The 3M Fourth Quarter Earnings Conference Call began with an introduction from the operator, followed by comments from Senior Vice President of Investor Relations, Bruce Jermeland. He introduced 3M's Chairman and CEO, Mike Roman, and President and CFO, Monish Patolawala, who discussed the company's financial results and outlook for 2024. They also mentioned the completion of significant milestones, such as the spin-off of the Health Care business and legal settlements. The presentation can be found on the Investor Relations website and certain non-GAAP financial measures will be used.

The Health Care business is expected to be spun off in the first half of 2024 with an estimated net leverage of 3x to 3.5x EBITDA. The company is working through the necessary processes and expects to finalize the spin-off soon. Without the proceeds from the spin-off, the company has not determined how it will fund the legal settlements. This could result in a potential negative impact on adjusted earnings per share. The dilutive earnings impact of 3M's option to satisfy the Combat Arms Earplug settlement will be treated as an adjustment in arriving at results adjusted for special items. When considering 3M's financials post spin, it is important to take into account factors such as transition services agreements, stranded cost, and below the line items. An investor meeting will be held later this year to provide an update on full year 2024 guidance and medium-term financial framework.

In the third paragraph, Mike Roman, the CEO of 3M, thanks everyone for joining the call and highlights the company's strong fourth quarter performance, with a growth in adjusted EPS and operating margin, as well as robust cash flow. He also mentions the company's full year performance, which exceeded their original guidance and included a decline in organic sales but increased margins and earnings. Roman then discusses the company's commitment to strategic priorities, including driving performance through the 3M model, which involved a significant restructuring to streamline the organization and generate cost savings. He also mentions the company's efforts to get closer to customers and modernize their technology.

In order to improve operational performance and create a more competitive company, 3M has taken various actions such as reducing rooftops, simplifying supply chains, and optimizing go-to-market models. They have also simplified their division structure and transitioned to an export-led model in smaller countries. These efforts have allowed them to prioritize growth opportunities and prepare for the spin-off of their Health Care business. 3M will continue to optimize their portfolio and address risk and uncertainty, such as the Combat Arms settlement.

The company has successfully completed the first three milestones of the settlement and is on track for the final approval hearing for the PFAS settlement. They will continue to address other PFAS litigation and plan to exit all PFAS manufacturing by the end of 2025. Despite the challenges of the past year, the company has remained focused on using material science to make a difference in the world. They have launched innovative products in various sectors, including a solar-powered communications headset and solutions for electric cars and advanced wound care. The company's innovation engine is strong.

In the fourth quarter, 3M saw improved financial performance due to aggressive cost control measures and restructuring efforts. The company also made progress in preparing for the spin of their Health Care business and addressing legal issues. Despite some softness in certain markets, overall sales and operating margins were in line with expectations. Adjusted earnings were up 11% from the previous year.

Despite not following our guidance, our fourth quarter earnings were still positively impacted by a lower tax rate and negatively impacted by restructuring actions. Our adjusted free cash flow for the quarter and full year exceeded our original expectations. The main drivers of our year-on-year operating margin and earnings performance were manufacturing productivity, sourcing actions, and strong pricing, offset by lower sales volumes and investments in the business. Pre-tax restructuring charges, inflation, and foreign currency translation also had an impact. Our adjusted tax rate was lower than expected, resulting in a positive impact on earnings.

In the fourth quarter, 3M's adjusted free cash flow increased by 18% year-on-year, driven by a focus on working capital management and a decrease in inventory. Capital expenditures were down 32% and the company returned $828 million to shareholders through dividends. Net debt also decreased by 17% year-on-year. The upcoming spin-off of the Health Care business is expected to further strengthen the balance sheet. In terms of business group performance, the Safety and Industrial segment saw a decline in sales due to lower demand for disposable respirators.

In the fourth quarter, organic growth was driven by roofing granules and core industrial markets in the United States, while China remained weak. Adjusted operating income was down 6%, but margins were improved due to restructuring, pricing, and spending discipline. In the Transportation and Electronics sector, sales increased 2.7% organically, with strong performance in the auto OEM business. The Electronics business was flat, while Advanced Materials and Commercial Solutions saw growth and Transportation Safety declined. Adjusted operating income for Transportation and Electronics was up 28%, with improved margins due to restructuring, pricing, and spending discipline. Health Care sales were down 1% organically in the fourth quarter.

In the fourth quarter, sales in the Medical Solutions business grew slightly, while Separation and Purification and Oral Care saw a decrease. Health Information Systems also experienced a decline in sales. Overall, the Health Care sector had a 1% organic growth for the year, with Medical Solutions and Oral Care showing positive growth and Health Information Systems and Separation and Purification seeing a decline. The Consumer business had a 2.2% decrease in organic sales, with Home Improvement showing growth and Home Health, Auto, and Stationery and Office seeing declines. The operating income for the Consumer business increased by 4% compared to last year. The company saw improvements in adjusted operating margins throughout the year.

The speaker, Mike Roman, discusses the company's strong performance in 2023 and their focus on improving operational performance, supply chain productivity, and portfolio optimization in 2024. He mentions the spin-off of their Health Care division, implementing a geographic prioritization strategy, and prioritizing product portfolios based on market potential and profitability. The company will also continue to invest in innovation and sustainability while managing litigation and reducing risk.

In 2024, the company expects to complete investments in water filtration technology and is laying out guidance for the year. They anticipate flat to 2% organic growth and earnings of $9.35 to $9.75 per share. A strong margin expansion and cash flow are also expected. The company will provide updates and guidance after the completion of the Health Care spin. The company is confident in their strengths and the progress made in 2023, and is excited about the year ahead.

In paragraph 13, the speaker thanks all employees for their hard work and dedication to the company. They then hand over to Monish, who provides more details on the company's guidance. Monish explains that they expect another year of strong execution on their priorities, including strengthening their competitive position, improving margins, and managing working capital. He then goes on to discuss the expected performance of each business segment, including flat to low-single-digit organic sales growth for Safety and Industrial, flat to low-single-digit growth for Transportation and Electronics (excluding the impact of PFAS manufacturing), and flat to low-single-digit growth for Health Care.

Bryan and his team are excited to lead the business and will provide more details on 2024 and beyond as they progress towards the spin. Consumer organic sales are expected to be down due to muted discretionary spending and portfolio optimization initiatives. The actions are estimated to create a headwind of $100 million and restructuring charges of $250 million to $350 million with savings of $150 million to $250 million. The restructuring program is on track to deliver savings of $700 million to $900 million with a similar level of charges upon completion. Pension expense is estimated to be a non-operating headwind of $100 million in 2024, but global plans are well funded. Net interest expense is expected to be a small benefit of $0.03 per share.

In the first quarter, the company expects adjusted sales to be down slightly compared to last year, with a headwind of approximately $100 million from geographic prioritization and consumer portfolio initiatives. Adjusted earnings per share are forecasted to be between $2 and $2.15, with adjusted operating margins increasing by over 250 basis points year-on-year. The non-op pension will be a $0.04 per share headwind, and the adjusted tax rate is expected to be between 20% and 21%. The company remains focused on its priorities and driving results through strong operational execution.

The company is taking decisive actions in 2023 to set the foundation for a strong 2024, including completing the spin of Health Care. When creating financial models for 3M post-spin, it's important to consider factors such as transition service agreements, stranded costs, and below-the-line changes. The company will hold an investor meeting after the spin is complete to provide an update on the outlook for 2024. The company is seeing signs of improvement in the consumer electronics market, but also experiencing a destock in China. Q1 sales are expected to be similar to Q4, with some stabilization in the electronics sector.

The consumer retail industry is expected to continue experiencing softness in discretionary product categories as consumer spending shifts towards experiences, services, and food due to inflation. The channels are stabilizing, with some cautiousness in China and Europe, Middle East, and Africa. The industrial channels are adjusting their safety stock as supply chains improve. Auto builds are expected to decrease by 10% sequentially, and the Consumer and Health Care businesses typically see a decrease in Q4 to Q1. The restructuring program is on track to match benefits to costs in 2023.

In 2023, the company implemented a significant restructuring program that generated $400 million in savings and costs. The program remains on track to achieve annual run rates of $700 million to $900 million and is expected to result in a 200 to 300 basis points margin improvement. Some restructuring was accelerated into 2023 due to the program's success. The incremental benefit is estimated to be $150 million to $250 million, while the cost is expected to be $250 million to $350 million on a cumulative basis.

The company expects its restructuring program to be mostly completed by the end of 2024, with continued benefits in 2025 and beyond. They want investors to focus on the overall margin of the company, rather than individual actions, and acknowledge that the change in distribution model in 27 countries will have an impact on both savings and revenue. They hope to provide transparency in their reporting and clarify any questions about the program. An analyst asks for more information on the countries involved in the export model, and the company does not provide specific details.

The impact of geographic prioritization and portfolio actions is around 100 basis points for the company, with 60% coming from product portfolio optimization and the rest from geographic prioritization. This may result in a revenue headwind, but is beneficial for margin rates. The company is also learning to run at lower working capital levels, specifically in terms of inventory, as demand is not expected to increase in 2024.

The 3M team has been able to efficiently manage supply chain disruptions and reduce inventory levels through investments in digital resources and dual sourcing. They are confident that they can continue to reduce inventory levels and generate cash through working capital, while also being able to increase production if demand picks up. The company's actions to streamline supply chain operations and align them with their go-to-market model have also led to improvements in service, costs, and working capital.

Monish clarified that operating margins were up 250 bps in Q1, and are expected to increase by 75-100 bps for the full year. There were some miscellaneous items in corporate and unallocated costs, with a $120 million benefit in the fourth quarter due to an annual incentive compensation accrual. This had no impact on total company margins.

The speaker discusses the company's expected expenses for the year 2024, based on the acquisition of Health Care. They estimate that the corporate unallocated expenses will be between $100 million to $200 million, and that the company will continue to prioritize organic growth and investment in sustainability. The speaker also clarifies that the $100 million to $200 million figure is for EBIT, not EBITDA, and does not include any potential costs related to the acquisition of Health Care.

During a conference call, Nigel Coe asked Monish Patolawala about the EBIT for 3M and if any stand-alone costs or corporate synergies were included in the range. Monish clarified that the current assumption is that Health Care is a part of 3M, even though the spin is on-track for first half 2024. He also mentioned that there will be additional costs for standing up Health Care as a stand-alone entity, which is impacting the margin. Nigel then asked about the restructuring cadence and pointed out that the math doesn't add up, as the cost savings for Q4 multiplied by 4 is higher than the midpoint of the cost savings guidance for 2024. Monish explained that the total benefits of the restructuring program will be $700 million to $900 million, with equal costs.

The company expects to see benefits from their restructuring efforts continuing into 2025, with net savings after necessary investments. These investments include enhancing their go-to-market models, automating processes, and investing in cybersecurity. The restructuring actions will also help reduce stranded costs associated with the pending spin of Health Care. The company anticipates annualized benefits of $700-900 million assuming Health Care remains a part of 3M. When looking at 2024 margins, the company is expecting flat margins year-on-year, despite expected volume growth.

Monish Patolawala states that the company's plan for 2024 includes a margin expansion of 75 to 100 basis points, which takes into account various factors such as investments in growth, productivity, and sustainability. He also mentions that volume gives the best leverage for increasing margins. In terms of restructuring costs, he estimates $75 million to $100 million for the full year, and the Q1 margin rates are expected to be 19.5% to 20% excluding these costs.

The company's margin rates are expected to increase by 250 to 300 basis points in the upcoming year, with $0.07 to $0.08 in standup costs for the spin of Health Care. The company plans to offset moderate inflation and labor market strength with price increases, global sourcing benefits, and other actions to improve margins. These efforts, along with restructuring initiatives, are expected to drive margin growth in the future.

The speaker discusses the restructuring expenses and potential benefits for the company in the next few years. They clarify that the assumption that Health Care will remain a part of 3M is not accurate and that the spin is on track for the first half of 2024. The $700 million to $900 million benefit range is driven by the pace of executing actions and rooftop consolidations. They also mention that there may be some delays in the process, but overall they feel confident in the range. In response to a question about the sequential decline in EPS from 4Q to 1Q, the speaker mentions a potential impact from taxes and sales, as well as a $0.07 charge from Argentine devaluation. They also offer to provide more specific details on the EPS bridge.

The speaker addresses Steve's question about the impact of restructuring on their financial results. They expect another strong quarter of execution and have provided a guide for January of approximately $7.6 billion, with no surprises so far. Factors affecting their first quarter results include lower volume, seasonal impacts, costs for standing up the Health Care business, a headwind from pension accounting, and a higher tax rate. Steve also asks about the seasonality of restructuring cost savings, and the speaker notes that they usually carry over annually and have ramped up significantly in the third and fourth quarters.

The speaker is responding to a question about why the company's benefits are not carrying over into the first half of 2024. They explain that the first quarter of 2023 had no restructuring benefits, leading to a 250 basis point increase in margin rates. They also mention that the $700 million to $900 million in savings includes necessary investments for sustained benefits, such as upgrading rooftops and automating customer operations. They reiterate that the company is seeing savings from their actions and will continue to invest in order to maintain those savings.

Monish Patolawala and Bruce Jermeland discuss the investments and benefits of the company's actions, which will continue into 2025 and beyond. They clarify that these investments are included in the estimated $700 million to $900 million. Stephen Tusa asks about the separation of the company and Monish explains that it is not as simple as splitting it in two. He mentions that stand-alone corporate costs for the Health Care business are around $100 million and that the timing of the spin will determine some of the costs and that the team will provide more details as they get closer to the spin.

The company plans to have an Investor Day after the spin-off to discuss the impact of the spin-off on revenue and margins, as well as the effects of transition services agreements and stranded costs. The company has not yet decided to use the $1 billion equity option for Combat Arms, but if they do, it will be treated as an excluded item in adjusted results. This may result in a difference between GAAP shares outstanding and adjusted shares outstanding.

Deane Dray from RBC Capital Markets asked about the outliers in the fourth quarter results, specifically the significant upside in transportation and electronics and the significant benefit in the corporate line. Mike Roman explained that the adjustment in transportation and electronics was due to the exclusion of the PFAS-related business, and Monish Patolawala clarified that the corporate line fluctuations are due to miscellaneous items, with the Q4 benefit being a result of annual incentive compensation accrual being allocated back to the business segments. This had no impact on total company margins.

In the paragraph, Deane Dray asks a follow-up question about 3M's plans to exit PFAS manufacturing by the end of 2025. Mike Roman confirms their commitment to this goal and states that they will not sell any equipment or assets related to PFAS production. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.