3M Company

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Fourth 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, January 23, 2024. I would now like to turn the call over to Bruce Germelin, Senior Vice President of Investor Relations at 3M.

Thank you and good morning, everyone, and welcome to our fourth quarter earnings conference call. With me today are Mike Roman, 3M's chairman and chief executive officer, and Monish Patalawala, our president and chief financial officer. Mike 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 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 10Q 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'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. Please turn to slide three. During today's presentation, Mike and Monish will discuss our 2024 outlook. This outlook will be provided on the same adjusted basis used during 2023. In the coming months, there are significant milestones that the company expects to complete, including the spin of the healthcare business and the finalization of the public water supplier and combat arms legal settlements. The healthcare spend remains on track for the first half of 2024, subject to customary closing conditions as detailed in our SEC filings. We continue to expect the business to be spun off with an estimated net leverage of three to three and a half times EBITDA and with the proceeds to be distributed to 3M prior to the completion of the spin. We are working through the processes with all parties and the courts in both the public water supplier and combat arms earplug legal settlements. Our goal is our finalization and ultimate implementation. Absent the proceeds from the intended spinoff of the healthcare business, the company has not concluded how it would fund amounts due under the public water supplier and combat arms earplug legal settlements. Therefore, we have not included the potential impacts of changes in net debt that may be needed to fund amounts under these agreements. For illustrative purposes only, in the absence of the proceeds from the spin, the adjusted earnings per share impact from financing the legal settlements could be up to approximately a 20 cent per share headwind based on current market conditions. Also, please note that we will be treating the dilutive earnings impact of 3M's option to satisfy the $1 billion in payments related to the combat arms earplug settlement with 3M shares as an adjustment in arriving at results adjusted for special items. Finally, it is important to note that when considering 3M financials post-spin, it is not appropriate to simply remove the healthcare business financial results. There are other factors such as transition services agreements, stranded costs, and below-the-line items that need to be taken into account. We are planning on holding an investor meeting later this year following the spin of healthcare, where we will provide an update to our full year 2024 guidance, along with our medium term financial framework. With that, please turn to slide four, and I'll now hand the call off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. 3M delivered a strong fourth quarter as we continued to improve our operational performance, with adjusted EPS growth of 11%, operating margin expansion of 180 basis points, and robust cash flow. Monish will cover more details of the quarter, but first I would like to comment on our full-year performance. Throughout 2023, we delivered on our commitments with results that exceeded our original earnings and cash flow guidance. While organic sales declined 3%, reflecting softness in certain end markets, including consumer retail and electronics, our disciplined execution supported year-over-year adjusted margin expansion. Excluding restructuring, we delivered increased margins of 60 basis points, helping drive earnings of $9.24 per share, along with a 30% increase in free cash flow and a conversion rate of 123%. Our strong cash flow enabled us to continue investing in the business while reducing net debt by $2 billion, or 17%, and returning $3.3 billion to shareholders through our dividend. Please turn to slide five. As you recall, in January of last year, we committed to take a deeper look at everything we do. Our success in 2023 reflects that commitment, along with our execution of three strategic priorities, which are unlocking value for customers and shareholders, both today and into the future. Let me highlight key achievements in these areas, including how we will build on our progress in 2024, starting with driving performance through the 3M model. In 2023, we implemented the most significant restructuring in 3M history to streamline the organization, reduce costs at the center, and get us closer to our customers, which generated more than $400 million in savings during the year. These efforts included aggressively cutting management layers, reducing corporate shared services, and modernizing our technology by removing hundreds of legacy systems. We reduced rooftops worldwide and took actions to help us address stranded costs as we progress the healthcare spin. We simplified our supply chains and are doing more to leverage data and data analytics to visualize the flow of goods so we can serve customers more efficiently. We optimized our global go-to-market models for each of our business groups. In consumer, for example, we simplified our division structure, with each of our global area teams now better aligned around their prioritized product portfolios and brands. At the same time, we have transitioned to an export-led model in approximately 30 smaller countries around the world, allowing us to reduce costs and complexity while still bringing 3M innovation to local customers. The simplification of our organization also frees up resources to prioritize exciting growth opportunities for 3M, such as automotive electrification, climate technology, and industrial automation. While we have more work to do in 2024, our actions are helping us improve our operational performance and create a more competitive 3M. Our next priority is the spinoff of Salventum, our healthcare business. Last year, we appointed experienced healthcare leaders to Solventum, including Brian Hansen as CEO, Carrie Cox as board chair, and Wade McMillan as CFO. The spin is on track to be completed in the first half of this year, and we are confident in the value it will create for customers, care providers, patients, and shareholders. As we look to 2024, we will continue to optimize our portfolio as we prioritize geographies, markets, and products where we see the greatest opportunity. Finally, we are focused on addressing risk and uncertainty. The combat arms settlement we announced last August has received strong support from both claimants and the broader military community. We completed the first three milestones of the settlement as planned, including earlier this month when we reached agreement with all plaintiffs who were being prepared for trial. We will continue to work with all parties in the courts to fully implement the settlement. With respect to PFAS, our settlement with public water suppliers is on track for the final approval hearing scheduled for February 2nd. We will continue to address other PFAS litigation by defending ourselves in court or through negotiated resolutions as appropriate. We also remain on schedule to exit all PFAS manufacturing by the end of 2025, with production volumes down 20%. Looking back, in a year full of change, I am pleased how 3M'ers around the world stepped up to lead. Importantly, we stayed relentlessly focused on doing what 3M does best, using material science to make a difference in the world. I see exciting examples of innovation across our company. Earlier this month, we unveiled the world's first solar-powered communications headset, building on our decades of leadership in both personal safety and sustainability. We are advancing more durable, energy efficient, and connected vehicles with an array of solutions, including new thermal barrier materials that improve the range and safety of electric car batteries. Just one element of our automotive electrification program, which grew 30% in 2023, on top of 30% growth in 2022. Our medical solutions business, a world leader in advanced wound care, just announced a partnership with the US Army, where we will collaborate with the military and leading universities to develop traumatic wound solutions. And in consumer, last year we launched more than a dozen new products, including new solutions for heavyweight hanging, part of our half a billion dollar command franchise, which leverages our world-class adhesives technology. 3M's innovation engine is strong. It will remain the heart of our business and our ability to deliver differentiated value for our customers. In summary, the 3M team delivered a successful 2023, and I am confident we will accelerate our progress in the coming year. I will come back to talk about our 2024 priorities and guidance after Monish takes you through the details of the fourth quarter. Monish.