Q2 2021 3M Co Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the 3 M second quarter earnings Conference call.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
And at that time, if you have a question. Please press the 1 followed by the 4 on your telephone keypad. It is recommended that you use a landline phone if you.
On the register for a question and.
This conference is being recorded channel.
July 27th 2020th line.
And I'd now like to turn the call over to.
General and.
Senior Vice President of Investor Relations at 2 P M.
Thank you and good morning, everyone and welcome to our second quarter earnings Conference call.
With me today are Mike Roman <unk>, Chairman and Chief Executive Officer M on edge Patella Wala, our Chief Financial Officer.
Mike and more niche will make some formal comments then we will take your questions.
Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website, and 3 M Dot com under the heading quarterly earnings.
Please turn to slide 2.
As we have done throughout the year I would like to remind you to mark your calendars.
For our next earnings call, which will take place on Tuesday October 26.
Please take a moment to read the forward looking statement on slide 3.
During today's conference call, we will make certain predictive statements that reflect our current views about <unk> 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 1 a 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.
Please note.
Throughout today's presentation, we'll be making references to certain non-GAAP financial measures.
Reconciliations of the non-GAAP measures can be found in the attachment to today's press release.
Please turn to slide 4 and I'll now hand, it off to Mike Mike.
Nick.
Thank.
And good morning, everyone.
<unk> performance and the second quarter was strong as we posted organic growth across all business groups and geographic areas are.
Our team executed well and delivered increased earnings expanded margins and robust cash flow from.
And from a macro perspective, the global economy continues to improve.
Bruce certainty remains due to COVID-19, and heightened concern over the increase and Delta variant cases.
We saw ongoing strength and many end markets, including home improvement oral care and general industrial.
Along with a pickup and health care elective procedures.
We continue to work to mitigate ongoing inflation.
So on re pressures and supply chain challenges as well as and market dynamics, such as the semiconductor shortage impacting automotive build rates and electronics.
We're also beginning to see a decline and pandemic related demand for disposable respirators, which I will discuss on the next slide.
Looking forward.
We will stay focused on investing and emerging growth opportunities and improving productivity and advancing sustainability.
We are confident and our ability to continue executing well and the face of COVID-19, uncertainties and are raising our full year guidance for organic growth to 6% to 9% and earnings per share to.
<unk> 70 to.
And to $10 and 10.
Please turn to slide 5.
And the second quarter, we delivered total sales of $8.9 billion.
We posted organic growth of 21% versus a 13% decline and last year's second quarter along.
And with earnings of $2.59 per share.
We expanded adjusted EBITDA margins to over 27%.
And increased adjusted free cash flow to $1.6 billion.
With a conversion rate of 103%.
Strong cash flow allowed us to further strengthen our balance sheet.
And while returning $1.4 billion to shareholders through dividends and share repurchases.
I am proud of our team's execution and a dynamic environment.
We are finding new ways to innovate for customers and improve our operational performance.
In addition to our strong day to day <unk>.
<unk>, we are investing to capitalize on favorable market trends and serve emerging customer needs.
I want to share a few impactful examples.
And healthcare, our innovative <unk> therapy, and Cision management system is the first and only medical device indicated by the U S.
P a to help reduce.
<unk> surgical site infections and high risk patients.
Helping lower the costly financial burden of complications.
Delivering on both improved clinical outcomes and cost savings for the health care system.
And automotive electrification, we are building on.
<unk> long history, and consumer electronics and.
And now expanding our solutions for the future of transportation.
Including new display technologies for both electric and internal combustion engines.
Helping us drive above market growth and our automotive business.
And home improvement.
We are building out a suite of innovations to help consumers personalize their homes.
Including our fast growing line of command damage free hanging solutions.
5 billion dollar franchise that Leverages, our world class adhesive platform.
With even greater opportunities ahead.
We have increase.
Attunity and across our businesses to apply 3 M science and drive long term growth and we will continue to invest and win in those areas.
As you all have seen the ongoing impact of COVID-19 is highly variable across geographies.
Since the onset of the pandemic we.
We have increased our annual respirator production and fourfold to $2.5 billion by activating idle surge capacity and building additional lines, while shifting 90% of distribution into health care to protect nurses doctors and first responders.
1 of our strength is to quickly adapt to changing market.
Marketplace needs.
Global demand reached its peak and Q1 of this year, which included stockpiling from governments and hospitals.
We are now seeing a deceleration and overall health care demand and are adjusting production, increasing supply to industrial and consumer channels.
Wow.
Moving to prioritize health care workers and the geographies seeing increased COVID-19 cases and elevated hospitalization rates.
As we do this we are reducing overall output to meet and market trends.
Like we have and the past we are prepared to rapidly increase production and response to.
Welcome to 19 related needs or future emergencies when needed.
As I reflect on the first half I am pleased with our performance, we delivered strong sales and margin growth along with good cash flow, while building for the future and advancing sustainability with significant new carbon and water.
Covid and and plastic commitments.
And the second half and addition to investing in growth productivity and sustainability. We also must navigate ongoing COVID-19 impacts and continue taking actions to address inflationary pressures and supply chain challenges.
We will do this by driving and unrelenting.
<unk> focus on operational performance.
Which includes improving service quality and operating costs and cash generation.
I would like to thank <unk> for your commitment and resilience as we bring together people ideas and science.
To help transform businesses solve customer challenges.
And improve lives around the world.
That wraps up my opening comments and I'll turn it over to munis to cover more details on the quarter and our updated guidance monish.
Thank you, Mike and I wish you all a very good morning.
Please turn to slide 6.
Companywide.
Second quarter sales were $8.9 billion.
Up 25% year on year on an increase of 21% on an organic basis.
Sales growth combined with operating rigor and disciplined cost management drove adjusted operating income of $2 billion.
Up 40% with adjusted operating.
Margins of 22% up 240 basis points year on year.
Second quarter, GAAP and adjusted earnings per share were $2.59 up 44% compared to last year's adjusted results.
On this slide you can see the components that impacted both operating.
Margins and earnings per share as compared to Q2 last year.
Our strong year on year organic volume growth, along with ongoing productivity restructuring efforts and other items added 4.1 percentage points to operating margins and 89 cents to earnings per share year on.
Operating included and this margin and earnings benefit what a few items of note.
During the quarter the Brazilian Supreme Court issued a ruling that clarified the calculation of Brazil's federal sales based social tax essentially lowering the social tax that 3 of them should have paid in prior years.
This favorable ruling added $91 million to operating income of 1 percentage points to operating margins and 12 cents to earnings per share.
And next as you will see later today in our 10-Q, we increased our other environmental liability by nearly $60 million and our respirator.
Later liabilities by approximately $20 million as part of our regular review.
In addition, we also incurred a year on year increase and ongoing legal defense costs. We are currently scheduled to begin a PFS related trial and Michigan in October along with the next step in the combat arms.
They are plugged multi district litigation with 1 trial in September and 1 in October.
And finally during the second quarter, we incurred a pre tax restructuring charge of approximately $40 million as part of the program, we announced in Q4 of last year.
Second quarter net.
<unk>, you price and raw materials performance reduce both operating margins and earnings per share by 140 basis points and 17 and risk.
And respectively.
This headwind was larger than forecasted as we experienced broad based cost increases for chemicals resins outsource manufacturing and logistics.
As the quarter progressed.
As a result of these increasing cost trends, we now forecast our full year raw material and logistics cost headwind in the range of 65 to <unk> 80 per share versus a prior expectation of 30 to 50.
As we have discussed we have been.
Bean and are taking multiple actions, including increasing selling prices to address these cost headwinds.
As a result, we expect continued improvement and our selling price performance and the second half of the year.
However, given the pace of cost increases we currently expect our third quarter.
And net selling price and raw materials headwind to.
<unk> margins and the range of 50 to 100 basis points.
Which we anticipate will turn to a net benefit in the fourth quarter as our selling price and other actions start catching up to the increased costs.
Moving to divestiture impacts the loss.
Income from the sale of drug delivery and May of last year was a headwind of 10 basis points to operating margins and 2 cents to earnings per share.
Foreign currency net of hedging impacts reduced margins 20 basis points, while benefiting earnings by 8 per share.
And finally, 3 non operating items combined had a net neutral impact to earnings per share year on year.
This result included a <unk> <unk> earnings benefit from lower other expenses.
That was offset by higher tax rate and diluted share count.
Which were each a headwind of 3.
Loss share versus last year.
Please turn to slide 7 for a discussion of our cash flow and balance sheet.
We delivered another quarter of robust free cash flow with second quarter adjusted free cash flow of $1.6 billion.
Up 2% year on year, along with conversion of 1.
Plus 3%.
Our year on year free cash flow performance was driven by strong double digit growth and sales and income.
Which was mostly offset by the timing of and income tax payment of approximately $400 million and last year's Q3, which is traditionally paid in Q2.
Through the first.
First half of the year, we increased adjusted free cash flow to $3 billion versus $2.5 billion last year.
Second quarter capital expenditures were $394 million and approximately $700 million year to date.
For the full year, we are currently tracking to the low end of our expected.
100, and Capex range of $1.8 billion to $2 billion, given vendor constraints and the pace of capital projects.
During the quarter, we returned $1.4 billion to shareholders through the combination of cash dividends of $858 million and share repurchases of.
$503 million.
Year to date, we have returned $2.5 billion to shareholders in the form of dividends and share repurchases.
Our strong cash flow generation and disciplined capital allocation enabled us to continue to strengthen our capital structure.
We ended the quarter with $12.7 billion.
And net debt a reduction of $3.5 billion since the end of Q2 last year.
As a result on net debt to EBITDA ratio has declined from $1.9 a year ago to 1.3 at the end of Q2.
On net debt position along with our.
Our strong cash flow generation capability continues to provide us financial flexibility to invest and our business.
Pursue strategic opportunities and return cash to shareholders, while maintaining a strong capital structure.
Please turn to slide 8 where I will summarize the business group performance for Q2.
I will start with our safety and industrial business.
Which posted organic growth of 18% year on year and the second quarter.
Driven by improving industrial manufacturing activity and prior pandemic impacts.
First starting with our personal safety business, we posted double digit.
Organic growth in our head face hearing and fault protection solutions as demand and general industrial and construction end markets remains strong.
However, this growth was more than offset by a decline and on an overall respiratory portfolio due to last year's strong COVID-19 related demand, resulting.
Results and an organic sales decline of low single digits for our personal safety business.
Within our respiratory portfolio second quarter disposable respirator sales increased 3% year on year.
But declined 11% sequentially as Covid related hospitalizations declined.
Looking ahead, we anticipate continued deceleration and disposable respirator demand through the balance of this year and into 2020.2.
Turning to the rest of safety and industrial organic growth was broad based led by double digit increases and automotive aftermarket.
Proofing granules.
Abrasives and.
These lives and tapes and electrical markets.
Safety and industrial second quarter operating income was $718 million up 15% versus last year.
Operating margins were 22, 1% down 130 basis points year.
Sure.
As leverage on sales growth was more than offset by increases in raw materials logistics and ongoing legal costs.
Moving to transportation and electronics.
<unk> grew 24% organically despite sustained challenges from semiconductor supply chain considering.
Constraints.
Organic growth was led by our auto OEM business up 76% year on year compared to a 49% increase and global car and light truck builds.
This outperformance was due to several factors.
First the regional mix of Euro on your growth and car.
We are on the truck builds what and regions, where we have high dollar content per vehicle.
Second our year on year increase and sell in of 3 M product versus the change and build rate.
Lastly, we continue to apply 3 M innovation to vehicles.
Gaining penetration onto new platforms.
And light our electronics related business was up double digits organically with continued strength and semiconductor factory automation and data centers.
Along with consumer electronic devices, namely tablets and Tvs.
Looking ahead, we continue to monitor the global semiconductor supply.
And and its potential impact on the electronics and automotive industries.
Turning to the rest of our transportation and electronics.
Advanced materials.
<unk> solutions and transportation safety, each grew double digits year on year.
Second quarter operating income was 5.
$246 million up over 50% year on year on.
Operating margins were 22% up 340 basis points year on year.
Driven by strong leverage on sales growth, which was partially offset by increases in raw materials and logistics costs.
Turning to our health care business, which delivered second quarter organic sales growth of 23%.
Organic growth was driven by continued year on year and sequential improvements and health care elective procedure volumes as COVID-19 related hospitalizations decline.
On medical solutions business grew.
Mid teens organically are up approximately 20%, excluding the decline and disposable respirator demand.
I am pleased with the performance of <unk>, which grew nearly 20% organically and the quarter.
As it helps us build on our leadership and advanced wound care.
Sales.
And our oral care business more than doubled from a year ago as patient visits have nearly returned to pre COVID-19 levels.
The separation and purification business increased 10% year on year due to ongoing demand for Biopharma filtration solutions for Covid related vaccines and therapeutics.
Along.
Improving demand for water filtration solutions.
Health information systems grew high single digits, driven by strong growth and clinician solutions.
And finally food safety increased double digits organically and.
Food safety activity returns along with continued.
Strong growth from new product introduction.
Healthcare second quarter operating income was $576 million up over 90% year on year operating margins were 25, 3% up 880 basis points.
Second quarter margins were driven by leverage.
Average on sales growth, which was partially offset by increasing raw materials and logistics costs, along with increased investments and growth.
Lastly, second quarter organic growth for our consumer business was 18% year on year with strong sell in and sell out trends across most retail channels.
Our home improvement business continues to perform well.
Up high teens organically on top of a strong comparison from a year ago.
This business continued to experience strong demand and many of our category leading franchises.
Particularly command.
Filtrate and Mcguire.
Stationery and office grew strong double digits organically in Q2 as this business laps last year's Covid related comparison.
We continue to see strength and consumer demand for Scotts branded packaging and shipping products.
Along with improved sell and trends and posted solutions and Scotts branded home and office day.
As retailers prepared for back to school and returned to work place.
Our home care business was up low single digits organically versus last year's strong Covid driven comparison.
And finally, our consumer health and safety business was up double digits as we lap COVID-19 related impacts from a year.
[noise] ago, along with improved supply of safety products for our retail customers.
Consumer's operating income was $311 million up 12% year on year on.
Operating margins were 21% down 160 basis points and increased costs for raw materials logistics and.
So its hard goods manufacturing, along with investments and advertising and merchandising more than offset leverage from sales growth.
Please turn to slide 9 for a discussion of our full year 2021 guidance.
While uncertainty remains we expect global economic and end market growth to remain strong.
Strong however.
However continue to be fluid as the world wrestles with ongoing COVID-19 related impacts that we all see and monitor.
And therefore, there are a number of items that will need to be navigated as we go through the second half of the year.
For example, we anticipate continued sequentially.
<unk> and health care elective procedure volume.
Also we expect ongoing strength and the home improvement market.
And currently anticipate students returning 2 classrooms and more people returning to the workplace.
Next we remain focused on driving innovation and penetration.
Rental and mobile auto OEM and electronics customers.
These 2 end markets continue to converge as highlighted by the well known constraints and semiconductor chip supply.
This limited chip supply is expected to reduce year on year, automotive and electronics production volumes and the second half.
With that Glenn mentioned earlier, we expect demand for disposable respirators to wane and negatively impact second half revenues by approximately $100 million to $300 million year on year.
Turning to raw materials and logistics as noted we anticipate a year on year earnings headwind of 65.
80 per share for the full year of 40 to 55 and the second half due to rising cost pressures.
We are taking a number of actions, including broad based selling price increases to help mitigate this headwind.
And finally, the restructuring program, we announced last December remains on track.
2 as part of this program, we expect to incur a pretax charge and the range of $60 million to $110 million and the second half of this year.
Thus taking into account our first half performance along with these factors we are raising our full year guidance from both organic growth and earnings per share.
Organic growth is estimated to be 6% to 9% up from the previous range of 3% to 6%.
We now anticipate earnings of $9.70 to $10.10 per share against the prior range of $9 and $22.9.70.
Also as you can see we now expect free cash flow conversion in the range of 90% to 100%.
Versus our prior range of 95% to 105%.
This adjustment is primarily due to ongoing challenges and global supply chain raw materials, and logistics, which I expect.
Persist for some time.
Turning to the third quarter, let me highlight a few items of note.
First we currently anticipate continued improvement and health care elective procedure volumes across most parts of the world.
Global smartphone shipments I expect to be down high single digits.
And just year on year.
While global car and light truck builds I expect to be down 3% year on year.
Relative to disposable respirators, we anticipate a year on year reduction and sales of $50 million to $100 million due.
Due to continued decline in global demand.
As mentioned earlier.
We are anticipating a third quarter year on year on operating margin headwind of 50 to 100 basis points from selling prices net of higher raw materials and logistics costs.
On the restructuring front, which I previously discussed we expect our Q3 pretax charge and the range of $50 million to $75 million.
As a part of this program.
And finally, we expect higher investments and growth productivity and sustainability and the quarter.
Along with higher legal defense cost as proceedings progress.
To wrap up our team has delivered a strong first half performance, including.
And broad based growth good operational execution robust cash flows and and enhanced capital structure.
With that being said, there's always more we can do and will do.
We continue to prioritize capital to our greatest opportunities for growth productivity and sustainability.
While remaining focused.
<unk> on delivering for our customers, improving operating rigor and enhancing daily management.
I want to thank our customers and vendors for their ongoing loyalty and partnership and especially our employees for their dedication and perseverance and execution in these uncertain times.
With that.
I. Thank you for your attention and we will now take your questions.
Ladies and gentlemen, if you would like to register your question using a landline phone. Please press. The 1 followed by the 4 and your telephone keypad, you'll hear a 3 tier impromptu acknowledged your request.
If your question.
And has been answered and you would like to withdraw your registration. Please press the 1 followed by the 3.
If you're using a speaker phone please lift your handset before entering your request.
Please limit your participation to 1 question and 1 follow up 1 moment.
Please while we compile the Q&A roster.
Our first question comes from the line of Scott Davis with Melius Research. Please go ahead.
Hi, good morning.
Good morning, Scott Good morning, Scott.
I'm on slide 13, the appendix just looking at the price.
Data and.
Based on my notes price was up about I think 70 basis points last quarter. It looks like 10 basis points this quarter.
But the real headwind was Asia Pacific what what can you give us a little color into kind of I know.
So.
What what's impacting the price dynamic perhaps from accomplishes 2 there so I'll just leave it at that.
Yeah sure Scott its great question, and you're right, but as I first side and now we are raising prices everywhere.
Taking a little bit of time, but it's broad based you see and what it would be upside will.
Some of this fifth third quarter and the fourth quarter to answer your question specifically on the second quarter you hit on 1 point, which is a comp comp issue from year over year, but the second piece of this was also as the volumes came in pretty strong and the second quarter.
And we had some rebates that get accounted for with that extra volume and that drove it but when you reflect.
On the guide that we gave you price pretty much came and where we had thought it just slightly lower than that so we were expecting this.
Okay and then.
Was there a supply chain impact on sales and explicit supply chain impact on sales that held back sales or is it more just a cost logistics issue.
I would say Scott, it's really hard to figure out exactly what the impact was there definitely was an impact I would say in general in the larger market and 3 M was no different where supply constraints were there. The team has done a marvelous job of trying to keep the factories running the best they can and making sure we're taking care of our customers.
Quickly as we can so I would say that we're more inefficiencies that we have had to deal with just as raw material was not as fluid as we would have thought through this process, but overall, we have done our best to keep our customers whole through this process.
But this is an ongoing piece Scott if you're allowed to watch how the second.
Second half plays itself out youre seeing not only us, but and markets also getting impacted by some of the raw material shortages and are we just going to keep working just as we go through the second half.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please go ahead.
Thanks, Good morning, everybody good morning, Joe.
And you guys talk a little bit about the durability in the healthcare margins.
Impressive back to 25% this quarter I'm just wondering if this is now kind of like a baseline going forward.
And we're back to kind of like debt.
The 2019 ish type level.
Yeah, I think Joe that's a great question and I think we also keep looking at that all the time I would just start with the team's done a really nice job of continuing to drive margins up while still investing and the business.
And sharp increase on a year over year basis is driven.
Driven by a lot of the volume increase that you saw Q2 of last year versus Q2 of this year.
And I would say the volume leverage was helped but we still got hurt by raw materials and logistics costs, and we continue to invest and the business I will to answer your specific question on what does it look like going forward I think it all comes down to ultimately.
And as volume turn out to be as I said in my prepared remarks that disposable respirators are starting to slowdown youre seeing a Q3 impact of $50 million to $100 million on a year over year basis, and 100 to 300 million for the second half. Some many most of that should hit the health.
Natalie regimen, and so we'll see where volumes plays itself out, but secondly, I think is how much investments, we keep driving as we see hospitalizations increase and and.
Electric procedures go up so I think it's going to be a trade between that.
Overall, I would say the team and I, we all believe and continuous improvement. So we are going to keep.
Driving productivity continuing to reduce cost investing where we think it's the right place to invest and driving efficiency and SG&A as much as we can.
Thanks, maybe just following up on that.
And helpful helpful to have that contact as I think about you know.
Just the health care.
You did mention that elective procedures have been and increase.
And perhaps maybe thats going to offset some of the respirator and can we think of that as being mix accretive.
And its impact.
R.
Our increasing and.
And are potentially offsetting that.
And that's and respirators.
I would tell you I think the way we got to think about it is as electives go up we don't have a 1 for 1 perfect connection between elective so it depends on which piece of the demand goes up.
So it's really hard to give you the perfect guidance on whether it makes on art what I generally believe is as elective.
<unk> procedures go up and as volume picks up you will see us getting more leverage because of that how much the disposable respirator volume goes down and and where it comes from and also have an impact. So it's a hard 1 for me to quantify exactly.
Thank you on <unk>.
Next.
Question comes from the line of Stephen Jay.
RBC capital markets. Please proceed with your question.
Okay. Thank you and good morning, everyone.
Hey, just want to say that slide 9 is especially helpful with all the moving parts your assumptions for the year.
And as for the third quarter. So appreciate all those specifics and my first question is on capital allocation and you've got the balance sheet and good shape..1 3 times net leverage you did restart buybacks, but still share count creep looks like it increased why would you not be doing more buybacks.
And.
Can we start there please.
Yeah sure Deane as I totally you know from.
Our priority of capital allocation and our first priority is always investing organically between R&D and Capex because we think that's the biggest return for our money. The second is dividend you've seen we've increased dividend it's.
60, 30, or and the role that dividends up it matters to our shareholders.
And so our second priority our third priority is M&A and we will normally do M&A in the area, where we believe that the target that we can acquire can benefit from being a part of 3 M.
Right now we are busy integrating our celerity and that team is doing a nice job into.
Here on that so we don't see any acquisitions of the size of facility and the near future, but we have an active pipeline of a number of things and.
And I lost discretionary use of capital allocation of share buyback. So for the year year to date, we have done $700 million give or take.
And I would say share buyback and continue.
Continued share buy depends on what the volume is going to be depends on the needs of future capital and.
Users that we have as well as what the cash flow that we generate.
And will depend on on that so I would say we will keep you posted during these quarterly calls as we continue this program and decide how much we do.
Integrated thick and then just as a follow up given all the changes it seems like day to day and the macro any commentary about how July has started especially regionally would be helpful. Here. Thanks.
Yes.
I would say I start with the expectation that the team is going to continue to execute well as we go into the.
And second half of the year and we've talked about some of the dynamics moonish outlined the number that we're seeing I would say so far no surprises as we start the first few weeks of July.
And we are expecting.
Global macroeconomic.
And end market strength to continue.
We'll remain fluid I would talk about the uncertainties as we look into the second half we.
We expect and are seeing continued increase in elective procedures and healthcare home improvement are expected to remain strong.
Industrial more broadly and generally improving as we go on the second half.
And we talked about it.
First half we saw broad based growth across geographies and we expect this.
And to continue the uncertainty there is COVID-19 and the impact on.
And on any.
Increases in cases, and hospitalizations and Theres certainly some areas.
Around the world, where we're seeing that and then.
Even as we talk about the decline and and respirator disposable respirator demand globally, we're seeing areas that we.
We are increasing supply and and so that's going to be 1 of the things that can impact second half geographically and across the world. So while we expect overall and.
Pandemic related respirator demand to decline and we expect some areas, we will see stronger and stronger demand and.
Corporate plays out so that gives you a little.
Bit of a view of how we look around the world second half.
Thank you.
Next question.
Comes from the line of John and loss with Credit Suisse. Please proceed with your question.
Hi, good morning, everyone.
Good morning, John.
Maybe just for the first 1 a clarification wanted to know if you could give us an order of magnitude of what you're looking at in terms of price increases that you plan to put through across the product portfolio and and obviously understand it will probably vary by product line.
And and then second question is if I look at your kind of organic growth.
M. You know kind of the same growth on growth and Q2 is Q1 was curious if you have any commentary around customer channel inventory and if youre seeing any change in behavior there.
Yeah.
Yes, John I would say if price.
Our teams are focused on munis talked about on on taking price and the second half to help us offset what we're seeing and inflation and thats fairly broad based and we are.
And we take.
As we've talked about it take some time to implement price changes and and get ahead.
Thank you Shannon and its been inflation has been and ongoing challenges we've gone through the year. So we're expecting to see stronger price broad based as we get into the second happened into fourth quarter. We we start to see a price raw positive positive impact and if you.
Look at where where our channel.
And of inflammatory today you know this is something we're always asking ourselves. It's a dynamic that we are continuously and measuring and assessing every region on the world and and I would say given the dynamics and the marketplace, the snapback and the economy, the fluid and and uneven market dynamics, it's difficult to know what the right level as today, we get visibility on.
Channel and our sell in and sell out is.
With that snapback in demand, it's hard to get clear visibility on on.
Level, the appropriate levels of inventory and there are some areas of course that are are very visible the ongoing semiconductor chip shortages and theyre impacting production volumes and and we are we see are our inventory.
On where and aligning with that.
We've talked quite.
And quite a bit about the visibility, we're putting on and 95 respirators, specifically, but beyond that it's really going to depend on how demand plays out and each market to really do it.
Get a view as we go through third quarter on where inventory and.
Channel sets.
And the channel great. Thanks for taking the questions.
Thank you.
And as a reminder, we ask that you. Please limit your participation to 1 question and 1 follow up.
Our next question comes from the line of Julian Mitchell with Barclays.
Please proceed with your question.
Hi, good morning.
Just wondering too and to good morning, I, just wanted to try and circle back to the safety and industrial.
Outlook.
And I suppose it's possible if we look at Q4 that your sales and that segment.
Can you be down year on year and aggregate because of respirators and just wanted any perspectives on that and also the margin implication.
And 2020, you'll F&I margins were up a good amount Q2, the softer I think sequentially and.
Year on year.
As the respirator business.
So should we.
We expect that sort of mix headwind to <unk>.
Play out for a few more quarters.
Yes, I think Julien it's a great question on on safety and industrial so to answer.
To your specific question first on the impact could it be negative on a year over year basis as well.
As we said and just a reminder, and 2019, we used to have revenue of approximately $600 million of disposable respirators that went up to 1.4 billion in 2020 and as.
And so get the second half we told you there could be a risk of 100 to 300 million, which is a range of where we think disposable respirator volume would come down on a year over year basis.
And if we go to that higher end of the range, which is 300, yes. The answer is you could definitely see negative volumes, what we have been.
And doing as a part of this is health care demand has waned do you do.
Lower hospitalizations due to Covid and increase and elective is we have been moving production out from the hospital channel 2 different parts, which is industrial and government, which we are actively doing.
The other piece.
And so of safety and industrial is as I mentioned in Q2, we have seen growth and quite a few other segments of safety and industrial whether its in our respiratory portfolio with our safety portfolio, but had head and face mask, whether you've seen us increase in auto.
Our abrasive business and our.
Adhesives business roofing granules. So all the other segments automotive aftermarket has seen increase and depending on how the economy plays itself out and as long as industrial activity continues you should see continued growth in those areas and our current assumption is that long term those markets will come back I think it's going to be a.
A little fluid and in the second half depending on how COVID-19 plays itself out to.
To answer your second question on margin you're right as we have seen in 2019 versus 'twenty. We did get benefited a lot by the volume day to leverage that we got across safety and industrial and so ultimately where volume lands and the.
And our App will have had an impact on weighted margins ultimately go.
We're actively working on price increases broad based and that segment. It's how much of that is offset by price and draws on logistics costs.
This is the second offset and then the third 1 is the ongoing.
Boeing.
Legal fees.
These are reserves that we've taken will be the third 1 and then the last 1 I would say is what do we invest in growth productivity and sustainability, and especially growth because that industrial activity goes up and 22 and 23, we're going to continue to invest in that segment. So put all that together, that's how we see where margins are going to land.
Second half.
Yeah.
Thank you.
Our next question.
From the line of Steven Tusa.
Mark and.
Please proceed with your question.
Hi, Good morning, Hey.
Hey, good morning.
Yeah.
Can you just maybe talk.
Talk about other than.
And the mask headwind kind of sequentially do you expect.
The kind.
Kind of auto stuff like what else is getting worse sequentially kind of on.
And we think about 3 to 4.3% and <unk> trends.
So Steve I.
Hey.
And just put everything in the context of back 2 and markets in total we feel will remains strong.
Youre going to see volatility as we get through the second half, but what happens with Covid. So a couple of items to note. We believe that elective procedures will continue to go up.
Quarter over quarter, but.
And would say parts of the World you could see it go down.
Secondly, I would say auto does show and increase its still on a year over year headwind down, 3% and the third quarter and if my Memory's right. It's projected to be down 3.7 and the fourth quarter I think the semiconductor shortages will have an impact on.
On what happens.
And is there and we'll see where that plays itself out.
Smartphone shipments are supposed to be down on a year over year basis, we'll see where it lands sequentially.
And then tablets and Tvs, which also will benefitted tremendously last year are also projected to be down on a year over year basis, but hard to quantify what.
And some back and it looks like on a sequential basis, you've seen us you've seen a pretty good increase and stationery and office supply and the second quarter.
And that momentum is there right now where we are seeing sell in trends as retailers are planning to have people more people return to the workplace kids in school, but depending on how the pandemic.
So that could have an impact.
And then on safety and industrial as I mentioned and in the prior question I think there is an assumption that industrial activity continues but currently the supply chain shortages across the word also put a lot of.
Variability on to what that demand looks like and that's why when we put all.
And I together, we said we are prudent to call the year at 6% to 9% for the year versus the 3% to 6% debt, we had said earlier, but.
Go ahead, and I guess at it at the high end of the range.
And I think first half to second half sales are down which.
And which makes sense because of the mask dynamic.
All of that and normally seasonally.
Thank you are down and the <unk> from on a modestly up <unk> versus <unk>, but.
But I guess is there anything this year seasonally I E kind of the semi shortages kind of pushing demand to be a little bit better seasonally sequentially youre kind of saying there.
A lot of moving parts and like so it's kind of normal seasonality and that including kind of the masks.
That's right there is a lot of variability, but we'll keep you on.
Okay, alright, thanks, a lot I appreciate it cool.
Yeah.
Thank you.
Next question comes from the line of Nigel.
Nigel Coe with Wolfe Research. Please proceed with your question.
Good morning, everyone.
And I imagine.
Yes, so on.
On the roadmap.
Let me just based on.
FIFO convention and.
Purchasing et cetera, when do you.
We expect commodity inflation to peak and I don't know, whether thats on a year on year basis, or whether on sequential basis, but when do you expect.
See the peak and.
And those roadmaps.
So if you're asking specifically on commodities I think it's a really hard 1 to call. For example, I would tell you when we.
We gave our guide of 30 to 50 cents, which is now being guided to 65% to 80.
I would tell you what we have seen is a broad based increase and all commodities, whether it is polypropylene chemicals resins, we are seeing.
And our outsource manufacturing goods, not just the labor cost, but other commodity.
First go into that also getting passed and then logistics cost has continued to be a pretty strong headwind where that peak I think and in my view and I may be wrong. It at some point demand and supply and need to start settling itself out there's a lot of demand there's not enough supply based on all the V shape recovery.
Is that a congestion and the ports et cetera, and until that stabilizes itself out I think we're going to continue to see inflation, we have seen where crude prices have gone up much heavier than we had thought coming into the year polypropylene has remained strong or heavy inflationary ocean rates have gone up or locked.
With 3 to 6 months, so it's really hard for us to come back and say when does it peak and when it starts coming down so we have taken what we know.
Putting all the factors that we know we have had a prediction of where we think these things could go and we have come up with 65% to 80, which currently is the best guide of everything.
And the line is going to be but with that said as I've mentioned, we are taking broad based price increases everywhere to help offset the mitigation of this we're also increasing yield we are working with our suppliers to reduce prices.
Et cetera, and then and so third quarter, we will see a headwind of 50 to 100 basis points price versus raw and in the.
Inflate water, our anticipation is that we should be able to get it to be flat to positive, which means price will offset the raw material inflation.
Okay. That's really helpful explanation and I think I am.
I think the view here on the.
On the second half outlook, you call net legal costs and legal defense costs and the second.
Half of the year.
Didn't give a number around that from assuming that's not that material.
And thinking about the magnitude of that and the back half and just confirm defense costs and not net.
So and I'm thinking here about litigation and also the Hudson and falls.
Settlement that you just announced.
Yes, so I think the first 1 debt Husak fault settlement was a part of our reserves and that was a part of the calculus already I would say.
We will we are it's ongoing litigation if you look at all the SEC material that we file as well as the Q that will get filed later on the day should give you an update of all the cases.
But just for your benefit we got a P fast case coming up and the October of this year.
Wolverine and and the use of PFS and there and we've got to combat on trials coming up so as we prepare for those cases thats the increased cost and legal fees and what I would tell you is we will spend waters.
What is required to defend ourselves as we go through these cases and that's what the cost is being and good for them.
Thank you on.
Next question comes from the line of and you have been.
With Bank of America. Please proceed with your question.
Yes, good morning.
Good morning.
Just sort of on a longer term question.
I think historically 3 M has.
Has very strong position in terms of sort of global capacity and your key technologies.
Do you think about sort of global non woven capacity post COVID-19.
And are you seeing emergence of new players does it change sort of strategic landscape with 3 M. BS IV players, particularly players out of Asia longer term. Thank you.
Yes, Thanks, Andrew.
As I highlighted in my prepared remarks, we saw probably the peak of demand at least near term and.
And Q1, and we as you know we built additional capacity as we went through 2020.
By the end of the year, we were at a run rate of $2.5 billion.
Billion, and 95, respirators and on an annual basis and and so that's the capacity we come into the year other other manufacturers build capacity as well to respond to the pandemic.
And I think youll see some of them idling some of their capacity as demand comes off the peak and we'll begin that process as well to idle lines to be ready for the next emergency or changes and COVID-19, and when we can ramp up quickly. So our strategy is is to be.
And our position and be a leader in personal safety personal protective equipment in normal times, and that's really serving the broader industrial markets.
Serving consumer market, serving health care markets and Thats.
And our strategy for where we manufacture and the volumes and then we have that idle capacity. So we can see.
And in times of emergency.
I think we were and are better positioned than ever before globally to be able to respond to a pandemic and I would add it's been good to see governments following through on their commitments to stockpile and that's something that and we have a number of efforts underway around the world that we're supporting as we've come through.
Through the first half of the year, so that that I think prepares the world.
<unk> for the next emergency and the next pandemic. So it's going to it will depend on when you look at where are we going to end up with respirator demand. We think we'll end up somewhere above where we were pre pandemic as use and protocols are changing around.
Round, the world will be well aligned to serve that our brand will be strong we've got a leading brand position and PPE and can.
And really take advantage of debt position around the world and so I think we've got the model well aligned I think there is a surge capacity that that will be available how much will.
And will depend both on on.
On the demand that comes and any kind of future emergency and and I.
I think we're like I said, we are ready for our part of that.
I guess from my question on sort of broader and longer term and a lot of this technology is used.
<unk> automotive.
And I was just wondering if you expect the incremental capacity that was brought on by your competitors to go into these industrial and Adjacencies and generated just more global competition that was the question actually yes, Andrew I can I can speak about us and we are our non woven capacity, we do leverage.
And utilize that and other areas other products that we have like air filtration, so it isn't and opportunity for us even with the capacity that we built to be.
Spot to the pandemic, we can take advantage of that and use that and other areas and that's something that and we're able to do broadly we take our tech.
That and juice and find innovative uses for them and air filtration is 1 of those will others do that I'm sure there'll be a focus and and other other markets for some of that capacity around the world how much.
I don't know how to give you a view of that perspective, the world will continue to grow and we see trends and Perth.
Technology safety Air filtration and so the demand is going to continue to grow so to some degree it will the demand and the capacity will will grow into the demand as we go forward over time.
Thank you.
Our next question comes from the line of Nicole to place some.
And from Deutsche Bank. Please proceed with your question.
Thanks, Good morning, guys good morning.
<unk>.
And we always give kind of a helpful color by geography, and Theres been a lot of noise about things kind of falling down in China with respect to you know a lot of different pieces of macro data can you guys and talk a little bit about what youre seeing and China.
Across your businesses.
Sure Nicole.
I'd like.
And I highlighted for the broader business, we saw broad based growth double digit growth and our transportation and electronics, our safety and industrial and our health care businesses consumer was up mid single digits as we came through the quarter and our growth was led by.
By General industrial and some some of the segments that are growing there, including our abrasives portfolio auto OEM had strong growth and electronics.
It's a it's important market for us, it's 10% of our total revenue it grew over 20% and the first half last year.
Second quarter, we saw 3% growth so China recovered if you remember ahead.
Ahead of other regions around the world and.
And when you look at the second half comparisons start to get a little more challenging and and so we're expecting just year over year comps I would say.
We expect to see a little more challenged there we still see opportunities.
And for growth across our businesses and.
Some of the same areas that we've highlighted on a global basis automotive will continue to be a focus penetrating with the Oems there and.
And we see even though it's our smallest business, we see significant opportunities to serve Chinese consumers through our consumer business, especially in areas like air and water quality. So.
We see opportunities and maybe a more challenging year over year comp, but still opportunities for growth.
Got it thanks, Mike and if I could just follow up on the second half margin outlook. There's clearly a lot of moving pieces here with legal costs growth investments price call, maybe just to boil it down do you.
Silicon back to kind of be in that 30% to 40% incremental margin range and <unk> and <unk>.
So I would just say Nicole volume is the biggest driver that gives us leverage so I think thats step number 1 with all the while there to lead on uncertainty that's out there. The question is weighted second half volumes.
Land as well as we've given you a range on disposable respirators are going to be down $100 million to $300 million on a year over year basis debt team continues to drive operating rigor, so driving productivity and efficiency across the supply chain, we are going after price increases and R&D.
Our anticipation is that and the fourth quarter, we should be able to offset the price the raw and logistics cost impact. So I would boil it down to saying what margin will come down to and the second half and and what Incrementals are will depend on the volume will depend on our ability to offset the price the raw and logistics pressure through pricing.
Price increase.
Continued productivity and good execution by the 3 M team and then finally, our decision on how much we are going to invest in growth growth productivity and sustainability plus a lot of these indirect that start snapping back and hopefully people start traveling you've seen we've been very disciplined and the first half.
It's making sure that we didn't spend ahead of what volumes come back, but as we see volumes coming back in and Youre going to see those indirect start snapping back up.
And then the last 1 is the legal fees and continuing to do what we think is right to protect ourselves as these cases go through so that's all the factors.
Ultimately impact what the incrementals are going to be.
Thank you.
And.
Our next question comes from the line of and you got to win with Citi. Please proceed with your question.
This is a time buchbinder on for Andy Kaplowitz.
Good morning, good morning.
Hi P M.
Priority growth platforms delivered 10% growth and Q1 can you update on how the group performed in Q2 as well as your outlook for the faster growing businesses and the back half of the year.
Yes.
And the priority growth platforms also had strong growth.
That I talked about our Q1 second quarter as well so overall, they were up over 40% and second quarter.
Now over half a billion dollars and revenue as a group.
Highlighted a couple of other areas of our business is seeing strong sequential growth and market dynamics.
And we are attractive. So these priority growth platforms broadly are in attractive market spaces part of that priority investment and growth that we've been talking about even as we came through 2020, staying focused on aggressively investing in growth areas and and Pgp's.
And we call them and the priority growth platforms continue to be important part and performing well.
Thank you that's helpful on the electronics business group was up 13% year over year, but down sequentially about 4%, so could ongoing chip supply constraint and lead the business to decline sequentially in Q3.
Well.
We saw as we said some strength and their end markets.
And I think it's.
The first half we were up overall still low teens for the business.
And on.
Maybe it's a.
I would say the.
It was really more of a seasonality than than a sequential dynamic and as.
Second half the 1 other thing I would add we're going to start to see some more challenging comps we saw strong growth dynamics not only in our home improvement and and other areas and consumer and also in the cleaning supplies business as we went through the pandemic. So that's the other dynamic to watch.
Thank you that concludes our question.
And we get to a certain portion of our conference call and I'll now turn the call back over to you Mike.
And then.
To wrap up our second quarter performance was strong marked by broad based growth increased margins and robust cash flow I'm confident and our ability to continue executing well as.
And and navigate COVID-19 impacts and we will stay focused on taking advantage of market trends and overcoming supply challenges, while continuing to invest and growth productivity and sustainability. Thank you for joining us.
And ladies and gentlemen that does.
This concludes the conference call for today, we thank you for your partition.
As we nation and <unk>.
Please disconnect your line.
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