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 26, 2022. I would now like to turn the conference over to Bruce Germelin, 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 and Transformation Officer, and John Banovitz, our Chief Technology Officer. John is joining us today to discuss our progress on the sustainability goals that we introduced in February last year. Mike, Monish, and John will make some formal comments, then we will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our investor relations website at 3M.com. Please turn to slide two. Please take a moment to read the forward-looking statement. During today's conference call, we'll be making 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 risk 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. Please turn to slide 3. Before I hand the call over to Mike, I would like to take a moment and highlight a financial reporting change we are making starting here in Q1 2022. We recognize that the increases in legal-related charges that we have incurred the past couple of years have impacted investors' understanding of our underlying financial and operating performance. We have been disclosing respirator and PFAS impacts in our public filings and have decided to provide additional disclosure by expanding the scope of our non-GAAP measurement adjustments to include all impacts of accrual changes and legal fees for respirator mask, PFAS, and combat arms matters. This change is a result of discussions we have had with many of you along with recent benchmarking work we have done. This morning, we issued a Form 8K with updated non-GAAP financial performance history for the past three years. Further, we will be issuing a Form 8K amending our most recent annual report on Form 10K to reflect the effects of this change in our non-GAAP measures and changes in segment reporting immediately after filing our Q1 2022 form 10-Q this afternoon. Also, our Q1 2022 financial performance and full year 2022 guidance in today's press release and presentation incorporate these changes. Please note that our guidance does not include future changes to reserves for PFAS or combat arms. Highlighted on this slide is the impact of this change to our non-GAAP financial reporting. As you can see, operating margins in 2021 were 22.2% on this new adjusted basis. or up 70 basis points from pre-COVID levels in 2019 versus down 40 basis points on the previous basis. And adjusted EBITDA margins have expanded 110 basis points since 2019 to 27.6%. Looking specifically at our Q1 2022 performance on slide four, adjusted earnings were $2.65 per share. This result excludes total special items of 39 cents per share, which is comprised of 13 cents of legal-related costs in the quarter, along with a 26-cent charge for PFAS-related remediation in Belgium, which we previously announced via a press release and form 8K filing on March 30th. As we indicated in the March press release and Form 8K filing, this charge would be reflected as an adjustment in arriving at our first quarter results adjusted for special items. We remain committed to providing strong transparency in reporting our financial performance, and of course, we are always here to address your questions. With that, please turn to slide five, and I'll now hand the call off to Mike.

Mike? Thank you, Bruce. Good morning, everyone, and thank you for joining us. In a challenging global environment, 3M delivered a strong start to 2022. As Bruce just noted, to provide additional clarity on litigation-related costs and our underlying business performance, starting in the first quarter, we are reporting adjusted earnings to exclude significant litigation costs, which was 13 cents in Q1. As we communicated on March 30th, we also made an additional investment related to our operations in Zvendrik, Belgium, which resulted in a 26-cent charge. Excluding this investment, our financial outlook for 2022 remains unchanged. As you recall, at our Strategic Outlook meeting in February, we committed to driving growth and shareholder value in 2022 by continuing to innovate for our customers and reposition our portfolio to win in attractive markets. We also committed to deliver strong margins, EPS, and cash flow through a focus on operational excellence while continuing to invest in growth, productivity, and sustainability. In the first quarter, we executed well and followed through on these commitments, which I will discuss on slide six. We relentlessly focused on serving our customers while managing supply chain disruptions, inflation, and geopolitical pressures. We posted organic growth of 2%, along with sequential margin improvement, adjusted EPS of $2.65, and robust cash generation. Overall, demand is strong. though the global economic outlook has softened due to challenges in certain end markets, evolving impacts from COVID, and recent geopolitical events. All of our businesses started the year with good performance. End market demand was strong in safety and industrial, partially offset by a decline in disposable respirators. In transportation and electronics, our automotive business continued to outperform build rates. despite the impact of semiconductor shortages. Healthcare performed well with 5% growth, and consumer grew 3% in addition to 9% growth last year. To position us for long-term growth, we continue to prioritize investments in high-growth opportunities across our businesses, commercial opportunities that are sizable and significant. For example, our automotive electrification platform grew 20% organically on the strength of new innovations, on top of 30% growth in 2021. In healthcare, our biopharma business posted 15% organic growth as 3M science advances the development and manufacturing of new therapeutics and vaccines. To support growing demand for our biopharma solutions, we are investing $35 million to double capacity at our plant in Columbia, Missouri. We also continue to manage our portfolio and unlock value for our customers and shareholders. We are on track to close the divestiture of our food safety business in the third quarter. And in March, we divested our floor products business in Western Europe, enabling us to prioritize other parts of our consumer business. In addition, yesterday we announced that we acquired the technology assets of LeanTech, a provider of digital inventory management solutions for the automotive aftermarket segment in the United States and Canada. It is another example of how we win in the core and build for the future, creating new platforms to access emerging trends and opportunities. In this case, the connected body shop. one of 3M's digital platforms that brings together data, analytics, and material science. We continue to navigate global supply chain disruptions, which have been amplified by recent geopolitical unrest. We are doing whatever is necessary to take care of customers while managing extended lead times and elevated inventory levels. At the same time, we have continued to drive strong pricing to offset inflation. Like many other global companies, we are actively managing through the conflict in Ukraine. Our focus remains on ensuring the safety of 3Mers in harm's way. I am proud how 3M has stepped up to help, from donating nearly $4 million to employees welcoming refugees into their homes. We stand with our Ukrainian colleagues and have suspended operations in Russia. Given what we are seeing around the world, we expect supply chain challenges to persist for the foreseeable future. Our balance sheet remains strong, allowing us to invest in the business while returning $1.6 billion in the quarter to our shareholders through both dividends and share repurchases. We increased our dividend in the first quarter, marking our 64th consecutive year of increases. With respect to litigation, We are vigorously defending ourselves in combat arms bellwether cases. We are pleased that a jury sided with 3M in the most recent bellwether trial earlier this month, which was a plaintiff's counsel pick. To date, we have won six and lost eight trials and have appealed or will appeal all adverse verdicts. Eight bellwethers were also dismissed by plaintiffs before they went to trial. I would also like to provide an update on operational disruptions at our factory in Zwendrik, which I know is top of mind. Last month, I visited Belgium to meet with local leaders and affirm our commitment to the Zwendrik community. As previously stated, we continue to work with Flemish authorities to address our remediation obligations and work toward greater operational certainty. Last September, we announced an investment of €125 million to advance air and water stewardship in our existing operations, which has included the installation of a new state-of-the-art filtration system. In addition, last month we committed €150 million to remediation that addresses legacy manufacturing and disposal of PFAS on 3M's site and in the surrounding area. To help reduce the impact to customers, we are supplying from other global sites and actively working to address any future potential impacts. We will continue to collaborate with officials to bring idle processes back online in Zvendrik, deliver essential products to our customers, and follow through on our commitments. On May 11th, we will publish our Global Impact Report, highlighting our progress to our sustainability commitments. In a moment, 3M's Chief Technology Officer, John Banovitz, will provide an update on an important part of these commitments, our environmental stewardship goals. In summary, the first quarter was a good start to the year for 3M, and I thank all of our employees for their contributions. As I mentioned earlier, we are committed to addressing the broader challenges of supply chain disruption and litigation risk as we continue to invest in our underlying businesses, which remain strong and well positioned to grow. We are maintaining our full year expectations as adjusted for the reporting change that we have discussed, which will provide greater clarity regarding our underlying performance as we navigate litigation matters. At 3M, we are driven by purpose and powered by four industry-leading businesses, unique global capabilities, and a highly experienced and diverse team. I am confident in our ability to grow above the macro and improve our operational performance as we move through 2022. I will now turn it over to John Banovitz. John.