Q2 2020 3M Co Earnings Call
Ladies and gentlemen, thank you for standing Bonnie.
Welcome to the three M. second quarter earnings Conference call.
During the presentation, all participants will be and they listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone keypad.
It is recommended that you usually landline phone if you're going to register for a question.
A reminder, this conference is being recorded Tuesday July 28 2020.
I would now like to turn the call over to Bruce a German land Vice President of Investor Relations at three.
Thank you and good morning, everyone.
Welcome to our second quarter 2020 business review.
With me today or Mike Roman three EMS, Chief Executive Officer, along with Nicking said and Modish Portola, our chief financial officers.
As you May know Nick will be retiring at the end of July.
Well in its joined the three M. team on July 1st succeeding Nick as CFO.
Mike Nick and Modish, we'll make some formal comments and then we'll take your questions.
Please note.
That today's earnings release and slide presentation accompanying this call are posted on our Investor Relations Web site at three am dotcom under the heading quarterly earnings.
Please turn to slide two.
Let me remind you to Mark your calendars for our third quarter earnings call, which will take place on Tuesday October 27.
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 three EMS 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-Q, let some of the most important risk factors that could cause actual results to differ from our predictions.
Finally throughout today's presentation, we will be making references to certain non-GAAP financial measures.
Conciliations of the non-GAAP measures can be found in the attachments today's press release.
Please note we have provided segment and total company adjusted EBITDA Reconciliations for reference in today's press release attachments as part of our non-GAAP measures.
Please turn to slide four and I'll hand, it off to Mike.
Mike.
Thank you Bruce Good morning, everyone I Hope you and your families are staying safe and healthy and I. Thank you for joining us.
We continue to fight depend dynamic from all angles to ensure the safety of our employees healthcare workers first responders and the public.
In a highly uncertain environment, where economic activity was restricted by global Lockdowns, we executed well and delivered another strong operational performance in the second quarter.
We posted solid margins and robust cash flow, while strengthening our balance sheet innovating for our customers investing in the future and continuing our transformation.
Our value model is strong and we are taking action on a number of fronts to lead through this crisis and emerge even stronger.
Well there remains a great deal of economic uncertainty, we are seeing an improvement in sales trends in July across all businesses and geographies as we start the third quarter.
And when this will provide additional comments later in the call.
I am proud of how our team is leading through these unprecedented times and I. Thank all three hours for their tireless efforts to serve those would count on US Please turn to slide five.
Our Kogan 19 response starts with a steadfast commitment to the health of our employees.
We have robust safety protocols in our manufacturing plants and distribution sites.
Enabling us to effectively protect our people, while maintaining supply chain operations.
For remote employees, we have developed a phased approach for their return to the workplace.
With enhance safety measures and emphasis on flexibility for individuals.
We've had our colleagues returned to the workplace in two dozen countries.
Mainly in Asia, and EMEA, along with our global R&D community.
And we are adjusting based on government guidelines and the evolution of the pandemic across the world.
As we protect employees, we worked around the clock to protect the safety of all people, including healthcare workers and first responders.
Three m. is making and distributing more respirators than ever before though demand continues to far outpaced, but the entire industry can supply.
In the first half of the year three I'm manufactured 800 million respirators globally.
With half distributed in the U.S., primarily to health care and FEMA.
For the full year, we expect to produce 2 billion respirators globally more than a threefold increase versus 2019.
We continue to make investments and partner with the U.S. Department of defense and other governments to bring additional global capacity online.
We're also working with federal state and local governments to deliver respirators, where the need is greatest.
At the same time, we remain vigilant in fighting fraud and price gouging.
To date, three M. as filed 18 lawsuits and removed over 7000 counterfeit websites.
Protecting people from bad actors.
Beyond personal protective equipment three I'm science is fighting cobot 19 in other areas as well.
Our membrane technologies help improve blood oxygenation procedures, and our Biopharma solution support the development of needed vaccines and therapeutics.
Earlier this month, we announced the collaboration with MIT on a diagnostic cobot 19 test that aspires to make testing faster more broadly available and less expensive.
The project has received approval from the National Institutes of health and we are working as fast as we can to develop a low cost highly accurate device that can be mass produced.
I will now turn to our second quarter results on slide six.
The financial impact of a pandemic remained mixed across three m. during Q2.
We continue to see strong demand in personal safety, along with other areas such as home improvement general cleaning and Biopharma filtration.
At the same time, we experienced steep but expected declines in other end markets.
Including medical and dental elective procedures, automotive OEM and aftermarket and general industrial.
Geographically, while organic sales in Asia Pacific declined, 8%, we saw year over year improvement in China up 3% in the quarter versus down 11% in Q1.
Organic trends in EMEA and the Americas remained consistent throughout the quarter.
Both declining in the mid teens each month.
All in organic sales companywide was minus 13%.
With adjusted earnings of one dollar and 78 cents per share.
Well growth conditions were challenging our operational execution was strong.
We expanded adjusted EBITDA margins to 26.5%.
110 basis points year on year.
In the second quarter, we delivered 400 million in cost savings versus last year as we aggressively managed expenses to offset cobot 19 impacts and associated restructuring.
This cost discipline, along with effective capital allocation enabled us to increase our adjusted free cash flow the $1.5 billion in the second quarter.
And Nick will walk you through the details.
Please turn to slide seven.
Importantly, while we managed near term uncertainty we continue to advance our four strategic priorities portfolio transformation innovation and people in culture to deliver value for our customers and shareholders.
We finalized the sale of our drug delivery business and may enabling us to focus more on our core health care portfolio.
We are encouraged that the benefits we are seeing from the new global operating model, we implemented this year.
A significant step in our transformation.
This includes our new enterprise operations team, which is enabling us to reduce cycle times and improve the customer experience.
Nearly all of our plants and distribution centers, our operational and we have worked with our partners to ensure consistency of supply.
Our new structure streamline decision, making.
And allows us to adjust faster than ever to the external environment.
All of which help our customers.
As just one example, one of our U.S. plants recently pivoted to manufacturing hand, sanitizer almost overnight.
Moving from formulation to production and less than 72 hours.
In addition, we're accelerating our efforts on automation and robotics, and introducing new digital capabilities, such as virtual selling tools to deliver on our promises to customers.
At the heart of three M. as innovation and our ability to apply science to solve critical customer needs.
We continue to invest in R&D and drive innovations to solve big challenges like air quality automotive electrification and food safety.
A few of our priority growth platforms, which are outperforming in the market say Sir.
For example, our air quality platform grew double digits in the quarter as we introduce new indoor air quality solutions through our innovation and increased investments in capital.
We're also finding new ways to engage our people strengthen our culture and advance our core values.
We continue to step up our leadership in sustainability and our annual sustainability report released in May includes a comprehensive look at our progress.
As part of this commitment we are proactively managing PFS guided by the principles of sound science corporate responsibility and transparency.
For example in March we launched a clearing house to share research on testing measurement and remediation.
Commitment we made at our congressional testimony last fall.
You can find this clearing house and all the latest information on PFS on our website at three am Dot com.
In addition, we provide regular updates in our 10-Q filings.
We're also fulfilling our commitment to comprehensive reviews of all three I'm manufacturing operations to ensure adherence to environmental requirements company policies and our values.
As we shared previously we continue to work with communities, where we manufacture along with government officials and regulators, including the EPA to advance our environmental stewardship.
Last week, we announced an agreement with the Alabama Department of Environmental management.
To resolve matters related to previously disclosed PFS discharges at our Decatur facility.
This is part of our commitment to address contamination at sites, where we manufactured or disposed of PFS.
With respect to PFS litigation, we anticipate the earliest trial date will now be in 2021.
Beyond or environmental responsibility, we know, we and others must do more to address and justice and inequality.
The death of George Floyd here in Minnesota was jarring for all three hammers, especially our African American employees.
At three M., we stand for equity fairness, and social Justice and we will be part of the solution by listening understanding and then acting.
Based on insights from our employees and communities, we have to focus areas.
First we are identifying the most impactful actions to accelerate inclusion and diversity within three up.
Well, we've made good progress in recent years, we have much more to do.
At the same time, we're working with other companies on actions that will make a difference here in Minnesota.
And we've made initial investments as part of these efforts.
We're also working with stakeholders to develop a long term plan to support economic opportunities and development and communities of color addressed the education gap and advance social Justice.
It is vital the company's step up to lead change to really make a difference this time.
I am personally leading these initiatives and we will provide you with updates as we move forward.
Please turn to slide eight.
Before turning the call to Nick I would like to make a few comments about our CFO transition.
First I want to thank Nick for his many contributions throughout 35 years at three pm.
He has been an outstanding leader and a great colleague and has created tremendous value for our company and our shareholders.
In six years as CFO next guidance has been especially valuable as he helped fleet our transformation and our work to optimize our portfolio and position three m. for the future.
I wish Nick and his family all the best in the future.
I'm also excited to welcome more niche to our leadership team.
Most recently munis with CFO at GE healthcare, a $17 billion business.
His experience, leading healthcare and industrial businesses.
Along with driving operational transformation is already making it an immediate impact for three.
Oneish is an ideal fit for our enterprise and for our culture.
And later in the call he will make a few comments about our perspective on the third quarter.
I'll now turn the call over to Nick for the details on Q2.
Nick.
Thank you, Mike and good morning, everyone.
Please turn to slide nine.
Companywide second quarter sales were $7.2 billion with adjusted operating income of $1.4 billion and adjusted operating margins of 19.6%.
On the right hand side of the slight you see the components of our margin performance in the second quarter.
The impact to the pandemic was varied and numerous across the business in operations.
The biggest factor negatively affecting Q2 operating margins was the impact of the pandemic global customer demand.
Which resulted in nearly a 14% year on year decline in organic sales volumes.
In addition, during the quarter, we undertook restructuring actions, resulting in a Q2 charge of $58 million due to the impact of the pandemic.
These headwinds were partially offset by aggressive cost management during the quarter, which reduced cost by approximately $400 million year on year.
Also providing a year on year benefit to operating margins is a restructuring charge in last year's second quarter.
All in these benefits were more than offset by decline in organic sales volume and restructuring actions, resulting in a 100 basis point reduction to second quarter margins versus last year.
Acquisitions, and divestitures reduced margins by 80 basis points due to less LNG purchase accounting impacts.
Higher selling prices, along with lower raw material costs contributed 70 basis points to second quarter margins.
And finally foreign currency net of hedging impacts reduced margins by 10 basis points.
Overall, we effectively manage costs throughout the quarter in a very dynamic and challenging global economy.
And as Mike mentioned, we expanded EBITDA margins by 110 basis points year on year to 26.5%.
Let's now turn to slide 10 for a closer look at earnings per share.
Second quarter adjusted earnings were $1.78 per share down 16.4% year over year.
Let me now cover the items that made up our second quarter earnings performance.
Similar to the operating margin discussion on the prior slight organic sales declines productivity and other actions collectively reduced year on year per share earnings by 28 cents.
Acquisitions, and divestitures reduced second quarter earnings by seven cents per share versus last year, primarily due to the sell it he acquisition.
Please note that this result includes financing costs associated with the acquisition.
Foreign currency net of hedging was a five cents per share headwind in the quarter.
Turning to tax rate, our second quarter adjusted tax rate was 20.7% versus 22.3% last year, adding three cents to earnings per share.
And finally average diluted shares outstanding declined 1% versus Q2 last year, adding two cents to per share earnings.
Please turn to slide 11 for a discussion of our cash flow and balance sheet.
As Mike noted, we delivered strong second quarter, adjusted free cash flow of $1.5 billion up 18% year over year.
This increase was driven by effective working capital management disciplined capital allocation, along with a 400 million dollar benefit related to timing of income tax payments, which will be paid in the third quarter.
Through the first half of the year adjusted free cash flow increased to $2.5 billion versus $2 billion last year.
As we continue to generate strong free cash flow, demonstrating the strength and resiliency of our business model.
From a capital allocation perspective, our long term strategy remains unchanged.
Our first priority is to invest in our business second maintaining our dividend and lastly, flexible deployment for M&A and share repurchases.
Second quarter capital expenditures were $379 million.
For the full year, we now anticipate capex expenses of approximately $1.4 billion versus 1.3 billion previously.
This increase in our full year Capex budget expectations is primarily due to the pace of projects picking back up as economic activity returns.
During the second quarter, we returned $846 million to our shareholders via dividends.
Share repurchases remain suspended throughout the quarter given the continued global economic uncertainty.
Our strong second quarter cash flow generation and disciplined capital allocation enabled us to strengthen our capital structure. We ended the quarter with $4.5 billion in cash and marketable securities on hand, and reduced net debt by $1.7 billion or 10%.
The second quarter.
Please turn to slide 12, where I will summarize the business group performance for Q2.
I will start with our safety and industrial business, which declined 6% organically in the quarter.
Personal safety saw strong double digit organic growth driven by continued unprecedented levels of demand for respirators globally in response to the pandemic.
The balance of the safety and industrial portfolio declined significantly due to the global slowdown in industrial production activity during the quarter.
Looking geographically the Americas declined 9% organically with the us down mid single digits.
We have declined 1% well Asia Pacific was down 4%.
Safety and industrial second quarter segment operating margins were 23.8%.
Up 180 basis points, driven by continued strong productivity cost actions and benefits from last year's restructuring.
Moving to transportation and electronics.
Second quarter sales were down 19% organically compared to last year.
Our electronics related business was down 1%.
A strong growth in semiconductor factory automation and data center, which was offset by continued softness in consumer electronics, particularly smartphones.
Our automotive OEM business was down 44% year on year inline with the 45% decline in global car and like truck builds.
Commercial solutions declined roughly 30% well transportation safety and advanced materials were down mid and high teens, respectively.
Geographically Asia Pacific declined 8%, while the Americas declined, 29% and EMEA was down 33%.
Transportation and electronic second quarter operating margins were 19.7%.
Negatively impacted by the 19% decline inorganic sales.
Which was partially offset by cost actions and benefits from last year's restructuring.
Turning to healthcare, which experienced significant pandemic related challenges and disruptions across the industry declined 12% organically versus last year.
Organic growth across much of our health care portfolio was negatively impacted by the effects of covet.
Which resulted in delays in elected medical procedures.
And closed most dental offices around the world.
These impacts were most prevalent in our oral care business, which was down nearly 60%.
And medical solutions, which declined mid single digits in Q2.
Food safety declined mid single digits as the business was impacted by the closure of food processing plants during the quarter due to worker safety concerns.
A positive note our separation and purification business grew mid single digits.
This business continues to experience strong demand for Biopharma filtration solutions and supported the Pharmaceuticals industries research and manufacturing efforts to develop vaccines and therapeutic treatments for coal that.
Looking geographically the Americas declined 14%.
Well, EMEA and Asia Pacific each declined 10%.
Healthcare second quarter operating margins were 16.8% or down nearly 10 percentage points year on year.
Approximately two thirds of this decline was due to the significant reduction inorganic sales.
With the remaining one third related to the a seller the acquisition.
Looking ahead, we expect both organic growth and operating margins to improve as elective procedures return.
Lastly, second quarter organic growth for our consumer business was down 5%.
Organic sales growth within consumer was led by our home care business up high single digits, along with home improvement, which was up low single digits.
Growth in these businesses was driven by strong customer demand for our Scotch fight cleaning products and solutions Scotchblue painter's tape Filtrete air filtration products and Mcguire his car care products.
Stationary and office and consumer health care both declined.
Impacted by the stay at home orders and social distancing protocols, which resulted in many offices and schools being closed across the world.
Looking at consumer geographically, the Americas, and Asia Pacific were each down mid single digits, well EMEA declined 10%.
Consumers operating margins were 23.2% up 250 basis points on strong cost discipline and ongoing productivity.
That wraps up my review of the second quarter results.
Before I turn it over to more Nash I'd like to take this opportunity to make a few comments given it is my last earnings call.
35 years ago I started my career at three am right out of college.
Humbled and grateful for the many opportunities and experiences I have had throughout my career and most importantly, the many wonderful people that I have gotten to know both professionally and personally around the world.
In the last six years I've been blessed to be the CFO of this great company and to lead three Oems Global Finance organization.
As part of my role as CFO I have also had the opportunity to engage with many of you in the investor community as greatly enjoyed the many interactions with those of you who have covered and invested in three EM.
I've appreciated your support input and feedback and I wish you all the best in the future.
With that please turn to slide 13, and I will hand, it over to mow Nash to discuss our thoughts going forward.
Monish.
Thank you Nick and good morning, everyone first I would like to recognize and thanks, Nick not only for 35 years of outstanding service to three M., but also for his partnership council and guidance over the past month in helping melancholy EM and ensuring a smooth transition.
Like Nick I'm humbled to be a part of this outstanding company.
Hi, great admiration of three M. and its vast scientific capabilities to positively impact the word including and across industry healthcare and consumers' lives.
It's great to be a part of the leadership team and to lead the company's global Finance organization.
Over the past month I have spent time meeting with leadership key finance members and also participated in strategic and operating reviews and discussions.
While I have only been on the job for a few weeks. This past month has given me a great opportunity to personally engaged with our leadership team and learn the company I.
I wanted to thank all three emrs for their warm welcome.
With that let me make a few remarks regarding our thoughts in the coming quarter.
As we start the third quarter, we are seeing sequential improvements in end markets, including automotive health care and general industrial.
While the strength and pace of recovery remains uncertain. We currently are expecting global economic activity to be stronger in Q3 as compared to Twoq.
Turning to our business via seeing a broad based pickup in growth across our businesses and geographies as we start that third quarter.
With one week left in July total company sales currently up low single digits year on year.
With respect to respirators, we anticipate continued strong demand, which we estimate will contribute approximately 300 to 350 basis points. The company wide Q3 organic growth.
As we did throughout Q2, we will continue to provide monthly sales information.
Therefore, we will provide an update on July sales once we have finalized results in a few weeks.
From an operational standpoint, Dolby anticipate some pickup in costs as sales growth improves we are maintaining our aggressive cost discipline.
Why is also continuing to invest in future growth and productivity.
Therefore, looking at margins. We currently anticipate a third quarter adjusted operating income margins in the range of 20% to 21%.
Finally, with respect to free cash flow, we will continue our efforts to drive improvements in working capital and prioritize capex spend.
Our ongoing focus on cash flow along with disciplined capital allocation.
Central to enhancing a financial flexibility and strengthening our capital structure.
While the uncertainty remains be are confident in our ability to continue to execute on our priorities respond to changes in the marketplace and invest in future growth and productivity.
With that I. Thank you for your attention and we will now take your questions.
No.
Gentlemen, if you would like to register a question using landline phone. Please press. The one followed by the four on your telephone keypad, you will hear grade three tone problem to acknowledge your request.
If your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three if you're using a speaker phone. Please lift your handset before entering your request.
Please limit your participation to one question and one follow up one moment. Please what we've compiled acuity roster.
Our first question comes from the line of Scott Davis with Millennials Research. Please go ahead.
Hi, Good morning, guys, Hey, Scott Scott.
Congrats snack on your retirement.
Enjoy all Don Thanks.
Emanates good luck to you.
Thank you always I.
Two questions here, one on the cost out how much of the 400 million. What you guys say is kind of permanent.
Hold onto versus.
The more temporary passion.
Scott I'd say the vast majority of the 400 is temporary that much of what we were doing in non second quarter was reducing expenses.
Through disciplined holding down of expenses there were some other things we did have restructuring actions that we think that we know will benefit us going forward, but the majority of this 400 million, we see is temporary spending reductions and not permanent spending reductions.
Okay.
And then as a follow up that July month today, I mean, I know we're only.
We're not totally through the month, yet close but that seems pretty positive based on the sequential on.
I wouldn't have expected positive towards later in the year until later in the years is there can you give us a little bit of color on that as or any particular snack factory inventory rebuild or back discretionary healthcare is started up again things like that that.
Perhaps is driving that growth.
Yes, Scott, maybe I'll I'll characterize that a little really in line with much more niche said in his remarks, it it's pretty broad based across businesses and geographies we are seeing.
Positive growth in China, it's coming out of Q2 and that that continues but it's really broad base. It is related to some of things you highlighted.
The procedures coming back the automotive build rate sequentially getting better still negative but getting better.
So we're we're seeing I wouldnt say, we're seeing signs of a snap back in the inventory in the channel yet, but it's certainly early days benefiting from that broader improvement across.
It really across businesses and geographies.
And our next question comes from line of Julian Mitchell with Barclays. Please go ahead.
Hi, good morning, gum, and I'll Echo the thanks to Nick and welcome to the Nash.
Maybe.
Just a question on the adjusted operating margin first of all soy so the guidance of 20% to 21% for Q3.
It is up slightly sequentially, but I guess year on year, it's still a very heavy decline maybe heavier even seen in Q2.
Even with a better revenue trajectory. So I just wanted to try and understand.
You know if that's right. It's maybe a three point decline in the adjusted margin year on year, maybe whats driving that to offset the better volume performance.
Hey, Julian Yeah, it with the with the guide that we're putting out for us.
Third quarter margin, 20% to 21%.
We've been looking at it from a sequential perspective and seen it up 50 to 100 basis points silverware, where we finished Q2 of this year.
Now as you doing in looking at last year, you got to remember last year had some some one off things benefiting that we had a gain on the sale of a building thats included in that we also have the impact of the salary a year on year with a selling not in our third quarter results last year, but theyre now now in there those are the two biggest things in.
Packed into year on year number.
That's helpful. Thank you and then maybe my second question.
If we look at the healthcare business.
Typically.
I think there was a comments around improving margins in the prepared remarks, maybe just put a finer points. So now I suppose in health care help us understand the pace at which the elective surgery related business as a coming back.
And did the comment mean that margins.
Could grow even in the second half or it's more just the much narrower decline.
In Q2.
Yeah, Julian I wouldn't take the comments to say that we expect the margins to be up year on year in in our health care business.
My comments there were in regards to compared to where we saw margins in the second quarter, we anticipate those continuing to expand as we see elective procedures coming back and our own volumes going up and if I use oral care as an example.
Each month of this second quarter, we were seeing improvement in our year on year growth rates in that and we expect some that can to continue going forward. We're also seeing.
Improvements.
On on the month in our in our medical solutions business. So we are seeing signs that these elective procedures are coming back and we were seen this started that later in the second quarter early in the third quarter and as that continues we expect that to have the positive impact on the sequential operating margins for her.
It's care.
And our next question is from the line of Andrew Obin Bank of America. Please go ahead.
Yes, good morning.
Morning, Andrew.
Just a question as things improve for you guys. What do you need to see what are the goalposts.
Oh I apologize before I go into my question I do want.
Thanks, Nick and welcome Manish I apologize prescriptions.
Nick Good luck in Canada, Nashwauk apologies for that.
So it just going back to your capital allocation.
What do you need to see in terms of things getting back to normal.
Yes, just to go back to share buybacks to go back to looking at M&A.
What does it take what are the goal posts.
Thanks for the question is whether we look at it is we have said before it's extremely uncertain environment. So for us to look at the what you call stability will have to figure out what end markets look like maybe think about a big end markets, where that's helped get automotive and personal safety so to until we see that.
Ability, it's just going to be really hard for us. So I would call. Those are the go to pull us enough costs how.
The Corona Vitesse cases play out in the word will be other big factor in this and how the economies start opening up. So those are just some of the macro indicators that we'll have to look at.
Before we feel comfortable and Thats why we are taking this day by day and we're going to continue providing you monthly guidance.
On a revenue and then as that stabilizes I think we'll be in a better position due to have a stronger view on capital allocation. So we're going to stop providing my guidance I should expect buybacks.
Sorry that was a job [laughter].
The other question you guys have some of the strongest presence in China have anybody would cover and we've been reading about possible supply chain disruptions related to sort of thanks. So river flooding are you seeing any impact on your customers in China, I know, where you guys are but are you seeing any.
Patrick from flooding on your supply chain are you make had a contingency plans just trying to figure out how real that thing as thanks.
Yeah Andrew.
Through the entire coveted.
Experience, we really have a validated the model that we've had around world and as you know we manufacturer in China, a majority of what we saw in China. So we really are closely connected with the supply chains. There I would say at this point, we don't see an impact from the flooding I mean, we're watching it closely we're staying connected to our customers as they see interruptions.
Yes.
Worsens or their businesses are interrupted we will certainly adjusting the supply chain.
At this point, we don't see material impact on the China results were seeing fairly broad based improvements really across electronics, and industrial and transportation markets, leading the way.
Like the U.S. and elective procedures and health care, a little slower to recover but it's it's fairly broad based on that and that growth that we saw in Q2. So not at this time, but we'll we'll stay close to it and update as we go.
And our next question is from a line of Steve Tusa JP Morgan. Please go ahead.
Hey, guys good morning.
Morning.
Can you just.
Discuss where you stand on some of the cost actions.
For a second half Denny said, you've got 400 million out in second quarter, but maybe just discussed what you're getting in second half and then how that temporary versus structural kind of plays.
You know into next year just.
Just assuming flat sales for example, even though they probably won't be flat just what you see kind of as temporary and structural now just an update there.
Sure Steve So as Nick mentioned in his prepared remarks and the prior question most of the actions that were taken in the second quarter were temporary in nature.
We have taken some structural actions to a restructuring charge.
As most of them are temporary nature I would say if you're going to continue our strong cost discipline that we have doing but at the same time as the economic recovery starts coming back up we are going to see investments in both growth and productivity as well as some of the timing items into Q, but played back out in Q3 in Q4 so.
That's our current view right now and as I said uncertain environment, but depending on which way the word plays out being ready to act.
And both investing in growth and productivity at the same time.
So I guess that sounds like for.
I guess headcount just pretty.
Performance next year will be pretty consistent.
To kind of normal incremental margins on growth.
Would maybe just a to Q temporary actions as kind of the key item to call out.
So as of right now I would say that Steve, but again as I said, let's see how the world plays out and we'll act both on growth and productivity as as required but for the full Q3 again looking at the cost actions just to reiterate we are looking at as sequential revenue goes up margin rates going to go up to 20% to 21% which is 52.
150 Bips.
Better than Q2.
Right right right. Okay. Thanks, a lot I appreciate it.
Thanks, Steve.
Our next question is from the line of Nigel Coe Wolfe Research. Please go ahead.
Thanks, Good morning.
Good morning client and Manish, Michigan left for the on Euro as well.
I just wanted to just to touch quickly on July versus June I mean, what's on the whole prepared remarks, but what caused the big snap in.
Looks like middle teens declines in June.
On a daily basis, and then stepping into positive growth in July.
Positive growth is that inclusive of acquisitions was up there will be organic just wondering what changed between the two months yeah. So the growth that was all in sales Nigel so it it's both acquisitions and organic we are I would say worse that broad based view of businesses and geographies, it's adding.
Yup everywhere, a little bit that's what's making a difference and and we're seeing that we're seeing demand come back. There was there was a lot of I think a lot of.
Optimism that we were seeing a economic recovery at the end of second quarter, and we saw pretty consistent.
Organic growth across the months in the quarter, we're seeing it come through now in July. So, it's just I would say the timing of it and that broad based.
Across businesses and geographies is adding up to improving trends I'm encouraged by what I see it it's still early days in the third quarter, but we're off to a good start and I think it's.
Let's start of a trend in those markets is of the causative.
Yes, I'd be curious if any channel impacts.
And that but my phone questions really on healthcare margins.
We still think of the best way to think about these on EBITDA basis, and we saw sequentially.
EBITDA margins declining from 20% down to 24.1 and.
The buildings, so big step down in Q2 Q.
Just purely a volume.
Impact that we're seeing there with other some mix impact, particularly in as well.
Hey, Nigel before I give it to Nick maybe just a comment about the channel that.
And there we did see strong point of sale as we came through second quarter. So there was expectation that sell end would follow that's probably contributing some of it but we aren't seeing a big as I said earlier big snap back in the channel, but there is has been stronger point of sale. So that's that's also contributed.
Okay. Thanks.
And Nigel to your question on the EBITDA.
Margins for health care and yes, we are seeing that down in your presumption is correct. What we are seeing there is almost all volume related when we look at it on an EBITDA basis. Because then we're pulling out the impact of the selling purchase accounting impact to almost.
All volume related and then again as we see volumes coming back up we expect that to abate and come back to more normal operating margins for health care business.
Our next question from the line of John Walsh Credit Suisse. Please go ahead.
Hi, good morning.
Good morning, Thanks, Nick welcomed oneish.
Thank you John.
Wanted to go back to the Q3 margin guidance.
I was trying to calculate the year on year decline, if I make adjustments for the flame detection gain last year, the property gain which you kind of sized in the prepared remarks last year and it seems like the year on year Delta actually gets worse.
Q3 versus Q2, so wanted to know one if that mass was right and if.
Or if we miss something there.
So so the way look at it John I think the reason, we went to incremental quarter over quarter sequential is because it's so hard to do the math year on year. There was some gains last time as well as we've got the impact of the affiliate the acquisition. This year and that's all I would just request that focus on the sequential.
Thats wherever you are showing margin improvement of 50 to 150 basis points as we go forward as volume starts getting better.
Okay. Thank you for that and then maybe just a follow up thinking about price raws.
For the back half year price ticked up was just curious where you're actually.
Seeing an acceleration in getting price.
Maybe by the segment units because we already have it by the geography.
Yeah. So so we're at a.
50 basis points of price growth in the second quarter, and we don't foresee that having a material change in the in the second second half of the year, what we've been experiencing for price growth. Both for the first in the second quarter. We think is a pretty indicative of where we'll be for the for the total year. So John.
Theres really not any big trend change going on there that to to highlight with its been a very stable number and we think it will remain stable.
Great. Thank you.
Yes.
The next question is some Joe Ritchie Goldman Sachs. Please go ahead.
Thanks, Good morning, everyone and I will echo.
All the comments missing that Nick and look forward to work with you money.
Thank you Joe.
So maybe just my first question maybe following up on.
Nigels question on healthcare margins.
So if we were to if we were to take out the affinity acquisition from QQ, what what would the core decrementals.
In Q2 in health care.
Yeah, Hi, Joe the core Decrementals in health care once I pull out a salary then we're in 60% or a little higher than 60%, which is not unusual given given the makeup of our cost structure in healthcare. So once they pull out a salary that.
Then we're in that range.
That's helpful.
Nick just following up on ill comment you made earlier.
None of that as mix related.
The elective procedures isn't isn't it.
Exacerbating that that decremental, hi, it's just basically volume oriented and that's it.
Yes, when we look at a mix impact we have pluses and minuses it really nets out to very little change on our overall health care margin.
Okay. All right. Thanks, and then maybe on one follow on question just going back to that to that comments around capital deployment and.
When you could potentially get more aggressive with a buyback or may.
The question I have is like how are you thinking about your your balance sheet and your leverage going forward, there's a lot of Keith.
Surely from.
From a p. fast perspective, and so I'm, just wondering whether you're thinking about your leverage in a different way.
When we start thinking about the.
You are getting a breadth of in the weaker.
Sure. So I'll just start by saying, though a hallmark of three M. has been its strong capital structure and our plan is to continue doing that de leveraging has been a priority for three m. and we're going to continue that journey I think the pace of de leveraging will depend on how economic activity to covers and also.
Our ability to continue driving strong cash flow and control that working capital. So thats, what I would just say for the time being as is our current view and to reiterate capital allocation. Our first priority has always been to invest in the business. Its R&D organic growth best return write their dividend is our second which has been a big call.
Mark of three M., that's our second priority and an M&A is third and then share buyback would be a last priority. So that's the way we're looking at it right now.
Next question is from the line of Jeff Sprague from vertical Research partners. Please go ahead.
Thank you good morning, everyone.
35 years, you look so young I thought maybe you started out of Middle school, but best of luck to you.
Jeff Your time, thank you.
Yes.
Hey, just to business related questions for me if I could.
First on electronics.
Just provide a little more color on what you solve their sounds like kind of a tale of two markets right consumer electronic versus the other buckets.
If you can give a little more color on what you saw in the quarter in those pieces and.
What the trajectory looks like into the third quarter.
Yes, Jeff.
Electronics for US was down 1% and as you said it was kind of a mix of different stories. There was strengthened semiconductor data centers factory automation those were all up double digits for us those have been part of our focus on where we invest for growth and electronics I was offset by.
Softness in consumer electronics.
The broader transportation electronics was impacted more heavily by automotive and I would say our commercial solution business.
In electronics, the strength, where in those categories, we see those trends continuing semiconductor fabrication continues robust growth our consumer.
Electronics still soft as we as we start third quarter, but the benefit of being in those higher growth segments has gave us some strength in electronics in the quarter.
Then secondly unrelated on the on the consumer side.
Obviously potentially a very peculiar back to school or maybe we don't even have back to school. This year what is going on.
In retail in terms of planning for this channel fill that sort of thing and what are you expecting in the third quarter.
Well, our retail partners are planning for back to school and as you said theres lot of uncertainty around it. It's it's another one of those things that's almost day by day. We are we are.
We built a little bit inventory, even as we went through the first half in anticipation of back to school where.
We see we see that being something that that is going to add to some of the growth as we move forward, but it's it's a lot of uncertainty around how it's going to play out the strength in consumer for us has been around home improvement.
And our cleaning products stationary office has been declining as a schools were closed of course, we're hoping to see an uptick in demand as schools opened but thats still remains to be seen.
Okay.
And our next question is from the line of.
RBC capital markets. Please go ahead.
Thank you good morning, everyone, an eco vessel love to Nick and welcome to Monish.
Good morning, Thanks, Dean I am not surprise that air quality is one of the priorities for three of them.
You've got such a big presence on the residential side would still tree.
Where and how do you see opportunities on the commercial building side on filtration as people start venturing back to work.
Are there new products that you're expecting to launch.
Yes, I knew you hit it our our innovation in our and our really a core of what we do infiltrate has been focused on residential both.
Indoor air quality.
I would say.
Residential HVAC.
Together with room Air Purifiers, being part of that and our innovation goes into the the Filtrete filters that are part of that the commercial side. While we contribute some are non woven technology is not a big part of our air quality growth is one of those areas that it's a it's still nascent and how the innovation is going to make a different there we work in our innovate.
Patient on on opportunities there, but when we talk about the outlook for the strength in this area and the growth that we're seeing in our priority growth platform is really in that residential side of the marketplace.
Got it and then for 2020, how to new product introductions shape up.
Again, this is a strange year, but in terms of product launches and contributions.
Yes, it's still.
The heart of three M. as our innovation that comes through and those new product launches that we highlight a little bit the benefit we're seeing in these priority growth platform, but it's much broader than that we continue to launch new products and.
Like everything else, we're adjusting in the middle of coal bed prioritizing, where we see market opportunities on and I would say in some cases, you see in our capex delaying some of the investments as as we see slowness in markets now we have plans for robust new product launches in the second half the year, it's going to be.
Still a critical part of our growth driver. So it's it doesn't change we just have to adjust to the market opportunities and I would say to the pace of investment as we go through the rest of year.
Next question is from line of Handicap fluids Citigroup. Please go ahead.
Good morning, guys, Nick Thanks for all your health much appreciated welcome.
Thank you thanks Andy.
So just focusing on safety industrial for second the margin performance in a clear was strong can you give us a little more color in terms of what led to the margin improvement in the quarter is the big increase in mask sales actually helping mix is it realignment that that's now helping that segment, which expect to see this kind of.
Form and we saw on safety and industrial moving forward.
Yes, Andy.
In in total the fact that are our revenue was down year on year on year, we're not seeing a benefit margin on in our safety and industrial business from the combination of the higher respirator sales in the lower sales in the rest that those we look pretty much as a as a push.
To us so the 180 basis point margin expansion.
Some of that's coming from that 400 million dollar of cost actions that we're doing that safety and industrial had its share of that but we do this was also a business where we were taking actions last year in restructuring.
So were the lack of repeated though that expense plus the positive benefit of that restructuring all of those things in combination led to that 180 basis point margin expansion, it's really not a mix or or a respirator story and then going forward, we do see continue.
Good margin expansion potential in the in this business.
Going forward.
Possibly not on the same scale is what we saw here in regards to the margin guidance that debt that we provided but it's still a business, where we see upside on on the margin on a year on year basis.
Thanks for that Nick and then just focusing geographically again.
China seems to continue be continuing to improve but Japan look worse in Latin America looked expectedly week. So can you talk about Asia and some of the other emerging markets. It seems like China continues at more V shaped recovery for you guys is that what you're seeing and then why did Japan turned down in Q2.
Yes, Andy we are seeing that.
Recovery in China, and as I highlighted earlier, it's really across safety and industrial.
Aspartame electronics, leading kind of the improvements source as we move ahead health care still still slow as elective surgeries, even or elective procedures come back in China as well.
So we are.
We see that.
I as I highlighted continuing as we as we start the third quarter, Japan was down.
12% in.
The quarter really.
Really seeing declines in safety industrial and consumer transportation electronics as well. So it's it's a broad based slowness. There I think we're seeing that across geographies that theres kind of a sequence to things that you're seeing there earlier recovery in China, the new see EMEA Americas and Japan other parts of.
Asia kind of going through.
Kind of us not stuck behind that and we saw some of that in Japan, Japan as we went through the second quarter.
Yeah.
And last question is from Marcus meter Meyer, you'll be yes go ahead.
Hi, good morning, everyone and again.
Manage thanks, Nick Faldo, you hope and all the best.
Thanks, Tim.
Yes, if I can maybe come back into just the monthly data.
Mike Nick when these then you spoke intra quarter, we've talked about these sort of feeling that adjustment.
We would have to make in May and June and if I do that arithmetic actually see June down significantly more than may enable us, which surprised me a bit and then.
Correct me, if I'm wrong, but.
Right that the low single digit number of loss, but all in what's the what's that organic maybe lets start here.
Yeah, when we look at on a per billing day on sales.
From April to May to June we saw we saw a improvement each of those each of those.
Months.
However, that's a normal pattern for us it's a normal pattern as we go through the second quarter that that May and June sales per billing day goes up and weak and we saw that again this year. So in a year on year growth comparison.
What we saw on a per billing day was.
Very comparable about the same growth on a sales per billing day in may as what we saw in June.
What we're seeing now in July is now a more noticeable direction change where on a sales per billing day and on absolute basis. We are seeing that add up low single digits versus where we were in July of last year.
Okay. Thanks. Thank you maybe I'll come back that also the closest to make sure.
And then.
On on the interim constant or that you mentioned with a them on the in your prepared remark.
Is that something that you had.
Already provisioned for before because in the special items, if I look at the that.
When those sort of litigation related charges in the quarter.
Thats something thats due coming up or is that something that was already.
Provision for in the in the past.
Well, we debt markets the announcement on eight M., we that's something that we had previously disclosed and it's it's we've reached the Weve reached an interim consent order with in partnership with a them. So this.
We'll have requirements as we move ahead of the there what we know about remediation that's probable and estimable as part of our reserve, but they're also be capital and operating costs that go along with complying with the consent order, it's not expected to be material for three I'm, but it is something that will become part of our operational costs.
As we move.
And that concludes the question and answer portion for conference call I will now turn the call back over to Mike Roman for some closing remarks.
To wrap up the three M. team delivered another strong operational performance in the second quarter.
In a challenging environment, we posted robust cash flow managed costs continue to invest for the future.
We will continue to fight covert 19 from all angles, and we are well positioned to deliver value for our customers and shareholders during the pandemic and as a economy recovers. Thank you for joining us.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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