Q1 2021 3M Co Earnings Call
[music].
And ladies and gentlemen, thank you for standing by welcome to the three and first quarter earnings Conference call, Joe and good presentation, all participants will be in a 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 for on your telephone keypad.
It is recommended that you use and landline phone if you're going to register for a question.
As a reminder, this conference is being recorded Tuesday April 27 2021.
I'd now like to turn the call over to Bruce Jim Malone.
Senior Vice President of Investor Relations at three P M.
Thank you and good morning, everyone and welcome to our first quarter earnings Conference call.
With me today are Mike Roman <unk>, Chairman and Chief Executive Officer.
<unk> <unk>, our Chief Financial Officer.
Along with John <unk>, our Chief Technology Officer.
John is joining us today to discuss our new sustainability goals, which.
Which we introduced in February.
Mike <unk> and John will make some formal comments 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 website at three a M dot com under the heading quarterly earnings.
Please turn to slide two.
Yeah.
Before we begin let me remind you of the dates for our upcoming 2021 quarterly earnings Conference calls.
Which will be held on July 27, and October 26.
Please take a moment to read the forward looking statement on slide three.
During today's conference call, we will make certain predictive statements that reflect our current views about three and 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 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 will be making references to certain non-GAAP financial measures.
Reconciliations of the non-GAAP measures can be found and the attachment to today's press release.
And finally cash.
As previously disclosed in our form 8-K dated March 22nd 2021 three.
Three of them changed its accounting principle for pension and post retirement plan cost and our measure of segment operating performance.
The information provided here and reflects the impact of these changes for all time periods presented.
Please turn to slide four and I'll now hand, it off to Mike.
Mike.
Thank you Bruce good morning, everyone and thank you for joining us.
For first quarter was strong for three of them.
And with broad based organic growth across all business groups and geographic areas.
Our team executed well and posted record sales robust cash flow and expanded margins.
Along with a double digit increase and earnings per share.
We saw encouraging improvement and many of our end markets well.
And while others remained well below pre pandemic levels.
We also faced and addressed ongoing supply chain disruptions due to COVID-19 exactly.
Exacerbated by improving macroeconomic trends and winter storm Yuri.
All of which are increasing the cost of doing business.
I am proud of the way three hours have stepped up to manage and overcome these challenges.
Keeping our factories running and expanding our manufacturing capacity and.
And driving innovation for our customers across our businesses.
We have found new ways to engage with customers and create solutions no matter, where we are around the world.
<unk>, we will take forward as we come out of the pandemic.
Looking ahead, we expect continued strengthening of the global economy.
So we anticipate the recovery to be uneven as the trajectory of the pandemic rollout of vaccines and government policies evolve in different stages around the world.
We are confident and our business as we navigate COVID-19 uncertainty.
And with one quarter behind US we are maintaining our full year guidance for organic growth earnings per share and cash flow.
Our team remains focused on driving growth improving.
Operational performance.
And delivering for our customers and shareholders.
Please turn to slide five.
Company wide total sales increased to $8 9 billion.
And with organic growth of 8%.
And earnings of $2 77 per share.
27% year on year on an adjusted basis.
Geographically organic growth was led by Asia Pacific.
Up 13% with China up 32%.
Growth in the Americas was 6% with the United States up 7%.
While EMEA grew 6%.
We expanded our adjusted EBITDA margins to nearly 28% with all business groups above 23% and.
And increased free cash flow to $1 $4 billion with a conversion rate of 86 per cent.
Three of them increased our dividend and the first quarter.
Marking our 63rd straight year of increases.
We also continued to build three of them for the long term.
And prioritize investments and growth productivity and sustainability.
While we manage and market challenges related to COVID-19, we are investing to capitalize on global growth opportunities and healthcare electronics home improvement personal safety and other favorable market trends.
This includes our priority growth platforms, which grew 10% and the quarter as we apply science to advance growing areas like automotive electrification and Biopharma filtration.
The fundamental strength of three of them are unique technology platforms advanced manufacturing global capabilities and leading brands position.
Position us well to win and these markets into the future.
We are accelerating digital strategies across three of them and.
And expanding our use of data and data analytics.
To better serve our customers and improve performance.
For example, we are using new cloud based technologies to provide better insights into our global workflows.
From raw material purchase through product delivery.
Which is helping us navigate the current supply chain challenges.
We are stepping up our leadership and sustainability.
And with significant new commitments that will bend the curve on carbon emissions water use and improving water quality.
And a similar way we are implementing a long term plan to advance equity and inclusion.
As we launch new scholarship programs and a new goal to create 5 million opportunities and stem education.
With the initial efforts focused here and the twin cities.
At the same time three of them continues to help lead the fight against COVID-19.
With 630 million respirators distributed and the first quarter.
We are also providing our expertise as we engage with the bite and administration and governments around the world on how to better prepare for future Pandemics.
Overall, I am pleased with our performance and the first quarter.
And as we remain focused on driving growth improving productivity and advancing sustainability.
To provide additional insight on that last point sustainability.
I will now turn it over to <unk>, Chief Technology Officer, John <unk> John.
Thank you Mike Good morning, everyone and please turn to slide six.
I'm proud to lead <unk> research and development and sustainability teams.
Every day, we bring our innovation to bear and tough challenges, which includes apply and three M science to create a more efficient company and a more sustainable world.
And as you may have seen in February we announced expanded sustainability goals, we plan to commit approximately $1 billion over the next 20 years through both capital and operating investments to make our operations more efficient and effective for the focus on air water and waste for.
<unk>.
We are committing to become carbon neutral across our global operations.
We expect to rapidly bend, our curve IP missions with 2019, as our baseline and aggressive milestones along the way.
A 50% reduction by 2030, 80% by 2040 and 100% by 2050.
Second three and plans to reduce water use at our facilities by 25% over the next decade targeting a 10% reduction by 2022, and 20% reduction by 2020 five.
Third at our largest locations, we are taking action and installing advanced filtration technology that will return even higher quality water to the environment after its use and our operations.
These goals are driven by science and a clearly defined path we.
And we've identified the investments and technologies that will enable our success from thermal oxidizer to reverse osmosis and work is already underway.
At three EMS facility and Antwerp for example, we've expanded our thermal oxidizer system and reduced our carbon emissions by 1 million tonnes per year.
Overall, our thermal oxidizer reduce our carbon footprint by more than 90% when fully installed.
And indicator, Alabama, we have implemented a water treatment system with granular activated carbon and also known as a gas system that has improved the quality of water, we returned to the environment by 90%.
We intend to add complementary technology that will further improve water quality by 2024.
We will continue to advance new state of the art technologies, including through partnerships with customers governments communities and others to further accelerate our progress.
Our actions demonstrate <unk> commitment to continuous improvement and our ongoing work to advance our environmental stewardship.
Over the last two decades three M has reduced our emissions by 70% while doubling revenues. Our headquarters is fully powered by renewable electricity and 40% of <unk> Global electricity use is now renewable on our way to 100 per cent.
Every new three M product includes a sustainability value commitment and over the last five years, our innovations that help customers avoid 75 million tonnes of emissions.
And just last week, we committed to reduce our use of new plastic made from petroleum also known as Virgin fossil based plastic by 125 million pounds by 2025 through new packaging and innovative product design and our consumer business.
We recognize the urgency of the world's climate and environmental challenges and are focused on making a difference both today and and future generations. I encourage you to read our annual sustainability report to be released in early may for more details on our progress and priorities.
Please turn to slide seven and I'll turn it over to him and ish monish.
Thank you John and I wish you all a very good morning.
<unk> first quarter sales were $8 $9 billion.
Up nine 6% year on year or an increase of 8% on an organic basis.
Sales growth combined with operating rigor and disciplined cost management drove adjusted operating income of $2 billion up 19%.
But the adjusted operating margins of 22, 5% up 170 basis points year on year.
First quarter GAAP and adjusted earnings per share were $2 77 up 27% compared to last year's adjusted results.
On this slide you can see the components that impacted both margins and earnings per share.
Organic volume growth along with our ongoing cost management and productivity efforts were the biggest contributors to first quarter operating margins and earnings.
Adding 150 basis points to margins and 34 cents to earnings per share year on year.
Turning to selling prices and raw materials.
As Mike mentioned, we experienced increasing costs, particularly for raw materials and logistics due to the impact from the strengthening end markets.
Ongoing COVID-19 pandemic, along with winter storm Yuri.
As a result first quarter net selling price and raw materials performance reduced both operating margins and earnings per share by 20 basis points and one scent respectively.
And our view, we expect global supply chain dynamics to remain fluid and for raw material and logistics headwinds to persist.
Therefore, we now anticipate a full year raw materials and logistics headwind of 30 to 50 cents per share versus a prior expectation of flat to a 10 cent headwind at the start up per year.
Looking at the second quarter, we currently anticipate our net selling price and raw material headwinds to operating margins in the range of 75 to 125 basis points.
We are taking multiple actions to address these increased headwinds, including selling price increases global sourcing efforts, improving yields and our factories and ongoing demand planning given the dynamic environment.
We expect these actions will gain traction as we move through the year.
Particularly in the second half.
Moving to divestiture impacts.
The lost income from the drug delivery Divesture and May of last year was neutral to margins.
However was a 3% headwind year on year two earnings.
Foreign currency net of hedging impacts added 40 basis points to margins and 13 cents to earnings per share as the U S. Dollar weakened against most major currencies year on year.
We continue to expect foreign exchange to be an earnings benefit of <unk> 15 per share for the full year.
Three other non operating items impacted our year on year earnings per share performance.
First our continued strong cash flow and liquidity position gave us the opportunity and Q1 to redeem and additional $450 million of debt early that was due to mature in 2022.
As a result, we incurred higher net interest expense of approximately <unk> <unk> per share versus Q1 last year.
This impact was more than offset by year on year, nonoperating pension and benefit of five <unk> per share.
Combined these items resulted in lower net nonoperating expense of three <unk> per share versus last year's first quarter.
Secondly, a lower tax rate versus last year provided a 14th and benefit to earnings per share.
The lower tax rate was primarily a function of non repeating favorable adjustments related to U S tax treatment of international income.
Along with regional income mix and equity based compensation.
Our full year 2021 tax rate expectations remained unchanged and the range of 20% to 21%.
Finally average diluted shares were up 1% year on year.
And with reduced per share earnings by two cents.
Please turn to slide eight for a discussion of our cash flow and balance sheet.
We delivered another quarter of robust free cash flow with first quarter adjusted free cash flow of $1 $4 billion.
Up 49% year on year with conversion of 86%.
Cash flows and the quarter was primarily driven by robust growth and cash flow from operations.
Along with our ongoing daily management of working capital.
First quarter capital expenditures for $310 million.
For the full year, we continue to expect capex to be and the range of one $8 billion to $2 billion.
During the quarter, we returned $1 $1 billion to shareholders through the combination of cash dividends of $858 million and share repurchases of $231 million.
Our strong cash flow generation and disciplined capital allocation enabled us to continue to strengthen our capital structure.
We ended the quarter with $13 billion and net debt.
A reduction of nearly $5 billion since the end of Q1 last year.
As a result, our net debt to EBITDA ratio has declined significantly from two point to a year ago.
To one point for at the end of Q1.
Our net debt position along with 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 nine, but I will summarize the business group performance for Q1.
I'm going to start with our safety and industrial business, which posted organic growth of 10, 3% year on year in the first quarter.
This result includes a six four percentage point benefit from pandemic related respirator demand.
Looking ahead, we continue to anticipate strong pandemic related respirator mask demand. However, the euro and your contribution to sales growth will decline as we lap last year's quarterly comparisons.
Overall general industrial and manufacturing activity continued to improve during Q1, resulting in a pickup and growth across the portfolio.
Personal safety posted double digit organic growth year on year, driven by ongoing demand for respirators.
Industrial adhesives, and tapes grew low double digits, primarily due to strong demand across industrial and electronics and markets.
The continued strength and the residential housing market drove good performance and our roofing granules business.
It was up double digits organically versus Q1 of last year.
Turning to the rest of the safety and industrial businesses.
Automotive aftermarket grew high single digits organically, the electrical markets business was up mid single digits and abrasives grew low single digits.
While our closure and masking business declined year on year.
Safety and Industrial's first quarter segment operating margins were 24, 4%.
Up 70 basis points year on year.
Operating margins were driven by leverage on sales growth, which was partially offset by increase in raw materials logistics and legal costs.
Moving to transportation and electronics.
Which delivered a strong start to the year with first quarter organic sales growth of nine 8%.
Despite the well known and semiconductor supply chain constraints.
Our electronics related business was up high teens organically with continued strength and semiconductor factory automation and data centers.
Along with strong demand for consumer electronic devices, namely tablets and Tvs.
Our auto OEM business was up 21% year on year.
Compared to the 14% increase and global car and light truck builds.
Looking ahead, we continue to monitor the global semiconductor supply chain and its potential impact on the electronics and automotive industries.
Turning to advanced materials, which increased mid single digits largely as a result of the year on year increase in automotive sales.
And finally, our transportation safety business was flat year on year, while commercial solutions declined slightly.
Transportation and electronics first quarter operating margins were 23, 3%.
Up 260 basis points year on year.
Benefiting from strong leverage on sales growth and prior year COVID-19 related asset write downs, which were partially offset by increases in raw materials and logistics costs.
Turning to our health care business health.
Health care providers continued to be challenged from the ebbs and flows of COVID-19 cases as elective procedure volume still remains significantly below pre pandemic levels.
At the same time, we continue to experience strong pandemic related demand for respirators to protect frontline health care workers.
Which more than offset the headwinds from the decline and elective procedure volumes.
As a result, our health care business delivered first quarter organic sales growth of nine 3% versus last year.
The medical solutions business grew high single digits.
Driven by continued strong respirator demand.
Excluding respirators organic growth and this business was down low single digits due to the ongoing year on year impact of lower procedure volumes.
Organic sales for our oral care business increased double digits year on year.
This result is primarily due to last year's COVID-19 related comp as dental office has started closing their doors during Q1 last year.
The separation and purification business increased low teens year on year.
This business continues to experience solid demand for Biopharma filtration solutions for COVID-19 related vaccines, and therapeutics development and manufacturing along with improving demand trends for water filtration solutions.
Health information systems returned to positive organic growth up mid single digits, while food safety declined mid single digits organically versus last year's strong comparison.
Healthcare's first quarter operating margins were 22, 7% up 120 basis points year on year.
First quarter margins were driven by leverage on sales growth, which was partially offset by supply chain disruptions and increasing raw materials and logistics costs.
Lastly, first quarter organic growth for our consumer business was seven 8% year on year with strength across most retail channels led by E Commerce.
Organic sales growth continued to be led by our home improvement business.
Up double digits organically.
Driven by strong demand for command adhesives, Filtrate air quality solutions, and Scotch Blue painters state.
Stationery and office returned to positive organic growth and Q1.
Mid single digits with ongoing strength and consumer demand for packaging and shipping products.
This business also delivered improved growth and Scotch brand office tapes as we start to lap the COVID-19 related impacts from remote work and school trends.
And finally, our home care business was up low single digits organically versus last year's strong comparison.
Consumer's operating margins were 21, 1%.
Or similar to last year.
As leverage on sales growth was offset by increasing costs for raw materials logistics and outsource hard goods manufacturing and.
And increased investments and advertising and merchandising.
Please turn to slide 10 for a discussion of our full year 2021 guidance.
And you can see from our Q1 results we are off to a good start for the year.
Looking ahead as Mike mentioned, we expect continued strengthening of the global economy.
Along with increasing opportunities and end markets with favorable trends.
However, we foresee that the improvement for remains fluid and uneven as we go through 2021, given the ongoing impact of the pandemic.
As a result, we anticipate a number of items that will need to be navigated as we go through the year.
For example, <unk>.
<unk> with the evolving impacts from COVID-19.
Including respirator demand health care elective procedures supply chains shutdowns and government response.
And next the continued constrained supply of semiconductor chips and related impacts to consumer electronics and automotive OEM production.
In addition, the expected increase and cost for raw materials and logistics and in some cases constrained availability.
And finally, we expect to increase investments through the year in growth productivity and sustainability, along with managing ongoing legal costs as P fast and other legal proceedings progress.
Thus, taking these items into account along with being early in the year, we think it prudent to maintain our full year guidance of 3% to 6% for organic growth.
Earnings per share of $9.20 to $9.70 and.
And free cash flow conversion of 95% to 105%.
Turning to the second quarter, let me highlight a few items of note.
First we expect continued strong execution by the three M team in the face of a very fluid and uncertain environment.
As I mentioned during my remarks, we have increased the expected headwind from raw materials and logistics costs for the full year.
We are taking several actions.
Including increasing selling prices to address these headwinds as we go through the year.
These actions will take a little time to gain traction.
Therefore, we anticipate a second quarter year on year operating margin headwind of 75 to 125 basis points from selling prices net of higher raw materials and logistics costs.
And finally, we expect our pre tax restructuring charge in the range of 25 million to $50 million as we continue our actions related to our December 2020 announcement.
To wrap up we are off to a good start for the year.
Delivering broad based growth strong operational execution and robust cash flows via.
We are prioritizing capital to our greatest opportunities for growth productivity and sustainability.
While focused on delivering for our customers improving operating rigor and enhancing daily management.
With that and I. Thank you for your attention and we will now take your questions.
Ladies and gentlemen.
And would like to register your question easing and landline phone. Please press the one follow up either for and your telephone keypad.
And I think Tom.
From two acknowledging requests.
Your question asked and answered and you would like to with China and registration.
Please press one followed by the three.
If you're using a speaker phone please lift your handset before entering as a class.
Please limit your participation to one question and one follow up.
One moment, please while we compile the Q&A for Boston.
Yeah.
Our first question.
Comes from the line of Scott Davis with Melius research.
Please proceed with your question.
Thank you operator, and good morning, everyone. Thanks sure Scott.
Thanks for.
And for letting me in here.
Oh.
Are you guys seeing any strange order patterns as far as like double ordering or any kind of panic.
Inventory rebuild for anything I mean, I would imagine.
We see it and transportation and electronics.
Perhaps equally and transportation and electronics and all of all the segments, but I'll just leave it at that and anything on the ordering patterns thats unusual.
Scott So I would say, we see certainly a pick up in orders when we see markets recovering and improving transportation electronics was strong and markets for us and Q1 I wouldn't say, we see anything unusual there. It's it's what comes with a normal pickup and the marketplace.
And you look at and a good measure for us is what's happening with channel inventories.
And I would say, we see them very much in line with what you have written about and your reports that we see the changes due to growth trends.
Overall inventory and our industrial channels remains still relatively low.
Transportation electronics with the supply chain impacts from the semiconductor shortage, we're seeing some challenges there and it's just responding with that with the disruption from the semiconductor shortage health care is pretty steady are reacting to the trends still electric procedures, well below pre pandemic levels and that's impact.
And there and and consumer it's and it's a mixed case, we have high demand and home improvement. So we're seeing lower levels. There. So I would say, we and you see a little lower levels. When you see the pickup, but it's responding to the marketplace, otherwise I would say that.
The trends in the quarter were you know.
The ordering trends were pretty much in line with what we expected a little better than we expected and March which was really reflected and our broad based growth, but otherwise nothing unusual.
Okay. That's helpful. And then just to clarify on the on the 30% to 50 <unk> supply chain.
Raw material and logistics whatever issues.
Is that net of what you expect on price for the year or is there some opportunity to offset that full amount with price you are just not certain yet of the magnitude.
Yeah, Hey, Scott that's a great question and a 30 to 50 is just pure on raw material and logistics headwinds.
As I said in my prepared remarks, we are going after price increases improving yields and our factories as well as.
Working with our supply chain partners to reduce the impact as much as we can.
You can see and the first quarter, we had 70 basis points of price increase and as I've also said, it's going to take a little bit of time for these actions to gain traction. So we expect that the second half will be better than the first half from a price perspective.
Okay. Good luck. Thank you thanks Scott.
Our next question comes from the line of Jeff Sprague with vertical Research partners. Please proceed with your question.
Thank you and good morning, everyone Hey, Jeff.
Good morning.
And how it could be tons and price cost and other questions, but maybe since we have John on the line.
You don't mind can I throw one at him.
Just wondering if you could actually update us on kind of the size of the priority programs. Currently that were outlined for us when we were in St. Paul whenever that was it seemed like a lifetime ago I think it was 2019.
And anything you can tell us really kind of on the vitality rate.
Of the portfolio overall, one of the one other things that I always try to put my finger on and it's always just a little bit difficult.
You know that the flip side of the new product development and what's going on on kind of end of life and Commoditization at the low end and so the.
Effort to counter that if you have any color there that would be interesting also.
Yeah.
Thanks, Jeff Thanks for the question so maybe on the on the first part around our our priority growth platforms and our PGP user so they're about 5% of the overall portfolio I would say and growing quite a bit I think as Mike referenced we.
And we've seen you know.
Approximately about a 10% growth over the last quarter of those all of those platforms and they continue to grow and as you know they they sit and high growth market spaces for us and so we would expect that growth to continue on those platforms as we continue to to find customer solutions and those areas.
Second comment is kind of around the vitality of the M P value or the part of it we've talked about M P value and the past and that's that's definitely an important metric for three of them without a question, but it's there's also a secondary metric for us the primary obviously being our growth and our profitability for that.
And so over the last few years, our M. P V I and things that have trended to be about and the mid Twenty's. If you take an average over the last five years or so which is I think a raw.
For a pretty good guide for three of them overall, and obviously COVID-19 has had some of the impact and trends here in the near term as well as we've gone forward.
And then kind of as you said the commoditization or the other.
And I personally don't think a whole lot about that.
Think about the you know are we are we aligned with our customers our resolve and customer needs are are our R&D resources geared toward growth and solving those issues for our customers and making sure that we can deliver our technologies and our solutions to our customers and order to be able to grow and sustain profitable margin and ROIC.
<unk>.
Thanks, and just a quick follow up is that M. P V. I, a mid twenty's kind of five year number of three year number and what.
And with time span and it's about a five year number for.
For the five year number okay.
I appreciate it and I'll pass it on.
Okay.
Yeah.
Deane Dray with RBC capital markets. Please proceed with your question.
Thank you and good morning, everyone hygiene.
Hey, I guess, if there's a surprise this quarter, it's that despite having a solid operating beat your leaving guidance unchanged.
And Monique walked through all the list of headwinds and.
And size all of them are ore leached framed them with the exception of the last item about potential legal.
Of course could you just yeah, either size for us or frame for us what the expectation might be this quarter either in terms of remediation costs are product liability because you certainly signaling that that's something could be brewing here. Thanks.
Yeah sure Deane as I said in my prepared remarks, I think some of this I'll just start first with.
All the headwinds that I've mentioned at the same time all the other actions that we are also taking to continue to drive operating rigor and whether its raising price driving operating rigor and continuous strong cash flow. So I keep all that first with the headwinds with some partial offsets that it'll take a little bit of time to implement as regards the legal fees and you can see this more.
Our legal costs and you can see this more as as you as we file our Q. This morning, but there are a couple of things there you'll see the P. Fast reserves are up around $50 million.
Between the end of fourth quarter to this quarter and then the mask respirator accrual is up approximately $20 million to predict what exactly is going to be and the second half of the year is quite quite tough, but what we do see is as we prepare for some of these trials example to combat arms trial, that's on and Florida right now.
With the M D L a as well as some of the other cases that will start picking up in P. Fast, we expect that our legal fees, our legal cost to prepare for these trials.
We'll go up during the second half of this year.
Okay. That's that's very helpful. And then just as a second question. It is interesting we're talking about a and it's gonna be tepid, but the back to school are returned to office is outside of the seasonality, but yeah. That's it is.
Encouraging can you frame for us expectations in terms of how much that might contribute and the second quarter.
Yeah, Deane and what.
What we talked about is we did see a return to growth and our stationery and office business and first quarter up mid single digits as well.
Monish mentioned that as the first indication that we're seeing the pick up from a return to school and and returned to the workplace to a degree that's it's one of those areas where we.
One of those areas, where we're looking at the uncertainties related to COVID-19, how will it play out.
Now how big a return to school, how big a return to the workplace and win Battle that'll end up being what drives the answer to your question. So I would say good signs that we saw the pickup and Q1.
Back to you know, we expect the economy to strengthen and we're you know we're encouraged by the vaccines, we're going to have to wait to see how the the return to the workplace and school plays out though.
I appreciate that thank you.
Yeah.
Our next question comes from the line of from Nigel Coe with Wolfe Research. Please proceed with your question.
Thanks. Good morning can you hear me guys.
Okay.
Great. Thanks.
So.
For the some of the constraints, you're seeing and the supply chain metrics among et cetera, normally you see TQ seasonally high of a monkey and I'm wondering if the combination of auto production.
Cetera might limit the ability to see that normal seasonal ramp and I'm just curious.
Right now too cheeky seasonality.
Nigel you were breaking up a little but I think your question was around Q2 seasonality correct is that the question right exactly.
I'll just start with my three quarters that I've been here in the pandemic WC and I don't think any trend seems to be normal Nigel you've seen trends that seem to be completely abnormal compared to what the past has been compared to monthly cyclicality as well as compared to quarterly cyclicality. So I'll just start with that as the first piece.
The second I would say is one thing you can definitely count on us and Q2 with strong execution.
We are also confident that and markets are going to pick up but I think they're gonna be uneven and for the second quarter. We are still monitoring quite a few things one of course, Mike just mentioned about what happens with the stationary how does that return to work come in they returned to work impacts not just the stationary business, but it impacts our our graphics business.
And this and impacts our signage business and what happens there and what people spend I think is going to be important to watch. The second piece of that pandemic is still playing out and parts of the word elective procedures continue to be remain to be below pre pandemic levels. So we'll see how that plays out the well known and semiconductor chip shortage, how it impacts auto Howard.
And banks consumer electronics, and other piece and then May and think about supply chain disruption and the supply chain disruption and one is of course, the raw material costs and logistics costs that I've talked about quite a bit. The other one of course is product availability and making sure that there is product available from our suppliers to continue to keep us manufacturing now I'll tell you there.
Is that our supply chain team has done an amazing job keeping the factories running making sure we are delivering to our customers. Thanks to the relationship they have it there, but the suppliers and we appreciate all the work. The suppliers are also down to partner with us to minimize disruption as much as possible.
We're also raising prices, but it's going to take a little bit of time, the inflation has come and faster. So youre going to see 75 to 125 basis points of headwind, which is the net of price versus inflation and logistics as I also mentioned that we're going to do restructuring, which was announced in Q4 of 2020. We had told you it's somewhere between a $2 50 to 300.
Charge for the year as our first quarter. We added 150. So we got approximately 100 for 150 to go for the remaining a day yeah. The second quarter is going to see 25 to 50 million of restructuring charges. The balance will come in and <unk> and <unk> and then if this economy continues to go the way it is.
Located that indirect costs travel costs some of the legal costs that we talked about we will keep going up any other one time headwinds will also go up as regards compensation and then I.
Our goal is as Mike has mentioned we have tremendous areas that we can invest in and our goal is for the long run and we want to keep investing in growth productivity and sustainability and put all that into play and that's why we felt it prudent to maintain guidance and also to answer your question and it's hard to follow normal seasonality trends with all.
And these other things and play.
Alright, Thanks, that's great color.
And my follow up question, and it's really just going back to the guidance and I understand all the uncertainties and just laid out very clearly but.
But the 20 and it seems like the pension change and the way you can for the the asset and it seems like that's about a 20 year over year benefit to two.
'twenty.
What does that change and and the original guidance range was that relative to the nine 9% for guidance.
Yes, Hi, Nigel I would say as we have stated we have restated all the years that are presented so the year over year impact of that is approximately 11 cents. So that's the two and so your specific question on pension the offsets for that a couple of things we took the opportunity to go redeem 450 million.
A bad debt was due in 2022 that had an impact of two cents on interest for the quarter and then as share prices have gone up even though we have done.
<unk> done share buyback of $231 million of share repurchase our dilution has gone up and that impacted two cents.
And for for the quarter debt total impact for other financial we had originally and our guide was zero right. Now we are saying its plus five five cents to be clear.
Great color. Thank you very much for niche.
Thank you.
Our next question comes from the line of Steve Tusa with Jpmorgan. Please proceed with your question.
Hey, guys. Good morning, Good morning, Steve Hi, Steve just just following up on I think.
The last couple of questions here just sequentially you guys are usually up.
<unk> and I think you mentioned a whole host of items that kind of break the normal seasonality can you maybe just give us like a total number that you see from <unk> that would be kind of the mechanical impacts <unk>.
Including the raws and the inflation that's fine.
And just all in what what what the headwinds are from one Q2 Q3.
You can kind of and we can just kind of like.
Because <unk> was obviously like a big upside, but then <unk> was going to be seasonally weak. So just trying to kind of figure out and in total where we should kind of start from mechanically.
Yeah, It's great question and Steve just a couple I would I same comments that I made before and you know volume is the biggest piece that drives margin leverage for three M. You should assume the normal 30% to 40% margin leverage that you would get the amount of volume is going to depend on a lot of the uncertainties that have talked about whether it's <unk>.
The procedures, whether it is a semi conductor.
Chip availability for auto and consumer whether it is the strength and stationery remains whether our oil and gas, but and the oil and gas industry picks up so a lot of long term I would say and markets growing we will have to figure out what happens and in the second quarter with all of these from and end market perspective. Similarly on supply chain disruption that two pieces one is.
Of course, the inflation that we have told you about which we'll call. It 75 to 125 basis points of headwind between price and and inflation and and the raw material and logistics costs as well as making sure that we have all the product availability that we have so that's the other I would say a headwind to <unk> is that is that is that.
Is that headwind can you just talk about that headwind sequentially, what that headwind would be yeah. So you've already kind of absorbed and first quarter and what it what it is sequentially. Yeah. So it's a piece of it got absorbed and the first quarter. Steve I think we'll have to see how April plays itself out and made you know as well.
We look at product availability, making sure that our suppliers continue to be able to provide all the goods over the quarter is what something we're working on.
And again, it's too early to say because it's a very dynamic situation that changes every day and and again the relationship we have with our suppliers helps us get the product as much as we can but they are also constrained right now with the overall supply chain situation and the word.
The other headwind is $25 million to $50 million of restructuring. So this is still a part of the overall restructuring program, we announced in Q4, we have done up to 150 and Q1, we're going to take another 25 to 50 in Q2 and the balance will come in Q3 and Q4.
Indirect costs. So as the economies are starting to open up you are going to see hopefully at March and and travel start to go up so that's a headwind to Q1 and then our increase as we're starting to see the economy is starting to pick up our investments and growth productivity and sustainability, we continue to.
So that's how I would frame Q1 versus Q2.
Okay. So it just doesn't it just seems to me like there is.
Biggest piece again is this kind of.
For all material issue, but some of that you absorbed in the first quarter and on a year over year basis, and it looks like that's like I don't know.
15% to 20 cents.
Year over year, it's 75 to 125 basis points headwind so.
Yeah, Okay, alright, thanks for the color I appreciate it thanks, Dan Thanks Heath.
Thank you.
Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your share.
Hi, Good morning, just wanted to focus perhaps on safety and and industrial.
You know the headline organic growth there.
And even lower in Q1, and Q4, even with the improving economy, and that's really that recipe ready to tailwind and.
For you, a 400 basis points less than Q1 and Q4.
Wanted to understand.
And what does the guidance for that segment, you know and there were three of them and aggregate.
Flagged for the respirator tailwind over the balance of this year.
We've seen some write downs and certain distributors and so for them for that kind of activity off the over ordering last year.
Do you assume that that could become a headwind as soon as later this year or the headwind really comes in 'twenty two.
Julia and thanks for the question.
We talked about Q1, we saw continued to see strong demand and that's 630 million respirators a.
Delivered in Q1 and still in the quarter, 90% going to health care workers, and and I would say first responders and and increasingly essential industries.
And the demand as we move forward, it's going to depend on a few factors. The first is what's going to be the demand and health care and that's going to depend on how the pandemic plays out and and I would say how governments respond to dynamics and a pandemic and and there has been changing and protocol of use of respirators. For example is one of those one of those dynamics.
As <unk> said this is one of the areas, where we're working through the uncertainties there.
And that demand. There is also governments and we're working with governments around the world on stockpile strategies and continue to supply into those and then there is consumer demand and increasing demand and industrial as economies recover. So we see some shifting as we go forward over time.
From the high priority more than 90% of their health care shifting more into industrial and consumer and then the demand overall, how much is it going to be.
Relative to the impact on the overall enterprise relative to S. I P. G. That's going to depend on how each of those play out, but where we're expecting to continue to see demand as we as we and the industrial and consumer and health care as we go through the year.
So to answer specific day.
And your other question Julien and I am sorry on why is the growth rate slowing down. Its we are starting to lap. So if my memory's right Q1 of 'twenty 'twenty, there was $100 million of disposable respirator debt the company and disclose even before my time, so you're going to see actually the amount if youre looking at the percent is going to slow down as I've said and more.
Prepared remarks, because you're starting to lap the pandemic related respirator demand year on year, Yeah, Julien we disclose all of that last year as we went through the year. So Q2, it's a $225 million a year on year comp.
So we start from a $100 million and two in a quarter than 235, and Q3 and I think and Q4, we are around 280 million last year last year. So the year on year contribution and growth is going to decline.
Yes understood. Thank you very much and maybe just my second question.
Around the capital deployment aspect.
Cash flow has been very very good yet again and leverage I think is now around one month for also times.
Any updated thoughts around the Alan.
Balance sheet.
Usage and what do we think that just given sort of the backgrounds and.
Leverage is likely to remain fairly low for the rest of the year.
Yeah. It's a great question Julian I would go back again to just our capital priorities.
Prioritization hasn't changed our first priority is always to invest in RMB and Mike mentioned the areas that we have as we think about just a few and even John talked about whether it's biopharma home improvement and personal safety digital semi conductor healthcare there are tremendous opportunities that we believe we can keep investing and so.
That's our first priority as I think and the long run and that'll give us the best return for the second priority is dividend, we did increase dividend, 1%. This year. It's the 60 <unk> year of consecutive dividend increase our third priority is M&A as you know we are busy integrating a saturday, it's doing very well and.
And integrating well into three M. We don't see another acquisition and the size of facility and the near future, but we are always looking for opportunities, where we believe that it's complementary to three M strength as well as three M can add value and synergies and then our last priority is share repurchase and as I said in my prepared remarks, we did.
Half $231 million of share repurchases I think the strength that we have right now Julian and one point for net leverage gives us it gives us a lot of flexibility to go either way as well as gives us strategic opportunities to deploy when needed.
Sure.
Great. Thank you.
Thank you.
Our next question comes from the line of Andrew Kaplowitz with Citi.
Please proceed with your question.
Hey, good morning, guys Hi, Andrew.
And so transportation and electronics as you know had a very high range of outcomes for the year, you know low to high single digits, and obviously, you're starting out at the high end of the range of 13 reason at this point you know why you wouldn't see the high end and a range and that particular segment given the comps do get a fair amount and easier for the next couple of quarters, maybe just could give.
And some more color and how electronics and auto are we performed versus your expectations. I know you said you know absolutely, but it seems like they continue to be strong or even improve despite supply chain concerns.
Its important question for us too and yet we had that wider range of beginning of the year, which really reflected the dynamics in those end markets and the uncertainty that we were looking at as we came into the year and we certainly had a good start for the year transportation electronics off to a strong start.
Like the rest of the company, they're still facing some considerable uncertainties and that marketplace and we've talked about.
The chip shortage and its impact on both electronics and automotive I think you see kind of changing dynamics and the build rates much of it's reflecting that dynamic electronics I would say consumer electronics is off to a strong start tablets and Tvs really driving a lot of that so it's it's how are these trends is going to play out through the year.
And and it still reflects I would say a wider range of outcomes and and.
And it also is going to depend on how the pandemic plays out some of these are dynamics being driven by the pandemic and its impact on the economy and general side I would say that wide range that we came into the year, we still have a wide range view of how the uncertainties will impact these key market segments, but again after a strong start automotive above the build.
Rates of.
Our growth and consumer electronics and both the build rates. There. So we are we're winning in the marketplace with our solutions and we're well positioned.
And we'll see how the market dynamics take us as we go through there.
And Mike I wanted to ask you about your priority growth platforms, and the context of and obviously their strong growth and the quarter I think 10% and there's a lot of money out there you know whether it's the bite and American jobs plan.
You know focus on automotive electrification continues to increase so how do you sort of changed your focus if at all and some of these platforms do you shift more money into something like automotive electrification do you see more growth and certain areas like that moving forward and Andy we talked about it all year last year about what we're doing to invest and the future.
While we were managing through the big challenges that the pandemic throw at us and 2020, and we're accelerating I would say investments not only and our priority growth platforms, but other market trends that we were seeing that were opportunities for us and we've talked about things that were going on obviously and personal safety, but also home and <unk>.
<unk> and and.
And other areas that the trends were strong. So that's how we're prioritizing growth based on the market trends, where we can create unique and differentiated value priority growth platforms tend to represent both of those strong markets and as John mentioned earlier. These are these are higher growth market segments, and then we have the <unk>.
<unk> said, we make and the trends coming out of the pandemic and we're stepping those up as we as we see the opportunities. So we're really we're really driving those based on the growth opportunity that we see in front of us as we go through 2021 not locked in on our plan that we put together for our priority growth platforms. You know before the year started so it's a it is.
It is.
What we see as an opportunity to drive growth and and the growth outlook that we had for the year as we came into 2020 one.
I appreciate it and Mike.
Thank you.
Our next question comes from the line of and you.
With Bank of America. Please proceed with your question.
Yeah, Good morning, Andrew Hi, Andrew.
Yeah, I can reassure you that this will be one consumer stocking up on three M masks, because we'd have to do with inferior inferior Kimberly Clark product.
Just wanted to tell you that [laughter]. Thank you Andrew.
Having said that just the dynamic in the Americas on safety and industrial and transportation and electronics in the quarter. I think you guys gave a very useful breakdown or just the broader dynamic by sub and market, but in America for safety and industrial is up 12% assume it's because of safety.
Mass transportation and electronics down 4% want is more all we want is more a channel and just talk about this dynamic.
Happening I fingered, the founders from pre stocking, but whats happening and the distribution channel.
Andrew Youre, right safety, and industrial business group, and our performance and Americas has driven a big portion of that is driven by personal safety and it's been a strong growth driver and we talked about it monish highlighted some of the other industrial businesses, we're seeing recovery and in the industrial markets in general were seeing.
And increasing demand and industrial adhesives, and tapes and industrial mineral products and the U S with a with a strong residential housing.
Growth that were all of those are driving what's going on and the Americas and across our safety and industrial business group transportation and electronics. That's it is.
It's driven globally the strong growth that you saw by semiconductor fabrication datacenters and what I talked about earlier and consumer electronics those are not the big drivers, obviously and the U S. At this point our automotive as is the driver and the U S and we're seeing.
I would say we're seeing good performance on our spec ins were winning additional spec ends and the Oems and and as that as the build rates pick up and the U S will see T E. G. The transportation business from the automotive side and get a strong contribution we are munis and talked about some of the areas of uncertainties and things that we're looking at commercial.
Solutions and the demand for graphics that are part of that the transportation safety products. Those are still flat year over year growth, even in decline and and key end market segments and that's one of the things that is and uncertainty as we look at here how are how are those markets going to recover as economies recover.
So that that'll be part of the answer to transportation and electronics picking up as we go and and the Americas in particular.
Got you and just a follow up question, I think and to touch a little bit on it but it seems that.
We have plenty of visibility on semiconductor capex going up and the U S over the next several years.
Given that semi capacity on the margin over the past decade has been added outside of North America do you need to make any adjustments to your manufacturing footprint in North America.
And to sort of play this growth or is this just nature of your process and fungible capacity and just surprise better overall capacity utilization and North America, given the half if you already have in place yeah. Andrew as you know, we our strategy is to be close to customers invest and.
Capacity to meet the demands regionally around the world and that's that's true broadly across the enterprise. There are some key product and market segments, where we have more of a critical center and in key areas of the World U S is one of those areas, where we are and then.
And we're a net exporter of of goods out of the United States, because we have a stronger footprint here and that's also true in much of the portfolio that we serve semiconductor fabrication with where we build that out close to the end users close to the customers. So we have significant resources and Asia. For example, we also have some.
<unk> a significant portion of it from a capacity and the U S and even some capacity in Europe. So it is I think we're well positioned if we see that shift and that's it's going to take time to play out and as has been the case for us throughout history is as we see market dynamics change and shift around the world.
We will invest to.
And to build up that capacity, where it's needed and so we'll have time to adjust and add capacity, where we start and a and a good place relative to that market segment.
Thank you for going on for Thanks, a lot.
Thank you.
Our next question comes from the line of John Walsh with Credit Suisse. Please proceed with your question.
Hi, Good morning, Hey, John.
Hey, so a lot of details already around the logistics and the supply chain as it relates to EPS and and margin, but curious if there's any sales impact you know your ability to kind of get raw feedstock et cetera.
That you'd want to call out just because if you look at I mean, even the midpoint of your guidance for the full year just the.
Having a little trouble reconciling the two year and the three year kind of growth stack deceleration from what you just printed.
So John and I would just say back to the point on Q2, and there is a lot of uncertainty and the supply chain markets other than of course, the raw material and.
And logistics costs, we've talked about it's just making sure that the product is flowing making sure our suppliers can make the product as of right now as I said, it's a very dynamic situation. That's changing every day. So that's that is why that's one of the uncertainties that we've called out in the second quarter and the total year.
And you go to navigate through this and hopefully as we get through the second quarter will be and a better state to see where we are for the year.
So hopefully that answers your question since Youre talking about the second quarter and my memory failed me earlier, sorry. So Steve's question earlier also on if Youre looking at Q1 versus Q2, just another point is FX, which is 13 cents benefit in Q1 for the year, we still see that to be 15 cents again will see their currencies.
Move and as the World plays itself out and then from a tax rate perspective, we were at $16 four per cent for the first quarter and our plan is 20% to 21% for.
For the year. So those are the other items I would I would talk about John as I talk about the second quarter and its overall impact.
Great and then maybe a broader question here you talked a little bit earlier about kind of new product vitality.
You're talking about a lot of interesting technologies around.
Enabling your sustainability commitments.
Is there a way for three M to actually commercialize some other stuff that you're doing to your own operations some of the either the technology or the materials science or.
Can you take what youre doing and actually bring that out.
And to other customers and monetize that and John I would say for us being a leader and sustainability is also about helping our customers and making a difference for them and and you see that and are our expectations and a requirement that every one of our new products has and improvement and an advantage and sustainability. So that's one.
Other ways, we can leverage our technology and our our technology platforms to make a difference for customers now.
We're also investing a lot of innovation in our operations and it's always been you look at our our fundamental strengths of our company our manufacturing capabilities as foundational there and about a third of our intellectual property sets and our manufacturing operations process technologies, and and we leverage that for our own perform.
<unk> and and our own product quality.
As a competitive advantage.
And there are opportunities as we think about ways that we can we can really lead forward and sustainability solutions that we can expand and our impact and we certainly expect to be able to be a good example for manufacturing companies and leading and sustainability will look at as we have all along and look at innovation opportunities where we can.
Commercialize those as part of our as part of our offerings to customers as well.
Yeah.
Alright. Thank you yeah. Thanks for thanks John.
Thank you.
And.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Thank you and good morning, everybody.
Hi, Joe Good morning, Joe.
And so my my first question, maybe just come back to Keith for momentum and I and I fully recognize that that things are fluid right now, but can you talk a little bit about.
Maybe it's the trends that youre seeing so far and Q2, you've got very easy comps. This quarter. So is the next day and the expectation that you'll see at least and acceleration.
And growth versus what we saw <unk> and <unk> based on what Youre seeing today.
Yeah, Joe So no major surprises in Q.
So far so we have started April pretty strong are similar to what we thought it would be the team continues to execute well and we're working through some of the challenges we've talked about whether it's on the cost for the product availability side, but as you correctly pointed out from a comp basis on a year over year basis, we will get into the first major.
Water and the pandemic and therefore on a year over year basis, you should see a higher.
Growth growth and what you saw in Q1, Yeah, Joe as a reminder, last year and Q1, we were up 20 basis points organically I believe and.
And we were down a little over 13%.
In Q2, so the comp is a fair amount easier.
Yeah that makes sense and just wanted to clarify that and then and then maybe my second question you.
And you talked about 30% to 40% type incremental volume incremental.
And when you have decent volumes I guess can you clarify that comment is that and all in number.
Going into accounts some of the headwinds that you've already discussed on the raw material side or.
Or is that is that just purely on volume.
And.
And just clarify and those comments, yes, Joe it's a great question. So I would say 30 to 40 and the long term, what we should get leverage 'twenty 'twenty. One in general is I think unusual unusual on multiple fronts. One is when we gave you. The guide at the beginning of the year, we talked about the snapback of indirect costs that should hopefully and <unk>.
And in 'twenty, one as people start traveling as we start investing from an AD much perspective would go up and a euro similarly at.
And at the beginning of the year, we reset our comps. So that's a headwind. We also had a property sale and fourth quarter of last year of approximately $50 million of game. That's a non repeat so all of those are one time headwinds coming into the year that'd be talked about we also talked that we will be increasing our investments and growth for productivity.
And sustainability and 'twenty, one as we see some of the trends playing out that can help us continue to grow and the longer term and so that's the second headwind and then the third is has come through that I've talked about it's the raw material and and logistics cost increase partially offset by the price increases that we are trying to do.
Increase our yield and then managing all of the other costs that we have whether it's legal costs as P fast and combat arms and some of those proceedings proceed as well as any other investments that we want to make as we keep seeing growth.
Growth opportunities and the long term that's why I would say 30 to 40 is the normal you should see in the long term for 2021 is just a little odd for these reasons.
That makes sense. Thank you for clarifying.
Thanks, Joe.
Thank you that concludes our question and answer portion of our conference call and I'll now turn the call back over to Mike for them for some closing comments.
To wrap up I'm pleased with our first quarter performance as we drove strong growth earnings and cash flow, we executed well and continue to build for the future through investments and growth productivity and sustainability, we are well positioned for a successful 2021 and remain focused on delivering value for our customers and returns for our shareholders.
Thank you for joining us.
Hum.