Bruce Jermeland:

Thank you, and good morning, everyone and welcome to our second quarter earnings conference call. With me today are Bill Brown, 3M's Chief Executive Officer; and Monish Patolawala, our President and Chief Financial Officer. Bill and Monish will make some formal comments, then we'll 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-Q 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. With that, please turn to Slide 3 and I'll hand the call off to Bill. Bill?

Monish Patolawala:

Thank you, Bill and good morning everyone. Please turn to Slide 4. I would like to take a moment to briefly remind you of a few items that we highlighted during last quarter's earnings call. Beginning with the second quarter, our results for business segment operating income includes prospectively the impact of dissynergies or stranded costs previously associated with Solventum. Therefore, for historical pre-spin periods presented, the dissynergies are reflected in corporate and unallocated. In addition, we added a new operating category named Other for Solventum transition service agreement activity. Other includes our Q1 cost associated with supporting the agreements for which 3M started to be reimbursed for in April. And finally, corporate and unallocated incorporates the commercial agreements between 3M and Solventum that started on April 1 and retrospectively picks up certain operations of the former healthcare business retained by 3M. Turning to our second quarter performance, we posted solid adjusted results, including sales of $6 billion, operating margins of 21.6%, earnings per share of $1.93, and free cash flow of $1.2 billion. We delivered adjusted organic growth of 1.2% or up 2.4%, excluding geographic prioritization and product portfolio initiatives. These results reflect the trends that we have previously discussed, including strong growth in electronics, mixed industrial end markets and continued softness in consumer retail discretionary spending. We had another strong quarter of execution with adjusted operating margins expanding 440 basis points year-on-year, and delivered adjusted free cash flow of $1.2 billion with conversion of 109%. Please turn to Slide 5. On an adjusted basis, we delivered operating margins of 21.6% up 440 basis points and earnings of $1.93 per share, up 39% versus last year's second quarter. Our second quarter year-on-year performance was driven by organic growth, productivity, strong spending discipline and restructuring savings which combined benefited operating margins by 310 basis points and earnings by $0.31 per share. In addition, income from the transition services we are providing to Solventum increased margins by 50 basis points and earnings by $0.05 per share. These benefits were partially offset by stock based compensation which was shifted into the second quarter due to the spin of Solventum. This was in line with what we discussed during our first quarter earnings call. This change in timing negatively impacted operating margins by 200 basis points and earnings by $0.18 per share versus last year's second quarter. Lower year-on-year restructuring charges were a benefit of 270 basis points to margins and $0.23 earnings to earnings. For the second quarter restructuring charges were $44 million, which were lower than anticipated. For the full year we continue to expect pretax restructuring charges in the range of $250 million to $300 million. Foreign currency was a negative $0.04 per share impact as a result of the stronger U.S. dollar. Acquisition and divestitures were a benefit of 10 basis points to margins and $0.03 to earnings year-on-year. This benefit is related to last year's second quarter reconsolidation of Aearo Technologies along with the commercial agreements between 3M and Solventum. Below the line items benefited earnings by a combined $0.14 per share. This benefit was primarily due to increased interest income year-on-year on a higher cash balance due to in part by cash proceeds received from the spin of Solventum. Taking into account our first half of the year performance, we now expect our full year non-operating expense to be in the range of $50 million to $75 million versus a prior range of $75 million to $100 million. A quick comment on corporate and unallocated and other before moving on to cash flow, Q2 corporate and unallocated sales were $86 million with a $2 million adjusted operating loss. Year-to-date, corporate and unallocated sales were $112 million with an adjusted operating loss of $73 million. This is in line with our full year anticipated sales range of $225 million to $275 million with a forecasted adjusted operating loss in the range of $125 million to $175 million. Our Other category had operating income of $37 million which reflects the level of activity and effort to support the successful spinout of Solventum. Year-to-date Other had an operating loss of $28 million which is in line with our full year expectation of flat to a loss of $25 million. Please turn to Slide 6. Second quarter adjusted free cash flow was $1.2 billion. Our second quarter performance was driven by strong operating income, lower CapEx spending partially offset by higher working capital. Adjusted capital expenditures were $250 million in the quarter as we continue to invest in growth, productivity and sustainability. During the quarter we returned a total of $800 million to shareholders split equally between dividends and share repurchases. And finally, net debt at the end of Q2 stood at approximately $3 billion. These strong results build on our track record of robust cash generation. For the first half of the year we have generated $2 billion of adjusted free cash flow. Our strong capital structure continues to provide us the financial flexibility to invest in our business, return capital to shareholders and meet the cash flow needs related to legal matters. Please note that in the month of July we will make total combined payments of $3.7 billion related to the Public Water Supplies and Combat Arms settlements. Before I move on to our business segment performance, I want to highlight a couple of items for your awareness that were excluded in arriving at our Q2 adjusted results. First, note that we reached settlements of approximately $120 million with insurance carriers related to combat arms. We remain in discussion with multiple carriers and anticipate additional future recoveries. Second, during the quarter we incurred a non-cash charge of approximately $800 million related to a $2.5 billion pension risk transfer on a portion of our U.S. defined pension obligation with Met Tower Life. This action helps us to reduce risk and administrative fees related to our U.S. pension plan. Please turn to Slide 7. Starting with our Safety and Industrial business, which posted sales of $2.8 billion, up 1.1% organically. Industrial Adhesives and Tapes posted mid-single digit organic growth driven by strength in Bonding Solutions for Consumer Electronic Devices. Personal Safety and Automotive aftermarket grew low single digits. Electrical markets was up slightly while roofing granules was flat due to unplanned customer manufacturing challenges. And finally, we experienced year-on-year organic sales declines in Abrasives and Industrial Specialties. Geographically, industrial markets grew low single digits in the U.S. and Asia Pacific, while EMEA was down low single digits. Overall, industrial end market demand continued to be mixed in the quarter as end user and channel remained cautious. Adjusted operating income was $623 million with adjusted operating margins of 22.6%, up 40 basis points year-on-year. This performance was driven by higher sales volume benefits from ongoing productivity and restructuring actions and lower year-on-year restructuring charges. These benefits were partially offset by the timing of stock based compensation and cost inefficiencies due to the spin of Solventum. Moving to Transportation and Electronics on Slide 8, which posted adjusted sales of $1.9 billion, or up 3.3% organically. Our electronics business outperformed the market up low double digits organically as we continued to gain spec in wins on consumer electronic devices and in semiconductor manufacturing. Our auto OEM business increased nearly 5% in Q2 versus a 0.5 point decrease in global car and light truck bills. Looking at the first half of the year, our auto OEM business was up 9% organically versus a flat global build rate of cars and light trucks as we continued to gain penetration on new platforms. Looking at the rest of Transportation and Electronics, advanced materials grew mid-single digits organically and commercial branding and transportation was down low single digits year-on-year. Transportation and Electronics delivered $426 million in adjusted operating income, up 16% year-on-year. Adjusted operating margins were 22.3%, up 250 basis points year-on-year. The team achieved this result through strong leverage on electronics volumes, ongoing benefits from productivity and restructuring actions, and lower year-on-year restructuring charges. Partially offsetting these benefits were the timing of stock based compensation grants and cost inefficiencies due to the spin of Solventum. Turning to Slide 9, the consumer business posted second quarter sales of $1.3 billion. Organic sales declined 1.4% year-on-year with continued softness in consumer discretionary spending. This included a 2.7 percentage point impact from portfolio and geographic prioritization. Home Improvement grew mid-single digits, Consumer Safety and Wellbeing grew low single digits, Packaging and Expression declined low single digits, while home and auto care declined mid-single digits organically. Geographically, the U.S. was up slightly, Asia Pacific was down mid-single digits and EMEA was down high single digits. Consumer second quarter operating income was $219 million, down 7% compared to last year with operating margins of 17.4%, down 80 basis points year-on-year. Operating margin performance was driven by lower volume and timing of stock based compensation grants along with the cost inefficiencies due to the spin of Solventum. Partially offsetting these headwinds were benefits from lower restructuring charges. Before I turn it back over to Bill, I want to take a moment to thank the 3M team for the tremendous progress they have made positioning the company for success. I am very proud of the relentless focus our teams have brought to create value by driving performance through our improved productivity and efficiency, spinning out of our healthcare business and reducing risk and uncertainty by managing legal matters. I am confident that under Bill's leadership, the team will continue to build on this momentum to create consistent value for our people, our customers and our shareholders in the years to come. I would also like to thank all the analysts and investors for our rich discussions and engagements over the last four years. With that, please turn to Slide 10 and I will turn it back over to bill for an update on our guidance. Bill?

Operator:

[Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research Partners. Please proceed with your question.

William Brown:

So good morning, Jeff, and thanks for the question. So as I mentioned in my remarks, there are two major thrusts here on driving organic growth. One is certainly to spur innovation and driving innovation to turn the top line up, drive organic revenue. And so part of it is, we've got to sort of bottom out on how much we're spending on new product development and start to turn the ship. The first half of this year we launched about 75, 76 new product introductions. This year we'll do probably less than 150. And as I reflect back over the last eight or nine, 10 years, at one point in time we did over 1000. So we've really got to turn that around. It's going to take some time to do that. We continue to invest some of our precious R&D dollars on cost reduction and PFAS exit, stabilizing our supply chain. I made a comment about 80% of our raw materials coming in a source. We've got to qualify other vendors to be able to reduce costs over time. So that's going to take some time. What I'm really working on as well in R&D is ideas for how we can offload non-value add activities from our researchers. It really comes in two, three themes. One is both efficiency as well as effectiveness. I think there's an opportunity to drive effective capacity of our engineering team. I think we have an opportunity to drive velocity through the new product development pipeline. We have an opportunity to think differently and how we govern differently on R&D, where we place our precious dollars so that they can move across the company to the highest ROI investment. So that's what I'm focused on, on R&D. But again, it's going to take a little bit of time. So we've got to sell more of what we have on the market today. That's simply commercial excellence. I'm digging into a number of different factors. We've got a sales force today it's just over 5000 people. We know over the last four or five years it's down about 25%. That's partly because of the export model we've moved to. But we have an opportunity to take a look at our coverage, our incentives, our training around our sales force. I think there are some opportunities there. We distribute to almost 30,000 distributors. I think we have opportunities there. There are probably some opportunities in pricing at a high level. We've done a very good job at the covering inflation and we'll see some incrementally positive pricing this year. But when you get down to a granular level there's some disconnects between pricing and discounts and margins to the volume or size of the customer and we have an opportunity to take a harder look at that. We're looking very hard at advertising and merchandising. It's a lever that's important in our consumer business. We were down quite substantially from where we were before relative to consumer packaged goods type companies, we're down. So we have an opportunity to think differently and very tactically around advertising and merchandising. I think lastly we're looking at cross selling. There are certain examples, certain places where we sell products into a distributor or into a customer, but those customers, they should be buying a different product from us, but they don't. For example, for customers that do surface by surface conditioning products to polish metals and woods, you always use a respirator to do that. You want to look at our customers. There's a bunch that don't buy the respirators from us, so there's an opportunity there. All of those things are levers that we're going to be pulling here in the short-term, Jeff and we'll keep updating analysts and investors as we learn more about how do we really drive the top line, which is so crucial to driving value creation at 3M.

William Brown:

So you're right. We've been through and are actually getting through a very substantial restructuring program, about 75% complete. It will drag into 2025. I think the team is executing very well on that. A lot of the things I'm talking about in terms of improving OpEx, they're incremental pay-as-you-go type of opportunities. You almost get the savings as you're covering investment. There are potentially over time some bigger bites. If you think about the complexity of our broader network, a few years out there could be additional restructuring, but can't size it today. Right now, the opportunities that I'm seeing are almost pay-as-you-go. Reducing waste and inefficiency in factories are things you can do and just execute against without substantial charges to get there.

William Brown:

Thank you.

Nigel Coe:

Oh, thanks. Good morning, everyone. Hello, Bill. It's been a while and I wish you good luck.

Nigel Coe:

So I think you might well have answered my question, but I do want to just kind of ask about the plants and the distributions at the footprint. I think you mentioned 105 plants and 95 DCs, 110 plants and 95 DCs. So are we talking here about, over time, a significant shrinkage in that footprint, or is it more a reconfiguration to reduce the complexity of the product velocity around that network? And then thinking about the opportunities around sort of investing to drive growth versus efficiency, how should we think about margins beyond 24? Are you confident we can still grow margins beyond 24, even though it sounds like you're going to be investing?

Nigel Coe:

Great. Thanks Bill, that's great color. And then Monish a quick followup on the insurance recovery. That's obviously great news on the Combat Arms recovery. Can you just disclose how many carriers are you negotiating with on Combat Arms? And maybe just bring us up to speed in terms of what's the opportunity within the water settlement? A - Monish Patolawala Yes, so Nigel, as you know, there's a tower insurance here, so we are dealing with multiple insurance providers. We were pleased with what Kevin Rhodes and the legal team have done on getting the 120 this quarter. And as I've mentioned in my prepared remarks that we believe that there is more to be had here and we'll definitely keep you all informed as these things happen.

Operator:

We'll go next now to Scott Davis with Melius Research. Please proceed with your question.

Monish Patolawala:

Thank you, Scott.

William Brown:

Well, I'm not sure I would say that today, Scott. In fact, as I think about it, it's a big business, a complicated business, a lot of different end markets, different business segments, different ways of going to market. A lot of the stuff that we make goes across all of these factories. So there's a lot of interconnection across the business. But as I've done in my past, I'll do the same thing here, which is take a fresh, hard look at what businesses that we're in. And as Mike said in my prepared remarks, dispassionately do that. Really look hard at what is better owned by us and we'll make some determinations over time on that. At the same time as we think about the kind of business that we want to be in over time, are there assets that aren't owned by 3M that are better owned here? And we'll take a hard look at that piece there as well. So I wouldn't draw any specific conclusion from my remarks other than we're going to take a hard look at it. And if we determine that something is better owned elsewhere, then we'll move forward in that. It's all about value creation for owners.

William Brown:

Look, I'll just say it's not about fail or success or right or wrong. I come in with a different set of experiences, different background, fresh look at the way we do business from the things that I've done in the past. I think the team here has done a marvelous job in managing through a lot of complex situations. I was a CEO of a company through COVID, and what we dealt with is well short of the challenges that 3M has faced, and you bring on top of that, a lot of the liabilities that Mike and the team have managed through, the structural changes. There's been an enormous transformation effort. And as I said, they launched the restructuring program. We're 75% complete. It's gone very, very well and you can see that in the margins. That's gone very well. I come in, I just look at it the way it is today with sort of looking at the cold hard facts, and it's a back to basics focus on the fundamentals approach does sound "basic", but at the end of the day, I do think that there's a lot of value that can be created from the raw materials that we have here. Just focusing on just how do you turn the business to top-line growth through the things that I've talked about, commercial excellence, driving growth from R&D, and driving a real culture of operational excellence through the company, and move at these things with speed and with urgency. I've been in situations like this before. It's easy to fall into a trap of this is the way things have been done. And as I said in my remarks, I'm encouraging people to challenge the way we've done things in the past every single day. That's what continuous improvement is really all about, and that's what I'm encouraging people to do. So I'm looking from here forward and I see a great opportunity for value creation.

William Brown:

Thank you.

Julian Mitchell:

Thanks very much. Welcome to Bill and Monish, thanks for all the help down the years. May be just the first question around the reinvestment point and organic growth, so Bill it sounds as if you can reinvest sufficiently in the business in the medium term to get growth moving, but still see reasonable margin expansion. I just wanted to confirm that that is what you're saying. And then on that growth rate point, I wondered sort of what your initial thoughts were on the growth entitlement for 3M. Maybe what you think it's addressable. Markets are growing at, how you view the growth rate of its aggregate peer set. Just the context I suppose is 3M has grown around 1% to 2% the last five to 10 years ex-Solventum. I wondered what you thought the market growth rate was versus that?

Julian Mitchell:

That's helpful. Thank you. And then just may be toggling back to the short-term as a lot has been asked about the medium term, if we're just thinking about the sort of framework for the second half guidance, I think it's implying an operating margin in the second half of maybe 21% or so. A little bit better perhaps, and that's fairly flattish year-on-year and half-on-half. I just wondered if I had that right, because it looks like restructuring charges are shrinking year-on-year and half-and-half and the top-line is pretty steady. So I just wondered if that was the correct assumption and any drivers behind that and if there was any preliminary thoughts on sort of third versus fourth quarter dynamics here?

Monish Patolawala:

Sure. And just Julian, to add on to Bill's points on first half, second half, just data points. We spent $165 million in the first half on restructuring, and at the midpoint that would be another $110 million in the second half. So the tax rate will be around 19% in the second half versus 20% in the first half. If you now go to just the guidance between 2Q, 3Q or 3Q, 4Q, 3Q revenue trends will be very similar to what we saw in 2Q. I think Bill already talked about what it looks like in the market, so that's where the team is seeing right now. I would say continued strong operational execution and spending in 3Q also. You will get a tailwind from the timing of stock comp, which we announced in 2Q, approximately 100 of it that comes back as a tailwind in Q3. But at the same time, as Solventum matures in its ability to execute independently, we also believe that they will keep exiting their TSAs. As I've told you, the TSAs, some are short-term, some are as long as two years. That could go up to three years. We will see lower fees as Solventum begins to exit. And that's an impact of approximately $0.09 from a headwind on an EPS perspective, which is overall still in the range 2Q was heavier than 3Q and 4Q. Bill talked about the seasonal impact in our factories as we bleed down inventory in Q3. Restructuring costs based on what the team sees right now is flat Q2 to Q3. So the balance will go into Q4 as we talked about. And then you will see -- we talked about $0.11 EPS impact for the second half on Combat Arms and PWS. As you know, we have made payments. By the end of July we would have made $3.7 billion of payments under our agreements under the settlements under Combat Arms and PWS, which means you have a lower cash balance in Q3, and that impacts us $0.06 of EPS. So between pension and interest costs, that's a headwind Q2 to Q3. The team continues to believe that they can step up to drive long-term growth, to step up investments. And then tax rate for the third quarter will be in the range of 20% to 21%. And the fourth quarter is, the whole year is, I mean, the second half is 19%. So you can back into the fourth quarter, which would be lower. Hopefully, this is helpful to get your models right.

Operator:

Our next question comes from Steven Tusa of JPMorgan. Please proceed with your question.

Monish Patolawala:

Thank you, Steve.

William Brown:

Well, thanks for the question. Look, first of all, we've got a great team of advisors, legal inside and outside that are managing PFAS and other liabilities. When I step back and look at just where we've been, the Public Water Supply settlement was a great step, important first step, really in managing some of the risks. But there's more to be done. We're continuing to manage litigation from some of the opt outs, other cases within the MDL [ph], there's Europe that's sort of hanging out there. We continue to control in that area. We've got very exhaustive disclosures in the Q and the K and again we have a great team that are really focused on managing that. Where I think I'm best putting my time are the things that drive value creation for our owners and that's driving the top-line and driving operational excellence in the business. We do generate great cash flow. We see it in the quarter. We saw the first half, 90% to 110% free cash flow conversion for the year. I've got ideas on how we can drive that further over time. We're at 0.3 leverage ratio. So when I step back, I think we actually have a very strong balance sheet. We can manage appropriately the risks that we see in front of us. And even through that, we have options here to do things with our balance sheet. So, I'm focusing on the things we can control and really getting the team pivoted back to what do we do to drive growth and operational excellence.

William Brown:

I can't really comment on what the market may or may not be missing on that, Steve. What I'm focusing on the things that we control. I read the Q very, very thoroughly, like all of our investors do. It takes a long time to get through it. I think we've done it. We do a great job at the disclosure there. But again, we've got a great team that's managing this. It's a dynamic situation and I trust what they're doing. I'm involved in that. Mike has been very helpful. He has a lot of expertise in this area because of the time he had to spend on it. I'm relying on him here as well. And again, I think where my time is best placed is what do we do to drive the other 64,000 of the 65,000 employees? What are they going to do to drive value creation? We've got a lot of people focused on PFAS. We have to get people focused back on the core things and what makes 3M great.

William Brown:

Likewise.

Andrew Obin:

Yes, good morning.

Monish Patolawala:

Good morning.

Monish Patolawala:

Thank you, Andrew.

William Brown:

Well, thank you. You're right. I was very purposeful in the four top priorities for capital deployment and number four was around excess cash for repos, or M&A. There's just not M&A on the horizon. So you saw a step into the market in the second quarter. That was under Mike and Monish's leadership, $400 million worth of buyback. We do have capacity. Our balance sheet looks very strong. We have an open authorization with our Board that's close to $4 billion. We keep evaluating this as we sort of manage the risks that happen to be out there, our ability to generate cash, drive down working capital in the back half. And through all those levers, we'll look hard as to what we do with excess cash in the back half as well as into next year. Nothing more to say about that today.

William Brown:

No. Good question. I mean, I do think, I do hope that we're bouncing along the bottom. It all depends on what happens here in the back half in the U.S. certainly and what the Fed does with interest rates and what's going on with inflation. There are a lot of geopolitical questions around the world. So I'm optimistic that the market is going to start to recover. But again, I don't have a crystal ball, like nobody on the call really does. So at the end of the day, I step back and I look at what do we do with the assets that we have. And I think about the long history that 3M has in core innovation, new to the world ideas. And I think as we reground ourselves back on that long-term mission, that culture, that spirit of innovation and we reignite that across the thousands of employees in this company that drive it every single day. To me, that's what I'm focused on. That's what I can control. There are lots of great markets out there. There are lots of different pockets of places where we can invest in to innovate, to penetrate, to grow, to differentiate offerings versus our competitors. So that's what I'm focusing my time on. The economy is going to do what it's going to do. I'm just watching where the trends happen to be and investing in places where we think we can drive some differentiation and grow higher than the market. So long answer to your question, but that's the way I think about it.

William Brown:

Likewise, thank you.

Andrew Kaplowitz:

Good morning, everyone.

Monish Patolawala:

Good morning.

Monish Patolawala:

No, same thing. I think we'll have to. Andy, as you know, this is cyclical, so we'll have to watch what happened in the second half. Bill mentioned that even in the prior question and that's what the team is watching. We are watching all the trends that all of you watch, which is build rates on cars, build rates on consumer electronics, what the holiday season turns out to be, I think, are all factors the team look. They watched in the past and will continue watching. And based on what we know right now, the team feels the guide that we have given you, which is for the company as a whole, is fair.

William Brown:

That's a very, very good question. From what I can tell last year, we had pretty significant price increases and we did cover inflation. This year in our sort of 1% center point of our 0 to 2 guidance, we have positive price within that. So we continue to see pricing. It's certainly lower than on a year-over-year basis than it was last year. So on a macro basis, our ability to price has been pretty good with capturing back inflation. But what I'm looking at is the more details around how we price by customer, by segment, by product, not just gross price, but net price. So discounts, market development funds, all of those things between gross and net price. And is there an opportunity at the real micro level to price better? My instinct is that there is an opportunity here and this is an area that I'm going to focus a lot of time and attention on that. Sometimes it's training, sometimes it is systems, sometimes it is data visibility. But there's an opportunity on a much more granular level. Take a look at how we price, and I'll know more in the next number of months and couple of quarters as we go through the analysis. But I do believe we'll find some opportunities do better job on pricing there. The other point you had mentioned about new product development, you're exactly right. Which is as we innovate and develop differentiating features, we should be able to get better margin and better pricing on those new products that are coming out. So as we reinvigorate the NPI engine, which I expect to do, hopefully that does drive price improvement, margin improvement, over time as well.

William Brown:

Sure.

Joseph O'dea:

Hi, good morning. Thanks for taking my question.

Joseph O'dea:

In the interest of time, I'll just keep it to one. But Bill, just curious if you could expand a little on the dispassionate portfolio review comments. I understand sort of no specifics today, but if you could just talk about your timeline for completing reviews? And then as you do these, what are the key metrics that you ask business leaders to present on in the reviews as you sort of focus on decision making there?

Joseph O'dea:

I appreciate the thoughts. Thank you.

Operator:

Our next question comes from Joe Ritchie of Goldman Sachs. Please proceed with your question.

Operator:

Mr. Ritchie, your line is open. Please proceed with your question. We are not hearing your question at this time. And Mr. Ritchie, please check your mute button. We are still unable to hear you at this time. Mr. Ritchie, please.

Operator:

[Operator Instructions] We'll take our next question now from Brett Linzey with Mizuho Securities. Please proceed with your question.

William Brown:

Thank you.

William Brown:

Oh, thank you. Yes, this is a -- it’s a complicated problem. It’s a lot of products, a lot of SKUs across a lot of factories and distribution points. If you look at this on a global basis, you map all the DCs and all the flows, all the factories, it's a spider's nest. I mean, it's a lot going on here. And we do have a great team in operations that are looking hard at this. We have outside advisors that have been involved and this will take some time. It's not a quarter, two quarters away. We'll continue to take a hard look at optimizing the networks and the flows. So, we have the right people at the top level and I do think that we've got the right incentive structures around this as well and motivations for the team.

William Brown:

Okay.

Nicole DeBlase:

Yes, thanks. Good morning, guys, and welcome, Bill and thanks, Monish, for all the help. Maybe Bill, you could talk about the level of employee response and engagement. I suspect that you've probably been making a bit of a world tour in your first few months. All of this change sounds really exciting and would just love to hear how employees have been responding to what you'd like to do.

Nicole DeBlase:

Thanks, Bill. In light of time, I'll pass it on and let someone else ask. Thank you.

Operator:

WE'LL take our next question now from Deane Dray of RBC Capital Markets. Please proceed with your question.

William Brown:

Thanks, Deane.

Deane Dray:

Lots of impressive game plan in terms of all the different operational initiatives bill, and it just raises the question for me is, you can't do everything at once. So what's the element of triage? And also, this is not a one man show. Talk about your team. Are you deputizing internal folks? You have an army of consultants, you've got a CFO search you've got to do, and then how much change can the organization handle at once? Is there any element, I mean, lots of stuff needs fixing, but is there a sense of how you can layer these in and can change be too disruptive?

Deane Dray:

Thank you. I'll leave it there. I appreciate it.

Operator:

We'll take our next question now from Laurence Alexander with Jefferies and Company. Please proceed with your questions.

William Brown:

So thank you for the question. Look, China for us is about 10% of our revenue. We had a good first half. We're up about 13% in the first half and part of that is electronics. When you look at the piece that's sort of local for local, if you will, it's about 1% so flattish and pretty similar to what other multinational, maybe even a little better than what a lot of other multinationals are seeing in China. Again, it's about 10% of our business, an important market, and we've seen good growth in the front half of the year simply because of the consumer electronics and auto builds.

Operator:

This does conclude the question-and-answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments.

Operator:

Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your line at this time.

Michael Roman:

Thanks, Monish.

Operator:

[Operator Instructions] We go first this morning to Julian Mitchell of Barclays.

Michael Roman:

Yes. Thank you, Julian.

Michael Roman:

Sure, Julian. I would start with we continue to be a strong cash generator, and we're well capitalized to invest in our business, which is -- continues to be the first priority for capital allocation and also return capital to shareholders, including the dividend that we've been talking about and share repurchases.

Monish Patolawala:

Julian, I'll answer your second question. When we talk about below-the-line items, we talk about 2 things

Nigel Coe:

Mike, hopefully, the Exec Chairman role is a bit less stressful than Chairman and CEO role. So congratulations on that. So just a few more -- maybe a few more details on the 2Q, Monish. The restructuring -- and I understand 70% in the first half, 30% in the second half. How does that phase between 1Q and 2Q? I'm just trying to understand whether that's fairly level-loaded or whether there's a bit more coming through in the second quarter.

Monish Patolawala:

Yes. So I'll start with the first one, Nigel. As I said, it's 70% weighted in the first half of the $250 million to $300 million range. In the first quarter, at a holdco basis, we did $122 million of restructuring that I've said in my announcement, and then you'll see Health Care was approximately $20 million of that. So you've got $100 million that is on a RemainCo basis. And so the balance is -- so you can get the math.

Nigel Coe:

Great. My follow-up question is on the dividend. There's been a huge sort of [ core ] industry about the potential dividend scenarios, but hopefully, that's now behind us. But the 40% payout ratio on adjusted free cash flow, is the intent, Mike, to keep that 40% relatively stable going forward, so as you grow earnings and free cash flow going forward, the dividend should increase as well?

Operator:

We go next now to Andy Kaplowitz at Citi.

Michael Roman:

Thanks.

Michael Roman:

Yes. Andy, I would say if you look at inventory in the channels as kind of a measure of that, that's -- I would say it's been reducing some of the inventory in the channel really around improving supply chains. We talked a bit about this last quarter. As supply chains improve, our distributors in the channel are taking advantage of shorter-cycle times and managing down some of their inventory.

Andrew Kaplowitz:

That's helpful, Mike. And then, Monish, obviously, you mentioned the relatively good T&E start. You did have a pretty easy comparison in Q1. But 7% growth, you're still guiding of low single digits. I know it's up a little bit. You mentioned the buy ahead was a big part of the Q1 improvement. But is there any reason why your improved spec-ins wouldn't continue in electronics? And then are you seeing any improvement at all yet in semiconductors and those kind of end markets?

Operator:

We'll go next now to Scott Davis of Melius Research.

Michael Roman:

Thanks, Scott.

Monish Patolawala:

Yes. So there were so many facts that were put together, Scott. This is one of them on how these profiles were scheduled. So there's no particular reason to give it out to you. This was a lot of factors, pluses and minuses that put the whole agreement together.

Monish Patolawala:

No.

Monish Patolawala:

Yes.

Michael Roman:

Yes. Scott, I won't get ahead of Bill and kind of how he's going to think about going forward. You saw our guidance for this year, it's in line with macro. Importantly, when you look at what drives our growth, it's really investing in the business. The organic investments have been the dominant driver of growth for us as a company, and we expect that to continue as we move forward.

Michael Roman:

Thanks, Scott.

Operator:

We'll go next now to Andrew Obin of Bank of America.

Michael Roman:

Thanks, Andrew.

Michael Roman:

Yes. Andrew, just talking about the change, so this was part of the restructuring -- actually was part of the model change that we've been making, really focusing on leading through our businesses globally and prioritizing where they -- the most important parts of their business and looking at what's the best model to put in place. And so geographic prioritization was the way we termed it.

Operator:

We'll go next now to Joe Ritchie of Goldman Sachs.

Michael Roman:

Thanks, Joe.

Joseph Ritchie:

Okay. All right. Great. Yes. So just on the operating income quickly, I think you guys have roughly $1.7 billion this quarter. I think we had like roughly, call it, $350 million or so in Health Care profit. So you back that out, that's above the $1.2 billion number. So I was just basically trying to understand how much the Health Care stranded costs go into the other segments.

Monish Patolawala:

Yes, Bruce can follow up off-line with you.

Michael Roman:

Yes. Joe, what we talked about in the results for TEBG in the first quarter in electronics, these are spec-in wins on some of the mobile platforms. And so the inventory, it's getting ready for the demand, really the demand that they're seeing into the second quarter. And at this point, it's really -- that's the step-up. And then there's a portion of it that's inventory kind of filling into the value chain of those OEMs. But it's -- the bigger part of it is the spec-in -- for us, anyway, the bigger part of it is the wins in the spec-in side of it.

Michael Roman:

It's mobile devices, largely phones. Yes, yes, largely phones.

C. Stephen Tusa:

Mike, congrats again, and thanks for all the help over the years and the effort.

C. Stephen Tusa:

Just to be clear, you said 40% of adjusted free cash flow. Can you just help us with what the construct of that is? What is adjusted free cash flow?

C. Stephen Tusa:

Yes, just the construct. I don't need a number for cash. Just how do you define that adjusted free cash?

C. Stephen Tusa:

Right. So whatever you're paying out in cash for these liabilities, that is adjusted out of free cash. So for example, the $4.3 billion or whatever in this year will be adjusted out, and then you take whatever we want to assume for free cash flow and then take 40% of that?

Bruce Jermeland:

Correct.

Jeffrey Sprague:

Thanks for clarifying that on the dividend. That was a key question. Also, I just wonder, to any degree, has Bill Brown been involved in the kind of the formulation of the updated guidance here, whether explicitly or tacitly? And I know he's formally starting tomorrow, but just any color on that would be interesting and helpful.

Jeffrey Sprague:

Great. And then just thinking about, again, the cash flows as it relates to the liability outflow that we're looking at here. What guidance, if any, could you provide on what you're thinking on insurance recoveries? And if you're successful in those claims, when those might start flowing as potential offsets to the liability schedule?

Operator:

We go next now to Brett Linzey of Mizuho.

Michael Roman:

Thanks, Brett.

Monish Patolawala:

So there's a little bit of drag next year, but I -- it's not big. I would just say the first half of this year will be slightly heavier than the second. But directionally, I would say, yes, you can use the first quarter as the math that gets you across the 4 quarters.

Monish Patolawala:

Yes. I would just say when we look at it in total is why are we doing these portfolio moves or geographic moves. It comes down to it allows us to do better focus, better prioritization. So at the end of the day, you're going to see it in multiple places. You're going to see better sales growth in other products because we're exiting these and the teams can focus, whether it's ad, merch, et cetera.

Operator:

We'll go next now to Joe O'Dea of Wells Fargo.

Michael Roman:

Yes. And Joe, as I said in my comments, we work with each of our customers as part of the transition. I would say there's kind of 3 alternatives for them. One is PFAS from another source. A number of the applications, many of the significant applications, they're challenged to find an alternative. So that's what they're looking to do is source PFAS from another supplier.

Michael Roman:

Yes. There are certain, I would say, EPA responsibilities that would come with CERCLA designation. We, at this point, we don't anticipate an impact on our ability to serve customers. And we'll -- as we better understand all of those requirements, and we're committed to meeting and complying with the requirements under CERCLA and the EPA guidelines.

Deane Dray:

My congrats to Mike and also to the team on orchestrating all these moving parts.

Monish Patolawala:

Thank you, Deane.

Michael Roman:

Yes. Deane, we are -- as I've said a number of times, we're proactively managing this, all aspects of the PFAS dynamic. And as soon as we can get to probable and estimable, we will take the reserves. And we'll keep you informed, and I would refer to our SEC filings for updates.

Michael Roman:

No, Deane, we're committed to that exit. We're on track, and we're committed to follow through.

Michael Roman:

This concludes my last earnings call as 3M's CEO. I would like to thank the investors, shareholders, analysts, employees and family who join these calls each quarter. I greatly appreciate your questions and diligence in working to better understand our company. I'm confident that under Bill's leadership, our people will continue to build on the momentum from our strong start to the year.

Operator:

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line at this time.

Bruce Jermeland:

Thank you, and good morning, everyone and welcome to our fourth 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 and then we will take your questions. Please note, that today's earnings release and slide presentation accompanying this call are posted on the homepage 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-Q 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 2024 outlook. This outlook will be provided on the same adjusted basis used during 2023. In the coming months, there are significant milestones that the company expects to complete, including the spin-off the Health Care business and the finalization of the public water supplier and combat arms legal settlements. The Health Care spend remains on-track for the first half of 2024, subject to customary closing conditions as detailed in our SEC filings. We continue to expect the business to be spun-off with an estimated net leverage of 3x to 3.5x EBITDA, and with the proceeds to be distributed to 3M prior to the completion of the spin. We are working through the processes, with all parties and the courts in both the public water supplier and Combat Arms Earplugs legal settlements. Our goal is our finalization and ultimate implementation. Absent the proceeds from the intended spin-off of the Health Care business, the company has not concluded, how it would fund amounts due under the public water supplier and Combat Arms Earplugs legal settlements. Therefore, we have not included the potential impacts of changes in net debt that may be needed to fund amounts under these agreements. For illustrative purposes only, in the absence of the proceeds from the spin, the adjusted earnings per share impact from financing legal settlements could be up to approximately a $0.20 per share headwind based on current market conditions. Also, please note that we will be treating the dilutive earnings impact of 3M's option to satisfy the $1 billion in payments related to the Combat Arms Earplug settlement with 3M's shares as an adjustment in arriving at results adjusted for special items. Finally, it is important to note that when considering 3M's financials post spin, it is not appropriate to simply remove the Health Care business financial results. There are other factors such as transition services agreements, stranded cost and below the line items that need to be taken into account. We are planning on holding an investor meeting later this year, following the spin of Health Care where we will provide an update to our full year 2024 guidance along with our medium-term financial framework. With that, please turn to Slide 4. And I'll now hand the call off to Mike. Mike?

Monish Patolawala:

Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 6. The fourth quarter culminated a year where we took significant steps to improve our operational execution, resulting in better financial performance. We aggressively controlled spending and initiated restructuring actions to simplify our supply chains, reduce structure and streamline our go-to-market models to better serve customers. At the same time, we continue preparing for the successful spin of our Health Care business and work to reduce risks and uncertainties related to legal matters. While there is more to do, our teams made tremendous progress in 2023 that we build upon in 2024 and beyond. Looking at fourth quarter performance, adjusted sales were $7.7 billion at the high-end of our guidance. End markets continue to play out as anticipated. Notably, the auto OEM market remains strong in the fourth quarter and we saw signs of end market stabilization in consumer electronics. As expected, China and consumer retail end markets continue to be soft. Organic sales on an adjusted basis declined 1.4% versus last year. The expected decline in demand for disposable respirator negatively impacted organic growth by 60 basis points of $50 million. Excluding this impact, Q4 adjusted organic sales were down 80 basis points. Adjusted operating margins were 20.9%, up 180 basis points year-on-year or up 320 basis points excluding the impact of restructuring charges. Adjusted earnings were $2.42 up 11% year-on-year. Versus our guidance, fourth quarter earnings were benefited by $0.06 due to a lower-than-expected tax rate which was partially offset by the acceleration of restructuring actions which impacted earnings by approximately $0.03. And finally, fourth quarter adjusted free cash flow was $2 billion up 18% year-on-year. For the full year, we delivered $6.3 billion in adjusted free cash flow versus an originally expected range of $4.2 billion to $5 billion at the start of the year. Please turn to Slide 7 for a recap of the components that drove our year-on-year operating margin and earnings performance. Benefits from manufacturing productivity, sourcing actions, restructuring, strong spending discipline and selling prices more than offset headwinds from lower sales volumes, investments in the business and last year's disposable respirator sales comparison. This net benefit drove a year-on-year expansion in Q4 operating margins of 400 basis points and earnings per share of $0.43 per share. Pre-tax restructuring and related charges in the quarter were $109 million, or a negative impact to margins of 140 basis points and $0.17 to earnings. Raw material, logistics and energy cost inflation was a slight year-on-year headwind of 10 basis points to operating margins or minus $0.01 to adjusted earnings per share. Foreign currency translation was a negative 70 basis points impact to adjusted operating margins are negative $0.07 per share. This result was primarily due to the net impact of hedging and the devaluation of the Argentinean peso. As previously mentioned, our adjusted tax rate was lower-than-expected coming in at 14.9%. This compared to 16.6% in last year's fourth quarter, resulting in a $0.05 benefit to earnings. And finally, other financial items and shares outstanding netted to a positive $0.01 per share year-on-year impact. Please turn to Slide 8. Fourth quarter adjusted free cash flow was $2 billion, up 18% year-on-year with conversion of 145%, up 800 basis points versus last year's Q4. Our ongoing focus on working capital management, especially inventory, continues to yield results. Inventory was down $550 million year-on-year and is now at 14.8% of sales, a 90 basis points improvement year-on-year. I am pleased with the progress to-date and see significant opportunity to further improve performance in all aspects of working capital. Adjusted capital expenditures were $308 million, down 32% versus last year's abnormally high fourth quarter. For the year, we invested over $1.4 billion versus an expected range of $1.3 billion to $1.5 billion. And finally, we returned $828 million to shareholders via dividends during the quarter. Turning to the balance sheet. Net debt at the end of Q4, stood at $10 billion, a decline of $2 billion year-on-year or 17%. 3M continues to be a reliable and robust cash generator. In addition, the upcoming spin-off our Health Care business will further strengthen our balance sheet. As Bruce mentioned, we anticipate receiving a 1x dividend from Solventum at an initial leverage of 3x to 3.5x EBITDA. We will also retain a 19.9% equity stake, which will provide additional liquidity. This combined with our existing strong capital structure provides us with the ability to continue to invest in the business, return capital to shareholders and meet the cash flow needs related to ongoing 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 3.9% organically. The expected decline in demand for disposable respirators was a headwind of approximately $50 million negatively impacting segment organic growth by 160 basis points. Organic growth was led by a double-digit increase in roofing granules, while industrial adhesives and tapes was flat, while all other businesses declined. Geographically, core industrial markets in the United States were relatively strong, while China remained weak. Our businesses were impacted by reduction in channel inventory towards the end of the quarter, particularly in the Greater China and EMEA regions, as channel partners manage cash and are cautious as we enter 2024. Adjusted operating income was $524 million, down 6% versus last year. Adjusted operating margins were 19.7%, down 70 basis points year-on-year. This decline was driven by lower sales volumes which was partially offset by benefits from restructuring, pricing and strong spending discipline. Moving to Transportation and Electronics, which posted sales of $1.8 billion or up 2.7% organically. Our auto OEM business continued to perform well and increased 13% versus a 9% increase in global car and light truck bills. The Electronics business was flat organically year-on-year as demand for consumer electronic devices began to stabilize, while semiconductor remains soft. We continue to closely monitor these trends and are well-positioned to grow with our customers in these large and important end markets. Looking at the rest of Transportation and Electronics, Advanced Materials grew organically high single-digits, Commercial Solutions grew low-single-digits and Transportation Safety declined –single-digits. Transportation and Electronics delivered $370 million in adjusted operating income, up 28% year-on-year. Adjusted operating margins were 20.9%, up 380 basis points versus Q4 last year. The team achieved this result through restructuring actions, pricing and strong spending discipline. Turning to our Health Care business. Q4 sales were $2 billion or down 1% organically versus last year. Sales in our Medical Solutions business grew low-single-digits organically, while Separation and Purification and Oral Care were both down low-single-digits. Health Information Systems organic sales decreased high-single-digits. Looking at the year, our businesses within Health Care continued to see lingering COVID related impacts. Full year organic growth in Health Care was approximately 1% with both Medical Solutions and Oral Care posting positive low-single-digit growth, while Health Information Systems and Separation and Purification were both down low-single-digits. Health Care's fourth quarter operating income was $372 million down 10% year-on-year. Operating margins were 18.3% or down 1.9 percentage points with adjusted EBITDA margins of 26%. Year-on-year adjusted operating margins were impacted by lower sales volumes along with added costs associated with the pending spin. Lastly, the Consumer business posted fourth quarter sales of $1.2 billion. Organic sales declined 2.2% year-on-year. Home improvement increased low-single-digits organically, while Home Health and Auto declined low-single-digits and Stationery and Office declined high-single-digits. Geographically, organic growth was down slightly in the U.S., while EMEA was down mid-single-digits and Asia Pacific declined low-double-digits. Consumer's fourth quarter operating income was $221 million, up 4% compared to last year. With operating margins of 18%, up 100 basis points year-on-year. The improvement in operating margins was driven by benefits from restructuring actions, portfolio optimization, strong spending discipline and productivity actions. Before I turn it back to Mike for him to discuss outlook for 2024, I wanted to take a moment to reflect on our 2023 total company performance. As the year progressed, we made strong improvements in adjusted operating margins. For reference, Slide 23 in the appendix provides our quarterly adjusted operating margin recon for the year. As you can see, we delivered significant improvement in performance, particularly when setting aside the impact from restructuring charges. Please turn to Slide 12, and I will now turn the call back over to Mike. Mike?

Monish Patolawala:

Thanks, Mike. Please turn to Slide 14. As Mike highlighted, we expect another year of strong execution on our priorities, including strengthening our competitive position, continued margin improvement and robust cash flows as we aggressively manage working capital. Let's now look at our 2024 expected performance for our business segments. Starting with Safety and Industrial, where we estimate organic sales growth to be flat to up low-single-digits. As we start the year, we continue to see demand in industrial end markets remaining mixed. Full year 2024, industrial production forecast is currently expected to be at approximately 2% worldwide with the U.S. being flat. This business is not only impacted by general industrial manufacturing but also production activity in automotive and electronics end markets, which I will cover next with my comments on transportation and electronics. Adjusted organic sales growth for Transportation and Electronics is forecasted to be flat to up low-single-digits organically. This range excludes the impact of the exit of PFAS manufacturing. Consumer electronics end markets are expected to be up slightly year-on-year as the market works to turn the corner. The semiconductor market is forecasted to start the year soft, however, improve as we progress through the year. Automotive unit volume production is forecast to be down slightly year-on-year. Despite this forecast, we continue to see significant opportunities in the automotive sector through our offerings in both electric vehicle and internal combustion engine vehicles. Health Care's organic sales growth is anticipated to be flat to up low-single-digits year-on-year. Bryan and his team are excited to lead this great business and we'll be providing more details on 2024 and beyond, as we progress towards the spin. Turning to Consumer. Organic sales are expected to be down low-single-digits as discretionary spending is expected to remain muted, especially in the U.S., along with our ongoing portfolio optimization initiatives. As Mike mentioned, these actions are estimated to create a year-on-year organic growth headwind of approximately $100 million or 2 percentage points. As you create your models for 2024, I want to highlight some important items. We anticipate pre-tax restructuring charges in the range of $250 million to $350 million and incremental savings in the range of $150 million to $250 million. As I've previously mentioned, our savings are net of the necessary costs required to provide sustained benefits from our restructuring. For example, this includes structure necessary to enhance our go-to-market models, automate processes and continued investment in cybersecurity. Additionally, the restructuring actions have helped to partially reduce stranded costs associated with the pending spin of Health Care. Overall, our restructuring program remains on-track to deliver pretax savings in the range of $700 million to $900 million with a similar level of charges upon completion. We anticipate our actions will be largely done by the end of 2024, with benefits carrying into 2025. Moving to pension expense. We estimate a non-operating pension headwind of approximately $100 million in 2024 or a negative $0.15 per share. This headwind is primarily due to the updating of assumptions, including mortality, along with the amortization of prior period losses. While we will have an earnings headwind in 2024, it is important to note that our global plans are well funded, ending 2023 at 94%. Net interest expense is anticipated to be a small year-on-year benefit of approximately $0.03 per share. Again, this excludes the pending impact of the Health Care spin and legal settlements that Bruce mentioned at the start of the call. Our adjusted tax rate is expected to be between 18.5% and 19.5% for 2024. This compares to our adjusted tax rate of 17.5% in 2023, resulting in a year-on-year headwind of approximately $0.17 per share at the midpoint. Therefore, the net impact of these below-the-line items is forecasted to result in an earnings headwind of approximately $0.29 per share. This combined headwind is included in our full year 2024 adjusted earnings range guidance of $9.35 to $9.75 that Mike mentioned. Please turn to Slide 15. Before we go to Q&A, let me briefly cover our thoughts on the first quarter. As we look at the first quarter, we see our adjusted sales being approximately $7.6 billion or down slightly versus last year. This forecast factors in an expectation for similar macroeconomic trends that we saw in Q4. It also includes an approximate $100 million year-on-year sales headwind from geographic prioritization and consumer portfolio initiatives, along with the impact of last year's disposable respirator comp. Turning to earnings. We expect first quarter adjusted earnings per share to be in the range of $2 to $2.15 per share. This expectation reflects adjusted operating margins in the range of 19.5% to 20%. This range includes continued standup costs related to this pending spin of Health Care, along with over 100 basis points impact from restructuring and related charges. Excluding restructuring charges, adjusted operating margins are forecasted to increase by over 250 basis points year-on-year. In the first quarter, non-op pension will be a $0.04 per share headwind to adjusted earnings. And finally, we expect our adjusted tax rate in the first quarter to be in the range of 20% to 21%. In closing, I would like to emphasize a few things. We remain focused on our priorities and the team continues to drive results through strong operational execution. Our decisive actions in 2023 set the foundation for a strong 2024. As you know, there are many important milestones in the coming months, including completing the spin of Health Care. And finally, as a reminder, if you are creating financial models for 3M post-spin, please keep in mind that simply removing the Health Care business from Total 3M financials will not equal 3M post-spin. There are other factors such as transition service agreements, stranded costs and below-the-line changes that need to be taken into account. As mentioned, once the spin is complete, we will hold an investor meeting and provide an update on our outlook for 2024 that incorporates these factors. In summary, we are building on our momentum and driving sustainable operating improvements that will drive improved financial performance. I want to thank the 3M team for their dedication and focus, as they continue to deliver for our customers and shareholders. That concludes my remarks. We will now take your questions.

Andrew Kaplowitz:

Good morning, everyone. Mike and Monish, could you give us a little more color into the consumer and industrial channels that you deal with? I know you said you're seeing signs of consumer electronics improvement, but also mentioned the destock in China, for instance, at the end of Q4. Maybe you could elaborate on what you're seeing across the consumer and industrial channels. And then you are modeling Q1 sales, I think, to be sequentially flat, excluding the $100 million of sales headwind you called out, which seems conservative if your early cycle business starting to turn. So what are you seeing?

Monish Patolawala:

I just would add, Andy, to Mike's comments that auto builds are expected to be down 10% sequentially. And then historically, if you just look at a couple of our businesses is Consumer and Health Care, they seasonally do come down Q4 to Q1. So we baked all that into the guide that we've given of approximately $7.6 billion.

Monish Patolawala:

No, I think -- Andy, let me explain that first. I'll just go all the way to the top again on our benefits and then I explain the math to you. So for everyone's benefit, in 2023, we implemented the most significant restructuring in our history that generated $400 million in savings last year and approximately the same amount in costs. But when you look at the overall program, it remains on track to achieve the annual run rates of $700 million to $900 million upon completion. And assuming a no-spin scenario of Health Care, as Bruce mentioned earlier, we expect nearly 200 to 300 basis points of margin improvement to be realized upon completion of the whole program. And the program, as you said, Andy, remains on track. We've said that it remains on track, and we did pull in or accelerated some of our restructuring into 2023 based on the success that we have had in the program. What I would tell you to answer your question specifically is what I've said is the $150 million to $250 million is incremental benefit. So on a cumulative basis, if you did $400 million in 2023, and you say midpoint of $150 million to $200 million, that's cumulative $600 million. So on a year-over-year, that's incremental $200 million. While on a cost basis, we said we incurred $400 million and change in the fourth quarter, I think, it’s $441 million. And I said we'll have $250 million to $350 million of cost. So on a cumulative basis, the cost will be around $750 million again at the midpoint. As I've also said in my prepared remarks, we believe this program will be largely completed by the end of 2024 from an expense perspective and the benefits will continue into 2025 and beyond. I just want to make sure 1 other thing, and we think about restructuring, I just want us to also think through this is -- and I want you all to know, this is how we work. And this is not a series of one-time actions. And I know a lot of investors have asked us, show us the break between benefits and costs. So we are definitely trying to do that the best we can. In 2023, it made all the sense because these were new actions, it was good to show it as individual. But as it becomes the way we work, my request to all of you is focus on the total margin of the company, which is demonstrated in 2024, where our guide is saying we'll improve margins, another 75 to 100 basis points in total. So, for example, and the reason I bring this up is you have to look at all of this in totality. For example, we announced that we were going to change our distribution model in 27 countries. The savings of the rooftops, the head count is shown as a benefit in our restructuring program. But as you all know, there's a corresponding impact on the revenue, and the action has to be looked at in totality versus standalone events. And I just want to make sure we bring that out, too. But we'll continue showing what it helps you all, and that's what we have tried to do with this go-round. So hopefully, I cleared that question, Andy, that you had.

Scott Davis:

Guys, can you help us understand the ebb and flow when you go to an export model for 30 countries and -- maybe help us understand the materiality of that, it could be 30 really small countries, could be a mix, I don't know. But if you think about kind of the revenue headwind versus the cost tailwind, is it -- is there some numbers we can talk around or any perhaps even some color on how that ebbs and flows?

Scott Davis:

I think it does. And just separately, working capital has been a real source of benefit for you folks and particularly in '23. But are we -- as an entity, are you learning to run at lower working capital levels? And more specifically, really, what I'm talking about is inventory. And I think historically just having covered you guys for a while, inventory levels kind of went up and down based on demand, you're not expecting much demand in '24. So explicitly, I suppose that means you can run at lower inventory levels. But if demand were to start to snap back at better levels than you're expecting, would you still be able to run at relatively low inventory levels? Have there been enough structural change, I guess, is what I'm asking to 3M where you can run more productively and efficiently from a working capital perspective?

Mike Roman:

Scott, just to add, the actions that we have been talking about all through '23, the actions to streamline our supply chain operations, simplify our go-to-market model, that streamlining supply chain operations. It was more than a restructuring. This was about aligning our global supply chains to our go-to-market models, really optimizing what we do across plan, source, make, deliver, with a focus on -- and an expectation that we're going to drive improvements, improvements in service, improvements in costs, improvements in working capital and cash. Monish said earlier, it's the actions we've taken about the way we operate, and it's an expectation we're going to continue to improve our execution. So there's a plan and strategy in data and data analytics gives us a basis for driving better visibility and improvement as well. So it's a -- it is part of that. So we do expect to continue to drive improvement as we our guide for '24 has us, again, driving improvements in how we execute showing up in growth in earnings and expanded margins and another year of strong cash generation. So it's a -- it is an important part of that -- those actions that we took as we went through '23.

Julian Mitchell:

Maybe first off, I just wanted to clarify some of Monish's comments on operating margins year-on-year. So I think Monish, you were saying that in Q1, the margin is up 250 bps, excluding restructuring. And then the full year is up 75 to 100 bps including restructure. I just want to make sure if those numbers were right.

Julian Mitchell:

Any color on sort of segments within that or the corporate cost, there was some reallocation you talked about on Slide 7? Any kind of major moving parts that you'd call out year-on-year on a segment basis or what that new sort of corporate run rate is?

Julian Mitchell:

And then just my second question, just trying to understand the free cash flow guidance because I think you did $6.3 billion of free cash in 2023. And this year is guided at about $5.3 billion. So it's a big decline year-on-year even with net income, I think, growing $200 million in the guide and CapEx is up about $100 million in the guide. Anything to sort of call out on that?

Operator:

Our next question comes from the line of Nigel Coe with Wolfe Research.

Monish Patolawala:

It's EBIT. It's EBIT, Nigel, so that -- can you hear me?

Monish Patolawala:

I'm sorry, what was your follow-up question? I didn't catch the...

Monish Patolawala:

No. That number, again, if you just go back to Bruce's comment at the beginning of the call, our current assumption is that Health Care is a part of 3M, even though the spin is on-track for first half 2024. And as we go through the spin of Health Care, we plan to have an Investor Day post-spin, where we'll update you on the stranded cost, the impact of transition services agreements as well as what 3M looks post-spin.

Nigel Coe:

No question. I just want to make sure that was the case. And then my follow-up question is just really trying to dig into the restructuring cadence. You obviously -- you quantified the Q1 impact, but take the $152 million of cost savings in Q4, Monish, and then multiply that 4. You get to mathematically about $650 million of cost savings. And the midpoint of your guide for 2024 is $617 million. So I'm just actually wondering, it doesn't look like we're getting any incremental costs coming through from here on in 2024. So just wondering what is the offset to that? Is there some level of investment here? Just wondering what's going on here?

Operator:

Our next question comes from the line of Chris Snyder with UBS.

Monish Patolawala:

So I would say exactly the same thing I said before. When you look at it in total, our plan for 2024 assumes a margin expansion of 75 to 100 basis points, which includes a piece -- which includes the restructuring benefits and the lower restructuring costs. But at the same time, it also includes many other factors that we take into. For example, we're going to continue to invest in growth, productivity and sustainability as the macro starts improving. We're going to continue to invest in product areas. We're going to continue to invest in our people. So I would again ask you to look at in total, if you exclude restructuring costs in 2023, we expanded margins 60 basis points. And in 2024, our total margin expansion, including the benefits of restructuring is 75 to 100 basis points. So Chris, I would say as the year progresses, and I've said this before, volume gives us the best leverage. So as we get more volume, we're going to continue to see leverage increase.

Monish Patolawala:

Yes. So the benefits, I would say, again, it depends on which way you're looking at it, Chris. I would tell you, on a year-over-year basis, as I said, there's approximately 75 to 100 basis points -- sorry, $75 million to $100 million of restructuring cost on a year-over-year basis. So if you exclude that margin rates are 19.5% to 20% for Q1. No, sorry, 19.5% -- my number is all getting. It's 19.5% to 20% is the guide, which includes $75 million to $100 million of cost. So if you adjust for that cost on a year-over-year basis, margin rates will be up 250 to 300 basis points. And then on standup costs, again, timing will determine what the final standup cost is. But currently, we see approximately $0.07 to $0.08 of total cost that we are incurring, as Bryan and the team get ready for spin of Health Care.

Joseph Ritchie:

Good morning, everyone. Just -- so obviously, like the volume environment remains fairly muted. But I'm curious like how are you guys thinking about pricing for '24 and particularly like what's embedded in the guide from a price cost standpoint?

Joseph Ritchie:

Got it. That's clear, Monish. I guess there's been a lot of discussion on the restructuring expenses and the benefits coming through in the next couple of years. I guess just for 2025, as we're thinking about the low-end versus the high-end of the benefits range. Maybe like how would you kind of handicap what are the key drivers that potentially puts you guys at the low-end of the in versus the high-end of the $900 million benefit range?

Operator:

Our next question comes from the line of Stephen Tusa with JPMorgan.

Monish Patolawala:

Sure. And Steve, as I said, as you start lapping quarters and the benefits of restructuring starts showing up in the results, it's going to get harder and harder to do sequentials. But anyway, I'll do my best, and hopefully, that answers your question. So I would start by first saying you're going to see another strong quarter of execution on a year-over-year basis, and I would ask you to look at that first. When you look at our guide for January, we're saying it's approximately $7.6 billion. And there are no surprises in January so far. It's very similar to Q4 trends. So volume is a little lower Q4 to Q1. That has an impact. Secondly, there is usual seasonality that we see in our business when it comes to resetting some of our pay plans and some of the other compensation things that we do. So seasonally, you see that as an impact. Third is, as I mentioned earlier, we are incurring incremental costs to stand up the Health Care business as we get ready for the spin. The total impact is approximately $0.07 to $0.08 is the total impact of the -- it's the total cost in the quarter. We have a headwind from our pension accounting that we talked about, which is $0.04 of headwind. And then from a tax rate basis, we expect our 1Q tax rate to be in the range of 20% to 21% versus we ended the fourth quarter at 14.9%. So I hope that kind of gives you all the puts and takes to get you to the range that we have of $2 to $2.15.

Monish Patolawala:

I'm not sure I -- one would agree with that. But when you look at 1Q of '23 versus 1Q of '24. There was no restructuring benefits pretty much in 1Q of '23, and we had a little bit of cost in '23. So if you look at 1Q versus 1Q, you actually see margin rates up 250 basis points, excluding the impact of restructuring costs. So you are seeing the benefits, Steve, on a year-over-year basis in 1Q. For the year, as we have previously mentioned, our savings that we are showing you in the $700 million, $900 million, which it always has been, are net of the necessary investments that we are required to provide, which we are going to spend to provide sustained benefits. So again, just to repeat, things like, we changed our method of delivery in certain geographies, 30 countries. You need a structure that has to get put into place to serve that. You've got rooftops. So we have exited the rooftops, you're starting to see the savings, but we have to spend the money to upgrade the rooftops that we are left because we have to consolidate that space so that people can come and work in that space. And then we'll continue to invest in things like, customer operations and automate customer operations, which was a part of the whole -- there was a reason why we did this. Mike said it, I've said it, it's the way we work and some of the savings you're seeing come ahead as you've made those actions. And now we're going to put it -- we're going to put in the necessary costs so that we can continue to see those savings. And that's why I keep saying at the end of 2024, we'll be largely done with these actions and the benefits will carry on into '25 and beyond at $700 million to $900 million.

Monish Patolawala:

In the $700 million.

Stephen Tusa:

Yes. Okay. That all makes sense. So it's kind of a bit of a timing thing.

Operator:

Our next question comes from the line of Jeff Sprague with Vertical Research Partners.

Monish Patolawala:

Yes, Jeff, as we said, I think the timing of the spin will definitely determine some of these costs. And I would just say let us work through it. As we get closer to it, Bryan and the team will walk you through as they get closer to getting ready for the spin. And as committed, we are going to have an Investor Day post-spin while we'll walk you through all the factors that you have to take into account, which is not only post 3M, what does that revenue and margin look like, but also the impact of transition services agreements because they will be transition services agreements for a period of time and then the amount of stranded costs. The good news, Jeff, is that through all the restructuring actions that we have done, to some extent, we have been able to reduce the amount of standard cost that would have been there if we hadn't taken these actions to reduce some of the cost at the center.

Monish Patolawala:

Have we decided, I'm sorry?

Monish Patolawala:

No, we have not, Jeff. That's an option we hold, and we will make the appropriate decision once -- we see the progress in the number of opt-ins for the Combat Arms litigation.

Jeffrey Sprague:

But it sounds like you then will be planning to use an adjusted share count if you go down this path, right? So we're kind of compounding adjustments on top of adjustments, it sounds like.

Operator:

Our last question comes from the line of Deane Dray with RBC Capital Markets.

Mike Roman:

Yes, Deane, I think what you're looking at is the adjustment for PFAS, the exit of PFAS. If you recall, we're excluding the PFAS related men -- the PFAS manufacturing and related business as we report. And that was part -- the primary business for that was transportation and electronics. So that's where you saw that, maybe that adjustment.

Monish Patolawala:

Yes. So as with previous years, Deane, there are a number of miscellaneous items at corporate and unallocated that are subject to fluctuation on a quarterly and annual basis. So if you answer specifically your question, if you look at for the year, corporate and unallocated was $44 million and on a -- and in the fourth quarter, it was a benefit of $121 million. The Q4 benefit was largely the result of annual incentive compensation accrual for the first nine months that has now been allocated back to the business segments based on final performance. This adjustment had no impact to total company margins because it's a move from corporate and unallocated to the business segment. And then for the full year 2024, we expect the expense range to be in the range of $100 million to $200 million on an adjusted basis.

Mike Roman:

Yes, Deane, we're committed to that what we announced to exit PFAS manufacturing by the end of 2025. And as I said, we're making good progress to that. We're working to help customers transition. We will -- I think we talked about this on one of our earnings calls, we will not sell the equipment, we won't transfer any of the assets. We won't sell the business. We won't license our intellectual property. So we are going to exit and complete by the end of 2025. That's everybody's focused on that goal.

Mike Roman:

To wrap up, we are executing our priorities and delivering on our commitments. We will stay focused on continuing to improve our performance, optimize our portfolio and reduce risk, while using 3M science to create unique solutions for our customers. Thank you for joining us.

Bruce Jermeland:

Thank you and good morning, everyone and welcome to our second quarter earnings conference call. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer; and Monish Patolawala, our President and Chief Financia. Mike and Monish will make some formal comments, and then we will take your questions. Please note that today's earnings release and slide presentation acCompanying this call are posted on the homepage of our Investor Relations website @3m.com. Please turn to Slide two. Please take a moment to read the forward-looking statement. During today's conference call, we'll 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-Q 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'll 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. With that, please turn to Slide three and I'll now hand the call off to Mike. Mike?

Monish Patolawala:

Thank you, Mike, and I wish you all a very good morning. Please turn to slide five. As Mike mentioned, we are seeing significant traction from the actions we are taking to strengthen the business. Through a focus on customers, effective adjustment of production, benefits from efficiency and productivity initiatives, ongoing proactive spending discipline, and the relentless focus on managing inventory, we were able to deliver solid adjusted third-quarter results, including sales of $8 billion at the high-end of our guidance range of $7.9 billion to $8 billion, operating margins of 23.2%, an increase of 160 basis points year-on-year and 390 basis points sequentially; earnings per share of $2.68, a year-on-year increase of 3%, and free cash flow of $1.9 billion, up 39% year-on-year with conversion of 130%. Organic sales on an adjusted basis declined 3.1% versus last year. This included an expected year-on-year headwind of approximately $140 million, or 1.7 percentage points related to lower disposable respirator demand and last year's exit of our operations in Russia. Excluding this, Q3 adjusted organic sales were down 1.4%. Consumer and electronics end markets continue to be soft. Our adjusted organic sales declined year-on-year mid-single digits in our electronics business and high-single digits in consumer. This softness was partially offset by strength in our automotive OEM business. Regionally, the U.S. was up slightly despite continued challenges in retail. Europe remained soft, and China was down mid-teens year-on-year organically due to continued end-market softness along with lapping strong sales backlog recovery in the prior year. Our strong adjusted EPS of $2.68, exceeded our expectations of $2.25 to $2.40. Roughly two-thirds of the beat was driven by operational execution in our supply chain and proactive spending discipline, and a balance driven by restructuring timing. The restructuring actions we announced earlier this year are largely on track and we are seeing favorable margin impact in our results. We continue to expect full year pre-tax restructuring benefits of $400 million to $450 million with offsetting charges. Turning to slide six for the components that drove our year-on-year operating margin and earnings performance, manufacturing productivity and restructuring actions, strong spending discipline, and selling prices partially offset by lower sales volume, investments in the business, and the previously mentioned headwind from disposable respirator and last year's exit of Russia, resulted an improvement to operating margins of 260 basis points and to earnings of $0.22 per share. Pre-tax restructuring and related charges in the quarter were $68 million or a negative impact to margins of 80 basis points and $0.10 to earnings. This charge was lower than our anticipated range of $125 million to $175 million in Q3 due to factors that impacted the timing of actions that are being pushed into Q4. The carryover impact of higher raw material logistics and energy cost inflation created a year-on-year headwind of approximately $25 million, or a negative 30 basis points impact to operating margins and $0.03 to earnings. Foreign currency translation was a positive 0.6% impact to total adjusted sales. This resulted in a $0.01 tailwind to earnings per share. Last year's food safety divestiture and the reconsolidation of aero technologies resulted in a net year-on-year tailwind of 10 basis points to margins and no impact to earnings. Finally, other financial items decreased earnings by a net $0.02 per share year-on-year. In summary, our team's focus on driving productivity, executing restructuring actions, and controlling spending continues to yield results. These actions drove meaningful year-on-year and sequential improvement in adjusted operating margins. Please turn to slide seven. Third quarter adjusted free cash flow was $1.9 billion, up 39% year-on-year, with a conversion of 130%, up 360 basis points, versus last year's Q3. This year-on-year improvement was driven by an ongoing focus on working capital management, especially inventory. Inventory was down over $200 million sequentially and $550 million year-on-year as we benefit from the power of daily management and data and data analytics to speed up inventory terms. As always, there is more we can do and will do to continue to realize benefits from our actions as we move forward. Adjusted capital expenditures were $367 million in the quarter as we continue to invest in growth, productivity, and sustainability. During the quarter, we returned $828 million to shareholders via dividends. Net debt at the end of Q3 stood at $10.8 billion, a reduction of 11% year-on-year. Our business segments continue their long history of robust cash flow generation. In addition, our proven access to capital markets, along with the anticipated one-time dividend from the spin of health care at leverage of three to three and a half times EBITDA and 19.9% retained stake will provide additional financial flexibility. This, combined with our existing strong capital structure, provides us with the ability to continue to invest in the business, return capital to shareholders, and meet the cash flow needs related to ongoing legal matters. Now, please turn to slide nine for our business group performance. Starting with our safety and industrial business, which posted sales of $2.8 billion or down 5.8% organically, this result included a year-on-year headwind of approximately $130 million, or 4.3 percentage points, due to last year's COVID-related disposable respirator decline and exit of our operations in Russia. Excluding this, Q3 adjusted organic sales were down 1.5%. Personal safety was down high single digits due to last year's COVID-related disposable respirator comp. Excluding disposable respirators, personal safety was up high single digits organically. Closure and masking continued to be impacted by lower packaging and shipping activity, and industrial adhesive and tapes by end-market softness in electronics. Abrasives, electrical markets, and automotive aftermarket declined versus last year's strong comparisons. And finally, organic growth in our roofing granules business was up high single digits. Adjusted operating income was $708 million or up 5% versus last year. Adjusted operating margins were 25.7%, up 250 basis points year-on-year and up 350 basis points sequentially. The year-on-year improvement in margins was mainly driven by ongoing productivity actions, restructuring benefits, strong spending discipline and price. Partially offsetting these benefits were headwinds from lower sales volume and restructuring costs. Moving to Transportation and Electronics on Slide 10, which posted Q3 adjusted sales of $1.9 billion. Adjusted organic growth declined 1.8% year-on-year, largely due to expected weakness in electronics. Our electronics business experienced a year-on-year mid-single-digit decline in adjusted organic sales as semiconductor and data center end market demand continues to remain soft. We are starting to see signs of stabilization in consumer electronics end market. However, we are closely monitoring demand trends as we head into the upcoming holiday season. Our auto OEM business had a strong quarter, increasing approximately 16% year-on-year versus a low single-digit global car and light truck build, as we continue to gain penetration on automotive platforms. Turning to the rest of Transportation and Electronics, commercial solutions and transportation safety both declined mid-single digits year-on-year, mainly driven by weakness in China, while Advanced Materials grew low single digits. Transportation and Electronics delivered $494 million in adjusted operating income, up 21% year-on-year. Adjusted operating margins were 26.3%, up 460 basis points year-on-year and up 650 basis points sequentially. The year-on-year improvement in margins was driven by productivity actions, restructuring benefits, strong spending discipline and price. Partially offsetting these benefits were headwinds from lower sales volumes and restructuring costs. Looking at our health care business on Slide 11, Q3 sales were $2.1 billion, with organic growth up 2.4% versus last year. Organic sales in oral care were up high single digits year-on-year and medical solutions grew low single digits organically, including continued impact from lower post-COVID-related bio-pharma demand. Health Information Systems declined low single digits due to tighter hospital budgets. As procedure volumes continue to improve and hospital budgets stabilize, we are confident in the long-term outlook of this business. Health Care's third quarter operating income was $460 million or up 2% year-on-year. Operating margins were 22.2%, up 50 basis points year-on-year and up sequentially 240 basis points. The year-on-year improvement in margins was driven by productivity actions, restructuring benefits strong spending discipline and price. These benefits were partially offset by restructuring costs. Finally, on Slide 12, our Consumer business posted third quarter sales of $1.3 billion. Organic sales declined 7.2% year-on-year as discretionary spending trends on hard-line categories remains subdued. The back-to-school season was soft and rising interest rates continue to impact the housing market and related spending. Consumers' third quarter operating income was $269 million, down 10% compared to last year with operating margins of 20.5%, down 70 basis points year-on-year, however, were up 230 basis points sequentially. The year-on-year decline in margins was driven by headwinds from lower sales volumes and restructuring costs. These headwinds were partially offset by benefits from productivity actions, restructuring and strong spending discipline and price. That concludes our remarks on the third quarter. Please turn to Slide 14 for an update on our full year's expectations. Our strong third quarter performance shows the results of the significant actions we have put in place this year to generate better productivity yield and efficiency from our supply chain, drive simplification, manage costs and deliver for our customers in an uncertain macro environment. As a result, we are raising our full year 2023 adjusted earnings per share and free cash flow conversion guidance. We now expect full year adjusted earnings in the range of $8.95 to $9.15 versus our prior range of $8.60 to $9.10. We are also updating our full year adjusted free cash flow conversion to be in a forecasted range of 100% to 110% versus 90% to 100% previously. Based on our year-to-date performance, we expect full year adjusted organic growth to be down approximately 3% versus our prior guidance to be at the lower end of flat to minus 3%. This updated expectation includes an incremental headwind of $50 million from continued softness in disposable respirator demand. We now estimate a full year sales decline for disposable respirators of approximately $600 million versus $550 million previously. Looking ahead to the implied fourth quarter, we expect end market trends to be consistent with Q3. Hence, we anticipate fourth quarter adjusted sales to be in the range of $7.6 billion to $7.7 billion, taking into consideration normal seasonality with fewer sales days due to holidays. Fourth quarter pre-tax restructuring charges are expected to be in the range of $70 million to $120 million, incorporating the timing impact I mentioned earlier, with pre-tax benefits of $145 million to $195 million. Taken together, we expect fourth quarter adjusted earnings per share will be in the range of $2.13 to $2.33. To wrap up, we are very focused on our priorities by driving improved performance through strong operational execution, progressing on our restructuring actions and spending discipline successfully spinning off health care and reducing risk by managing litigation exposures. At the same time, we are positioning 3M for the future as we prioritize the most attractive markets, invest to support continued innovation and capitalize on emerging opportunities. We expect our actions will continue to build momentum and drive long-term improvement in our organic growth margins and cash flow performance into the future. As we exit 2023, we will be a stronger, leaner and a more focused 3M, and I remain confident in our future. Our solid third quarter is a direct result of the hard work of 3M employees. I want to thank them for their dedication and focus as they continue to deliver in partnership with our suppliers for customers and shareholders. That concludes my remarks. We will now take your questions.

Scott Davis:

Good morning, Mike, Monish, and Bruce. I haven't been able to say this in a while, but a pretty solid, complete quarter overall, so some progress there. But, guys, I want to back up a little bit. What are the remaining steps to get health care spin complete? Any big hurdles still remaining?

Monish Patolawala:

Just process-wise to add to Mike's comments, the teams are working through system changes, standing up legal entities and as well as all the regulatory filings, Scott, that we need to do, and that's what everyone is focused on from the health care side.

Michael Roman:

Yes. Scott, there's a couple of dimensions to the answer to your question. The first starts with what we've been talking about. We announced a restructuring back in Q1, and that was really coming from what we had learned as we operated our businesses and we looked at where we were going with our supply chains in the face of some of the challenges in supply chains globally. And it was really behind that was an expectation that we could drive greater productivity, improvement in our execution, stronger performance, improved margins. And so that was really the foundation of that restructuring. And so I think part of the answer to your question is we took those decisions to lean out the center of the Company, simplify our supply chain, streamline our go-to-market models. Those are a foundation for the future of 3M. And those are -- you can see starting to demonstrate that we can drive improved financial performance for the Company. And that's -- we expect that to be a foundation for the future as well. I even talked about this is with that performance starting to build some momentum, we can accelerate how we view the future. And then you are talking about investing in growth and innovation and productivity and sustainability. And we'll continue to be our capital allocation, first priority is going to be investing in organic growth in R&D and CapEx. And really, thinking of and targeting high-growth market spaces, places where we can differentiate ourselves with our innovation capabilities where we can be aligned to emerging market trends. So I think that how we prioritize that investment is going to be aligned with where we see that ability to make a difference. So both are important foundations for the future.

Andrew Obin:

Yes. Good morning. Just a question on electronics. It's been a headwind for a while. What KPIs are you looking at? When do you think -- and I think you said that was broadly in line with expectations. But when do you see the light at the end of the tunnel? When does it bottom -- what does it take for this business to bottom?

Monish Patolawala:

Just another data point for you, Andrew, at the end of second quarter, we had said that the way we predicted electronics was the amount of negative Vs quarter-on-quarter would get better. So if you compare us to the first half and the amount we were down year-on-year versus the third quarter, we are less down. It doesn't mean we are not down, but that's another point that Mike was trying to make is that's where we are starting to see some signs of stabilization. But as I said in my prepared remarks, I think we'll have to just watch how the holiday season plays out.

Michael Roman:

Yes, Andrew, going back to really how did we think about the strategy to spin out health care. And one of the important questions was do we see health care as a leading health care technology Company attractive to shareholders with a great future. And that portfolio of businesses, the answer for us was yes. And that the -- the best way to create that value was to stand it up as a stand-alone Company and the portfolio work we had done even over time as part of 3M position it to be a successful stand-alone Company. And each of the businesses play an important role there. Now it is going to be an independent Company. We'll have a new CEO and a Board and they will develop the strategies for how they think about creating the greatest value driving growth for that business, thinking about how to really manage that portfolio of businesses as they go forward. So we see it as being ready to stand forward as a leader and are really confident in the leadership that will take the Company as a stand-alone.

Joseph Ritchie:

Thanks. Good morning, everyone. Can we start just on the restructuring, the benefits and the push out a little bit of the expenses? Just -- it seems like you're running ahead of schedule on the benefits. So I'd love to get any color about where this is. What you see coming in better than expected? And then also just on the push-out on the cost into 4Q, just what were some of the reasons for why the costs are getting pushed out from 3Q to 4Q?

Joseph Ritchie:

Got it. Okay. Great. That's helpful, Monish. And then I guess -- I know it's probably too early to think about 2024. But if you kind of think through like the price/cost equation from here on out, it seems like raw materials are becoming less and less of a headwind for you guys. Can you maybe just provide any type of framework for 2024 and ultimately, like how you think about both price and what you're seeing from a raw mat perspective?

Operator:

Our next question comes from the line of Chris Snyder with UBS. You may proceed with your question.

Monish Patolawala:

So I would say, first, Chris, it's a huge thanks to the 3Mers who have been focused on their priorities. The priorities, as Mike mentioned, driving performance across all of 3M, spinning out health care, reducing risk by managing litigation is all starting to show up in the results. To your point, even if you exclude our restructuring costs and benefits, the margin rate is -- has shown a pretty good ramp. And that's driven, I would say, by two or three things. One is continued execution in the supply chain, with some of the restructuring that we have made and the supply chain is definitely more agile. We are also using a lot of data and data analytics. We have also learned through the pandemic on how to continue to operate our supply chain. 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.

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.

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?

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.

Operator:

Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Michael Roman:

Yes, Deane, so it's something we're watching very closely. We're -- as you know, we stay very close with the automotive OEMs, our key customers there. We are -- we haven't seen a significant impact on our business to date. And we continue to watch it closely. We're staying connected on what happens week-to-week and impacting our demand. But it's something that as part of -- an important part of our global automotive business, the automotive as we talked about in the quarter, had very good performance. We had 16% growth in the quarter, outgrowing build rates and that's the broader core of our automotive business, our auto electrification business is growing even faster. So it's an important part. It's had some impact but relatively small impact to this point. Again, we're watching it closely as we move ahead.

Michael Roman:

Yes, Dean, I probably would point you back at some of the data out there about year-over-year spend back-to-school being down per student. There's a number of metrics out there. For us, our category broadly in consumer is exposed to like shifting discretionary spend. So that continues to be part of the consumer story. So it wasn't back-to-school story, only back-to-school was muted. We didn't see the strong replenishment cycles that we would have seen in a stronger back-to-school. So I think we confirmed the data that's out there. And as we look ahead, we're -- I would say we're just looking at the uncertainty around what happens for the holiday season as well. And so we'll be monitoring that. And again, there's a broader story around consumer, retail for us, the shift of spending from discretionary products into areas like food and I would say, experienced kinds of spending, that trend has continued. So those are both underlying some of the performance that we saw in consumer in the quarter and how we're thinking about it into Q4.

Stephen Tusa:

Hi, good morning. Could you just give just an update total expected now inflation kind of carryover for the year? I know you mentioned it in the second quarter. Is that unchanged relative to what you had said before? I think it was like $150 million? Maybe that changed?

Stephen Tusa:

Okay. And then I guess, low single digits for the year on pricing. So that's kind of like a mid-single-digit volume decline. That kind of feels already recessionary. Things seem like very stable for you guys revenue-wise. How much of that negative 5% do you think is a function of destocking versus trend line on demand? And then just one last one for the fourth quarter. How much of that sequential sales decline are you expecting from electronics seasonality?

Monish Patolawala:

Steve, I'll just add. I'll just add -- I just wanted to add one more disposable respirators is down $600 million on a year-over-year basis. That's approximately 200 basis points of growth.

Michael Roman:

Yes. Well, in the broader business, we have seasonality. Some of that is normal end market cycles, but it's also billing days as well. We have the holiday season. So we see it sequentially from Q3 to Q4, we see that normal trend.

Operator:

Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.

Michael Roman:

Well, Nigel, I would say it's going to depend on the outlook as we get to 2024 for electronics and those key end markets that you're talking about it. And we've seen -- maybe that's part of the stabilization that we're seeing is the quarterly trend in electronics and against that year-over-year comparable is stabilizing in the second half. What will decide the performance in first quarter or first half of next year will really depend on the demand that we see. And some of that will come through the holiday season, but we'll be -- we'll come back at our Q4 earnings call and update on how we're looking at the first half of next year.

Michael Roman:

Yes. I think Monish called out the performance in the U.S. was up slightly, and -- and that, I would say, mixed performance in our industrial businesses in the U.S., reflecting some areas of strength, but also some, I would say, caution and uncertainty around the broader economy. So I think we're seeing the U.S. performing a little better, up slightly. And that's -- I would say that's in spite of the challenges that we've been talking about in consumer retail. So Safety and Industrial posted, I think, mid-single-digit growth in the U.S. in the quarter. So that's a good reflection on what we're seeing more broadly. And maybe that PMI is aligned to that. That PMI represents kind of a middle kind of expectation from the purchasing managers

Operator:

Our last question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.

Monish Patolawala:

Yes, Julian, I would just say the same thing that I said with another question before. The way I would just say long term, 3M has always been able to add value to its customers, and that is reflected in the pricing that it charges. We look at this not based on just a formula, but we look at it market by market, look at our competitive position and market by market, look at the value we add, and that's how we come up with our pricing that we go with. And I would say, based on the innovation and the value that we add to our customers, long term, I don't see that changing. In the short run, as you have seen, the Company has been able to manage inflation through price. And if needed, we'll continue doing that. But overall, right now, the teams are quite focused on delivering the fourth quarter, and then we'll see where long term goes this topic. It will be a function of demand, a function of inflation. So that's the way I look at it.

Michael Roman:

Yes, Julian, I wouldn't -- we saw a little bit of destocking in electrical markets. That was one of the areas in industrial that we saw that impacting. And I would say our automotive aftermarket probably saw a little bit of adjustments given what we talked about and Monish highlighted that, improving supply chains, distribution and the channel are managing their inventories, their safety stock, so more in line with stable supply chain. So I think that's part of it. Those have both been seeing good market performance as we've gone through the year. I think again, we're watching closely the trends as we go into the end of the year. But really, it's, I think, reflects on the -- a little bit of destocking and also the end market demand.

Michael Roman:

To wrap up, we continue to execute our strategies, delivering results in a challenging environment while positioning 3M for the future, prioritizing high-growth markets and geographies where 3M innovation can deliver the most impact. Thank you for joining us.

Bruce Jermeland:

Thank you and good morning, everyone and welcome to our second quarter earnings conference call. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer; Monish Patolawala, our Chief Financial and Transformation Officer; and Kevin Rhodes, our Chief Legal Officer. Mike, Kevin 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 homepage 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'll 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'll 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. With that, please turn to Slide 3 and I'll now hand the call off to Mike. Mike?

Kevin Rhodes:

Thank you, Mike and good morning. This is an important step forward for 3M. As Mike said, we have entered into a broad class resolution with public water systems that provide drinking water to the vast majority of Americans. We are taking a proactive approach to managing PFAS by establishing a more certain path forward for public water systems, communities and 3M. Subject to court approval, 3M has agreed to support PFAS remediation for public water systems that detect PFAS at any level and our agreement addresses all PFAS, not just those compounds that have been the primary focus of litigation to date. Our agreement also provides funding for eligible public water systems that may detect PFAS into the future and we have agreed to fund additional testing by public water systems as well. As Mike shared, the agreement terms entail a present value commitment of $10.3 billion paid over 13 years. Additional details regarding the payment schedule are available in our Form 8-K filed in June. While this agreement provides an alternative to continued litigation for class members and for 3M, we remain prepared to defend ourselves in litigation should the agreement not receive court approval or should public water systems choose to litigate instead. We are building on actions 3M has taken and continues to take. We were the first company to exit the manufacturing of 2 forms of PFAS, namely PFOA and PFOS which we announced more than 20 years ago. We have invested in state-of-the-art water filtration technology in our chemical manufacturing operations. And we have announced that 3M will exit all PFAS manufacturing by the end of 2025. We will continue to build on this important progress as we focus on the future and work to proactively manage PFAS. Now, let me turn it over to Monish to provide more details regarding our performance in the quarter. Monish?

Operator:

[Operator Instructions] Our first question comes from the line of Andrew Obin with Bank of America.

Monish Patolawala:

Thanks, Andrew. So as I mentioned in my prepared remarks, when we came into the year, we thought we would have end markets that remain uncertain as well as economic uncertainty would exist. Looking at where we in the first half, as I've called out, electronics continue to remain soft. We were nearly down 30% in the first half. We had consumer spending continue to remain soft. The consumer discretionary spending continues to remain soft. China remained soft in the first half. And then when you put all that together, you look at it and say, what are the trends we are looking for in the second half. And so what we are watching is electronics and see whether it's hit its bottom or not, we believe that electronic softness will remain. It's still going to be negative for the year but less negative in the second half. Consumer spending has remained soft in the first half. We believe it will remain soft in the second half. So we are watching back-to-school season and holiday season. Industrial activity has remained mixed. There are certain markets that continue to remain strong. There are certain markets that we are seeing a little bit of destocking in there. Health care elective procedures, we believe, will continue to go up on a sequential basis. At the same time, Biopharma and Health Information Systems are still constrained. Biopharma is going through COVID-related demand and HIS, or Health Information Systems, is impacted by stressed hospital budgets. As I've also mentioned in my prepared remarks, DR right now looks like it's going to be at the worst end of our range of down $550 million versus we thought it was going to be $450 million to $550 million coming into the year. And in China, we have -- second quarter was weak, down 4% on lower comps and we currently have not seen much of the recovery show up in China. Plus as a reminder, it was a tough comp in -- through 3Q of last year as China was coming out of COVID. So when you put all that together, Q3 is very similar to 2Q. And overall, the trends that we see make us feel that where we are right now in the first half and where we see trends going in the second half, we feel that from a revenue guide basis, we'll be at the lower end of our guide that we had given which was flat to minus 3% coming into the year. But with that said Andrew, if markets change, we will definitely be there to serve it. The teams are executing well as you have seen in the results that we have announced. We've got momentum on supply chain and supply chain execution. The team is doing a great job on restructuring and driving the cost as well as the team has hyper focus on making sure we are continuing to be prudent on our cost spending. But as we see these markets start to evolve in the second half and into 2024 and beyond, we won't hesitate to invest in growth in the high-growth markets because ultimately, we are in for the long run. Hope I answered your question, Andrew.

Mike Roman:

Yes, Andrew. Maybe I'll pick up on Monish's description of what we're looking at in the second half. And if you look a little further at the consumer electronics, we saw a soft first half in -- across all consumer electronics category, smartphones, TVs, notebooks, tablets. It -- you just saw -- and it was impacting our results as Monish outlined. And as we look into the second half, maybe there starts to be projected recovery in the markets in fourth quarter but really third quarter looks like the first half. And I would say picking up on inventory in the channel, we see destocking in a slowdown like this. And so we expect some destocking to continue in the electronics channel. So as we go into third quarter, that's kind of forming the view that we have. Now what would we need to see? We would need to see a turnaround in demand in those particular build rates in those end markets. And we'll see, I think, confidence show up in the inventory in the channel as well. So we're watching each of those categories closely in consumer electronics. And we also keep an eye on semiconductor capacity as well and how that's being -- how production is changing there. That gives you an indication of demand as well.

Andrew Kaplowitz:

So I just want to delve in a little more into your margin performance in Q2 and what it means for your second half. I mean, obviously, you had a nice step-up in sequential margin despite absorbing the 2.7% of pretax charges. So how do we think about the durability of the productivity actions, the positive price versus cost that look like was going on in the quarter? And how do you think about margin performance embedded in Q3? And Monish, the second half as it looks like you're forecasting margin below Q2 and Q3.

Andrew Kaplowitz:

No, that's very helpful, Monish. And then just for the next question, maybe just a little more color into industrial businesses within Safety and Industrial. I think you'd guided to down low single digits for the year and you continue to be down mid-single digit in Q2. I know last quarter, you described industrial markets as mixed, same description this quarter. But maybe you can characterize markets for us. Do you still see low single-digits decline for the year in industrial?

Operator:

Our next question is from the line of Scott Davis with Melius Research.

Mike Roman:

So yes, Scott, I would say as you see -- Monish called it disinflation, moderating of inflation. You're going to start to have discussions around impact on price. I would say when we look at it, our price value is in the right place where we are, where we face our markets. You -- I would say the area where you have the most discussion, typically are retail markets. It's an ongoing discussion, it always is. Even in the times of high inflation, it's a strong discussion. But price is a topic everywhere, right? We're confident that we're priced in the right place as we come through this market dynamic broadly. So we're not looking at pressure specific in one segment or another. But I would say the conversation is something that we anticipate as we see disinflation and eventually, we see deflation, then we would expect it to ramp up.

Mike Roman:

Yes, Scott, maybe I'll step back for a second. As we came through the pandemic, we saw a lot of factors impacting our supply chains. Inflation, labor shortages, raw material availability, all that was impacting our production runs and really creating inefficiency in our factories, impacting yields. And as we came into this year, we started to see supply chains healing. We're seeing labor availability improving. Our -- Monish highlighted, we're still seeing inflation in labor. Raw material availability has improved. And we put a lot of focus during the most difficult times in the supply chain disruptions on multiple sources for raw materials. And we were engaging with many suppliers, hundreds of suppliers, on a monthly basis to try to manage those raw material interruptions. As they've healed, that's become much more focused on a few raw materials. We're seeing much better availability. All this is helping us run our factories a little more efficiently. We're seeing improvements in yield. We're seeing improvements in logistics as supply chains heal more broadly. And so as we stepped into the restructuring, we were taking stock of what we learned during the pandemic, what we learned during the restructuring, also what we learned as we moved to our global operating model. And so streamlining is really taking advantage of all those learnings and I would say also taking advantage of investments in data and data analytics, our digital strategies, investing in productivity, more broadly in our manufacturing models. And so streamlining is focused broadly across our supply chain. I talked about we're working to improve every aspect of it, better, more disciplined planning, taking advantage of data and analytics, stronger focus on sourcing, that dual sourcing, taking advantage of that strategy, what we can learn in the plants about running more efficiently and how we can manage logistics more efficiently. So plan, source, make, deliver, we're streamlining across that really taking advantage of the learnings and I would also say stepping into aligning to customers in our business models. And it's going to continue to be an opportunity for improvement. We'll continue to evolve this. But the restructuring actions really try to incorporate those learnings. And it wasn't a top-down. We're going to take out so much head count. It was how do we restructure, realign, streamline our supply chain plan, source, make, deliver to take advantage of all that and position us in the markets that we're in but also position us to be ready for a stronger performance as we go forward in the future.

Joe Ritchie:

I appreciate the additional details on the restructuring, Monish. Just -- my first question really just around that deflationary point. Things are getting a little bit better or better than you originally expected. It seems like most of the inflationary headwinds have already occurred for the year. And so do you expect that to turn positive, I guess, by 4Q? Or is that something that could turn positive in the 3Q numbers?

Joe Ritchie:

Yes, that's super helpful. I guess my follow-on question, I know we talked a little bit about the weakness in electronics but I want to go back to it for a second. Is there a way to maybe just kind of parse out exactly what you're seeing in that end market? And then specifically, I know that Apple is considering rolling out like an all-OLED iPad next year. And I know when we went through that transition a few years ago on smartphones. That was a hot topic for your company. Any thoughts just around that specifically and how that impacts your business?

Operator:

Our next question comes from the line of Chris Snyder with UBS.

Monish Patolawala:

Yes, Chris, a great question. So your math is right. I would also look at fourth quarter, where we have said $185 million to $235 million. You take that midpoint and you annualize that, you'll get to -- closer to the overall annual range. But when you look at the way our charges are, some of it is rooftops, some of this is noncash charges and some of it is restructuring people. All that put together in the first half, we have done $262 million. What is left to go which is, I think, your question in '24 and beyond, what happens with the cost, there are a couple of things. Geography by geography, we go through negotiations, make sure we are following all the regulations in there. So there will be a cost for that. And then we've got some other rooftops, et cetera, that take a little longer for us to exit that also happen in 2024 and beyond. So that's why you're seeing this the way it is right now.

Monish Patolawala:

Yes, I would say, listen, on Q2, the teams knew that we had to execute well and early and they've done a nice job. Some of the benefit came from head count. But a lot of the other benefits that we've got, as Mike mentioned about streamlining the corporate, we were able to go after a lot of indirect costs in those areas, including exiting some of the rooftops that we wanted to that we were planning to early. So again, it goes back to a lot of focus on cost control, making sure that where we are spending our money on an indirect perspective also is well focused on. And that's where we were able to get to be off to a better start than we expected. So I give the team a lot of credit. They're going through very granular level of detail, making sure that we are doing the right amount of spend and focusing in the right place as we get the best return. So my credit to the team.

Nicole DeBlase:

Maybe just starting with biopharma. So this is an area where we've seen weakness post-COVID for some time now. Have there been any green shoots there? I don't know if you think about like orders or what customers are saying about spend to the second half?

Monish Patolawala:

Nicole, I'll add one more is we are very confident and bullish about this business. In fact, we have added capacity to continue to have more production output out there as the demand comes back.

Monish Patolawala:

So as I've mentioned, there is slight improvement that you're going to see in -- overall in Health Care. One is electric procedures should go up. Biopharma demand should start settling down. Hospital budgets are hopefully starting to bottom but we don't know that. So we'll have to see what happens with elective procedures. But overall, I would say there is improvement from a first half to second half in the market in general in Health Care that we have embedded into our guide. On the other hand, the thing we are watching also is oral care, Nicole, or orthodontics. Because as you know, if the economy slows down, that's an area that people will control their spending on. And so that's the other thing we're watching and, of course, China and seeing how the recovery in China plays itself out. But as I mentioned in my prepared remarks, Mike has said it multiple times too, this is a great business. In the long term, this will continue to have very good growth. We are working through some comps from last year which was COVID as well as capital budgets and hospitals. But all those trends in the long term will turn themselves around.

Stephen Tusa:

Just -- can we just calibrate? Because there's a lot of moving parts around the adjusted sales numbers. I think your guidance implies roughly like $7.9 billion in sales, like a modest sequential step-down from the third quarter just on an absolute basis. Is that right?

Bruce Jermeland:

For Q3.

Stephen Tusa:

No, Q4, Q4, Q4.

Stephen Tusa:

What's implied?

Stephen Tusa:

Yes. Okay. And can you just give us an idea of the range of the absolute margin? I mean we could probably do a lot of backing into it but what you now expect for the year from just a range on an absolute margin basis?

Stephen Tusa:

That's great. And then, just one last one on these liabilities. So what was the change in the mindset from really drawing a bit of a hard line and talking about how the science made you guys look at this stuff and then taking what is still a pretty sizable $10 billion to $12 billion charge? Like what -- like that's a pretty significant change in mindset.

Stephen Tusa:

What drove that internally?

Stephen Tusa:

Does it matter where the stock price is and what that's reflecting when it comes to your -- how you think about this stuff?

Operator:

Our next question is from the line of Laurence Alexander with Jefferies.

Monish Patolawala:

Yes. You -- as I've said before, as supply chains start to heal, one of our big opportunities or opportunities to continue driving cash flow as inventories. The teams have done a really nice job of starting to use data and data analytics. We are getting better at doing demand planning. So I would say in the long term, you should see trends continue to improve from an inventory turns perspective. Because as supply chains heal, as we get better on demand planning, that's why you're going to see it. So you will see it get better in the long run.

Mike Roman:

To wrap up, we continue to execute in a dynamic environment. While we see progress and positive momentum, we have more work to do. And we'll continue to advance our restructuring actions, control costs, strengthen our supply chain. At the same time, we will drive our strategic priorities, improving operational execution, successfully spinning off our Health Care business and addressing litigation. I thank 3Mers for their contributions and commitment, especially as we continue to lead through significant chain. We will stay focused on driving growth, improving operational performance and delivering value to customers and shareholders. Thank you for joining us.

Bruce Jermeland:

Thank you, and good morning, everyone, and welcome to our fourth quarter earnings conference call. With me today are Mike Roman, 3M’s Chairman and Chief Executive Officer and Monish Patolawala, our Chief Financial and Transformation 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 homepage 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. With that, please turn to Slide 3. And I will now hand the call off to Mike. Mike?

Monish Patolawala:

Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 5. As Mike mentioned, the first quarter macro and end-market trends have played out largely as anticipated. We experienced significant end-market weakness in consumer electronics, shifting consumer spending patterns along with the retailer destocking and mixed industrial end markets. We also continue to navigate COVID-related impacts in China and the ongoing geopolitical challenges in Europe. Given the expected challenging start to the year, we relentlessly focused on serving our customers and took very aggressive actions to manage costs and spending. These actions, coupled with a lower-than-expected foreign currency headwind, enabled us to deliver a first quarter that was better than forecasted. First quarter total adjusted sales was $7.7 billion or down 9.7% year-on-year. In addition to focusing on serving customers, first quarter sales benefited from a smaller-than-anticipated headwind to sales from foreign currency translation. The first quarter year-on-year translation impact was a minus 2.8% or approximately $230 million versus a forecast of minus 3% to minus 4%. We also experienced a 1.3% sales decline from divestitures or approximately $120 million versus Q1 last year. This decline was largely from the third quarter 2022 divestiture of Food Safety, along with the deconsolidation of Aearo Technologies. On an adjusted organic basis, first quarter sales decreased 5.6% versus last year. This result included an expected year-on-year headwind of approximately $300 million or 3.4 percentage points related to lower disposable respirator demand and the exit of our operations in Russia last year in the third quarter. Excluding this decline, Q1 adjusted organic sales growth was minus 2.2%. First quarter adjusted operating income was $1.4 billion with operating margins of 17.9% and adjusted earnings of $1.97. Turning to the components that impacted first quarter operating margins and earnings year-on-year performance, our Q1 margin and earnings reflect the previously mentioned lower sales volume. This lower sales volume, combined with our efforts to reduce inventories, resulted in lower manufacturing productivity versus last year’s first quarter. We were able to partially offset these headwinds through pricing performance and aggressive cost management, resulting in a net headwind to margins of 90 basis points and $0.17 to earnings. As mentioned, we faced a challenging Q1 comp from last year’s Omicron-driven disposable respirator demand, along with the exit of operations in Russia. This sales comp headwind resulted in a negative impact to operating margins of 1.1 percentage points and to earnings of $0.21 per share. We continued our focus on improving our manufacturing and supply chain operations, including executing on restructuring actions to streamline the organization and adjust to slowing end-market demand. Restructuring charges in the quarter were $52 million or a year-on-year headwind of 50 basis points to margin and $0.05 to earnings per share. The carryover impact of higher raw material, logistics and energy cost inflation created a year-on-year headwind of approximately $100 million or a negative 130 basis point impact to operating margins and $0.15 to earnings. As mentioned, foreign currency translation was a negative 2.8% impact to total sales. This resulted in a headwind of 30 basis points to margins and $0.10 to earnings per share. Divestitures, primarily Food Safety, along with the deconsolidation of Aearo Technologies, resulted in a year-on-year headwind of $0.03 to earnings per share in the quarter. Finally, other financial items increased earnings by a net $0.05 per share year-on-year driven by lower share count, partially offset by higher non-op pension expense. Please turn to Slide 6. First quarter adjusted free cash flow was approximately $950 million, up 24% year-on-year with conversion of 87%, up 37 percentage points versus last year’s Q1. This year-on-year improvement was driven by lower annual incentive cash compensation and a strong focus on working capital management, particularly inventory improvement. During the quarter, we continued to address manufacturing production levels to better align with end-market trends. Since last August, we have driven an approximately $500 million reduction in inventory levels. As I’ve said before, as supply chains heal and we progress the use of data and data analytics, we will see a reduction in inventory levels. Adjusted capital expenditures were $445 million in the quarter, up 15% year-on-year as we continue to invest in growth, productivity and sustainability. During the quarter, we returned nearly $900 million to shareholders. Net debt at the end of Q1 stood at $12 billion, down 10% year-on-year with net debt-to-EBITDA at 1.5x. Please turn to Slide 8 for our business group performance. I will start with our Safety and Industrial business, which posted sales of $2.8 billion or down 6% organically. This result included a year-on-year comp headwind of $285 million due to last year’s Omicron-driven disposable respirator demand and exit of Russia. Excluding the impact from disposable respirators and Russia exit, Safety and Industrial sales grew nearly 4% organically in Q1. Organic growth was led by high single-digit increases in automotive aftermarket, electrical markets and abrasives, while the personal safety business declined mid-teens primarily due to the decline in disposable respirator demand. Excluding the impact from disposable respirators, the personal safety business grew low double digits organically. Turning to the rest of Safety and Industrial, organic growth declined high single-digits in industrial adhesives and tapes due to consumer electronic softness. And closure and masking systems was down low single digits as consumers pull back on discretionary spending, impacting e-commerce shipments. Roofing granules were down low single digits. Adjusted operating income was $562 million or down 19% versus last year. Adjusted operating margins were 20.2%, down 2.4 percentage points year-on-year. Margin headwinds were driven by lower sales volume, manufacturing and supply chain headwinds, carryover raw material, logistics and energy cost inflation, investments in the business and impacts from China COVID-related challenges. These headwinds were partially offset by benefits from pricing, aggressive spending discipline and productivity actions. Moving to Transportation and Electronics on Slide 9, which posted Q1 adjusted sales of $1.7 billion. Adjusted organic growth declined 11.3% year-on-year, heavily impacted by a significant decline in demand for consumer electronic devices. Our auto OEM business increased approximately 6% year-on-year, in line with global car and light truck builds. We continue to gain penetration on new automotive platforms and expect to outperform build rates over the long run. Our electronics business saw adjusted organic sales declines in the mid-30% range. This business continues to be impacted by significant end-market weakness along with tiers and OEMs aggressively reducing inventories, particularly for smartphones, tablets and TVs. Turning to the rest of Transportation and Electronics. Advanced Materials had adjusted organic growth of high single digits year-on-year, while both transportation safety and commercial solutions declined. Transportation and Electronics delivered $284 million in adjusted operating income, down 36% year-on-year. Adjusted operating margin was 16.7%, down 5.5 percentage points year-on-year. Margin headwinds were driven by sales volume declines, manufacturing and supply chain headwinds, carryover raw material, logistics and energy cost inflation, investments in the business and impacts from China COVID-related challenges. These headwinds were partially offset by benefits from pricing, aggressive spending discipline and productivity actions. Looking at our Healthcare business on Slide 10. Q1 sales were $2 billion with organic growth of 1.4% versus last year. Excluding the impact on the exit of Russia, Healthcare grew Q1 organic sales by approximately 2%. Sales in our Medical Solutions business and oral care grew low single digits organically year-on-year, while Health Information Systems was flat due to strained hospital budgets. Separation and purification declined high single digits due to the normalization of post-COVID-related biopharma demand. First quarter elective healthcare procedure volumes were approximately 90% of pre-COVID levels as nurse labor shortages and strained hospital budgets continue to impact the pace of recovery. We continue to expect procedure volumes to improve as we progress through the year. Healthcare’s first quarter operating income was $360 million, down 19% year-on-year. Operating margins were 17.9%, down 3 percentage points. Year-on-year, operating margins were impacted by manufacturing and supply chain headwinds, carryover raw material logistics, and energy cost inflation, and investments in the business. These headwinds were partially offset by benefits from pricing, aggressive spending discipline, and productivity actions. Lastly on slide 11, our consumer business posted first-quarter sales of $1.2 billion. Organic sales declined 6.8% year-on-year with particular weakness in the U.S., which was down high single digits. Stationery and office grew low single digits organically year-on-year, while the home improvement, home health and auto care business declined organically. Relative to first quarter last year, consumers have shifted their spending patterns to more non-discretionary items and retailers have aggressively reduced their inventory levels. We expect consumers to remain cautious with their discretionary spending as we move forward through the year. Consumer’s first quarter operating income was $179 million, down 18% compared to last year with operating margins of 15%, down 1.8 percentage points year-on-year. The year-on-year decline in operating margins was driven by lower sales volume, manufacturing and supply chain headwinds and carryover raw material, logistics and energy cost inflation. These headwinds were partially offset by benefits from pricing, aggressive spending discipline and productivity actions. That concludes our remarks on the first quarter. Please turn to Slide 13 for a discussion on our outlook for the year and the second quarter. We are maintaining our full year guidance, reflecting a macroeconomic and end-market environment that remains very fluid and uncertain. Our outlook continues to incorporate the expected second half improvement in macroeconomic forecasts, including in China. We also anticipate the continued healing of global supply chains, which will help support ongoing product cost improvements in our manufacturing and supply chain operations, along with working capital performance, particularly inventory reductions. As a reminder, our full year adjusted organic sales growth is expected to be in the range of minus 3% to flat. This range includes an estimated 2 percentage point headwind from the ongoing decline in disposable respirator demand, along with the impact of our exit from Russia. Adjusted earnings are expected to be in the range of $8.50 to $9 per share. Full year adjusted free cash flow conversion remains forecasted in the range of 90% to 100%. Turning to our outlook for the second quarter. First, looking at external macroeconomic forecasts, both global GDP and IPI are currently expected to improve year-on-year and sequentially. The softness we experienced in Q1 in consumer electronics and consumer retail is expected to continue into Q2. We expect both sequential and year-on-year increase in auto bills, while healthcare procedure volumes are anticipated to be similar to Q1 levels and industrial end markets are expected to remain mixed. As discussed, we implemented very aggressive cost controls in the first quarter given the challenging start to the year, including on travel, advertising, external services and head count management. While we will remain disciplined, we expect to increase investments as we progress through the year to support end-market demand improvement in the second half and into the future. Including these factors, our expectations for Q2 are for total adjusted sales to be in the range of $7.7 billion to $7.9 billion versus $8.4 billion last year or down 6% to 8% year-on-year. Organic sales is expected to be down low to mid-single digits, which includes the forecasted year-on-year headwind of approximately 1.5% from disposable respirators. And finally, foreign currency translation is expected to be approximately a minus 2% headwind to sales versus last year’s Q2 and divestitures a year-on-year headwind of minus 1%. From an EPS perspective, we estimate that second quarter adjusted earnings per share will be in the range of $1.50 to $1.75, including a pretax restructuring charge of $175 million to $250 million or $0.25 to $0.35 per share. This range also incorporates the continued softness in organic sales and expected increase in investments, higher non-op interest costs and an adjusted tax rate of 18.5% to 19.5%. To wrap up, 2023 is a pivotal year for 3M from an execution perspective. As I mentioned, we aggressively managed cost, focused on serving customers while navigating end-market weakness, particularly in consumer-facing markets as we started the year. We expect organic sales volumes will improve as consumer retail and consumer electronics markets stabilize, China work through its COVID-related challenges as our year-on-year comps ease. The actions we announced today will enable us to exit 2023 stronger than we started and provide for significant margin and cash flow improvement into the future. I want to thank our customers and suppliers for their partnerships and the 3M employees for their hard work and dedication as they continue delivering for our customers. That concludes my remarks. We will now take your questions.

Andrew Kaplowitz:

Good morning, everyone.

Monish Patolawala:

Good morning, Andrew.

Monish Patolawala:

Yes. Thanks, Andy. So I’ll just start again back to 1Q. As we said in the prepared remarks, end markets pretty much played out as anticipated. You had consumer-facing businesses, both our Consumer business and our Electronics business. The Consumer business was down 7%. Electronics was down 35%. China continued to remain soft in Q1. We were down 20% in China. And also the DR and Russia comps pretty much came in where we said. So the end markets played up pretty much as anticipated. Coming into the quarter, we had given you a guide of $7.4 billion to $7.6 billion. We came in at $7.7 billion. So that’s at the high end of our range with some of the benefit also coming from a better FX rate at minus 2.8% versus the 3% to 4% that we had guided coming into the quarter. So when you look at that and you translate that into 2Q, I would still say the macroeconomic continues to remain fluid and uncertain. We are still seeing consumer weakness both in our Consumer business and in any of our consumer-facing businesses, especially consumer electronics. And so putting all that into the equation also looking into industrial markets that remain mixed, healthcare and oral care procedures pretty much remaining flat sequentially and then auto will be up a little bit sequentially and also up low double digits year-on-year. But then semiconductor is also down mid-teens on a year-over-year basis. Our current guide is $7.7 billion to $7.9 billion, which then translates to an EPS of $1.50 to $1.75. Included in that, Andy, in that $1.50 to $1.75 is a restructuring charge for the actions that we’ve announced today of $0.25 to $0.35. So if you exclude that for a moment, then on an apples-to-apples basis, you’re looking at $1.85 to $2. And the delta, if your question is about 1Q versus 2Q is the items you correctly said, which is some more investments as we think – as we look at the second quarter and the second half and the future, investments that we believe we want to take advantage of the markets as they get better in the second half, continuing to – but we will still continue to remain prudent with our investments depending on how the market evolves. And then it’s the tax rate and some of the non-op that just sequentially looks tighter. But with that said, just for the year, again, we are maintaining guidance, which includes the restructuring charge of $700 million to $900 million for the program. We expect half of that will be incurred in 2023. And the benefits from that program are also $700 million to $900 million. And we expect the benefits – half of those benefits also to show up in 2023. Just for you to know and for others, we’ve announced a significant announcement today. Some of them are organizational changes and business combinations or division combinations. We will be working through all of the reporting – our reporting on the new division basis. We plan to do that from 1Q 2024 onwards.. Hopefully, that answers your question, Andy.

Mike Roman:

Yes. Andy, as I said 3 months ago, we’ve been looking at everything we do as we come through the pandemic, come through the supply chain disruptions even face into the outlook for the year and our markets as we move ahead. So the actions that we’ve come to, they have been something that we’ve been very deliberate about thinking through. They are taking from learnings about what worked well and areas that we know we can improve. So it starts with a pretty strong basis. We’re confident that these are the right actions about positioning us for growth and profitability as we go forward. And it will help us navigate – as Monish just laid out, help us navigate some of the challenges and uncertainty we have in the current market. So our focus is – as your question kind of indicated, our focus is on executing successfully. And that’s – these are significant changes. We’re confident we’ve got the right focus. We’ve made some leadership changes to really ensure that we have our leadership focused on successfully making these improvements. And I think that this is the next step for us. We believe and we’re confident these will be the steps that really help improve our performance in our businesses and our supply chain. And as the second part of your question focused on, it’s about improving our costs and margins. Reducing our costs and improving our margin performance gives us a position to be successful in the future, leverage our innovation to create differentiated value with customers and deliver that to the bottom line performance that we expect both in terms of margins and cash flow. So it does position us for confidence in being able to do that as we go forward that incremental margin from our differentiated innovation. So yes, that’s – it’s exactly the reason and confident we’re positioned at the right – with the right strategies in place.

Operator:

Our next question comes from Stephen Tusa with JPMorgan Securities. You may proceed with your question.

Mike Roman:

Good morning, Steve.

Stephen Tusa:

So just on this restructuring cost, can you maybe just give us a quarterly cadence on the costs and then the savings? And I mean getting half of the savings this year, that seems like a pretty quick payback on half the spending. Like is there anything unique to this program that would have an accelerated payback like that? It seems like a one-for-one on a quarterly basis, which is pretty fast.

Stephen Tusa:

And so as far as the cadence of the charges, is there – is it – should we assume that they are spread throughout 3Q and 4Q and additionally with the savings, 3Q and 4Q?

Stephen Tusa:

Okay. And then what was – as far as like the go-to-markets are concerned and how you’re changing things, what was the catalyst for this? What did you see in the business that you thought you needed to improve on from a go-to-market perspective with all these changes that you were talking about? It seems like some pretty significant initiatives from that perspective and a change in the way you guys have done business historically. What was the catalyst for that? What did you see that you didn’t like?

Monish Patolawala:

Can I just add one more, Steve? As – I’ve always said this before, digital is a multiplier for 3M. And some of the digital capabilities that we have built over the last few years allows us to serve customers better. For example, Mike mentioned one of the areas where we are relooking at how we go to market in certain countries where in the past, we have had a full roof stop and a full cost structure, and now we’re going to work through our partnerships of third-party distributors, leverage our digital capabilities, leverage our export capabilities. And that also allows us to reduce cost while making sure we still continue to take care of customers in those countries.

Operator:

Our next question comes from Scott Davis with Melius Research. You may proceed with your question.

Mike Roman:

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?

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.

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.

Mike Roman:

Thank you, Scott.

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.

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.

Chris Snyder:

Thank you.

Josh Pokrzywinski:

Hi. Good morning guys.

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?

Josh Pokrzywinski:

Yes. That’s helpful. And I will leave it there with the interest of time.

Joe Ritchie:

Hi. Good morning everyone.

Mike Roman:

Good morning Joe.

Monish Patolawala:

So, Joe, the $700 million to $900 million, if we just break it down to broad buckets, 40% of it is around the supply chain simplification that Mike talked about. The remaining 60%, you can split between costs at the center of the company and costs at the BGs. From a P&L perspective, a couple of items that Mike talked about, again, on the go-to-market. There will be a couple of divisions in TEBG that will be combined. And then from a consumer perspective, we will serve our customers more from an area perspective and then realign them around portfolios. And the other piece on a go-to-market cost saving is, as we look at some of the countries, the way we serve using our digital capabilities, we will look at using our partnerships that we have with our third-party distributors in those countries and use a digital/export model to serve those customers in those countries, which will also allow us to take out rooftops and fully loaded P&Ls in those countries that will also allow us to save cost.

Monish Patolawala:

Yes. So, depending on the business group, Joe, we had anywhere between low to mid-single digits. The average is low-single digits. The guide for the year is low-single digits. And at the same time, as we have said before, if we continue to see inflation, we will readjust as needed. The teams have done a good job, I would say, of looking at it product-by-product, market-by-market and making the right necessary price moves as required when they see inflation.

Operator:

Our next question comes from Julian Mitchell with Barclays. You may proceed with your question.

Mike Roman:

Good morning Julian.

Mike Roman:

Yes. Julian and I will come to kind of the organic growth and margin. I would say we continued to see the healthcare procedures as an important driver of our healthcare performance. And there, we see some improvements. Monish highlighted in his prepared remarks some of the headwinds and challenges that are still – the labor shortages and some of the challenges and healthcare recovering to pre-pandemic levels. So, that’s important factor in driving our growth. If you look at our business, we also had some headwinds from the Russia exit in DR and so close to 2% organic growth. And we expect as procedures do recover that we will see improvements in our organic growth. On the margin side, Monish called out some of the headwinds, we have – still seeing some supply chain headwinds, still seeing some carryover from material, raw material and logistic inflation, energy cost inflation. And we are making some investments, investing in – it is a prioritized area of growth for us, and we are making and really staying focused on those investments. So, it’s a – it is part of the performance in the quarter. But again, confident that as procedures improve, we will see growth and growth gives us the best leverage to the margin. We will see those margins improve as we see some of the supply chain healing and some of the actions that we are taking help impact that as well.

Julian Mitchell:

Thank you. And then just my follow-up on electronics specifically, I think you mentioned, Monish, that was down sort of 35% in Q1 year-on-year. It looks like the second quarter is down maybe in the teens based on Slide 13 in electronics. How are you thinking about that sort of rate of improvement? What’s baked into the back half for electronics in your guidance? Do you think we should see year-on-year growth by the fourth quarter for electronics? Any sort of color there around how you are looking at that business through the balance of the year?

Julian Mitchell:

Great. Thank you.

Nigel Coe:

Thanks. Good morning.

Nigel Coe:

Yes. Great. Thanks. So, just wanted to touch on the Mike Vale as Group President, just first of all, congratulations to Mike. But how does this change your role, Mike Roman, in terms of your focus areas? I mean Mike is obviously – seems like he is getting direct for the three segments. I mean how does this change your focus areas going forward?

Nigel Coe:

Okay. That’s helpful. Thanks Mike. And then one for Monish, just a follow-up on Joe’s question on pricing. It seems like given the 1.3 percentage points hit to margins from raw materials, it seems like price/cost was positive this quarter. Just wondering if there had been any change in the way you are viewing the supply chains to raw material kind of dynamics for this year.

Nigel Coe:

Alright. Thanks a lot and good luck.

Operator:

Our next question comes from Deane Dray with RBC Capital Markets. You may proceed with your question.

Monish Patolawala:

Good morning.

Deane Dray:

Can we get an update on the healthcare analyst meeting? And what’s the effect on the separation of R&D? There is so much in way of shared technologies. What’s the plan there and also for stranded costs?

Monish Patolawala:

Just on your second question on timing. As you know, Deane, last quarter too, Mike had said, the teams are continuing to make good progress. This quarter too, they are making good progress. We were going – we were working towards a Q4 ‘23, early 2024 timeline. But just a reminder, our spin timing ultimately is subject to the IRS rulings because we want this to be a tax-free transaction, government approvals, making sure we get final Board approval and also take into account other conditions like equity and debt markets, other external conditions that could impact – on other developments that could impact 3M or any of its business. So, put all that together, I would just say that teams are focused, dedicated teams continuing to make progress, working through all the government regulations that we have to work through to get ready.

Monish Patolawala:

So, I will just – on stranded costs, when we announced this transaction mid last year, one of the items we have talked about was that benchmarks were anywhere between 1% to 1.5% of revenue is stranded cost. And we had talked about saying, we believe we can do much better than that. Based on all the actions that we are taking today, currently, our view on stranded costs ultimately depends on the revenue of ParentCo too is between 50 basis points to 75 basis points, so much lower than benchmark. But we will keep working it. We will keep working it from now until the end of the – until the spin-off. And we will keep working it post that too, to reduce that.

Deane Dray:

Thank you.

Operator:

And our final question comes from Nicole DeBlase with Deutsche Bank. You may proceed with your question.

Mike Roman:

Good morning Nicole.

Monish Patolawala:

So, Nicole, I would say overall, the quarter pretty much played out as we thought. Jan, Feb, March, we expected acceleration, which we saw. April is also playing out pretty much where we saw. So, there is – I would say there was nothing in the intra-quarter trends in Q1 that stood out from where we had expected it to be. China remains soft, consumer-facing businesses remains soft, industrial end markets ex-electronics remain strong. And then healthcare elective procedures pretty much remain the same. And you normally in that industry see a Q4, Q2 or 1Q slowdown just as procedures slow down, and we saw that too. So, nothing I would say is major to call out intra-quarter in 1Q.

Operator:

That concludes the question-and-answer portion of our conference call. I will now turn the call back over to Mike Roman for some closing comments.

Operator:

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.

Bruce Jermeland:

Thank you, and good morning, everyone, and welcome to our Fourth Quarter Earnings Conference Call. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer; and Monish Patolawala, our Chief Financial and Transformation Officer. Mike and Monish will make some formal comments, then we'll 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'll 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 turn to slide 3. Please note throughout today's presentation, we'll 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. Before I hand the call over to Mike, I would like to take a moment and highlight of financial reporting change we are making starting here in Q1 2023. As we announced in our press release on December 20th, we'll be exiting PFAS manufacturing by the end of 2025. As a result, we have decided to provide additional disclosure by expanding the scope of our non-GAAP measurement adjustments to include the exit of PFAS manufacturing. For 2022, we have treated the Q4 PFAS manufacturing exit cost as a special item in arriving at results adjusted for special items. However, beginning in 2023, we will expand the existing adjustment for special items to also adjust for the sales and estimate of income and associated activity of PFAS manufacturing. Therefore, our outlook for 2023 reflects this adjustment. Today's press release, press release attachments and slide presentation provide information regarding our 2022 performance on our existing Q4 2022 non-GAAP basis, along with some comparative information on the new 2023 outlook basis. We will be providing a Form 8-K during the first quarter to reflect additional effects of this change in our non-GAAP measures and changes in segment reporting. We remain committed to providing strong transparency in reporting our financial performance. And of course, we are always here to address your questions. With that, please turn to slide four and I'll now hand the call off to Mike. Mike?

Monish Patolawala:

Thank you, Mike, and I wish you all a very good morning. Please turn to slide five. As you will recall, we highlighted negative trends in our consumer retail and electronics-related businesses in late November. As the fourth quarter progressed, those trends accelerated. We also experienced significant slowing in China as COVID-related impacts resulted in a 17% decline in organic sales in December and down 8% for the quarter. Health Care continued to be challenged in its recovery to pre-pandemic levels, given labor shortages and hospital budgets being under pressure, while industrial end markets mostly remain steady. Fourth quarter total sales were $8.1 billion or down 6.2% year-on-year, which included headwinds from foreign currency translation of minus 5% or $400 million, which is better than the minus 7% we had expected. We also experienced a 1.6% decline from divestitures, or nearly $140 million, largely from the third quarter divestiture of food safety, along with the deconsolidation of Aearo Technologies. On an organic basis, fourth quarter sales increased 0.4% versus last year. This result included an anticipated falloff in disposable respirator demand and the exit of our operations in Russia. These two items, combined, negatively impacted organic sales growth by approximately $230 million or 2.6 percentage points. Excluding this decline, Q4 organic sales growth was 3%. On an adjusted basis, fourth quarter operating income was $1.5 billion, with operating margins of 19.1%. Adjusted earnings for the quarter were $2.28 versus $2.45 last year. Turning to the components that impacted fourth quarter operating margins and earnings year-on-year performance. We took a number of actions to navigate the fluid and slowing macroeconomic environment, including managing selling prices to address inflationary pressures, reducing manufacturing output, maintaining strong spending discipline and taking additional restructuring actions to streamline the organization and adjust to slowing end market demand. These actions delivered an underlying benefit to operating margins of 110 basis points and $0.19 to earnings. This helped more than offset headwinds from the sales decline in disposable respirators and Russia exit, which negatively impacted operating margins by 70 basis points and earnings by $0.15 per share. Inflation continues to impact raw material, logistics and energy costs. These pressures remain persistent and are broad-based. In Q4, raw material cost increased approximately $110 million or a negative impact of 1.4 percentage points to operating margins and $0.16 to earnings. As mentioned, foreign currency translation was a negative 5% impact to total sales. This resulted in a headwind of $0.10 to earnings per share, however, was a benefit of 10 basis points to margins. Divestitures, primarily Food Safety, along with the deconsolidation of Aearo Technologies, resulted in a year-over-year headwind of $0.04 to earnings per share in the quarter. Finally, other financial items increased earnings by a net $0.09 per share year-over-year driven by lower share count, partially offset by a higher tax rate. Please turn to Slide 6. Fourth quarter adjusted free cash flow was $1.7 billion, up 3% year-on-year, with conversion of 131%, up 18 percentage points versus last year's Q4. During the quarter, we aggressively adjusted manufacturing production levels to end market trends, which drove a sequential reduction in inventory levels by $250 million. For the full year, adjusted free cash flow was $4.7 billion with adjusted free cash flow conversion of 82%. Capital expenditures were $506 million in the quarter and $1.75 billion for the year, or up 9% year-on-year as we continue to invest in growth, productivity and sustainability. Looking to 2023, we expect capital expenditures in the range of $1.5 billion to $1.8 billion, which includes approximately $200 million of investment in water stewardship related to our exit of PFAS manufacturing. During the quarter, we returned $1.4 billion to shareholders through the combination of cash dividends of $820 million and share repurchases of $540 million. For the year, we returned $4.8 billion to shareholders, including $3.4 billion in dividends and $1.5 billion in share repurchases. In addition, we reduced our outstanding share count by 16 million shares via an exchange offer associated with the Food Safety divestiture. Having a strong balance sheet and capital structure remains a priority for 3M, because of the flexibility it provides. Net debt at the end of Q4 stood at $12 billion, down 4% year-on-year with net debt-to-EBITDA at 1.4 times. Please turn to slide 8 for our business group performance. I will start with our Safety and Industrial business, which posted sales of $2.7 billion or up 1.3% organically. This result included a year-on-year headwind of approximately $165 million due to the ongoing decline in demand for disposable respirators. Excluding disposable respirators, Safety and Industrial grew Q4 organic sales by 7.5%. Our Personal Safety business declined mid-single digits organically, primarily due to the decline in disposable respirator demand. Turning to the rest of Safety and Industrial. Organic growth was led by low double-digit increases in electrical markets, automotive aftermarket and abrasives. Industrial adhesives and tapes and closure and masking systems both declined low single digits. Operationally, the Safety and Industrial team drove strong execution during the fourth quarter. Adjusted operating income was $611 million, or up 9% versus last year. Adjusted operating margins were 22.4%, up 2.7 percentage points as the team managed inflation with price actions, drove yield and efficiency and exercised strong spending discipline, while also investing in the business. Moving to Transportation and Electronics, which posted sales of $2.1 billion, or up 1.4% organically. Our auto OEM business increased mid-teens versus a 2% increase in global car and light truck builds. We continue to gain penetration on new automotive platforms, while also benefiting from a favorable comparison due to last year's Q4 channel inventory drawdown. Our electronics business declined 10% organically as it continued to be impacted by the significant end market weakness particularly for smartphones, tablets and TVs. Turning to the rest of Transportation and Electronics. Advanced materials grew organically low double digits, while both commercial solutions and transportation safety increased low single digits. Transportation and Electronics delivered $366 million in adjusted operating income, down 3% year-on-year. Adjusted operating margins were 17.8%, up 60 basis points versus Q4 last year. The team was able to more than offset manufacturing productivity headwinds and inflationary pressures with ongoing benefits from pricing, along with strong spending discipline and restructuring actions, while investing in the business. Looking at our Healthcare business, Q4 sales were $2 billion, with organic growth of 1.9% versus last year. Sales in our medical solutions business declined low single digits organically. Fourth quarter elective health care procedure volumes were approximately 90% of pre-COVID levels as nurse labor shortages and strained hospital budgets continue to impact the pace of recovery. Oral care was up low single digits despite decreased consumer spending on discretionary items. And finally, separation and purification organic sales increased high single digits while Health Information Systems was up mid-single digits. Health Care's fourth quarter operating income was $421 million, down 18% year-on-year. Operating margins were 20.6%, down 2.9 percentage points, with adjusted EBITDA margins of nearly 29%. Year-on-year operating margins were impacted by manufacturing productivity headwinds, increased raw materials and logistics costs, along with investments in the business. These headwinds were partially offset by pricing actions along with the strong spending discipline. Lastly, our consumer business posted fourth quarter sales of $1.2 billion. Organic sales declined 5.7% year-on-year with particular weakness in the US, which was down high single digits. All businesses declined organically as consumers pull back on discretionary spending and retailers aggressively took actions to reduce their inventories, particularly in the US. Looking ahead, we anticipate those trends to continue at least through the first half of 2023. Consumers fourth quarter operating income was $224 million, down 24% compared to last year, with operating margins of 17.9%, down 3.3 percentage points year-on-year. This year-on-year decline in operating margins was driven by increased end market weakness, higher raw materials and logistics and outsourced hard goods manufacturing costs, manufacturing productivity headwinds, along with investments in the business. These headwinds were partially offset by selling price actions and strong spending discipline. I'll now turn it back over to Mike for a recap of our full year 2022 performance. Please turn to slide nine.

Monish Patolawala:

Thank you, Mike. Please turn to slide 12. The macroeconomic environment remains very fluid and uncertain. For 2023, we anticipate that GDP and IPI will continue to moderate with both currently estimated to be around 1.5% or about half of 2022 levels. Therefore, against this backdrop, we feel it prudent to set our expectations to reflect this reality. As Mike mentioned, we estimate our full year adjusted organic sales growth to be in the range of minus 3% to flat. This includes selling prices up low single digits. Therefore, organic volumes are expected to be down low to mid-single digits for the year. This range also includes an estimated two percentage point headwind from the ongoing decline in disposable respirator demand, along with the impact of our exit from Russia. We currently expect our disposable respirator demand to be down to pre-pandemic levels. As the strength of the US dollar carries into 2023, we estimate a foreign currency translation impact to sales of minus 1% to minus 2%. And divestitures that were completed in 2022 will be a headwind to sales of nearly one percentage point. Adjusted earnings are expected to be in the range of $8.50 to $9 per share. This range includes a combined earnings headwind of $0.55 to $0.80 per share year-on-year from the following three items. First, the expected sales decline of disposable respirators and exit of Russia will be an impact of minus $0.30 to minus $0.45. Second, foreign currency will be a headwind of minus $0.10 to $0.20; and third, divestiture impacts would be a minus $0.15. In addition, the 2022 carryover impact of higher raw material and logistics costs, combined with energy inflation, creates a year-on-year headwind of approximately $150 million to $250 million or roughly $0.20 to $0.35 to EPS. And finally, non-operating items are estimated to be an impact to earnings per share of flat to minus $0.10. This range includes a year-on-year increase in non-operating pension expense of $125 million. A full year adjusted tax rate in the range of 18% to 19% and a lower year-on-year outstanding share count. While there are a number of headwinds to earnings in 2023, ultimately, our full year performance will be driven by organic sales volumes, sustained progress in global supply chains and raw material availability, and our ability to drive improvements and reduce costs in our manufacturing and supply chain operations. Finally, full year adjusted free cash flow conversion is forecasted to be in the range of 90% to 100%. This range includes the continued healing of global supply chain, expected improvements in working capital performance, particularly inventory reductions and full year capital expenditures of $1.5 billion to $1.8 billion, which includes approximately $200 million of investment in water stewardship related to our exit of PFAS manufacturing. Please turn to slide 13. Looking at our expected performance by business. We see Safety and Industrial organic sales growth to be down low single digits in 2023. This includes an estimated decline in disposable respirator sales of $450 million to $550 million or a negative impact of approximately four percentage points as the business returns to pre-pandemic levels. Demand across industrial end markets is moderating as customers remain cautious. Our Safety and Industrial team will also be monitoring the recovery of industrial production activity in China as we start the year. Adjusted organic sales growth for Transportation and Electronics, excluding the impact of the exit of PFAS manufacturing is forecasted to be down mid-single digits to flat organically. Looking across end markets, automotive unit volume production is currently forecasted to be up nearly 4% year-on-year. We also expect automotive electrification trends to remain strong as we leverage our technologies and develop new innovative solutions for our automotive OEM customers. Electronics, however, is expected to be down significantly due to weak end market demand for TVs, tablets and smartphones, along with the ongoing impact of display technology shifting to OLED from LCD. Healthcare's organic sales growth is anticipated to be up low to mid-single digits versus 2022. We expect gradual improvement in healthcare elective procedure volume as nurse labor shortages and strain hospital budgets continue to impact global healthcare systems. In oral care, we will be monitoring consumer discretionary spending and its impact on patient visits, including orthodontic care. The Healthcare team continues to create differentiated value and deliver strong margins for the attractive end markets we serve. And finally, organic sales in consumer are estimated to be down low single digits to flat as US consumers remain cautious and retailers continue to aggressively reduce the excess inventory levels. Despite these near-term challenges, the consumer team remains focused on leveraging our iconic brands and accelerating new products in 2023. Please turn to slide 14. Before we go to Q&A, I want to walk through how we are seeing the first quarter. First, three weeks into January, we are seeing continued slowing in organic sales volume as we start the year. This slow start is driven by the same weakening end market trends that impacted the finish to 2022. We expect soft consumer discretionary spending, along with retailer destocking to continue into the first quarter. Sales of electronic devices are forecasted to be down between 10% and 30% sequentially in the first quarter, while semiconductor end markets and automotive builds are down mid-single digits sequentially. Health care and oral care elective procedure volumes are expected to be at the same levels as Q4. And as we have noted, industrial end markets are mixed. And we anticipate the ongoing COVID-related challenges to continue in China and the geopolitical situation in EMEA to persist. Therefore, taking all of these items into consideration, we estimate Q1 total adjusted sales in the range of $7.2 billion to $7.6 billion versus $8.5 billion adjusted for the exit of PFAS manufacturing or down 10% to 15% year-on-year. This anticipated year-on-year decline includes headwinds of 3 to 4 percentage points from disposable respirator sales declines and Russia exit, 3 to 4 percentage points from foreign currency translation, and 1 percentage point impact from divestitures. Taking these factors into account, we expect Q1 organic sales to be down low single digits to mid-single digits. From an EPS perspective, we estimate that first quarter adjusted earnings per share will be in the range of $1.25 to $1.65. This range is impacted by the continued slowing of organic sales volumes, a pre-tax restructuring charge of $75 million to $100 million or $0.10 to $0.15 per share, a tax rate of approximately 19%, along with normal Q1 items. As you can see, the first quarter presents a tough start to the year. We will have our most challenging year-on-year comps related to the declining disposable respirator demand and our exit of Russia. Ultimately, organic volume trends will be the biggest factor in determining how the quarter will turn out. 2023 is an important year as we work on progressing our strategies, including preparing for the spin off health care, improving our manufacturing and supply chain operations, and taking actions to further streamline the organization. We are focused on creating the shortest path to the customer and providing innovative solutions to their most challenging problems. We will remain nimble and take appropriate actions as we respond to changing market dynamics. And we will continue to invest in growth, productivity and sustainability to ensure the long-term success of our enterprise. To wrap up, I continue to be bullish on our long-term trends. The large and attractive end markets we serve provide exciting opportunities for the future of 3M. We are not satisfied with our performance and the expected start this year. We are working to aggressively address our operating performance in this challenging environment. We expect organic sales volumes will improve as consumer retail and consumer electronic markets stabilize. China works through its COVID-related challenges and as our year-on-year comps ease. We also expect supply chains to continue to heal and raw materials and logistic cost headwinds to abate. Therefore, we anticipate improvements in organic growth, operating margins, earnings and cash flow as we progress through the year. As you've heard me say before, there is always more we can do and we will do to improve our performance. I want to thank our customers and suppliers for their partnerships and the 3M employees for their hard work and dedication as they continue delivering for our customers. That concludes my remarks. We will now take your questions.

Scott Davis:

Hi, good morning everybody.

Monish Patolawala:

Good morning, Scott.

Mike Roman:

Yeah, Scott. So maybe I'll take you back to the announcement of the exit. We said we'll exit all PFAS manufacturing by the end of 2025. We also said we would work to discontinue use of PFAS in our products broadly across the company. That's both in our products, but also in the manufacturing of our products. And I think your question is really on our manufacturing part of that. And we said we will meet contractual commitments that we have to our customers, and we're working closely with them to manage that as we make this transition. But ultimately, also, I talked about that we are not planning and won't sell the businesses and that we will plan to shut them down as we work through the transition as we get to the end of that -- end of 2025.

Scott Davis:

Okay. That's helpful. And then you talked about doing some further restructuring, perhaps help us understand the scope or scale, or at least are you talking about -- I think you mentioned 2,500 people. But are the rooftops and meaningful cost out that you see in this plan?

Scott Davis:

All right. Thank you. I’ll pass it on guys. Appreciate it.

Operator:

Our next question comes from Andrew Kaplowitz with Citi. You may proceed with your question.

Mike Roman:

Hey, Andy.

Andrew Kaplowitz:

Mike or Monish, you mentioned that industrial end markets are moderating, customers are cautious. I think for instance, you mentioned industrial adhesives and tapes down in Q4. Has there been a material change from conversations that you've had previously with industrial customers, or is this just gradual moderation? And then is the regional weakness that you're seeing in China just a function of COVID interruption and more consumer base versus end demand related? And how do you think that pans out in 2023?

Andrew Kaplowitz:

Mike, that's helpful. And then maybe could you give us a little more color regarding price versus cost expectations for 2023. You mentioned the low single-digit price improvement you're seeing. You also mentioned supply chains are healing. Are you generally seeing pricing hold up for you despite some of this demand weakness across the portfolio? And then versus raw material and energy related headwinds, does that price versus cost equationgetting increasingly green as you go throughout the year?

Andrew Kaplowitz:

Appreciate the color, Monish.

Andrew Obin:

Yes. Good morning.

Andrew Obin:

Just few questions. What are you guys just -- and if I missed it, I apologize, but are you sort of modeling an explicit recession in your forecast? What are your macroeconomic assumptions? I know you sort of said things are slowing, but are you explicitly modeling a recession?

Andrew Obin:

Got you. And then the question about pricing. Just historically, given -- and I know the way you report pricing is not necessarily how we think about pricing internally. I completely appreciate that. But has anything changed in the market structure in terms of your ability to drive the pricing. I just would have thought for 3M reported pricing would have been more of a tailwind into 2023. But it is what it is, but are there any structural changes that you're seeing and that you're trying to address? Thank you.

Operator:

Our next question comes from Stephen Tusa with JPMorgan Securities. You may proceed with your question.

Mike Roman:

Hey, Steve.

Stephen Tusa:

What are you guys seeing on the inventory side of the -- of your more industrial businesses? I think you talked a bit about auto, but maybe just on the general industrial side, customer inventory behavior?

Stephen Tusa:

Okay. And then you mentioned January was starting slow. I mean, can you give us a little bit of context? Is that -- is January an organic kind of like below the low end of the annual range? Just roughly, just some color on kind of how slow January started for you guys?

Stephen Tusa:

Yes. You weren't down double-digit in January. Are you? Double-digit?

Stephen Tusa:

Okay. Great. Thanks for the color. Really appreciate it.

Joe Ritchie:

Thanks and good morning everybody.

Monish Patolawala:

Morning Joe.

Monish Patolawala:

Yes. So, on Consumer -- so you're right, Joe, I'll start with the summary, which is we are expecting that as things stabilize and as customers slow down their destocking, you will start seeing the comps get better in the year. The fourth quarter was extremely hard. And as Mike said, we saw an acceleration of a trend in December. We continue to see that in January, and that's why the first quarter starts pretty soft. But our hope is that as things stabilize, as destocking gets better, as consumer confidence builds into the year, we'll start seeing the consumer business starting to get better.

Monish Patolawala:

What -- I would answer and then I'll ask Mike to join in. The way I look at this, Joe, is there are a couple of things. The company has always -- has been looking at the LCD-OLED transition for a period of time. And that transition has been happening for a few years and the team has continued to deal with that as it goes on. What the team is working through is as new devices are coming on, what does that mean from a OLED to LCD ratio to mix. It definitely did have an impact for us in 2022. And then we are seeing what trends we are seeing -- as of right now, the trends we saw, we have predicted into 2023. But with that said, the one thing about the Electronics segment and especially the display teams is they always have a lot of innovation that is out there that helps offset some of these headwinds that come across. That business keeps reinventing itself as time has gone. For example, Ashish and his team have launched products that are used in AR and VR technology, which also hopefully is a growth market in the future, and that's what -- that business is very good at looking at these trends, working these headwinds, and then finding innovation to offset that as time goes. But right now, we have embedded what we think is the trend in LCD-OLED shift into our 2023 guide.

Joe Ritchie:

Thank you.

Julian Mitchell:

Hi. Good morning.

Julian Mitchell:

Good morning. Maybe just wanted to start on the operating margins. So, sort of, backing into what you've talked about, are we right in assuming that the guide embeds sort of 19% operating margin for the year and sort of mid-teens in Q1? And then, on that Q1 aspect, very heavy decremental margins sequentially, even without the restructuring charge. Is there a lot of sort of under production going on at 3M to clear out inventory, for example? Just trying to understand why that Q1 margin is so light. I think, it's like a 50% decremental or something excluding the restructuring.

Julian Mitchell:

And, Monish, is that roughly right on that sort of mid-teens operating margin Q1 and 19-ish for the year in your guide?

Julian Mitchell:

Okay. Thanks a lot. And then one quick follow-up on that for Mike. Mike, you've announced a restructuring program today. I think it's the first kind of formal discrete one since fourth quarter of 2020. And you had the business transformation savings program prior to that. Just wondered, sort of, when you think about the scope of the current restructuring plan, what kind of savings run rate we should expect annually when do you get to that? And how do you assess the scope of this being enough to get margins back on track as you had those prior restructuring programs, but margins have stayed under pressure? Thank you.

Julian Mitchell:

Thank you.

Deane Dray:

Thank you. Good morning, everyone and thank you for all the 2023 planning assumption details.

Monish Patolawala:

Hi, Deane.

Mike Roman:

Yeah, Deane, maybe I'll talk a little bit about just the spin. Monish, can talk about the separation cost model. We have a dedicated team working and building the execution plans. We're making very good progress. We talked about our expectation that we would be completing the spin by the end of 2023, early 2024 and that's the focus for the teams as they work to execute this. You commented on there had been some -- actually, there was a suit in the marketplace around the spin of healthcare and would we be able to complete that. And that was something that was dismissed. And so there's nothing from that dynamic that's impacting us. It's really about our teams working to execute the spin. And as I said, they're making very good progress. We're confident that we're moving in the right direction and moving ahead at pace.

Deane Dray:

Thank you.

Nigel Coe :

Thanks. Good morning, everyone. We've covered a lot of ground here. But I want to go back to 1Q 2023, perhaps Monish. We calculate a 15% margin, which is kind of similar to Julian's mid-teens. I don't think we've ever seen a margin that low. I think the GFC, we saw 17% and change margin. So just wondering why margins will be so low. And I understand supply chain is a factor here, but why 15%? What's going on? And as part of this sort of question, the kind of the coverage of the full year plan even at the low end of the range is still really, really low. So I think it's about 17% to 19% coverage, making a very big back-end loaded year. So I know you said volume gets better, but what gives you confidence and what can give investors confidence enough capture in the back half of the year?

Bruce Jermeland:

Hey, Nigel, I just want to correct one thing Monish said. Our total sales for Q1 are going to be down 10% to 15%, not volume.

Bruce Jermeland:

Organic sales growth is forecast to be down low single digits to mid-single digits.

Mike Roman:

Yeah, I would say that, Nigel that, the change is that – there's a couple of different changes that we made to the supply chain maybe that you're thinking about. One was we did take actions on some of the structure and really looking at factories, our footprint of factories a number of years ago. And then we moved to – when we announced the change to our business group led model, we went to a common supply chain model globally. And we made some additional steps in that in last year, really to continue to drive more flexibility, greater streamlined performance end-to-end in our supply chain. So, we see it really more as an opportunity to build on the changes we have made and drive simplification, streamline, more productivity, reducing our costs, delivering more directly to customers. So it's continuing to build on some of those changes. I think those actually have positioned us to be more flexible as we go ahead. And there's an expectation that supply chains will continue to heal. So we want to be able to take advantage of those of those tailwinds that we hope to see as we go through the year. At the same time, we control what we control, and that is making additional changes based on what we've learned to, to really execute our performance in our supply chain. It's the biggest opportunity we have to improve margin and cash flow as we go through the year.

Operator:

And our last question comes from Laurence Alexander with Jefferies. You may proceed with your question.

Monish Patolawala:

Yeah, it's 90% to 100% for 2023, just to be clear, that was the guide.

Monish Patolawala:

For last year, we ended at 82%. As I've said multiple times, the opportunity for 3M's cash from a working capital comes from inventory management and EP. And to answer your question, is it sustainable, of course, it will ultimately depend on the income that we generated depends on how supply chains behave and the capital. But if you just look at the ability for us to use data and data analytics to help drive inventory and working capital clearly exists. In the fourth quarter, the teams did an amazing job to take inventories down, got it down by nearly $250 million. And as supply chains start to heal, this is clearly an opportunity for us, and we're going to keep driving that.

Monish Patolawala:

Thanks.

Mike Roman:

To wrap up, we are focused on creating value for customers and shareholders in a challenging environment. We will continue to take actions to improve our performance, control costs and drive simplification while building 3M for the future. Thank you for joining us.

Bruce Jermeland:

Thank you, and good morning, everyone, and welcome to our third quarter earnings conference call. With me today are Mike Roman, 3M’s Chairman and Chief Executive Officer; Monish Patolawala, our Chief Financial and Transformation Officer. Mike and Monish will make some formal comments and then we will take your questions. Please note that today’s earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3m.com. Please turn to slide two. 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 appendix to these slides and in the attachments to today’s press release. With that, please turn to slide three, and I will now hand the call off to Mike. Mike?

Monish Patolawala:

Thank you, Mike, and I wish you all a very good morning. Please turn to Slide 4. Overall, the 3M team delivered third quarter sales and operating margins that were very much in line with my comments at a conference in mid-September. With some puts and takes, as consumer and consumer electronics demand declined as the quarter progressed, while industrial end markets demand remained steady. Third quarter total sales were $8.6 billion or down 3.6% year-on-year, which included headwinds of 5.1% of $450 million from foreign currency translation and 50 basis points of $50 million from the divestiture of Food Safety, along with the deconsolidation of Aearo Technologies. On an organic basis, third quarter sales increased 2% versus last year. This result includes an anticipated falloff in disposable respirator demand, which negatively impacted organic sales by approximately $130 million or 1.4 percentage points. Excluding this decline, Q3 organic sales growth was 3.4%. On an adjusted basis, third quarter operating income was $1.9 billion, with operating margins of 21.5%, which were up 40 basis points year-on-year and 50 basis points sequentially. Adjusted earnings for the quarter were $2.69 versus $2.58 last year. Turning to the components that impacted third quarter operating margins and earnings year-on-year performance. As you may recall, during our Investor Day this past February, we laid out our operating framework and operating principles that included daily management, data democratization, transparency and accountability. We continue to make progress in the consistency of application of this framework. By embracing these principles, along with taking self-help actions, the team executed well in the quarter as we continue to navigate the fluid and uncertain macro and geopolitical environment. We continue to focus on serving our customers and drive additional actions, including recovering our sales backlog in China from the April and May COVID-related lockdowns, implementing appropriate selling price actions to address ongoing inflation, maintaining strong spending discipline, implementing targeted productivity actions to adjust businesses to end market demand trends while driving simplification and continuing to invest in growth, productivity and sustainability to ensure we are all well positioned for long-term success. These actions helped to more than offset a number of headwinds in the quarter, including the decline in disposable respirator sales, which negatively impacted Q3 operating margins by 30 basis points and earnings by $0.07 a share; incremental end market softness particularly in consumer electronics, along with oral care and consumer retail in the U.S. as persistent inflationary pressures are slowing consumer spending; ongoing global supply chain challenges and raw material constraints; and finally, geopolitical impacts, particularly Russia, which was a year-on-year headwind of $50 million to revenue and $0.03 to earnings per share. In total, our operating framework and self-help actions resulted in an overall net benefit to operating margins of 2.9 percentage points and $0.41 to earnings. Moving to raw material and logistics inflation. As I have noted over last several quarters, inflationary pressures remain persistent and are broad-based. Therefore, we continue to experience year-on-year headwind with a Q3 cost increase of approximately $225 million or a negative impact of 2.6 percentage points to operating margins and $0.31 to earnings. Our full year raw materials and logistics inflation estimate of $750 million to $850 million remains unchanged. And as we have said before, we continue to expect to offset this through pricing actions. The strength of the U.S. dollar continued to affect total revenue as foreign currency translation was a negative 5% impact. As a result, we had a benefit of 10 basis points to margins, however, incurred a headwind of $0.12 to earnings per share. As Mike mentioned, we have been actively managing our portfolio. On September 1st, we closed the Food Safety divestiture, resulting in approximately $1 billion in consideration received, along with reducing outstanding share count by 16 million via an exchange offer. However, we lost one month of sales and income from Food Safety in the quarter. Therefore, the lost sales and income from food safety, along with the deconsolidation of Aearo Technologies resulted in a year-on-year headwind of $0.02 to earnings per share in the quarter. Finally, other financial items increased earnings by a net $0.15 per share year-on-year, driven equally by benefits from a lower share count along with a lower-than-expected tax rate. The lower third quarter adjusted tax rate was primarily the result of favorable outcomes from prior year audit settlements and geographic income mix. Looking at the full year, we now expect our adjusted tax rate in the range of 17.5% to 18.5% versus 18.5% to 19.5% previously. Please turn to Slide 5. Third quarter adjusted free cash flow was $1.4 billion, with conversion of 88%, an improvement from first half performance as we drive working capital intensity, including improved inventory levels, while also increasing CapEx for growth and sustainability investments. We remain focused on working capital improvement as we continue to navigate through a fluid supply chain environment. Even though the environment remains challenging, we are realizing benefits from our efforts as we leverage the use of data and data analytics to reduce inventory levels through better demand planning and optimized customer payment terms. We expect to continue to realize benefits from our actions as we move forward. Capital expenditures were $435 million in the quarter and $1.2 billion year-to-date are up 19% year-on-year as we continue to invest in growth, productivity and sustainability. Based upon the current status of supply chains and pace of projects, we now expect full year CapEx investments in the range of $1.75 billion to $1.85 billion. During the quarter, we returned $1 billion to shareholders through the combination of cash dividends of $850 million and share repurchases of $155 million. On a year-to-date basis, we returned $3.5 billion to shareholders, including $2.6 billion in dividends and $900 million in share repurchases. In addition, we reduced our outstanding share count by $16 million via an exchange offer associated with the Food Safety divestiture. Both dividends and share repurchases remain important pillars of our capital allocation strategy. We continue to see the current value of the stock as a very attractive opportunity and have resumed share repurchase activity following the Food Safety divestiture. Having a strong balance sheet and capital structure remains a priority for 3M, because of the flexibility it provides us to continue to invest organically in the business, pursue strategic M&A opportunities and return cash to shareholders while navigating legal matters. Net debt at the end of Q3 stood at $12.1 billion, down 3% year-on-year and down over 30% since 2019. Please turn to Slide 7 for our business group performance for Q3. I will start with our Safety and Industrial business, which posted sales of $2.9 billion or up 1.7% organically compared to last year’s third quarter. This result included a year-on-year headwind of approximately $130 million due to the ongoing decline in demand for disposable respirators. Excluding disposable respirators, Safety and Industrial posted Q3 organic growth of over 6%, driven by broad-based performance along with the backlog recovery in China from the April and May COVID-related lockdowns. Our Personal Safety business declined low double digits organically, primarily due to the decline in COVID-related disposable respirator demand. Turning to the rest of Safety and Industrial, organic growth was led by low-teen increases in both automotive aftermarket and roofing granules. Electrical markets and abrasives grew high-single digits, while closure and masking systems and industrial adhesives and tapes delivered mid single-digit growth. Operationally, the Safety and Industrial team drove strong execution during the third quarter, delivering adjusted operating income of $673 million, up 8% versus last year and up 7% sequentially versus Q2. Adjusted operating margins were 23.2%, up 2.5 percentage points as the team managed inflation with price actions drove yield and efficiency, and exercise strong spending discipline. The Safety and Industrial Business Group continues to focus on investing for the future, including in digital platforms such as repair stack for connected automotive body shops and sustainable platforms like thermal barriers for auto electrification. Moving to Transportation and Electronics, which posted sales of $2.2 billion or up 3% organically compared to last year. Overall growth was benefited by COVID-related backlog recovery in the Greater China region, which was partially offset by increased weakness in consumer electronics demand, along with the continued constraints in the semiconductor supply chain. Our electronics-related business declined mid-single digits organically, with decreases across consumer electronics, particularly smartphones, tablets and TVs. These declines were partially offset by continued strong demand for our solutions in semiconductor, factory automation and automotive end markets. Organic sales in our auto OEM business were up 21% year-on-year, as compared to an estimated 27% increase in car and light truck builds. As you may recall, we outperformed last year’s Q3 build rate by nearly 20 percentage points as we benefit from a channel inventory build, which was unwound in Q4 last year. Turning to the rest of Transportation and Electronics. Commercial Solutions grew organically high single digits, while Advanced Materials grew mid-single digits and Transportation Safety was down low single digits. Despite the continued fluid end market environment, the Transportation and Electronics team delivered strong operating performance. Third quarter operating income increased 9% to $474 million, with operating margins of 21.2%, up 2.5 percentage points year-on-year. Operating margins were benefited by price actions as we navigated inflationary pressures along with the strong spending discipline. The Transportation and Electronics business group is investing to solve some of the toughest challenges in the market and executing for future growth. For example, in Q3, we opened a new battery component testing lab to support accelerating opportunities in automotive electrification. Looking at our Healthcare business, which delivered Q3 sales of $2.1 billion, with organic growth of 1.7% versus last year’s strong 8% comparison. Our Medical Solutions, Food Safety, Separation and Purification, and Health Information Systems businesses all increased low-single digits organically. While we did have organic growth in Separation and Purification year-on-year, Biopharma was down in the U.S. due to last year’s strong demand for COVID therapeutics. Third quarter elective medical procedure volumes were approximately 90% of pre-COVID levels as we saw activity dip in July and ramp back up as we went through the quarter. Fourth quarter procedure volumes are currently projected to be 90% to 95% of pre-COVID levels as labor shortages continue to impact the pace of recovery. Oral care was down mid-single digits against low double-digit growth from a year ago. We are also seeing softening due to the ongoing inflationary pressures impacting consumer spending on discretionary oral care and orthodontic procedures. Healthcare’s third quarter operating income was $452 million, down 11% year-on-year. Operating margins were 21.8%, down 1.7 percentage points with adjusted EBITDA margins of over 29%. Year-on-year operating margins were impacted by increased raw materials and logistics costs along with manufacturing productivity headwinds. These impacts were partially offset by price actions and spending discipline. The Healthcare business group is focused on delivering innovation, including investments in the launch of 3M Filtek Matrix, which creates a new and innovative approach for dental restorations, simplifying the procedure and enabling more natural tooth structure to remain. In addition, the team made capital investments to support manufacturing capacity expansion in the Separation and Purification, and Medical Solutions business. Lastly, our Consumer business posted third quarter sales of $1.4 billion or up 1.5% year-on-year on an organic basis versus last year’s 8% comparison. Year-on-year growth in the third quarter was led by Consumer Health and Safety, which was up mid-single digits organically, and Stationery and Office and Home Care, which both grew low single digits. Home improvement growth was down low single digits organically versus last year’s strong comparison, however, increased mid-teens sequentially. The back-to-school season was softer than expected as consumer spending continues to be impacted by ongoing inflationary pressures, along with retailers aggressively addressing elevated inventory levels. Looking ahead, we anticipate these impacts to continue throughout the upcoming holiday season. Consumer’s third quarter operating income was $299 million, down 3% compared to last year with operating margins of 21.3%, down slightly year-on-year. Our Consumer business operating margins benefited from selling price actions, spending discipline and restructuring actions. These benefits were more than offset by increase in raw materials, logistics and outsourced hardgoods manufacturing costs and manufacturing productivity headwinds. The Consumer business group is executing for future growth, including expanding our Command platform to help consumers hang, organize and decorate in even more creative ways. Please turn to Slide 9 for a discussion on our 2022 outlook. The macro environment remains uncertain with mixed trends and signals across geographies and end markets. While we are working through these challenges and taking actions, we are updating our full year guidance, reflecting our year-to-date performance, increasing U.S. dollar trend along with the continued fluid environment. Our updated 2020 to full year outlook includes; organic growth in the range of 1.5% to 2% versus a prior range of 1.5% to 3.5%; adjusted earnings in the range of $10.10 to $10.35 versus a prior range of $10.30 to $10.80, which includes an additional headwind of $0.15 per share from foreign currency exchange compared to just three months ago; and adjusted free cash flow conversion to be in the range of 85% to 95% versus our prior range of 90% to 100%. Before I wrap up, let me make a few comments regarding the fourth quarter. First, from an end market perspective, GDP and IPI continue to moderate with current Q4 estimates of 1.4% and 2.2%, respectively. We are closely monitoring the geopolitical environment in Europe and the impact on energy inflation and end market demand. Auto build rates are currently estimated to be up 2% year-on-year, while consumer electronics demand is expected to remain soft. Healthcare elective procedure and oral care volumes are expected to be in the range of 90% to 95% of pre-COVID levels. And lastly, we anticipate continued inflationary impacts on consumer spending, along with the inventory reduction actions at retailers. Therefore, looking at the fourth quarter, we expect total sales to be in the range of $7.9 billion to $8.2 billion. This includes organic growth in the range of 1% to 3%, which includes a 2% headwind or $150 million to $200 million from the continued decline in disposable respirator demand, and the exit of Russia, which will create a year-on-year headwind of approximately 80 basis points or approximately $70 million. Excluding the impact from these two items, Q4 organic growth is estimated to be nearly 4% to 6%. Increasing U.S. dollar strength is anticipated to be a year-on-year headwind of approximately 7% of sales or roughly $600 million. The divestiture of Food Safety and deconsolidation of Aearo Technologies will result in a Q4 headwind of approximately $120 million to sales of 1.5%. Turning to raw materials and logistics costs, we anticipate a Q4 year-on-year headwind of approximately $100 million to $150 million, which we expect to be able to navigate and offset the price actions. Operating margins are expected to be in the range of 20% to 21%. And finally, our outstanding share count is currently anticipated to be in the mid-550 million share range, taking into account the $16 million share count reduction that I mentioned earlier. Looking ahead to 2023, while we are in the early stages of working through our plan, we see some items impacting us this year that will continue into next year, while some challenges may ease. We expect the macroeconomic environment to continue to moderate, while geopolitical uncertainties persist, impacting energy costs and end market demand, particularly in Europe. We are also monitoring the impact of the strong U.S. dollar, along with evolving COVID-related impacts, including on government policy response, healthcare elective procedure volumes and disposable respirator demand. Looking at end markets, we expect the pace of secular industry trends to accelerate, particularly in automotive, electronics, safety, digitization and sustainability. Each of these markets have tremendous opportunities for long-term growth, as we continue to innovate and invest in these areas. Raw material, logistics and labor inflation are starting to show some signs of moderation, and we are starting to see some evidence of global supply chain stabilization. As Mike mentioned, we believe manufacturing and supply chain operations are our greatest opportunity to reduce costs and increase productivity to drive improvement in operating margin performance. While significant uncertainty is expected to remain, we are focused on serving customers and executing our operating framework and operating principles. We are prepared and will adjust as warranted, and take necessary self-help actions to deliver long-term value for all our stakeholders. And finally, we are also working on ensuring we execute well on our Healthcare spin to create two leading world-class companies. As always, there is more we can do and will do. To wrap up, I want to thank our customers and suppliers for their partnerships and the 3M employees for their hard work and dedication as they continue delivering for our customers. That concludes my remarks for the third quarter. With that, we will now take your questions.

Scott Davis:

Hi. Good morning, Mike and Monish and Bruce. Thanks for taking my questions.

Monish Patolawala:

Hi, Scott.

Scott Davis:

You guys were pretty clear about the end market outlook and stuff. Can you just take a step backwards and walk around the world, just by region on where things are getting kind of better or worse or where are things coming in a little bit better or worse than expectations. And I guess the onus of the question is that some of the results we have seen so far have been a little bit better in Europe and China than expected that you guys noted some cautious comments there. But I will just stop there and let you guys give some color?

Scott Davis:

Okay. That’s super helpful. And then just to be clear, Mike, is price where you want it to be right now, are we kind of at a fairly balanced level or just cost and that’s no longer a major issue?

Scott Davis:

Okay. Super helpful. Best of luck. Thank you, guys.

Monish Patolawala:

Thanks, Scott.

Andrew Obin:

Hi, guys. Good morning.

Monish Patolawala:

Hi, Andrew.

Monish Patolawala:

Andrew, it’s a great question. As I mentioned in my opening remarks, we are still early in looking at 2023. What we are seeing is a little moderation in inflation, but it’s not been consistent and persistent. We are seeing inflation is pretty much still broad-based. In areas that we are seeing is logistics has seen some slowdown in the pace of inflation. However, if you look at intermediate finished goods, they are still pretty high and so specialty raw materials. So I would say if you just look at what inflation we had in the third quarter, it was $225 million. In the fourth quarter, we are seeing somewhere between $100 million to $150 million. So there’s a little moderation. I think what time will tell is whether 2023, we are able to see sustained lower prices and I think that would be good for all. So that’s one. To answer your question on pricing, as Mike mentioned in his remarks and mine and even the prior question, we take a very thoughtful approach to pricing. Nearly 70% of our pricing is -- our products are pretty much spec in products. So we take a very thoughtful approach. We look at it region by region. We look at it product by product. And I would say we will have to follow. We follow a very thoughtful approach. We will follow a very thoughtful approach in 2023 also, because no one has seen this historic level of inflation in the recent past. So depending on where that goes, we will play that self out in the market. But at the end of the day, as Mike mentioned, part of our pricing is not just driven by cost, it’s also the value that we drive for our customers.

Mike Roman:

No. Go ahead.

Andrew Obin:

Oh, just a follow-up question, if you look at recent stimulus that has been passed in the U.S., a lot of investment in chipset, a lot of investment on semiconductor, a lot of talk about supply chain for semiconductors, particularly things like upstream like substrate, maybe moving closer to North America. Do you guys need to sort of redo your global electronics supply chain, given what’s happening out there on the regulatory front and stimulus front and just voluntary moves in capacity globally? Thanks.

Andrew Obin:

But nothing sort of definitive at this point yet. You are still waiting...

Andrew Obin:

Thank you.