nothing unusual.

Bill Meyer Okay, that's helpful. And then, just to clarify on the 30 to 50 cent supply chain, raw material, logistics, whatever issues, is that net of what you expect on price for the year, or is there some opportunity to offset that full amount with price? You're just not certain yet of the magnitude.

Yeah. Hey, Scott, that's a great question. Now, 30 to 50 cents is just pure on raw material and logistics, Edwin. As I said in my prepared remarks, we are going after price increases, improving yields in our factories as well as working with our supply chain partners to reduce the impact as much as we can. You can see in the first quarter we had 70 basis points of price increase, and as I've also said, it's going to take a little bit of time for these actions to gain traction, so we expect that the second half will be better than the first half from a price perspective. Okay.

Good luck. Thank you.

Thanks, Guy.

Our next question, comes from the line of Jeff Sprague with Vertical Research Partners. Please proceed with your question.

Thank you. Good morning, everyone. Hey, Jeff. Good morning. Probably could be tons of price, cost, and other questions, but maybe since we have John on the line, if you don't mind, could I throw one at him? Just wondering if you could actually update us on kind of the size of the priority programs, you know, currently that we're outlined to us when we were in St. Paul, whenever that was, seems like a lifetime ago, I think it was 2019. And anything you could tell us really kind of on the vitality rate of, you know, of the portfolio overall, you know, one of the things that I always try to put my finger on, it's always just a little bit difficult is, you know, the flip side of the new product development, what's going on, on kind of end of life and commoditization at the low end. And so the you know, the effort to counter that. If you have any color there, that would be interesting also.

Yeah, thanks, Jeff. Thanks for the question. So maybe on the first part around our priority growth platforms and our PGPs or so, they're about 5% of the overall portfolio I would say, and growing quite a bit, I think, as Mike referenced. We've seen, you know, approximately about a 10% growth over the last quarter of those platforms, and they continue to grow. And as you know, they sit in high-growth market spaces for us, and so we would expect that growth to continue on those platforms as we continue to find customer solutions in those areas. Second comment's kind of around the vitality of the NPVI or the part of it is, We've talked about NP value in the past, and that's definitely an important metric for 3M without a question, but it's also a secondary metric for us, the primary obviously being our growth and our profitability for that. I'd say over the last few years, our NPVI and things have trended to be about in the mid-20s if you take an average over the last five years or so, which is, I think, roughly a pretty good guide for 3M overall. And obviously COVID's had some of that impact on trends here in the near term as well as we've gone forward. And then kind of the, as you said, the commoditization or the trend, I personally don't think a whole lot about that. I think about the you know, are we aligned with our customers? Are we solving customer needs? Are our R&D resources geared toward growth and solving those issues for our customers and making sure that we can deliver our technologies and our solutions to our customers in order to be able to grow and sustain profitable margin in ROIC?

Thanks. And just a quick follow-up. Is that NPVI a mid-20s kind of five-year number or three-year number? What... What time span?

It's about a five-year number.

It's a five-year number. Okay. Thanks. Appreciate it. I'll pass it on.

Dean Dre with RBC Capital Markets. Please proceed with your question. Thank you. Good morning, everyone.

Hi, Dean.

Hey, I guess if there's a surprise this quarter, it's that despite having a solid operating beat, you're leaving guidance unchanged. And Monish walked through all the list of headwinds and sized all of them or at least framed them with the exception of the last item about potential legal costs. Could you just you know, either size for us or frame for us what the expectation might be this quarter, either in terms of remediation costs or product liability, because you're certainly signaling that something could be brewing here. Thanks.

Yeah, sure, Dean. As I said in my prepared remarks, I think some of this – I'll just start first with – all the headwinds that I've mentioned. At the same time, all the other actions that we are also taking to continue to drive operating rigor, whether it's raising price, driving operating rigor, and continue strong cash flow. So I'll keep all that first with the headwinds, with some partial offsets that will take a little bit of time to implement. As regards legal fees, and you can see this more, or legal costs, you can see this more as we file our queue this morning. But there are a couple of things. You'll see the PFAS reserves are up around $50 million between the end of fourth quarter to this quarter, and then the mask respirator accrual is up approximately $20 million. To predict what exactly is going to be in the second half of the year is quite tough, but what we do see is as we prepare for some of these trials, for example, the combat arms trial that's on in Florida right now with the MDL, as well as some of the other cases that we'll start picking up in PFAS, we expect that our legal fees or legal costs to prepare for these trials will go up during the second half of this year.

Okay, that's very helpful. And then just as a second question, it is interesting, we're talking about a, it's going to be tepid, but the back to school return to office is, you know, outside of the seasonality. But, you know, that's, it is encouraging. Can you frame for us expectations in terms of how much that might contribute in the second quarter?

Yeah, Dean, what we talked about is we did see a return to growth in our stationary office business in first quarter, up mid single digits, as Monish mentioned. That is the first indication that we're seeing the pickup from return to school and return to the workplace to a degree. It's one of those areas where we, you know, it's one of those areas where we're looking at the uncertainties related to COVID. How will it play out? How how big a return to school, how big a return to the workplace, and when. That will end up being what drives the answer to your question. So I would say good signs that we saw the pickup in Q1. Back to, you know, we expect the economy to strengthen, and we're encouraged by the vaccines. We're going to have to wait to see how the return to the workplace and school plays out, though.

Appreciate that. Thank you.

Our next question comes from the line of Nigel Coe with Wolf Research. Please proceed with your question.

Thanks. Good morning. Can you hear me, guys? We can, Nigel. Great. Thanks. So some of the constraints you've seen in the supply chain, residence demand, etc., Normally, you see 2Q seasonally higher than 1Q, and I'm wondering if the combination of order production, et cetera, might limit the ability to see that normal seasonal rate. So just to cue it, you know, right now to 2Q seasonality.

Nigel, you were breaking up a little, but I think your question was around Q2 seasonality, correct? Is that the question?

Right, exactly.

Yes. So I'll just start with my three quarters that I've been here in the pandemic that we've seen. I don't think any trend seems to be normal, Nigel. You've seen trends that seem to be completely abnormal compared to what the past has been compared to monthly cyclicality as well as compared to quarterly cyclicality. So I'll just start with that as the first piece. The second I would say is one thing you can definitely count on us in Q2 is strong execution. We are also confident that end markets are going to pick up, but I think they're going to be uneven. And for the second quarter, we're still monitoring quite a few things. One, of course, Mike just mentioned about what happens with the stationary, how does that return to work come in. The return to work impacts not just the stationary business, but it impacts our graphics business, it impacts our signage business, and what happens there and what people spend I think is going to be important to watch. The second piece is as pandemic is still playing out in parts of the world, elective procedures continue to be below pre-pandemic levels. So we'll see how that plays out. The well-known semiconductor chip shortage, how it impacts auto, how it impacts consumer electronics is another piece. And then when you think about supply chain disruption, the supply chain disruption, one is, of course, the raw material costs and logistics costs that I've talked about quite a bit. The other one, of course, is product availability and making sure that there is product available from our suppliers to continue to keep us manufacturing. Now, I'll tell you this, that our supply chain team has done an amazing job keeping the factories running, making sure we are delivering to our customers thanks to the relationship they have with the suppliers, and we appreciate all the work the suppliers have also done to partner with us to minimize disruption as much as possible. We are also raising prices, but it's going to take a little bit of time. The inflation has come in faster. So you're going to see 75 to 125 basis points of headwind, which is the net of price versus inflation and logistics. As I also mentioned that we're going to do restructuring, which was announced in Q4 of 2020. We had told you it's somewhere between a $250 to a $300 million charge for the year. As of first quarter, we are at $150. So we got approximately $100 to $150 to go for the remaining of the year. The second quarter is going to see $25 to $50 million of restructuring charge. The balance will come in 3Q and 4Q. And then if this economy continues to go the way it is, our look is that indirect costs, travel costs, some of the legal costs that we talked about will keep going up. Any other one-time headwinds will also go up as regards compensation. And then our goal is, as Michael mentioned, we have tremendous areas that we can invest in. And our goal is for the long run, we want to keep investing in growth, productivity, and sustainability and put all that into play. That's why we felt it prudent to maintain guidance. And also to answer your question is, It's hard to follow normal seasonality trends with all these other things in play.

Great. Thanks, Militia. That's great, Kala. My follow-up question is really just going back to the guidance. I understand all the uncertainties you just laid out very, very clearly. But it seems like the pension change and the way you account for the assets, it seems like that's about a 20-cent year-over-year benefit versus FY20 benefit. Was that change in the original guidance range or was that additive to the 920 and 970 guidance?

Yes, Nigel, I would say, as we have stated, we have restated all the years that are presented. So the year-over-year impact of that is approximately 11 cents. So that's to answer your specific question on pension. The offsets to that, a couple of things. We took the opportunity to go redeem $450 million of debt that was due in 2022. that had an impact of $0.02 on interest for the quarter. And then as share prices have gone up, even though we have done share buyback of $231 million of share repurchase, our dilution has gone up, and that impacted $0.02 for the quarter. The total impact for other financials, we had originally in our guide was zero. Right now we are saying it's plus $0.05, to be clear.

Great, Carlos. Thanks very much, Manish.

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

Hey, guys. Good morning. Good morning, Steve. Hi, Steve. Just following up on, I think, the last couple questions here, just sequentially you guys are usually up 1Q to 2Q, and I think you mentioned a whole host of items that kind of break the normal seasonality. Can you maybe just give us like a total number that you see from 1Q to 2Q that would be kind of the mechanical impacts, including the RAS and the inflation, that's fine, just all in what the headwinds are from 1Q to 2Q? Because 1Q is obviously like a big upside, but then 2Q is going to be seasonally weak. So just trying to kind of figure out. in total where we should kind of start from mechanically?

Yeah, that's a great question, Steve. Just a couple, same comments that I made before. As you know, volume is the biggest piece that drives margin leverage for 3M. You should assume the normal 30% to 40% margin leverage that you would get. The amount of volume is going to depend on a lot of the uncertainties that I've talked about, whether it's selective procedures, whether it is semiconductor chip availability for auto and consumer, whether it is the strength in stationary remains, whether our oil and gas, whether the oil and gas industry picks up. So a lot of long-term, I would say, end markets growing. We'll have to figure out what happens in the second quarter with all of these from an end market perspective. Similarly, on supply chain destruction, there are two pieces. One is, of course, the inflation that we've told you about, which will cost 75 to 125 basis points of headwind between price and inflation and the raw material and logistics costs, as well as making sure that we have all the product availability that we have. So that's the other, I would say, headwind to one cue.

Is that headwind, can you just talk about that headwind sequentially, what that headwind would be? What you've already kind of absorbed in first quarter and what it is sequentially?

Yeah, so it's a piece of it got absorbed in the first quarter, Steve. I think we'll have to see how April plays itself out. And May, as we look at product availability, making sure that our suppliers continue to be able to provide all the goods over the quarter is something we're working on. Again, it's too early to say because it's a very dynamic situation that changes every day. And, again, the relationship we have with our suppliers helps us get the product as much as we can, but they are also constrained right now with the overall supply chain situation in the world. The other headwind is 25 to 50 million of restructuring, so this is still a part of the overall restructuring program we announced in Q4. We are done up to 150 in Q1. We're going to take another 25 to 50 in Q2, and the balance will come in Q3 and Q4. Indirect costs, so as the economies are starting to open up, you are going to see hopefully, ad merch and travel start to go up. So that's a headwind to Q1. And then our increase, as we are starting to see the economy starting to pick up, our investments in growth, productivity, and sustainability will continue to increase. So that's how I would frame Q1 versus Q2.

Okay. So it just seems to me like there's the biggest piece, again, is this kind of raw material issue, but some of that you absorbed in the first quarter. And on a year-over-year basis, it looks like that's like, I don't know, 15 to 20 cents year-over-year?

It's 75 to 125 basis points headwind.

Yeah.

Okay. All right. Thanks for the call. I appreciate it.

Thanks, Steve. Thanks, Steve.

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.

Hi, good morning. Just wanted to focus perhaps on safety and industrial. You know, the headline organic growth there was slightly lower in Q1 than Q4, even with the improving economy. And that's really that respirator tailwind, 300 or 400 basis points less in Q1 than Q4. So just wanted to understand that. What does the guidance for that segment and or 3M in aggregate reflect for the respirator tailwind over the balance of this year? We've seen some write-downs at certain distributors and so forth for that kind of activity after over-ordering last year. Do you assume that that could become a headwind as soon as later this year, or the headwind really comes in 2022?

Yeah, Julian, thanks for the question. We talked about Q1. We saw a continuously strong demand. That's 630 million respirators delivered in Q1. And still in the quarter, 90% going to healthcare workers and I would say first responders and increasingly essential industries. The demand as we move forward, it's going to depend on a few factors. The first is, what's going to be the demand in healthcare? And that's going to depend on how the pandemic plays out, and I would say how governments respond to dynamics in the pandemic. And there's been changing in protocol of use of respirators, for example, is one of those dynamics. As Monish said, this is one of the areas where we're working through the uncertainties. There's that demand. There's also governments, and we're working with governments around the world on stockpile strategies and continue to supply into those. And then there is consumer demand and increasing demand in industrial as economies recover. So we see some shifting as we go forward over time. from the high priority, more than 90% into health care, shifting more into industrial and consumer. And then the demand overall, how much is it going to be relative to the impact on the overall enterprise relative to SIVG? That's going to depend on how each of those play out. But we're expecting to continue to see demand in industrial and consumer and health care as we go through the year.

To answer specifically your other question, Julian, I'm sorry, on why is the growth rate slowing down, we are starting to lap. So if my memory is right, Q1 of 2020, there was $100 million of disposable respirator that the company had disclosed even before my time. So you're going to see actually... The amount, if you're looking at the percent, it's going to slow down, as I said in my prepared remarks, because you're starting to lap the pandemic-related respirator demand year-on-year.

Yeah, Julian, we disclosed all that last year as we went through the years. So Q2, it's a $225 million year-on-year comp. So we stepped from $100 million to $2.25 million, then $235 million in Q3, and I think in Q4 we were around $280 million last year. So the year-on-year contribution to growth is going to decline.

Yes, understood. Thank you very much. And maybe just my second question around the capital deployment aspect. Cash flow has been very, very good yet again. Leverage, I think, is now around 1.4 or so times. Any updated thoughts around the balance sheet usage, or do we think that just given sort of the background of leverage is likely to remain fairly low through the rest of the year.

Yeah, it's a great question, Julian. I would go back again to just our capital priorities. Prioritization hasn't changed. Our first priority is always invest in R&D. Mike mentioned the areas that we have as we think about just a few, and even John talked about whether it's biopharma, home improvement, personal safety, digital, semiconductor, healthcare. There are tremendous opportunities that we believe we can keep investing in. So that's our first priority, I think, in the long run that will give us the best return. The second priority is dividend. We did increase dividend 1% this year. It's the 63rd year of consecutive dividend increase. Our third priority is M&A. As you know, we are busy integrating Accelity. It's doing very well and integrating well into 3M. We don't see another... acquisition and the size of the facility in the near future, but we are always looking for opportunities where we believe that it's complementary to 3M strengths as well as 3M can add value and synergies. And then our last priority is share repurchase, and as I said in my prepared remarks, we did have 231 million of share repurchases. I think the strength that we have right now, Julian, of 1.4 net leverage gives us a lot of flexibility to go either way, as well as gives us strategic opportunities to deploy when needed.

Great. Thank you. Thank you. Our next question comes from the line of Andrew Kapowitz with Citi. Please proceed with your question.

Hey, good morning, guys. Hi, Andrew. So transportation electronics, as you know, had a very high range of outcomes for the year, you know, low to high single digits, and obviously starting at the high end of the range. Is there any reason at this point, you know, why you wouldn't see the high end of the range in that particular segment, given the comps do get a fair amount easier for the next couple of quarters? Maybe you just could give us more color in how electronics and auto OEs before versus your expectations? I know you said, you know, absolutely, but it seems like they continue to be strong or even improve despite supply chain concerns.

Yeah, it's an important question for us too, Annie. You know, we had that wider range at the beginning of the year, which really reflected the dynamics in those end markets, the uncertainty that we were looking at as we came into the year, and we certainly had a good start to the year. Transportation electronics off to a strong start, you know, much like the rest of the companies. they're still facing some considerable uncertainties in that marketplace. And we've talked about the chip shortage and its impact on both electronics and automotive. I think you see kind of changing dynamics in the build rates, much of it reflecting that dynamic. Electronics, I would say consumer electronics is off to a strong start. Tablets and TVs really driving a lot of that. So it's how are these trends going to play out through the year? And And it still reflects, I would say, a wider range of outcomes. And it also is going to depend on how the pandemic plays out. Some of these are dynamics being driven by the pandemic and its impact on the economy in general. So I would say that wide range that we came into the year, we still have a wide range view of how the uncertainties will impact these key market segments. But again, off to a strong start. Automotive above the build rates. Our growth in consumer electronics above the build rates there. So, you know, we are winning in the marketplace with our solutions, and we're well positioned. We'll see how the market dynamics take us as we go through the year.

And, Mike, I wanted to ask you about your priority growth platforms in the context of, obviously, their strong growth in the quarter, I think 10%. You know, there's a lot of money out there, you know, whether it's the new Biden American Jobs Plan, focus on automotive electrification continues to increase. So how do you sort of change your focus, if at all, on some of these platforms? Do you shift more money into something like automotive electrification? Do you see more growth in certain areas like that moving forward?

Yeah, Andy, we talked about it all year last year, about what we were doing to invest in the future while we were managing through the big challenges that the pandemic threw at us in 2020. And we're accelerating, I would say, investments not only in our priority growth platforms, but other market trends that we were seeing that were opportunities for us. And we talked about, you know, things that were going on, obviously, in personal safety, but also home improvement and other areas that the trends were strong. So that's how we're prioritizing growth based on the market trends, where we can create unique and differentiated value. Priority growth platforms are tend to represent both of those strong markets, as John mentioned earlier. These are higher growth market segments. And then we have the investments that we make in the trends coming out of the pandemic. And we're stepping those up as we see the opportunity. So we're really driving those based on the growth opportunity that we see in front of us as we go through 2021, not locked in on a plan that we put together for our priority growth platforms, you know, before the year started. So it is... what we see as an opportunity to drive the growth and the growth outlook that we had for the year as we came into 2021. Appreciate it, Mike.

Thank you. Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.

Yeah, good morning. Hey, Andrew. Hi, Andrew. Yeah, I can reassure you that this will be one consumer stocking up on 3M masks because We have to do with inferior Kimberly-Clark product. So I just want to tell you that. Thank you, Andrew. Having said that, just the dynamic in the Americas on safety and industrial and transportation electronics in the quarter, I think you guys give very useful breakdown, just broader dynamic by, you know, sub-end markets. But in America, safety and industrial is up 12% assume it's because of safety. mass, but transportation electronics down 4%. One is more OE, one is more channel. Can you just talk about this dynamic, what's happening? I think it does sound there's some pre-stocking OE, but what's happening in the distribution channel?

Yeah, Andrew, you're right. Safety and industrial business group and the performance in America is driven, a big portion of that is driven by personal safety. It's been a strong growth driver. You know, we talked about it. Monish highlighted some of the other industrial businesses. We're seeing recovery in the industrial markets in general. We're seeing recovery increasing demand in industrial adhesives and tapes and industrial mineral products in the U.S. with the strong residential housing growth. All of those are driving what's going on in the Americas across that safety and industrial business group. Transportation electronics, it's driven globally, the strong growth that you saw by semiconductor fabrication, data centers, what I talked about earlier in consumer electronics. Those are not the big drivers, obviously, in the U.S. at this point. The automotive is the driver in the U.S., and we're seeing, you know, I would say we're seeing good performance on our spec ins. winning additional spec ins in the OEMs. And as the build rates pick up in the U.S., we'll see TEBG, the transportation business from the automotive side, get a strong contribution. We are, Munish talked about some of the areas of uncertainties and things that we're looking at. Commercial solutions and the demand for graphics that are part of that, the transportation safety products, those are still flat year-over-year growth, even in decline in in key end market segments. And that's one of the things that is an uncertainty as we look at the year. How are those markets going to recover as economies recover? So that'll be part of the answer to transportation electronics picking up as we go in the Americas in particular.

Gotcha. And just a follow-up question. I think Andy touched a little bit on it, but it seems that, you know, we have plenty of visibility on semiconductor CapEx going up in the U.S., over the next several years. Given that semi-capacity on the margin over the past decade has been added outside of North America, do you need to make any adjustments to your manufacturing footprint in North America to sort of play this growth, or is it just nature of your process and fungible capacity and just applies better overall capacity utilization in North America given the assets you already have in place?

Yeah, Andrew, as you know, our strategy is to be close to customers, invest in capacity to meet the demands regionally around the world, and that's true broadly across the enterprise. There are some key product and market segments where we have more of a critical center in key areas of the world. U.S. is one of those areas where we are, in the end, we're a net exporter of goods out of the United States because we have a stronger footprint here. And that's also true in much of the portfolio that we serve semiconductor fabrication with. We build that out close to the end users, close to the customers, so we have significant resources in Asia, for example. We also supply a significant portion of it from capacity in the U.S. and even some capacity in Europe. So it's I think we're well positioned if we see that shift, and it's going to take time to play out. And as has been the case for us throughout history, as we see market dynamics change and shift around the world, we'll invest to build up that capacity where it's needed. So we'll have time to adjust and add capacity. But we start in a good place relative to that market segment.

Thank you for your answer. Thanks a lot. Yep.

Thank you. Our next question comes from the line of John Walsh with Credit Suisse. Please proceed with your question.

Hi, good morning. Hey, John. Hey, so a lot of details already around the logistics and the supply chain as it relates to EPS and margin, but Curious if there's any sales impact, you know, your ability to kind of get raw feedstock, et cetera, that you want to call out. Just because if you look at, I mean, even the midpoint of your guidance for the full year, just having a little trouble reconciling the two-year and the three-year kind of growth stack deceleration from what you just printed.

So, John, I would just say back to the point on Q2, you know, there is a lot of uncertainty in the supply chain markets other than, of course, the raw material and logistics costs we've talked about. It's just making sure that the product is flowing, making sure our suppliers can make the product. As of right now, as I said, it's a very dynamic situation that's changing every day. So that is why that's one of the uncertainties here. that we have called out in the second quarter and the total year that we got to navigate through this. And hopefully as we get through the second quarter, we'll be in a better state to see where we are for the year. So hopefully that answers your question. Since you're talking about the second quarter and my memory failed me earlier, sorry. So Steve's question earlier also on, if you're looking at Q1 versus Q2, just another point is FX, which is 13 cents benefit in Q1, Again, we'll see where currencies move as the world plays itself out. And then from a tax rate perspective, we were at 16.4% for the first quarter, and our plan is 20% to 21% for the year. So those are the other items I would talk about, John, as I talk about the second quarter and its overall impact.

Great. And then maybe a broader question here. You talked a little bit earlier about kind of new product vitality. you're talking about a lot of interesting technologies around enabling your sustainability commitments. Is there a way for 3M to actually commercialize some of the stuff that you're doing to your own operations, some of the, either the technology or the material science or, you know, can you take what you're doing and actually bring that out to other customers and monetize that?

Yeah, and John, I would say for us, being a leader in sustainability is also about helping our customers and making a difference for them. And you see that in our expectations and our requirement that every one of our new products has an improvement and an advantage in sustainability. So that's one of the ways we can leverage our technology and our technology platforms to make a difference for customers. we're also investing a lot of innovation in our operations. And it's always been, you look at our fundamental strengths of the company, our manufacturing capabilities is foundational there. And about a third of our intellectual property sits in our manufacturing operations, process technologies. And we leverage that for our own performance and our own product quality as a competitive advantage. There are opportunities as we think about ways that we can really lead forward in sustainability solutions that we can expand and our impact. And we certainly expect to be able to be a good example for manufacturing companies in leading sustainability. We'll look at, as we have all along, look at innovation opportunities where we can commercialize those as part of our offerings to customers as well.

Great.

Thank you.

Thanks, John. Thanks, John.

Thank you. And our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everybody.

Hi, Joe. Morning, Joe.

So my first question, maybe just going back to 2Q for a moment, and I fully recognize that things are fluid right now, but can you talk a little bit about You know, maybe it's the trends that you're seeing so far in Q2. You've got very easy comps this quarter. So is the expectation that you'll see at least an acceleration in growth versus what you saw in 1Q based on what you're seeing today?

Yeah, Joe, so no major surprises in Q2 so far. So we've started April pretty strong. similar to what we thought it would be. The team continues to execute well. We're working through some of the challenges we've talked about, whether it's on the cost or the product availability side. But as you currently pointed out, from a comp basis, on a year-over-year basis, we will get into the first major quarter of the pandemic. And therefore, on a year-over-year basis, you should see a higher growth than what you saw in Q1.

Yeah, Joe, as a reminder, last year in Q1, we were up 20 basis points organically, I believe. and we were down a lower 13% in Q2. So the comp is a fair amount easier.

Yes, that that that makes sense. I just wanted to clarify that and then and then maybe my second question when is you know you talked about you know 30 to 40% type incrementals volume incrementals. You know when when you have decent volumes, I guess. Can you clarify that comment? Is that an all in number? taking into account some of the headwinds that you've already discussed on the raw material side, or is that just purely on volume, just to just clarify in those comments?

Yeah, Joe, it's a great question. So I would say 30 to 40 is in the long term what you should get leveraged. 2021 in general is, I think, unusual. Unusual on multiple fronts. One is when we gave you the guide at the beginning of the year, we talked about the snapback of indirect costs that should hopefully in 2021, as people start traveling, as we start investing from an ad merge perspective, would go up on a year over. Similarly, at the beginning of the year, we reset our comp. So that's a headwind. We also had a property sale in fourth quarter of last year of approximately $50 million of gain. That's a non-repeat. So all of those are one-time headwinds coming into the year that we talked about. We also talked that we will be increasing our investments in growth, productivity, and sustainability in 21 as we see some of the trends playing out that can help us continue to grow in the longer term. And so that's the second headwind. And then the third, as I've come through, that I've talked about, it's the raw materials. and logistics costs increase, partially offset by the price increases that we are trying to do, increase our yield, and then managing all the other costs that we have, whether it's legal costs as PFAS and combat arms and some of those proceedings proceed, as well as any other investments that we want to make as we keep seeing growth opportunities in the long term. That's why I would say 30 to 40 is the normal you should see in the long term, but 2021 is just a little odd for these reasons.

That makes sense. Thank you for clarifying.

Thank you.

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

To wrap up, I am pleased with our first quarter performance as we drove strong growth, earnings, and cash flow. We executed well and continue to build for the future through investments in growth, productivity, and sustainability. We are well positioned for a successful 2021 and remain focused on delivering value for our customers and returns for our shareholders. Thank you for joining us.

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.