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    3M Co (MMM)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$90.81January 1, 2024
    Final Price$94.02April 1, 2024
    Price Change$3.21
    % Change+3.53%

    What went well

    • 3M has resolved major legal issues, including settlements of PFAS litigation and Combat Arms litigation, reducing uncertainties for investors.
    • Strong growth in key markets: Automotive electrification sales increased over 30% year-on-year in Q1, and spec-in wins in electronics position the company for future growth.
    • Committed to maintaining a competitive dividend, targeting approximately 40% of adjusted free cash flow, with potential to increase over time, aligning with industrial peers and well above the S&P 500 median.

    What went wrong

    • 3M is facing significant cash outflows due to legal liabilities, paying up to $4.3 billion this year, which may impact free cash flow and dividend sustainability.
    • The company expects annual dissynergies of $150 million to $175 million from the Health Care spin-off, potentially affecting profitability.
    • There is uncertainty regarding future strategic direction as the new CEO, Bill Brown, was not involved in formulating the current updated guidance.

    Q&A Summary

    1. Q2 EPS and Margin Outlook
      Q: Can you clarify the Q2 EPS and margin expectations?
      A: Management indicated that second-quarter EPS may be down slightly compared to Q1's $1.70, due to stock compensation and one-time charges. Restructuring charges of $250–$300 million, with 70% in the first half, will impact margins. They expect first-half margins at 47% and second-half margins at 53%, affected by Solventum-related charges and FX headwinds.

    2. Dividend Payout Policy
      Q: Will the 40% dividend payout ratio remain stable?
      A: Management stated that the approximately 40% payout ratio of adjusted free cash flow serves as a guide going forward. As earnings and free cash flow grow, they expect the dividend to increase accordingly.

    3. Restructuring Charges and Savings
      Q: What is the payback on restructuring, and are you on track for $700–$900 million savings by 2025?
      A: Management confirmed they are seeing good payback from restructuring actions. They highlighted margin expansion of 200–275 basis points year-over-year as evidence of benefits from streamlining the supply chain and reducing stranded costs. They continue to work towards achieving the targeted savings.

    4. Electronics Business Outlook
      Q: Are improved spec-ins in electronics sustainable, and is semiconductor improvement expected?
      A: Management mentioned that the second half is crucial for consumer electronics. With increased spec-ins, they are positioned to grow if the market picks up. They anticipate semiconductor demand to improve in the second half of the year.

    5. Industrial Demand Visibility
      Q: Is destocking over in industrial channels, and is demand improving?
      A: Management observed that inventory levels are reducing due to improved supply chains, but they see mixed signals in end markets. Areas like industrial adhesives and tapes show slight growth, but overall demand remains cautious.

    6. Long-term Growth Expectations
      Q: What is the expected long-term growth rate excluding Health Care?
      A: Management emphasized prioritizing investments in attractive markets and leveraging innovation for differentiated solutions. They aim to drive growth by focusing on markets with better-than-macro dynamics but did not provide specific growth targets.

    7. PFAS Exit and Alternatives
      Q: Will 3M participate in PFAS alternatives, and how is the product pipeline?
      A: Management is committed to exiting PFAS manufacturing by the end of 2025. They are working with customers to find alternative solutions and are helping engineer products without PFAS but will not move into other durable chemistries.

    8. Insurance Recoveries for Liabilities
      Q: Can you provide guidance on insurance recoveries for liabilities?
      A: Management believes they are eligible for insurance recoveries related to PFAS and Combat Arms liabilities. They have notified insurance providers and are working through arbitration for Combat Arms, but these processes take time.

    9. New CEO's Involvement in Guidance
      Q: Has Bill Brown been involved in formulating updated guidance?
      A: Management stated that while Bill Brown has been engaged in preparation for his new role, he was not part of the decisions on the guidance provided in this earnings call.

    10. Adjusted Free Cash Flow Definition
      Q: How do you define adjusted free cash flow for dividend calculations?
      A: Adjusted free cash flow excludes items like litigation expenses, PFAS-related costs, and costs to spin off Solventum from GAAP results. This adjusted figure is used to determine the 40% dividend payout ratio.

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