Q3 2021 3M Co Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by welcome to the three and third 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.
At that time, if you have a question. Please press the one followed by the four on your telephone keypad. It is recommended that you use a landline phone if you're going to register for a question. As a reminder, this conference is being recorded Tuesday October 26, 2021 I would.
Now like to turn the call over to Bruce Jo Malone Senior Vice President of Investor Relations at three and.
Thank you and good morning, everyone and welcome to our third quarter earnings Conference call.
With me today are Mike Roman <unk>, Chairman and Chief Executive Officer.
Monish Bitola, Wallach, our chief financial and transformation officer.
Mike <unk> will make some formal comments and then we'll take your questions.
Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at three a M dot com under the heading quarterly earnings.
Please turn to slide two.
As we have done throughout the year I'd like to remind you to Mark your calendars for our next earnings conference call.
Which will take place on Tuesday January 25th 2022.
Please take a moment to read the forward looking statement on slide three.
During today's conference call, we'll 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 about 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'll be making references to certain non-GAAP financial measures.
Conciliations of the non-GAAP measures can be found in the attachments to today's press release.
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.
In a dynamic environment our performance throughout 2021 has shown the skill of our people around the world the resiliency of our business model and the relevance of our technologies.
In the third quarter and year to date, we have delivered broad based organic growth across all business groups and geographic areas.
Along with good margins and strong cash flow.
Q3 organic growth was over 6% as we drove innovation across our market leading businesses.
With margins of 20% and earnings of $2 45 per share.
Geographically growth in the quarter was led by the Americas up 7%.
With the United States up 6%.
Growth in APAC was 6% with China up, 3% and Japan up 6%.
While EMEA grew 4%.
With respect to the macro environment overall end market demand remains strong.
My conductor shortage continues to impact many markets most visibly in electronics and automotive.
As we navigate near term uncertainty, we continue to invest in growth productivity and sustainability, which I will discuss shortly.
We are also actively managing disruptions in the global supply chain with a relentless focus on customer service.
Looking at our performance through nine months, we have executed well and delivered 11% organic growth with all business groups above 10%.
Along with margins of 22% and earnings of $7 81 per share.
Today, we are updating full year expectations for organic growth to a range of 8% to 9%.
And EPS to a range of $9 70.
$9 90.
Reflecting our results to date and ongoing supply chain challenges.
I would like to make a few comments on how three of them is actively managing those challenges.
As you know many companies are facing supply chain disruptions.
The result of a convergence of issues, including the Delta variant strong demand energy and labor shortages and extreme weather events.
For example.
Ocean freight costs have more than doubled over the last year.
And the number of containers on the water is up 70% because of port congestion.
Suppliers are challenged to provide consistent and predictable supply.
On any given day, we are working with more than 300 suppliers with critical constraints.
With manufacturing sites in 35 countries around the World and is a 5 billion dollar annual export or out of the United States. We are working tirelessly to serve our customers.
The cornerstone of three arms response, because our expertise and deep relationships across the supply chain.
Along with our local for local manufacturing and supply chain strategy, which.
Which helps us move with agility and keep our factories running.
We have daily meetings with suppliers to strengthen our planning and in some instances are strategically prioritizing geographies and markets and portfolios.
But necessary decisions to ensure we meet the most critical needs of our customers.
We are moving product in different ways.
Such as expanding our use of rail shipping out of more flexible ports.
And increasing our use of charter flights by over 40%.
While deploying new capabilities to better track our flow of goods in real time.
Maintaining talent is also key and we are using several tactics to attract new workers.
While protecting the health and safety of all of our employees.
Some of our actions have impacted our productivity and gross margins.
Which <unk> will touch on.
But we will do what is necessary to take care of customers.
The combination of strong demand along with supply chain challenges is also contributing to broad based inflation.
We are taking multiple actions to help offset inflationary pressures, including price increases dual sourcing and improving factory yields with more work to do.
Ultimately the duration of these supply chain challenges is difficult to predict.
We remain focused on serving customers managing backlogs and making good on our commitments.
<unk> the unique high quality products that are the hallmark of three of them.
Please turn to slide five.
While we execute day to day, we are investing to drive long term growth and capitalize on trends in large attractive markets.
In home improvement for example, we have multiple half a billion dollars plus franchises that keep families healthier and more productive.
Including our fast growing command damage free hanging solutions.
Phil treat home filtration products.
These brands leverage three of his deep expertise in adhesives and nonwoven materials.
The same technologies, helping drive success in our automotive business.
Which consistently outgrow the build rates.
Auto electrification sales are up 40% year to date on the strength of new innovations, including advanced display technologies.
Automobiles become the next consumer electronic device.
In healthcare the Biopharma market is growing more than 10% annually with our business up more than 30% year to date.
There's three of them science has supported the unprecedented pace of advancement over the past 18 months to develop therapeutics and vaccines and scale manufacturing to help address the pandemic.
The fundamental strengths of three of them are unique technology platforms advanced manufacturing global capabilities, and leading brands position us to win and we will continue to invest in these areas.
In a similar way, we are driving productivity by advancing digital capabilities across our operations.
Allowing us to expand our use of data and data analytics.
And sustainability, we have achieved 50% renewable electricity use in our operations.
Four years ahead of our timeline on our way to 100%.
We are advancing the environmental goals, we announced earlier in the year.
Making the investments to accelerate our ability to achieve carbon neutrality reduce water use and improve the quality of water returned to the environment from our industrial processes.
In addition, we are proactively managing PFS, making.
Making our factories in communities stronger and more sustainable.
In Cottage Grove, Minnesota, We recently announced that we are closing our incinerator in.
And partnering with a leading disposal company to more efficiently manage our waste streams.
We just broke ground to add new filtration technology in Cordova, Illinois.
And as <unk>, Belgium, we are working with government officials to resolve the issues related to PFS and we will invest up to 125 million over the next three years to improve water quality around our factory.
These proactive initiatives and others are accelerating <unk> ability to go beyond current regulatory standards and deliver on our commitments.
With respect to the P fast strategic roadmap announced last week.
<unk> remains committed to working with the Biden administration, EPA and others and taking our science based approach to managing PFS.
Let me also touch on a few litigation updates.
Last week, we announced a collaborative agreement to resolve litigation related to PFS neuro facility indicator, Alabama the <unk>.
Fact is included in our previously disclosed reserves.
On combat arms, there have been four bellwether trial, so far with six additional trials here in the fourth quarter.
We are early in this litigation and we will continue to actively defend ourselves.
Including through the appeal process.
As always we encourage you to read our 10-Q for updates on all litigation matters.
To wrap up we are driving strong results in a challenging environment.
Investing in attractive end markets and positioning <unk> for continued growth I am proud of our <unk> team, which is United by a common purpose unlocking the power of people ideas and science to re imagine what's possible and create what's next.
I will turn it over to Monish, who will cover the details of the quarter Monish.
Thank you, Mike and I wish you all a very good morning.
Please turn to slide six.
As I look back on the quarter. The three M team demonstrated the resilience of our business model and the relevance of our technologies as we executed well in a very challenging environment effectively navigating the supply chain disruptions, while serving and innovating for our customers.
Don't manufacturing raw materials and logistics challenges persisted throughout the quarter, we continued to invest in the business, while driving operating rigor and managing costs.
Turning to the third quarter financial results.
<unk> were $8 9 billion up seven 1% year on year.
Or an increase of six 3% on an organic basis.
Operating income was $1 8 billion down 6%.
With operating margins of 20% coming in at the top end of the range, which we had previously communicated in mid September.
Third quarter earnings per share were $2 45, which was similar to last year.
On this slide you can see the components that impacted both operating margins and earnings per share as compared to Q3 last year.
Our strong year on year organic volume growth was more than offset by the headwinds.
Starting from the global supply chain challenges.
Investments in growth and sustainability and litigation related costs.
Combined these impacts lowered operating margins by one four percentage points and earnings per share by <unk> year on year.
The restructuring program, we announced in Q4 of last year remains on track.
As part of this program, we incurred a pre tax restructuring charge of $50 million in the third quarter.
This charge was offset by the benefits we achieved this quarter.
Moving to price and raw materials as expected increases in selling price gained traction as we went through the quarter.
With the euro on your selling prices up 140 basis points in Q3 were just 10 basis points in Q2.
However, we continued to experience higher costs for raw materials logistics, and outsource manufacturing, which outpaced the increase in selling prices.
Thus third quarter net selling price and raw materials performance reduce both operating margins and earnings by 130 basis points and 12 cents per share respectively versus Q3 last year.
Looking at Q4, we expect our selling price actions to continue to gain traction as we work to mitigate the raw material and logistics inflationary pressures, we have experienced throughout the year.
Next foreign currency <unk>.
Net of hedging impacts reduced margins 20 basis points and earnings by one cents per share.
Also three other nonoperating items impacted our year on your earnings per share performance.
First lower other expenses resulted in an eight cent earnings benefit.
Consistent with prior quarters nonoperating pension was a five cent benefit.
Along with the two cent benefit from net interest due to our proactive early redemption of debt.
Secondly, a lower tax rate versus last year provided a nine cent benefit to earnings per share.
The tax rate was lower due to favorable adjustments this year related to impacts of U S International tax provisions.
Our year to date tax rate is 18, 8%.
Therefore, we now expect our full year tax rate in the range of 18, five to 19, 5% versus 20% to 21% previously.
And finally average diluted shares outstanding increased 1% versus Q3 last year.
<unk> per share earnings by two cents.
Please turn to slide seven for a discussion of our cash flow and balance sheet.
Third quarter adjusted free cash flow of $1 $5 billion was down 29% year on year with conversion of 107%.
Adjusted free cash flow year to date was $4 5 billion.
Which was similar to last year with free cash flow conversion of 98%.
The decline in our year on year free cash flow performance was primarily driven by higher inventory balances due to strong customer demand.
Along with the raw material inflation and more goods in transit as a result of the ongoing global supply chain challenges.
Third quarter capital expenditures were $343 million and $1 billion year to date.
For the full year, we now expect Capex investments in the range of one five to $1 $6 billion versus being at the low end of our prior range of one $8 billion to $2 billion.
We continue to step up investments in growth productivity and sustainability. However, the pace of projects continues to be impacted by supply chain and vendor constraints.
During the quarter, we returned $1 $4 billion to shareholders through the combination of cash dividends of $856 million and share repurchases of $527 million.
Year to date, we have returned $3 $8 billion to shareholders in the form of dividends and share repurchases.
Our net debt position.
Cash flow generation capability and disciplined capital allocation continues to provide us financial flexibility to invest in our business pursue strategic opportunities and return cash to shareholders, while maintaining a strong capital structure.
Please turn to slide eight where I will summarize the business group performance for Q3.
I will start with that safety and industrial business.
Which posted organic growth of six 1% year on year in the third quarter.
Organic growth was driven by continued robust industrial manufacturing activity, along with probably a pandemic related impacts.
First our personal safety business declined 4% organically.
Up against a 40% pandemic driven comparison a year ago.
Third quarter disposable respirator sales decreased 7% organically year on year and 15% sequentially.
Looking ahead, we anticipate continued deceleration in disposable respirator demand through the balance of this year and into 2022.
Turning to the rest of safety and industrial organic growth was led by double digit increases in adhesives, and tapes abrasives and electrical markets.
In addition, <unk>.
Closure and masking systems was up high single digits.
Automotive aftermarket up low single digits, while roofing granules declined against a strong comparison from last year.
Safety and industrial third quarter operating income was $620 million down 20% versus last year.
Operating margins were 19, 2%.
Down 650 basis points year on year.
As leverage on sales growth was more than offset by ongoing increases in raw materials logistics and litigation related costs.
Along with manufacturing productivity impacts.
Moving to transportation and electronics.
Which grew five 1% organically.
Despite the continued impact of semiconductor supply chain constraints.
Our auto OEM business was flat year on year.
Compared to the 20% decline in global car and light truck builds.
This outperformance was due to a few factors.
First we continue to grow our penetration by driving <unk> III innovation onto new automotive platforms.
Second we saw a notable increase in channel inventories at tier suppliers, given the dramatic reductions in Oems build forecast through the quarter.
Lastly, we benefited from a vehicle model makes standpoint as auto Oems produce more premium vehicles, which tend to have higher three M contract.
Electronics related business declined low single digits organically with declines across consumer electronics, particularly smartphones and Tvs as Oems face production challenges due to ongoing semiconductor constraints and COVID-19 related impacts.
These declines were partially offset by continued strong demand for our products and solutions and semiconductor and factory automation end markets.
Turning to the rest of our transportation and electronics.
Advanced materials and commercial solutions, each grew double digits year on year, while transportation safety grew low single digits.
Third quarter operating income was $465 million down 9% year on year operating margins were 19% down 320 basis points year on your drip.
Driven by strong leverage on sales growth, which was more than offset by increases in raw materials and logistics costs, along with manufacturing productivity impacts.
Turning to our health care business, which delivered third quarter organic sales growth of three 3%.
Our medical solutions business declined low single digits organically impacted by the continued decline in demand for disposable respirators, along with the pace of hospital elective procedure volumes, which came in at the low end of industry expectations of 90% to 95% for the quarter.
Sales in our oral care business grew low double digits year on year as dental procedures continue to be near pre COVID-19 levels.
The separation and purification business increased high single digits year on year due to ongoing demand for Biopharma filtration solutions for Covid related vaccines and therapeutics.
Health information systems grew low double digits, driven by strong growth in clinician solutions.
And finally food safety increased double digits as foodservice activity returns.
Health Care's third quarter operating income was $529 million up 7% year on year.
Operating margins were 23, 5% up 70 basis points.
Third quarter margins were driven by leverage on sales growth, which was partially offset by the increasing raw materials and logistics costs.
Manufacturing productivity impacts along with increased investments in growth.
Lastly, third quarter organic growth for our consumer business was seven 6% year on year with continued strong sell in and sell out trends across most retail channels.
Our home improvement business continues to perform well up high single digits on top of a strong comparison from a year ago.
This business continued to experience strong demand, particularly in our command and filtrate category leading franchises.
Stationery and office grew double digits organically in Q3 as this business laps last year's Covid related comparisons.
We also had strong back to school consumer demand and holiday related sell in for Scotts branded packaging and shipping products.
Hosted solutions and Scotts branded home and office tapes.
Our home care business was up low single digits versus last year's strong Covid driven comparison.
And finally, our consumer health and safety business was up high single digits as we lap COVID-19 related impacts from a year ago.
Consumer's operating income was $332 million down 3% year on year.
Operating margins were 21, 7%.
Down 260 basis points.
As increased cost for raw materials logistics and outsourced hard goods manufacturing.
More than offset leverage from sales growth.
Please turn to slide nine for a discussion of our full year 2021 guidance.
As we reflect on the macroeconomic environment, we expect demand to remain strong across most end markets.
However, uncertainty persists given the ongoing impacts of the pandemic, along with a well known global supply chain raw materials and logistics challenges that all companies are working through.
Looking ahead, we remain focused on our customers and doing what is necessary to serve them as we continue to navigate the fluid environment.
Turning to guidance.
Creasing, the bottom end of our expectations for organic growth.
We now project, our full year organic growth to be in the range of 8% to 9%.
As our prior range of 6% to 9%.
With respect to earnings we anticipate a range of $9 70.
The $9 90 per share as compared to our prior range of $9 70 to $10.10.
And finally, we expect to continue to generate strong free cash flow. Therefore, we are maintaining our free cash flow conversion range of 90% to 100%.
This updated outlook implies a wider than normal fourth quarter range accounting for ongoing impacts of COVID-19 and the uncertain supply chain environment.
For example from a growth perspective.
The well known constraints in semiconductor chip supply are impacting more and more end markets, most notably automotive and consumer electronics as reflected in the low production forecast for the year.
We anticipate global elective health care procedure volumes to stabilize with recent trends.
Relative to a disposable respirators, we expect continued impact from the decline in health care related demand along with elevated inventory levels in the industrial channel.
And finally, we expect our pricing actions to continue to gain traction as we work to mitigate raw material and logistics cost pressures.
Turning to operations as we have discussed we are actively managing inefficiencies and global supply chain with a relentless focus on customer service.
Therefore, we're adjusting demand plans with greater frequency and as a result, incurring more manufacturing production changeovers, along with expediting shipments.
All of these actions are impacting both cost and productivity, but we are taking the necessary steps to ensure we meet the most critical need of our customers.
We continue to make progress relative to December 2020 restructuring announcement.
To date, we have incurred over $240 million in pre tax restructuring charges and anticipate an additional $25 million to $50 million in Q4.
We now expect total pre tax restructuring charges of $300 million to $325 million versus our original expectations of $250 million to $300 million.
We expect the remaining actions under this program to be initiated by the first quarter of 2022.
In addition, we expect to incur higher costs related to our ongoing litigation matters, along with increases in our other indirect related costs like travel expense.
And finally, we continue to invest in the business for the long term and therefore anticipate increased investments in growth productivity and sustainability.
To close I would like to take a moment to thank our customers who have placed their faith in us all vendors, who are tirelessly working with us to ensure continued view of supply and most importantly, our 90000, plus III <unk>, who continue to deliver for our customers.
We have a very steady eye on the long term to deliver growth margin and cash through strong operating rigor, while continuing to navigate the uncertainty in the short run.
With that I. Thank you for your attention and we will now take your questions.
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Please limit your participation to one question and one follow up one moment. Please while we compile the Q&A roster.
Our first question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Thanks, Good morning, and thanks for the detail on the quarter.
<unk>.
So many C U E.
You mentioned the 19, 20% margin for <unk> you came in at the high end of that range.
Obviously, you'd like to be conservative, but I'm just curious what's in the better.
Maybe not quite as bad as you expected. So we'll see it's a back in mid September.
That's great question, Nigel I think you know when I gave you the range of 19% to 20% as we have said in my prepared remarks, we were facing a lot of inflation at the same time, there was a lot of uncertainty as regards volumes as regards our supply chain flow and then third I'd also mention that as we will face.
All of those items, but also doing our own self help versus just letting these things go through whether it was dual sourcing whether it was controlling some of our expenses et cetera, and when you put all that together we came in at the 20% if you look at where.
We ended up I would say inflation came in pretty much where we thought it was going to be be executed on price. We have moved from 10 basis points of price increase in Q2 240 basis points in Q3, so that was pretty much in line and we were able to execute more volume so our vendors.
The flow of supply we were able to get good flow of supply the strong demand as Mike said, and we were able to execute the demand as well as we control our expenses.
Across the corporation to make sure that we are prioritizing on serving our customers.
And trying to mitigate.
Pact of inflation as much as we could so put all that ANP came in at the 20% versus the range of 19 to 20 that I mentioned earlier.
That's great. Thank you and on the on the on the margin bridge.
Based on based on your full Q your full year guidance. It looks like full key margins looked at 18 handle Midland, but my math is off that but I'd be curious if you can maybe.
To that end.
And maybe the two major margin bridge items, the voting and productivity supply chain and price cost 140 basis points negative on volume productivity and 130 on price cost this quarter, how does that look in pool in a broad sense for <unk> year over year.
Yeah, So I would start by saying that I did a couple of things. So your math is not way off if you followed the implied guide that we gave you it's directionally very close.
A couple of things on just the items you talked about which was priced at all we expect to continue to have continued momentum in price in the fourth quarter. Your thoughts again go up from 10 to 140 basis points and we should see that go up as price continues to take hold across the various geographies and product lines things that we've talked about.
Before I would say, we don't see the raw material or the inflation environment slowing down in any way I think youre going to see that volatility is going to depend on what the holiday season does it depends on what logistics costs are going to be our goal is to get to neutral. The question is going to be how does raw materials at some point play itself.
And do we see a turn in some of the commodities like polypropylene ethylene et cetera, where we have seen a lot of inflation I would say that's number one on your question I think there was another point on bridge on revenue I would just say if youre looking three to full queue. Just remember there are a couple of things that impact III M. There's one less billing day from <unk> to <unk> and <unk>.
Do you have a normal seasonality that you have in three M. As many of the factories, but our industrial customers slow down during the holidays and thats the impact. So I think I've answered your question, but if there's anything else and I'm happy to answer Mike.
That's perfect. Thanks Mitch.
Thank you.
Our next question comes from the line of Jeff Sprague with vertical Research partners. Please proceed with your question.
Hey, Thank you good morning, everyone.
Hey, John.
Good morning.
I just wonder if you could touch on auto a little bit.
Kind of extraordinary kind of divergence in the numbers there as you laid out.
I just wonder does that create some kind of significant headwind for you now if you look forward, obviously, we should have volumes going up but.
We have suppliers that need to burn off inventory in and kind of mix shifts back I just wonder if you could give us a little more perspective on what's going on there.
Yeah, Jeff maybe there's a couple of parts to that.
Talk about the first if you look at what we've done year to date, it's really been reflective of of our innovation is something we've been talking about for some time, we outgrow the build rates and even in a dynamic like this year, where the build rates are swinging down as as there were some challenges in the OEM production plans for Q3.
And the outlook for Q4 being similar we're continuing to drive our innovations win.
Spec ins in design in opportunities and then as Monish mentioned the mix of vehicles in this kind of demand environment is more premium, which we have a higher level of penetration in those vehicles. We also have.
Very good growth in our auto electrification.
Priority growth platform, and broadly and getting good traction and 40% year to date. So those are all driving that performance as we as we come through year to date, and we expect to be able to continue to out perform build rates as we go forward the channel.
Everybody is challenged with matching up to the changes in production plans and these are.
They are changing quickly and the dynamic has been challenging for the supply chains and I would say everyone in the value chain to keep up with.
That said, we see inventory trying to track pretty well with that we don't see a.
Really.
And our results were not seeing a year to date impact from excess inventory. So it is really about matching up with where the mix is going where the build rates are going and again, we see good momentum in our in our portfolio against those those build rates.
And just on your maybe your Capex and what you're seeing your customers do you know when I heard Monish I'll talk about seasonal slowdown.
With everybody kind of running full out here and trying to get caught up do you actually think it's possible. We don't have a normal normal seasonal seasonal slowdown as people try to kind of execute on some of these backlogs and kind of.
Separate and little bit unrelated, but your own capex, what sort of projects.
Did you have planned that are sliding to the right.
Yeah, Oh I see.
Good question, Jeff listen as you are trying to be helpful. By giving you. What we are seeing right now is that a possibility that customers continuing to keep running through 24 seven.
And that there is more production that comes out from them, absolutely possible and and as Mike mentioned and sort of I will do whatever it takes to make sure that we keep serving our customers overall I would still say this is a short term phenomena long term. We are seeing good end market trends and that's why you're seeing us continue to invest.
So your point on the next piece, which is Capex and where we were I would say the areas that we would where we are looking to keep investing.
In all the three buckets growth productivity and sustainability and the cycle times to get.
Capex raw materials for these businesses is just taking longer than we had originally thought and that's why we if we had to slow it down to one five to 1.6, but I would just end by your question by saying, Jeff We are not done with the quarter. This team knows how to fight we are going to keep doing whatever it takes to keep serving for our customers is long.
As the demand is there and at the same time that teams furiously working to make sure that we mitigate some of the raw material pressures that we have as well as keep investing for growth productivity and sustainability, because we just see the long term to be very bright where we can grow above the macro we can get margin expansion and keep having strong cash.
Great. Thanks for the color.
Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.
Hi, good morning.
<unk>.
Maybe just a first question around China, Hong Kong demand, obviously <unk> has a very large presence in the region. Good perspectives on different industries the growth rate.
Slowed I think to 3% in Q3 that was down from low double digit last quarter and those therapies in Q1.
So just wanted to.
We think that China, Hong Kong, maybe down in the fourth quarter and maybe just describe how you see what's going on there as being maybe different or idiosyncratic.
Or do you think that that pace of slow down is a good template for what we should expect elsewhere in the world as the demand recovery matures.
Yes Julien.
Look step back and look at year to date, China's up mid teens for us so that I think reflective of strong growth through Q3, and as you pointed out.
We saw a 3% in the quarter.
I would say it's it's.
Having an impact from the same things we've been talking about supply chain logistics port closures those are impacting our business and just as a reminder, our business in China. So we manufacture most of what we saw in China in factories in China, and we sell to customers about 50% of them exposed to exports about 50%.
To the domestic market and exports are probably one of the areas that is hardest hit so it's down about 10% looking forward. That's the expectation as we go forward into Q4, so that'll be one of the impacts it's been one of the impacts being.
Hurt most by the supply chain challenges for us our focus in China has really been very much in line with what we've been talking about as we came through the pandemic, we see market segments that are high growth and we've been prioritizing investments there and we see those growth trends continuing so we're well that's where we're focused we're focused where we have the kind of the winning solutions.
We do see opportunities across each of our businesses year to date, we've been led with strong growth in our health care business are actually in Q3, and the health care business, we expect that to continue as we as we go into Q4.
Julian just to add to Mikes point on all the items you mentioned on the macro trends just on a year over year basis too for the quarter at 3%. You also got to look at the comp of last year, we had a very strong growth in China. If you remember the third quarter of last year.
You had seen China is starting to come out of the pandemic first so their order patterns were higher in the end of June and then into the third quarter and that's the other reason you see a 3%.
That's helpful. Thank you and then maybe just my follow up around safety and <unk>.
Dusty real margins.
Understand what's going on with.
Some of the markets.
In terms of supply chain constraints and the impact that's having on margins, but maybe focusing on the impact of the legal costs.
And also as the respirator business.
Move slower sequentially any.
Any color you could provide on the impact that those two things are having on margins, perhaps sizing that that legal headwind.
Do we expect that to bleed into next year as well. Thank you.
Yes, sure Julien that two ones under legal won the combat arms litigation that that we are incurring costs on show up in the <unk> margins.
As Mike mentioned, we are continuing to defend ourselves in that litigation, there's an acceleration in the fourth quarter, we will have five more of these.
For which we are going to prepare so I would say depending on how the litigation goes do you see it bleed into 'twenty two yes, because the.
<unk> will all be done by fourth quarter of 2021.
On disposable respirator is as we've talked about depending on seeing how the pandemic has played itself out.
We felt Q1 was peak we had mentioned that even in our last earnings call we have seen.
Revenue consistently has sequentially come down you've seen became down nearly 6% in Dr. In the third quarter, we see that further down between 75 to 125 on a year over year basis, or 25% to 75 sequentially and depending on where the pandemic goes that'll have an impact into 2010.
Two but again, we are seeing pockets, where you are seeing COVID-19 cases go up where you're seeing demand go up and then in other cases, you're starting to see demand come down so it's pretty dynamic on their disposable respirator site, but as we've talked before we've got capacity of $2 5 billion respirators that we can ramp up very quickly the teams done a re.
Really nice job of managing this environment in certain cases, we have shut down manufacturing lines in certain cases, we are managing our inventory levels as we go through this but we'll be ready for the next factor event.
And hopefully it never happens, but that's not been the history of the world, but we'll be ready for that.
Great. Thank you.
Yeah.
Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.
Good morning, everybody Hi, Scott.
The price increase in the quarter was a pretty dramatic.
Quarter to quarter sequential change but.
Yes, clearly seen pretty big step ups in CPI and PPI.
What do you think about <unk> and kind of think about the ramp into 2022 do you continue with this aggressive of a ramp.
Is there any mitigating factors that kind of holds you back from getting.
Price.
Thank you.
I remember you guys being as far below CPI before.
But these are strange times too so I'm not sure it really matters.
Some color on that ramp would be helpful. Thank you.
Sure Scott.
As I mentioned in my prepared remarks, you will see us continue to gain price in the fourth quarter I know there've been quite a few questions around why it has taken us this long to get price as we mentioned before we follow a pretty methodical approach of taking consistent taking price across geographies.
We work with our customers in certain cases, we are working with contract and the constraints in those contracts.
And we put a pretty thoughtful approach to how we go after price increases how it goes into 2022, Scott I think will also depend on where we see inflation going to be in 'twenty two and beyond.
Right now I think we are comfortable with the price increases that we have taken but we are going to keep doing it as long as we need to as I mentioned the goal of the team is to get to neutral.
But it's going to highly depend upon what happens with inflation.
So I don't know if I answered your question, but that's how we are thinking about pricing from from that angle and we tried to be as.
Again, as I've said before thoughtful and methodical in how we go about it we have a pretty rigorous approach in how we approach our customers and be try to work it as a partnership with bolt and you've got different businesses. So you've got spec in businesses, where you are expecting for a certain period of time, you've got health care, where you got.
Half my business, where it's easier to take price and other cases that are contracts and then you've got the industrial business, which is distributor led and then you've got the consumer business, maybe working with all the big retailers. So each one of them have a different dynamic and we factor all that in and you've seen that we have made progress in Q3, and we will keep making.
Progress in Q4 and beyond.
Okay helpful.
As a follow up in.
The China comments were helpful. But can you talk about some of the other major emerging markets.
What <unk> seen as far as.
Improvements are decrements over the quarter and outlook.
Yes.
Sure. Thanks, Scott and just as a reminder.
I remember back to 2019, we aligned our our business is now around four go to market models globally and so those businesses are executing.
Global strategies locally everywhere around the world and they each of them have a view of each of the regions I will give you a kind of a view at the higher level. So we've talked about Americas being up 7% in the quarter and low double digits year to date, the highest growth as we came through the quarters in Latin America, and Canada and up.
Digits across all business groups. So again similar to what we've talked about and the way we're seeing year to date demand across III globally broad based across business groups and in the Americas.
And I would state is still in.
In a strong position.
6% in the quarter and double digits for the year EMEA. If you look at how we're doing there we're growing high single digits for the year, 9%, 4% in the quarter.
We haven't seen a strong rebound in growth as other areas, but we are seeing a recovery now in health care and transportation and electronics starting to.
Drive that growth that we are seeing and then in Asia Pacific growing mid teens year to date double digit growth across the business groups all business groups again, and as I mentioned, we've talked about China, a bit I mentioned, Japan in prepared remarks.
That's been one of the improving areas is Japan now starting to see improving growth as we come through the year. So.
Not down.
Not near the pre COVID-19 levels, yet, but again starting to see some improvements and then in that case also being led by health care. So we're seeing some I would say the recovery of elective procedures around the world being one of the dynamics that is helping to start drive improving growth.
Thank you good luck guys.
Alright. Thanks.
Thank you.
Our next question comes from the line of Deane Dray with RBC capital markets. Please proceed with your question.
Thank you and good morning, everyone.
We've heard lots of specifics on material costs inflation I'd like to hear some color on labor cost labor shortages I know.
Nick highlighted in the opening remarks about new initiatives for recruiting I'd imagine higher comp and benefits are among those and is this more of a U S centered headwind or just how's labor costs and shortages look globally you can start there. Please.
So I would say Deane, it's a global item, but it's more pronounced right now for us in the U S.
So we are seeing higher cost whether it is cost driven by some of the items, Mike mentioned as well as with the demand that we have we are spending more money on over time.
And also we are seeing cost of inflation, which is labor cost that comes through us through outsource manufacturing hard goods, so hard goods that we buy.
We're also seeing inflation on that but with that said I do want to recognize all of the employees of three M, who are tirelessly working to make sure that we are delivering for our customers in this tough demand environment as well as a very tough supply environment, but we are confident dean will get through this.
Do you have a year over year labor cost any kind of specifics you can help us with.
I don't have have it very specific I can ask Bruce to follow up and give you an answer but just if you go back to the bridge.
On.
The walk for Q3, you can see there's 140 basis points of pressure due to organic volume and productivity.
Some of that is driven by labor constraints in other words, the higher cost, but at the same time, making sure that we have all the production that we can make and some of it is driven by the fact that we have had to have more changeovers, because raw material has not been flowing properly.
Got it and just as a follow up on the <unk>.
Go back to litigation I was hoping you could comment on the strength of your insurance coverage both.
Just.
Whether it's P. Fast specifically, we will see headline settlement's, what we don't always have line of sight on is the insurance coverage are there any coverage limits.
And just help us frame for us the strength of the insurance coverage if you could.
Yeah. So deane, we do have insurance coverage, we are working with with our various insurance providers through multiple dialogues that we keep having with them.
But as you know some of these things take time, so when we do get those settlements and we'll definitely keep you posted.
Okay. Thank you.
Thanks.
Thank you.
Next question comes from the line of Andrew <unk> with Bank of America. Please proceed with your question.
Good morning, Andrew Andrew.
Hey, just a question on sort of a bigger picture question for Mike maybe Monish.
I think three of them have it.
Fairly unique integrated model.
Your supply chain flows internationally I think inside the company is also fairly unique.
Do these.
Current supply chain constraints and shipping constraints sort of a give you an opportunity.
To re evaluate how your internal supply chain are constructed.
And I'll just leave it at that.
Yeah Andrew.
One of our fundamental strengths and back to what <unk> was talking about how we're focused on delivering for customers. We're leveraging the strengths of our three on model. The idea that we talked about in the prepared remarks local for local building our capabilities across our value model to the customers close to them regionally around the world and that.
Has been a strength as we come through Covid and I would say this year as we as we deal with the interruptions in the supply chain. This this regional strategy has allowed us to be more agile and just what <unk> was talking about the changing nature of our production plans and our production wheels and our what we're doing in our factories. So we can have a lot of flexibly flexibility.
Built in I.
I would say, we're always evaluating how to better serve customers. How do we look at our lean value streams under and how do we take.
Take new strategies into that getting based on I would say the improving visibility we have we see opportunities to me.
More efficient and improve our cycle times and so on so we're always looking at changes I do think the model that we have has served us well and and it's been a great place to respond to the challenges and I think that's the foundation as we go ahead as it's how do we make that better how do we drive better performance.
Improving operational efficiencies.
Building on those strengths is where I'd leave you with.
Thank you Mike.
Just a follow up question I apologize, if I missed it but on elective procedures.
Your best guess with sort of falling Paul Vette cases under your WAF.
Yes.
The most likely trajectory for elective procedures over the next.
Let's say six months.
Yeah. So Andrew that's one of course, we keep watching very closely we for the quarter. We ended up at I think the industry ended up at the lower end of the 90% to 95% that was originally forecasted.
It was I think September was a tougher month as many countries saw a spike in Covid cases.
Our belief and I think it's the industry's belief that we should stabilize in the fourth quarter and hopefully get back to the 90% to 95% range as we get into the fourth quarter and then the bigger bigger discussion around the industries, what does 2022 and beyond look like the reason there is a lot of these elective procedures that have been slow.
Down.
<unk>, but theres still time sensitive at the end of the day. So there's so that's what we'll have to see and see what capacity is added in all the countries. We have to see how cases go.
Play out from a Covid perspective, but I also think hospitals are far better equipped right now are more prepared to deal with this so our hope is that elective procedures come back up to 2019 levels in.
In 2022, when it happens I think will depend on different parts of cases in the world, but that's that's how we see it.
Do you see a possibility of a cumulative catch up in 'twenty two.
Well, that's I think that's the debate right, who knows but I think thats going to depend basically on hospital preparedness as well as patient readiness to come into the hospital to get their surgeries done.
From our end you know, we would rather have the volume that not half the volumes sold.
I would say it would be a good problem to have but I think we'll have to see what happens.
Thanks, a lot guys. Good luck Bang thanks, Andrew.
Thank you.
Next question comes from the line of Nicole <unk> with Deutsche Bank. Please proceed with your question.
Yeah. Thanks, Good morning, guys Hi, Nicole.
I just wanted to dig into what you guys are seeing from a supply chain perspective more so if you could talk about any changes in the key bottleneck versus last quarter's update and is.
Is there a sense at all that there's green shoots here meeting that is there any possibility that the supply chain issues or headwinds.
Thanks.
Well, Nicole I would go back to it it really is a convergence of multiple factors and so you got to pull those apart a little bit the strong demand. We think we'll continue to see strong demand. So that's that's going to put pressure on the supply chain going forward, we've seen challenges in labor shortages the pandemic has impacted.
Production semiconductor.
Shortages are impacting end markets for us in particular and then we were also impacted as we went through the year with some extreme weather events, which interrupted our raw material supply those are getting better so some of the raw material supply issues that.
That we are facing are getting better as we go and we do expect supply chains to improve its difficult to estimate or predict the duration of each of these factors and how they play with each other.
Watching the congestion and logistics is.
<unk>.
One of the things that we are carefully looking for improvements and as well can we can we.
Can we move back to more normal logistics patterns for us as we go forward that'll be a good sign that broadly supply chain disruptions are improving but you have to keep an eye on each each of these aspects to see step by step and we do we do it we are optimistic we are hopeful as we as we get into 2022, but we're going to continue to see improvements.
Nicole we also have a control tower that has been set up so we are constantly watching whether it is the port congestion whether it is shutdown of airports, whether it is customers suppliers, telling us that raw material may be few hours late so thats why we are changing.
Changing in our factories faster to keep other products moving so that'd be just make sure that we keep customer demand as well as customer demand itself is pretty variable right now and Thats. Another big thing that control tower is doing is watching customer demand and then adjusting supply as needed.
Got it thanks, Tony Thanks, Mike that was helpful.
And then I guess for <unk> as we kind of think about the expectations by segment, we've kind of discussed elective procedures within health care, you guys talked a little bit about safety and industrial look around with math, but.
Consumer and TNT are facing tougher comps in the fourth quarter.
Expectation that those businesses can still grow organically or is there a risk it could be down year on year.
So I would start with just transportation and electronics, you know that business is impacted the most by two one is the auto industry and second is the electronics industry in the semiconductor shortages hits that business squarely.
I would say on the auto build the latest IHS forecast that we look at is on a year over your 20% down is where auto builds are expected to be.
Theres also they're facing comps from last year in the electronic side, so, but its consumer electronics Tvs tablets all of them are supposed to be down on a year over year basis, I think we'll have to see where semiconductor shortages land up for that business, but there are ashish and team are fighting hard and if the volumes there they're going to do whatever it takes to make sure.
Sure that the customers are served on consumer you are right that is also facing a very strong comp from last year, but you can see what that what Jeff and team have done in the first 11 months, we have seen strong growth.
Our platforms, whether it was commando, our filtrate or post it notes et cetera, all have seen good growth in the third quarter.
Good early start in our stationary business in the in the holiday season. The question is whether that continues is the thing that we'll have to keep watching.
Got it thanks I'll pass it on.
Thank you.
Kim.
And our next question comes from the line of Steve Tusa with Jpmorgan. Please proceed with your question Hey, good.
Morning.
Steve.
Hey, guys. So what what is like the <unk>.
Underlying like leverage this quarter.
Back out price cost and then I think like the year over year on restructuring cost savings and then temporary costs.
Mask things, a little bit, but if I, just if I kind of like back into what I'm getting something.
Negative on the revenue growth.
But that obviously there is you know the supply end.
Other inflation that you have to deal with so what is like the the underlying is the underlying leverage positive this quarter on that 5% or was it negative because of mix just kind of hash that out a little bit because a lot of moving parts here.
You're breaking up a little bit Steve, but I think I got your question is what's the underlying leverage and I would tell you. It's a little hard for me to ex everything out from a restructuring perspective ex out organic volume price raw and then give you a leverage I would just tell you. When you look at the bridge that we have given you we did see volume growth.
But that was offset by the productivity from global supply chain as well as our growth and productivity and increased litigation costs and you can see that hurt us one 4% on that productivity basis. That's the way I look at it Steve its very hard and I think it would be unfair for me to just everything out and they can tell you leverages.
Good because I don't think Thats the way, we look at it because for me its ultimately its the all in what I would give you versus exiting some stuff out.
Right I guess like is there a reason why you wouldn't be able to convert more normally in.
22, I guess, assuming these things stabilize I mean is this business still a.
A 35% kind of core incremental margin business.
I would say so Steve I think if again you have to go back to all things being equal, yes, it's a 30% to 40% leverage business and I don't see that change.
But I think it will come down to what is supply chain trends look like in 2022, you've seen not just us, but many of our peers as well as other people have said supply chain constraints go into 2022.
But I think long term as Mike has mentioned that I've said, we are very confident we can grow about the macro we can get margin expansion and we can continue to have strong cash. So all of those it's I think it's just a short uncertain time that we'll have to see how supply chain self plays itself phone yeah.
Yeah, Yeah, there I appreciate it okay. Thanks, thanks for the house.
Yep.
Thank you and our next question comes from the line of John Walsh with Credit Suisse. Please proceed with your question.
Hi, Good morning, Hey.
Hi, John Hi, John.
Hi.
Maybe just first question around the restructuring I think you used the term on track, but I just wanted to confirm the numbers here I mean, the prior program was $275 million of costs 225.
And as a savings and then now you've you've taking are obviously up higher here.
How do we think of what is that is that what you mean by on track that's kind of like an 82% conversion on the savings and on the new actions how do we think about the payback on those.
Yeah. So.
Reiterate in them.
Our program was going to cost somewhere between $2 50 to 300 and benefits of somewhere between 202 50.
What do we have look what I said in this in my prepared remarks was year to date, we have spent $240 million against the $2 50 to 300, and we would update updating that from.
250 to 300 to 300 to 325, and we largely expect the program to be initiated by the end of <unk> 22 on the benefit side. We are we had said 200 to 250 with all the actions that we have taken we see ourselves at the higher end of that range.
And between the $2 25, and the $2 50, that's half of it that's already shown up or will show up for this year and 'twenty. One by the time, we had done with the fourth quarter and the balance will show up in 'twenty two.
Yes, John I, just wanted to clarify one thing when I said year to date, we've had $240 million of charges charges, sorry, that's actually $104 last year in Q4.
<unk> hundred million year to date this year, yes, sorry program to date.
And as you know John we don't remove restructuring charges from our results and that's all included in the numbers we report.
So we don't adjust for that.
Yeah no. Thank you for the for the extra details there and then maybe just as a follow up here.
A lot of questions around supply chain.
I think we're all following the semi shortages et cetera, but.
You also mentioned like polypropylene and some other supply chains that you know a little bit more ancillary to kind of semi and some of the things we might be tracking day to day I'm, assuming there was some.
Pact there from either Hurricanes forest matures et cetera can you, maybe just help us understand what youre seeing in that part.
Of your supply chain.
And so the duration of that might be.
So we are seeing polypropylene ethylene resin is all of the ones other companies I mentioned seeing inflation.
Many of these are crude better values, they're not perfectly tied to the price of crude but you can see where crude is going so there's derivatives. They.
They all have got impacted all the way in February with the Hurricane that happened and then I would say that global supply chains have further put pressure on it for the material flow across the globe and that makes it harder for you to buy material only in certain locations and just I would if my memory's right on polypropylene in ethylene.
We saw actually a jump in August and we've seen it come down a little bit in September, but that's again, it's a demand supply equation there, but it all goes back to hurricane Idaho that happened in February and then the demand from the pandemic also increased.
Need for the product and all of that put together Mike used the word convergence has driven some of the pressures on the chemical side of the house.
Great appreciate you taking the questions.
Thanks, Sean and thanks, Sean.
Thank you <unk>.
<unk> question comes from the line of Andrew Kaplowitz with Citigroup. Please proceed with your question Hey, good.
Good morning, guys good morning.
Maybe an update on how you're thinking about cash deployment at this point I think we all understand your priorities and they start with organic investments, but at what point do you ramp up repurchases for instance, if your stock continues to languish, a bit and or at what point do you think you've gone far enough into facility integration. So three of them might be better equipped to make a larger deal again.
Yeah. So I'll just again just I.
And my apologies, Andy I am just going to reiterate our capital allocation priorities just so that everyone's on the same page. Our first priority is always go organic we just see it's the best use of our capital Best return as you can see via not afraid to deploy capital. We've done that in 2020, we are continuing to do that in 'twenty, one which is investing in <unk>.
Growth productivity and sustainability.
We're going to spend one $8 billion to $2 billion this year, but with some of the supply chain constraints, it's down to one five to one six but we still believe in the long term growth and so we're going to keep investing in that.
As Mike had announced early in the year, we also announced a $1 billion to improve for our sustainability efforts, that's going to be spend over the next 20 years, but it's front end loaded. So that's the second piece on organic investment dividend is our second priority important for our shareholders. So that's the priority that we.
Clearly are focused on.
Third priority priority is M&A and Youre right that we are integrating esselte and the team is doing a very nice job by integrating <unk> into our business at the same time, we have tons of ideas and we have a pipeline that we would be will execute when we see that we get a target that we believe can add value.
To our shareholders at the same time it is things that we believe that we can add value to the target two by using some of the strengths that we have which is our brand our global capability. Our employee base are our material science capability et cetera. So that's the third and we always have an active pipeline.
And then the last one is share buyback you've seen we are now down one point.
3 billion for the year, we did 527, that's the last priority for us from a.
Deployment of capital perspective, but depending on the stock price and how much cash we generate we clearly will look at that to overall I would just say when I look at net debt to EBITDA leverage which is at approximately 1.3.
At that point.
It gives me a lot of financial strength and Optionality. It gives three M. A lot of financial strength and Optionality, so depending on what opportunities, we see we won't hesitate to deploy capital because as Mike mentioned, even some of the platforms that we've talked about all of them are GDP plus growth platform. So that's an area, we would love to keep investing.
Okay. That's helpful. And then could you give us a little more color on what's going on in your health care business in terms of margin I think margin performance was relatively good year over year at least versus your other segments. So how much is a Saudi integration, helping you know is it a mix of your businesses such as oral care outperforming that's helping margin and how are you.
Thinking about the margin trajectory in that business moving forward.
Yes. So if you you know for health care I also look at EBITDA, if that helps sandy I think year to date, we had approximately 31% on an EBITDA basis. The team most and team have done a really nice job of continuing to drive margin. We increased margins 70 basis points in the third quarter I would say, it's a performance all around.
The oral care business in the snapback is definitely helped it helps us on our volume it helps us on leverage with the volume in the factories.
M. S D business, if you exclude the disposable respirator decline grew very nicely in the second quarter and MST is where is <unk> in there too <unk> was impacted in the third quarter by lower elective procedures, but the integration is going well we are continuing to find synergies.
Between the cross selling that we can do with our wound care business and <unk>, our existing wound care business and facility. So we are very happy with that progress, but you know in the spirit of continuous improvement there's always more we can do.
To drive growth and margin and most of that and team are very focused on continuing to do that.
I appreciate it.
Thank you.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Thank you thanks for fitting me into everybody.
Joe.
Maybe just on the price cost discussion I guess I guess you haven't covered you guys for a while it's rare to see that price cost equation negative I guess the question I have is.
Do you think we're at the peak of pain that 140 basis point impact on price cost.
And then my follow on to that Munis, you talked about some of your some of your business being going through contracts I'm. Just curious like what portion of your business is tougher to re price in this environment.
So to answer your first question, we have made progress on price you saw us going from 10 basis points to 140, and if you recall, Joe We had said that you will see this ramp through the year, because we take a very methodical approach to driving price across the multiple geographies in which channels we have.
We would we should continue to see progress in the fourth quarter as these price actions that we've taken in the third quarter continued to take hold.
I think the big issue that we have seen as inflation has come in faster than anybody thought.
And so the team is cons continuously done what it can to drive price increases.
To the question that was even asked earlier our goal is to get to neutral of price and raw.
But I think it'll all depend on how inflation goes but the team knows.
How to drive price the team.
Drives a lot of innovation that also helps from a price increase perspective, so all that put together teams working it pretty hard.
And I guess the question on the contract.
And being able to reprice some of your contract because there you have some kind of bench.
Benchmark for us on what portion is a little bit tougher to reprice in this environment.
Listen all price increases we work with our customers we have contra.
Contracts with many of our customers in some cases, we give 90 to 120 days notice in some cases these are longer contracts.
That we worked through.
And then we have spec in businesses that we work directly with the OEM. So put all that together that's how we look at that so it's hard for me to give you one number because.
And pick a day and I think you'll have a different percent of contract under contract quote unquote.
Got it okay. Thank you very much thanks Joseph.
Joe.
Thank you.
Concludes our question and answer portion of our conference call I will now turn the call back over to Mike Roman.
Finishing remarks.
To wrap up our team is performing well in a challenging environment delivering broad based growth good margins and strong cash flow, we will stay focused on managing supply chain constraints investing in attractive market trends to drive our growth and creating greater value for our customers and shareholders. Thank you for joining us.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
Thank you.
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