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 do have a question, please press star one on your telephone keypad. As a reminder, this call is being recorded Tuesday, January 21st, 2025. I would now like to turn the call over to Chinmay Trivedi, Senior Vice President of Investor Relations and Financial Planning and Analysis at 3M.

Thank you. Good morning, everyone, and welcome to the fourth quarter earnings conference call. With me today are Bill Brown, 3M's Chief Executive Officer, and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag 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 and take a moment to read the forward-looking statements. 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 these 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 will hand the call off to Bill. Bill?

Thank you, Chinmay, and good morning, everyone. Before I start, I'd like to welcome Chinmay to his first earnings call as the head of investor relations. He's been with 3M for three years, leading the FP&A function, and was with GE before joining 3M. He's replacing Bruce Germelin, who retired on January 1st. Bruce led IR for the last six years and was with 3M for more than two decades, and we wish him well in his retirement. 2024 was a pivotal year for 3M. Earlier in the year, we spun off our healthcare business group as Solventum, and we settled two significant legal matters. We also substantially completed the largest restructuring program in company history, which focused on reducing complexity and improving margins. These changes weren't easy. but the team has done a terrific job executing the programs and the results are showing up in our financial performance. This relentless focus on operational execution drove a strong finish to the year. Fourth quarter adjusted earnings per share was $1.68 on 2.1% organic revenue growth. The company generated free cash flow of $1.3 billion with conversion of 145%. During the quarter, we returned $1.1 billion to shareholders via dividends and share repurchases. These results capped a strong year for the company, where we delivered $7.30 in adjusted earnings per share at the high end of our guidance and up 21% year over year. Organic sales grew 1.2%, and we generated $4.9 billion in free cash flow with a conversion rate of 111%. Turning to slide four, the fourth quarter results reflect our focus on the fundamentals. Each business group drove positive adjusted organic growth, the first time in nine quarters that all business groups grew together, and it was broad-based. Twelve of our 16 divisions posted positive growth compared to only seven in the first quarter. One of the fundamentals is commercial execution, and we're beginning to make progress in this area. For example, in safety and industrial, we launched a campaign to drive cross-selling at our channel partners with some encouraging early results. And this year, we pulled forward the quota-setting process for our sales force to ensure we get out of the gates quickly, and we instituted standard work for our sales managers and area leaders who support our frontline sales reps. Reinvigorating the innovation engine is critical to sustain this top-line momentum. In 2024, we launched 169 new products, up 32% over the prior year. This was above expectations due in part to the rigor and governance we've put in place around new product introductions, but more importantly to the enthusiasm of the team to get back to innovating for our customers. One launch we're particularly excited about is our LCD 2.0 platform program that enables LCD displays for tablets, notebooks, and monitors to achieve the brightness and contrast similar to OLED, combining our multilayer optical film technology with our micro-replication technology. Another one is our expanded beam optics, or EBO connector, which is an optical interconnect designed for data centers that reduces installation time, cleaning, and maintenance while delivering exceptional performance. But we're still in the early days of our R&D turnaround effort. NPI is clearly an important metric, and in 2025, we expect to see a double-digit increase in the number of launches on top of the higher performance in 24, but it's just one of several we're tracking. Over time, we need to work to shorten the development cycle time to increase launch cadence, focus investment dollars on higher-octane programs, and see NPI translate into higher sales and margins. Also critical to driving growth is improving service. And a key metric for us is on time in full or OTIF. OTIF was 88% for the year, up three percentage points versus last year and eight points versus 2022. Our team has made solid progress, but we have more work to do. While consumer and transportation electronics are now consistently delivering to their customers at over 90% on time, our performance and safety in industrial remains well below expectations in the low 80s. It will take a fundamental shift in our approach to raise service levels to where they need to be. And we're doing this by standardizing the demand planning process, using new algorithms to improve forecast accuracy, improving supplier delivery performance, and driving consistency and reliability in logistics. These are key elements of our broader operational excellence program, which continues to mature but is still in the early innings. Our goal remains to deliver 2% net productivity through sourcing efficiency, quality improvement, lean manufacturing, and asset utilization, which I described last time as Operating Equipment Efficiency, or OEE. These efforts are starting to take hold and will support further gross margin expansion toward our goal of high 40s. We also made progress on inventory days, which was down two days versus last year and eight sequentially, ending the year at 94 days. This is just the start as our goal is to get to 75 days, freeing up cash for our capital deployment priorities, which include returning cash to shareholders. Last year, we returned $3.8 billion to shareholders, $2 billion in dividends, and $1.8 billion in share repurchases. Lastly, we continue to assess our portfolio, and we have several small actions underway. We'll update you on progress as deals are signed. Moving to guidance on slide five, our strong finish in the fourth quarter gives us confidence in our ability to deliver in 2025. For the year, we expect organic sales growth in the range of 2% to 3%, adjusted earnings per share in the range of $7.60 to $7.90, and free cash flow conversion of approximately 100%. Our back-to-basics approach and focus on our three top priorities underpins our ability to deliver on these commitments as the macro recovery continues to be uneven. Currently, IPI is forecasted to be 1.9% in 2025, but as you may recall, the forecast for IPI in 2024, 12 months ago, was also about 2%, and we ended the year at about 1%. We'll see how that evolves, but we'll be looking to take advantage of this acceleration as it materializes. Other key data points to watch include auto builds, which are expected to be slightly negative, but down 3% to 4% in Europe and the U.S., where we have better penetration, and flat in China and up across Asia, where our content per vehicle is lower. Consumer electronics is expected to be up low to mid-single digits, and consumer discretionary spend remains soft, especially in the U.S., where retail sales are expected to be relatively flat. As we navigate the ups and downs of the macro environment, we'll focus as always on what we can control, servicing our customers at higher levels, improving commercial excellence at the customer interface, filling up the innovation pipeline to support future growth, and driving productivity and efficiency throughout the organization. We look forward to sharing more details on each of these priorities, as well as our medium-term outlook during our Investor Day in St. Paul on February 26th. You'll hear from our leaders in R&D, supply chain, and the business groups about their execution plans that will turn our priorities into results. I hope to see you there. With that, I'll turn it over to Anurag to walk through the details of the quarter. Anurag?

Thank you, Bill. Turning to slide six, we had a strong finish to the year with Q4 performance coming in better than expected. Total adjusted sales were $5.8 billion, with organic growth up 2.1%. All three business groups had positive adjusted organic growth in the quarter and performed better than our end markets. In the fourth quarter, global IPI was up 1.4% year-on-year, and the markets we served trended in line with expectations. Consumer electronics remained stable, automotive OEM builds were flat, and consumer retail discretionary spending was soft. Geographically, our growth was led by China, up high single digits, driven by our electronics business, where we continued to gain share and saw modest front-loading from an anticipated change in tariffs. The U.S. was up low single digits, despite the challenging macro backdrop, with growth in aerospace and general industrial. And EMEA was down low single digits, due to the continued weak environment, including a high single-digit decline in auto bills. Adjusted operating margins were 19.7%, down 20 basis points year-over-year, and adjusted EPS was $1.68, or 5 cents better than the midpoint of our guidance. The better performance was driven by $0.09 of volume leverage, higher productivity, and lower restructuring charges, more than offsetting the unexpected $0.04 headwind from FX due to the significant recent US dollar strength. I will provide a quick overview of our growth performance for each business group on slide 7. Safety and industrial organic sales grew for the third consecutive quarter with 2.4% growth in the fourth quarter. This growth was broad-based with six out of seven divisions posting positive growth. We saw particularly strong demand for e-bonding in electronics and earring and body protection in personal safety. In addition, growth was driven from a large few power grid orders as anticipated in Asia and the U.S. for aluminum high-capacity conductors and power cable accessories for data centers. For the year, safety and industrial sales were approximately $11 billion, with organic sales growth of 0.7%, led by strength in e-bonding, cable accessories, and auto body repair. Roofing granules add another year of mid-single-digit growth as we continue to capitalize on the multi-year roof replacement cycle. Transportation and electronic adjusted sales were up 2% organically in the fourth quarter. The consumer electronics business showed continued strength, growing high single digits driven by solid volumes through the holiday season and continued share gains. Aerospace was again up double digits in the quarter, while the auto OEM business was down mid-single digits, reflecting continued weakness in global car and light truck builds. For the year, transportation and electronics had adjusted organic growth of 3.4% driven by electronics, aerospace, and auto. Our electronic sales were up approximately 12% from strong market demand combined with new product introductions and spec wins that drove share gains. Despite a challenging Q4, our auto OEM business was up 2% versus a 1% decline in auto-build rates. And the aerospace business grew double digits again for the year and 50% over the past two years, reflecting a focus on growth portfolios. Finally, the consumer business returned to growth in the fourth quarter, up 1.2% organically. Home improvement led the way up low single digits, driven by strength during the holiday season for command, scotch tape, and paint protection products. And for the year, our consumer business was down 1.2% with low single-digit growth in home improvement sales, mainly command, more than offset by low to mid-single declines in the other divisions. Let me summarize our full year 2024 financial performance on slide 8. On the back of strong fourth quarter performance, We finished the year with total adjusted sales of $23.6 billion and organic growth up 1.2%. All of our business groups were in line with our guidance, and from a geographic perspective, we saw solid organic growth in Asia-Pacific up 4.4%, driven by consistent strength in our electronics business. In the U.S., despite IPI being down 0.3%, our business was up 0.7% driven by electrical markets, aerospace, cable accessories, and home improvement. EMEA was down 1.3% due to the decline in auto builds and the weak industrial and manufacturing environment. Our adjusted operating margins expanded 280 basis points above the high end of our guidance range of 250 to 275 basis points to 21.4%. This performance was driven by benefits from volume leverage, productivity, solventum transition service agreement cost reimbursements, and restructuring, partially offset by FX and investments to drive growth in the business. We delivered $7.30 of EPS for the year, up 21%, and at the high end of a guidance range. Over 80% of our year-on-year performance was driven by strong operational execution. Finally, we delivered free cash flow of $4.9 billion, or 111% conversion, which included net working capital improvement of eight days and returned $3.8 billion to shareholders in 2024. Please turn to slide nine as we look into our 2025 guidance. As Bill indicated, We expect organic sales growth of 2-3%, earnings per share of $7.60-$7.90, representing growth of 4-8%, and free cash flow conversion of approximately 100%, all on an adjusted basis. We expect all business groups to grow low single digits, which is in line with or above macro. We expect this higher growth trajectory to be supported by a focus on commercial excellence, improvement in service levels, and new product launches. We have largely moved past product portfolio prioritization headwinds, and the small amount that remains is incorporated into our guidance and won't be specifically called out going forward. Our EPS growth is anchored by margin expansion in the range of 130 to 190 basis points, which reflects our relentless focus on operational excellence. Adjusted free cash flow conversion is expected to be approximately 100% driven by strong operating income growth and a focus on working capital management. Adjusted capex of approximately $1 billion will be in line with depreciation and amortization. Let me take a minute to walk through the EPS drivers for 2025 on slide 10. We expect EPS growth of 4% to 8% driven by operational performance that is partially offset by non-operational headwinds. We are confident that our focus on operational excellence will contribute $0.70 to $1 or 10% to 14% to adjusted EPS growth. This growth will come from volume, restructuring, and net productivity more than offsetting growth investments and stranded costs. We expect non-op headwinds of approximately 40 cents, half from FX due to recent strengthening of the U.S. dollar, and the other half from below-the-line items, including pension expense, net interest, and tax, partially offset by share buyback. We plan for a gross share repurchase program in 2025 to be approximately $1.5 billion. Putting all this together, we expect strong operating performance and capital deployment to drive EPS growth. As we think about the cadence through the year, we expect sales and EPS to be split equally between the first and second half in line with historical trends. Within the first half, we expect Q1 sales growth to be similar to Q4, and earnings will reflect the annual equity grants which last year were deferred to Q2. This will result in Q1 earnings being similar to that of last year, and we expect sequential improvement into Q2 as we lap the Silventum spin items with earnings being approximately equal between the two halves. I want to take a moment to thank the 3M team for the strong finish to the year, and I'm confident in our ability to deliver another strong year in 2025 with growth acceleration, strong margin expansion, and return cash to our shareholders in excess of $3 billion. With that, let's open the call for questions.

Ladies and gentlemen, if you would like to register a question, please press star 1 on your telephone keypad. If your question has been answered and you would like to withdraw, please press star 2. If you are using a speakerphone, please lift up your handset before entering your request. Please limit your participation to one question and one follow-up. Our first question comes from the line of Jeff Sprague with Vertical Research. Please proceed with your question.

Thank you. Good morning, Bill and Anurag. Just on the top line in particular, Bill, I was wondering if you could give us a sense of to what degree you know, sort of the operational execution, you know, product development has actually impacted the top line already versus, you know, what you expect to kind of play out in 2025. Just thinking of some of these product launches and the like came later in the year. So perhaps we could start there.

So good morning, Jeff. Thanks for the question. Yeah, we were very pleased with the Acceleration of new product introductions, as I mentioned in my remarks, came in above expectations, in fact, quite a bit above expectations. You know, but still very early. You know, a lot of the products that we're launching are what we call Class 3, so they're incremental. So year one sales on these products are going to be somewhat light, and it'll grow over time over the next several years. You know, more importantly, as we, you know, grow our NPI launches next year by double digit, We shift to more what I called higher octane or class four type products, which have more sales capability. You know, we'd likely see more impact on the top line from these launches. It's an important dimension. I think the team has built momentum. It's part of the governance process. It's a lot of it's the enthusiasm of the team. Some of it is shifting some resources around. We added 50 people in Q4 and we moved about another 100 people into R&D development. you know, in the quarter. So we're on the right track. You know, there's a good sign. We've got to see it turn into reasonable and substantial margin and income over time. You know, but whatever we've seen in terms of launches is built into the two to three guidance we see next year.

Great. And then maybe just one for Anurag. A lot of conversation last year, you know, as we were all trying to fine tune our models on kind of the restructuring versus, you know, stranded costs and the like. Just wonder within that 70 to a dollar, 70 cents to a dollar bridge item, Anurag, you could give us a little bit of granularity on restructuring investments and stranded costs in particular.

Good morning, Jeff. Sure. Let me do that. And probably what I'll do is I'll break the pieces to the bridge. So at the midpoint of our EPS guidance, we are growing 10% to 14%, excluding the non-op items, which is quite strong relative to the midpoint of organic growth. So there are three factors for that. One of them is sales volume, which creates significant volume leverage as well as incrementals. So at 2.5% volume growth at the midpoint of the guidance, And 35% incrementals, that's about $200 million or so. Second is the lower restructuring cost to your specific question. That's about $200 million tailwind into 25. So that's another $200 million. And finally, on the net productivity, that's about $150 million as well. And lots of pieces in that. The PFAS stranded cost is a negative $100 million. We're making some growth investments as well, but offsetting that is overall net productivity through the factories, through our SG&A function as well. So you put all the three buckets together, it's about $515 million of margin improvement. FX is offsetting about $125 million of that or so. So the $425 million is at the midpoint of our 160 basis points of margin expansion. So those are the three big pieces driving the operational growth of $0.70 to $1. Great.

Thank you for that. I'll pass it on.

Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.

Hey, good morning. Good morning, guys. And thanks for the shorter presentation, too. Hey, Bill, you mentioned the quota pull forward. I think you mentioned something about some changes in the sales organization. But if we just back up a little bit, perhaps you could just frame kind of what you're trying to change with the sales organization and maybe a little bit more detail on what exactly does that mean when you talk about a quota pull forward for a

as far as trying to drive growth? Yeah, so it's a great question. Thank you for that. You know, when I laid out the original plan around driving top-line growth, the basis is around driving more innovation, and that's going to take time, and I commented on that a little while before. You know, growth in the near term is going to come from selling more of what we have on the market today, and that's an important dimension to this, which is You know, just a more aggressiveness in our frontline sales and marketing resources. You know, they're dealing with right now with not a lot of new things to say to the customers because we haven't been innovating as much. You know, and our on-time and full performance out of the factories has not been that great. It's improving, but it has not been that great. So... that the sales force is challenged in some ways to sell, and I think they've been on their back feet in some ways. And I think what Chris and the team at SIBG and others across the company are doing is really leaning into this. So what we're trying to push for is making sure that the sales leaders, the sales reps out in the field, they know what they're expected to do in 2025 early in the year. So they're getting out of gates January 1 with their quota, their targets, specific things around sales, closed one wins. Typically, that would have been in early April when it rolls out. So a little bit lag. So that's why Q1 might not have had some momentum. A little more structure around how the sales managers and area leaders are working in terms of their cadence, reviewing progress with their sales reps. That's quite important. Some of the other dimensions that we're pushing on here is around cross-selling. It's a pilot. It's six combination pairs that we've done, six or eight different distributors. So it's small pieces here. But in December, we saw some pretty good momentum building. And I'm pretty optimistic that over this year and next, that there's going to be some benefits for cross-selling. We're working on pricing and reinstituting some price corridors and changing our governance process on pricing. So when you step back, I think all of this gets back to the original premise was, we've got to get better at selling what we have today on the marketplace. And that's where the back end at 24, and then most of 25 is going to come from, which is why I think it's important to investors to understand that piece. The NPI will come over time. I'm very confident about that, but we've got to get better at selling more what we have on the market today.

Makes sense, Bill. And just I think when you talk about on time and full, it seems very fundamental. But in theory, if you had 100% on time and full, would your growth rate be 100 basis points higher, 200 basis points higher? Is there any way to kind of? narrow that down?

Yeah, it's hard to quantify it, Scott. It's a good question. Clearly, running at 88% is not where we need to be. We're running around 93, a little over 93% in consumer. We should be in the high 90s. That's the expectation of some of the big box retailers. So we're getting there. We're doing better there. We're over 90% in the transportation business. That's good. It should be better. The concern really is in SIBG, the safety and industrial business. In the low 80s, we're definitely losing business for sure there. We are not delivering when somebody needs something right now and we don't have it available. That is causing them to go someplace else, even though we have a better brand, sometimes a better product, an attractive price. So it is costing us sales. So I do know that as a fundamental part of driving top line. We've got to get better at, you know, exercising the supply chain and making sure we meet our customers' expectations. Okay.

Best of luck. Thank you, guys. Thank you. Our next question comes from the line of Nigel Coe with Wolf Research. Please proceed with your question.

Thanks. Good morning, everyone. So, Morning. Bill, you sound a little skeptical about the 1.9% IPI forecast, just based on that's where we were this time last year. So I'm just wondering, when you went through the plan process, looked at the bottoms-up kind of projections from the businesses, and then you overlaid that with the top-down, what kind of haircuts have you taken to that 1.9%? And that brings me on to my next question. Well, the real question, I guess. What have you baked in for pricing in 2025? And then just going forward, what is the sort of framework here? Is it IPI plus price? Is it IPI multiplied by some kind of factor plus price? I mean, any way to think about that growth function going forward? So it's a good question.

I don't think we're going to deconstruct the, you know, elements of growth between price and volume and share gain and other parts of it. But, you know, but look, you know, we did enter 24, you know, with an expectation IPI was going to be a bit better and it softened through the year. You know, there was an expectation of auto builds and that softened quite a bit in the back end of the year. You know, as we were three months ago thinking about IPI in 2025, you know, it was higher than we actually are sitting at today. It was around 2.4%. The auto build was, at that point in time, higher expectation for 2025 than we see here today. These indicators, they're just that. They're indicators, and we use them. It's an important dimension, but it's sort of a starting point. Of course, we've done a bottoms-up review of our business. We feel confident that 2% to 3% is the right place to be. When you look at a blended macro between IPI and GDP, because we're about 80% weighted to IPI, 20% of GDP. It's around 2.1, so the center point at 2.5 is a little bit above the macro. We know that some of the initiatives we're putting in place around commercial execution, new product development, getting our factories run a bit better, those are all very important dimensions. But, Nigel, again, we're two, three weeks into the year. We've got a new administration in Washington. There's lots of conversations floating around around tariffs. We'll see as the year goes by both progress and traction of some of the initiatives we have internally, plus what happens in the macro, and we'll update investors accordingly. So right now we feel good about 2% to 3% is the right place to start in 2025.

Great. Thanks, Bill. Anirag, for you, thanks for the details on the margin bridge. The 150 of net productivity, that appears to be mainly the payback on the destruction actions in 2024. So I'm just wondering, you know, if there's anything from some of the more structural drivers, such as, you know, improving OEE, improving footprint, supply chain, et cetera.

Yeah. There is. So let me break up the $150 in a little bit more detail. So first, just on the headwinds over there. So I said it was $100 million of stranded costs. The incremental investments we are making as well, which is about $225 million. Some we did in 2024, some in 2025. It's both a carryover as well as in-year. So if you add the two together, it's about $325-ish, $350 million. Now, offsetting that, you're correct. There is probably $70 million of restructuring benefits, about $280 million. But then to get to the positive $150 million, we're driving about more than $400 million of net productivity. And that is coming through, again, through supply chain, be it procurement, more on the G&A efficiency, and a few of the other areas that Bill has spoken about. So overall, I would say the productivity driving is $450 million, just being offset by all these other line items to get us to $150 million.

Okay, that's helpful. Thanks.

Our next question comes from the line of Andrew Kaplowitz with Citigroup. Please go ahead with your question.

Hey, good morning, everyone. Good morning. Bill, you had mentioned in the conference circuit in December that you saw a bit of an uptick in industrial demand in Q4. Did that continue into January here, or do you think it was just related to pre-buy ahead of tariffs? Or could it have been a reflection of maybe some modest recovery in short cycle markets? How would you characterize it?

Yeah, so we did see, you know, I'd say across the industrial part of the portfolio, not referring to the consumer side, but the industrial part of the portfolio, we did see order rates. First of all, they're very steady through the quarter, which I think was very positive. You know, they're a tick higher than they were in Q3. You know, the order rates were somewhat higher than the growth rate, organic growth rate in the quarter. So there's a bit of backlog that was built, you know, into 2025. Those are all good indicators. But we are a shorter cycle business, so we don't really live off backlog. It's more of a book and ship type business. But, you know, they're small little indicators. It was pretty broad based. There was no specific criteria. you know, region or business that was the driver of it, that also is somewhat encouraging. Again, it's – and I contrast that to where we were in Q4 of 23, where I think there was a pretty dramatic tail-off in orders towards the back end of December, which, you know, got the team a little bit shaken in some ways. We did not see that happen here. So those are all good indicators, which is why when we look at, you know, 2 percent, 2.1 percent organic growth in Q4, you know, that we feel that that's a good floor, if you will, for 2025. But I think it's good news. You know, it's holding steady, you know, and again, it's a reflection of some modestly improvements in the industrial markets. But again, it's kind of early days.

Can you give more color into 25 margin guidance by segment and then also comment on T&E margin in particular in Q4-24 as it seemed a little weak in Q4 versus the other segments?

Yeah. So first, let me talk about Q4 and then I'll get into 25. So overall, Q4 came in better than expected across from our expectations, what we gave in the October guide across all the three segments. And as I noted in my prepared comments, it's probably five cents higher than where a midpoint of a guide was because of volume and productivity, with FX being the big headwind in the quarter, which was unexpected. Now, on TEBG, we did expect the margins to be lower in Q4 seasonally, of course, between Q3 and Q4 because of underabsorption as we clear out inventory. So that was a big reason. And if you look between Q3 and Q4, you know, sequentially we improved inventory by eight days. So that clearly has an absorption issue. Second is we started making growth investments, which we are seeing in the revenue right now. That was a driver for it. And FX, TEBG does have a fair amount of business outside the U.S., so that impacts it as well. So you put all these three things together, the margin is lower. It actually came in better than what we expected. So overall, if I look at all the three business groups for 24, the margins came in a little bit better than expected. As we go into 25, we're probably not giving guidance right now, very specific to each of the segments. But the $130 to $190 range that we gave in terms of margin expansion, we expect all the three business groups to grow quite a bit. The TEBG could be a little bit lighter than the other two because of the PFAS stranded costs, a large part of it is in TEBG. But having said that, we expect good margin expansion across all the three business groups.

Very helpful, guys. Thank you.

Thank you.

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

Hi, good morning. Maybe just the first question, trying to understand the sort of operating margin expansion framework. So you talked about, I think, Anurag, 450 million of overall productivity improvement in 2025. In the past, or recent past, let's say, Bill, you've talked about that sort of 250, 260 COGS productivity number as a sort of annual placeholder. So I just want to understand the kind of delta between that. I'm guessing 450 is not a medium-term placeholder because you have some extra savings this year from the 2023 plan. But maybe just help us understand sort of how to think about productivity on top of that 35% core leverage placeholder.

Sure. So, Julian, you're correct. What we have said is on the COGS line, 2% net productivity, which is about $250 million. The productivity which I'm talking about is overall for the company, which also includes SG&A, other parts of the business as well. It also has one quarter of the TSA reimbursement, which overlaps over there too. Right. So if you so those are the pieces which takes us to 450. I mean, we'll provide more on the investor in terms of the framework looking forward. But I think our goal is still to get 2 percent net productivity in COGS and for even on SG&A line to see whatever productivity we can get to offset inflation and other other investments that we are making.

Thanks a lot. And I'll leave other medium term questions for that event. So maybe just on the very short term, Anurag, I think you'd mentioned sort of 170-ish of EPS adjusted in Q1. The first half is, you know, just under $4, though, I think, based on that 50% comment. So you've got a decent sequential step up in the second quarter in EPS. Maybe just any very large puts and takes. It seems like organic growth pretty steady year on year, but anything you're calling out, the sort of Q1 to Q2 delta.

Yeah, thanks for the question. So let me break it up into two parts. One is some discrete items in the first quarter. And then second is on the recurring operational performance and non-op impact, which you should see through the year. On the discrete items, as I mentioned in my prepared comments, due to the solventum spin, there were few pieces, but a large part of it was the equity-based compensation, which I called out last year. We accrued in the second quarter. And as this year, as we're returning back to historical trends, we'll be accruing it in the first quarter. This is about a 15 cents headwind in the first quarter, which becomes a tailwind in the second quarter. On the operational side, we'll see good flow through from volume, lower restructuring costs, TSA absorption, all the productivity that we spoke about, which will offset PFAS stranded and mixed headwind, and also all the growth in respite. So this should be about 20 to 25 cents of EPS growth in the quarter. On the non-op, we have $0.40 for the year, so the first quarter is probably going to be closer to $0.08 to $0.10. So if you put all these items together, Julian, you've got $0.20, $0.25 of operational EPS growth. You minus the $0.08 of non-op and the $0.15 of equity-based comm, so the earnings are flat to Q1 of last year. Now, as you move into the second quarter, if we continue the similar trajectory on operating performance and the non-op headwind, it will be 10, 15 cents of EPS growth. And then you add back the 15 cents of the equity-based compensation. So the growth in Q2 would be closer to 25, 30 cents. So that's the bridge between Q1 and Q2. And then to your math, the first half and second half should be fairly equal in terms of EPS.

That's great. Thank you. Our next question will come from the line of Steve Tusa with J.P. Morgan. Please proceed with your question.

Hey, good morning. Good morning, Steve. Could you talk a little bit about, I'm not sure you mentioned it before, but the price assumption for this year?

No, we've not talked about that. I don't think we're going to disaggregate organic growth. And it's embedded into 2% to 3%. I think, as we've said before in the past, we do get price increases. The price increases cover material cost inflation. And I expect it to be in a similar magnitude in 2025. But we're not going to sort of get that specific number here today.

And is that a net positive, or you're just covering it?

No, it'll be a net positive in this year, yeah.

Okay. And then just one follow-up on the T&E segment in the fourth quarter. Margin was a little bit weaker than we were expecting. Anything in particular going on there in the fourth?

No. In fact, as I mentioned earlier, Steve, it's probably a little bit better than expected. Nothing unusual. It's a combination of seasonality as you bring inventory down. Some growth investments we made. But as you move into 2025, you should see margin expansion again in TEBG. TEBG was actually our highest margin expansion segment in 2024 by growing over 220 basis points. So I would say nothing unusual in the fourth quarter, just timing of different things.

And sorry, one more. Just on the corporate side, a little bit lower in expense this year. How does that look going forward? Is that a sustainable number in the model going forward into 26, 27, the corporate side?

Yeah, we'll talk about 25 right now first, Steve. Just on 25, two pieces over there, both equal assets, about $60 million each. One is just a reallocation between corporate and the business group. It's one last quarter of overlap over there because we did it for nine months of the year. So one is just a reallocation. And the second is covering the TSA absorption cost of $60 million. So those are the only two pieces on corporate.

Great. All right.

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

Hi, guys. Good morning. How are you? Good, Andrew. Good morning. Good morning. Yeah, can we just talk about free cash flow, you know, good improvement of free cash flow conversion this year? As we think about next year, you know, this squiggly line, 100% free cash flow conversion, what kind of working capital benefit do you have dialed in? And what are their offsets in terms of cash flow to keep it at 100%? Because, you know, you do have working capital released. And, you know, I would have expected that you could deliver over 100 quite sustainably for a number of years.

Yeah. Thanks for the question. Yeah, we did very well in 24, as you could see, you know, 111% conversion, really good on the working capital as well, where we improved the cash conversion cycle by eight days. It's early days right now in 25. The reason we put 100% conversion is one is CapEx is in line with depreciation. We're going to invest on the growth side as well as sustainability. So CapEx is in line with depreciation. On the working capital, two things. As revenue goes up, obviously, we're going to consume more on the receivable side. But we're going to need to offset it by inventory. Our goal is to get to 75 days. We showed good progress in 24. We'll continue that in 25. Now, of course, we strive to do better than that. So as the year goes by, if we do better on inventory to offset the DSO impact, there could be more than 100%. But that's the number we're going to start with and move from there.

Great. And just a question on abrasives and industrial specialties. You know, it seems to be sort of a nice canary in the coal mine short cycle business. It's been consistently declining for a while. You do sound more optimistic about But if you look at these numbers, they seem to be relatively flat for the past four to six quarters. Any visibility there? You know, when do they turn positive? What are you seeing in the channel? What are you seeing at inventory levels at OEMs? I know auto is probably a decent market there, but just more color as to when do you think these businesses could turn. Thank you.

So good question. I mean, so both businesses in the year were down low single digits. They're very different. You know, industrial specialties is a grouping of lots of different pieces. Some are growing, some are not. You know, overall, it's been declining, but we see that flattening out and starting to grow over time. On the abrasive side, you know, we should see a better 25 than 24. Part of it is because of the industrial economy. Part of it is, you know, because of the launch of a new product offering called Cubitron 3, you know, that we launched over the last year. It's now moving into a variety of different industries. instantiations of different abrasive products. It's growing. It's got tremendous differentiation versus competitors. So we feel very positive about that. So we see that getting a little bit better here in 2025. Part of it is because of the new products being introduced. So we think it's going to both turn the corner here in 2025.

But no commitment, Q1, Q2, nothing more, nothing specific like that.

You know, it's a little bit granular. We'll come out, you know, we probably can say more about this at the investor day when Chris talks about the individual components of his business, but nothing more today. You know, you asked about the inventory and the channel. That's been pretty normalized. There's not any significant concerns one way or the other about inventory and the industrial channel. So that's not really the big driver here.

Great. I appreciate it. See you in February. Thank you. Thank you.

Our next question comes from the line of Amit Marotra with UBS. Please go ahead with your question.

Thanks. Morning, everybody. Anurag, you know, one of the things that obviously stood out to me is the expectation for profit growth to be well in excess of revenue growth for this year. You obviously provided a very helpful walk around how we get there. But as we're coming up in kind of late February, we think about the multi-year outlook. Do we expect you know, a high level of incrementals to be sustainable? It doesn't have to be, you know, over 100 percent, but can we expect a higher level of incrementals kind of on a sustainable basis as some of these cost initiatives have legs? And I also assume, you know, cash flow is going to grow in excess of earnings growth over the next several years. And if you could just talk about that, and I'm trying to square that with you know, a 2025 buyback guide that's, you know, a little bit lower than what you kind of exited at from a run rate perspective.

Right. Good morning, Ahmed. Thanks for the question. So an investor day will provide a framework as we look out at the medium term as to what's kind of going to drive the sales growth and from the sales, you know, are we going to get gross margin expansion, which is going to flow through to the bottom line. So you're absolutely correct. We will provide that framework as we get into the end of the month in February. Yeah. On the cash flow side, listen, as growth, as we continue to grow, that is going to be a drag on receivables. But we have put an inventory goal out there for 75. We feel there's a good path for us to get there. We're executing well towards that. And, you know, it's 100% conversion. If you look historically at 3M, it's been around there. But going forward, you know, depending on revenue being the big variable here as well, but on inventory being something we can control, our drive would be to be over 100% conversion. Yeah.

Okay. And just maybe a bigger picture question for Bill. You mentioned earlier about industrial OTIF kind of stubbornly in that low 80% level. Obviously, that's a pretty big deal just given the size of that business. Can you talk about maybe when you expect to see more progress on that and And talk a little bit about, you know, the manufacturing in D.C. footprint and when you expect to make more progress on that as well.

So, look, I expect more progress on SIBG OTIF in January. You know, we expect it in February. You know, we did not expect the deterioration we saw in November and December. Part of it is certain specific issues, equality issues, a couple of specific assets, S-I-B-G. One of the things that I've been reminded about by people is it's a much more complicated portfolio. It's about 35 percent more SKUs in India. S-I-B-G than T-E-B-G, and it's probably more than double the number that's in C-B-G. So it's a pretty complicated portfolio. And there's been some unique supplier challenges in that business as well. But that being said, we expect that business to be closer to 90% this year. Maybe it's towards the end of the year, but... We need to be making sequential improvement throughout the year on S-I-B-G OTIF. And I know Chris is depending upon that. His sales force is depending upon that. And more importantly, our customers are. So, you know, we're on it. We're pushing on it. It's certainly gotten a lot of attention inside the company. And, you know, the team is pretty laser focused on making those improvements. I think you talked about the complexity as well in the network. You know, look, it's part of a longer-term plan in terms of operational excellence. The first part really is making sure that all of our factories have an improvement target, an improvement plan for how they run their four-wall spend. You know, we will also be looking at how we can run this network that we have today more efficiently. And then over time, you know, as we really mature the operating equipment efficiency metric, which is a measure of utilization of assets, as that gets more mature, you know, then we can start taking on a little more of a holistic look at the overall network. You know, but right now it's really just focused on blocking and tackling inside the factories. And I think we've got a lot of opportunity in front of us to improve in those dimensions. Thank you very much. Appreciate it. Thanks, Ahmed.

Our next question comes from the line of Nicole DeBlaise with Deutsche Bank. Please proceed with your question.

Yeah, thanks, guys. Good morning.

Good morning, Nicole.

Maybe just starting with China, I think you're expecting a little bit of a slowdown to mid-single digits in 2025, but definitely not too shabby. I guess, can you talk a little bit more about what you're seeing on the ground there?

Yes. So, you know, from a macro perspective, you know, China is expected to slow a little bit, you know, both from the GDP and IPI perspective. But again, it depends on what you believe in those forecasts and those in those numbers. Now, I do think that tariffs could have an effect on what's happening in China, certainly on the export part of of China. So, you know, we're watching it very, very carefully. There's news of the minute, you know, on tariffs for sure. So just stepping back, Nicole, China is about 10% of our revenue globally. Last year it was up about 10%. It was up about 13% in the first half. It sort of slowed down in the back. Part of it is from electronics. When I look at – so half the business is export, and electronics have been an important driver. But the other half that's really sort of, if you will, China for China, that did grow. It was up about 3% last year. So we saw a decent growth on the ground, not quite at macro, but decent growth. You know, we had quite a bit of activity in December, you know, quite a bit of activity happening here in January. Again, it's, you know, you never know. You know, it could be some pull-aheads. You know, it could be, you know, just getting ahead of Chinese New Year, which is end of January. So we do expect that our business in China will be slower in 2025 than it was in 2024, probably in the low single-digit range is what we expect for revenue for 3M in China.

Got it. That's really helpful. Thanks, Bill. And then any update on insurance recoveries? I think you promised us an update each quarter. Thank you.

So we're making progress on insurance, and we're actively engaged in arbitration, negotiations, and some places litigation with insurance carriers for both for PWS and Combat Arms. In Q4, we recovered about $170 million. So to date, so through last year, it was about $340 million, mostly in the Combat Arms area. Again, we're pretty active in pushing this. The legal teams are driving this pretty hard. And As I said last time, I'll say it again, we expect our insurers to honor the commitments they have to us and their policies, and we're going to make sure that they go and do that. So that's kind of where we stand today.

Thanks so much. See you in February.

Thank you.

Our next question comes from the line of Joe O'Day with Wells Fargo. Please proceed with your question.

Hey, good morning.

Good morning, Joe.

Just wanted to ask one on cash and just what you think the right amount of cash to carry is. So you ended the year with cash and marketable securities at about $7.7 billion. Where do you expect to end 2025? And then thinking maybe a little bit farther out, just what you think the right amount of cash to have is, whether that's percent of sales or dollar amounts?

Hey Joe, it's Anurag here. So we, as you correctly said, we ended the year at $7.7 billion. It's probably 2x of the working capital requirement for the business. If you look at 25, you know, we said we're going to buy back shares worth $1.5 billion. At current dividend rate, we're paying about $1.5, $1.6 in dividends, $3 billion. We got $3 billion to settle on combat arms and PWS as well. So these are the big ones we have for the year, and our plan is to refinance the majority of our debt. So if we put all of that together, we should end 25 at over $6 billion in cash.

And then also, Bill, just on industrial production, what are you watching most closely there, whether it's a region or whether it's an end market, in terms of how you're thinking about where the best potential sits for this accelerating industrial production that we're kind of all waiting for?

Yeah, so we're looking at all the different pieces. Obviously, we're pretty levered to the manufacturing economy within IPI, so that's an important one. You know, and we're a little bit heavier weighted in U.S. and probably Europe and others, you know, after that. So, you know, clearly U.S. is an important focus of ours in watching IPI. You know, the current forecast is it does turn positive from minus 0.3 to plus 0.5, I think is what it was in 2025. You know, Europe, we have to watch. We've got a pretty good presence in Europe as well. It's a very big turnaround in Europe from down 60 basis points to up 130 basis points next year. That's a pretty big movement. So those are the key things that we're looking at, I think, pretty carefully on IPI. It's on the industrial side. On auto, you know, look, it's, you know, I'm a little bit concerned about that only because we had some deterioration last year. You know, the auto build forecast for this year is weak and a little bit down 60 basis points. But when you, as I mentioned in my remarks, when you disaggregate that, U.S. and Europe are down three to four points. You know, China's flat and the rest of Asia's up a little bit. So, you know, we have to watch that and look at where our content per vehicle happens to be. Obviously, the team is very focused on gaining share, gaining content, and those automakers that are growing faster. That's a very important strategic focus of Wendy and her team. You know, but those are some of the things we're looking at from a macro perspective. I appreciate the color. Thank you. You bet. Thank you.

Our last question will come from the line of Dean Dre with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning, Dean.

Hey, I wanted to circle back on the strategies for reinvigorating new product introductions, but specifically reinvigorating innovation. I know we're going to start off the analyst event at the Technology Center. I think there's art and science here when it comes to innovation. I'd just be interested in your thoughts. You can't just dump cash at the front door and say innovate, but I know you're adding some headcount. Are there any other thoughts there in terms of ramping up innovation, and how do you feel about that longstanding policy at 3M R&D where the senior scientists get 15% of unbudgeted time. Does that still fit into the equation? Thanks.

You know, look, so 15% of time is sort of a hallmark of the company. You know, I sort of joke that, you know, it's 115%, not going from 85 to 100, but, you know, everyone gets their 15%. And I think that's important because it gives people a time to step back and think and ponder. You know, I mean, I do the same thing. I go into my office and I think about what, you know, what are the issues upon the company. And, you know, we all have to do that. So I think that's a hallmark of the culture of the organization. You know, look, I think the first look, it's not a shortage of ideas and concepts for where we can innovate. I think we've got a great list of products as you turn the scientists, the engineers on, you know, the people doing product development, those in the business units, you know, those out meeting with the customers themselves. You know, the ideas are there. The pipeline is pretty full. We've got to do more to keep filling it up. But the pipeline has been full. I think it's about just turning on that. and unleashing that energy that's in the folks that do the innovation. And so part of it is eliminating some of the bottlenecks in the processes. And I went through last time a number of pieces of that. We are shifting within our capital budget more investment to R&D. for lab equipment, for prototype equipment to speed up the prototyping and scaling up of innovation. We are adding resources there. I think if you put the right framework in place and you're motivating the teams in the way we are, and we're starting to kind of focus people on the growth verticals that we really want to focus our investment and time on, I do think that that's going to pay dividends over time. This is something that Wendy and TEBG is going to lay out pretty clearly when we get out to the end of February and we have our investor day. How do we get closer to those innovation partners so that we're really tied with them very closely so their ideas translate back to us and we're working with them in not a transactional way but in a strategic way? And I think if you do all of these things, this machine will turn on. And again, we saw good progress over the last six months. It's early days. You know, I think we'll have another good year in 25. But ultimately, you know, this is going to come down to are we are we growing faster than the market? Therefore, we're gaining share. And are we driving margin and margin expansion? Because the products we're offering the marketplace are better than what the competition puts on the marketplace. And I think that's the that's the end objective. We have a good start.

It's great to hear, especially that support of that 15% unbudgeted time. I'm sure a lot of people like hearing that. And then just a second question, quick follow-up on the plan for reducing inventory days. I mean, I know there's an immediate benefit for free cash flow, but Is there any pressure on service levels once you start to reduce the level of inventory, and is there any kind of tradeoff there?

Thanks. You know, look, that's something that we're watching very, very carefully. We came down two days year over year, and I think it was eight days sequentially in Q4. You know, in SIPG, we saw sort of OTIF come back. So we're watching this very carefully. You know, our intention is to prioritize OTIF over inventory, frankly. That's what we think is really important. That's a greater lever. You know, that being said, there are opportunities to eliminate OTIF. The waste, if you will, in inventory, not all the inventory we have is good inventory. You know, we have a lot that's stuck on the water. We have a lot of components in warehouses and factories. You know, we have to make sure we have the right inventory. That's why I believe, you know, this is the and, not the or. I believe that we can get to 75 days and over 90% OTIF. And I think we can get there. You know, that's our goal. That's what we ought to be shooting for. It's not going to be linear. And we saw in Q4 it wasn't linear. We had better inventory, not as good on OTIF, at least in one segment. But that's the objective. And, again, we're going to prioritize OTIF over inventory, knowing that we'll get the inventory over time.

Very helpful. Thank you.

Okay. This concludes the question and answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments.

Okay, well, thank you. I appreciate everyone's time and attention today. I know we're running top of the hour here, but I want to thank all of the 3Mers for their continued hard work and dedication to our customers and our shareholders. I look forward to introducing you all, you analysts and investors, to the senior leadership team at 3M at our Investor Day coming up on February 26th in St. Paul. It's going to be brisk. Today is minus 18, so dress warmly. So we look forward to seeing you on the 26th. Thank you very much, and have a good day.

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