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 25th, 2023. I would now like to turn the call over to Bruce Germelin, Senior Vice President of Investor Relations at 3M.

Thank you. 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, and Monish Patelawalla, our chief financial and transformation officer. Mike and Monish 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 risks and uncertainties. Item 1A of our most recent form, 10K, list some of the most important risk factors that could cause actual results to differ from our predictions. Please note, throughout today's presentation, we'll 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. With that, please turn to slide three, and I'll now hand the call off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. Before I recap our first quarter, I want to discuss actions we are taking to improve our performance. As you recall, over the past few years, we have implemented a new global operating model led by our four business groups, which included moving to a common global supply chain design end to end. We have since advanced our digital capabilities, further repositioned our portfolio, and continue to invest in growth and productivity. Our experience throughout this journey, including lessons learned during the pandemic, supply chain disruptions, and changing global trends, has shown us what is working and what we can do better. As I said last quarter, we are looking at everything we do. Today we are announcing additional actions to improve our cost structure, streamline our corporate center, strengthen our supply chain, enhance our go-to-market models, and drive greater focus in markets where 3M science gives us a clear competitive advantage. We will reduce costs at the corporate center by eliminating management layers across the company. We are broadly reducing our corporate shared services, like our central design group. We are reducing rooftops worldwide, including exiting our conference center in northern Minnesota. We are also simplifying and modernizing our technology by moving to the cloud and removing hundreds of legacy systems. This reduces costs and provides us greater agility and flexibility to invest in differentiated digital areas like data, analytics, and automation, while increasing investments in cybersecurity. We are simplifying our supply chain structure to better align with our businesses and improve performance in every aspect of plan, source, make and deliver, while adding industry expertise to help drive our progress. The actions we are announcing today will help us complete our shift from area to global management, simplifying reporting lines and clarifying accountability. We are also taking out layers of management and duplication of activities across all areas of supply chain. Our progress in digital gives us better tools to use in the areas of planning, sourcing, and logistics, removing redundant work and improving productivity. And we will prioritize our continuous improvement efforts in our largest factory operations. We will have a more efficient support structure and operating model to improve service cost in inventory. We are streamlining go-to-market models to better align with customers, improve agility, and reduce management structure. This is driven by our relentless focus on optimizing the path to our customer. We are not adopting a one size fits all approach. We are customizing an approach for each business that ensures greater focus. In safety and industrial and transportation and electronics, we will eliminate certain area based business group leadership and move to a division led model. In transportation and electronics, we will also combine two divisions, further reducing structure. In consumer, we will simplify how we go to market with each area team aligned around their prioritized product portfolios and leading brands. In addition, we are changing our go to market model in approximately 30 countries around the globe, which represent less than 5% of our revenue. In these countries, we will leverage our digital and export capabilities and move to a model partnering with distributors with deep local knowledge and infrastructure, enabling us to significantly reduce our people, real estate, and other related costs. Through our actions, we plan to eliminate approximately 6,000 positions globally, in addition to the reduction of 2,500 global manufacturing roles we announced in January. In total, this represents about 10% of our global workforce and senior executive roles. Reductions will span all functions, businesses, and geographies and be completed in accordance with local regulations. We expect to take total pre-tax restructuring charges of $700 to $900 million, with approximately half of the charges to occur in 2023 and the balance to be largely taken in 2024. We anticipate the actions will drive savings in the range of $700 to $900 million, expand margins, and position 3M for future growth. We estimate that approximately half of the annualized savings will be realized in 2023. At the same time, we are continuing to build 3M for the future, prioritizing high growth markets like automotive electrification, personal safety, home improvement, semiconductors, and healthcare. We are also investing in large emerging markets that demand our material science innovation, including climate technology, industrial automation, next generation electronics, and sustainable packaging. As we move forward, we will drive additional cost reductions through improvements in sourcing, yield, productivity, factory automation, and network optimization of our plants and distribution centers. Today, we are also announcing changes to align our leadership to our future direction. Effective immediately, Mike Vail has appointed group president and chief business and country officer a new role on the company's corporate operations committee, reporting to me. In this new role, he will have responsibility for three of the company's four business groups, safety and industrial, transportation and electronics, and consumer, and also country governance. Jeff Lavers, who was leading our consumer and healthcare business, will now lead our healthcare business and support the company's progress towards a spinoff and the transition to a new CEO and management team. Jeff continues to report to me. Karina Chavez will become group president consumer. Chris Goralski will become group president safety and industrial. Ashish Kanpur will continue as group president transportation and electronics. All three are experienced leaders at 3M and well positioned to help drive the actions we announced today to improve our performance. Karina, Chris, and Ashish will report to Mike Vail. In total, today's actions will make 3M more streamlined and competitive. Now please turn to slide four for a summary of our first quarter. In an economic environment that remains challenging, we stayed relentlessly focused on serving customers and aggressively managed costs. We posted adjusted organic growth of minus 5.6%, or minus 2.2%, excluding our Russia exit and decline in disposable respirator sales. We delivered adjusted margins of nearly 18% and adjusted earnings of $1.97 per share, while expanding our adjusted free cash flow to $900 million. Today we are affirming our full year guidance for organic growth, EPS, and cash flow, which is inclusive of the restructuring charges and related savings. And market trends played out as expected with ongoing weakness in consumer facing markets. We saw continued strength in certain industrial markets, including automotive, electrical markets, and abrasives. Our actions to reduce costs, which included plant spending, external services, travel, and hiring help drive stronger than expected earnings and margins. We also continue to improve inventory levels, enabling us to deliver strong cash flow. At the same time, we are advancing our strategic priorities for long-term value creation as we make progress on the spin of our healthcare business. Turning to litigation, on combat arms, 3M continues to support aero technologies through mediation discussions. we are focused on achieving a resolution that is efficient and equitable for all parties. With respect to PFAS, we continue to address litigation by defending ourselves in court or negotiating resolutions as appropriate. We also have a dedicated team to facilitate an orderly transition as we exit PFAS manufacturing and work to discontinue the use of PFAS in our products by the end of 2025. In summary, we are improving day-to-day operational execution, advancing our strategic priorities, and taking necessary actions to move 3M forward. We are dedicated to building on our progress, delivering greater value for our customers and shareholders, and exiting 2023 a stronger and more focused 3M. Monish will now take you through the details of the quarter. Monish.