3M Company (NYSE:MMM) Q1 2024 Earnings Call Transcript

3M Company (NYSE:MMM) Q1 2024 Earnings Call Transcript April 30, 2024

3M Company misses on earnings expectations. Reported EPS is $1.67 EPS, expectations were $2.08. 3M Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. [Operator Instructions] As a reminder, this call is being recorded Tuesday, April, 2024. I would now like to turn the call over to Bruce Jermeland, Senior Vice President of Investor Relations at 3M.

Bruce Jermeland: 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; and Monish Patolawala, our President and Chief Financial 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 home page of our Investor Relations website at 3M.com. Please turn to Slide 2. Please take a moment to read the forward-looking statement. During today’s conference call, we will 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 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. During today’s presentation Mike and Monish will discuss our total company Q1 2024 results which are inclusive of the Health Care business and are on the same basis on which 3M provided first quarter guidance back in January. As we have mentioned, it is important to note that Solventum Corporation’s separate financial reporting will differ from the basis of presentation used by 3M for the Health Care segment.

3M’s full year 2024 earnings guidance initiated today is on a continuing operations basis, reflecting Solventum as discontinued operations for the full year, including the first quarter of 2024. In addition, we will be treating changes in the value of our 19.9% equity interest in Solventum as a special item in arriving at non-GAAP results, adjusted for special items. And finally, we are providing additional financial information this quarter in our press release and slide presentation given the impact of the Solventum spin. We hope that you find the information useful in understanding our Q1 performance and outlook for 2024. We also plan on filing additional information on a continuing operations basis including in late July or early August Form 8-Ks with recast 2023 Form 10-K and Q1 2024 Form 10-Q information.

Slide 4 for a summary of our updated post-spin financial reporting framework. Beginning with the second-quarter, Safety and Industrial, Transportation and Electronics, and Consumer business segment operating income will include the impact of the dis-synergies or stranded costs, previously associated with Solventum. In addition, we have added a new operating category named Other for Solventum Transition Service Agreement costs which 3M will be reimbursed for beginning here in April. Finally, Corporate and Unallocated will incorporate the commercial agreements between 3M and Solventum that started on April 1st. One final comment, in the appendix on Slide 27 you will find information on our Public Water Suppliers and Combat Arms legal settlements, including the pre-tax payment schedule by year, and total combined pre-tax present value and after-tax estimates.

See also 11 Best EV Charging Stocks To Invest In and Jim Cramer is Recommending These 10 Stocks Heading Into May 2024.

Q&A Session

With that, please turn to Slide 5 and I will now hand the call off to Mike. Mike?

Mike Roman: Thank you, Bruce. Good morning, everyone, and thank you for joining us. In the first quarter, we delivered strong results that were better than our expectations as we returned to adjusted organic growth and achieved double-digit adjusted earnings growth. We improved performance across our businesses and in our operational execution. We also completed the spin-off of Solventum and finalized two major legal settlements. Our results demonstrate the positive impact of the changes we have made over the past last several years. We’ve also made significant progress in executing our strategic priorities, which has positioned the company for long-term shareholder value creation. In the first quarter, on an adjusted basis, we delivered revenue of $7.7 billion, including improved organic growth, operating margins of 22%, up 400 basis points and earnings of $2.39 per share, up 21%.

On April 1st, we successfully completed the spin-off of our Health Care business, Solventum, creating two world-class companies well-positioned to deliver greater shareholder returns through distinct and compelling investment profiles. As independent companies, both 3M and Solventum are better able to tailor their capital allocation and investment priorities to win in their respective markets. I want to thank and congratulate the teams whose dedication made this major accomplishment possible, and wish the entire Solventum team, led by CEO, Bryan Hanson, great success in the future. In Q1, we also finalized two major legal settlements. First, our settlement agreement with U.S.-based Public Water Suppliers received widespread support and participation.

It was granted final approval by the Court on March 29th. We anticipate making total payments with a pre-tax present value of up to $10.3 billion over the next 13 years. The first payment is expected in the third quarter of 2024. It is important to note our agreement with Public Water Suppliers addresses the detection of any type of PFAS at any level. This includes PFAS that have already been detected or may be detected in the future, including those that are the subject of the U.S. EPA’s recently announced limits in drinking water. Second is our settlement of the Combat Arms multi-district litigation. As of today, more than 99% of claimants have chosen to participate. This provides us the certainty and finality the settlement was intended to achieve.

We anticipate making total payments up to a pre-tax present value of $5.3 billion through 2029. We also continue to make good progress on our exit of all PFAS manufacturing. We are on track to meet our commitment by the end of 2025 and are working closely with each of our customers to complete an orderly transition. In summary, the progress across all three of our strategic priorities has helped make 3M stronger, leaner and more focused on what we do best, utilize 3M science to make indispensable products for our customers. I will now turn the call over to Monish for more details regarding our performance in Q1 and to discuss our guidance for 2024.

Monish Patolawala: Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 6. We continue to build upon the strong foundation we laid in 2023. We remain focused on our priorities and the team continues to deliver improving results. We posted strong adjusted results in the quarter, including sales of $7.7 billion, operating margin of 21.9%, earnings per share of $2.39 and free cash flow of over $800 million. These results were better than our expectations as we continued to drive strong operational execution and spending discipline. We also benefitted from significant operating leverage, particularly in Transportation and Electronics which was driven by strong organic volume growth in electronics and automotive.

Our results also benefitted from the acceleration of certain nonrecurring actions which I will go through in more detail on the next slide. Our first quarter adjusted sales of $7.7 billion exceeded our expectations of $7.6 billion as we delivered improved organic growth which was partially offset by a headwind from foreign currency translation. We delivered adjusted organic growth of nearly 1% or up 2.4% excluding geographic prioritization, product portfolio initiatives and last year’s disposable respirator comp. Organic growth was driven by our Transportation and Electronics business as the team won share gains from spec-in wins and new product introductions with automotive and Consumer Electronics OEMs. This drove strong organic growth as the OEMs ramped production for new launches for end customers.

Geographically, year-on-year strength in China and EMEA was driven by our strength in electronics and automotive. Sales in the U.S. were flat year-on-year, with Industrial and Health Care end-markets showing relative strength offset by consumer retail softness. Please turn to Slide 7 for details of the components that drove our year-on-year operating margin and earnings performance. As mentioned, on an adjusted basis, we delivered operating margins of 21.9%, up 400 basis points, and earnings of $2.39 per share, up 21% versus last year’s first quarter. Our first quarter performance was driven by improved organic growth, particularly in Transportation and Electronics, along with a continued focus on operations, restructuring actions and spending discipline, which drove better than expected improvements in operating margins of 340 basis points and earnings of $0.42 per share.

As disclosed in our Form 10-K and as factored into our 1Q guidance that we provided in January, our year-on-year margins and earnings were benefitted from the delay of our stock-based compensation grants from our normal timing in the first quarter to the second quarter due to the Solventum spin. This timing adjustment added 140 basis points to margins and $0.15 to earnings per share as compared to last year’s first quarter. We also accelerated certain non-recurring benefits, including property sales as we progress on our asset light strategy. This benefitted first quarter year-on-year operating margins by approximately 70 basis points and earnings by $0.08 per share. We accelerated restructuring actions in the quarter incurring pre-tax charges of $122 million, which was higher than our guidance of $75 million to $100 million.

This compared to last year’s restructuring charge of $52 million, resulting in a negative year-on-year impact to margins of 90 basis points and $0.10 to earnings. Foreign currency negatively impacted adjusted margins by 60 basis points or a negative $0.09 per share as a result of the strong U.S. dollar. This headwind was larger than we had expected. The reconsolidation of Aearo Technologies in Q2 2023 resulted in a $0.01 benefit year-on-year to earnings per share and was neutral to margins. As expected, our adjusted tax rate was 20.5% this year which was higher than when compared to 17.7% in last year’s first quarter, resulting in a $0.09 headwind to earnings. And finally, other financial items and shares outstanding netted to a positive $0.04 per share year-on-year impact.

This benefit was primarily driven by interest income on proceeds from Solventum’s issuance of $8.4 billion in debt prior to the separation, partially offset by a non-op pension headwind. Please turn to Slide 8. First quarter adjusted free cash flow was over $800 million. Adjusted free cash flow conversion was 63% in line with our historical first quarter trends. We continue to focus on driving working capital efficiency, including improved cash conversion cycle times. I am pleased with the progress we have made, yet there remains significant opportunity to further improve performance in all aspects of working capital. Adjusted capital expenditures were $355 million in the quarter, down 20% year-on-year. The lower year-on-year spend is primarily due to nearing completion on water filtration investments at our manufacturing facilities.

And finally, we returned $835 million to shareholders via dividends. Turning to the balance sheet, net debt at the end of Q1 stood at $10.4 billion, a decline of 13% year-on-year driven by strong free cash flow generation of our businesses. Also of note, in late February, Solventum issued debt of $8.4 billion for which the repayment obligation went with Solventum, while 3M kept approximately $7.7 billion in proceeds upon spin on April 1st. These proceeds, combined with our business’ strong and reliable cash generation have further strengthened our balance sheet. In addition, the retained 19.9% equity stake in Solventum will provide additional future liquidity. Also, during the quarter, we retired $2.9 billion of debt. Our strong capital structure and robust cash generation provides us with the financial flexibility to continue to invest in our business, return capital to shareholders and meet the cash flow needs related to legal matters.

Now, please turn to Slide 10 for a discussion on our business group performance. Starting with our Safety and Industrial business which posted sales of $2.7 billion, down 1.4% organically. Industrial end-market demand remained mixed in the quarter. We delivered strong double-digit growth in roofing granules driven by replacement demand and storm repair. Industrial adhesives and tapes posted low single-digit organic growth driven by spec-in wins in new bonding solutions for Consumer Electronics devices. The personal safety business declined low-single digits as strong demand for self-contained breathing apparatus for the first responder market was more than offset by a year-on-year comp headwind from disposable respirators. And finally, we experienced year-on-year organic sales declines in electrical markets, abrasives, automotive aftermarket and industrial specialties.

Geographically, Industrial markets in the United States were up 1%, while China remained challenged. Adjusted operating income was $664 million, up 18% versus last year. Adjusted operating margins were 24.3%, up 410 basis points year-on-year. This performance was driven by benefits from ongoing productivity actions, timing of stock-based compensation and strong spending discipline. These benefits more than offset headwinds from lower sales volume and higher restructuring costs. Moving to Transportation and Electronics on Slide 11, which posted adjusted sales of $1.8 billion or up 6.7% organically. Consumer Electronics end markets were stable in the quarter while the semiconductor market remained soft. Our Electronics business outperformed the market, up mid-teens organically year-on-year.

The introduction of new products continues to be well received in the market as evidenced by recent spec-in wins. In addition, we also experienced continued channel inventory normalization as Electronics demand stabilizes. Our auto OEM business increased 13% in Q1 versus a 1% decline in global car and light truck builds. We continue to win increased penetration, including strong momentum in automotive electrification, which was up over 30% year-on-year in Q1. We also saw an increase in channel inventory at tier suppliers during the quarter given the forecasted 8% sequential increase in the auto OEM builds from Q1 to Q2. Looking at the rest of Transportation and Electronics, commercial branding and transportation grew low-single digits organically and advanced materials was flat year-on-year.

While our Transportation and Electronics business is off to a good start to the year, we estimate that approximately two-thirds of the strong first quarter organic growth was driven by initial buy ahead by customers as they ramped production and introduced new products, along with channel inventory normalization. Transportation and Electronics delivered $479 million in adjusted operating income, up 68% year-on-year. Adjusted operating margins were 26.3%, up 960 basis points versus Q1 last year. The team achieved this result through strong leverage on improved electronics volumes, ongoing productivity actions, strong spending discipline and the previously mentioned timing of stock-based compensation grants. Partially offsetting these benefits were headwinds from restructuring costs.

Turning to slide 12, the Consumer business posted first quarter sales of $1.1 billion. Organic sales declined 3.9% year-on-year with continued softness in Consumer discretionary spending, which included a 2.4-percentage-point impact from portfolio and geographic prioritization. Home improvement, and consumer safety and well-being declined low-single digits, and home and auto care declined mid-single digits, while packaging and expression declined high-single digits organically. We continue to invest in the business including supporting successful new product launches such as Command Heavy Weight hanging products and sustainably focused Scotch-Brite Cleaning Tools and Scotch Home & Office Tapes. Organic growth declined across all geographies.

The U.S. was down low-single digits, Asia-Pacific mid-single digits and EMEA high-single digits. Consumer’s first quarter operating income was $216 million, up 21% compared to last year, with operating margins of 19%, up 400 basis points year-on-year. The improvement in operating margins was driven by benefits from productivity actions, portfolio initiatives, strong spending discipline and the previously mentioned timing of stock-based compensation grants. Partially offsetting these benefits were headwinds from lower sales volume and higher restructuring costs. Finally, included in the appendix, is a slide on the first quarter performance for Health Care. The business delivered results within our expectations with organic growth of 1% and operating margins of 17.5%.

Now turning to guidance for the year on Slide 14. As Bruce mentioned at the beginning of the call, our full year 2024 outlook initiated today is on a continuing operations basis, reflecting Health Care as discontinued operations for the full year, including the first quarter. We have confidence in the momentum we have built throughout 2023. We continue to deliver strong results including the first quarter, which was better than expectations. The guidance initiated today represents a return to growth, adjusted margins up 200 basis points to 275 basis points year-on-year versus the illustrative mid-point of 18.7% for 2023 and over 15% earnings per share growth at the midpoint. We anticipate full year adjusted organic growth of flat to up 2% or up 1% to 3% excluding the impact from geographic prioritization and product portfolio initiatives we are taking.

This estimated organic growth range incorporates full year external forecasts for major end markets, including; an expectation of continued mixed growth in Industrial end markets; automotive OEM build rates are currently forecasted to be down slightly; Consumer Electronics are expected to grow low-single digits for the year, while the semiconductor market is currently forecasted to start the year slow and improve as the year progresses; and finally, Consumer retail discretionary spending is expected to remain muted for the year. As mentioned, we expect a strong expansion in adjusted operating margins of approximately 200 basis points to 275 basis points year-on-year, up from an estimated mid-point of 18.7% in 2023. With respect to adjusted EPS, we anticipate full-year 2024 earnings in the range of $6.80 per share to $7.30 per share on a continuing operations basis, or over 15% year-on-year growth at the midpoint.