Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for scanning body.
Welcome to these three <unk> first quarter earnings conference call.
During the presentation, all participants will be they listen only mode.
Afterwards, we will conduct a question answer session.
At that time, if you have a question. Please press the one follow up at a 400 telephone keypad.
It is recommended that she was a one like phone if you're going to register for questions.
As a reminder, this conference is being recorded Tuesday April 28 2020.
I would now like turn the call over to Bruce terminal and Vice President of Investor Relations at three yet.
Thank you and good morning, everyone welcome to our first quarter 2020 business review.
With me today or Mike Roman three inch Chief Executive Officer.
Nick Gang said, our Chief Financial Officer.
Mike and Nick will make some formal comments and then we'll take your questions.
Please note that todays earnings release in slide presentation accompanying this call are posted on our Investor Relations website.
I had three M dot com under the heading quarterly earnings.
Please turn to slide two.
Before we began let me remind you of the dates for upcoming 2020 quarterly earnings Conference calls.
Which will be held on July 28 in October 27.
Also please note given the uncertainty related to the coal that 19 pandemic, we have not set a date for an investor meeting later this year.
Please take a moment to read the forward looking statement on slide three.
During today's conference call will make certain predictive statements that reflect our current views about 300 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 one eight 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.
Finally throughout today's presentation 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 note we have provided segment in total company adjusted EBITDA reconciliations for reference.
In today's press released attachments as part of our non-GAAP measures.
Please turn to slide four Oh handed off to Mike.
Mike.
<unk>.
Thank you Bruce Good morning, everyone I Hope you and your families are safe and I. Thank you for joining us.
Let me also take this opportunity to say how much we appreciate and admired everything our ROIC nurses doctors and first responders around the world are doing to fight called at 19.
And I'd like to share this sentiment with our employees and this unprecedented time I could not be more proud of how you have stepped up to help protect those on the front lines at this crisis.
I would like to also recognize those three hours in our manufacturing and distribution sites. When these most challenging circumstances continued to work around the clock to accelerate production of respirators and other critical supplies.
Thank all of our people for your tireless efforts and your incredible work.
At three M., we have a unique and critical responsibility and pandemic preparedness and response.
Response throughout called at 19 has been guided by our purpose as an enterprise and shaped by these three principles.
First and uncompromising commitment to the safety of our employees second.
Citing the endemic with urgency from all angles.
Putting everything we're doing to help protect healthcare workers and first responders.
And third maintaining business continuity executing actions to deliver for our customers and shareholders and to lead out of the economic slowdown.
In January we mobilized three EMS crisis action team to coordinate our response to cold at 19.
This team meets daily to ensure we are addressing our highest priorities, which as I mentioned starts with protecting the safety and well being of our people.
Our learnings from China, which was impacted by the virus first helped guide our actions worldwide and made a significant difference in our ability to rapidly prepare and respond.
We moved quickly to implement remote work where possible across the enterprise.
Today, approximately half of our employees are working from home, including myself.
And our plants and other facilities, where remote work isn't feasible, we have instituted robust safety protocols.
These include stringent cleaning and medical screening along with staggering chefs and reorganizing how we work to increase social distancing.
[noise] Cobot 19 is impacting all of us both professionally and personally.
But for some it's much more serious than others.
Three hammers personally affected by the virus, we have implemented endemic support policies to help protect their pay and benefits and allow them to take care of themselves and their families.
The situation is changing daily sometimes hourly and we will continue to assess the safety of our people and facilities to ensure their wellbeing and comply with government directives.
Please turn to slide six.
As we protect our own employees, we continue to work urgently to protect the public.
Including healthcare workers and first responders.
Three I'm as a long time leader in personal safety with a range of science based solutions for respiratory face hearing and fall protection.
Which goes to the heart of our vision of improving every light.
This includes our and 95 respirators, which three m. pioneered nearly 50 years ago, and which we have continuously refine and improved ever sets.
Our largest production about 95 respirators is in the U.S. at two plants in South Dakota and Nebraska.
And we also manufacture them in Asia Pacific Europe, and Latin America.
After Sars and the early 2000, we made the decision to prepare for future crises.
Vesting and significant surge capacity at each of our respirator plants around the world.
This additional capacity has largely remained idle for the last two decades.
Except for emergency such as H, one N one the Japanese tsunami and wildfires in California in Australia.
As you know compared to prior emergencies Cobot 19 has caused an unprecedented explosion in demand.
When the virus broke out we were able to immediately activate our surge capacity and maximize production to support the public health response.
Beginning in January three M. doubled our global output of and 95 respirators to 1.1 billion per year or about 100 million per month, including 35 million per month in the U.S.
We've made additional investments and are also working with the department of defense double annual production once again to 2 billion by the end of this year with additional capacity already beginning to come online.
In the U.S., we will be producing and 95 respirators at a rate of roughly 50 million per month in June.
40% increase from current levels.
We're also partnering with other companies on innovative solutions to protect those on the front lines.
In collaboration with multiple sterilization companies, we have introduced new methods for hospitals to safely clean and reuse there and 95 respirators.
We're also working with Ford and Commons to expand production of three EMS powered error purifying respirators.
With a plan to increase capacity by tenfold within the next 60 to 90 days.
Protecting people in this crisis is not just a three m. challenge, it's an industry wide challenge each.
Even with three items accelerated production. The stark reality is that global demand for respirators far outpaces, the ability of the entire industry to deliver.
That is why as we urgently expand capacity, we're also prioritizing and treat measuring our supplies to the most critical needs.
We move quickly within days of regulatory approval to redirect more than 90% of our respirators into health care.
With the rest deployed to other critical industries, such as energy and food.
Within individual regions in countries, we are working with government agencies, such as FEMA and distribution partners to identify and serve hot spots.
In addition, as the pandemic unfolds in different stages globally, we're working with governments to address trade restrictions and regulatory standards. So we can redirect supplies around the world.
For example in early April three I'm in the U.S. government announced a plan to import 166 million respirators, primarily from our plant in China.
$20 million up these respirators have already shipped via the FEMA Air Bridge with a total of 40 million expected by the end of this month.
This would not have been possible without the partnership of the White House I.
I would like to thank the president and his team for their leadership.
Yeah, D.A. for extending its emergency use authorization.
And FEMA for their work and expediting the import a product to the U.S.
This plan is enabling us to maximize support for the U.S. and other areas in urgent need, including Europe, Central and Latin America and Canada.
We also continue to aggressively fight fraud price gouging and other illegal and unethical activity three I'm has not and would never raised prices as a result of this crisis.
And we are executing a multi prong strategy to pursue and deter unscrupulous behavior that is causing real harm to the public.
We created a fraud hotline.
Published our list prices for and 95 respirators and are collaborating closely with partners to ensure that supply chains are secure.
Well virtually all of those engaging and predatory practices have no relationship with three M.. We have in a few instances terminated distributors in our industrial channel for acting unethically or in violation of their agreements.
We have also file multiple lawsuits and continue to make referrals to law enforcement take down counterfeit websites and remove deceptive social media posts.
Beyond personal protective equipment three M. science is leading the fight against Cobot 19 in other significant areas as well.
We are providing biopharma filtration and purification solutions to support the development of vaccines and therapeutics, including multiple drugs in current trials.
Our advanced membrane technology is being utilized in blood oxygenation procedures and medical devices.
Vital treatments for some of the sickest patients.
We are helping hospitals in New York City and elsewhere quickly connect their temporary facilities.
And our providing leading software and coding solutions at no cost during this critical period of time.
Enabling frontline workers to better manage the surge inpatient volume.
Three M. has also donated $20 million to support healthcare workers honorable populations and scientific research.
In summary, I'm proud of all three I'm is helping lead the fight against covert 19.
And we have launched a comprehensive web site on three M. dotcom with more details on a response and other valuable information.
Please turn to slide seven.
Three I'm is leading from a position of strength.
And then these challenging times the benefits of our business model have never been clear.
We are science and manufacturing powerhouse with strong capabilities and brands across the world with our greatest capabilities here in the United States.
In the U.S., we have nearly 80 manufacturing plants and distribution centers anchoring communities and 29 states across the country.
Three M. has never left her home country and has continuously expanded our U.S. capabilities.
Over half of our research and development and capital investments are in the U.S.
And every year, we export $5 billion and goods to other nations from our robust U.S. manufacturing base.
At the same time over the decades, we've also built out robust capabilities around the world to be close to customers and better server unique needs of regional and local markets.
These global capabilities include plants and distribution centers and 54 countries.
Along with three global R&D centers, and Asia and Europe.
And this crisis, our model has enabled us to respond with agility and at scale, including the rapid deployment of personal safety equipment that we just talked about.
It is also enabling us to maintain business continuity continue to serve our customers and ensure the integrity of our supply chain, which brings me to slide eight.
I am pleased how our team is managing through the pandemic and adjusting our operations to the realities of this fast changing situation.
This includes working closely with our customers to modify our supply and demand plant.
Our critical sites are fully operational so we have implemented some targeted plant or line shutdowns due to weak customer demand our government mandates.
Overall as of late April roughly three quarters of our plants and distribution centers remain fully or partially operational.
And to support three hammers impacted by shutdowns, we have implemented a short term paid furlough program.
And this crisis I'm, especially encouraged that the benefits we are seeing from the new global operating model, we rolled out at the start of this year.
As part of our new model, we consolidated manufacturing supply chain and customer operations into a seamless end to end enterprise operations organization.
This team is enabling us to maintain strong customer service.
Streamline decision, making and adjust faster than ever to the external environment.
As an example, we've reduced our production planning cycle times by 70% across our portfolio of businesses.
In addition, our new corporate Affairs organization has increased our collaboration with governments around the world.
While enhancing our employee and community engagement.
Beyond our operations. We are also executing financial actions to deliver 2020.
And set us up for success in 2021 and beyond.
We are maintaining critical investments inorganic growth through R&D, including and personal safety and other priority areas.
At the same time, we are aggressively managing costs.
Continuation of our relentless focus on efficiency and productivity improvements.
We have already implemented sharp spending reductions, including a global hiring freeze limiting our use of temporary contract workers and cutting indirect costs across the enterprise.
In total we expect these reductions to result in cost savings of 350 to 400 million in the second quarter.
We're also adjusting capex plans as we delay or experienced slowdowns in certain projects.
And we have suspended our share repurchase programs as of March twentyth.
Importantly, we remained committed to our dividend as a high priority for capital allocation.
Overall these steps will help protect our company as we manage through this uncertain period, and we're prepared to respond with additional actions as needed.
Please turn to slide nine.
Given the diversity of our businesses the financial impact of coded 19 is mixed across three yeah.
Some areas of our portfolio are experiencing high demand, while others are facing steep declines.
In the first quarter, we saw strong growth in personal safety as well as in other areas such as home improvement retail cleaning products food safety and Biopharma filtration.
At the same time, we saw a weak demand and several other end markets with the biggest slowdowns in oral care automotive aerospace and general industrial.
The slowdowns in these markets accelerated in the second half of March as many countries began to shut down their economies.
With respect to geographic trends, we saw mixed performance across Asia Pacific with significant declines early in the year and gradual improvement in March.
The Americas held steady through most of the quarter with the U.S. up 4%.
So beginning in mid March we saw significant deceleration in both the Americas EMEA.
All in we delivered organic growth company wide of 30 basis points.
Along with adjusted earnings of $2 in 16 cents per share solid margins of 21% and a double digit increase in cash flow.
In summary, I'm confident in our ability to lead through this crisis and emerge even stronger.
Our execution against our four strategic priorities portfolio transformation innovation and people and culture has positioned us well leading into this downturn.
Going forward and a continued focus on these priorities combined with the actions, we're taking will enable us to deliver even greater value for our customers shareholders and all stakeholders as the economy recovers.
That wraps up my opening comments I'll come back to discuss our guidance. After Nick takes you through the details of the quarter Nick.
Thank you, Mike and good morning, everyone, let's start on slide 10, and review the first quarter TNL highlights.
Companywide first quarter sales were $8.1 billion with adjusted operating income of $1.7 billion and adjusted operating margins of 20.8%.
On the right hand side of this slide you see the components of our margin performance in the first quarter.
Solid underlying productivity in the quarter.
Along with benefits from our Q2 2019 restructuring actions contributed 40 basis points to the margins.
This result includes kovac 19 related asset write downs, which negatively impacted margins by 40 basis points.
Acquisitions, and divestitures combined reduced margins by 90 basis points.
This impact is primarily due to the integration and amortization costs associated with our acquisition of a salad.
Higher selling prices, along with lower raw material costs together contributed 40 basis points to first quarter margins.
And finally foreign currency net of hedging impacts reduced margins by 40 basis points.
Let's now turn to slide 11 for a closer look at earnings per share.
First quarter adjusted earnings were $2 in 16 cents per share down 3% year over year.
Looking at the components of our year on year earnings performance solid productivity and benefits from Q2 2019 restructuring actions.
Increased first quarter per share earnings by seven cents.
This includes a negative four cents impact from the asset write downs related to covert 19 mentioned on the prior slide.
Acquisitions, and divestitures reduced first quarter earnings by five cents per share versus last year.
Primarily due to the a seller the acquisition.
Please note that this result includes financing costs associated with the acquisition.
Foreign currency net of hedging.
Was an eight cents per share headwind in the quarter.
Turning to tax rate, our first quarter adjusted tax rate was 20.6%.
Versus 19.5% last year.
Lowering earnings per share by three cents.
And finally average diluted shares outstanding declined 1% versus Q1 last year, adding three cents to per share earnings.
Please turn to slide 12 for a discussion of our balance sheet and liquidity.
One of the hallmarks of three M. is our strong balance sheet.
Along with our time tested business model, which generates strong cash flow through economic cycles.
As Mike mentioned, we have taken proactive steps during the first quarter to protect and enhance the companys financial flexibility in this uncertain time.
With respect to our balance sheet, we had cash and marketable securities on hand of $4.5 billion as at the end of March.
This includes $1.75 billion in additional liquidity from last month debt issuance.
We are well capitalized to meet our two upcoming debt maturities totaling $1.2 billion. This year, one in may and another in August.
Additionally, we have multiple sources of liquidity.
First and foremost a business that generate strong free cash flow.
In the first quarter, we had adjusted free cash flow of approximately $900 million with adjusted free cash flow conversion, 74%.
Also we continue to expect the drug delivery divestiture to close in the second quarter, providing approximately $400 million an after tax proceeds.
From a capital allocation perspective.
Our long term strategy remains unchanged.
Our first priority is to invest in our business and second maintaining our dividend.
And lastly, flexible deployment for M&A and share repurchases.
Well, we continue to invest in the business in the near term, we are taking actions and adjusting our 2020 capital allocation plans.
As a result, we are lowering our full year capex budget to approximately $1.3 billion.
From a range of $1.6 billion to $1.8 billion previously.
This expectation includes investing an additional $100 million to continue to expand our output of respirators.
In addition in March we suspended our share repurchase program.
And finally, we are aggressively managing discretionary spending to preserve financial flexibility.
That wraps up my prepared remarks, please turn to slide 13, and I'll hand, it back over to Mike Mike.
Thank you Nick.
Ill start by providing an update on the market trends, we're seeing so far in April.
On a geographic basis, we're seeing ongoing improvements in Asia Pacific, most notably in China, where the virus first emerged.
However, we continue to experience significant downturns in the U.S. Europe, and Latin America areas that remain in the throws of the crisis.
I can share that we're seeing a slowdown in growth during the first several weeks of Q2.
With total company organic growth through late April down in the mid teens.
We anticipate continued strong demand for respirators, which we expect to contribute approximately 150 basis points to companywide Q2 growth.
At the same time, we expect ongoing weakness in other end markets through Q2, including oral care automotive office supplies and general industrial.
Due to this end market uncertainty at this time, we are unable to adequately quantify the impacts to our business for the remainder of the year. Therefore, we are temporarily withdrawing our 2020 guidance until we have better visibility of the duration and impact of the slowdown.
At this time, we believe Q2 results will be especially challenged given the trends we have seen so far in April with revenue and EPS declines year over year.
In lieu of guidance starting in May we will provide monthly updates on how our business is performing.
And we will continue to provide us until we are better able to forecast future performance.
Please turn to slide 14.
To wrap up our strong fundamentals and position with customers across industries provides a firm foundation during this time of uncertainty.
We may not know the exact shape of the recovery, but we are well prepared for a wide range of scenarios and are taking actions to prepare us to lead out of this slowdown.
Before turning to Q in a I'd like to once again, thank all three hammers for your tremendous work and for everything you're doing and this unprecedented moment.
I'm very proud to represent three and our people around the world.
Going forward, we'll continue to do all weekend to protect our employees protect our enterprise and help the world get through this crisis.
That concludes our remarks, and we'll now take your questions.
Ladies and gentlemen, if you like to register a question using a landline phone. Please press the one follow with a four on your telephone keypad.
You will hear me three Tom promise to acknowledge request.
If your question has been answered and you would like to withdraw your registration. Please press the one over the three.
If you are using you speakerphone. Please mr. headset before entering a request. Please limit your participation to one question and one follow up.
One moment, please we compile the Q when a roster.
Our first question comes from the line of Andrew Obin with Bank of America. Please proceed.
Good morning.
Andrew.
That's great to see three and finally doing with Threea.
Always does congratulations.
Thank you.
Just first question just big picture question.
No.
In terms of your capacity additions in non Wovens specifically.
Respirators, how do you think the industry will change because you're not only want adding capacity at lots of capacity added in China. You know all the suddenly have Honeywell showing up in North America in Europe, what does that mean for competitive environment.
Two years out.
Yes, Andrew it's a little hard to look two years out, but certainly as we think about capacity expansion that we're doing today, a big part of that is and in that category of surge capacity for situations like we're facing with Covance 19, there is going to be we think a significant tail to demand.
And as you can look out there's a demand from governments from healthcare and Theres also an ongoing demand in industry as as industry comes back from economic slowdown. So we're mapping all of that into our our capacity and then we're working with governments and the department of defense in the U.S. to play.
And for capacity that will be dedicated to their needs in a pull that like price. So it's I think it's really lined up well with what we see as ongoing market and industry demand and and we're looking obviously broader than just our capacity, we're looking at the marketplace and and the capabilities and.
Yes.
And we are focusing here on and 95 and and.
Really respiratory solutions that meet those requirements. So I think it's got to a view as far as we can see it as we look out further beyond you said a couple of years out it's a it's going to depend on where we end up in those and those big end markets health care and industrial.
And just on an unrelated topic I think there were some news items I think Bloomberg reported.
With some sort of developments and the hearing protection.
Lawsuits.
Can you just get on it's interesting I guess the messages on pricing and disclosure I guess analyze if you guys actually published list for and 95, but can you just comment.
You are in terms of this hearing protection lawsuit and any comment sort of on the Bloomberg article. Thank you.
Yes, Thank you Andrew.
Let me start here three I'm has great respect for the brave men and women to protect us around the world and we have a long history of partnering with US military and we continue to be committed to making safe products. We work that in close coordination with them and three I'm did not withhold information from the government about fit and use of this product the narrative out there.
There is misleading and really lacks context. So I think it's we will defend ourselves and we deny that our product was effectively design. So I I would just say that that narrative is is very misleading.
Thank you very much and congratulations on good quarter. Thanks, Andrew Thanks, Andrew.
Thank you.
Our next question comes from the line of Deane Dray with RBC capital markets. Please proceed.
Thank you good morning, everyone, Hey, good morning trended.
Had I'd also like to add my appreciation for all the three M. has done to help healthcare workers globally and in my view, that's exactly the kind of corporate citizen, we'd expect three m. to respond and so congratulations to everybody. Thanks, Steve. Thank you.
Hey, a number of companies have in lieu of.
Considering suspending guidance they have been offerings, some scenario analysis or sensitivity in terms of how the year could play out in terms of Decrementals margins.
Can you take a stab at that and how might this all compare to the financial crisis of 2008 2009, if we use that as kind of a benchmark that we start there. Please.
Yes, Dean I'll I'll take that one first of all of course, we like I think any other company, we're going through a number of scenarios and when I don't plan to share the different scenarios. Because this is a dynamic situation couple of things I will share first of all we as as Mike noted on as we go through this call.
Quarter and until we really see a reason to change that we're going to be providing monthly revenue.
To give to give you the inside of of what's what's going on with their businesses in different geographies. In addition, you heard my talk about <unk>.
The cost saving actions that we are do that we've implemented for Q2.
And job and bait inclusive of that we expect in the second quarter that we will be seen decremental margins between 30, and 40% and now that's inclusive of the the $350 million to $400 million of a cost saving actions so between sharing the revenue.
Each month as we see it end to end our view on decremental margins. We think that gives you some insight as to what you can be expecting from us from an earnings perspective, as we are going forward.
That's helpful start and then could you also clarify census is and we appreciate getting the monthly revenue updates you just suggested we be getting it by geography will you also be sharing will it be organic and all so by segment. We think we think.
Organic is the best way to share. This net that's our plan right now.
And we do plan to be providing insights of what's going on by both business and geography.
Okay, that's going to be really helpful. So appreciate and just last question. It got decided but not clarified what would the asset write downs that where coal bed related you sized it but what were the businesses and why.
Those are within our company we have on.
What we called New ventures, where we're investing venture capital in a number of of places of emerging technologies that we think will complement to 300 business model These where some mark to market actions.
All are virtually all were felt within the court Miss miscellaneous aspect of our company.
Book, but why were those cold and related.
As a result of changes in non triggering events in terms of the value of those companies that we saw that as coded related.
Okay.
Thank you good luck and stay healthy yes sandy.
Thank you.
Our next question.
Comes from the line of Steve to sit with JP Morgan. Please proceed.
Hi, guys good morning.
Dave.
Hey, sorry, sorry, I might've missed that side busy earnings morning, but the $350 million to $450 million in costs in the second quarter.
That's a pretty big number does that is there kind of carry forward into the sorry in the second quarter does that carry forward into like the third and fourth and.
How much of that is temporary how much of that was from last year's restructuring I just unclear to me. What's included there sorry, if I missed.
Detailing it earlier in the call Im sure you did but I Miss I might've missed that thanks, Yes, Steve I'll go through a few of those details on first of all it is taking actions on a number of.
Number of components of cost structure, the first and end the biggest component as things what we internal to threem called indirect costs things that are not pay rule, where raw material cost related so travel external services.
On temporary workers targeted AD merged things like that we are we're working on bringing that spending down in line with what we're seeing happened in the external market. We've also.
Frozen.
Any new hiring.
And in the case of with employee Theres. Some parts of the world, where we have put employees on required on mandatory use of vacation. So those those are the things that are that are driving that in terms of carry forward into future quarters, I'd say, Steve. It's just volatile now that ER and flexible debt.
Some of it or much of it may carry forward, depending on what we see but not necessarily depending on the type of recovery to that three m. season in the coming in the coming quarters.
Okay. So so yet so you kind of have yet to take structural action incremental structural actually beyond what you guys did last year, which is what most companies are doing just by the way that is that's correct Steve Okay. And then one last one just on how you're approaching this environment.
The.
Inventories a lot of companies are keeping a little bit of a buffer stock have you guys.
Have you guys maintain that buffer stock or or have you continue to work out inventories from where they were last year, yes, Steve one of things I highlighted in my prepared remarks was.
How our enterprise operations, so, bringing together manufacturing supply chain and customer operations together into one organization that we launched the began the year, it's really been benefiting us in this is another area where were really I. We continue to take down days of inventory outstanding. So we do have plans to reduce inventory.
Some of it in response to slower demand some of it really taking advantage of that improved performance. So we we have targeted significant inventory reductions on both of those on both those drivers.
Okay, great. Thanks, like I appreciate the detail thanks, Steve.
Thank you.
Our next question.
Some a lot of Nigel Coe with Wolfe Research. Please proceed.
Thanks, Good morning.
No other way great idea morning, Andy on the multi sales and piece continue that Kevin.
We should have.
I'm sure you won't though.
So.
Looking at the April trends I don't see lot of companies use in April two anchor patients with GQ and beyond.
Then using China as a so the lead in Canada, So what to expect elsewhere Im just two part question here one would be.
Can you use the mid teens.
Kind of pace told us for April.
Yes, the guidepost seats, but TQ or are you seeing sequential deterioration through April which indicate that might get at the will get better and then in China.
We've seen in April which is up keybanc hedging, but how should we still this is the obviously that we should be declines we saw in February.
Yeah, Nigel maybe I'll take that.
When you look at April it's what it is our April trends to date.
I led with our outlook kinds description very fast changing a lot of uncertainty so to look beyond that trend and part of the reason we're going to give monthly updates as it's just you can't project April into May or June or or any further than what we are we are seeing right now and and I would so it will we'll update you.
As we go on that and give you better clarity month by month. When you look at China. We are seeing improvements were returning to growth in China, it's pretty broad based across our portfolio and for sure there's going to be some restocking, but we're seeing the the the economies start to show signs of recovery broadly and it's.
It's not back to normal yet, but improving as we move through April.
Okay, great. Thanks, Mike and then I think one for Nick on the on the price increase 40 basis points in the quarter I'll be constant the pricing remained positive.
Yeah, we've seen anywhere inside and outside of Asia.
Pricing I think you just amongst the market on whether we'll material benefit is right now.
20.
Yes, Nigel we.
We started the year seen our price growth that we thought would be consistent with past trends in the 40 basis points that we saw in the first quarter is very much in line.
As we look forward for the balance of this year, we were not seen any kind of material change in what we're expecting for price growth for us. We think it will stay in this zone in regards to raw materials on Nigel we at the beginning of the year, we said that we expected raw materials to be between flat to up to.
10 cents tailwind to US right now as we look at it it's going to be better than that it's going to be a more significant tailwind I'm not going to quantify it because things are dynamic enough, but we're seeing it go beyond that for benefit right now.
Okay. Thank very much get thanks Nigel.
Thank you. Thank you. Our next question comes from line of Julian Mitchell with Barclays. Please proceed.
Hi, good morning.
Maybe hey, maybe just the first question please around the health care.
Division.
Maybe just help us understand within that what you have seen so far as the puts and takes.
Hi, David and it looks like underlying margins, excluding acquisition impacts have been sort of.
Flattish in Q1 in Q4.
So just wondering if and when healthcare sales recover alongside say oral care coming back.
Should we expect good incremental margins.
Or is it just the health care is at a higher kind of level of reinvestment for the near or medium term. Thank you.
Yeah, Julian maybe I'll comment just on the business trends that we're seeing so we saw health care grow a little over 1% in first quarter was led by medical solutions and food safety.
As we got to March we saw significant slowdown in oral care and we also saw an impact from elective surgeries and a slowdown in health care and in some of our medical solutions areas as well. So those are those are some of the trends we're seeing behind that that overall gross number maybe I'll ask Nick to comment on the margin.
And your question around margins.
Yeah Julien.
Of course is the biggest thing that we're seeing from margins I in health care right now is.
He is from our higher at acquisition of a salary.
And I think you will note in the appendix, we're now providing EBITDA margins. We felt we felt that would be helpful. Given the acquisition of the salary to give one more level of information on that.
In terms of the margins that were seeing it was absent accelerated pretty close to flat and we've seen some mix impact in this in the first quarter as we've seen some parts of that business more impacted by calls it.
Hi.
And as Mike said as we go into second quarter, we will continue to see impacts on elective procedures that will be having an impact both on our growth growth and on our margin as those recover and you as we see people going back to their oral care professionals in electing to do elective procedures.
We've also seen that have the positive impact on our margin going forward.
That's helpful. Thank you and then just my second question around the safety and industrial business.
Clearly some good tailwinds from all the work being done around.
Respirators, but that may be focusing on the margins side very good margin uplift in the first quarter.
Do you think we now it at a level in that business sweat.
Given the cost cutting action some of the reorganization measures at three and.
Once we see the sales side improve in the second half of next year in industrial within that Division, we should see very good operating leverage the as well as good good sales growth.
Hey, Julian I'll I'll take that one so we have been doing a number of actions within our.
Our safety in industrial business to be enhancing the margins the things that we've been doing to make that a more efficient productive operation in part of what are what we were announcing not on our January earnings call.
When we look at work in our margins and in particular in the first quarter, that's been impacting that but I think even more importantly, we've had really good spending control going on in our safety and industrial business and that's been one of the big drivers what you see in their first quarter margin. So yes going forward if theres.
As when we return to growth, we will be seen some benefits, but but we also are seen a impact right. Now is really good disciplined spending control in that business.
Great. Thank you.
Thank you.
Our next question.
Comes from a line of Jeff Sprague with vertical research partners. Please proceed.
Thank you good morning, everyone.
Hey, good morning good.
Morning, just a a little more granularity on some of the divisional stuff.
Excuse me.
First of all safety was up looks like 7% in the quarter 60 to 60 million bucks or so.
I guess I would have expected maybe to be even stronger than that I guess the.
1.5% benefit you're talking about for Q2, I think is relative to total company sales saw it looks like you're looking for another kind of 120 million or so at a lift thought it on a year over year basis.
Is that correct and would that be kind of indicative of what you're kind of current run rate production adds for that business.
Hey, Jeff This is Bruce organically personal safety is up 14%.
Well, you're seeing for all in sales growth, we added divestiture impact from a gas and flame detection divestiture.
Which is impacting obviously total sales growth.
That's helpful. Thanks, Bruce and then.
Nick just thinking about the sources and uses of cash and thanks for your color there.
What does your view on repo should we consider it's off the table for the balance of the year is something that.
You'll be reconsidering as the year progresses and.
You know as you're going to be any requirement.
Pension as as you get towards the end of this year looking into next.
Yes, Jeff Slide eight as I mentioned earlier, where we continue to look at a number of scenarios and and.
And manage accordingly for those I think it would be fair to say that a it's a dynamic situation. So I'm not going to put a timeline of when we would be possibly back in the market with a share buyback program, but I think it's safe to say that we would want to have enough confidence in the future that we can resume guidance of what.
The paying for our financial results before we would be resuming our share buyback program.
In regards to the pension.
We started the year with a well funded pension and we.
We took on what I will call a minor hit in our pension funded status in the first quarter and right now we don't foresee any changes in our in our captive.
Allocation plans to our pension we've we've been targeting around $200 million a year to our global defined benefit pension plan and we don't see any required changes required in that pension funding going forward. So we don't or for the foreseeable future at this point, we're not seeing that change Jeff.
Great. Thank you.
Thank you our next question.
Comes from the line of Joe Ritchie with Goldman Sachs. Please proceed.
Thanks, Good morning, everyone out there all well.
Good morning job.
Yes.
Maybe touching on China to start off.
Looks like a rebound in April.
Has been pretty strong is there is there any end market specific commentary that you can provide on what's really driving the strength in.
In April.
Yes, Joe I it when I said it was broad based that we're seeing it across our business as I, maybe I'd highlight automotive is recovering and remember we had a big decline in Q1, so as we're coming off of a low point, but starting see some recovery there electronics has been leading the way too.
After our manufacturing has been strong demand for us our consumer electronics off but not not as much.
We're seeing healthcare and oral care recovering as weak as we come into April and then broader industrial and consumer as well so it really broad based across the market.
Although all the markets and businesses for us.
Got it and Mike I mean, but this that made this earlier, but as you're kind of thinking about the guided.
And clearly.
We don't have one now for the rest of the year, but like as you're kind of thinking about the trajectory.
For the U.S. in Europe, how much are you using China as it was like a guide posts from from a growth perspective for the rest of the company Yeah, I would say back to this fast changing and lots of uncertainty I I think it's encouraging what we're seeing in China, but it's it's as good as April to date for Us Big.
'cause, it's a pretty fast changing dynamic globally.
We did see as I mentioned trends on the second half a margin in the Americas EMEA down and some of the business was that we highlighted that were weaker oral care elective procedures and our medical solutions automotive general industrial those are trends that you know that we saw coming into the quarter.
We'll have to see how it plays out and get to get a little further before we can give you a better projection.
Okay give that thanks.
Yeah. Thanks show.
Our next question.
Comes from a line of Scott Davis with Melisa Research. Please proceed.
Hi, Good morning, guys. Thanks, Scott.
His comment here just as late April 75%.
Plants and distribution centers fully or partially operational what.
Is there a sense how do you compare that to past cycles said is that.
Given that you'd probably be shutting some stuff down or.
Shifts declined and stuff like that is that.
Terribly different than what you saw in late 2008 is it.
Nothing you expect to ramp up.
Any play over the summer.
So look on that please Scott I think the way to think about it is look at our sales value of production and and we.
Talked about some of the benefits of our enterprise operations way, we're operating at we're able to just more quickly and and track with our demand and make sure. Our production plans are tracking with it but remember Q1 last year was one of the things we're working on adjusting to a slowdown in end markets. We are we're shortening our cycle times to do that Saar SDLP is tracking with what you saw.
In Q1, it's tracking with what we're seeing April year to date that 75% number is kind of a view over a broader portfolio against.
End demand and and just how we're managing the factories in the middle of the Cobot crisis. So I think looking at Esso Best VLP is the way to look out and we can adapt quickly and we'll adjust as we see changes in the marketplace.
Okay. Good Mike, but can you help us understand how that might compared to past recessions if.
It doesn't have to be explicit but if you have a sense of where you were on late 2008 was it like.
On or is this I think I would probably think about as Scott as I look at the magnitude of the slowdown and it's probably similar there might be a little faster reaction to it and adaption to it now than even then but weve and living in the in 2009, we really managed our operations very quickly.
Two inline with what we're seeing in the slowdown and then back up again as the markets recovered even in the second half a year. So I think it's similar and it's one of the strength of our of our model being vertically integrated with our manufacturing that we can do those so I do give our teams credit for reducing cycle times, but this strategy in the three a model there the stress.
This is there in 2009, it's here again in 2020.
Okay Super helpful. Thanks, Good luck, guys and not stay safe and I appreciate the monthly data to so thank you. Thanks. Thanks.
Thank you.
Our next question.
Some a lot of any capital what's with Citi. Please proceed.
Good morning, guys hope you're well.
Andy Andy.
So you mentioned like you mentioned the impact from restaurateurs and the business just following up Jeff on just a question a little bit a 150 basis points, but given your ramping to 2 billion respirators, a year would seem like your impact could be more than 150 basis points. They ended the year, especially for the total pp business you do make surgical mask gallons.
That's got safety now so could you give us more color on the sizing of overall pp anymore color there would be helpful.
Well I think the 150 basis points is that's Q2, that's the way we look at it in Q2, and we are adding capacity in the U.S. coming out of Q2 in late June will get to 50 million respirators, a month, that's up 40% from where we've been running.
In coming into the quarter, and where we expect to run for much of the quarter and then are.
Increased capacity that we plan to bring on later in the year and that likely to be a Q4 impact.
Kind of.
Kind of on the business results it'll give us additional additional supply into very strong demand. So we'll see additional growth impact from that I don't have a number for you at this time, it's it's not clear the demand and how exactly the timing on when that production comes on but you can use that 35 to 50 in the U.S., which the 35 was part of $100 million.
Worldwide. So you can kind of back into maybe a 15% 15% increase on the worldwide and 95 piece of that.
Come out of two two and Andy for reference our disposal respirator business, which is largely the in 95.
Pre crisis was about 2% or a global revenue slightly less than that were around $600 million.
Got it that's helpful guys and then like I wanted to follow up on a comments on electronics I mean, you mentioned the recovery in China.
It's obviously more of a China based business for you guys, but is that business then a little more resilient. This cycle than expected. He can you give us more color and what your add to it extends you cannot expectations moving fuller between Semicon, obviously, you've got mobile devices in there what do you see in that business.
And even as we came into the year, we were starting to feel better about electronics and it was really semiconductor manufacturing demand increasing and that has held up we're seeing that and that's part of that that broader growth and return to growth in China consumer electronics, you know as Ben year over year.
A bit of a slowdown we continue to see that but overall electronics is seeing a positive uptick as as we come into Q2.
So just pushing a little bit is it out.
Now a year over year at this point in April.
April year to date or April month today, yes.
Okay. Thanks, guys, Hey, Andy I wanted just give a little just gold one level down that where we are seeing the our most significant growth in electronics in China is around fluids and semiconductor and less Phil on the consumer electronic side.
Got it thanks, Nick Yep.
Thank you.
Our next question.
Comes from a line of Nicole Deblase with Deutsche Bank. Please proceed.
Yes, thanks, good morning, guys.
The goal.
So just following up on some of the questions around the cost cutting activities that you and they're doing this year.
Does that that the 30% to 40% decremental margin assumption I assume that also includes the carryover from payback on last years restructuring actions is that correct.
Hi, when we say that 30 to 40 that also including the the year on year impact of taking those are taking those actions.
Last year, so that that is part of us being able to deliver a 30% to 40% decremental in the second quarter, Yes, that's part of it on plus the extra 350 to 400 million of cost savings were initiating in this quarter.
Okay got it thanks snack and.
As my follow up if we think about the health care because that is there a way to quantify how much of the health care business is actually being impacted by elective surgeries not taking place I'm just trying to get a sense of what part of that they.
Let's come back as Kobe cases died down and elective surgeries retired.
Medical solutions, Nicole is our is our largest business in health care and that's being impacted by elective procedures were also seeing that in our selling the business, which is part of medical solutions.
Oral care has been the more sharply impacted in demand slow down as we come out of March so that's.
Our second largest business and health care. So it's the bigger part of the impact I would say as we come into the quarter, but we would expect.
As elective procedures come back end demand there increases, we'll see the benefit of that in that medical solutions business and and so I I think it's both is the answer and and that's the expected to recover as as elective procedures come back.
Thanks, I'll pass it on.
Thanks.
Sure.
Thank you.
Our next question comes from John Walsh with Credit Suisse. Please proceed.
Hi, good morning.
Hey, John.
Hey, I'm kind of a specific question here.
In the geography of where something might move.
Looking at Slide 22, when you talk about the cell division, but.
In your prepared remarks, you talk with our low risk related.
I mean industries health or.
Consumer.
Just wondering if we absolutely.
The.
Some different behavior from consumers, whether that would show what does that actually hit the consumer.
Take me through some type of health care or would that goes through a different many of them ultimately end up you know consumers' homes.
John Thank you for four catching me on that because consumer is an important part of where we do supplier respirator solutions that reaches a broad range of customers some of them in and through our our DIY channel and so.
Small construction companies are strong customers for that but we do expect to see a demand from consumers as we move forward as well and that will show up in the in the results of our consumer business.
Yeah, John the biggest impact we're seeing is in our stationary and office business currently as people have gone remote work remotely from home on the negative side, along with obviously school shutting down.
Yes, no. Thank you that's helpful and then.
Kind of a lot of excitement that we might see some manufacturing returned to the U.S.. Obviously you highlighted on pp any there's been some discussion around life Sciences just.
Curious, what what you're hearing or seeing from some of your folks that are doing.
Pharma filtration I'm thinking about.
They are actually starting to get quotes or is it up tick activity for some of those solution.
So to that that manufacturing process, yeah, John maybe I'll start there we have seen some increased demand in our biopharma filtration I highlighted as one of the stronger demand stronger growth in in Q1, and even as we come into April.
You know when talking about manufacturing and and having supply in the U.S. We are we're a company that as we took our model overseas. We never left the U.S., we continue to manufacture in the us for the demand we have in this marketplace and and then some we have we we take advantage our strong base here and.
And our technology in the U.S. and we do export as well so our strategy and that's true around the world, but especially true in the U.S. Our strategy is to just to locate our manufacturing and supply chains close to customers to be able to serve them regionally and that's true of respirators and it's true of of health care products and as drew a biopharm.
Great Thanks to the color.
Thanks, John.
Thank you.
That concludes the question answer portion of our conference call I will now turn the call back over to Mike Roman for some closing comments.
To close I'm incredibly proud of how are people are helping lead the response to covert 19 and managing through this uncertain time going forward. We will continue to be guided by the three principles I laid out at the beginning of my remarks, protecting our employees fighting the pandemic from all angles and maintaining business continuity, while positioning three m. to lead out of the.
Slowdown and deliver for our employees customers and shareholders. Thank you for joining us.
[noise], ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask you. Please disconnect your lines.
Yes.
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