Q2 2022 3M Co Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by.
Welcome to the three am second quarter earnings Conference call.
During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
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 July 26 2022.
I would now like to turn the call over to Bruce German Lynn Senior Vice President of Investor Relations at three P. M.
Thank you and good morning, everyone and welcome to our second quarter earnings Conference call.
With me today are Mike Roman <unk>, Chairman and Chief Executive Officer.
More niche Buttala Walsh, our chief financial and transformation officer.
And Kevin Rhodes, <unk>, Chief Legal Affairs Officer.
Please note.
Mikes and more initiatives formal comments this morning will be longer than past quarters, given the announcements that we made this morning.
Therefore, when we get to Q&A. Please keep it to one question and one follow up so that we can try and get to everyone as efficiently as possible.
Also 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, and 8-K, whereas 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 appendix to these slides and then the attachment to today's press release.
With that please turn to slide three and I'll now hand, the call off to Mike Mike.
Mike.
Thank you Bruce good morning, everyone and thank you for joining us.
Today is an exciting and important day for three of them.
We are positioning our company for future success by creating more opportunity while reducing uncertainty.
We plan to spin off our health care business, which will result in two world class public companies that are global leaders with significant growth opportunities in their respective markets.
We intend to execute a tax free spinoff, creating a global diversified health care technology leader.
Three of them will remain a leading global materials science innovator.
Serving customers across a range of diverse and attractive end markets.
Each company will be well capitalized more agile and focused and well positioned for long term success.
Also we are proactively taking steps to resolve litigation related to combat arms earplugs.
<unk> technologies are three of them subsidiary has voluntarily elected to initiate chapter 11 proceedings.
This process is intended to resolve claims related to combat arms in a manner that is efficient and equitable.
Three of them has not filed for chapter 11.
Both three I'm in Aero I expect to continue to operate in the ordinary course.
And as we announced earlier in our earnings press release three of them continues to deliver in a challenging environment with adjusted earnings per share of $2 48 in the second quarter.
We also posted organic growth of nearly 5%, excluding the impact of disposable respirators and COVID-19 related lockdowns in China.
Munis will cover our Q2 results in detail. After my remarks, please turn to slide four.
Now is the right time for three of them to act as we position our company to win in a rapidly changing world.
As I shared at our Investor meeting in February disciplined portfolio management is foundational to our growth strategy.
Our board and management team actively evaluate strategic options to drive long term sustainable growth.
Importance of portfolio management has never been greater especially given the extraordinary macroeconomic changes brought about by the pandemic.
I'll speak to health care in a moment, but let me first talk about the strong businesses that will make up new three of them.
Our market leading business groups are aligned to highly attractive end markets with tremendous opportunities in front of them.
Each of these business groups grew above 8% in 2021 and are delivering solid results in a challenging environment. This year.
Together these businesses make up an outstanding portfolio that actively leverages, our world class capabilities.
As global Mega trends have accelerated many of those trends demand our customer driven innovations that align to our growth priorities areas, such as electronics safety mobility, Digitization home improvement and sustainability all represent significant opportunities for three of them.
An important example of our strategic portfolio management is the progress we have made in health care.
Through organic investments in innovation strategic M&A and updates to our operating model, we are positioned to health care to be successful as a standalone enterprise.
In 2019, we acquired a solid <unk> and M modal, establishing our leadership in advanced wound care and in health information systems.
Also we have divested drug delivery and are in the process of separating our food safety business.
Our business group led operating model, which we implemented in 2020 has also enabled our businesses and R&D to be closer to our customers.
These actions in addition to health care strong capabilities.
Why do we feel now is the right time for it to formally operated as a stand alone health care leader, especially given important trends that favor our business.
With shifting demographics growing demand for virtual and in home care, our focus on reducing re hospitalizations advances in health care It systems.
And a growing focus on delivering better patient care at a lower cost.
Our health care business is at the intersection of data analytics and technologies needed to deliver precision medicine.
Both companies will sharpen their focus to continue investing and winning in global end markets and have greater flexibility to strategically deploy capital drive innovation and accelerate growth.
Turning now to slide five.
Our actions will drive long term value for our shareholders.
New three am and health care will tailor their capital allocation and investments to drive innovation and growth.
As leaders in their markets their enhanced focus will help position each to respond even faster to shifting industry dynamics and needs.
They will both offer distinct and compelling investment profiles appealing to different investor basis.
These actions will help unlock and unleash value for three am and the health care business and chart and exciting course for our future.
At the same time, we're also working to reduce uncertainty by efficiently and equitably resolving combat arms Earplug litigation.
I will now provide more detail about our planned spin off of our health care business and the opportunities. This will create please turn to slide seven.
Each business will be financially strong leaders in their respective industries.
Three of them will be approximately $26 8 billion dollar business and remain a leading provider of innovative solutions for a broad diverse range of end markets, including industrial safety automotive electronics and consumer.
Each of these businesses benefit from three M science and innovation.
Our health care business drove $8 $6 billion in sales in 2021, which includes approximately 400 million in revenue from our food safety business.
We intend to complete the previously announced separation of the food safety business through a split off transaction with a targeted closing date of September one 2022 subject to approval by Neogen shareholders. In addition to other customary closing conditions.
Our go forward health care business will build upon strong positions in attractive markets, including wound care oral care health care, I T and Biopharma filtration.
Next slide please.
With our fundamental strengths in science and technology manufacturing global capabilities and iconic brands, we are well positioned to capitalize on and invest in key megatrends.
A hallmark of three of them is our ability to leverage unique and differentiated technologies across our organization.
Allowing us to create new solutions required by a world, where we are seeing accelerated demand for innovation and sustainability.
We will continue to actively manage our portfolio with discipline and focus generates strong margins and cash flow and grow earnings by improving operating rigor.
Our capital allocation priorities remain unchanged.
These include investing in organic growth and attractive dividend strategic M&A and finally share repurchases next slide please.
Yeah.
As we look ahead innovation talent and operations will remain core strengths for new three of them.
We will drive more customer focused innovation leverage data and insights from our retail partners.
And connected with customers through advanced E Commerce strategies.
We will share technology platforms and leverage R&D across the enterprise, which will help drive growth in all of our businesses.
Attracting and retaining talented people our top priorities.
We will connect them through greater flexibility with our work your way model and continuously strengthen our culture of innovation.
We will also advance our capabilities through Digitization to provide unique solutions and a tree greater end to end performance across our global operations.
Our innovative manufacturing expertise will continue to be a differentiator.
And to ensure greater connectivity to customers.
We'll enhance our service and streamline our operating model.
We are equally excited for the future of our health care business, which I will explain on slide 10.
Our health care business enables better smarter and safer care, and we will be well positioned to support customer needs and make the most of attractive opportunities, including a growing focus on infection prevention to help providers reduce related re hospitalizations.
Hospitals, increasing investments and improvements in clinical and operational workflows to drive efficiencies and improve patient experiences.
More frequent use of biologics as a first line choice of treatment.
In addition, medicines are becoming more complex and advanced requiring specialized tailored solutions.
And the combination of materials science, and digital science, especially within oral care is changing the patient experience for the better.
With our deep and diverse portfolio of trusted brands global capabilities regulatory expertise and leading positions in attractive segments. We expect the health care business to generate strong recurring revenues margins and cash flow next slide please.
We are excited about the health care business, we have built with intention and a clear focus on helping improve the health of people around the world.
Our business is powered by core strengths, including our proven leadership in multiple care pathways our.
Our position in attractive end markets, and an innovation mindset customer relationships regulatory expertise and operational excellence.
These strengths enable strong sales growth and profitability and importantly deliver better patient care next.
Next slide please.
We are well positioned in large and growing health care end markets, which are expected to grow at a strong and steady rate over the next several years.
Our wound care business is a world leader and comprises a portfolio of innovative products.
Our oral care business is another leading platform, which is developed award winning innovations.
Health care information systems are increasingly essential as providers seek to deliver better care through comprehensive data and insights.
Our biopharma filtration products are critical to manufacturing potentially lifesaving medical devices vaccines drugs and therapeutics.
Now, let me turn to some of the specifics of the transaction on the next slide.
Three of them plans to pursue a tax free spin off and retain a 19, 9% stake.
Which we expect to monetize over time.
We expect health care will be spun off with net leverage of three to three five times adjusted EBITDA and we will delever rapidly given the business is strong cash flow.
Subject to the satisfaction of certain conditions, we anticipate completing this transaction by the end of 2023.
And we anticipate no change and three EMS capital allocation priorities through separation.
In addition, three of them will retain responsibility for non health care related litigation.
Including combat arms Earplugs and PFS.
Over the next several months, we will begin our work to stand up these two companies and we'll share updates as we progress.
Now let me provide some additional background on combat arms litigation, Please turn to slide 15.
To provide some context in 2008, three I'm acquired Arrow technologies, which manufactured combat arms earplugs.
Since the acquisition Arrow has continued to operate as a wholly owned subsidiary of three of them.
These products provided effective hearing protection when used properly.
And we stand by their performance.
The U S. Military continues to rely on three of them products, including newer versions of the combat arms earplugs.
Nonetheless, there has been an extraordinary increase in litigation related to combat arms.
As of June 32022, there were approximately 115000 filed claims and an additional 120000 claims on an administrative docket.
The multi district litigation process and the highly variable outcomes. It has generated has not provided certainty or clarity.
We believe that litigating. These cases individually could take years, if not decades.
We want to do right by veterans and all stakeholders and we expect the steps. We are taking today will provide greater certainty as we take action to efficiently and equitably resolve claims related to combat arms.
We have made the decision to adopt a new legal strategy. So let me provide.
A little more context on the actions we are taking.
Arrow has voluntarily elected to use well established chapter 11 procedures to resolve this litigation.
Arrow will indemnified three of them for all liabilities related to combat arms and certain discontinued Aero respirator mask products.
Three of them has entered into a funding agreement and has committed to fund the trust of $1 billion to resolve all claims determined to be entitled to compensation.
This amount is based on the analysis of inexperienced estimator of claims in chapter 11.
In addition, we are committing $240 million to cover projected case related expenses.
Three of them will provide additional funding if required under the terms of the agreement.
By taking these actions, we expect to provide greater certainty and clarity and help funds go to plaintiffs with claims that are determined to be entitled to compensation sooner.
This will help reduce the cost and time that could otherwise be required to litigate thousands of cases.
Let me now say a few words about our plans to manage PFS.
Three of them stands by a record of environmental stewardship, we are already deploying state of the art technology that will help us achieve our goal of a 99% reduction in PFS discharges from our operations.
We are making progress against our goals of improving water quality, reducing water use reducing plastic use and achieving carbon neutrality.
In addition, we continue to remediate at sites, where three of them historically manufactured or disposed of P. F O a N P F O S.
Now specifically to P fast related litigation.
We plan to vigorously defend ourselves.
We're preparing our defense for upcoming milestones in the litigation process and we are well advised of our options next slide.
We are excited about the future of three of them our actions today will provide greater focus for our organization.
Before I turn it over to Moonish I want to reiterate a few key takeaways.
Our investments in innovation, our portfolio management strategy, and our realigned operating model will power our future growth.
We will have dedicated teams to help facilitate focused execution of our actions announced today.
Our planned tax free spin off will result in a leading global diversified health care technology company.
We will create more opportunity for both three am and the newly Standalone health care business through this transaction.
With two public companies well positioned to drive future success.
In addition, we are taking action to efficiently and equitably resolve combat arms litigation.
Finally, we remain focused on delivering in a challenging environment.
Now I will turn it to <unk> to provide an update on our Q2 performance.
And updated outlook for the year Monish.
Thank you, Mike and I wish you all a very good morning, Please turn to slide 17.
<unk> team executed well and delivered solid Q2 results by remaining focused on serving our customers. While navigating continued supply chain challenges inflationary pressures along with the geopolitical and Covid dynamics.
Second quarter total sales were $8 7 billion.
Which increased 1% on an organic basis versus last years, 21% comparison.
Adjusted operating income was $1 8 billion.
With adjusted operating margins of 21% and adjusted earnings per share of $2.48.
We continued to experience strong demand across most end markets. However, a couple of items had a negative impact on overall Q2 results, which we had highlighted during the quarter.
First as forecasted we experienced a year on year decline in disposable respirator sales of approximately $150 million.
And second the greater China regions Covid related Lockdowns resulted in a sales decline of approximately $140 million year on year the.
The impact was lower than the 300 million dollar headwind than we had anticipated as the reopening of our facilities in June went better than anticipated.
Our China team did a tremendous job, adding additional shifts to ramp up production distribution and drive productivity to serve our customers.
Adjusting for these two impacts organic revenue growth was nearly 5% for the rest of three M in the quarter.
Also the continued strengthening of the U S. Dollar resulted in a foreign currency translation impact of minus four percentage points to Q2 total sales growth.
This FX impact combined with the China Covid related Lockdowns negatively impacted second quarter operating margins by nearly one percentage point and earnings by 24 cents per share versus our expectation of 30 cents as discussed during our conference in early June .
We also continue to support our people and manage the business and supply chain impacts from the ongoing Russia, Ukraine conflict.
We also announced additional investments to resolve matters related to our operations in swine rank and began the process of restarting manufacturing operations.
Is progressing to plan.
And finally as I will expand upon later, we are updating our full year expectations, primarily to incorporate the impact of the strong U S dollar along with macroeconomic uncertainty.
Please turn to slide 18, but I'll get into more details of the quarter.
On this slide you can see the components that impacted our operating margins and earnings per share performance as compared to Q2 last year.
We continue to benefit from selling price actions restructuring savings and strong spending discipline, which helped drive an improvement to underlying margins of two nine percentage points or <unk> 44 cents to earnings per share year on year.
These actions helped to more than offset headwinds, including the forecasted decline in disposable respirator demand, which negatively impacted Q2 operating margins by 40 basis points and earnings by nine cents a share.
The previously mentioned, China, Covid related Lockdown, which has resulted in a year on year headwind of 70 basis points to operating margins in 11 cents to earnings per share.
And finally as discussed during last year's second quarter earnings call, we realized a benefit to both operating margins and earnings in Q2 last year from a Brazilian Supreme Court, social tax ruling, which led to a 100 basis point margin and 12 cents per share headwind to this year's second quarter.
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 safety healthcare electronics software at home improvement.
Moving onto raw materials and logistics.
Inflationary pressures resulted in a year on year headwind of nearly $270 million in the quarter or a negative impact of three one percentage points to operating margins and 36 cents to earnings.
Halfway through 2020 to be have experienced approximately $480 million of raw materials and logistics headwinds versus our original full year expectation of $3 $50 million to $450 million at the start of the year.
We now anticipate this year full year headwind to be in the range of 752 $850 million, which we continue to expect to offset through pricing actions.
As I mentioned earlier foreign currency translation was a negative four percentage point impact or a reduction of nearly $340 million and told me sales and over $80 million in operating income net of hedging year on year.
This resulted in a headwind of 10 basis points to margins and 13 cents to earnings per share.
Other financial items increased earnings by a net 10 cents per share year on year, driven by benefits from a lower share count and tax rate. Please.
Please turn to slide 19.
Second quarter adjusted free cash flow was $1 billion with conversion of 68% a year on year conversion performance was the result of a higher than expected increase in working capital along with the cash impact from the capitalization of R&D for U S tax purposes.
Working capital improvement is a big piece of how we keep generating good strong cash flow for three of them.
The global supply chain and logistics environment remain challenging.
The data analytics platform that we have created will help us to reduce inventory levels through better demand planning S. SKU rationalization and use of visualization tools.
We expect the benefits of these efforts will start showing up in the second half and years to come.
Capital expenditure was $384 million in the quarter and $808 million year to date are up 15% year on year as we continued to invest in growth productivity and sustainability for.
For the full year, we continue to anticipate Capex investments in the range of one $7 billion to $2 billion.
During the quarter, we returned $848 million to shareholders through cash dividends as we have communicated previously share repurchases remained suspended in Q2 due to the pending food safety separation.
We intend to complete the separation through a split off of the closing date of September 1st subject to Neogen shareholder approval and other customary closing conditions.
Net debt stands at $13 $3 billion up approximately 4% as we continued to invest in the business.
Please turn to slide 21 for our business group performance for Q2.
I will start with our safety and industrial business, which posted sales of $2 $9 billion are up 0.7% organically compared to last year's second quarter.
This result included headwinds from the decline in disposable respirator sale of approximately $150 million year on year, which negatively impacted safety and industrials organic growth by five seven percentage points, along with the Covid related lockdowns in the greater China region.
Our personal safety business declined high single digits organically, primarily due to the decline in COVID-19 related disposable respirator demand.
We continue to anticipate that COVID-19 related disposable respirator demand will decline as we move through 2022. However, we remain prepared to respond to changes in demand as appropriate.
Turning to the rest of safety and industrial.
Abrasives electrical markets and closure and masking businesses, all grew low double digits organically.
Roofing granules automotive aftermarket and industrial adhesives and tapes, all delivered low single digit organic growth.
Safety and industrial second quarter, adjusted operating income was $630 million down 12% versus last year.
<unk> operating margins were 21, 5% down two one percentage points.
Adjusted operating margins were impacted by China, Lockdowns and manufacturing productivity headwinds, which were partially offset by spending discipline and benefits from restructuring actions.
Moving to transportation, and electronics, which posted sales of $2 $3 billion up 0.5% organically compared to last year.
Organic growth was held back by the Lockdowns in China, along with the ongoing impacts of the semiconductor supply chain constraints on the automotive and consumer electronics end markets.
Organic sales in our auto OEM business were up low single digits versus flat global car and light truck builds as we continue to gain penetration on automotive platforms.
Electronics related business declined low single digits organically with decreases across consumer electronics, particularly smartphones tablets and Tvs.
These declines were partially offset by continued strong demand for our solutions and semiconductor factory automation and automotive end markets.
Turning to the rest of transportation and electronics advanced materials and commercial solutions grew organically mid single digits, while transportation safety was down high single digits.
Second quarter operating income was $476 million down 7% year on year.
Operating margins were 21% down 80 basis points year on year.
Operating margins were impacted by manufacturing productivity headwinds due to China's lockdowns and the continued shutdown during Q2 of certain operations in <unk> factory.
These impacts were partially offset by the strong spending discipline and benefits from restructuring.
Looking at our healthcare business, which delivered strong quarter sales of $2 2 billion with organic growth of four 4%.
Medical solutions and oral care businesses increased low single digits organically.
Second quarter U S elective medical procedures in oral care volumes were approximately 90% to 95% of pre COVID-19 levels up sequentially from Q1 levels.
Health information systems grew mid single digits, driven by strong growth in revenue cycle management.
The separation and purification business increased high single digits with sustained demand for Biopharma filtration solutions for Covid related vaccines.
And finally food safety was flat year on year.
Healthcare second quarter operating income was $494 million down 10% year on year operating margins were 22, 7% down two six percentage points with strong adjusted EBITDA margins of nearly 30%.
Year on year operating margins were impacted by manufacturing productivity.
Investments in the business and costs related to the food safety separation.
These impacts were partially offset by the benefit from leverage on sales growth strong spending discipline and benefits from restructuring actions.
Lastly, our consumer business posted second quarter sales of $1 $3 billion or down two 5% year on year on an organic basis versus last year's 18% comparison.
The home improvement business was down high single digits organically, while consumer health and safety declined low single digits as both businesses were up against strong comparisons from a year ago.
Ah stay study in office business performed well up mid single digits year on year and home care was up low single digits.
Consumer's operating income was $247 million down 15% compared to last year.
Operating margins were 18, 5% down two two percentage points year on year.
Our consumer business operating margins were impacted by ongoing supply chain constraints and manufacturing productivity impacts. These.
These headwinds were partially offset by strong spending discipline and benefits from restructuring actions.
Please turn to slide 23 for a discussion on our 2022 outlook.
As you know the macro environment remains uncertain with mixed trends and signals across geographies and end markets for example, improving build rate trends in automotive.
Continued strong demand in semiconductor data center and factory automation.
Creasing health care elective procedure volumes and a strong bounce back in China. Following April and May Covid related lockdowns.
However that also continued challenges in areas of concern that'd be a monitoring including that stubborn and evolving impacts of COVID-19.
Global supply chain and logistics challenges persistent and broad based inflation, which is pressuring consumers purchasing power and shifting spending patterns.
Softening trends in consumer electronics, and geopolitical uncertainties, particularly in Europe .
We are working through these challenges and are taking actions.
Such that we expect to offset the majority of these headwinds.
However, as I mentioned earlier the strength of the U S. Dollar is having an increasing impact on our top and bottom line, which is the primary factor driving our update to full year guidance.
Foreign currency translation is now expected to be a full year headwind of minus 4% versus minus 1% previously.
This FX headwind is it resulting in a reduction of over $1 billion in annual sales and has also accounting for nearly 80% of the adjustment in our full year earnings expectation.
Therefore, we now expect full year earnings in the range of $10 30 to $10.80 versus a prior range of $10 75 to $11 25.
Given our first half performance along with the continued uncertain environment. We also believe it is prudent to adjust our organic growth expectations. Therefore, we now expect full year organic growth in the range of 1.5% to 3.5% versus our prior range of 2% to 5%.
And finally, we expect adjusted free cash flow conversion to be in the range of 90% to 100%.
Before I wrap up let me make a few comments regarding the third quarter.
First we currently anticipate an approximate five percentage point headwind to total sales from foreign currency translation.
While build rate forecast for automotive have moderated we see easier comps here in Q3 versus last year.
U S medical elective procedure volumes are expected to be in the range of 90% to 95% of pre COVID-19 levels, while oral care volumes are estimated at approximately 90%.
We expect a headwind of $100 million to $200 million year on year from the ongoing decline in disposable respirator demand.
We continue to closely watch weakening consumer electronics demand trends and overall consumer sentiment and spending.
And finally looking at raw materials and logistics costs, we anticipate our Q3 year on year headwind of approximately $225 million, which we expect to be able to navigate and offset through price actions.
To wrap up our team delivered one percentage organic sales growth in the quarter, 21% adjusted margins and.
And generated $1 billion in adjusted free cash flow.
I wanted to thank our customers and suppliers for their partnerships and the three M employees for their hard work and dedication as they continue delivering for our customers.
While the macro environment continues to be extremely fluid. The three M team remains focused on serving our customers and delivering a strong second half of the year.
We will remain focused on investing in favorable macro trends, increasing operating rigor through a focus on deep root cause and driving working capital intensity to further strengthen cash flow.
I'm excited about the future of new three M. In our healthcare business, we believe that today's announcements positioned the company to drive significant long term value for our customers employees and shareholders are.
Businesses and capital structure are strong and we are well positioned for success.
That concludes my remarks for the second quarter.
With that we will now take your questions.
Ladies and gentlemen, if you like to register a question using a landline phone. Please press the one followed by the four on your telephone keypad.
He was sweet Tom prompt to acknowledge a request. If your question has been answered and you like to try your registration. Please press the one followed by the suite.
If 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 Andrew Open with Bank of America. You May proceed with your question.
Yes, good morning.
Hey, Andy.
Yeah first of all congratulations on achieving these key milestones I'm sure. The team worked incredibly hard to achieve that so congrats thank you Ann.
My first question I'm, sorry, maybe not from not from an Asia, Kevin is on the phone as well.
So we're getting a lot of questions about just the structure for the combo arms.
Kevin could you just talk about the process for sort of ring fencing, the combo arms liability.
You highlighted an estimator.
How much of it is sort of just you know.
How much of this estimate is sort of discretionary in nature.
Much of it is based on precedent just maybe explain the process.
Little bit better to us because my understanding is that it is a fairly complex process to come up with the number but any help would be.
Be useful thank you.
Yes, maybe Andrew maybe I'll start with and Kevin can add some details as well so as we as we've talked about in prepared remarks, you know arrow technologies operating entity in three M is voluntarily taking on this liability and it's really about us three of them stepping up to do what's right here and do right by veterans and drive a drive more certainty drive better.
Clarity for everyone involved.
We've talked about we are committed to fund the trust and this is based on the analysis by an experienced estimator of claims.
The third party that we're working with an economic consulting firm <unk> white.
Is the one that.
Develop the estimate for US we believe the $1 billion is the appropriate amount based on that expert analysis.
And we are as part of this process, we will provide additional funding if required under the terms of agreement, but that's not the basis for that $1 billion I, Kevin I don't know if you have anything to add to that.
Thanks, Mike I'll, just add that the analysis will be explained in an expert report it will be reviewed as part of the chapter 11 proceeding it's important to note that the chapter 11 Court will oversee this process and the claimants will be represented as well and the goal is to have the court held aero.
This trust funded by three of them as Mike said and those seeking compensation can present their claims to the trust rather than going through the litigation process on a case by case basis.
And does this number again updated on a regular basis in the Q or intra quarter or it's just we're going to get big.
Big update as things evolve.
If at all.
So this is the commitment to fund the trust of $1 billion at.
At the end of the process when the trust has established that Sweden.
The proceeding will be concluded.
Got you. Thank you and just a follow up question.
I guess this question for Mike.
There is a lot of talk about a recession.
Headlines that were technically in a recession.
Did address inflation consumer slowing but.
From your perspective, you have such broad exposure to.
To the economy.
Why do you think we are in the economic cycle and how does that sort of figure in your planning for the second half of the year and as you start initial budgeting process for 'twenty three thanks, a lot yeah, Andrew maybe I'll start in Q2, we saw most of our end markets remains strong and like everybody else. We saw some softening in the macro both IP.
And GDP.
As we look forward, it's really important in the current backdrop economic backdrop to look at individual markets and we're seeing some positive signs we see electric procedures continuing to improve kind of sequentially. As we go we will see a second half improvement in build rates for automotive versus first half there is some areas of softness in our.
Markets were looking at.
<unk> Electronics for example that has now.
I'll look for the total year that will be negative growth for for that segment, we're watching I would say consumer and retail spending closely with the focus on inventory and the retail customers and also just the general dynamic around spending as some of the challenges with inflation, causing some shifts in where consumers are spending their money. So we're watching that.
Closely there's a few other areas that.
Really are looking at it we see Europe , and really broadly EMEA down in the second quarter and impacted by geopolitical impact Covid I would say inflation impacting so just general some softness there as well so all of this when you put it together, it's leaving us with some.
Uncertainty around the economic outlook.
The way I would wrap it up as we go into the second half we're cautious about where the economy is going we're watching it closely.
Andrew.
FX to police foreign exchange down 4% for the year down 5% for the for the third quarter.
As you know that strong dollar does impact our earnings and that's why 80% of our guide down was due to FX. So that's the other piece I would add to mikes comments.
Really appreciate it thanks a lot.
Our next question comes from Scott Davis with Melius Research you May proceed with your question.
Hey, good morning, guys and congrats on the healthcare spin announcement that seems like a smart move.
Climate in minutiae here on slide 18, since you guys don't give us price anymore can you just give us at least some sense of.
What.
You've got a 36% raw material impact if price came close to offsetting that or just give us a little bit of sense of the progress you've made on the price cost.
Sure.
Sure Scott I'll take that.
As I've mentioned before the teams have done a very disciplined approach to pricing actions across multiple markets multiple geographies. As you know we don't do just cost plus pricing. So we take into account our competitive position we've taken into account market situations. The inflation that has by commodity. So when you put all that together I would say between.
The business is in the product lines that somewhere between low single digits to high single digits, but if I had to do a weighted average of that I would say mid single digit Scott is where we came in on price. So we did offset inflation.
As I mentioned in my prepared remarks, we are managing inflation through pricing actions and in the <unk>.
Second half we continue to see broad based inflation will be updated on inflation guide.
To nearly 750 to 850 versus the earlier range, we had which was in the in the $3 50 to $4 50 range and even there we continue to manage that inflation. We continue to take price I don't know if I answered your question, but I think that was your question.
Yes, that's helpful.
And just going back to Andrew's question on.
On slide 15, we talk about Arrow technologies being always operate as a wholly owned sub.
Wholly owned subsidiary or is there some sort of is there a litmus test there on.
Whether it was truly integrated or funds commingled ERP systems Commingled I just remember.
From the asbestos days.
There were kind of lines, you Couldnt cross to be able to keep something.
Separate and put a liability into a separate entity like this.
Yeah.
Yes, so so arrow I'll take this so arrow has been a wholly owned subsidiary since the 2008 Act.
Acquisition. It has continued to operate and.
It is important to note that the.
CRO entities have been involved in the combat arms litigation from the beginning.
They are named as co defendants in the litigation and.
They launched manufactured and actually sold the majority of the combat arms earplugs that issue before the 2008 acquisition by <unk>.
And Scott we don't see a reason why we can't have our systems, especially.
Especially your question on ERP is set.
Separate the two entities.
Okay. So ultimately there'll be a judge's ruling on that I would assume perhaps correct.
Yes.
Okay, great. Thank you I'll pass it on I appreciate it.
Thanks Scott.
Our next question comes from Andrew Kaplowitz with Citi. You May proceed with your question.
Hey, good morning, guys.
Randy.
Mike can you give can you give a little more color on what youre seeing by region I know you mentioned Europe and.
Potential weakness there in the second half, but you also talked about China and.
Stronger than expected improvement in June and it was down 8% in Q2. So what do you think growth looks like for the rest of the year. There and you know how worried are you about a bigger slowdown in Europe .
Yeah. It's.
Maybe just to give you those two areas in particular, so China is monish highlighted in his prepared remarks, we saw better than expected recovery in June to the Lockdowns that we're seeing.
Soft start to April Amanda we talked a bit about in China. So as we go forward in for the quarter Youre right. Its down high single digits year on year GDP still looks positive in Q2 as we go forward part of the answer is going to be how quickly does it recover what is the impact going forward of.
Of Covid as you know.
Any potential additional locked down so it's really looking at where we go there I mean, China continues to be an important market for three of them. It's the macro backdrop shows you know a good positive backdrop, but it's really going to be how things progressed relative to COVID-19 and the recovery from Covid and then what else comes our way as we go.
Through the quarter and then through the rest of the year.
Back to Europe , our declines there were really led by consumer and safety and industrial health care was still growing strong in the quarter. We saw some strong growth in individual market segments back to my comments that the current outlook and the current growth is market dependent as opposed to broad based one.
One view of everything and so I think Europe is is that we've got the geopolitical risks here, we've got the impact of the supply chain issues and challenges in our inflation as well so.
And the down in the quarter, and we think a soft outlook as we look at the second half.
That's helpful. Mike and then maybe you can give a little more color into how the change in here approaching the combat combat arm situations impacting your total litigation cost does it lower three EMS over our litigation costs either in the short for longer term.
How does it work in terms of because you've been spending call. It 5% to 6% EPS has been you've separated out for US does that now go down up how do we think about that with the change today.
Yeah, So the way the way the work Andrews.
When we came into the year, we had told you approximately 60 cents off of adjusted.
Earnings of litigation related expenses.
That number has been updated for three items item number one is the pre tax charge that we will take as a part of the combat arms litigation, which is approximately $1 2 billion.
The second one is the charge that we announced earlier in the quarter about as Weinrich thing, which is $355 million and for the year that it would be approximately $500 million.
And then the item, which was around 60 cents of litigation related expenses now with the way.
This transaction load workout is around 55, so put all that together that's approximately $2 2 billion of adjusted.
Earnings for litigation related and Zane Drake related items, so hopefully that answers your question.
Thanks for that money.
Our next question comes from Stephen Tusa with Jpmorgan Securities. You May proceed with your question.
Hey, guys good morning, Steve.
Steve.
Are there any you know what what are the risks around creating the structure for this entity.
You know.
How do you kind of gauge that and its political environment.
Any kind of risk to not being able to kind of execute on this or you are your lawyers tell you it's pretty ironclad.
Yes, Steve.
There is certainly there are process steps that we will go through as we file today for the.
Arrow technologies and so there are we have to work through each of those steps. So theres always decisions that are made along the way. So I think that's part of <unk>.
<unk> certainty as we go and we'll keep everybody updated I don't Kevin do you want to make any comments, specifically, yes, certainly well most chapter 11 proceedings are congested Stephen we've.
We're prepared to move forward and we believe the applicable law supports our position as we move forward into this process and.
The goal again is to.
Remove uncertainty too.
Two.
Set up a more efficient and equitable process for Istar.
Establishing a fun to compensate our claimants who are entitled to compensation as opposed to the process of continuing to litigate them on a claim by claim basis.
Got it helpful. And then just and then just one.
One quick follow up on.
You know how you are kind of preparing for a potential pullback in demand more broadly.
When you look at what happened in Covid. All you guys took a lot of temporary cost out able to defend the margins pretty.
Pretty nicely.
What are what are kind of the contingencies. This time around it did things are things going to be a little bit different or should we look at COVID-19 is kind of like the same playbook, if we do see a <unk>.
Significant macro pullback in the next couple of quarters, Yes, Steve I think as <unk>.
<unk> seen we manage into recessions and through any kind of slowdowns with a broad based.
Approach and we will do what's needed given economic conditions as I said, we're watching how each of the market demand areas are developing how the overall macros developing whats going on on the global economic outlook, and we will take actions as as required and it'll be you know.
And what we do in our factories and how we manage our commercial businesses and how we operate the company so well.
Keep you updated as we as we get a better view.
Excellent. Thanks.
Thanks Heath.
Our next question comes from Nigel Coe with Wolfe Research you May proceed with your question.
Thanks, Good morning, everyone.
Joe.
Yeah. Thanks, So just wanted to go back to the bankruptcy filing so when you put arrow into a chapter 11 do you lose some EBITDA.
And that business, how does how does that work.
Yes Nigel.
So depending on how the bankruptcy proceeding goes the plan will be to deconsolidation that entity.
But the overall revenue and earnings are immaterial in the Grand scheme of things.
Okay. Okay.
Offline that then is the I mean, there is controversy around the structure and appeals and congressional hearing about it but how contingent is the health care separation on a successful filing for Aero I mean is one contingent on the other.
So can you still go ahead and separate health care, even if the the the filing for Arrow is unresolved.
Yes Nigel.
We did announce both actions today, there really the result of separate kind of strategies and decisions.
Health care spend was based on as you know we actively manage our portfolio.
Look at broadly where to invest in our portfolio, where acquisitions make sense and how do we get the most value out of it and that's what was behind the decision to ultimately spend health care <unk>.
<unk> invested in strategies to create a stronger health care company is.
Well positioned to succeed and have a great future as a standalone company and that really drove that decision the decision to to really take the steps related to combat arms litigation came out of really first and foremost. The result of the bellwether trials. They were highly variable. We believe it would take years to litigate those claims and so given a choice.
Between.
Less costly litigation process.
Better fairer more efficient resolution, that's what drove the decision to step into the new the new actions that we're taking so they were they had.
We also announced on the same day, but they are really based on on separate strategies in both really helping to set us up for I think well positioned for as we said at the top greater opportunity with the spin and more certainty with the actions, we're taking related to combat arms.
Thanks, Mike and then if I can just follow up you know we got a lot of questions from investors around obviously the billion dollars is what you put in initially, but obviously the plaintiffs will be at a much much higher level. So assuming the structure is approved.
How does that gap get bridged between the 1 billion, you're putting in and obviously the plaintiffs are much much higher level, how does that how does that get resolved.
Well based on what we're doing there'll be a separate process there will be a different process, Kevin can talk about how that proceeds but there will be.
And the court that takes responsibility for these proceedings they will oversee a process. There that we believe that as I said, we're committed to a fund that was based on what you think appropriate analysis from an expert outside firm, but Kevin can talk about the steps of that process and how that all of that results.
Yes, as part of the chapter 11 proceeding there will be a claims estimation process where.
The court overseas.
Process and we believe that.
The $1 billion that we have committed based on the external analysis is sufficient to fund the trust.
For those claimants, who are entitled to compensation.
The proceedings will be the subject of expert reports overseen by the court. The claimants will be represented as well and we believe this is the number that is required.
The agreement if necessary three M is prepared to provide additional funding to resolve this matter at the end of the process.
That's really helpful.
Okay.
Our next question comes from Joe Ritchie with Goldman Sachs. You May proceed with your question.
Thanks, Good morning, everyone and congrats on both announcements.
Morning, Joe only my question.
Yeah, maybe my question is for Kevin actually because this is all fairly new to us I am just curious thanks.
Is there some kind of likelihood that the plaintiffs will come back and want their lawsuit.
<unk> be heard outside of the bankruptcy court.
So.
Once the chapter 11 filing is made there's an automatic stay.
As to the debtor and the tea, which in this case is arrow technologies. We are also asking for that automatic stay to be extended to three M. We.
We are funding according to the terms of the funding indemnification and indemnification agreement, we're committing to fund the trust to help the court set up a mechanism for compensation for those claimants entitled to compensation for providing.
Providing that funding through arrow. So we think we are entitled to as three am and hope the court will extend the stay of the litigation to three am and that would put a stay on the existing litigation and state and Federal Court.
Got it Okay. That's helpful. And then can you guys, maybe just provide a little bit more color around the timing like how how the structure actually helps to expedite the timing.
Getting to resolution with the potential.
Yes.
Yes. So the chapter 11 case was just filed this morning. The court has not set a schedule yet there'd been a wide range of duration for other chapter 11 filings to resolve litigation matters, we're hoping to work through the process and resolve the matter as quickly as possible. We hope that that all parties will share that goal and.
Move it along as expeditiously as the courts.
Procedures permit will certainly provide updates as the case progresses and.
If you think about this in context, we've participated in the M. D. L process for the past three years taken 16 cases through bellwether trials, where now as the next step which is to pair 500 cases for trials around the country well, we await the outcomes of our appeals so as compared to the <unk>.
This I had to litigate each of these cases on a case by case basis, we believe that the chapter 11 proceeding will be more expeditious and certainly we'll provide more clarity and a way to more efficiently and equitably provide compensation to those who are entitled to it.
Okay got it thank you very much.
Okay.
Our next question comes from Julian Mitchell with Barclays. You May proceed with your question.
Hi, good morning.
So maybe just wanted to kind.
Kind of clarify a couple of things on the on health care.
And so it's been a little focus on combat arms on the healthcare side.
You know you've had margins down for several quarters now I.
I know him initially say the volume leverage is the main driver of margins, but a health care that hasn't seemed to be the case. Most recently used to just wondering kind of when those health care margins turnarounds or are they going to be up year on year in the back half.
And also on health care is the plan that you know, it's it's levered at three three and a half times is the plan you get that sort of step one a big dividend back to the remain co at that point when it spins out and then step two a year late so you can start to monetize that just under 20% stake is that is that the way to think about the.
Cash sort of from health care.
Yeah, I think both great questions Julien I'd start with the first question on margins as we told you the EBITDA margins for the second quarter with 30%.
As we've talked about before when you compare prior you have to take into account the esselte acquisition and its impact on <unk>.
Purchase accounting et cetera, which depresses the margins. So that's how I would look at EBITDA was just 30% in the second in second quarter for the year 2021, we ended at 31% EBITDA. So hopefully that answer your question on that range back to do we see it continuing to improve absolutely I mean, this is something that the business is doing.
A really nice job of continuing to Manny.
Manage inflation with price actions that continue to drive productivity actions and as the volume starts which is back to your point, which is volumes drive the biggest leverage as we are seeing elective procedures starting to go back up and hopefully.
It doesn't get impacted by another wave of Covid youre going to start seeing that business continue to drive the growth in that area. So that answers. Your question on margin. The team is quite focused on margin quite focused on driving organizational efficiency through root cause.
On your second question about how the dividend works I would start by saying this is still a 15 to 18 months away, but the way it will work at that moment in time when that spin happens there will be a dividend payout from health care, which currently we are saying is going to be levered three to three and a half times with positioning for rapid deleveraging.
Because of the strong cash flow that helps health care itself generate as a part of that transaction <unk> will also retain 19, 9% equity stake in <unk>.
In our health care business that we can monetize over time.
Whole purpose of the whole intent of this transaction is to be as tax efficient and.
Tax free for which we will go ahead and file all the requirements that needed to make it tax free.
And but we're in no rush right now to sell the stake once the spin happens and we'll monetize it over time.
And I think that gives us a lot more flexibility for us to pursue strategic options between the dividend that we get as well as the retained stake that we can monetize overtime.
Hope that helps Julien.
That's great. Thanks Foundation, and maybe a sort of more prosaic kind of operating guidance question.
So if I look at the new guidance I think it implies sort of.
$2 70 ish.
Earnings.
A quarter in the second half.
You did about 250 in Q2.
I don't think FX is getting easier in the back half.
Organic volumes, probably not better in the second half given the macro so just trying to understand sort of what do you think is getting better in that back half versus the second quarter or the first half kind of run rate because you're starting out with the FX headwind, maybe there's a little bit less of that in China.
<unk> Covid hit anything else you'd call out to drive that sort of step up in earnings sure Julian I'll give you all the pieces and I'll try to give.
To give you a data between sequential and year on year. So it's confusing my apologies upfront, but I'll just start first by saying, yes, FX, you're right continues to be a pressure.
As I've said in my prepared remarks for the third quarter FX is at 5% for the year or does that 4%. So that actually adds additional pressure first half to second half.
But back to your points on the positives and negatives. So we'll start by one again in my prepared remarks, I said, China we.
Still came in with the backlog that we expect to clear in the second half you'll see that in the third and fourth quarter.
We came in we came in $140 million down on a year over year basis. So there's recovery. There secondly, if you look at build rates in automotive first half versus second half. They are up nearly 9%. However for the year. They are up 5% versus earlier, we thought the whole year would be up 9%.
Youre continuing to see strong demand in semiconductor data center Datacenters in factory automation.
Third elective procedures, which are in that range of 85 to 90 in the first quarter. It moved up to 90% to 95, we expect that to come back to 100%, but by the end of fourth quarter.
And then lastly, GDP in Ipi is still forecasted to be up 3% to 4% and 3% for the year.
First is when we started the year at just 4% over the second half they still predicting projecting a GDP up.
On the flip side on the things to your point that have become negative we talked about FX.
Seeing the stubborn and evolving impacts of Covid.
Supply chain and logistics pressures continue we are going to see higher inflation in the second half, but we are managing that inflation with price and offsetting that we are watching consumer behavior because of broad based inflation is having an impact on consumers' purchasing power and then we are seeing softening trends in consumer electronics.
Actually in Tvs, but again, if you look at smartphones on a half over half basis smartphones.
Supposed to be up around 7% to 8%.
However, on a year over year basis, Theyre down 4%, Okay. So I'm, just giving you some data points and hopefully that helps and then the last one Mike already talked about with geopolitical uncertainties, particularly in Europe , but with all that said I just wanted to make sure you do understand that team's doing a great job of continuing to manage this making sure.
We're doing whatever it takes to first deliver for our customers because that's our most important priority spending cost discipline, but at the same time continuing to invest in growth productivity and sustainability because as we think about it Julien long term. All these trends will play themselves out that are great areas for investment for new three M for health care.
And we want to keep making sure we are investing for the long run. So all of these actions that we're taking are all about setting both these businesses up to be successful in the long run.
Sorry for the long answer, but I just want to make sure we got the data points. Thank.
Thank you for the details.
Our next question comes from Josh <unk> with Morgan Stanley You May proceed with your question.
Hi, good morning, everyone. Thanks for all the detail so far this morning.
Morning, Josh.
Just a question on maybe come into perspective, our capital allocation strategy for remain co you said kind of through the separation no real change but.
Just given kind of the focus of the liabilities and the cash coming out with with health care health care free cash flow margins being pretty high.
Any any change in the way folks should think about.
Nothing like a dividend policy going forward.
Yeah, Josh I would say I'd start with.
Continuing to focus on driving growth and our capital allocation priorities reflect that and then that will remain unchanged.
First and foremost about investing in our business it's about.
Paying an attractive dividend high priority for us continues to be so looking at strategic M&A that can add value and deliver on greater opportunities for the company and then returning capital to shareholders.
Share repurchases and we continue to see that as our set of priorities as we go forward. When you look at new three am and its going to be a very strong focused well capitalized.
<unk> a leader in highly attractive markets as we've been talking about on the call. We will have tremendous cash flow in that business, a strong balance sheet and as munis just highlighted with the proceeds.
From the spin and the 19, 9% retained stake that we can monetize over time it will get stronger. So we are we will be well positioned to continue to execute.
Execute those capital priorities and continuing to create value.
Got it that's helpful. And then just I know the historical kind of framework on three M or the portfolio rationale is that a lot of the IP was domicile that incorporate I think theres, some more diverse assets and healthcare maybe than some of the the other industrial businesses, but are there any dis synergies by virtue of either some of the IP or.
<unk> process versus sourcing that that kind of gets separated irwin healthier lives.
Yes, Josh long talked about the benefit of our businesses have in leveraging the fundamental strengths with three of them and they've certainly been important to building the health care business. The technologies, we have our unique and differentiated technologies, our manufacturing capabilities and our global capabilities.
Abilities and our brands in health care. It is as you touched on it with our portfolio strategies. We've we've built a stronger health care business, we've done it with organic investments and sometimes leveraging some of those key technologies.
Added acquisitions.
<unk>.
Part of the business now with a solid intermodal coming in as part of the business. We've also stepped into really focused that business through the divestiture of drug delivery and soon the separation of the food safety business. So all of that is position health care not only to be a strong standalone company well positioned to be able to execute those same strategies moving forward.
Theres always some connectivity to the technology and manufacturing of <unk>.
Yeah, I would say the connection between health care and the rest of the company is more limited than than the three businesses that will make a new three of them.
We'll be able to manage that separation well, we think that especially with the focus on health care has on on those specific markets. So it's been a important part of building and we think it's well positioned.
What we can do in the spend to be able to take it forward Josh I just wanted to add a few more things to what Mike just said that you're going to have dedicated teams that are going to drive.
The separation also just looking at precedent of other springs publicly plus some of the experience that we've had with our divestitures in the health care space. We believe the separation cost is going to be somewhere in the range of one to one $5 billion that will get played out over time some of it will start now and some of them.
Sort of play out over the next 24 months, but again, it's quite early in the process. The teams are starting to get ramped up.
As we get and learn more we will definitely keep you posted.
That's great color best of luck guys.
Yeah.
Our next question comes from Deane Dray with RBC capital markets. Please proceed with your question.
Thank you and good morning, everyone. Good morning, Dan and Jim.
Just a couple of cleanup questions here. The first it just wasn't clear but is the board considering any other divestitures or spin or is remain co three.
Portfolio going to be as as on a go forward basis.
Yes.
Our portfolio strategy, it's a continual strategy, we're always evaluating where we wanted to make change in our portfolio adding.
With through M&A managing to optimize the value. So that's something that will continue.
Really as we go forward I talk a lot about new three of them were really believes the three businesses that make up that new <unk> company will be a strong well positioned for success in their markets say, they will leverage well the technology.
They've got the heart of three of them the fundamental strengths of three of them. So it will be a continual process and strategy. That's important I think a portfolio strategy really complementing what we do with innovation where.
Driving innovation, creating new solutions for customers building new businesses at the same time portfolio management make sure. We're looking broadly at where we're creating the greatest value and how do we need to think differently about it so that's not going to change.
As we execute through the spin.
Got it and then just wanted to understand is there a scenario similar to what Youre doing in combat arms for P. Farce, where you would consider a similar bankruptcy structure and just related to this it wasn't clear in the filing today. Maybe this is a technical question for Kevin but.
Are you is this being filed under a one O five a bankruptcy structure because it certainly sounds that because that would require all of those sign ups and approvals, which would suggest there's going to be an extended process here.
Get to the finish line Yeah, Dean maybe I'll take the first part of that question and then I'll, let Kevin answer the 105 a question.
So on <unk>, we continue to be focus on proactively managing our environmental stewardship.
Stepping up and following through on our commitments there were vigorously defending ourselves in the cases that we have with PFS and we are looking to reasonably resolve remediate, where we can we expect PFS is going to play out over years and I would probably leave it at we're well advised of our options.
Understood and Kevin.
Yeah. So.
We believe that <unk> does provide authority as well as other provisions of the bankruptcy code given the light Arrow technologies liabilities that are included.
Included in our filings.
You are being completed today and those will spell out the.
The various.
Our bases for seeking relief that that we've asked the chapter 11 court to provide.
Well you also pledged your insurance assets.
So our insurance assets are.
Part of it.
The ability to.
Sure.
Funds that we can tap into two.
To fund the trust.
If those assets.
We'll be.
B.
Provided as well as other assets from the from the company to provide a.
The trust and you know I just want to clarify that.
Combat arms.
Our liabilities as well as the some legacy some discontinued.
Arrow.
Technologies, a respirator Admass claims.
Which are part of the filing as well as some of those are for asbestos exposure, which are under 524 <unk> of the code as well.
Got it that's real helpful. Thank you.
Our next question comes from Nicole <unk> with Deutsche Bank. You May proceed with your question.
Yes. Thanks, good morning, guys good morning.
A couple of questions on the business I mean.
Looking at inventory, how would you categorize inventory in the channel versus what they deal and I think probably the biggest question would be around how you would view your consumer inventory.
Yes, Nicole it's something we watch closely always it's something that gives us a good indication of our.
The sell through of each of our businesses.
There are certainly some areas that we've seen some inventory.
Buildup there.
Related to Covid Lockdowns as an example, we've added some inventory and build some inventory ahead of some ERP go live actions that we're taking when we look at the channel inventory, it's been relatively stable. It it's having to react to the same kind of supply chain challenges that we are seeing and react to it disruptions in supply.
Logistics challenges, so it's a little more dynamic than usual, but pretty well aligned with what we're seeing in terms of demand. We're watching consumer closely. There's there was elevated inventory in the channel as part of that that's something that it's been very publicly talked about.
Retail leaders are working through we are seeing some of that is while we still see strong.
Sellout point of sale demand there so something that we're watching closely and again it's.
I would say its more dynamic, but but maybe except for something like a retail inventory pretty well in line with with expected demand.
Got it. Thank you and then just a follow up on price cost. So I mean, some kind of key commodities have started to come down.
When could that start to impact your margins positively like is that as soon as it could impact the back half of 2022 or is that more of a 2023 margin dynamic at this stage.
Yeah Nicole.
We watch this closely as you know we have exposure to multiple feedstocks Luckily not one of them is overly material.
You look at polypropylene you look at resin you look at logistics airfreight costs et cetera. The thing that we haven't yet seen is sustained reduction. So you get data points like you've seen the data points of oil come down, but how that translates down to the feedstocks because we don't buy crude oil is going.
Play itself out so thats, what we are watching and so I don't know whether it impacts 2022 or 2023.
But what is what we do see still right now is there's broad based inflation all around that is getting pushed down as tears out getting in ward and as I told you. We have updated our guidance to $7 50 to 850 of inflation for the year.
Which is higher than what we thought coming into the year, but at the same time, we are managing that inflation.
Through price and I think what we'll have to watch as those supply chains get sustainability sustainably improved versus one or two data points.
Understand thanks, Denise I'll pass it on.
Our last question comes from Brett Linzey with Mizuho Securities. You May proceed with your question.
Hi, good morning, all and congrats on today's announcements.
Thank you Brett.
Hey.
I appreciate the color on the separation costs and one to one 5 billion, but was hoping you could provide some some color insight on.
What the go forward stand up corporate structure cost will be for the two entities.
Yes, sure Brad So again.
You benchmark data so we have a placeholder for the healthcare business.
Theres a bench.
Using standup costs, that's approximately $100 million is what we said as public company costs for that size of company.
Similarly, right now what we have penciled in is for a new three M to have around one 5% of revenue.
As as incremental cost us trended cost however, as Mike and I've told you multiple times, we are all focused on in order to get efficiency.
Still very early in the process and we're going to keep working this down we got time.
Until the spin gets done so we're going to keep trying to be as efficient as we can and make both companies continue to grow about macro keep having margin expansion and strong cash.
Okay got it thanks, and just one last one on the Belgium facility. So you reached the agreement in early July on some of the actions of the new commitments.
Could you just provide us with an update how that facility production is ramping and are you still partnering with a third party there or are you going to get back to kind of full run rate in terms of your internal sourcing strategy by the end of the year.
Yeah, Brett we are in the process of restarting the manufacturing operates and then it takes some weeks to do that.
The agreement we were pleased with the outcome of the.
The cooperation that we've had with the local authorities there to resolve the matters and move ahead. So we'll be ramping up to full production here soon so.
We're staying in touch with our customers, making sure everybody is aware of our timelines, but it's we're in the middle of that ramp up.
Okay, Great best of luck.
Thank you.
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.
In summary, we are positioning three of them for the future to create more opportunity in greater certainty there'll be two world class well capitalized public companies, we will work to efficiently and equitably resolve our combat arms litigation and we will maintain our relentless focus on delivering for our customers and shareholders. We remain focused on driving growth.
And margin expansion and generating strong cash flow. We're excited about the new opportunities to apply <unk> science to life. Thank you for joining us.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Uh huh.
Okay.
Yes.
Yes.
Okay.
Yeah.
Yes.
[music].
Okay.
Okay.
Okay.
Okay.
So.
Okay.
Sure.
Uh huh.
Uh huh.
Alright.
Okay.
Uh huh.
Okay.
Okay.
Uh huh.
Yeah.
Yeah.
Uh huh.
No.
Okay.
Right.
Sure.
Uh huh.
Okay.
Yes.
Okay.
[music].
Okay.
Okay.
Uh huh.
Okay.
Yes.
Yes.
Sure.
Okay.
Thanks.
Yeah.
Yes.
Yeah.
[music].
Okay.
Yes.
[music].
Okay.
Yes.
Okay.
Perfect.
Yes.
[music].
Okay.
Thanks.
Got it.
[music].
Okay.
Yes.
Yes.
Yes.
Okay.
Uh huh.
Okay.
Okay.
Sure.
Okay.
Uh huh.