Q1 2022 3M Co Earnings Call
Thank you and good morning, everyone and welcome to our first quarter earnings Conference call.
With me today are Mike Roman <unk>, Chairman and Chief Executive Officer, <unk> Patel of Wala, our chief financial and transformation Officer, and John <unk>, Our Chief Technology Officer.
John is joining us today to discuss our progress on the sustainability goals that we introduced in February last year.
Mike Monash and John will make some formal comments then we will take your questions.
Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at three a M dot com.
Please turn to slide two.
Please take a moment to read the forward looking statement.
During today's conference call, we'll 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 bracket.
Reconciliations of the non-GAAP measures can be found in the attachments to today's press release.
Please turn to slide three.
Before I hand, the call over to Mike I would like to take a moment and highlight our financial reporting change we are making starting here in Q1 2022.
We recognize that the increases in legal related charges that we've incurred the past couple of years have impacted investors' understanding of our underlying financial and operating performance.
We have been disclosing respirator N P fast impacts in our public filings and have decided to provide additional disclosure by expanding the scope of our non-GAAP measurement adjustments to include all impacts of accrual changes and legal fees for respirator mask P fast.
In combat arms matters.
This change is a result of discussions we've had with many of you along with recent benchmarking work we have done.
This morning, we issued a form 8-K with updated non-GAAP financial performance history for the past three years.
Further we will be issuing a form 8-K amending our most recent annual report on Form 10-K to reflect the effects of this change in our non-GAAP measures and changes in segment reporting immediately after filing our Q1 2022 form 10.
Q this afternoon.
Also.
Our Q1 2022 financial performance and full year 2022 guidance in today's press release and presentation incorporate these changes.
Please note that our guidance does not include future changes to reserves for P fast or combat arms.
Highlighted on this slide is the impact of this change to our non-GAAP financial reporting.
As you can see operating margins in 2021 were 22, 2% on this new adjusted basis.
Or up 70 basis points from pre Covid levels in 2019 versus down 40 basis points on the previous basis.
And adjusted EBITDA margins have expanded 110 basis points since 2019 to 27, 6%.
Looking specifically at our Q1 2022 performance on slide four adjusted earnings were $2 65 per share.
This result excludes total special items of 39 per share, which is comprised of 13 cents of legal related costs in the quarter.
Along with a 26 cent charge for P fast related remediation in Belgium, which we previously announced via press release and form 8-K filing on March 30th.
As we indicated in the March press release and form 8-K filing this charge would be reflected as an adjustment in arriving at our first quarter results adjusted for special items.
We remain committed to providing strong transparency in reporting our financial performance and of course, we are always here to address your questions.
With that please turn to slide five and I'll now hand, the call off to Mike Mike.
Thank you Bruce good morning, everyone and thank you for joining us.
In a challenging global environment three of them delivered a strong start to 2022.
As Bruce just noted to provide additional clarity on litigation related costs and our underlying business performance starting in the first quarter. We are reporting adjusted earnings to exclude significant litigation costs, which was <unk> 13 cents in Q1.
As we communicated on March 30th we also made an additional investment related to our operations in <unk>, Belgium, which.
Which resulted in a 26% charge.
Excluding this investment our financial outlook for 2022 remains unchanged.
As you recall at our strategic outlook meeting in February we committed to driving growth and shareholder value in 2022 by continuing to innovate for our customers and reposition our portfolio to win in attractive markets.
We're also committed to deliver strong margins EPS and cash flow through a focus on operational excellence, while continuing to invest in growth productivity and sustainability.
In the first quarter, we executed well and followed through on these commitments, which I will discuss on slide six.
We are relentlessly focused on serving our customers, while managing supply chain disruptions inflation and geopolitical pressures.
We posted organic growth of 2%.
Along with sequential margin improvement.
Adjusted EPS of $2 65.
And robust cash generation.
Overall demand is strong so the global economic outlook has softened due to challenges in certain end markets evolving impacts from Covid and recent geopolitical events.
All of our businesses started the year with good performance.
End market demand was strong in safety and industrial partially offset by a decline in disposable respirators.
And transportation and electronics or automotive business continued to outperform build rates despite the impact of semiconductor shortages.
Healthcare performed well with 5% growth.
And consumer grew 3% in addition to 9% growth last year.
To position us for long term growth, we continue to prioritize investments in high growth opportunities across our businesses.
Commercial opportunities that are sizable and significant.
For example, our automotive electrification platform grew 20% organically on the strength of new innovations on top of 30% growth in 2021.
In healthcare, our Biopharma business posted 15% organic growth.
Three of them science advances the development and manufacturing of new therapeutics and vaccines.
To support growing demand for our Biopharma solutions, we are investing $35 million to double capacity at our plant in Columbia, Missouri.
We also continue to manage our portfolio and unlock value for our customers and shareholders.
We're on track to close the divestiture of our food safety business in the third quarter.
And in March we divested our floor products business in Western Europe .
Enabling us to prioritize other parts of our consumer business.
In addition, yesterday, we announced that we acquired the technology assets of lean Tech provider.
A provider of digital inventory management solutions for the automotive aftermarket segment in the United States and Canada.
It is another example of how we win in the core and build for the future.
Adding new platforms to access emerging trends and opportunities in this case the connected body shop one.
One of three arms digital platforms that brings together data analytics and materials science.
We continue to navigate global supply chain disruptions, which have been amplified by recent geopolitical unrest.
We are doing whatever is necessary to take care of customers, while managing extended lead times and elevated inventory levels.
At the same time, we have continued to drive strong pricing to offset inflation.
Like many other global companies, we are actively managing through the conflict in Ukraine.
Our focus remains on ensuring the safety of three hours in harm's way.
I am proud all three of them has stepped up to help from donating nearly $4 million.
Two employees welcoming refugees into their homes.
We stand with our Ukrainian colleagues and have suspended operations in Russia.
Given what we're seeing around the world, we expect supply chain challenges to persist for the foreseeable future.
Our balance sheet remains strong, allowing us to invest in the business, while returning $1 6 billion in the quarter to our shareholders through both dividends and share repurchases.
We increased our dividend in the first quarter, marking our 64th consecutive year of increases.
With respect to litigation, we are vigorously defending ourselves in combat arms bellwether cases.
We are pleased that a jury sided with three of them in the most recent bellwether trial earlier this month, which was a plaintiff's counsel picked.
To date, we have one six and lost eight trials.
And have appealed or will appeal all adverse verdicts.
Bellwethers, we're also dismissed by plaintiffs before they went to trial.
I would also like to provide an update on operational disruptions at our factory in vendor, which I know is top of mind.
Last month, I visited Belgium to meet with local leaders and affirm our commitment to the vendor community.
As previously stated we continue to work with Flemish authorities to address our remediation obligations and work towards greater operational certainty.
Last September we announced an investment of 125 million Euro to advanced air and water stewardship and our existing operations.
Which has included the installation of a new state of the art filtration system.
In addition last month, we committed 150 million euro to remediation that addresses legacy manufacturing and disposal of PFS on three on site and in the surrounding area.
To help reduce the impact of customers. We are supplying from other global sites and actively working to address any future potential impacts we.
We will continue to collaborate with officials to bring idled processes back online in its vendrick deliver essential products to our customers and follow through on our commitments.
On May 11th we will publish our global impact report highlighting our progress to our sustainability commitments.
In a moment <unk> Chief Technology Officer, John <unk>, who will provide an update on an important part of these commitments our environmental stewardship goals.
In summary, the first quarter was a good start to the year for three of them and I think all of our employees for their contributions.
As I mentioned earlier, we are committed to addressing the broader challenges of supply chain disruption and litigation risk as we continue to invest in our underlying businesses, which remains strong and well positioned to grow.
We are maintaining our full year expectations as adjusted for the reporting change that we have discussed which will provide greater clarity regarding our underlying performance as we navigate litigation matters.
At three a M. We are driven by purpose and powered by four industry leading businesses.
<unk> global capabilities, and a highly experienced and diverse team.
Im confident in our ability to grow above the macro and improve our operational performance as we move through 2022.
I will now turn it over to John benefits John .
Thank you, Mike and please turn to slide seven.
As a global manufacturer three of them has a long record of environmental stewardship over the last two decades, we have reduced our greenhouse gas emissions by 75% while more than doubling our revenue nearly.
Nearly 50% of our global electricity use renewable on our way to 100% and over the last five years, our innovations that help customers avoid 100 million tonnes of emissions.
To drive our growth as a company we will continue to build on our strong foundation advance our strategy and invest in science based commitments to improve the environment.
Last year, we accelerated our leadership with a commitment to invest $1 billion.
And deliver on new goals around air water and waste.
As you see on the left side of the slide our goals are meaningful authentic and impactful to the world. They are rooted in three M science applying math to a path to rapidly bend the curve on emissions.
We committed to a 10% reduction in water use by 2022 and 25% reduction by 2032.
To improve water quality, we committed to install filtration technology by 2023 at our largest water using sites and.
And we've committed to become carbon neutral with aggressive milestones along the way.
Finally, we will reduce our use of Virgin fossil based plastic by 125 million pounds by 2025.
Over the last year, we have made strong progress on each of our goals putting us ahead of schedule in some areas and on track in all other areas.
We have already cut our carbon footprint by 25% and reduced our use of water by more than 10%, which included a new closed loop water recirculation system at our factory indicator, Alabama.
As Mike mentioned, we've also advanced our filtration capabilities into <unk> with a new state of the art system part of the 125 million Euro investment, we announced last September with additional work completed at several other three M sites.
Later, this year and Cordova, Illinois for example, new filtration technologies will be fully installed including ion exchange and reverse osmosis, we've announced $165 million investment in Cottage Grove, Minnesota.
Which follows our decision last year to close our incinerator, resulting in improved waste management, while reducing energy and water usage at the site.
In addition over the last year, we have reduced our use of plastic by 19 million pounds through innovative designs in our consumer business, such as our Scotch double sided mounting tape, which we reformulated to eliminate PVC plastic in packaging and reduce our solvent used by 300000 pounds per year.
In summary, we are on track to meet or exceed each of the goals laid out last February and we will advance our progress in 2022. This year, we expect to reduce our water usage by an additional 5% double our reduction of Virgin based plastic and further expand our filtration capabilities across our largest water use.
<unk> sites.
I'm proud of how <unk> have come together to follow through on our commitments moving forward. We will continue to work with communities customers and governments to advance our environmental stewardship and make a difference in the world as Mike mentioned I encourage you to read our annual global impact report to be released on May 11th with more <unk>.
Details on our priorities and progress now.
Now I will turn it to Monish, who will cover the details of the quarter Monish.
Thank you John and I wish you all a very good morning.
Please turn to slide nine.
The <unk> team delivered strong execution in Q1 in a macro environment that remains extremely fluid and increasingly uncertain. We remained focused on delivering for our customers drove operational execution and maintained cost discipline, while also continuing to invest in the business to fuel growth.
First quarter total sales were $8 8 billion, which.
Which increased one 7% on an organic basis.
As a reminder, organic sales growth does not include impacts from FX or M&A.
Adjusted operating income was $1 9 billion.
But adjusted operating margins of 21, 4%.
And adjusted earnings per share of $2 65.
On this slide you can see the components that impacted our operating margins and earnings per share performance as compared to Q1 last year.
We continue to drive price actions realized savings from past restructuring and maintained strong spending discipline, which helped offset both known and new headwinds.
As I highlighted in my February Investor Day presentation.
Made significant progress driving actions in 2021 to address rising raw material and logistics costs via leveraging the power of daily management data and data analytics, along with the spirit of embracing the red direct actions to offset the inflationary pressures.
During last year, we developed new sourcing and pricing tools and processes to improve agility drive alignment and simplify our processes.
In addition, we are also enhancing our reporting and data analytics capabilities by rolling out tools that modeled price realization leakage in elasticity.
These efforts continued to pay off in Q1 as benefits from selling price actions offset raw material and logistics headwinds.
Looking ahead, while we see raw material and logistics inflation persisting, we will continue to leverage daily management powered by data and data analytics with the expectation of offsetting raw material and logistics inflation through pricing actions in 2022.
Also during the first quarter, we completed the final actions related to our December 2020 restructuring announcement.
Since Q4, 2020, we have incurred total pretax restructuring charges of approximately $280 million versus an original expectation of $2 $50 million to $300 million.
These actions are expected to deliver total pre tax savings of approximately $250 million or at the top end of our estimated range of $250 million.
We realized $180 million of the savings in 2021 and expect the balance of the savings of $70 million in 2022, which is incorporated in our guidance.
In the quarter, we experienced a year on year decline in disposable respirator demand of nearly $50 million, which negatively impacted operating margins by 10 basis points and earnings by three cents a share.
On any given day, our global sourcing manufacturing and supply chain teams continue to navigate a number of items, including.
Raw material and logistics availability.
Evolving COVID-19 related impacts including mandated lockdowns.
Employee absenteeism in our U S factories in January and February .
And now in China.
The continued shutdown of certain operations in our plant in Belgium.
And recently the impacts from the geopolitical crisis in the Ukraine.
These dynamics continue to result in ongoing changes to demand plans, along with increasing costs and pressuring manufacturing productivity as we work to serve our customers.
Also as you will hear from me throughout the year, we 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 electronics and software.
Moving to raw materials.
We continue to experience inflationary pressures with a year on year increase of approximately $215 million in the quarter.
Which resulted in a headwind of two four percentage points to margins and <unk> 30 per share to earnings.
Foreign exchange fluctuation is something we are watching closely particularly given the geopolitical uncertainties.
During the quarter.
FX was a benefit of 10 basis points to margins. However was a negative <unk> <unk> per share impact to earnings year on year.
Primarily the result of the strength of the U S dollar.
Other financial items increased earnings by a net four cents per share year on year, but benefits from a lower share count and a decline in net interest expense more than offsetting a headwind from a higher tax rate.
While you are on your margins and earnings decline. It is also important to look sequentially, given the fluid and uncertain environment.
Our actions to continue to drive price to offset inflation.
Navigate supply chain challenges and control costs enabled us to expand adjusted margins and earnings 140 basis points and 20 cents per share respectively.
Please turn to slide 10.
First quarter adjusted free cash flow was $715 million with conversion of 47%, which was in line with our expectations.
Year on year conversion was lower due to higher cash compensation and an increase in capex for growth and sustainability investments.
Looking at the full year, our free cash flow conversion expectations of 90% to 100% remain unchanged.
As you know, we currently have a very fluid environment, especially around global supply chain and logistics challenges.
Therefore, we will experience some working capital ups and downs in the short run, but you should see the benefits of the power of data and analytics and operational rigor start to play out once things stabilize.
Capital expenditures were $424 million in the quarter up 37% year on year, as we increased investments in growth productivity and sustainability.
For the full year, we continue to expect capex to be in the range of one $7 billion to $2 billion.
During the quarter, we returned $1 6 billion to shareholders through the combination of cash dividends of $852 million and share repurchases of $773 million.
Our cash flow the global economic situation and a stock price that all factors into determining the pace and amount of share repurchases.
We believe our current stock price presents a good buying opportunity and we have been active in the market to start the year.
While we are currently out of the market due to the pending food safety divestiture. We currently anticipate $2 billion in aggregate share repurchases over the course of the full year.
Net debt stands at $13 3 billion up approximately 2% as we continued to invest in the business.
Our capital structure is well positioned giving us financial flexibility and Optionality.
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.
Please turn to slide 12 for our business group performance for Q1.
I will start with our safety and industrial business.
Which posted organic growth of 0.5% year on year in the first quarter.
This result included a disposable respirator sales decline of approximately $50 million year on year, which negatively impacted safety and industrial Q1 organic growth by one five percentage points.
Our personal safety business declined mid single digits organically.
Versus last year's 20% pandemic driven comparison.
Looking ahead, we continue to anticipate that COVID-19 related disposable respirator demand will decline as we move through 2022.
However, if trends change we remain prepared to respond to changes in demand as COVID-19 impacts evolve.
Turning to the rest of safety and industrial.
Industrial adhesives, and tapes electrical markets, abrasives, and closure and masking, but all up mid single digits compared to last year, while roofing granules and automotive aftermarket businesses were up low single digits.
Safety and Industrial's first quarter, adjusted operating income was $699 million down 14% versus last year.
Adjusted operating margins were 22, 9%.
Down three five percentage points.
Year on year, adjusted operating margin performance was impacted by higher raw materials and logistics costs.
And manufacturing productivity headwinds.
Partially offsetting these impacts was selling price increases.
Spending discipline and benefits from restructuring actions.
The safety and industrial business group continues to focus on building the future through emerging trends and opportunities.
Most recently <unk>.
<unk> acquired the technology assets of lean Tech to advance digital solutions for auto body shops.
This digital platform integrates data capture and analysis, but material product platforms, providing shop owners and managers more access to data for enhanced productivity and inventory management.
Moving to transportation <unk> electronics on slide 13 reached.
Which declined <unk>, 3% on an organic basis.
Primarily due to the ongoing impacts of semiconductor supply chain constraints on the automotive and consumer electronics end markets.
Organic sales in our auto OEM business was flat year on year, what does a 5% decline in global car and light truck builds as we continue to gain penetration on automotive platforms.
Electronics related business declined low single digits organically with declines across consumer electronics, particularly smartphones and Tvs.
These declines are 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.
Commercial solutions grow high single digits advanced materials was flat, while transportation safety was down mid single digits year on year.
First quarter operating income was $496 million down 11% year on year.
Operating margins were 21, 2% down.
Down two percentage points year on year.
Operating margins were impacted by higher raw materials and logistics costs.
Manufacturing productivity impacts and investments and auto electrification.
These year on year headwinds were partially offset by increases in selling price strong spending discipline and benefits from restructuring actions.
The transportation and electronics business group is focused on executing well against our strategic imperatives to build new growth platforms in high growth segments, including automotive electrification.
Semiconductor electronic materials, and graphic and architecture of films.
Turning to our health care business on slide 14.
Which bolstered our first quarter organic sales increase of four 7% with growth across every business.
Our medical solutions business increased mid single digits organically.
First quarter U S elective medical procedure volumes were approximately 85% to 90% of pre COVID-19 levels as COVID-19 slowed the pace of procedures, particularly in January and February .
Sales in our oral care business grew low single digits year on year.
Global Auto care procedure volumes dipped in January and February due to Covid, but started to recover in March.
Overall patient visits for the quarter of about 85% to 90% of pre pandemic levels.
We continue to watch COVID-19 related trends and its impacts on the global healthcare industry, including labor shortages, which drove lower than expected surgical and dental procedure volumes in the quarter.
The separation and purification business increased mid 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 as Mike mentioned, we remain on track for a Q3 close of the planned divestiture of this business, which will be combined with neogen.
Health care is first quarter operating income was $448 million down three 5% year on year.
Operating margins were 21, 1% down one four percentage points.
Year on year operating margins were impacted by raw material and logistics cost manufacturing productivity investments in the business and food safety deal related costs.
These impacts were partially offset by benefit from leverage on sales growth.
Strong spending discipline and benefits from restructuring actions.
Despite the current environment the health care business group is focused on delivering clinically differentiated innovative platforms that improve patient outcomes and reduce cost of care.
We have been sharply focused on three key segments.
Wound care health care and Biopharma filtration.
These segments are well supported by key market trends, which include.
The increase in chronic conditions, driven by an aging population.
Shifting of care at the lowest cost setting.
Improving healthcare access trends and finally digital and connected solutions.
Please turn to slide 15.
Lastly, our consumer business delivered first quarter organic growth of three 4% versus last year with growth across every business.
Our home improvement business continued to perform well.
Up low single digits on top of last year's growth of over 20%.
This business continued to deliver strong growth with a home improvement retail customers in our category, leading fill treat and command brands.
Stationery and office and home care grew low single digits organically in Q1.
And finally, our consumer health and safety business was up low teens year on year.
Consumer's operating income was $224 million down 17% compared to last year.
Operating margins was 17, 1% down three seven percentage points year on year.
Historically Q1 is typically our lowest margin quarter of the year for our consumer business.
But this year's operating margin was further impacted by ongoing supply chain constraints.
Along with higher raw materials, and outsource hard goods manufacturing costs and manufacturing productivity impacts.
These headwinds were partially offset by good price performance strong spending discipline and benefits from restructuring actions.
Continuing to innovate and drive sustainability within the consumer business group is a top priority.
As consumers and businesses are increasingly shopping online they want solutions that protect their packages and contents, while making the process more convenient and sustainable than ever.
As a result, we recently launched Scotch cushion lock, a new sustainable alternative to plastic Cushing drop and a perfect solution for protecting and packaging items with 100% recycled paper.
Our Scotch portfolio is centered on innovating and solving this large and growing market.
Please turn to slide 17 for a discussion on our 2022 outlook.
As you know most companies are facing a macro environment that has become even more fluid and uncertain due to several factors including.
Continued global supply chain and logistics challenges.
Ongoing impact from semiconductor constraints, particularly on the automotive and electronics industries.
Evolving impacts of COVID-19.
Growing geopolitical uncertainties.
Increasing foreign exchange volatility and finally, rising inflationary pressures, including raw material logistics labor and energy costs.
This has resulted in softening trends impacting full year growth expectations for GDP and Ipi.
Both macro indices are now expected to be up approximately 3% versus up 4% at the start of the year.
Despite the fluid and uncertain macro environment.
We continue to expect organic growth in the range of 2% to 5%.
Adjusted earnings per share is expected to be $10 75 to $11 25.
This range incorporates the change to our adjusted earnings that Bruce highlighted at the start of the call.
And finally free cash flow conversion expectations remain in the range of 90% to 100%.
Before I wrap up let me make a few comments regarding the second quarter.
First we are seeing a slow start to sales in April primarily due to COVID-19 related impacts in China, along with the geopolitical crisis in the Ukraine.
Raw materials and logistics costs are expected to be up impacting Q2 year on year by approximately $225 million.
Yeah.
We expect disposable respirator demand to decline both year on year and sequentially by approximately $100 million to $200 million.
During the first quarter and particularly over the last month growth expectations for transportation and electronics end markets have moderated.
Second quarter Global auto builds are currently forecasted to increase approximately 2% year on year.
However declined 3% sequentially and smartphones are forecasted to be up approximately 1% year on year, but declined 5% sequentially.
We expect both U S medical and oral care elective procedure volumes in Q2 in the range of 90% to 95% of pre COVID-19 levels.
And finally as a reminder, last year's second quarter included an approximately $90 million operating income benefit of <unk> 12 per share from a Brazilian Supreme Court associated tax ruling.
To wrap up.
Although we remain cautious in this current environment.
Bullish about the long term via.
We are committed to delivering for our customers.
Taking appropriate price actions driving operational execution and managing spending.
While continuing strong financial rigor and maintaining a strong capital structure and financial flexibility.
In the long run we will grow about the macro expand margins and deliver strong cash.
I wanted to take a minute to thank the three employees for delivering for our customers and shareholders in a very uncertain and fluid environment.
Our team delivered one 7% organic sales growth in the quarter.
21, 4% adjusted margins up 140 basis points sequentially and generated $715 million and adjusted free cash flow.
I also wanted to take a moment to personally thank our customers and suppliers for putting their trust and confidence in us and for maintaining strong in close partnership that help us navigate the current challenges.
We had a good start to the year.
We are watching the environment closely and working on navigating current challenges with.
With more work to do.
That concludes my remarks for the first quarter with that we will now take your questions.
Okay.
Ladies and gentlemen, if you would like to register a question using a landline phone. Please press. The one followed by the four on your telephone keypad, you'll hear three tome prompt with knowledge of request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the suite.
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 Steve Tusa with J P. Morgan Securities. You May proceed with your question.
Hey, guys. Good morning, good morning, Steve.
Can you just maybe give a little more precision on the second quarter in that I mean, there's a lot of.
Kind of moderate downward revisions to some of the assumptions I'm just not not 100% clear to me how the guide is reaffirmed maybe you're talking about.
More youre still within the range, but towards the low end just kind of.
Those two factors just to start.
Sure Steve.
Just start with the overall guide for the year as you know, we don't give quarterly guidance. So the guide for the year coming into the year was 2% to 5% organic growth. We are continuing to see that that that's doable in the 2% to 5% growth no change there at all.
The purpose of giving you two quarters. The second quarter outlook was just as Youre building. Your models to help you think through the macroeconomic environment.
As I've said the start to April was slower mainly driven by China and the work there, but we'll have to see when the Lockdowns are released at how fast China ramps up historically when they have that ramp up is there. So we're just giving you what we've seen in April and then you can see some of the macro trends in the auto and consumer.
Our industry have gone down sequentially, driven by semiconductor and chip shortages.
But health care starts moving up from the 85 to the 90% to 90% to 95%. So puts and takes for the year, we still see ourselves getting to the 2% to 5% range that we told you about with adjusted earnings per share of $10 75 to $11 25. So no change there overall I would say in end market demand has remained strong in the first quarter.
<unk>.
So far we are seeing good strong other than for what I told you about China, but overall still seeing market is strong and I think time will play itself out on how some of these uncertainties go through the year, but bullish about the long term.
And bullish about the year.
Got it great. Thanks, a lot.
Thanks, Susan.
Our next question comes from Scott Davis with Melius Research you May proceed with your question.
Good Thank you and good morning, everyone. Good morning, Scott.
I think.
What are the issues that you addressed this morning are pretty comparable to what we've seen everywhere else, but can we talk a little bit about pricing I know you stopped breaking that out as a line item but.
Perhaps you can talk more big picture I mean last quarter, you were up two 6% price and.
Your core volumes this quarter around 2% so that would imply you probably if I had a guess you probably a little bit better than that in price and maybe volumes are more flattish.
Apples to apples, but can you talk about kind of the price cost parity goals I mean, when do you think given the higher costs that have come in even just in the last you know.
Month.
When do you think you can reach a price cost parity.
Can you reach it this year and perhaps when and Directionally are prices still going up and I'll pass it on after that thank you sure Scott listen the team did an amazing job as I've talked about.
Tools that we have had a daily management.
Last year, we started slow on pricing 0.14 went up to one 4% in Q3 and two 6% in Q4. This quarter. We continued the momentum which was driven by two pieces, the carryover impact plus new pricing.
As I said in my prepared remarks, we more than offset the amount of inflation. So if you just do the math.
On a rate basis, not just on a dollar basis. So that's we got a <unk>, 3% plus price in the quarter. The team is very focused on looking at the extra inflation, that's coming in they're already working on higher price a nice as I said in my prepared remarks. The goal is to offset the extra inflation that we are seeing with extra price and really good start to the.
The first quarter.
Okay, great. Thank you.
Yeah.
Our next question comes from Nigel Coe with Wolfe Research you May proceed with your question.
Okay.
Yeah.
Nigel are you there.
Mr. <unk>. Your line is open you May proceed with your question.
Operator, why don't we move ahead to the next question. Please.
We'll move on to the next one from Julian Mitchell with Barclays. You May proceed with your question.
Yes.
Hi, good morning.
Good morning.
Good morning, maybe just a first question around the understood on the Belgium plant and the remediation measures, but it is a topic that you've sort of mentioned a bunch of times in recent months and we get that question a lot on the plant from investors just trying to scale sort of the import of the plant to three.
I am just kind of aggregate operations.
Maybe help us understand kind of what impact from the plant production issues is dialed into your guidance now.
Now now that you're sort of giving us a full update with one quarter behind you you know where are we in terms of kind of inventories at that plant that you can keep shipping from it even without full production.
Yeah, Julian so as we've talked in the past we've had some <unk>.
Certain operations shut down at that plant and we continue to work on on with local authorities on the the.
The updated permits that are that we have there and continue to work to resolve that.
We're a leading provider out of that plant for specialty fluids, including heat transfer fluids that are used in semiconductor and were working to address the operational disruptions we have.
<unk> is an important source of supply for those materials to our customers and so we're working to resolve it. There. So we can we can continue to supply from there. We're also looking to supply from capacity that we have an alternative sites where possible. So it's it's you know it was an impact that we saw in Q1, it's something that's built into our outlook.
It is something we're working with customers on to address any ongoing disruption for them. So it's something we'll keep updating you on as we mitigate the impacts and and we can update you as appropriate going forward.
Understood, but it is going to sort of material headwind dialed in for Q2 or the balance of the year, you can sort of cope with it the shortage still.
Yes.
There is a process, we're working through and so there is some uncertainty there we've got to resolve the.
The permit issues. There are we've got a permit renewal as we go through the year. So this is all something that we're working on we've been we've been careful to say that we have certain operations that have been interrupted at this time there is a potential for operations to resume theres a potential for operation additional operations to shut down so we.
Ben.
Careful to lay out the possibilities what we saw in Q1 was part of our results and is an interruption that we're working on with customers.
That's helpful. And then just my follow up around the EMEA.
Region, MISO organic sales down about 2% there and in the first quarter.
Understood that probably.
Pearl is may be trending worse than that based on my initial comments, maybe help us understand kind of what are you seeing in EMEA exactly most companies seem to say it's about the same as it was a few months ago, you all sort of numbers and comments imply that you are seeing some kind of short cycle weakness there.
So maybe help us understand kind of what's changing in Europe by region.
Or industry in terms of demand for you.
Yeah and.
Julian as you recall, we realigned around our businesses back in March of 2019. So we really are are managing each of our four go to market models globally and executing in the areas. We update you on just how we're how we're performing overall in the areas of the world and so EMEA down.
2% in Q1 really was led by declines in our consumer and safety and industrial businesses transportation.
Electronics was down slightly health health care was up actually low single digits in the quarter. So we saw some impact from from both.
I would say COVID-19 as well as the supply chain disruptions and and.
I would say the challenges in Ukraine, So, let's say it is a.
Ongoing dynamic that we're watching closely we saw strong growth in a number of our businesses as we came through the quarter end and Monish walk through the outlook on the macro so certainly that will have an impact on EMEA, but I would say we're watching it closely as we look at the rest of the year.
Great. Thank you.
Yeah.
Our next question comes from Jeff Sprague with vertical Research partners. You May proceed with your question.
Hey, Thank you good morning, everyone.
Hey, good morning.
Thinking about the adjusted framework and I didn't get a chance to go back and look at all the restatements, but just to be clear so on a move forward basis.
We're just excluding litigation and environmental related cost both on the go forward and on the way you restated the numbers.
I'm not sure I followed it but are you asking are we going to go forward basis, yes. So we have made the adjustment.
That going forward all costs for significant litigation matters will be shown as an adjustment to our earnings and so you will see the GAAP EPS number which is reported and adjusted earnings per share and we have also we have also filed an 8-K showing you restating the history.
And just so that you can catch up on water. It was Bruce talks about in his prepared remarks is.
For example in 2021, we would have excluded approximately 61 cents, which was lit course for significant litigation matters as to show it as an adjustment, which will be 140 basis points of margin impact, yes, Geoff the other comment I'd have is it does not include potential changes in the future.
Reserves.
So that's clear.
Yes.
I mean, the thing Thats tricky about the Sky is not to editorialize right, but I think youre, leaving things like Brazil charges and gains that are truly one off in the numbers in <unk>.
Like litigation that might be lumpy, but you know as sort of ongoing and pulling that out of the numbers I mean, I guess, we all have the discretion to use gas as we want but.
No.
It's just a confusing construct I think to use.
My point, Jeff Fair point at the end listen the first results of GAAP EPS Theres no going away from that the reason we have broken this out into two was there was a lot of requests from investors asking us to show being better clarity to the underlying performance of our business and we have disclosed 90 million, we disclosed that last year too.
We are disclosing it this year or two as a reminder of what we disclosed last year.
And there was an ask for people to know how much we were spending on cost for a litigation related matter. So we've shown that as a separate line item you can put it either way at the end of the day a GAAP EPS is the first thing.
Does the adjustments. So you can see how much are you spending on litigation and you can see the clarity bring clarity of our underlying business. So hopefully that clarifies.
Thank you.
And then just on the kind of the litigation milestones can you can you update us on what is next on the docket I believe theres a few more things on combat arms, maybe theres. Some other things we should be aware of as we're looking over the balance of the year. Yeah. So so Jeff we still have to combat arms bellwether cases to go here.
In May so those are the next the next two trials on the docket beyond that it's a little less clear what the next next cases will be if you look at PFS. The other one trial schedules I would say have been moving frequently we were currently scheduled for two trials. This year, we have a June trial in Michigan and then we have an October trial in.
Alabama.
Aqueous film, forming foam multi district litigation in the first trial, there is not expected until until.
2023, so that gives you kind of an update.
Alright, thank you.
Our next question comes from Andy Kaplowitz with Citi. You May proceed with your question.
Good morning, everyone.
Good morning.
One is to the extent you can can you give us a little more color on how you're thinking about safety and industrial margin moving forward I know margin was down year over year, but it was materially up sequentially versus the last couple of quarters is that a function of maybe better mix with NASA being a bit stronger I think he mentioned strong spending discipline restructuring did the extra 70 million of restructuring benefits fine there.
A way into the segment in the corner in a bigger way.
Yes, So I would tell you I'll start Andy but if you go back to Mike whales comments at Investor Day. He talked he talked about one of his priorities is continuing to drive margin expansion.
And we saw that sequentially, we knew going into the year that the year on year comps will be difficult as you've correctly pointed out with the amount of inflation, but the team has driven momentum on all items, which is price continued to see the restructuring benefits were able to continue to drive productivity in the factories at the same time.
<unk> continued to invest in the right amount of growth is based on the priority platforms that we have listed out and you saw it in the first quarter.
Our masked respirator did come in better when we had come in from the beginning of the quarter. We have told you it would be down sequentially $100 million to $150 million. It came in at $50 million down. So we know we came in stronger I think we'll have to watch what are your plays out when it comes to match respirator, and see where that lands as well.
Also told you it it does have an impact on us on an incremental margin basis and coming into the year. We had said it would be down 700 on a year over year basis, but to sum it up Mike Wheeler and his team are focused on continuing to drive margin expansion.
As all of the initiatives that they've taken from productivity price restructuring continue to.
Play out offset that and stability comes in you start seeing the productivity also starting to kick in from a margin perspective, so good start to the year.
Okay. That's helpful and I just wanted to follow up on Jeff's question, just to make sure I understand the ongoing litigation costs. It looks like ex the special charge related to the Belgium facility that you've gone to about 35 cents of special items for 'twenty two but your litigation expenses had been running at like 13, 14 times a quarter. So are you expecting litigation customer ramp.
Down as year goes on or their gains you're expecting me any more color there am I understanding it right yeah.
Yeah, Andy this Bruce if you look at our press release attachments.
We lay out about $600 million in pre tax charges are estimated for the year.
That includes as wind rig charge that we took in Q1.
So setting that aside underlying ongoing litigation costs to be about $450 million.
From a total EPS impact for the year, we forecast 86 cents.
Which includes 26 cents related to vendor charge in Q1.
No I'm sorry.
Yeah on the remaining 60, we took roughly 13 cents here in Q1.
Thank you.
No.
Our next question comes from Joe Ritchie with Goldman Sachs. You May proceed with your question.
Thanks, Good morning, guys.
Joe.
Hey, Bruce I, just wanted to follow up on the.
$600 million.
I'm just curious like is.
What does that what does that actually encompass.
In terms of litigation and then also is that is that all cash.
Yeah. So when we provided our guidance back in February encompassed in the 10 to 15 to $10 65 was a plan of about 60 cents.
All costs related to ongoing litigation matters around P fast combat arms and respirator.
So and then we had an additional 26 cent charge as we announced on March 30th.
So what brings it to a total of 86 cents.
Relative to cash Joe that's difficult to know exactly.
When that plays out.
For example, the 26 cent charge, we took here in Q1.
Will be paid out over time as remediation actions take place.
And also it's important to remember that there is no.
Presumed forecast relative to updates to reserves.
So largely that's largely largely will be cash driven but won't won't a lineup of 100%.
Got it that's helpful. And then really just wanted to follow up on China I saw that it was down low single digits in the quarter I'd be curious, Mike or munis, maybe maybe just provide.
How that is trending.
As the quarter ended and into April and then and then also if you could provide a little bit of end market color.
I would imagine that respirator sales are probably holding up a little bit better, but any any type of commentary you can provide on trends there by end market would be helpful.
Yeah sure John I'll start with what you said they were down low single digits in the first quarter that was a reminder of top of 30% of our more than 30% growth in Q1 of last year.
We've been impacted in Q1 by the Covid Lockdowns, that's impacting manufacturing and distribution and we saw that as we finished the quarter. It's also.
Contributing to I would say a soft start to April as well and it's really a.
Driving increasing backlog factory shutdowns for US also complying with all government safety mandates youre seeing increased port congestion reduced air cargo capacity. So a number of things impacting that softer start it's I would say it's it's.
The outlook remains uncertain, it's difficult to predict where we see maybe maybe one percentage point kind of headwind as we start Q2, but that can change as we go through the year. So it's.
It's it's important market as we're seeing in Q1, we saw health care, leading the way up mid teens, we saw declines across consumer safety and industrial and transportation and electronics all down mid single digits. So that's that's what got you to the low single digits.
Helpful. Thank you.
Our next question comes from Andrew <unk> with Bank of America. You May proceed with your question Hey, good morning.
Andrew Andrew.
Just a question on the consumer business historically looking at your consumer peers.
It gives you a fairly good indication of where you guys. Okay.
But sort of looking at wherever is Kimberly I think Procter <unk> Gamble have reported.
Your numbers seem to be this quarter quite a bit below the peer group.
And also and particularly if you look at some of the verticals if you disclose like.
<unk> granules home improvement.
Separation purification would've expected those to do better given the end markets I guess the question I'm asking.
The issue in the Belgium facility, but should we be thinking about a specific.
Vertical.
Within your technology portfolio, that's being particularly impacted by supply chain that sort of gauge your ability to grow in this environment.
Yeah, Andrew I would say.
You highlighted a couple of those particular challenges of supply chain more broadly is impacting all of our businesses. So were seeing disruptions in raw materials logistics inflation. All of that is impacting broadly are our portfolio of consumer did have organic growth up 3% in Q1 on top of 9% last year and it was.
Across all divisions. It was led by consumer health and safety I'm also our home care and.
Our home off home improvement products continue to lead the way so we're seeing growth and stacked on top of last year's growth we're seeing.
Continued performance good performance.
Theyre not seeing any specific or particular impact and if you look across the portfolio aside from.
Some of the disruptions from <unk>.
We're not seeing.
Our supply chain focused in one part of our portfolio. Another it is.
It is I would say more some of the impacts may be from Covid, having a geographic impact.
Healthcare electric procedures still looking for recovery, there and as <unk> highlighted the.
Outlook for the macro in certain end markets softening, that's less about supply chain disruptions, maybe automotive and electronics being impacted by summer conductor shortages, but it's really more end market slowdowns that are impacting our businesses.
Where you see.
And impact on something like electronics or automotive.
Got you and just a follow up question interesting to know that you guys continue to push into electronics you highlighted it as one of your sort of technologists within your periodic table or can you just talk more about sort of potential M&A opportunities when it comes to digital and how do you sort of seed.
Getting into your broader portfolio.
Andrew our M&A strategy important part of capital allocation, we see it as a place we can create value and the way we create value. There is as you're pointing out we look at prioritizing attractive markets higher growth markets that can leverage <unk> capabilities, our technology, our manufacturing our global.
Reach to customers and so that really that really kind of steers us and our strategy for M&A and when we can identify.
Companies that we can integrate into three of them and really leverage those strengths of three M. That's and move into more attractive higher growth market spaces, that's what's going to drive us whether it's in opportunities around electronics or any one of our four businesses.
Thank you.
Our next question comes from Brandon <unk> with Bernstein, You May proceed with your question.
Good morning, guys. Thanks for taking my question and Brendan Good morning Brendan.
So just.
I wanted to circle back on a couple of items from our from the guidance call or in this year.
I'm wondering how your point of view may have changed given ongoing pressures for the business. So first off I believe we talked about.
Around 30% Incrementals net a respirator impacts.
Is that still is that still a target.
In light of continued inflation.
Inflationary headwinds and then second part would be around operating cash flows you guys had guided to $7 billion to $8 billion, but we came in at around 1 billion in Q1, I'm wondering sort of what the you know what.
Puts and takes look like to get to the FY target there.
Yeah, So I'll start with your operating leverage question Brendan.
What I've said is always in the long term, 30% to 40% is what our targeted leverage is incremental leverage.
And when you just think about it and look at our gross margin, which is anywhere between 45% to 50% you can see you can get to the 30 to 40.
On top of that.
What I would tell you volume gives us the best leverage so the more we can grow youre going to get more incremental leverage add to that productivity in the factories strategic sourcing will add more to that leverage and then continued actions to drive simplification et cetera, all of them drive positive leverage tend to that way.
Take some of that and we invested back into growth productivity and sustainability and then of course manage the litigation matters et cetera is ongoing so when you put all that together long term 30 to 40 is what is doable.
We came into the guide for the year, we had said it's 30% to 40% is our target we said around 30%. If you look at the midpoint of the range right now, which we have given you which is 2% to 5% revenue growth.
75 to 11 25 on an EPS basis, and you put in FX, which could range anywhere from 1% to 2%. We ended at 2% right now for the for the for the first quarter and you assume that that carries over you will see that we are still targeting at that 30%. We are seeing higher inflation as everyone has seen.
But as I've said in my prepared remarks, we are going to offset that inflation target to offset that by price actions.
<unk> is strong in the first quarter you can see incremental leverage was up if the math is the math is nearly 70%.
Leverage in the first quarter sequentially and will continue to drive leverage.
Of course have to factor in all the uncertainty that's going on in the world, but the team is committed to driving it and I would say in the long run and also I don't see why we can't get to that 30 to 40.
Hopefully I answered your question Brendan on item one.
The second item on operating cash flow again, we have reiterated that we are and we started the year with 90% to 100% free cash flow conversion. We had told you that at Investor Day, We reiterate we have a path to get to the 90% to 100% free cash flow conversion the first quarter at a 47% conversion was pretty much what we expected.
And with all in the guide in the 90% to 100%. The first quarter conversion is driven by two pieces. One is higher compensation expenses from a year over year basis has to be paid out.
And secondly, as higher investments in sustainability that we had also called out but if you look at history of three M. The first quarter is always the lowest from a conversion races. In your business. So we still see a path to the 90% to 100%.
Outstanding Thank you.
Our next question comes from Deane Dray with RBC capital markets. You May proceed with your question.
Thank you good morning. Good morning. The question good question from a niche plays.
Just on the FAA.
FX assumption for the year.
Three of them historically, it's been one of the few companies that actually use financial hedges on FX.
They're still in place.
And there's typically a lag when you use those hedges.
So versus what you're seeing in the spot market just whats I can see you've got that 1% to 2% in guidance, but does.
Are there hedges at play.
Yes, so we do cash flow hedging Deane and that's been done even before my time. The team continues to do that as per the rules that are out there for the first quarter. It was the FX was a four cent headwind.
And then on our revenue it was a 2% headwind if you just take and its very volatile. It's all due to the strength of the U S. Dollar, but if you just had to snap the chalk line a week ago and save if that's what the trend is for the future I would say on a revenue basis, it's somewhere between 1% to 2% impact and then from a EPS perspective.
It's a five to 10 cent headwind we've taken four so then you'll have another center six cents, but again, it's very volatile. So it's really hard I am just giving you a point in time.
Based on just snapping the chalk line a week ago on those currency rates.
That's helpful. Thank you.
Our final question comes from Nigel Coe with Wolfe Research you May proceed with your question.
Sorry about that thanks again.
Hi, Jeremy.
It wasn't a mute button issue I just to make that very clear.
So thanks again, so just to put a finer point on the guide I mean, you've acknowledged.
A stronger.
Raw material pressure.
China, Europe , so lots of incremental headwinds, but what is what is the offset to that in terms of keeping the range essentially unchanged.
So I'll start with just do you take the top line growth at 2% to 5% that we came into the year with we continue to see that Nigel play itself out who take GDP Ipi, that's growing give or take 3% to 4% you'll take auto build rates, which is still at the 5% growth rate. We have told you we can get three.
<unk> hundred or 500 basis points of outbid.
In the long term you saw in this quarter. The team did on a negative 5% auto growth rate. They came in at plus flat. So it's 500 basis points healthcare started slow in a in.
In January and February we still see ourselves getting to in U S elective procedures <unk>, 95% to 100%.
You look at all CSD oral care, we are starting to see that back again January was down due to the omicron variant, but we've seen that back up and then consumer is we said low to mid single digits, that's where they delivered in the first quarter. So that remains as is so I would say when you look at all of this from a macro perspective for the year as a <unk>.
Whole, it's we still see ourselves in that range of two to five and of course, we are continuing to get more price to offset the inflation. So that's number one I would say secondly, we did bring out the second quarter. Because we wanted you ought to know what we are seeing.
From a headwinds perspective, I'm sure you're yielding it from all industries and we are not telling you anything new that you haven't heard from others and then on EPS, which is $10 75 to 11 25 I go back to volume gives us the best leverage so the 2% to 5% growth there plus the continued work that the teams are doing to drive.
Productivity in the factories strategic sourcing continuing to be smart about investments in the growth and productivity and sustainability all of that put together, we see the calculus that gets us to the 10, 75% to 11 25, and that's what we're working towards I think things will play out as they will play out in the short run, but again I go back.
The long term growth above macro margin expansion and cash is clearly doable in the short term headwinds will all play itself out.
Okay.
Great.
I know we're running late here so.
You know it seems like you're working around the Belgium facility issue, which is good news, but it seems to me and maybe this is a question for Mike you know, Belgium is a symptom of a broader problem, which is you know to.
To date, we've had litigation actions against PFS and now it seems to be more operational.
And Jimmy I know it was suppose.
To phase out <unk> products.
California's got some similar proposals as well so how is the board's thinking about this.
Number one and then secondly, how material could this be for three of them longer term just any color that'd be helpful. Thanks.
Yeah, Nigel maybe I'll just try to just kind of frame this up a little bit. So there are two parts to what we're managing vendrick and I would say in our manufacturing sites around the world. There is a historical.
The impact of the PFS Chemistries <unk>, we exited and also exited almost 20 years ago now.
Our exit almost 20 years ago, and then there is the ongoing operations and so we're working on both of those inns Vendrick is the charge that we announced in March was to resolve remediation related to that historical CFO APL for West manufacturing and then we're working with.
The the authorities in Flanders around an operating permit going forward and that's something that we've been doing around the world that are five sites with regulatory authorities and continue to do that its DFAST continues to be a critical PFS substances theres more than 4000 of them. We continue to have some.
<unk> in our in our products that is critical to customer needs and in healthcare electronics automotive and so it's something we're managing with those sites managing with those authorities and something we'll keep you updated on as appropriate as we go forward.
Thank you.
That concludes our question and answer portion of our conference call I will now turn the call back over to Mike Roman for some closing comments.
To wrap up we had a good start to the year with solid growth sequential margin expansion and strong cash generation. We are positioned for a successful 2022, and we'll stay focused on taking care of our customers driving growth and improving our operational performance. Thank you for joining us.
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.
Uh huh.
Okay.
Yes.
Right.
Thanks.
Okay.
Yeah.
Yes.
Okay.
Yeah.
Okay.
Okay.
Uh huh.
Uh huh.
Okay.
Sure.
Uh huh.
Uh huh.
Okay.
Okay.
Uh huh.
Okay.
Sure.
Okay.
Okay.
Uh huh.
Hum.
Okay.
Okay.
Thanks.
Uh huh.
Okay.
Okay.
Uh huh.
Okay.