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    3M Co (MMM)

    Business Description

    3M is a diversified global manufacturer and technology innovator, operating across four main business segments: Safety and Industrial, Transportation and Electronics, Health Care, and Consumer . The company develops and sells a wide range of products, including industrial abrasives, electronics assembly solutions, and consumer bandages, leveraging its technological innovations and global reach to maintain a strong market presence . Recently, 3M spun off its Health Care segment as Solventum, which was a substantial part of its business .

    1. Safety and Industrial - Offers industrial abrasives, autobody repair solutions, and personal safety equipment, significantly contributing to the company's revenue .
    2. Transportation and Electronics - Provides advanced materials, electronics assembly solutions, and reflective signage, with strong growth observed in electronics .
    3. Health Care - Previously included health care coding software, wound care products, and filtration systems before being spun off as Solventum .
    4. Consumer - Supplies consumer bandages, cleaning supplies, and stationery, with sales affected by seasonality, especially during back-to-school periods .

    Q3 2024 Summary

    Initial Price$102.86July 1, 2024
    Final Price$137.06October 1, 2024
    Price Change$34.20
    % Change+33.25%

    What went well

    • 1. Strong growth in China market:* China represents about 10% of 3M's sales, and year-to-date, sales in China are up about 11%, driven primarily by electronics. Excluding electronics, organic growth in China is approximately 3%.
    • 2. Operational efficiency initiatives targeting significant cost savings:* 3M is focused on achieving 2% net productivity on its $13 billion cost of goods sold, which translates to approximately $260 million in annual savings and potential gross margin expansion of about one percentage point per year.
    • 3. Commitment to innovation and increasing new product introductions:* 3M's New Product Vitality Index (NPVI) is currently running at 10-11%, with plans to increase it back to previous levels of 25-30%. This indicates a renewed focus on launching fresh offerings to drive growth.

    What went wrong

    • Operational inefficiencies: 3M's machine utilization averages around 50%, which is well short of best-in-class companies, indicating significant underutilization of assets. Supplier on-time performance is in the low 70% range, and forecast accuracy is 10 to 15 points below expectations, highlighting challenges in supply chain and demand planning.
    • Declining innovation: Over a decade-long decline in new product introductions, 3M's New Product Vitality Index (NPVI) has decreased from 25-30% to just over 10-11%, suggesting an aging product portfolio and reduced competitiveness due to fewer new product launches.
    • Significant legal liabilities: 3M faces ongoing litigation related to PFAS and combat arms, with settled liabilities being higher than their total insurance value, indicating potential financial risk and limited insurance recovery prospects.

    Q&A Summary

    1. Margin Expansion Goals
      Q: Can gross margins reach high 40s from current 42%?
      A: William Brown aims to improve gross margins from the current 43%-44% to the high 40s over time. Achieving 2% net productivity on their $13 billion cost of goods sold could add about a point per year to gross margins. Despite variables like mix and PFAS exit, margin improvement is a significant focus.

    2. Capital Allocation and Buybacks
      Q: How will share buybacks proceed amid liabilities?
      A: They increased share repurchases to $700 million in Q3, totaling $1.1 billion year-to-date. With strong cash flow and no significant unforeseen liabilities ahead, they have capacity for further buybacks. Ended Q3 with $7.3 billion in cash and net leverage of 0.8x, maintaining an A3/A- credit rating.

    3. Insurance Recoveries
      Q: What's the status of insurance recoveries for PFAS and combat arms?
      A: Recovered $54 million in Q3 and over $175 million year-to-date. Active in arbitration and litigation with insurers, they expect recoveries to ramp up. Although liabilities exceed insurance coverage, additional recoveries are anticipated over time.

    4. Productivity Initiatives
      Q: What's driving the 2% net productivity improvement?
      A: Supply chain improvements are key, as half of their $13 billion cost of goods sold is supply chain. Implementing lean practices, reducing waste, and conducting continuous Kaizen events, which doubled this year. These efforts are expected to significantly boost productivity.

    5. Demand Outlook and Growth
      Q: How is demand shaping up for next year?
      A: Acknowledged that 1% organic growth isn't sufficient. Plans to accelerate new product launches, up 10% this year and aiming for a 25% increase. Improving sales execution and OTIF delivery to drive better growth into 2025.

    6. Restructuring and Margin Impact
      Q: Are restructuring efforts benefiting 2024 margins?
      A: On track with $275 million in restructuring charges for the year. Some margin improvements stem from restructuring, but productivity initiatives are laying groundwork for future gains. In early stages of operational excellence with significant opportunities ahead.

    7. Portfolio Reshaping
      Q: Any plans for portfolio changes or divestitures?
      A: Evaluating portfolio to focus on businesses leveraging technology and innovation. Considering divesting small businesses that don't fit, representing a couple of points of revenue. Further details will be shared as evaluation continues.

    8. China Sales Performance
      Q: How did China sales perform this quarter?
      A: China sales up about 11% year-to-date, driven by electronics. Mid-single-digit growth in Q3, aligning with the market. Optimistic about their position in China despite broader uncertainties.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Michael F. RomanExecutive Chairman of the BoardMay 1, 2024Michael F. Roman has been with 3M for over 35 years. He became Chairman of the Board and CEO in May 2019. He was appointed Executive Chairman of the Board effective May 1, 2024 .
    Monish PatolawalaPresident and Chief Financial Officer2023Monish Patolawala was elected President and CFO in 2023. He previously served as Executive Vice President, Chief Financial and Transformation Officer from 2021 to 2023 .
    John P. BanovetzExecutive Vice President, Chief Technology Officer and Environmental Responsibility2023John P. Banovetz was elected to his current position in 2023. He previously served as Senior Vice President, Chief Technology Officer and Environmental Responsibility in 2021 .
    Karina ChavezGroup President, Consumer2023Karina Chavez was elected to her current position in 2023. She previously served as Senior Vice President and Chief Strategy Officer from 2021 to 2023 .
    Torie ClarkeExecutive Vice President and Chief Public Affairs Officer2023Torie Clarke was elected to her current position in 2023. She worked as an independent communications and crisis management consultant from 2017 to 2023 .
    Zoe DicksonExecutive Vice President and Chief Human Resources Officer2021Zoe Dickson was elected to her current position in 2021. She previously served as Senior Vice President, Talent, Learning and Insights in 2021 .
    Peter D. GibbonsGroup President, Enterprise OperationsNovember 29, 2021Peter D. Gibbons was appointed Group President, Enterprise Operations effective November 29, 2021. Before joining 3M, he was CEO at Tirehub from 2018 to 2021 .
    Chris GoralskiGroup President, Safety & Industrial2023Chris Goralski was elected to his current position in 2023. He previously served as President of the Industrial Adhesives & Tapes Division from 2020 to 2023 .
    Bryan HansonGroup President and Chief Executive Officer, HealthcareSeptember 2023Bryan C. Hanson joined 3M as Group President and CEO of the Health Care business in September 2023. He is set to become CEO of Solventum upon its spin-off from 3M in April 2024 .
    Mark MurphyExecutive Vice President, Chief Information and Digital Officer2021Mark Murphy was elected to his current position in 2021. Before joining 3M, he was CIO at Abbott Laboratories from 2020 to 2021 .
    Kevin H. RhodesExecutive Vice President, Chief Legal Affairs Officer2022Kevin H. Rhodes was elected to his current position in 2022. He previously served as Senior Vice President and Deputy General Counsel in 2021 .
    William M. BrownChief Executive OfficerMay 1, 2024William M. Brown was appointed CEO of 3M effective May 1, 2024. He previously served as Chairman and CEO of L3Harris Technologies .
    Anurag MaheshwariExecutive Vice President and Chief Financial OfficerSeptember 1, 2024Anurag Maheshwari joined 3M as Executive Vice President and CFO in early September 2024. He was previously CFO of Otis .
    Theresa ("Teri") ReinsethInterim Chief Financial OfficerAugust 1, 2024Theresa Reinseth was appointed Interim CFO effective August 1, 2024, following the departure of Monish Patolawala. She has been 3M's Senior Vice President, Corporate Controller, and Chief Accounting Officer since April 1, 2019 .

    Questions to Ask Management

    1. You mentioned centralizing your factories and supply chains under a common leader; can you elaborate on any challenges this centralization has posed, and how it affects your ability to respond swiftly to regional market demands?

    2. With $175 million in insurance recoveries year-to-date related to PFAS and combat arms, but liabilities exceeding total insurance coverage, what is your expected total recovery, and how will remaining liabilities impact future financial results?

    3. Your new product vitality index has declined to around 10-11%; what specific actions are you taking to boost innovation and increase this metric, and when do you anticipate seeing tangible results in the market?

    4. Operating equipment efficiency in your largest facilities is averaging 50%, well below best-in-class levels; what precise initiatives are you implementing to improve OEE, and what targets have you set for operational improvement timelines?

    5. Considering the slowdown in China's economy and geopolitical tensions, how are you adjusting your strategy in the region to mitigate risks, and what impact do you foresee on your sales and operations in China, which currently accounts for 10% of your revenue?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateNovember 2018
    End Date/DurationNo pre-established end date
    Total additional amount$10 billion
    Remaining authorization$3.1 billion
    DetailsSupports stock-based employee compensation plans and other corporate purposes

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Full Year 2024 Adjusted Organic Growth: Approximately 1%.
      2. Full Year Adjusted Operating Margins: Up 250 to 275 basis points.
      3. Earnings Per Share (EPS): Range of $7.20 to $7.30.
      4. Adjusted Free Cash Flow Conversion Performance: 100% plus .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Earnings Guidance: Range of $7 to $7.30 per share.
      2. Adjusted Operating Margins: Increase by 225 to 275 basis points.
      3. Adjusted Organic Growth: Flat to up 2%.
      4. Nonoperating Expense: Range of $50 million to $75 million.
      5. Corporate and Unallocated Sales: Sales range of $225 million to $275 million; operating loss of $125 million to $175 million.
      6. Restructuring Charges: $250 million to $300 million.
      7. Tax Rate: Around 19% for the second half .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Organic Growth: Flat to up 2% or up 1% to 3%.
      2. Adjusted Operating Margins: Expand by 200 to 275 basis points.
      3. Adjusted EPS: Range of $6.80 to $7.30 per share.
      4. Free Cash Flow Conversion: 90% to 110% post spin.
      5. Foreign Currency Impact: 1% headwind to sales.
      6. Commercial Agreement with Solventum: 75 basis point benefit to sales.
      7. Restructuring Charges: $250 million to $300 million.
      8. Other Expense Net: $75 million to $100 million.
      9. Adjusted Tax Rate: 19% to 20%.
      10. Corporate and Unallocated Net Operating Loss: $125 million to $175 million.
      11. Sales by Business Group:
        • Safety and Industrial: Flat to up low single digits.
        • Transportation and Electronics: Up low single digits.
        • Consumer: Down low single digits .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted Sales: Approximately $7.6 billion for Q1 2024.
      2. Organic Growth: Flat to plus 2%; excluding certain impacts, 1% to 3%.
      3. Earnings Per Share (EPS): Range of $9.35 to $9.75.
      4. Operating Margins: 19.5% to 20% for Q1 2024.
      5. Adjusted Tax Rate: 18.5% to 19.5%.
      6. Free Cash Flow Conversion: 95% to 105%.
      7. Restructuring Benefits: Margin expansion of 75 to 100 basis points.
      8. Standup Costs for Health Care Spin: $0.07 to $0.08 in Q1 2024 .