Q4 2023 Summary
Published Jan 10, 2025, 5:10 PM UTC- 3M is entering 2024 with strong momentum and is focused on improving operational performance to deliver sustainable margin and cash flow expansion.
- The company is optimizing its portfolio by exiting low-growth areas (about 5% of the consumer portfolio) to focus on higher-margin, higher-growth opportunities, which is expected to drive improved growth and margins in the long term.
- 3M anticipates earnings per share of $9.35 to $9.75 per share in 2024, with continued strong margin expansion and strong cash flow, supported by its investments in R&D and capital expenditures, and management of working capital.
- 1. Potential shareholder dilution due to legal settlements:* 3M may choose to issue equity to satisfy $1 billion in payments related to the Combat Arms Earplug settlement, which could dilute existing shareholders. The company stated, "There would be a difference in GAAP shares outstanding versus adjusted shares outstanding if we decide to exercise this option to issue equity."
- 2. Incremental costs impacting earnings due to the spin-off of the health care business:* 3M is incurring $0.07 to $0.08 per share of incremental costs in Q1 2024 to stand up the health care business ahead of the spin-off. These costs contribute to a sequential decline in EPS from Q4 to Q1.
- 3. Exiting PFAS manufacturing without recovering asset value:* 3M is committed to exiting PFAS manufacturing by the end of 2025 and will not sell or transfer equipment or license intellectual property, potentially leading to a loss of future revenue and no recovery of asset value. The company stated, "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."
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Restructuring Program Impact
Q: Why aren't restructuring benefits matching costs in '24?
A: Management explained that while the restructuring program remains on track to achieve $700 million to $900 million in annual run-rate savings upon completion, they expect incremental benefits of $150 million to $250 million in 2024 versus costs of $250 million to $350 million. The difference is due to necessary investments and timing; benefits will continue into 2025 and beyond. -
Health Care Spin-Off Costs
Q: Are stand-alone health care costs included in guidance?
A: Yes, the guidance assumes Health Care remains part of 3M, even though the spin is on track for first half 2024. Additional costs incurred to stand up the Health Care business, approximately $0.07 to $0.08 per share, are included and impact margins. Post-spin impacts will be detailed at an Investor Day. -
Margin Outlook
Q: What's the margin outlook for 2024 and Q1?
A: For 2024, operating margins are expected to expand by 75 to 100 basis points, including restructuring benefits and costs. In Q1, margins are anticipated to be up 250 to 300 basis points year-over-year excluding restructuring costs. -
Free Cash Flow Guidance
Q: Why is free cash flow declining in '24 guidance?
A: The company forecasts free cash flow of about $5.3 billion for 2024, down from $6.3 billion in 2023. Management attributes the decline to continued investments in growth, productivity, and sustainability, emphasizing commitment to organic growth. -
Geographic Prioritization Impact
Q: What's the impact of moving to export model in 30 countries?
A: The shift affects approximately 100 basis points of company revenue, with 60% from product portfolio optimization and the rest from geographic prioritization. While revenue faces headwinds due to lower pricing through distributors, it improves margin rates since these countries had lower-than-average margins. -
Working Capital Management
Q: Can you sustain lower inventory levels if demand rises?
A: Management believes that through supply chain improvements and digital tools, they can continue to reduce inventory levels while being ready to meet increasing demand. They view working capital as a continued source of cash generation. -
PFAS Exit Plans
Q: Will 3M produce PFAS after 2025?
A: No, 3M is committed to exiting PFAS manufacturing by the end of 2025, without selling equipment, transferring assets, or licensing intellectual property.