The operator introduces the 3M First Quarter Earnings Conference Call and turns it over to Bruce Jermeland, Senior Vice President of Investor Relations. Jermeland reminds participants that the call is being recorded and introduces Mike Roman, Chairman and CEO, and Monish Patolawala, President and CFO. Jermeland also mentions that the earnings release and slide presentation are available on the company's Investor Relations website. He then discusses the forward-looking statement and non-GAAP financial measures. Finally, he notes that Mike and Monish will discuss the company's Q1 2024 results, including the Health Care business, on the same basis as the first quarter guidance provided in January.

Solventum Corporation's financial reporting will differ from 3M's for the Health Care segment. 3M's 2024 earnings guidance is on a continuing operations basis, with Solventum as discontinued operations. Changes in the value of 3M's equity interest in Solventum will be treated as special items in non-GAAP results. Additional financial information will be provided in a press release and slide presentation, with further information to be filed in late July or early August. A post-spin financial reporting framework has been established, with dis-synergies and stranded costs from Solventum now included in segment operating income. A new operating category, "Other," has been added for Solventum Transition Service Agreement costs, and Corporate and Unallocated will incorporate commercial agreements between 3M and Solventum. Information on legal settlements is provided in the appendix. Mike Roman will now take over the call.

The company delivered strong results in the first quarter, with improved performance and execution. They completed the spin-off of their Health Care business and finalized two major legal settlements. The company is now better positioned for long-term shareholder value creation. The first quarter saw revenue of $7.7 billion, operating margins of 22%, and earnings of $2.39 per share. The company also wishes the Solventum team success in the future. The company's settlement agreement with Public Water Suppliers received final approval and they anticipate making total payments of up to $10.3 billion over the next 13 years. The agreement addresses the detection of any type of PFAS at any level.

3M has made progress on its strategic priorities, including addressing PFAS and settling litigation. They are on track to exit PFAS manufacturing by 2025 and have seen strong results in Q1, with higher than expected sales, operating margin, earnings per share, and free cash flow. This was due to operational execution, spending discipline, and operating leverage in Transportation and Electronics. The company also saw a boost from nonrecurring actions.

In the first quarter, the company exceeded expectations with adjusted sales of $7.7 billion, driven by improved organic growth and offset by foreign currency translation. The Transportation and Electronics business saw strong growth due to share gains and new product introductions. Geographically, China and EMEA showed strength while the US saw flat sales. Operating margins and earnings also improved, driven by organic growth, operations focus, and spending discipline. There was a benefit from the delay of stock-based compensation grants due to the Solventum spin.

In the first quarter, the company saw a 70 basis point increase in operating margins and a $0.08 per share increase in earnings due to accelerated non-recurring benefits such as property sales and restructuring actions. However, foreign currency had a negative impact on margins and earnings, and the reconsolidation of Aearo Technologies had a neutral effect. The adjusted tax rate was higher this year, resulting in a $0.09 headwind to earnings. Adjusted free cash flow was over $800 million, with a conversion rate of 63%. Capital expenditures were down 20% compared to last year.

In Q1, the company saw a decline in year-on-year spend due to nearing completion of water filtration investments. They also returned $835 million to shareholders through dividends and had a decline in net debt. The Safety and Industrial business group had mixed performance, with strong growth in roofing granules and industrial adhesives, but declines in personal safety, electrical markets, abrasives, automotive aftermarket, and industrial specialties.

In the United States, industrial markets were up 1%, while China faced challenges. The adjusted operating income was $664 million, with a 18% increase from last year. This was due to ongoing productivity actions, timing of stock-based compensation, and strong spending discipline. In the Transportation and Electronics sector, there was a 6.7% organic growth, with stable consumer electronics and a soft semiconductor market. The Electronics business outperformed the market and experienced increased demand for new products. The auto OEM business also saw a 13% increase, with strong momentum in automotive electrification. The rest of the Transportation and Electronics business had low-single digit growth and was flat year-on-year. However, it is estimated that two-thirds of the strong first quarter organic growth was due to initial buy ahead by customers and channel inventory normalization.

In the first quarter, the Transportation and Electronics sector saw a 68% increase in adjusted operating income, with strong margins due to improved electronics volumes and cost-saving measures. The Consumer sector, on the other hand, experienced a decline in organic sales, with lower spending on discretionary items and portfolio changes affecting their performance. However, the team continues to invest in new products and saw a 21% increase in operating income, with improved margins due to cost-saving measures. The Health Care sector's first quarter performance is also included in the appendix.

The business met expectations with 1% organic growth and 17.5% operating margins. The full year 2024 outlook is on a continuing operations basis and shows confidence in the momentum built in 2023. The guidance for 2024 includes a return to growth, a 200-275 basis point increase in adjusted margins, and over 15% earnings per share growth. The estimated organic growth range takes into account external forecasts for major end markets. Adjusted EPS is expected to be between $6.80 to $7.30 per share, representing over 15% year-on-year growth. The business also continues to generate strong free cash flow.

The company expects adjusted free cash flow conversion performance to remain between 90% to 110% after the spin-off. They anticipate a 1% foreign currency headwind and a 75-basis-point benefit from a commercial agreement with Solventum. The second half of the year is expected to have stronger sales and adjusted operating income and earnings per share. The company will also benefit from productivity and restructuring actions, but will see increased investments in the business. Other expenses are estimated to be between $75 million to $100 million, with a 2024 adjusted tax rate of 19% to 20%. The new operating category, Other, is expected to have a net operating loss of approximately neutral to $25 million, including a first quarter net operating loss of $65 million.

In April, 3M will start generating modest income through Transition Service Agreement costs plus a markup. The Corporate and Unallocated division will also see sales in the range of $225 million to $275 million from commercial agreements with Solventum starting in April. The net operating loss for this division is expected to be between $125 million to $175 million for the full year, including $25 million in revenue and a $75 million net operating loss in the first quarter. The company expects to incur $125 million to $150 million in stock-based compensation expenses in the second quarter, and will also increase investments to support growth and productivity. Organic sales growth is estimated to be flat to up low-single digits in Safety and Industrial, up low-single digits in Transportation and Electronics, and down low-single digits in Consumer.

The actions taken by the company are estimated to create a 2% decline in organic growth for the Consumer business. The team is thanked for successfully executing strategic priorities and creating value for shareholders. The company has delivered a strong start to the year and is focused on building momentum for future growth and value creation. The company will continue to prioritize paying a competitive dividend and has reset the dividend following the spin-off. They also plan to seek Board approval for share repurchases.

The speaker concludes the article by highlighting the strong start to the year and thanking the team for their efforts. They mention important milestones achieved and announce a transition in roles. The speaker then takes a question from an analyst about the quarterly cadence and clarifies that the second quarter EPS may be slightly lower due to stock comp and one-time expenses, but expects higher revenues and good operating leverage in the second half.

Monish discusses the factors that contribute to 3M's revenue and margin split for the first and second half of the year. He mentions that restructuring charges and stock-based compensation will have a significant impact in the first half, and that the stronger dollar will continue to affect the company in the second quarter. He also mentions that the company has given guidance for the first and second half of the year and that more details can be provided by the team. Julian asks a question about capital allocation, and Monish defers to Mike.

The speaker discusses the company's strong cash generation and capital allocation priorities, including investments in the business, dividends, and share repurchases. They also mention that they are well positioned to drive these priorities. In response to a question, they provide a guide for net expenses in the second quarter, which will be mostly weighted towards the second half of the year. The speaker also congratulates the CEO on his new role.

The speaker discusses the restructuring charges and payback for the company. They mention that the charges are 70% weighted in the first half of the year and that they have already done $122 million of restructuring in the first quarter. They also mention that the goal of the restructuring is to change the way the company works, streamline the supply chain, and reduce costs. They originally planned for $400 million to $450 million in savings, but now with the spin out of Health Care, they are expecting $150 million to $175 million in dis-synergies.

The company is seeing growth in some areas and is investing in new projects. They have also been able to increase margins through restructuring and one-time gains. The company plans to maintain a 40% payout ratio for dividends going forward. The industrial channels within Safety and Industrial are doing well, but no specific details were provided.

The company has seen some improvement in inventory levels in the channels due to better supply chains. However, there is a mixed outlook for industrial markets, with some businesses seeing growth and others facing challenges. The company is also seeing a cautious approach from distributors due to the mixed market conditions. The T&E sector has had a relatively good start, but growth is still low-single digits.

The speaker is discussing the company's improved spec-ins in the first quarter and the potential reasons for this improvement. They mention that two-thirds of the improvement is due to inventory normalization and customers buying ahead for end markets. They also mention that the second half of the year is important for the Consumer Electronics business and that they are watching for any potential growth in this area. They also mention that the semiconductor market is expected to pick up in the second half. The speaker also thanks a departing member of the company and addresses a question about a dip in payments in 2026.

The speaker discusses how the profiles were scheduled and explains that there is no specific reason to share this information. They also mention that there are many factors that go into the growth agreement and that there is nothing specific in the agreement for 2026. The speaker then discusses the long-term growth rate of the business and mentions that organic investments have been the main driver of growth. They emphasize the importance of investing in attractive markets and prioritizing investments to drive growth.

The speaker emphasizes the importance of leveraging innovation to create growth and differentiated value for shareholders. They also thank the previous speaker for their congratulations and address a question about the company's growth, stating that the company has historically grown at 3.7% organically and that there are various factors that may impact growth in the post-COVID era.

The macro, or overall economic environment, is an important consideration for 3M's growth strategy. They prioritize attractive markets where they can leverage their innovation and deliver differentiated solutions. To drive growth, they have been restructuring and focusing on leading through their businesses globally. This includes using distributors in smaller countries, which they have already implemented in 27 countries.

The speaker discusses the need for a successful model to support distributors in countries where 3M is transitioning to an export-driven model. They highlight the importance of having strong governance globally and mention the revenue impact and potential benefits of this change. They also mention the potential for cost savings and inventory rationalization. A question is asked about a specific slide and the operating income number mentioned on it.

The speaker is clarifying the financial impact of Health Care stranded costs on the company's performance this quarter. They state that the restructuring charges of $250 million to $300 million for the year do not include Health Care, and that the company has $150 million to $175 million in dis-synergies and $250 million in costs that are not reimbursed until April 1st. This results in a loss of $65 million for the Other segment in Q1. The speaker suggests following up with Bruce for further clarification.

The speaker asks for clarification on the inventory benefit for the Electronics business and what is driving demand. The CEO explains that the demand is due to spec-in wins for mobile devices, mainly phones. The next question is about the construct of adjusted free cash flow, which the CFO clarifies is referring to dividends.

Monish Patolawala explains that the company has historically adjusted its GAAP results to get to adjusted results, with items such as litigation expenses, PFAS, and costs related to spin-outs. He also clarifies that these adjustments are detailed in the company's press release attachments. Mike Roman confirms this and clarifies that the adjusted cash paid out for liabilities is also excluded from free cash flow. Steve Tusa asks for further clarification and Monish and Mike provide it. Jeff Sprague asks if Bill Brown has been involved in the formulation of the updated guidance and Mike responds that he has been engaged with senior management and the Board since the announcement.

The new executive, Bill, will start tomorrow and will not be involved in the decisions made in this earnings call. The company is eligible for insurance payments and is working on recovering them. The portfolio and geographic prioritization will result in a 100 basis points headwind in 2024, with a slight drag in the first half of the year.

In response to a question about the benefits of recent portfolio and geographic moves, Monish Patolawala, CFO of the company, explains that the changes will result in better sales growth, inventory management, and margin improvement. He also mentions that the company is seeing some one-time benefits from property sales. The next question is about the company's progress in exiting PFAS, and Patolawala says that the exits are going according to plan and may even be ahead of schedule. He is also asked about the company's involvement in alternative applications for PFAS, such as in semiconductors, military, or auto industries.

The speaker discusses the company's approach to transitioning away from PFAS and providing alternative products for customers. They also mention their efforts to discontinue the use of PFAS in their own products and help customers find alternative solutions. The speaker is then asked about the CERCLA designation and explains that it could potentially impact the company's ability to remediate the issue in a timely and appropriate manner.

The speaker discusses the potential impact of CERCLA designation on the company's ability to serve customers and states their commitment to meeting and complying with EPA guidelines. They also address the recent enforcement actions by the EPA regarding PFAS and state their commitment to setting reserves for remaining liabilities. The speaker confirms that the company will not continue to manufacture PFAS after the 2025 target.

Mike Roman, the CEO of 3M, thanks investors, shareholders, analysts, employees, and family for joining the earnings calls each quarter. He expresses confidence in the company's future under the leadership of Bill and concludes the call. The operator thanks everyone for participating and ends the call.

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