So number one, you’re starting to see the benefit of the improved yield and efficiency, you’re able to take longer runs to as material gets better. Secondly, the team has been very thoughtful in proactive cost management to the extent where they saw there were places they could invest, they have; to the extent where we had lower volumes, we have managed to control cost. Third is we have had a relentless focus on working capital with inventory, and you’re seeing that from a cash conversion basis. So I would just say it’s continued good, strong operating performance that you’re starting to see. And then as you add on the benefits that you get from the restructuring and once the cost goes away, which we have said this program will take approximately two years to complete out, you can see the overall, long-term benefits from the margin rate that you’re going to get from better operating performance as well as better restructuring benefits.
At the same time, you’ve got to keep in mind that we are that — the teams are going to continue to watch this in the fourth quarter. It’s an uncertain macro. But I’m very confident with what we’re doing that the execution is there, but there’s always more we can do, and we’ll keep trying to drive more and more execution as we go.
Christopher Snyder: I appreciate that. And maybe kind of taking that and bridging to the Q4 guide. It seems to us by our math, that you’re kind of guiding underlying operating margins ex restructuring to something like 19% down from the almost 22% this quarter. I know revenue is down, but it seems to suggest a very sharp decremental. Can you just maybe talk about what’s causing that margin step down? Because it feels like a lot of the improvements, whether it’s supply chain or price cost are sustainable. Thank you.
Monish Patolawala: Yes. Chris, again, depends on the math. I’ll just start with margin rates in total. When we started the year or we came into the year, we had said margin rates for the year are going to be around 19%. At the end of Q2, we said margin rates are going between 19.5% to 20% for the year. And now based on where we are with the midpoint of our guide, our margin rate will be approximately 20%. So when you back into it, the fourth quarter is higher than the 19.5% that you have, it’s somewhere in that 20.5% to 21% for the fourth quarter. And just to keep in mind, the reason you see this decremental. One is, of course, the restructuring is higher in Q4 versus Q3, plus it’s higher of — the midpoint is $95 million to $100 million of restructuring on a year-over-year basis, if you’re doing year-over-year decrementals.
The second piece to keep in mind is, in general, revenue in 3M drops from Q3 to Q4, you have less billing days or less business days in Q4. That’s why our revenue guide, which is going from $8 billion, it goes down to between $7.6 billion and $7.7 billion, which is basically saying the underlying macro trends are the same. It’s just lower billing days or lower business days, which also puts an impact. If you look at the history of 3M, Chris, and you look at Q3 to Q4, you will always see a pretty sharp decline from Q3 to Q4 in margin rate. And that’s mainly driven by just the lower volume because of the less business days that come into Q4. Hopefully, that answered your question.
Operator: Our next question comes from the line of Andrew Kaplowitz with Citi. Please proceed with your question.
Andrew Kaplowitz: Hey, good morning, guys. So, Monish, I think at a conference a month ago, you had lowered your revenue guidance a bit and you sort of report $8 billion — I think you had $7.9 billion to $8 billion. So maybe you can talk about the cadence of revenues for the quarter. Did any of your businesses pick up in September here in October? Are you just being conservative at the time? And then how are you thinking about the impact of higher rates on your businesses?
Monish Patolawala: So I’ll start by saying at that moment in time, what we saw is what we told you all, which we felt was in that $7.9 billion to $8 billion. There Was uncertainty in electronics, consumer and China, I would say, thanks to all the focus the teams have on taking care of customers, we were able to get to the high end of our range of $8 billion. I would say the same trends, Andy, pretty much stayed through the quarter. Electronics pretty much was where we thought it was going to be. China continued to remain weak and so did consumer retail. As Mike mentioned and so I have in my prepared remarks, we are seeing electronic stabilizing. We are watching for the fourth quarter what the holiday trends will bring for consumer retail.
Back-to-school was softer than we expected. And then China, again, I would say is we are — it’s pretty much the trends we expected in China. Overall, for the fourth quarter, you’ll see us having revenue of $7.6 billion to $7.7 million, which is again just driven by the fact you have less business days. On the other side, if you look at margin and you look at what the teams have done, the teams have continued to be very good on an operating execution perspective. We have continued to drive proactive cost control. We’ve done that in Q3. We’ll continue to do that in Q4. And as a result, we were able to beat the 225 to 240. I had said in that conference a few months ago, and then we have raised totally a guide from 860 to 910 to 895 to 915. And then the other point, Andy, that’s another bright spot is the cash conversion.
The teams have done a marvelous job managing inventory, 130% free cash flow conversion in the third quarter, which has allowed us to raise our total year guide of free cash flow — adjusted free cash flow conversion from 200% to 110% from 90% to 100%. So overall, the team is focused on operating execution.
Andrew Kaplowitz: Monish, if I can follow up on that, the cash conversion target raise. Maybe talk about your efforts. I know you talked about improving digitization at the Company, it seems like you’re focused on digitization inventories having impact. So maybe you can talk about the confidence in generating higher cash conversion going forward, sort of the duration of these improvements as you go forward in ’24 and beyond.
Monish Patolawala: Yes. From the day of coming here, Andy, I’ve said working capital is a great opportunity for 3M. And through the pandemic, unfortunately, we had to build inventory levels and most companies did just to make sure we took care of our customers. And our first priority was always to take care of our customers. So we made sure we had enough inventory. As two things, as supply chains are stabilizing, number one, but more importantly, the execution that the teams are doing using data and data analytics and not — and what I mean by that is not just going and using analytics, but being able to visualize by looking at data, they are able to see where the inventory is better. They are able to get a better demand signal, which allows them to get a better manufacturing signal, which allows them to get a better supply signal to their suppliers.
