Q4 2022 3M Co Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the <unk> fourth 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 January 24th 2023.
I would now like to turn the call over to Bruce Jo Malone Senior Vice President of Investor Relations at three.
Thank you and good morning, everyone and welcome to our fourth quarter earnings Conference call.
With me today are Mike Roman <unk>, Chairman and Chief Executive Officer.
They're more niche for Tyler wall, our chief financial and transformation officer.
Mike <unk> will make some formal comments then we'll take your questions.
Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at <unk> Dot com.
Please turn to slide two.
Please take a moment to read the forward looking statements 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 turn to slide three.
Please note throughout today's presentation, we'll be making references to certain non-GAAP financial measures.
Reconciliations of the non-GAAP measures can be found in the attachment to today's press release.
Before I hand, the call over to Mike I would like to take a moment and highlight our financial reporting change we are making starting here in Q1 2023.
As we announced in our press release on December 20th.
We'll be exiting P fast manufacturing.
The end of 2025.
As a result, we have decided to provide additional disclosure by expanding the scope of our non-GAAP measurement adjustments to include the exit of P fast manufacturing.
For 2022, we have treated the Q4 P fast manufacturing exit cost as it is.
Special items in arriving at results adjusted for special items.
However.
Beginning in 2023, we will expand the existing adjustment for special items to also adjust for the sales and estimate of income and associated activity a P fast manufacturing.
Therefore, our outlook for 2023 reflects this adjustment.
Today's press release press release attachments and slide presentation provide information regarding our 2022 performance on our existing Q4 2022 non-GAAP basis, along with some comparative information on the new 2023.
What pieces.
We will be providing a form 8-K during the first quarter to reflect additional effects of this change in our non-GAAP measures and changes in segment reporting.
We remain committed to providing strong transparency in reporting our financial performance and of course, we're always here to address your questions.
With that please turn to slide four and I'll now hand, the call off to Mike Mike.
Thank you Bruce good morning, everyone and thank you for joining us.
We continue to focus on delivering for our customers and shareholders in a challenging economic environment with slowing growth inflation and supply chain disruptions.
We posted organic growth of 4% versus our expectation of 1% to 3% along with adjusted margins of 19% and adjusted earnings of $2 28 per share.
The slower than expected growth was due to rapid declines in consumer facing markets, such as consumer electronics and retail.
The dynamic that accelerated in December as consumers sharply cut discretionary spending and retailers adjusted inventory levels.
We also saw a significant slowing in China due to COVID-19 related disruptions.
Along with moderating demand across industrial markets.
As demand weakened we took actions to adjust manufacturing output and control costs, which enabled us to deliver a $250 million inventory improvement.
In addition to actions taken in the second half of last year today, we announced restructuring in our manufacturing operations as we expect the demand trends that we saw in December to extend through the first half of 2023.
I will discuss this more later in the call.
With supply chain stabilizing we are focused on improving manufacturing operations and driving working capital.
These are our most significant opportunities to improve margins and cash flow.
As we navigate the external environment, we continue to position three of them for the future by investing in growth productivity and sustainability.
I will recap 2022, and our outlook for 2023 after more niche takes you through the quarter Monish.
Thank you, Mike and I wish you all a very good morning, Please turn to slide five.
You will recall the highlighted negative trends in our consumer retail and electronics related businesses in late November as the fourth quarter progress those trends accelerated.
We also experienced significant slowing in China as Covid related impacts resulted in a 17% decline in organic sales in December .
And down 8% for the quarter.
Healthcare continued to be challenged in its recovery to pre pandemic levels, given labor shortages and hospital budgets being under pressure.
While industrial end markets, mostly remained steady.
Fourth quarter total sales were $8 $1 billion or down six 2% year on year, which included headwinds from foreign currency translation of minus 5%, a $400 million, which was better than the minus 7% we had expected.
We also experienced a one 6% decline from divestitures are nearly $140 million largely from the third quarter divestiture of food safety, along with the deconsolidation of Arrow technologies.
On an organic basis fourth quarter sales increased 0.4% versus last year.
This result included an anticipated falloff in disposable respirator demand and the exit of our operations in Russia.
These two items combined negatively impacted organic sales growth by approximately $230 million or two six percentage points. Excluding the decline in Q4 organic sales growth was 3%.
On an adjusted basis fourth quarter operating income was $1 $5 billion.
But the operating margins of 19, 1%.
Adjusted earnings for the quarter by $2.28 versus $2.45 last year.
Turning to the components that impacted fourth quarter operating margins in earnings year on year performance.
We took a number of actions to navigate the fluid and slowing macroeconomic environment, including managing selling prices to address inflationary pressures.
Reducing manufacturing output, maintaining strong spending discipline and taking additional restructuring actions to streamline the organization and adjust to slowing end market demand.
These actions delivered an underlying benefit to operating margins of 110 basis points and 19 cents to earnings.
This helped more than offset headwinds from the sales decline in disposable respirators, and Russia, which negatively impacted operating margins by 70 basis points and earnings by 15 cents per share.
Inflation continues to impact raw material logistics and energy cost.
These pressures remain persistent in our broad based in.
In Q4 raw material cost increased approximately $110 million or a negative impact of one four percentage points to operating margins and 16 cents to earnings.
As mentioned foreign currency translation was a negative 5% impact of total sales.
This resulted in a headwind of 10 cents to earnings per share.
However was a benefit of 10 basis points to margins.
Divestitures, primarily food safety, along with the deconsolidation of Arrow technologies resulted in a year over year headwind of four cents to earnings per share in the quarter.
Finally, other financial items increased earnings by a net nine cents per share year over year, driven by lower share count, partially offset by a higher tax rate.
Please turn to slide six.
Fourth quarter adjusted free cash flow was $1 $7 billion up 3% year on year with conversion of 131% up 18 percentage points versus last year's Q4.
During the quarter, we aggressively adjusted manufacturing production levels to end market trends, which drove a sequential reduction in inventory levels by $250 million.
For the full year adjusted free cash flow was $4 $7 billion, but adjusted free cash flow conversion of 82%.
Capital expenditures were $506 million in the quarter and $1 $75 billion for the year are up 9% year on year as we continue to invest in growth productivity and sustainability.
Looking to 2023, we expect capital expenditures in the range of one five to one $8 billion, which includes approximately $200 million of investment in water stewardship related to our exit of P fast manufacturing.
During the quarter, we returned $1 $4 billion to shareholders through the combination of cash dividends of $820 million and share repurchases of $540 million.
For the year, we returned $4 $8 billion to shareholders, including $3.4 billion in dividends and $1 $5 billion in share repurchases.
In addition, we reduced our outstanding share count by 16 million shares why at an exchange offer associated with the food safety divestiture.
Having a strong balance sheet and capital structure remains a priority for three of them because of the flexibility. It provides.
Net debt at the end of Q4 stood at $12 billion down 4% year on year with net debt to EBITDA at 1.4 Pi.
Please turn to slide eight for our business group performance.
I will start with that safety and industrial business, which posted sales of $2 $7 billion are up one 3% organically.
This result included a year on year headwind of approximately $165 million due to the ongoing decline in demand for disposable respirators.
Excluding disposable respirator safety and industrial group Q4 organic sales by seven 5%.
Our personal safety business declined mid single digits organically, primarily due to the decline in disposable respirator domain.
Turning to the rest of safety and industrial organic growth was led by low double digit increases in electrical markets.
Automotive aftermarket and abrasives.
Industrial adhesives, and tapes and closure and masking systems, both declined low single digits.
Operationally, the safety and industrial Dream drove strong execution during the fourth quarter.
Adjusted operating income was $611 million or up 9% versus last year adjust.
Adjusted operating margins were 22, 4% up two seven percentage points as the team manage inflation with price actions drove yield inefficiency and exercise strong spending discipline, while also investing in the business.
Moving to transportation, and electronics, which posted sales of $2.1 billion or up 1.4% organically.
Our auto OEM business increased mid teens versus a 2% increase in global car and light truck builds.
We continue to gain penetration on new automotive platforms, while also benefiting from a favorable comparison due to last year's Q4 channel inventory drawdown.
Our electronics business declined 10% organically as it continued to be impacted by the significant end market weakness, particularly for smartphones tablets and Tvs.
Turning to the rest of transportation and electronics advanced materials grew organically low double digits, while both commercial solutions and transportation safety increased low single digits.
Transportation and electronics delivered $366 million in adjusted operating income down 3% year on year.
Adjusted operating margins was 17, 8% up 60 basis points versus Q4 last year.
The team was able to more than offset manufacturing productivity headwinds and inflationary pressures with ongoing benefits from pricing along with strong spending discipline and restructuring actions, while investing in the business.
Looking at our health care business Q4 sales were $2 billion with organic growth of one 9% versus last year.
Sales in our medical solutions business declined low single digits organically.
Fourth quarter elective health care procedure volumes of approximately 90% of pre COVID-19 levels, and a nurse labor shortages and strained hospital budgets continue to impact the pace of recovery.
Oral care was up low single digits, despite decreased consumer spending on discretionary items.
And finally separation and purification organic sales increased high single digits, while health information systems was up mid single digits.
Health care fourth quarter operating income was $421 million down 18% year on year.
Operating margins were 26% down 2.9 percentage points, but adjusted EBITDA margins of nearly 29%.
You are on your operating margins were impacted by manufacturing productivity headwinds increased raw materials and logistics costs, along with investments in the business.
These headwinds were partially offset by pricing actions along with the strong spending discipline.
Lastly, our consumer business posted fourth quarter sales of $1 $2 billion organic sales declined five 7% year on year with particular weakness in the U S, which was down high single digits.
All businesses declined organically as consumers pulled back on discretionary spending and retailers aggressively took actions to reduce their inventories, particularly in the U S.
Looking ahead, we anticipate those trends to continue at least through the first half of 2023.
Consumers fourth quarter operating income was $224 million down 24% compared to last year.
With operating margins of 17, 9%.
Down 3.3 percentage points year on year.
This year on year decline in operating margins was driven by increased end market weakness higher raw materials, and logistics and outsource hard goods manufacturing costs.
Manufacturing productivity headwinds along with investments in the business.
These headwinds were partially offset by selling price actions and strong spending discipline.
I'll now turn it back over to Mike for a recap of our full year 2022 performance.
Please turn to slide nine.
Thank you Manish.
2022 was a pivotal year for three of them.
Throughout the year, we took decisive actions that are foundational to our future and at the same time maintained our focus on our customers.
We addressed inflation through selling price actions and proactively managed cost as demand softened throughout the year.
To address supply chain disruptions, we did what was necessary to serve customers and reduce cycle times, including opening a new distribution center on the East coast.
We navigated COVID-19 related Lockdowns in China reached.
We reached agreement with the Flemish government to restart operations in spend drip and exited our Russia business.
As always we put three M science to work to solve customer needs across our market leading businesses.
In safety and industrial our new robotic paint repair system received multiple prestigious honors as we continued to drive innovation in automotive manufacturing and.
In area, we let in for more than 100 years.
In consumer we launched Scotch cushion lock a sustainable alternative to plastic round.
Which was recognized by fast company as one of its world changing ideas.
In healthcare, we advanced our leadership in wound care, which includes our negative pressure wound therapies, becoming the first solution of its kind to surpass 2000 peer reviewed studies.
In transportation and electronics, we introduced new thermal barrier films to improve performance of electric car batteries.
One element of our half a billion dollar automotive electrification platform, which delivered 30% organic growth in 2022.
Companywide for the total year, we delivered organic growth of 1% or 3%, excluding the impact of disposable respirators and our Russia exit.
We posted adjusted EPS of $10.10, along with adjusted free cash flow of $4 7 billion with an adjusted conversion rate of 82%.
We strengthened our balance sheet and reduced net debt by a half a billion dollars ending 2022 with a net debt to EBITDA ratio of 1.4.
This enabled us to invest in the business and returned $4 $8 billion to shareholders through dividends and share repurchases.
At the same time, we took actions to position us for the long term.
Divested our food safety business, receiving $1 billion and reducing our outstanding share count by $16 million.
We continue to progress in our health care spinoff.
Which will create two world class public companies better positioned to drive growth and value creation.
With respect to combat arms litigation as last week's report from the chapter 11 co mediators indicated three of them continues to support Arrow technologies in this ongoing confidential mediation process.
We continue to address P past litigation by defending ourselves in court or negotiating resolutions as appropriate.
We also announced we will exit all P fast manufacturing by the end of 2025.
Our decision is based on careful consideration of the external landscape, including regulatory trends and changing stakeholder expectations.
We simplified and streamlined our supply chain organization.
And advanced our digital strategies to better serve customers.
We followed through on our sustainability commitments. We are ahead of schedule installing state of the art filtration technologies and factories around the world.
We now have capabilities up and running at all three of our largest water using sites in the U S and in spending.
We supported employee health safety, and wellbeing, including new flexible work arrangements and factory investments.
And we advanced diversity equity and inclusion with each of our business groups now executing initiatives.
The steps we took in 2022 and the steps we are continuing to take in 2023.
Position us well as we look towards the future.
Please turn to slide 11.
We expect market and macroeconomic challenges to persist in 2023.
Based on this outlook, we expect organic growth of minus 3% to flat.
Along with adjusted EPS of $8 50.
The $9 and.
And adjusted free cash flow conversion of 90% to 100%.
Our expectations reflect the slowing in demand we are seeing as we start 2023.
Supply chains are improving however, we still see headwinds from material availability and inflation.
Be it at a lower level.
We are not satisfied with our progress or performance.
We are taking additional actions building on the actions taken in the second half of 2022 to reduce cost structure and inventory.
We have implemented strict control of hiring and discretionary spending.
We announced that we will reduce approximately 2500 global manufacturing roles.
A necessary decision to further align with adjusted production volumes.
In addition to the actions we are taking to respond to the macroeconomic environment.
We are taking a deeper look at everything we do as we prepare for the healthcare spin.
As we move through the year, we will take additional actions to improve supply chain performance drive simplification and bring us even closer to our customers.
At the same time, we win in the market because we stay close to customers and continue to invest in innovation, even in the most difficult times.
We will continue to invest in growth opportunities in our businesses aligned to global trends that take best advantage of our innovation.
Automotive electrification industrial automation Biopharma processing and home improvement are just a few examples of large fast growing markets, where we are investing and we're at three am innovation can make a difference.
We will continue to prepare for the spinoff of our health care business, which presents a tremendous value creation opportunity.
While at the same time preparing three of them for future success.
We will work to resolve litigation we face.
Following through on the actions we initiated in 2022.
Underpinning all of our work will be the strengths of three of them are people are industry, leading innovation, our advanced manufacturing our global capabilities.
And our iconic brands.
I'm confident in our future as we exit 2023 will be a stronger leaner and more focused three of them.
<unk> will now cover the details of our outlook Monish.
Thank you Mike please.
Please turn to slide 12.
The macroeconomic environment remains very fluid and uncertain.
For 2023, we anticipate that GDP and IP I will continue to moderate with both currently estimated to be around one 5% about half of 2022 levels.
Therefore against this backdrop, we feel it prudent to set our expectations to reflect this reality.
As Mike mentioned, we estimate our full year adjusted organic sales growth to be in the range of minus 3% to flat.
This includes selling prices up low single digits. Therefore organic volumes are expected to be down low to mid single digits for the year.
This range also includes an estimated two percentage point headwind from the ongoing decline in disposable respirator demand along with the impact of our exit from Russia.
We currently expect our disposable respirator demand to be down to pre pandemic levels.
As the strength of the U S. Dollar carries into 2023, we estimate a foreign currency translation impact of sales of minus one to minus 2%.
And divestitures that were completed completed in 2022 will be a headwind to sales of nearly one percentage point.
Adjusted earnings are expected to be in the range of $8 50.
Two $9 per share.
This range includes a combined earnings headwind of 55 to 80 cents per share year on year from the following three items.
First the expected sales decline of disposable respirators and exit of Russia will be an impact of minus 30 to minus 45 cents.
Second foreign currency will be a headwind of minus 10 to 20 cents.
And third divestiture impacts would be a minus 15 cents.
In addition, the 2022 carryover impact of higher raw material and logistics costs combined with energy inflation creates a year on year headwind of approximately $150 million to $250 million or roughly 20 to 35 cents to EPS.
And finally nonoperating items are estimated to be an impact to earnings per share of flat to minus 10 cents.
This range includes a year on year increase in nonoperating pension expense of $125 million.
Our full year adjusted tax rate in the range of 18% to 19%.
And a lower year on year outstanding share count.
While there are a number of headwinds to earnings in 2023, ultimately our full year performance will be driven by organic sales volume.
Sustained progress in global supply chains, and raw material availability.
And our ability to drive improvements and reduced costs in our manufacturing and supply chain operations.
Finally full year adjusted free cash flow conversion is forecasted to be in the range of 90% to 100%.
This range includes the continued healing of global supply chain.
Expected improvements in working capital performance, particularly inventory reductions and full year capital expenditures of one five to $1 $8 billion, which includes approximately $200 million of investment in water stewardship related to our exit of P fast manufacturing.
Please turn to slide 13.
Looking at our expected performance by business.
V C safety and industrial organic sales growth to be down low single digits in 2023.
This includes an estimated decline in disposable respirator sales of $450 million to $550 million or a negative impact of approximately four percentage points as the business returns to pre pandemic levels.
Demand across industrial end markets is moderating as customers remain cautious.
Our safety and industrial team will also be monitoring the recovery of industrial production activity in China as we start the year.
<unk> organic sales growth for transportation and electronics, excluding the impact of the exit of P. Fast manufacturing is forecasted to be down mid single digits to flat organically.
Looking across end markets automotive unit volume production is currently forecasted to be up nearly 4% year on year.
We also expect automotive electrification trends to remain strong as we leverage our technologies and develop new innovative solutions for our automotive OEM customers.
Electronics, However is expected to be down significantly due to weak end market demand for Tvs tablets and smartphones along with the ongoing impact of display technology shifting to OLED from LCD.
Health Care's organic sales growth is anticipated to be up low to mid single digits versus 2022.
We expect gradual improvement in health care elective procedure volumes as nurse labor shortages and strained hospital budgets continue to impact global healthcare systems.
In oral care, we would be monitoring consumer discretionary spending and its impact on patient visits including orthodontic care.
The healthcare team continues to create differentiated value and deliver strong margins for the attractive end markets we serve.
And finally organic sales in consumer are estimated to be down low single digits to flat as U S consumers remain cautious and retailers continue to aggressively reduce the excess inventory levels.
Despite these near term challenges the consumer team remains focused on leveraging our iconic brands and accelerating new product launches in 2023.
Please turn to slide 14.
Before we go to Q&A I wanted to walk through how we are seeing the first quarter.
First three weeks into January we are seeing continued slowing in organic sales volume as we start the year.
This slow start is driven by the same weakening end market trends that impacted the finish to 2022.
We expect soft consumer discretionary spending along with retailer destocking to continue into the first quarter.
Sales of electronic devices are forecasted to be down between 10, and 30% sequentially in the first quarter, while semiconductor end markets and automotive builds are down mid single digits sequentially.
Health care and all looked at electric procedure volumes are expected to be at the same level as Q4 and as we have noted industrial end markets are mixed.
And we anticipate the ongoing COVID-19 related challenges to continue in China, and the geopolitical situation in EMEA to persist.
Therefore, taking all of these items into consideration we estimate Q1 total adjusted sales in the range of seven to the seven $6 billion versus $8 $5 billion adjusted for the exit of P. Fast manufacturing are down 10% to 15% year on year. This anticipated.
Year on year decline includes headwinds off three to four percentage points from disposable respirator sales declines in Russia exit three.
Three to four percentage points from foreign currency translation.
And one percentage point impact from divestitures.
Taking these factors into account, we expect Q1 organic sales to be down low single digits to mid single digits.
From an EPS perspective, we estimate that first quarter adjusted earnings per share will be in the range of one dollar and 25 cents to $1.65.
This range is impacted by the continued slowing of organic sales volumes, a pre tax restructuring charge of $75 million to $100 million are 10 to 15 cents per share.
<unk> rate of approximately 19% along with normal Q1 items.
As you can see the first quarter presents a tough start to the year.
We will have our most challenging year on year comps related to the declining disposable respirator demand and our exit of Russia.
Ultimately organic volume trends would be the biggest factor in determining how the quarter will turn out.
2023 is an important year as we work on progressing our strategies, including preparing for the spin off healthcare.
Improving our manufacturing and supply chain operations.
And taking actions to further streamline the organization.
We are focused on creating the shortest path to the customer and providing innovative solutions to their most challenging problems.
We will remain nimble and take appropriate actions as we respond to changing market dynamics.
And we will continue to invest in growth productivity and sustainability to ensure the long term success of our enterprise.
To wrap up I continue to be bullish on our long term trend.
The large and attractive end markets, we serve provide exciting opportunities for the future of Korea.
We are not satisfied with our performance and the expected start of this year.
We are working to aggressively address our operating performance in this challenging environment.
We expect organic sales volumes will improve as consumer retail and consumer electronic markets stabilize.
China walks through it's COVID-19 related challenges and as a year on year comps ease.
We also expect supply chains to continue to heal and raw material and logistics cost headwinds to abate.
Therefore, we anticipate improvements in organic growth.
Operating margins earnings and cash flow as we progress through the year.
As you've heard me say before there is always more we can do and we will do to improve our performance.
I want to thank our customers and suppliers for their partnerships and the three of them employees for their hard work and dedication as they continue delivering for our customers.
That concludes my remarks, 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, you'll hear a sweet Tom prompt with knowledge of request.
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If youre 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 Scott Davis with Melius Research you May proceed with your question.
Hi, Good morning, everybody good morning, Scott.
I was hoping you could walk us through just.
Perhaps logistically Opportunistically, how you exit P fast so kind of integrated with your.
With your product line your manufacturing systems can you can you sell some facilities can you extract some value or is it or you just have to kind of close lock up the facility in and walk away or how does that kind of work logistically.
Yes, Scott So maybe I'll take you back to the announcement of the exit we said well exit all DFAST manufacturing by the end of 2025. We also said we would work to discontinue the use of PFS and our products broadly across the company that's both.
In our products, but also in the manufacturing of our products and I think your question is really on our manufacturing part of that and we said we will meet contractual commitments that we have to our customers and we're working closely with them to.
Manage that as we make this transition but ultimately also.
You know I talked about that we are not planning and won't sell the businesses.
And now we will plan to shut them down as we as we work through the transition as we get to the end of that and at the end of 2025.
Scott Just also reminder, as we disclosed we said we would take our debt exit cost of this would be in the range of 1.3 to $2 3 billion.
And we took a fourth quarter charge of $800 million. That's included in that range of 1.3 to $2 3 billion.
Right.
Okay. That's helpful and then.
You talked about doing some further restructuring and perhaps help us understand the scope or scale or at least are you talking about.
I think you mentioned 2500.
People are the rooftops and meaningful kind of cost out that you see in this plan.
Yes, Scott so the announcement, we made today was 2500 jobs in manufacturing really is responding to the volume that we see the outlook for the volume and that's what we're putting our focus on supply chain, we see an opportunity to continue to streamline our supply chain, we hope to take advantage of some of the tailwind is our supply chain heel as monish.
Talked about we're taking actions ourselves and we're looking at what additional actions we can take there and we're looking deeper in the company as well as we've as we've worked to prepare for the health care spend we've been looking at three am parent co as well and how do we simplify streamline them.
<unk> put a position ourselves closer to customers. So it's really looking deeper and broader and I think you know.
Taking actions proactively taking actions against the outlook, we have for our markets.
Alright, Thank you I'll pass it on guys I appreciate it Scott.
Our next question comes from Andrew Kaplowitz with Citi. You May proceed with your question.
Hey, good morning, everyone.
Andy Good morning.
Mike or money as you mentioned that industrial end markets are moderating and customers are cautious I think for instance, you mentioned industrial adhesives and tapes was down in Q4 is there been a material change from conversations that you've had previously with industrial customers or is this just gradual moderation and then is the regional weakness you're seeing in China, just a function of COVID-19 interruption and more.
Consumer base versus end demand related and how do you think that pans out in 'twenty three.
Yeah, Andy back the Mone initiatives comments, we're seeing kind of mixed.
Mixed performance and in the industrial markets, we see strengths as we said as we came through the quarter in areas like electrical markets and automotive aftermarket.
We're seeing some moderation in specific end market segments, and the comment about industrial adhesives, and tapes and closure and masking some of that is related to the electronics slowdown. So that's that's part of that impact.
So impacted by China. So China has really got a couple of things that are part of the slowdown one of them is COVID-19 and the interruption in the markets in industrial production and GDP. It's also reflecting the importance of electronics to that market into our business there in China, and we see that continuing those dynamics are we.
So on Q4 continuing into into the start of the new year. We saw some moderation in specific segments of industrial we saw specialty vehicle construction markets. We saw some moderation coming through the end of the quarter, we're off to a slow start as we start the year. There's there's a couple of areas of Destocking.
Related to those end market segments, where we've seen nothing more broad based on that we had strong performance across some of those other end markets in industrial but it's we're starting to see some moderating and like I said January is off to a slower start for industrial.
Mike That's helpful. And then maybe could you give us a little more color regarding price versus cost expectations for 'twenty. Three you mentioned the low single digit price improvement Youre seeing you also mentioned supply chains are healing are you generally seeing pricing hold up for you. Despite some of this demand weakness across the portfolio and then you know versus raw material and energy related headwinds does that.
Versus cost equation getting increasingly green as you go throughout the year.
Yeah, So I think.
Two different points that Andy is as you correctly pointed out the carryover impact on what we have assumed right now in the guide is two pieces on the selling price reset.
We said approximately 2% at the same time, the cadieux would impact of both raw materials and energy inflation is approximately 150 to 250.
So when you just do that equation together right now it's positive I think what we'll see as we go through is how do supply chain heel and how fast can we get the cost out but at the same time to take a little bit of time as we sell through our higher cost of goods through our inventory youre going to see some of that moderate but it will start.
Throwing up as the year progresses.
A key question for us that we have to think through and that's what we're thinking through is as deflation start showing up in the economy. The discussion that's going to come up is is the elasticity of price across not just our company, but across all companies.
And what we have found over time, Andy as you know three of them, so well that our innovation ultimately drives the value that we add for our customers and historically, we have been able to have a good price cost equation.
Because of the value that we add for our customers. So seeing what we'll see in 'twenty three will depend on supply chains, and where it plays out but in the long run we are very confident that the price cost equation continues to be green just because of the value we add to our customers.
I appreciate the color monies.
Our next question comes from Andrew <unk> with Bank of America. You May proceed with your question.
Yes, hi, good morning.
Hi, Andrew.
What are you guys.
And if I missed it I apologize, but I use sort of modeling and with the recession in your forecast what are your macroeconomic assumptions I know you've sort of said.
If things are slowing but are you exclusively modeling of recession.
Yeah, Andrew underlying our view of the year as the projections for the macro is part of it and then we're talking about specific markets and dynamics that we're seeing coming through the quarter into coming through fourth quarter into into the new year. So when you look at the macro global GDP Ipi and 015 percent kind of range is the outlook for the year you see.
U S softer than that see GDP.
Below 1% you see ipi, even projected to turn negative as we get into the middle of the year. So those are kind of the macro dynamics that we're looking at we're also looking closely as we've talked about it in a couple of these market segments.
Fourth quarter, we saw this 10%, 10% to 30% decline in the consumer electronics build and that is expected and projected it I would say to continue as we get into first quarter and the first half of the year and consumer discretionary spending and the impact on.
Our end markets as you know that was in decline in Q4, I expect that to continue so the macro is part of it and we're looking closely at these key market segments and the indicators there.
I think it really says Q1 looks like Q4, and there are some areas of additional slowing in and then we we kind of look at the total macro for the rest of the year as we as we shape up Earl.
Gotcha.
Then the question about pricing just you know historically you.
Given.
And I know the way you report pricing does not have somehow everything.
Pricing internally I completely appreciate that but has anything changed in the market structure.
In terms of your ability.
To drive the pricing I, just would've thought a four three am reported pricing would have been more of a tailwind.
Into 'twenty three but.
You know it is what it is but are there any structural changes that you're seeing and if you were trying to address thank you Andy.
Uh huh.
They are really two parts to our pricing actions in the near term one of them is what munis talked about we are always.
Really looking closely at our price value in the marketplace, our innovation delivers value to our customers, we manage our pricing in another.
Take advantage of that value and really make sure that we are getting that value through our our broader market market pricing.
Last couple of years has brought in the inflation dynamic and that's really been the driver where we're taking pricing actions to adjust for the input costs and so you've got a mix of our innovation as well as the inflation dynamic and so as you look into 2023.
We're confident we will continue to position ourselves and strong price value based on our innovation, we are going to be managing inflation, along with everyone else. How do we see that progressing and what will we do with our prices adjusting those if we see additional inflation in managing those as as the I would say.
The elasticity in the market around inflation plays itself out.
So much.
Our next question comes from Stephen Tusa with J P. Morgan Securities. You May proceed with your question.
Hey, good morning.
Okay.
What what are you guys seeing on the inventory side of the of your more industrial businesses. I think you talked a bit about auto, but maybe just on the general industrial side customer inventory behavior.
Yeah.
Down a little bit of that I would say as we begin as.
As we began Q4 overall inventory look to be in pretty good shape and that was with a notable exception of consumer everyone was working to reduce inventory and we saw a lot of destocking efforts in consumer as I said, we're starting to see some destocking in industrial.
I would say Asia, and China, where we are seeing weaknesses in consumer electronics, driving some of that and as I mentioned earlier, some specialty markets like construction and a few other areas like even packaging, we're seeing some some reduction of inventory as we start the new year.
When you look at our transportation electronics business.
Consumer electronics Oems are reducing inventories with that with that outlook for you know for their demand. They are they are reacting to it automotive OEM inventory still remains low it's improving but it remains low.
They are are they recovering from some of the supply chain disruptions health care overall looks pretty stable, we see oral care channel reacting to some of the consumer discretionary spending and slowing there in oral care, we saw really in the second half and then.
It comes back the biggest the biggest movers in in the consumer where our retailers are still aggressively reducing inventory. So some dynamics, reflecting some of the changes in demand in the end markets. Okay.
Okay and then your event you mentioned January was starting slow I mean can you give us a little bit of context is that is January our January is January organic kind of like below the low end for the <unk> of the annual range just roughly just some color on kind of how slow January started for you guys.
Yes, Steve So back to January yes, it is lower than the overall range and partly that's also driven by the toughest comps that we are going to have.
Going into <unk> as I mentioned seven two to seven 6% seven two to $7 6 billion is the revenue range it could be down 10% to 15% versus last year's adjusted and you have to take revenue on adjusted for the exit of PFS manufacturing, which would be around $8 5 billion, but ambev.
And that is 3% to 4% from foreign currency headwinds. So its a Q4 caddy over impact you got 1% from divestitures, which is based on the closure of the food safety and some of the other transactions. We did in <unk> and then you've got a very large headwind from Dr. In Russia. If you recall last year, we had a very.
Strong <unk> with the Omicron variant plus at that time, we had not announced the exit of Russia until mid March. So that's another three to 400 basis points of pressure.
Because you've got a calm and therefore overall it's L. S. D to MST is what we think right now is organic sales growth for <unk> and what you'll find is as the year goes on these comps start getting easier and that will start showing the growth on a year over year basis, hopefully you won't count. Your question, Yeah, you weren't down double digits in <unk>.
How are you.
Double digit.
As of right now we are somewhere in that range of where I told you.
Okay, great. Thanks for the color really appreciate it.
Our next question comes from Joe Ritchie with Goldman Sachs. You May proceed with your question.
Hi, Thanks, and good morning, everybody good morning, Joe Good morning, Joe.
Hi, I know, we've talked a lot about the organic growth guidance for the year I guess I'm just I'm just curious when you think about the consumer specifically.
It seems like you're embedding improvement as the year goes along is that just a function of.
Inventory is getting better how much of that is China reopening I just want to get an understanding of that business specifically.
Yeah, so on consumer.
So youre right, Joe I'll start with a summary, which is we are expecting that as things stabilize and as.
Customers slowed down their Destocking, you will start seeing that comps get better in the year. The fourth quarter was extremely hard and as Mike said, we saw an acceleration of a trend in December we continue to see that in January and that's why the first quarter starts pretty soft, but our hope is that as things stabilize.
<unk> Destocking gets better as consumer confidence builds into the year, we will start seeing the consumer business starting to get better.
Got it that's helpful monies and maybe my follow on question is a little bit of a.
Longer term question on that.
The electronics business, specifically I think in your in your comments you mentioned the shift into.
Into OLED I know there is an announcement about apple making their own custom displays starting in 2024, just trying to understand like how that will potentially impact your business.
And this year and then is it already expected to impact your business in 2023.
What I would I would answer and then I'll ask Mike to join in the way I look at this Joe is there a couple of things that the company has always has been looking at the LCD OLED transition for a period of time and that transition has been happening for a few years and the team has continued to deal with that as it goes.
<unk>.
What the team is working through is as new devices are coming on what does that mean from a.
OLED to LCD ratio to makes it definitely did have an impact for us in 2022.
And then we are seeing what trends we are seeing as of right now the trends. We saw we have predicted in 2023, but with that said the one thing about our electronics segment and especially their display teams as they always have a lot of innovation that is out there that helps offset some of these headwinds that come across that business keeps reinventing itself.
As time has gone for example, Ashish and his team have launched products that are used in E. R. In VR technology, which also hopefully is a growth market in the future and that's what that business is very good at looking at these trends working these headwinds and then finding innovation.
To offset that as time goes but right now we have embedded what we think is the trend in LCD OLED shifting to our 2023 guide Joe I would add we've been managing that transition and that trend for some time.
And it's part of our innovation.
Our innovation that we're doing with our customers to innovating on both sides of that the OLED displays.
As said the other higher growth segments in electronics.
Historically, our electronics business has been overweight to consumer electronics as we've talked about over the last few years. Our strategy is to continue to innovate there and we're working with our customers multiple generations ahead, whether its OLED displays or other applications, where we're really working with them to innovate and <unk>.
<unk> value and opportunity for three of them in that consumer electronics at the same time, we recognize the big growth drivers are some of these other higher growth segments and when I talked about <unk> are now emerging as one of those opportunities automotive electrification of course is the largest of those right now theres other areas like factory automation.
And even into electronic.
In the semiconductor manufacturing kinds of processes. So we are we are innovating in those spaces and at the same time looking ahead in managing through the next display technologies in the next mobile device technologies and consumer electronics.
Thank you.
Our next question comes from Julian Mitchell with Barclays. You May proceed with your question.
Hi, Good morning, Alright, Julian maybe good morning, maybe just wanted to start on the the operating margins.
Sort of backing into what you've talked about we right in assuming that the guide embeds, a sort of 19% operating margin for the year and sort of mid teens.
In Q1 and then.
Unlike Q1 aspect.
Very heavy decremental margins.
Sequentially, even without the restructuring charge.
Is there a lot of sort of under production going on at three a M to clear out inventory for example, just trying to understand why.
Why that Q1 margin is so light I think it's like a 50% decremental something excluding the restructuring.
Yeah. So as I've always said Julien first is volume gives us the best leverage and what you have seen in Q4 continues into Q1.
As we have said in Q4, we took some aggressive actions on making sure we right sized our manufacturing facilities.
To help control inventory. Our plan is we will continue to aggressively manage production as a way to.
Managed production as a way to manage cash at the same time. So we are not building unnecessary inventory. So that's number one I think number two is as I've mentioned there is continued pressure on a year over year basis on foreign currency between a 3% to 4%. If you look at it versus fourth quarter exit rate it's pretty.
Much I would say flat to what fourth quarter exit rate was.
And then the other item you mentioned the restructuring, but we also have other normal <unk> items that we have from an accounting basis that we take which is normal in every quarter and that's why that start to <unk>.
Floor, but as you as you accelerate or move through the year volume and their supply chain.
Selling other two factors that will continue to drive us to get these margins better and if we're looking at it in euro or euro basis, It's all driven by the comps that we had last year, which impact us heavily so it's lower volume.
In Q1, that's a big driver in volume will be the big determinant.
On what we think Q1 is going to be.
And Manish is that roughly right on that sort of mid teens operating margin in Q1, and 19 ish for the year and Youll delayed.
Yeah, Yeah, so actually close there it's close.
Close enough Julien.
Thanks, a lot and then one quick follow up on that from for Mike, Mike You've announced a restructuring program today I think it's the first kind of formal discreet ones since fourth quarter of 2020.
And you had the business transformation savings program prior to that.
Just wanted to sort of when you think about the scope of the current restructuring plan.
What kind of savings run rate, we should expect annually when do you get to that and how would you assess the kind of scope of this being enough to get margins back on track.
As you would had those prior restructuring programs, but margins have sort of stayed under pressure. Thank you.
Yeah, Julian the way, we're thinking about it and I think I said this is certainly taking taking on what we see in our markets and our performance in the supply chain dynamics that were facing all of that's part of what we're focused on as we as we look at these actions as we go through the year, adding to what we've already announced and then.
We are taking and getting ready for the spin of health care, we're taking a deeper look as I said that everything we do there's opportunities to streamline what we do as a company in the face of those end market dynamics and in our operations and we're learning from the changes that we've made to this point. So we will continue to.
Work on that in terms of giving you a view of the impact of that that's something we'll come back with as we as we make decisions and announced those those actions. So as additional actions as we go through the year.
Thank you.
Yes.
Our next question comes from Deane Dray with RBC capital markets. Please proceed with your question.
Thank you and good morning, everyone and thank you for all the 23 planning assumption details.
Hey, good morning.
And also for providing first quarter guidance I know, that's not a typical practice, but given all the moving parts. We appreciate that so my question relates it's come up a couple of times on the healthcare spin can you remind us the timing.
You were expecting there was some noise about potential challenges in the courts, where does that stand and on the separation costs.
How much is this impacting.
'twenty three or is that all excluded and stranded costs. How quickly would you be able to address those thank you.
Yes, maybe I'll talk a little bit about just the spin.
I Wonder if you can talk about the separation costs.
Models.
We have a dedicated team working and building the execution plans, we're making very good progress we've talked about our expectation that we would be completing the spin.
The end of 'twenty three early 'twenty, four and that's kind of the focus for the teams as they as they work to execute this.
You commented on there had been some.
Actually there was a there was a.
Suite in the marketplace around.
The spin of health care, and again would we be able to complete that spend.
And that was something that that.
Was that was dismissed and so there's nothing from that dynamic that's impacting us it's really about our teams working to execute the spin and as I said, they're making very good progress or we're confident that we're moving in the right direction and moving ahead.
At pace.
So as regards the.
Dean as we had disclosed when we announced the spinoff healthcare. We currently do not be thinking of counting it as a special item. So that would be excluded from our ongoing operations. We are unable to predict how much of that will show up in 2023. So we haven't put that in our guide, but when we announced the transaction with.
Giving you a framework that our transaction cost of spin off would be somewhere in the range of one to one 5 billion, which is a mixture of capex and opex that teams are continuing to work that as they go through right. Now we have now been at this for the last four to five months. So as we get better estimates around that we will definitely keep you posted.
As regards stranded cost as Mike mentioned, and we had also mentioned it in the last quarter.
This is an opportunity for us to look at everything that we do as we are getting ready for the spin and our goal is to reduce <unk> cost as much as we can and we will keep working it as we go through it and we'll definitely let you all know.
We figure this out.
But the teams are actively working it teams are staffed and they're doing an amazing job keeping the keeping the program on track.
Thank you.
Our next question comes from Nigel Coe with Wolfe Research you May proceed with your question.
Thanks, Good morning, everyone with.
We've got a lot of ground here, but.
So I wanted to go back to <unk> 23, perhaps diminish.
We can't get at 15%.
You know margin.
Which is kind of similar to julians mid teens.
I don't think we've ever seen a margin that low I think the G. F. C 17 and change margins. So just wondering why you know margins would be so low and I understand supply chain is I think to hit the 115%.
What's going on and on.
Part of this sort of question you know the the kind of the coverage of the full year plan.
Even at the low end of the range is still really really low and I think it's about 17 to 19 defense coverage, making it very very backend loaded year. So I know you said volume gets better but what.
What gives you confidence and will can give investors confidence there's enough capture in the back half of the year.
Yeah, So I think two different questions and both great. One so I'll try to answer the first one similar to what I told Julien volume gives us the best leverage and when you just look at it even sequentially.
And you adjust for FX, which helped us versus our guide that we had given volumes are going to be flat. We have started very low in the month of January and that puts tremendous pressure.
On a on a fixed cost number one number two we have a restructuring charge.
And then number three our tax rate is 19% and then of course, we have some other normal <unk> items from an accounting basis that we take so when you put all that together.
I would say Nigel it comes down to volume volume is down 10% to 15% on a year over year basis, and so that's number one.
This is the toughest comp and you have D R and the exit of Russia, both of which we have disclosed in the past when you apply them at company margin, which is at 46% that puts pressure also on a year over year basis.
When I go through the remaining quarter, a euro and as you correctly asked the question what happens on margins as you start thinking about we've be exit some of these comps that are difficult <unk> being the toughest volumes will start our comps will start getting better.
Apply chain efficiencies the actions that we have announced also in <unk> and some of the actions we took in <unk> with all start showing up in the remaining of the year again as I mentioned some of these items, including cost out from raw materials to take a little bit of time as we work through our higher cost inventory.
Through the system.
If you also look at external data and that's what we can look at because none of us are able to predict what we can in the future external data says the second half gets better it gets better in China. It gets better globally and that's another reason why we are hopeful that as volumes come back in the second half.
We should see we should see our own margins go up and our own revenue go up.
But with that said at the end of the day, we control, we don't control the market, but what we definitely control is our own actions and so continuing to drive supply chain efficiency continuing to make sure that we are being as nimble and agile as we can.
Using Mike's words, we're looking at everything we are being very careful in discretionary and hiring.
In 2023 is an important deal for you. It's a year that we plan to execute on a lot of our strategies over the last few years, including the spinoff are healthcare and improving our supply chain operations.
I wanted to end with your question is we are not satisfied with where we are we're going to continue to look at this we are going to continue to be nimble and agile as the volume plays itself out and our goal is to is to keep building from where we are right now hey, Nigel I just wanted to correct. One thing one ish said, our total sales for Q.
We're going to be down 10% to 15% not volume Oh, I'm, sorry, yes, organic sales growth is forecast to be down low single digits to mid single digits.
Okay, I was going to follow up on that so thanks, thanks for that clarification, Bruce and I know I know I asked two questions there, but I do have one for Mike.
You said everything's on the table in terms of reorganizations and thinking about new ways of doing things you know five or six years ago three of them went through a pretty big centralization of supply chain and business support functions.
In hindsight has that left the organization a bit to budgets you know whats out there might move in cause you unwind that suddenly the nation.
Yeah, I would say that Nigel does the changes that theres a couple of different changes that we've made to the supply chain, maybe that youre thinking about one was we did take actions on some of the structure. It really looking at factories, our footprint of factories, a number of years ago, and then we moved to when we announced the change to our business.
Group led model, we went to a common supply chain model globally, and we made some additional steps in that in last year really to continue to drive more flexibility greater streamlined performance end to end in our supply chain. So we see it really more as an opportunity to build on the changes we.
Have made and drive simplification streamlined more productivity, reducing our costs delivering more directly to customers. So it's continuing to build on some of those changes I think those are <unk>.
Actually have positioned us to be more flexible as we go ahead and.
Yes.
There is an expectation that supply chains will continue to heal. So we wanted to be able to take advantage of those of those <unk>, we hope to see as we go through the year at the same time.
We control, what we control and that is making additional changes based on what we've learned to to really execute our performance in our supply chain. So.
It's the biggest opportunity we have to improve margin and.
And cash flow as we go through the year.
Okay. Thanks.
And our last question comes from Laurence Alexander with Jefferies. You May proceed with your question.
Hi, This is Dan Rizzo on for Laurence. Thanks, Thanks for fitting me in I.
I don't know if I missed this or not but you mentioned that free cash flow conversion is 90% to 100% this year.
That.
Our long term goal can you maintain that I mean as things kind of I guess, it will get less volatile.
In the out years.
Yes, it's 90% to 100% for 2023 just to be clear that was our last year, we ended at 82%.
As I've said multiple times the opportunity for a three <unk> cash from a working capital comes from inventory management and AP.
And to answer your question is it sustainable of course, a lot of to mentally depend on the income that would be generated it depends on how supply chain behave in the capital, but if you just look at the ability for us to use data and data analytics to help drive inventory and.
And working capital clearly exists in the fourth quarter. The teams did an amazing job to take inventories down got it down by nearly $250 million.
And as supply chain start to heal this is clearly an opportunity for us and we're going to keep driving that.
Alright, Thank you very much.
Thanks.
Yeah.
We have no further phone questions at this time.
To wrap up we are focused on creating value for customers and shareholders in a challenging environment. We will continue to take actions to improve our performance control costs and drive simplification, while building three of them for the future. 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.
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