Mike Roman: Good morning.
Monish Patolawala: Good morning.
Scott Davis: We’ve got a couple of different – I mean this restructuring is large as the fellows have said. But you’re also going to be getting out of the PFAS manufacturing business. Is that included in the restructuring? Or there’ll be separate actions kind of sequentially on top of that as you exit each of these things?
Mike Roman: Yes, Scott. The PFAS exit, I would say this, we are executing what we announced at the end of last year and working to discontinue the use of PFAS in our products and working to exit the manufacturing. It’s not a specific focus in the restructuring actions. That’s – we’ve got a dedicated team following through on that set of actions, and we continue to make good progress. We’re working closely with customers and, I would say, making progress on our innovation to discontinue the use of PFAS in our products across the company. So it’s a separate focus, separate team and a separate strategy for us.
Monish Patolawala: Just to remind us, Scott, from a numbers perspective, when we announced the exit of – the intent to exit our PFAS manufacturing and reduce our use of PFAS in our products, we had announced a fourth quarter charge. We said the total program would cost us $1.3 billion to $2.3 billion. In the fourth quarter of last year, we took a charge of $800 million, which was largely non-cash. We continue to make progress around that. Our current excluded numbers include what that – the extra charge in the quarter. For a total program basis, we still expect to incur right now $1.3 billion to $2.3 billion.
Scott Davis: Okay. And Mike, I wanted to just ask you on R&D productivity. I mean when you think about the investments that you guys have made over the last 50 years forever, there has been time periods where growth has been great and a lot of support on the margins. And then there is been, perhaps the last decade, where I’d characterize growth is pretty minimal and maybe not as much support in the margin structure as you had in the past. But is part of the restructuring and the changes you are making to help drive more accountability and productivity in R&D? Is it – is there a – I mean I guess, a more polite way to ask the question is, is there any cultural or structural problems in R&D that you can address and perhaps improve that productivity going forward?
Mike Roman: Yes. Scott, I think it’s an important part of the actions we are announcing today, I would say, is to position us to be successful in delivering on the differentiated value that is 3M innovation. And we are always innovating around how we do that. We – I talked about in the announcements today that we are prioritizing some large, high-growth market segments where we have strong commercial presence and we can leverage strong innovation. So, I think if there is a kind of a consistent message over the last year or so from me is that we are prioritizing more and more where we focus that R&D investment. It’s still the first priority in our capital allocation, invest in R&D, invest in CapEx to drive that growth. We see the opportunities in those high-growth market spaces.
We also called out and we are – as part of our actions that we are announcing today, we are putting in place a central group to really focus some of the capabilities that we have in broad material science going after some emerging market segments like climate tech and industrial automation, sustainable packaging. Next-generation electronics has got over the horizon some really exciting spaces. So, it’s about continuing to evolve that prioritization. And the businesses, they have got, I would say very clear focus on where their priority markets are, where their customer opportunities are that they can really create the most differentiation. So, that’s the, I would say a continuous innovation and evolving nature of how we think about investing in R&D, how we think about driving growth.
And our goal remains the same, to leverage our innovation, to grow at or above the macro of the economies that we are part of and really focusing on those high-growth market segments so that we can do that.
Scott Davis: Okay. Helpful. Good luck guys.
Mike Roman: Thank you, Scott.
Operator: Our next question comes from Chris Snyder with UBS. You may proceed with your question.
Chris Snyder: Thank you. I wanted to ask on China. I think you guys called out China down 20% in the quarter. Was that worse than you guys anticipated? And it sounds like there is an expectation of China stabilization or improvement as the year goes on? Is there anything you are seeing here through April maybe that gives you confidence that things there are getting better? Thank you.
Monish Patolawala: Yes. So, Chris, we did call out down 20%. It’s pretty much played out exactly where we expected it to be when we gave you the first quarter guide. And in the second quarter, currently, we are expecting China to be down low-single digits to mid-single digits. But sequentially, a few days into April, it’s pretty much playing out where we saw. And just talking to customers, talking and looking at all the external factors, there is an expectation that China GDP grows and increases in the second half sequentially and year-on-year. And our full year guidance, as I have talked about, assumes overall recovery in all economies in the second half, including China. And as supply chains continue to heal, we should start also seeing the productivity or cost reductions in our cost of goods to start showing up in the second half.
And so sitting right now, that’s how we see China. China was impacted heavily by consumer electronics down in the first quarter, and that’s also reflected in our results.
Chris Snyder: Thank you for that. And then for my follow-up, I wanted to ask on the destocking that you are seeing at the customer level. I think you guys called out retail as destocking year-to-date. And then we have seen the same in the data. Can you maybe just talk about where you think the supply chain is in that destock cycle? Thank you.
Mike Roman: Yes. Chris, we talked a bit about the consumer retail destocking as we came into the year, and we saw that play out in Q1. There – I would say, in the U.S., in particular, retail has been destocking in the discretionary categories. And we saw that, and that was part of our expectation and pretty much played out as expected. We see that getting back to closer to your more consistent weeks of stock, but there is still probably some destocking to continue there, not maybe as aggressively as we saw in Q1, but we still see that playing out as we move ahead. We are also seeing destocking, I would say, across some of the industrial markets. So, we talked about that back on our Q4 earnings call as well that it was maybe out of cautious view of the outlook, and I would say that has played out as expected.
We saw destocking in China around the slowdown in electronics. Also, in automotive, we – China saw a slowdown in automotive builds in Q1 and Asia more broadly destocking around electronics. I think the automotive levels more broadly given the growth are relatively in balance, maybe even low in some areas. Healthcare is pretty well aligned with the market and the recovery that we are seeing in procedures. I think the consumer is also seeing the dynamic of seasonal builds. There are some seasonal builds going on in the channel as well. So, some destocking, which played out as expected in the first quarter, I would say some of it carrying into the second quarter as we go forward. And then when you see the downturn in demand in electronics, there is naturally some destocking in the channels related to electronics as well.
Chris Snyder: Thank you.
Operator: Our next question comes from Josh Pokrzywinski with Morgan Stanley. You may proceed with your question.
Josh Pokrzywinski: Hi. Good morning guys.
Mike Roman: Good morning Josh.
Josh Pokrzywinski: I just want to follow-up on the restructuring program. Mike, Monish, I think you guys have had a few programs now over the last several years. And I know that they are approaching different aspects of the cost elements and different regions, etcetera. But trying to roll up to where do you see the margin entitlement for the business as we get through these programs over the next several years. Is there anything that you sort of have pencil out there that we should keep in mind, especially with a few of these programs overlapping and different mix changes, etcetera, going on within the business?
Monish Patolawala: Yes, Josh. So, I would say a couple of things. One is, of course we have to have these programs work through. As we said, it’s $700 million to $900 million. A large piece of those charges will be completed by 2024. So, you would start seeing the benefit without these charges in 2025 and beyond. That time, of course you had to think through what the revenue is. But if you just use 2023 as a guide, as a basis, the margin expansion, excluding these charges are when these charges are done, is a 200 basis points to 300 basis points of margin expansion that you should see on an annualized steady-state basis. What I would tell you is that allows us to definitely get the better leverage that we have all been talking about.
But the second other factor that comes into play is, as supply chains start to heal, you should start seeing productivity and cost-out starting to show up, which again is in our second half guide for the year. But that should continue into the future years. And then you add on data, data analytics and the digital capabilities that we have, that will allow us to do better network and logistics optimization, also dual-sourcing programs kicking in, etcetera. So, we should continue to see margin rates expand into the long-term once these programs are done. So, hopefully I answered your question, Josh.
Josh Pokrzywinski: Yes. That’s helpful. And I will leave it there with the interest of time.
Operator: Our next question comes from Joe Ritchie with Goldman Sachs. You may proceed with your question.
Joe Ritchie: Hi. Good morning everyone.
Monish Patolawala: Hey Joe.
Mike Roman: Good morning Joe.
Joe Ritchie: So, I know we have had a bunch of questions on the restructuring. I want to delve in a little bit deeper there because there is lots of cost levers that you described. I am just curious, is there a way to bucket perhaps like some of these – how big, like whether it’s reducing the layers or supply chain is in that $700 million to $900 million cost-out? And then maybe specifically on the simplification piece, again, any kind of quantification, like how many P&Ls are you streamlining? Any other color around that would be helpful.
