Q4 2021 3M Co Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the three in the fourth quarter earnings Conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and.
That's your 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 January 25th 2022.
I would now like to turn the call over to Bruce Jo Mill, and senior Vice President of Investor Relations at two P. M.
Thank you and good morning, everyone and welcome to our fourth quarter earnings Conference call.
With me today are Mike Roman <unk>, Chairman, and Chief Executive Officer, and Monish, Patella, Wallach, our chief financial and transformation officer.
Mike and more niche 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.
I had three M dot com under the heading quarterly earnings.
Please turn to slide two.
Before we begin I would like to announce our next two investor events.
On the morning of February 14th.
We will be having a virtual investor meeting, where we will be providing a near term strategic update along with our 2022 guidance.
Also please mark your calendars for our first quarter earnings conference call, which will take place on Tuesday April 26.
Please take a moment to read the forward looking statement on slide three.
During today's conference call, we will be making certain predictive statements that reflect our current views about <unk> future performance and financial results.
These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties.
Item 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.
Reconciliations of the non-GAAP measures can be found in the attachment to today's press release.
Before I hand, the call over to Mike I would like to take a moment and highlight a couple of presentation changes we.
We are making in 2022 to simplify our financial reporting and increase understanding of our performance.
Yeah.
These changes are a result of discussions we have had with many of you over the last few years, along with recent benchmarking work that we've done.
First we recognize that dual credit reporting has presented some challenges.
For example, having a clear understanding of the impact of disposable respirator performance over the past two years on our segment results, particularly.
Particularly safety and industrial and health care.
Therefore, we have decided to eliminate dual credit reporting and will no longer report dual credit within our business segments, starting in Q1 2022.
We will provide a form 8-K and ahead of our February 14th meeting with updated history for the past three years, reflecting this change.
And second we will be providing organic sales change components in aggregate as opposed to reporting separate volume and price components.
With this change we will also be updating the descriptor to organic sales versus organic local currency sales.
Please note this change will be reflected in our 2021 Form 10-K filing.
We remain committed to providing strong transparency of reporting our financial performance and of course, we're always here to address your questions.
With that please turn to slide four and I'll now hand, the call off to Mike Mike.
Thank you Bruce good morning, everyone and thank you for joining us.
Three of them delivered a solid performance in the fourth quarter closing out a strong year as we focused on serving customers in a dynamic external environment.
Our revenue in the quarter finished better than we expected across all businesses, including an increase in respirator demand due to the impact from the omicron variant.
Organic growth companywide was 1% on top of 6% in last year's Q4 with.
With earnings of $2 31 per share driven by a good December strong execution, and a lower than anticipated tax rate.
I am pleased with how we effectively manage production operations to meet customer demand.
<unk> ongoing logistics and raw material challenges that are impacting many companies.
While focusing on customers. We also saw good benefits from our actions to drive productivity improved yields and control costs.
Helped offset the margin impact of supply chain disruptions inflation and COVID-19.
In addition, our selling price actions continued to gain traction with.
For the year on year increase of two 6% in Q4 versus one 4% in Q3.
We expect this to be a tailwind for the full year in 2022.
Overall demand remains strong across our market leading businesses.
And we are continuing to prioritize growth investments in large attractive markets.
We also took actions to strengthen our portfolio and advance our commitment to sustainability.
I will highlight examples of our progress later in the call.
In summary, we delivered a good finish to the year and are well positioned to drive growth in 2022.
As Bruce noted, we will provide full year guidance, along with strategic updates from our business leaders at our February 14th meeting.
<unk> will now take you through the details of the quarter Monish.
Thanks, Mike and I wish you all a very good morning.
Please turn to slide five.
Looking back on the fourth quarter. The three M team continued to manage through a challenging environment.
As Mike noted revenues for December , but better than previously expected across all the businesses.
Including disposable respirators as the Omnicom variant increased near term demand.
Dow manufacturing raw materials, and logistics challenges persisted throughout the quarter. The three M team executed well by driving operating rigor and managing costs, while continuing to invest in the business.
Turning to the fourth quarter financial results sales were $8 $6 billion up one 3% year on year or an increase of one 3% on an organic local currency basis against our toughest quarterly comparison last year.
Operating income was $1 $6 billion with operating margins of 18, 8% and earnings per share of $2.31.
On this slide you can see the components that impacted our operating margins and earnings per share performance as compared to Q4 last year.
The biggest impact to fourth quarter results was the ongoing effects from the well known global supply chain raw materials, and logistics challenges, which persisted throughout the fourth quarter.
Our enterprise operations teams continued to work tirelessly through ever evolving changes in customer demand, while navigating these challenges to keep our factories running.
All of our customers and protect the health and safety of our employees.
We continue to experience significant productivity headwinds in our factories due to shorter production runs and more frequent production changeovers throughout the quarter.
As we focus on serving our customers.
As forecasted at the start of last year, we also had higher year on year compensation and benefits costs.
These impacts were partially offset through strong spending discipline, along with benefits from restructuring and lower legal related expenses versus last year's Q4.
We also continue to prioritize investments in growth productivity and sustainability to drive long term performance and capitalize on trends in large attractive markets, including automotive home improvement safety healthcare and electronics.
All in these impacts lowered operating margins by two point full percentage points and earnings per share by 33 cents year on year.
Moving to price and raw materials as expected our selling price actions continued to gain traction as we went through the quarter.
On a year on year perspective, Q4, selling prices increased 260 basis points as compared to 140 basis points in Q3, and 10 basis points in Q2.
In dollar terms higher year on your selling prices offset raw material and logistics cost inflation in Q4.
Which resulted in an increase in earnings of three cents.
However remained a headwind of 20 basis points to operating margin.
Next foreign currency net of hedging impacts was a headwind of 10 basis points to margins and four cents per share year on year.
There are three other nonoperating items that impacted our year on year earnings per share performance.
First a reduction in other expenses resulted in a 10 cent earnings benefit.
This included a six cent benefit from nonoperating pension, which was similar to prior quarters.
We also have been proactively managing our debt portfolio, including the early redemption of one and a half a billion dollars, which helped drive a four cent benefit year on year from lower net interest expense.
Second a lower tax rate versus last year provided a 12 cent benefit to earnings per share.
Our Q4 tax rate was benefited by geography income mix and favorable adjustments related to impacts of U S International tax provision.
And for the full year, our tax rate was 17, 8%.
And finally average diluted shares outstanding decreased 1% versus Q4 last year, increasing Porsche earnings by two cents.
Please turn to slide six for a discussion of our cash flow and balance sheet.
Fourth quarter adjusted free cash flow was $1 $5 billion are down 30% year on year.
With conversion of 110%.
For the full year adjusted free cash flow was $6 billion with adjusted free cash flow conversion of 101%.
That decline in our Q4 euro on your free cash flow performance was driven primarily by lower noncash legal and restructuring expenses versus Q4 last year.
Along with higher litigation related payments and Capex investments, which was partially offset by improvements in working capital velocity.
Fourth quarter capital expenditures were $556 million up $134 million, a year on year and $213 million sequentially as we continued to invest in growth productivity and sustainability.
Looking at the full year capital expenditures totaled $1 $6 billion.
During the quarter, we returned $1 $8 billion to shareholders through the combination of cash dividends of $848 million and share repurchases of $938 million.
For the full year, we returned $5 $6 billion to shareholders in the form of dividends and share repurchases.
Our strong fourth quarter cash flow generation and disciplined capital allocation enabled us to continue to maintain a strong capital structure.
We ended the year with $4 $8 billion in cash and marketable securities on hand, and reduced net debt by $1 $2 billion or 8% versus year end 2020.
As a result, we exited the year with net debt to EBITDA of one four times.
Our strong balance sheet and cash flow generation capability, along with disciplined capital allocation continues to provide us the 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 seven bed I will summarize the business group performance for Q4.
I will start with our safety and industrial business, which posted an organic sales decline of one 3% year on year in the fourth quarter.
This result included a disposable respirator sales decline of approximately $110 million year on year, which negatively impacted safety and industrials Q4 organic growth by nearly four percentage points.
Our personal safety business declined mid teens organically versus last year's 40% pandemic driven comparison.
Looking ahead, we anticipate that COVID-19 related disposable respirator demand will decline as we move through 2020 two.
However, we remain prepared to respond to changes in demand as COVID-19 related impacts continue to evolve.
Turning to the rest of safety and industrial organic growth was led by a double digit increase and closure and masking.
In addition, the abrasives business was up high single digits, industrial adhesives, and tapes and electrical markets were each up mid single digits automotive aftermarket was flat while roofing granules declined against the strong comparison from last year.
Safety and industrials fourth quarter operating income was $543 million down 22% versus last year.
Operating margins were 17, 7% down 440 basis points versus Q4 last year.
You're on your operating margin performance was impacted by a decline in sales volumes.
Higher raw materials logistics and litigation related costs.
Manufacturing productivity impacts.
Along with last year's gain on sale of property.
Partially offsetting these impacts were selling price increases strong spending discipline net benefits from restructuring and a smaller increase to our respirator mask resort.
Moving to transportation and electronics.
Which declined slightly on an organic basis due to the continued impact of the semiconductor supply chain constraints.
Our auto OEM business was down mid teens organically year on year compared to the 13% decline in global car and light truck builds.
As we mentioned last quarter, we experienced an increase in channel inventory levels, but the tier suppliers in Q3 as auto OEM production volumes decelerated from $18 5 million build in Q2 to $16 3 million in Q3.
During the fourth quarter OEM production volumes increased to 22 million barrels are up over 20% sequentially.
This sequential increase in bid activity drove a reduction of channel inventory levels with the tier suppliers during the quarter, which negatively impacted Q4 organic growth for the automotive business by approximately 10 percentage points.
For the full year, our auto OEM business was up low double digits as compared to global car and light truck builds growth of 2%.
Throughout the year, we continued our track record of success of winning with our customers and gaining penetration on new internal combustion and electric vehicle platforms.
Our electronics related business declined low single digits organically with declines across consumer electronics, particularly smartphones and Tvs.
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 transportation and electronics commercial solutions grew low double digits advanced materials was up high single digits, while transportation safety declined high single digits.
Fourth quarter operating income was $406 million down 15% year on year.
Operating margins were 17, 6% down 270 basis points year on year.
Operating margins were impacted by higher raw materials and logistics costs Manny.
Manufacturing productivity impacts along with an increase in comp and benefits costs.
These euro and euro headwinds were partially offset by increases in selling price.
Strong spending discipline and net benefits from restructuring actions.
Turning to our health care business, which bolstered our fourth quarter organic sales increase of one 6%.
This result included a nearly four percentage point drag from the year on year sales decline in disposable respirators.
Our medical solutions business declined low single digits organically.
Which included a six percentage point impact from the Euro on your sales decline in disposable respirators.
Fourth quarter elective medical procedure volumes were approximately 90% of pre COVID-19 levels, which was similar to Q3 and last year's Q4.
Sales in our oral care business grew low single digits year on year as patient visits continue to be near pre COVID-19 levels.
The separation and purification business increased high single digits year on year with sustained demand for Biopharma filtration solutions for Covid related vaccines and therapeutics.
Health information systems grew mid single digits, driven by strong growth in revenue cycle management and clinician solutions.
And finally food safety increased high single digits. Despite continued COVID-19 related impacts of the global hospitality industry.
In December we announced the planned separation of this business, which will be combined with neogen.
As disclosed in their December press release, we expect the transaction to close by the end of Q3 of this year.
Health Care's fourth quarter operating income was $536 million down 2% year on year.
Operating margins were 23, 6% down 50 basis points.
You're on your operating margins were negatively impacted by raw materials and logistics costs.
Manufacturing productivity compensation and benefits costs and food safety deal related cost.
These impacts were partially offset by benefits from leverage on sales growth strong spending discipline and restructuring actions.
For the quarter and full year health Care's, adjusted EBITDA margins was strong coming in at nearly 31%.
Lastly, our consumer business finished out the year strong.
With organic growth of 4.9% year on year on top of last year's 10% comparison.
Our home improvement business continued to perform well up low single digits on top of last year's strong double digit call.
This business continued to deliver strong growth with our home improvement retail customers in our category, leading filtrate command and Scotch Blue brands.
Stationery and office, along with the consumer health and safety business each grew low double digits organically in Q4.
As both of these businesses continue to lap last year's Covid related comparisons.
The holiday season demand drove strong growth for our Scotch branded products during the quarter.
We also posted strong growth and posted branded products, despite workplace through openings being pushed out due to the resurgence of Covid cases.
And finally, our home care business was up low single digits versus last year's strong Covid driven comparison.
During the quarter, we took a small portfolio action to divest our flow care business in Europe , which is expected to close in Q1.
Consumer's operating income was $316 million flat compared to last year.
Operating margins were 21, 4%.
100 basis points year on year.
Operating margins were impacted by higher raw materials logistics and outsourced hard goods manufacturing costs.
Manufacturing productivity impacts.
Along with increased compensation and benefit costs.
These impacts were partially offset by leverage on sales growth, which included good price performance strong spending discipline and net benefits from restructuring actions.
That concludes my remarks for the fourth quarter.
Before I turn it back over to Mike to recap the year I would like to make a few comments, reflecting on our operating performance this past year.
The macro environment in 2021 was defined by strong but fluid end markets.
Semiconductor constraints.
Supply chain and logistics challenges.
Along with ever evolving impacts from COVID-19, particularly on the global healthcare industry.
These dynamics were further compounded by winter storm Yuri in mid February , which led to significant disruptions to raw material supply and logistics availability, which further disrupted global supply chains.
All of these factors collectively helped contribute to broad based and accelerating inflationary pressures throughout the year.
Against this backdrop that three M team kept our relentless focus on serving customers and she ought to continue to you have raw material supply.
Managed ever changing manufacturing production plans navigated logistic constraints and delivered strong full year organic growth of 9% with all business segments posting high single digit growth.
We also worked hard to raise selling prices control.
Controlled spending and drive improvements in operating rigor to daily management.
Leveraging data and data analytics.
While continuing to execute on our restructuring actions.
These actions combined with strong organic growth helped to deliver full year operating margins of 28% or down 50 basis points year on year on an adjusted basis.
This result included an 80 basis point headwind from raw materials, and logistics inflation net of selling price actions.
Along with increased spending to advance our sustainability efforts and higher legal related expenses.
In addition, we continue to focus on working capital improvement, which helped contribute to another year of robust adjusted free cash flow.
Coming in at $6 billion.
I wanted to thank the three of them employees for delivering for our customers and shareholders in a very uncertain and fluid environment.
I also want to take a moment to personally thank our customers and suppliers for putting their trust and confidence in us and for maintaining strong and close partnerships that helped us navigate the challenges of the past year.
We've made good progress in 2021 and are well positioned for 2022.
And in the spirit of continuous improvement there is always more we can do and will do.
With that please turn to slide eight and I will turn it back over to Mike for his recap of 2021.
Thank you Manish as I look back at 2021, I am proud of our team and our performance.
Our results demonstrated the strength of the three of them model and our investments in growth productivity and sustainability advanced our company.
In the face of an uncertain environment, we delivered strong organic growth of 9% with strength across all business groups, along with margins of 21%.
This drove a 14% increase in adjusted earnings per share.
These results exceeded our original guidance that we communicated in January of 2021, and recent updates to that guidance.
We generated robust free cash flow of $6 billion.
With an adjusted conversion rate of 101%.
Enabling us to invest in the business reduce net debt by $1 billion and returned significant cash to shareholders.
All in three of them returned $5 $6 billion to our shareholders through dividends and share repurchases in 2021 marked our 60 <unk> third consecutive year of dividend increases.
We continue to help the world respond to COVID-19, with $2 3 billion respirators distributed last year.
For a total of $4 3 billion since the onset of the pandemic while.
While engaging with governments on how to prepare for future emergencies.
We stepped up our commitment to ESG.
Including sustainability as we made progress on new goals to achieve carbon neutrality reduce water use improve water quality and reduce plastics.
As part of our ongoing sustainability commitments, we proactively manage PFS and deploy capital to make our factories and communities stronger and more sustainable.
As one example, we are on track to complete our new water filtration system in Cordova, Illinois by the end of 2022.
And spine drink, Belgium, we installed and activated a treatment system last month to reduce <unk> discharges by up to 90%.
This is part of a 125 million year old commitment to improve water quality and support the local community.
As disclosed in our 8-K in November we continue to work with local authorities related to a safety measure that shut down certain operations in spine deck.
We're also appealing and discussing with local authorities, a new change to our wastewater discharge permit that if implemented could have a material impact and potentially interrupt production at the entire site.
Impacting customers and the supply of material to other three factories.
We are actively working to address current and future potential impacts and we'll update you as appropriate.
With respect to litigation, we reached settlements last year and certain P. Fast cases, and continue to vigorously defend ourselves on combat arms.
As always we encourage you to read our SEC filings for updates on these matters.
As we advance our ESG priorities. We also continue to take actions to improve diversity equity and inclusion.
This includes multiple programs to make stem education more available to under represented groups and achieve our goal to deliver 5 million learning experiences.
Our businesses have also made commitments.
Safety and industrial for example is focusing on access to skilled trades.
And we are increasing transparency through an annual diversity equity and inclusion report.
At the same time, we are advancing our strategic priorities for long term growth and value creation.
We are innovating faster and differently, including new ways to collaborate with customers and partners virtually.
While investing $3 $6 billion and the combination of R&D and capex to strengthen three of them for the future.
To make the most of long term growth opportunities. We also continue to prioritize investments in large fast growing areas like automotive home improvement safety healthcare and electronics.
In 2021 for example, our automotive electrification platform grew 30% organically.
And our Biopharma business grew 26%.
Our home improvement business grew 12% on top of 13% growth in 2020.
Driven by iconic brands, including our command damage free hanging solutions and filtrate home filtration products.
To accelerate our ability to meet increasing demand for command unfilled treat last week, we announced them nearly $500 million investment to expand our operations and Clinton, Tennessee, adding nearly 600 manufacturing jobs by 2025.
We look forward to sharing more about how we are capitalizing on growth trends and winning in these markets at our February meeting.
Last year, we also continued to reposition our portfolio to maximize value across the enterprise.
Including an agreement to divest and combine our food safety business with Neogen.
Creating a global leader that is well positioned to capture long term profitable growth.
We continue to make progress in transforming three M <unk>.
Accelerating our digital capabilities and expanding our use of data and analytics to better serve customers and improve our operational agility and efficiency.
This includes the ongoing deployment of our ERP system.
Which went live in Japan in Q4.
And also moving more than 60% of our enterprise applications and global data center infrastructure to the cloud.
While streamlining our business group led operating model.
To help our people be at their best we also introduced new employee work models rooted in flexibility and trust.
Along with investments to support their health and wellbeing.
As we enter 2022 I'm confident we will continue to grow our businesses improve our operational performance and find new ways to apply science to improve lives.
Delivering for our customers shareholders and all stakeholders, who have placed their trust in us.
We are building a stronger three of them and I want to thank our 95000 employees for their contributions include.
Including the 50000 people in our factories, who continue to show up Dan and day out to make a difference.
That wraps up our prepared remarks, and we will now take your questions.
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You're using a speaker phone please lift your handset before entering your request. Please limit your participation to one question and one follow up one moment. Please while we compile the Q&A roster.
Our first question comes from Nigel Coe with Wolfe Research you May proceed with your question.
Yeah.
Thanks, Good morning wasn't expecting the first question because one of the things for them.
Nigel.
So some nice upside to your.
Your December guide.
Guidance. Many some you you called out a number of factors, but so it didn't call out in 95.
You know given all the talk we got from the federal government about.
Free mosques and on the new guidance machine Sims and just curious what you're seeing.
From from that side of the business given all the commentary we've seen.
Yeah, So Nigel I would say when we gave you the guidance in December at that time, we had not seen the pickup of 90 fives and one of the factors that made us deliver better than what we thought and in December .
December was the pick up off the respirator business, we came in 40 million better than what we had originally predicted so we have seen that pick up but I would still say.
It's a volatile we'll see how that plays itself out we are pleased with the partnership that we have at the federal government right now as regards to this we've had a lot of dialogue with them and as things evolve, we'll keep you posted.
Okay.
Then just I know you're going to give guidance on on Sep 14, but just curious you know just given given the you know there's lots of moving parts at the margin line. Just wondering how we think about the takeoff point into into 2022, specifically <unk> train two.
Normal seasonality would have you up slightly from full can you just wondering how you think about that and have we seen the peak of the inpatient care at this point.
Have you seen the peak I'm sorry of loss.
Yeah, So I'll start with that first comment Nigel and and that's an item that we constantly keep watching and debating as you know we have tried to to fine tune our analysis as much as we can on inflation. So what we saw exiting December was the pace of inflation slow downs.
Versus the prior months, it's still inflationary, but we saw the pace slowed down and I think that's a positive but again it'll depend on how winter plays itself out it depends on logistics et cetera, and whether the ports get on congested just on data points or any of other points on margin et cetera things to keep in mind as you get into one.
<unk> 22 first of all from an inflation perspective, youre going to find not just us, but most companies have the highest the toughest comp because if you remember in the first quarter of last year of 21, there wasn't as much inflation, we started seeing it in March and then it accelerated in April onwards, So I would factor that wanting.
First the second I would say is COVID-19 uncertainty you brought up the respirator demand, but there are other impacts also depending on what happens with coal where the labor shortages that we're seeing from our customers. We are seeing it in our own factories vendors I'm sure are facing it too. So that's something we'll have to watch the third one.
Is we are going to continue to invest in growth productivity and sustainability. So I would say that's an area as we continue to see it but you're going to keep keep investing especially in the area as Mike has already talked about.
I would say we continue to see a strong market we saw it in the fourth quarter. We are seeing it right now and I think 2022 will continue to remain a strong market.
The team has done a marvelous job in driving price price has gone up from point wanted to one point for the coupon 6%, Mike Mike had talked about that also in his opening remarks that we see that to be a tailwind.
Team's done a good job on executing on restructuring so there's approximately $70 million of carryover of restructuring benefits for your auto and electric growth right now sequentially from a build rate is showing flat for the year of 'twenty 'twenty. Two it's a 9% increase I think the chip shortage and where that ends up will have an impact on the auto business.
Health care elective procedures came in at 90% that our predictions that says they should be at 100% by Q4 2022 from out and we're going to continue driving operating rigor. We are going to continue to drive margin expansion. As we have said before we will also have to watch litigation costs and see where that goes with all of the.
The cases that are on and then Mike mentioned about weinrich, and we're working with the authorities and in Belgium for our factory and we'll have to see the impact in and.
When we can start up production in some of those areas that are currently shut down so all that put together I would say again, we are well positioned and I know, it's a long answer to your question Nigel but I just wanted to give you a full framework. We are well positioned for 2022 week, we closed Q4 pretty well and we hope to continue that momentum into 2022.
Great. Thanks for the details.
Thanks, a lot.
Okay.
Yeah.
Our next question comes from Jeff Sprague with vertical Research partners. You May proceed with your question.
Thank you good morning, everyone. Good morning morning, Jeff Martin a couple here from me.
Just I was wondering if you could level set us actually now on the actual size of the respirator business I think we were 600 million pre COVID-19 .
I feel like we're in the 1 billion and a half to $2 billion range, but could you put a put a finer point on where we stand at the end of 2021 .
Yeah, So Jeff it's $1 5 billion is what we did in 2021. It was 619 1.4 in 'twenty 'twenty and 1.5 and 2021, if you look at it quarter over sequentially. We were down and we were also down 110 million versus Q4 of 2020.
We believe that the peak was Q1 of 2021 .
And then depending on how it goes but we believe in 2022 disposable respirator demand is going to be lower than what we had in 2021.
I know youre going to reserve your guidance for next month, but you did essentially get to price cost neutrality in the quarter right a little negative on margins a little positive on E. P. S.
Is it your view that.
That gets better over the course of the year.
If you think about kind of carryover price I understand there is a ton of variables in that but directionally.
Directionally I just wonder if you could give us your preliminary thoughts on how that tracks for the year.
Yeah, Jeff I think we are working through that but just as Mike mentioned pricing will continue to remain a tailwind for 2020 to inflation I think we'll have to watch how the different factors play out back to raw material logistics I think what you're going to see is you're going to see some of your primary feedstocks start stabilizing between.
On December but you are going to see specialty feedstock starting to get more expensive. We are seeing inflation has gone downstream now so you're seeing it in much more places than you had seen it before I think what's also going to impact inflation is what happens with the labor pool and what goes on there.
And then as as long as the ports can start getting on congested I think you're going to see logistics costs come down if commercial airline capacity comes back in you're going to start seeing airfreight start coming down. So we are watching all of that I would say first half and in talking to people our own relapses analysis et cetera, I think the first half is going to be.
Tougher than the second half of 2022, when it comes to inflation first half part of it is as I mentioned, we are still seeing sequential increases but slower. So that's good but are you going to start facing last year's comp when it comes to inflation and I think that's going to impact us. So I think we are well positioned and as I've told you before.
The team has gone off the price we are managing our price raw equation as best we can and we are prepared to act as as the situation evolves.
And then just lastly for me if I could.
I think you made a comment about the dramatically reducing.
P. Fast discharges are perhaps this is my bad but I didn't know you were still discharging PFS and.
In places.
And at a single location or is this still an issue that.
You know you were addressing in multiple locations yeah. Jeff. This was part of our you know really following through on what we committed to do and we announced back at the beginning of 2021 to make our investment in reducing the water use in our factories, improving the water quality of our largest facilities and part of that is is there.
Discharge controlling discharge is reducing that as part of that investment and that includes what P. Fast as a broad category of Chemistries, we've talked about how we exited now almost two decades ago, the <unk> chemistries, which are a part of.
Lot of the discussions and PFS, but there are other PFS chemistries that are used and chemical manufacturing in general in some of our sites and that was the focus I mean, we're always in compliance with with the regulations.
Our on our plants. This is our chance to step forward and do even more and reduce further and that was what I talked about with spine breakfast is reducing further below our are our requirements at the time are our additional are improving the water quality even further.
Alright, thank you.
Yep.
Yeah.
Our next question comes from Scott Davis with melodies Research you May proceed with your question.
Okay. Good morning, everybody.
Scott.
I wanted to.
Follow up on Jeff's question on price a little bit.
Price is up again in January meaning did you have a January one price increase or did you implement your last big price increase in <unk>.
So we've implemented big price increases in a full queue, but again Scott as we have said a lot of these were pretty coordinated across different geographies different markets. So to the extent, we see the need that we have to do and <unk> will do the same on through 2022 will do the same.
And then just.
Jim situations can you give us a little bit of color on it.
How material I mean, you've had a couple of them.
A couple of months of your disclosure.
This disclosure said you can't measure the materiality, but you've had a couple of months now I mean can you supply out of other factories and meet demand.
How disruptive is this should we.
It's a fancy way of saying should we built this into our models and some sort of a headwind in 2022 or do you feel like youre going to have some remediation here.
Yeah, Scott I I know back to the comments I made in my prepared remarks, we're in the middle of this right now we continue to work with the local authorities.
We are appealing and discussing the changed our wastewater discharge permit there it could have a material impact on potentially interrupt production at the site.
So that's something we wanted to be clear on it's it's we're in the middle of it and I don't really want to speculate at this point on what it will ultimately mean this is a it's a priority for US we have our best people working on it actively working on a problem and we'll update as appropriate as we go forward here as we as we work through it.
Okay. Good luck. Thank you I'll pass it on thanks.
<unk>.
Our next question comes from Joe Ritchie with Goldman Sachs. You May proceed with your question.
Hi, Good morning, everyone, Hi, Joe Good morning, Joe.
So I know, we'll get more details are in mid February , but I guess, maybe just kind of thinking about the margin trajectory for both safety and industrial and transportation and electronics.
Both of those segments have been hit pretty hard the last the last couple of quarters and I'm just I'm just curious as you kind of think through the beginning part of 2022, I mean should we could we continue to expect the same type of headwinds or you know are there certain things that you would call out perhaps.
Litigation costs, not you know not recurring into 2022 that could be potential tailwind to margins in the early part of the year.
Yeah, Joe I, just said, we'll give you more guidance as we go through but just to answer your question more specifically I.
I would say a couple of things that I've said that before two volume has the biggest impact for us on a margin, but that's S. B G. T. B G L. Carol C B G.
I think we'll have to see what <unk> Mart volume turns out to be what headwinds we have our tailwind. When you think about just the trends that those two businesses are seeing overall GDP and ipi is going to be positive for 2022, I think is volatile in the first quarter.
And the second quarter, and what that turns out so that'll determine industrial activity on an auto build it is flat to down sequentially.
So and it's flat to down on a year over year basis, too. So that'll have an impact on T. B G.
Of course, then we'll have to see smartphone shipments so that the macroeconomic environment on our own you've seen the team has done a good job of raising price. So we have seen price go up.
Sequentially through the quarter and so you should see that price hold it'll get better inflation is another area that <unk>.
I think we will face a very tough comp from last year, we had very little inflation in the first quarter of last year. So you are on a year over year basis, Joe going to face that comp and then the third piece is on litigation as we have told you. We are actively working and defending ourselves in the combat arm cases, it's.
Right now I don't know where that goes and we'll keep doing what's right to keep defending ourselves and see where those are.
Expenses land. So I think that this is the best I can give you at this moment I a little bit of macroeconomic some of our stuff and then internally the last piece before I turn it back to you for another question is from driving supply chain efficiency driving out factories, improving rigor that just something that you're going to keep doing we've done it with <unk>.
Keep doing it so that should help.
And then supply chain availability or the manufacturing productivity impacts that we've had in the last two quarters, which has impacted <unk> T. B G. A lot we'll have to see how the material flows again December turned out to be better and you saw that come through from a leverage perspective.
Which goes back to the comment that volume because that's the best leverage.
That's super helpful. Thank you and then just maybe my quick follow on I guess, you mentioned the combat arms and clearly Pete that's being just just didn't a important part of the story.
Here for investors I'm, just curious just from a from a timeline perspective as you think about 2022 are there certain dates that we should be thinking about or pinpointing in just to be paying close attention to any type of progress or resolution on either of those two items.
Yes, Joe.
We try to keep you updated even in these calls on what's coming next and we don't have any specific trials coming up in the next one is related to the M. D L, which we're expecting in 2023. There is as you know our EPA is working on our management plan and there's a strategic roadmap through the President binds administration.
So where we're we'll be watching that and updating you as we learn more around that you know related to combat arms.
We're just just frame. This up you know we have great respect for the brave men and women of the military protects us around the world and we have a long partnership here, we've been providing products and continue to provide products.
And a matter with the combat arms, we we believe our product was safe and effective in its use and were vigorously defending ourselves and we've been working through these bellwether trials. We've had a 10 trials so far five of those were in our favor.
Actually were dismissed in addition to the 10 trials, we've had and we're in the middle of those bellwether. So there's another six bellwethers planned for 2022, and we'll update you as we go through that and update you as appropriate.
Great. Thank you both.
Our next question comes from Julian Mitchell with Barclays. You May proceed with your question.
Hi, Thanks, very much maybe the first question on sort of cash flow and capital deployment.
So you know cash flow was down double digits in Q4, and the full year and understood the sort of abnormal base in 2020, but how should we think about cash.
Cash flow for this year, how quickly do we get sort of working capital.
On the control and also in terms of the sort of disbursement of cash Hum.
And you paid out around 90 or 95% of free cash flow last year to shareholders do we expect a sort of similar type of approach in 'twenty two.
Yeah. So I'll start Julian would just reminding you from a capital allocation perspective, and I'll just for everyone's benefit first is always organic growth.
Where we believe we will get the best return you saw us putting in $1 6 billion from a capex perspective in 2021 for 2022 and beyond we are going to continue to invest in growth you've seen us make the big announcement in Clinton, it's a half a billion dollars of investment that we're going to put over the next couple of years. We also have given you.
Our goal on sustainability, maybe plan to spend $1 billion.
Part of it Capex Opex, which is front end loaded.
Third as we had talked about on Capex, We had mentioned during our earnings call as well as other updates throughout the quarter. Our plan was to spend $1 $8 billion to $2 billion, we were not able to unfortunately, because of raw material and labor availability. So to the extent that we have good programs out there that you're going to keep doing that so that's organic growth.
Second is from a dividend perspective, we know it's an important piece for our shareholders, we're going to continue to do that.
Mike mentioned it was 60 30 out in 2020 , one that we increased dividend. So we'll see what 2020 goes with that third is M&A and portfolio L. B.
Have an active pipeline and we are always looking for good businesses that can help us that we can add value as well as the business that we acquired can add value to three M and the shareholders and then the last piece of share buyback, which we have done.
And we stepped up in Q4, and if you had mentioned that during our earnings call as well I think I'm, sorry, and sewed and updates in the quarter, maybe said the stock was attractive and we stepped into it and that's what we did in Q4 talking specifically about working capital working capital continues to remain a big priority for us doing data and data.
Analytics, and if you actually see.
And do the math Julien and you do cash conversion cycle in Q4 of 2020 versus Q4 of 2021 you're actually going to see that the velocity of working capital went up.
That revenue was higher in total for 2021. So therefore, you do see the drag on working capital and at the same time. If you further split the working capital up inventory is where with all the supply chain challenges. That's an area that the team has done a nice job of managing the inventory, but that's where you have much more opportunity.
As as a supply stabilizes. So that's an area I would say we're going to continue driving cash there's a lot of opportunity to keep giving strong cash we generated 6 billion and then from a net debt to EBITDA basis, we are down to 1.4 versus when I started 18 months ago. We were at close to 2324, so the team's done a really nice.
Job of driving cash and working capital is a big piece of it.
That's helpful. And then maybe just a follow up it feels a long time ago, but I suppose it was fairly recent the food safety divestment is sort of broad perspective, you know on.
On the portfolio.
The fact that it was one of the 12 priority growth platforms in the company and he's still being divested.
Does that tell US you know at least on the outside bunker interpret that as meaning that there is a much broader sort of remain around potential divestments at three am if you even willing to sell our priority growth businesses that are sort of a reasonable interpretation yes.
Yeah, Julian I would I would say first it reinforces what we've been talking about our portfolio strategy is actively continuously evaluating our portfolio, we do that to make decisions on where we invest organically our more attractive markets that can leverage three ams capability just fundamental strengths we look at.
<unk> that can complement what we do organically and when integrated into three of them give us attractive markets that can add value and greater than the sum of the parts of the two businesses. We also are looking how to maximize value all the time and that is everything from managing our businesses differently to up to and including divestitures and we've we've done a number of those over time.
Where we saw better owners or greater value to be really achieved through the.
The divestiture and sometimes thats strengthening the business so that it can deliver greater value to customers. It's always focused on how can we deliver greater value creation through the business, including returns to our shareholders and so when you look at food safety, while it was a organic priority for us because it had strong growth opportunities and can leverage some of that.
Capabilities of three M. We also saw a path to greater value a combination with Neogen, where you can you can strengthen the two businesses by putting them together and really create greater value for customers and for shareholders. So it's very consistent with what how we look at our portfolio management and I think it's an outcome of that a continuous process.
So we're.
We're going to continue to actively manage our portfolio.
Great. Thank you.
Our next question comes from Brent Lindsay with Mizuho Securities. You May proceed with your question.
Thanks, and good morning, good morning, Brian .
Wanted to come back to the margin bridge you guys called out the manufacturing inefficiencies that occurred in Q4 related to the shorter production runs more production changeovers et cetera are you able to isolate and size in dollars or margins, how large of a headwind that was in Q4 and on a full year basis in 'twenty one.
Yeah, Brent, it's really hard to do it that way because it has a compounding effect so.
Unfortunately, it's hard to isolate the number in total when we put up.
The manufacturing productivity together, including the spend.
You can see it's 33 cents negative in total which included three things one is lower volume, which has an impact first on just generally the plans.
Second is the material productivity. The third is the wage inflation and the prior headwinds that we had talked about.
When it comes to variable compensation and then we continue to invest in growth productivity and sustainability.
Yeah, It makes sense and understandably inflation logistics pressures continue but I'm just trying to get a sense do those resolve.
You know early in Q1 as some of the demand pulse gets better here.
Yeah. So I think we are watching it Brian I think our view is we are going to see a volatile environment in the first half things should get better in the second half, but I would not expect a big snap back on stability of supply in <unk> of 2022.
Right right Okay.
Just wanted to come back to the comment on prioritizing investments for this year I think.
Last year R&D as a percent of sales was at the lower end of what it's been historically does the R&D number need to move higher in 'twenty, two or can you keep it at the same level and just allocate those dollars more effectively.
Yeah Brent.
It's really.
But it's something we focus on prioritizing our investments, we talked about prioritizing and growth productivity and sustainability as we've come through the pandemic as we came through 2021 accelerating.
Accelerating those investments, where we saw the best opportunity that that's R&D. That's capex, that's commercial investments very big focus on R&D is as you would expect that's where we drive our innovation with that investment in R&D in and so the overall percent of sales that you see at an enterprise level.
Wouldn't surprise me that there are there are parts of our portfolio that are much higher than that and others that are lower than our average and where we're prioritizing that in some of the areas that I talked about in my prepared remarks, we see attractive investments.
We actually are increasing R&D in some areas and managing it overall pretty well in line with where we've come from but there's a lot going on underneath that it's really that prioritization, where we are targeting stepping up our investments in those most attractive areas is true for capex as well.
Mhm got it makes sense best of luck.
Thanks.
Our next question comes from Deane Dray with RBC capital markets. You May proceed with your question.
Thank you and good morning, everyone I D.
Hey, just a couple of clarifications.
Back to the opening Q&A and Nigel is question on December coming in better you did clarify that masks were better by $40 million.
What were the other businesses that did better or product lines that did better than December .
Yes, it's a $40 million was for the whole quarter Dean just to clarify that December definitely had and had to pick up their consumer came in strong and then health care. It came in strong so that that's the other two I would call out in December .
Got it and then when Bruce.
Made two topics that are going to change in reporting going forward. I mean can you just clarify the second one it sounded like you were not going to report.
Segment volume and priced separately, just just clarify what what the thinking is there and what we see going forward.
Yes, Deane. This is Bruce we have never reported separate segment volume.
In price by the segments.
We have at the total enterprise level and a G geography level.
We are no longer going to report separate volume and price going forward.
And it's due to a lot of benchmarking work. We have done also the one conversation piece, we've had throughout the year rare.
Relative to price is what's showing up in prices what gets realized in the quarter and its not a true reflection of the actions were taken in the end market.
So when I think it created a lot of a lot of confusion relative to history, I'm, taking price or not yeah, we're taking price.
It really is only showing up.
Relative to what actually got realized in a particular period.
So organic growth is our number one objective and that's what we're going to report going forward.
So slide 12 in the appendix, where you break out organic volume by region.
And price does that go away Yep.
So it's.
If you recall Dean.
When we moved to our new business group led business model, we're running global businesses now we no longer have a separate international structure.
So and that's how we're operating the business driving growth around the world no matter where its at.
Got it thank you.
Our next question comes from Andy Kaplowitz with Citigroup you May proceed with your question.
Hey, good morning, guys.
Andy.
Can you give us a little more color into what Youre seeing in electronics I think you mentioned in Q4 is down still and it tends to be quite volatile volatile for you so without giving specific outlook for 'twenty. Two have you seen any improvement in semiconductor availability starting to help that business how are inventories in the channel at what point do your businesses such as data center focused products at all.
Electrification start to become meaningful enough to better support that business.
Yeah, So I would say, Andy and I think I'd start with your first thing on chip. So production did go up in auto in December versus what was originally planned for the year auto ended at plus two for the quarter ended at minus 13, and I think it came in a little better than what was the original forecast.
So it did get a little better there I think what we're seeing is it's still volatile from a supply chain perspective, and our view is that youre going to see that volatility in the first half of 2022 when.
When you take consumer electronics consumer electronics was down on a year over year basis, it's projected to be up from 21 to 22 for the year and we'll have to see when when launches happen et cetera.
And then on the fluids.
That's the semiconductor of our business the business has grown very well, we continue to perform very well.
We continue to deliver value for our customers and are in 'twenty 'twenty. Two you should expect us to continue doing.
Doing the same.
When he says that's helpful and then maybe a little more color on what you're seeing regionally. Obviously you have tougher comparisons in China. As you go into next to learn to 'twenty two there's some geopolitical risk out there so any sort of trends that you're seeing I want to highlight is we're going into 'twenty two regionally yeah.
Andy I would take it to GDP and IP I think.
There is an outlook or 2022 that that says we're going to see pretty good tobacco backdrop globally.
Led by probably.
And Asia in that regard in the stronger areas Ipi GDP, both if you look.
Go into China in particular, we saw we saw growth in <unk> and 'twenty 'twenty. One we were up low single digits in Q4, which is similar to the overall China macro.
For the whole year, we were up low double digits, which was above the macro for China. So continue to see growth opportunities. There. Our growth was led by our health care business, we saw growth in our consumer business both of those were up low teens.
Our industrial business was up low single digits in the quarter and where we saw some weakness was in transportation electronics really back to the semiconductor chip challenge of some of the supply chain challenges.
Those were impacting that in China as well.
I paint that picture. So you can kind of see where we have a focus on growing at or above the macro in China as well and the outlook is to be positive and we're prioritizing like everywhere else, where we see the trends in some of those areas and electronics have continued to stay strong while overall consumer electronics challenge with the chip shortage, we saw strength in semiconductor.
Fabrication factory automation so there.
We see those as areas that we're well positioned as we come into 2022 as well.
I appreciate it guys.
Our next question comes from Stephen Tusa with J P. Morgan Securities. You May proceed with your question.
Oh, Hey, guys. Good morning, Hey, wondering if Judy I'm just just a question on I know moniz, you've kind of taken on this side. It's I guess, an additional title of kind of transformation.
Officer.
Many times that means there's going to be some kind of major portfolio moves.
What.
What is this what is this kind of transformation title mean from that perspective is it is it really looking at kind of the structure of the company or is it more about improving processes and more of a of an operating yes, Steve.
I'm interested in munitions answer as well, but I thought I'd just frame it up he's leading transformation, which has really taken responsibility for leading our it and digital strategy and overall transformation includes what we call business transformation.
<unk> has been driving some of these efforts from his role as CFO and he led transformation his prior employer as well he brings that operating rigor to it.
We recently hired a new chief information and digital officer that reports to munitions part of that so you can think about it it's really that business transformation, we've talked about for a number of years focused on deploying new digital capabilities digital strategy broadly digital enterprise.
Capabilities like our ERP and our move to the cloud also digital operations and even how we're digitizing for our customers and so it's really bringing his leadership to that.
Monish can give you his perspective on it.
Listen I don't have much to add Steve other than the fact that when we look at the opportunity at three am whether it's growth that are about macro margin expansion and strong cash underneath that you can tuck in portfolio digital is a big opportunity for us, whether it's leveraging data and data analytics.
And I just view my job is to.
Enable the teams to achieve what three M. Can so I'm excited and we have a great set of people working on this.
Right and then I think you guys mentioned buyback in the presentation I might have missed this but is that a new kind of are you guys going to be stepping up buybacks in a significant way here in the near term.
Is it a change in tone on buybacks or or pretty consistent what we've said historically no Steve its pretty consistent.
The level of buyback is always our fourth priority in the full priorities.
To the extent the amount of buyback will always get determined by the amount of cash we have what the market is doing what the opportunities are and as I had mentioned in the fourth quarter. We saw an opportunity to talk to stock was attractive and we felt we should step up buyback in the fourth quarter, but no change in tone that still remains the <unk> priority.
In our list of capital allocation priorities.
Okay, Thanks for being for being straightforward. Thank you. Thanks, Thanks, Steve.
Our next question comes from Andrew <unk> with Bank of America. You May proceed with your question.
Yes, good morning.
Good morning, Andrew.
Yeah. So my first question is on Asia, and specifically you know as we see omicron in China, what's the feedback you're getting on the ground about the scope of shut downs versus what was expecting around the Olympics and.
How is that going to play out in the first quarter, given what you're seeing right now thanks.
Yes, Andrew I would say you know what we came through December into the new year Theres, a lot of uncertainty around omicron, and how it's going to impact supply chains globally and in China. Obviously are important focus there and with the Olympics coming a spotlight on that as well.
We've been managing supply chain logistics issues, there as well you saw that a little bit play out in the China export numbers in Q4 down.
Down low single digits I think for the quarter. So it's a it's something we're focused on we've been managing through the challenges we've seen in and we will Oh, well update you as we as we get further into.
Into February and March.
And just the second question is.
You know almost two years into Covid and maybe it's a little preview for your analyst day, but you know almost two years into COVID-19 .
What portion of your portfolio sort of look structurally better and what has lagged and what do you think happens as the world Normalizes again. Thanks.
Yeah, Andrew maybe I'll start with we've been investing accelerated investments in a number of areas as we've come through Covid and it's really recognizing some of the trends maybe even though we came into the pandemic with that accelerated so we talk about investments and automotive electrification, maybe less COVID-19 related but certainly a trend that is accelerating.
We saw home improvement accelerate during COVID-19 , so where we're.
We're investing in those areas, where we're seeing strong growth as we came through 2021 and those areas and we we see that continuing as we go forward. So that's our that's the way we look at it.
Across our portfolio we've talked to.
Often about different parts of our portfolio how are they doing relative year over year, even back to 2019 I would say.
We have strength and broad parts of the portfolio, including those that were investing and there's a couple of areas that are still still recovering and I wonder if you even highlighted one in his comments, our how electric procedures are still at about 90%.
Medical procedures that is at about 90% of where they were in 2019. So there is the impact of Covid on increased hospitalization rates and the knock on effect on health care. There is still we think theres still some.
Some impact net net versus 2019 and some of those areas. So it's plays out a little differently across our portfolio.
Where we saw strong demand in our homecare and cleaning products in 2020.
Tough comp and a little lower growth as we came through 2021. So there's a number of trends that we're watching again prioritizing, where we see an opportunity to invest and leverage <unk> strengths and managing those other areas too in the middle of the supply chain disruptions to serve customers as things recover.
Thank you very much.
Yep.
Okay.
And our final question comes from John Walsh with Credit Suisse. You May proceed with your question.
Hi, good morning, and thanks for fitting me in here.
Good morning, John .
Maybe just just one question from me and going back I think to a comment you made in response Tonight Joes question around restructuring I thought I heard 70 million just wanted to make sure that was kind of capturing all the restructuring delta.
And ask if that was in line with the Q3 update cause I guess by my math I had a little bit higher of a number but just wanted to ask for clarification. There. Thank you, yes. It's a good one John So you heard it right at 70 and the reason is we achieved more in the fourth quarter.
Then we had previously thought and that's why you also saw our margins came in higher and because we achieve more so just to recap the program. In total we have spent the program that was announced in Q4 of 2020.
We had said we would go in and we have spent 260 to date we.
We had told you in Q3 that would be 300 to 325 right now, we're saying up to 300, we had said benefits would be in the range of 200 to 250, we achieved approximately 180 in that program. So there's a carryover benefit of $17 million.
Yeah.
Great I appreciate the clarification. Thank you.
Thanks.
Okay.
That concludes the question and answer portion of our conference call I will now turn the call back over to Mike Roman for some closing comments.
Thank you to wrap up I'm proud of our team's performance in 2021, and we are well positioned for a successful 2022 I look forward to talking to you again at our February 14th meeting have a good day.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and we ask that you. Please disconnect your lines.
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