Q2 2023 3M Co Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the <unk> second quarter earnings Conference call.
As a reminder, this conference is being recorded Tuesday July 25th 2023.
I would now like to turn the call over to Bruce German land Senior Vice President of Investor Relations at <unk>.
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, <unk>, <unk>, our chief financial and transformation Officer, and Kevin Rhodes <unk> Chief Legal officer.
Mike Kevin and more niche will make some formal comments then we will take your questions.
Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at <unk> Dot com.
Please turn to slide two.
Please take a moment to read the forward looking statement.
During today's conference call, we will be making certain predictive statements that reflect our current views about <unk> future performance and financial results.
These statements are based on certain assumptions and expectations of <unk>.
<unk> events that are subject to risks and uncertainties.
Item one a of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions.
Please note throughout today's presentation, we'll be making references to certain non-GAAP financial measures.
Reconciliations of the non-GAAP measures can be found in the attachment to today's press release.
With that please turn to slide three I'll now hand, the call off to Mike Mike.
Thank you Bruce good morning, everyone and thank you for joining us in the second quarter, we made significant progress on the important actions, we've been taking to improve our performance and shape the future of thrilled with.
We posted adjusted organic growth of negative two 5%, which includes a negative one 7% headwind from the expected decline in disposable respirator sales revenue.
Revenue for the quarter was at the high end of our guidance range.
Our adjusted operating margin was 19, 3% impact.
Or a headwind to adjusted operating margin of two seven percentage points.
Excluding these charges, we increased operating margin year over year.
We delivered adjusted earnings per share of $2 17, and adjusted free cash flow of $1 5 billion driven by continued improvements in inventory management.
Today, we are updating our full year earnings per share guidance to $8 60 to $9.10.
Up from a previous range of $8 50.
The $9.
We remain confident in our ability to deliver on our commitments realize additional benefits from our restructuring actions and positioned three of them for the future.
In the quarter, we maintained a strong focus on serving customers driving operational execution and maintaining spending discipline.
All business segments delivered sequential improvement in adjusted operating margins.
Our restructuring actions and strong focus on cost management drove these margin improvements.
Looking at our markets trends played out as expected we.
We saw strength in automotive, both OEM and aftermarket as.
As well as highway infrastructure and personal safety, excluding disposable respirators.
Health care, which was up slightly continues to be impacted by lower post COVID-19 related demand.
Notably in our Biopharma health information and medical solutions businesses.
We also saw continued weakness in electronics consumer retail in China.
Please turn to slide four.
As we focus on improving our performance and managing a dynamic external environment. Our teams are driving three strategic priorities improve.
Improving operational execution successfully spinning off our health care business and addressing litigation.
We are on track with our restructuring actions and have made significant progress in leaning out the center of the company simplifying our management structure and streamlining our supply chain.
The changes to our enterprise supply chain organization are enabling improvements in service cost and inventory.
Which helped drive our second quarter results.
We are also taking advantage of the continued healing and supply chains to reduce logistics costs and improved production yields.
We've also made progress in advancing our go to market models to bring our innovation closer to customers.
In support of these changes to date, we have initiated the transition to a new export model in 24 countries.
I am pleased with how these changes are helping drive performance.
We've made good progress on our planned spin of our health care business.
Including regulatory filings and system updates and preparation for soft spin.
We are also in the final steps of naming a CEO .
We continue to work towards closing the transaction by year end 2023 or early 2024.
Subject to the required conditions and additional factors, we have disclosed in our SEC filings.
Last month, we announced an agreement subject to court approval the resolved public water systems claims nationwide in the a triple left multi district litigation.
This agreement will benefit U S based public water systems that provide drinking water to a vast majority of Americans.
The settlement covers all forms of PFS.
As we announced we have taken a Q2 related charge of $10 $3 billion payable over 13 years.
Also related to litigation, we continue to participate in the confidential mediation process as part of the combat arms M. D L and we'll provide updates as appropriate.
To provide additional details on our P. Fast settlement agreement I will now turn the call over to Kevin.
Please turn to slide five.
Kevin.
Thank you, Mike and good morning.
This is an important step forward for three M. As Mike said, we have entered into a broad class resolution with public water systems that provide drinking water to the vast majority of Americans.
We are taking a proactive approach to managing P fast by establishing a more certain path forward for public water systems communities and three a M.
Subject to court approval <unk> has agreed to support P. Fast remediation for public water systems that detect P fast at any level and our agreement addresses all P. Fast not just those compounds that have been the primary focus of litigation to date.
Our agreement also provides funding for eligible public water systems that may detect P fast into the future.
And we have agreed to fund additional testing by public water systems as well.
As Mike shared the agreement terms entail a present value commitment of $10 3 billion paid over 13 years.
Additional details regarding the payment schedule are available in our form 8-K filed in June .
While this agreement provides an alternative to continued litigation for class members and for three M. We remain prepared to defend ourselves and litigation should the agreement not received court approval or should public water systems chose to litigate instead.
We are building on actions three of them has taken and continues to take we were the first company to exit the manufacturing of two forms of <unk> SaaS, namely P. F O a and P. F O S, which we announced more than 20 years ago.
We have invested in state of the art water filtration technology, and our chemical manufacturing operations and we have announced.
<unk> had three of them will exit all P fast manufacturing by the end of 2025.
We will continue to build on this important progress as we focus on the future and work to proactively manage P fast.
Now, let me turn it over to <unk> to provide more details regarding our performance in the quarter.
Sure.
Thank you, Kevin and I wish you all a very good morning.
Please turn to slide six.
Our second quarter performance was driven by a continued focus on serving our customers improving manufacturing and supply chain productivity, but also maintaining strong spending discipline.
Also during the quarter, we initiated a large part of our restructuring program to simplify and streamline the organization, we are aggressively reducing management layers and rooftops. While also streamlining our go to market models and supply chain, bringing us closer to our customers.
End market trends continue to play out as anticipated with ongoing weakness in electronics softer discretionary spending patterns and consumer retail and mixed trends in industrial end markets.
Regionally, China recovery has been slow in.
Impacted by electronics and soft export trends.
Europe remains challenged.
The uncertain geopolitical situation persists.
While end markets in the U S largely remained steady.
Second quarter total adjusted sales were $8 billion are down four 7% year on year.
This result was a little better than forecasted as we experienced a smaller than anticipated headwind from foreign currency translation of minus 0.9% versus a forecast of minus 2%.
On an adjusted basis organic sales declined two 5% versus last year.
This result included an expected year on year headwind of approximately $140 million or one seven percentage points related to lower disposable respirator demand.
Excluding this impact Q2, adjusted organic sales declined 0.8%.
On an adjusted basis second quarter operating income was $1 $5 billion with operating margins of 19, 3% and earnings of $2.17 per share.
These results included pre tax restructuring charges of $212 million, which negatively impacted adjusted operating margins by two seven percentage points and earnings by 31 cents per share.
Without the impact of restructuring second quarter, adjusted operating margins were 22% or up 40 basis points versus last year and earnings were $2 48 up <unk> year on year.
Turning to other components that impacted results year on year.
We were able to more than offset the impact of lower sales volumes and inflation impacts through improved manufacturing productivity.
Benefits from restructuring strong spending discipline and selling prices, while continuing to invest in the business.
The net result was an increase to margins of one four percentage points and 15 cents to earnings.
The previously mentioned headwind from disposable respirators and resulted in a negative impact to operating margins of 50 basis points and to earnings up nine cents per share.
The carryover impact of higher raw material logistics and energy cost inflation created a year on year headwind of approximately $30 million or a negative 30 basis points impact to operating margins and four cents to earnings.
As mentioned foreign currency translation was a negative 0.9% impact of total sales.
This resulted in a headwind of 20 basis points to margins and two cents to earnings per share.
Divestitures, primarily food safety did not impact margins, but resulted in a year on year headwind of three cents to earnings per share.
Finally, other financial items increased earnings by a net six cents per share year on year, primarily driven by a lower share count, which was partially offset by a lower non op pension benefit.
In summary, our teams focus on driving productivity executing restructuring actions and controlling spending is starting to yield results.
These actions coupled with improvement in global supply chains drove sequential improvement in adjusted operating margins across all of our business groups, excluding restructuring charges adjusted operating margin improved three six percentage points sequentially.
Please turn to slide seven.
Second quarter adjusted free cash flow was approximately $1 5 billion up 44% year on year with conversion of 122% up 50 percentage points versus last year's Q2.
This year on year improvement was driven by our ongoing focus on working capital management, especially inventory and the timing impact related to restructuring charges.
Inventory was flat sequentially what are the typical historical build from Q1 to Q2.
We continue to adjust production output to end markets and leveraged the power of daily management and data and data analytics to increase the velocity of inventory turns.
Adjusted capital expenditures were $328 million in the quarter are similar year on year as we continue to invest in growth productivity and sustainability.
During the quarter, we returned $828 million to shareholders via dividend.
Net debt at the end of Q2 stood at $11 $7 billion are down 12% year on year.
Our business segments continue their long history of robust cash flow generation.
In addition, our proven access to capital markets, along with the anticipated one time dividend from the spinoff healthcare at 3% to three five times EBITDA and 19, 9% retained stake will provide additional financial flexibility.
This combined with our existing strong capital structure provides us the flexibility to continue to invest in the business returning capital to shareholders and meet the cash flow needs related to ongoing legal matters.
Now please turn to slide nine for our business group performance.
Starting with our safety and industrial business, which posted sales of $2 $8 billion are down four 6% organically.
This result included a year on year headwind of approximately $140 million of four eight percentage points due to last year's COVID-19 related disposable respirator decline.
Excluding disposable respirator safety and industrial sales grew 0.2% organically in Q2.
Organic growth was led by mid single digit increases in roofing granules and automotive aftermarket while personal safety declined due to last year's disposable respirator call.
Excluding disposable respirator personal safety was up high single digits organically.
Closure and masking declined due to slowdown in packaging and shipping activity.
While industrial adhesives, and tapes continued to be impacted by end market softness in electronics.
Adjusted operating income was $614 million or down two 4% forces last year.
Adjusted operating margins were 22, 2% up 70 basis points year on year.
And up two percentage points sequentially.
The year on year improvement in margins was driven by productivity actions.
Strong spending discipline and price.
Partially offsetting these benefits were headwinds from lower sales volume.
Restructuring costs and inflation impacts.
Moving to transportation and electronics on slide 10.
Which boasted Q2 adjusted sales of $1 9 billion.
Adjusted organic growth declined two 4% year on year, largely due to the continued decline in demand for electronics.
Our auto OEM business increased approximately 21% year on year, approximately 600 basis points higher than global car and light truck builds.
Our electronics business continues to be impacted by soft end market demand for electronics.
As a result, this business experienced a year on year decline in adjusted organic sales of approximately 22%.
Electronic end markets continue to remain highly uncertain.
We expect a year on year organic growth rates in electronics to remain negative in the second half however, improved versus down nearly 30% in the first half as we start to lap easier comps.
Turning to the rest of our transportation and electronics.
Our expectation safety grew high single digits organically, while commercial solutions and advanced materials were up low single digits year on year.
Transportation and electronics delivered $369 million in adjusted operating income down 19% year on year.
Adjusted operating margins were 19, 8% down three six percentage points year on year, However, increased three one percentage points sequentially.
Margin headwinds were driven by sales volume declines.
Restructuring costs and inflation impacts.
These headwinds were partially offset by benefits from strong spending discipline productivity actions and pricing.
Looking at our health care business on slide 11.
Q2 sales were $2.1 billion with organic growth up slightly versus last year.
Organic sales in oral care were up low single digits year on year and medical solutions business grew slightly.
Separation and purification and health information systems declined mid single digits and low single digits respectively.
These businesses continue to be impacted by lower post COVID-19 related biopharma demand and ongoing stress on hospital budgets.
As procedure volumes continue to improve.
Hospital budgets stabilize and we walked through post COVID-19 related impacts we are confident in the long term outlook of this business.
Health Care's second quarter operating income was $411 million down 16% year on year.
Operating margins were 19, 8% down two eight percentage points year on year.
However increased sequentially, one nine percentage points.
Year on year operating margins were impacted by lower sales volume.
Restructuring costs and inflation impacts.
These headwinds were partially offset by benefits from strong spending discipline productivity actions and pricing.
Finally on slide 12, our consumer business posted second quarter sales of $1 3 billion.
Organic sales declined two 2% year on year as discretionary spending on hardline categories remains soft.
We expect this trend to continue into the second half of the year.
Organic sales grew slightly in home health and auto care, while home improvement and stationery and office businesses both declined.
Consumer second quarter operating income was $235 million down 5% compared to last year with operating margins of 18, 2%.
Down 40 basis points year on year, but up three two percentage points sequentially.
The year on year decline in operating margins was driven by lower sales volumes.
Restructuring cost and inflation impacts.
These headwinds were partially offset by benefits from strong spending discipline.
Productivity actions and pricing.
That concludes our remarks on the second quarter.
Please turn to slide 14 for an update on our full year expectation.
During our January earnings call, we highlighted that we expected macroeconomic and end market uncertainties to continue to persist into the year.
In addition, we noted that we were starting to see the healing of supply chain. However, we expect it to continue to see headwinds from raw material availability and inflation, although at a lower level than 2022.
We also stated that we were not satisfied with our performance and we would be taking a deeper look at everything we do as we continue to prepare for the spinoff healthcare.
As a result, we noted that as we move through the year.
We will be taking additional actions to improve supply chain performance drive simplification and bring us closer to our customers.
While we have more work to do let me take a moment to provide a few examples on the progress we have made through the first half of the year.
Starting with our sales performance, while end markets continue to play out as expected.
Q1, and Q2 revenue was slightly above our expectations are.
Our teams continue to relentlessly focus on serving our customers.
Work down backlog and leverage the use of data and data analytics to drive improvements in demand planning.
Next as we have mentioned we are aggressively addressing structure.
We are on track with our actions to reduce structure across the company, including at corporate.
In our business segments and in manufacturing supply chain.
We have initiated the transition of 24 countries to an export model partnering with local distribution to serve those customers and markets.
In addition, we have made good progress in reducing corporate structure, including the exit of our aviation operations and our conference Center in Northern Minnesota.
And finally, we continue to adjust our production levels to end market trends manage inventory and aggressively controlled spending.
As a result of our actions along with improvements in global supply chains and raw material availability.
Able to deliver first half performance better than anticipated, particularly for margins earnings and cash flow.
Yeah.
In the first half of the year on an adjusted basis, we delivered sales of $15 7 billion operating margins of 18, 6% and earnings per share of $4.14.
These results included $264 million in pre tax restructuring charges or a headwind to margins of one seven percentage points and to earnings of 38 cents per share.
In addition, our strong operational execution and working capital management, particularly inventories helped us deliver $2 $3 billion of adjusted free cash flow with a conversion rate of 105%.
Turning to guidance, we are raising our full year adjusted earnings expectation as a result of our strong first half operational execution as evidenced by our improving margin rate.
We now expect full year earnings in the range of $8 60.
To $9.10 versus a prior range of $8 50 to $9.
We continue to closely monitor and market trends across all our businesses, particularly in electronics.
Consumer retail industrial and China.
And have yet to see signs of improvement in trends.
Therefore, we currently see organic growth tracking to the lower end of our range of flat to minus 3%.
This reflects our performance to date, along with a year on year headwind from disposable respirator is tracking to the high end of our anticipated range or down approximately $550 million, along with continued macro and end market uncertainty.
And finally, our full year adjusted free cash flow conversion expectation remains unchanged in a forecasted range of 90% to 100%.
Looking ahead to the third quarter, we expect end market trends to be very similar to Q2.
Hence, we anticipate third quarter adjusted sales to be approximately $8 billion.
The impact from the Covid related decline in disposable respirators and last year's exit of Russia is anticipated to be a year on year headwind to sales of approximately $130 million or one five percentage points.
Third quarter pre tax restructuring costs I expect it to be in the range of $1 25 million to $175 million pre tax benefits of 125 million to $150 million.
Taken together, we expect third quarter adjusted earnings per share will be in the range of $2 25 to.
To $2.40.
To wrap up we continue to have a strong focus on serving our customers improving the execution in our supply chain.
Making progress in our restructuring actions managing costs and investing in the business, while navigating ongoing end market weakness.
We expect our actions will continue to build momentum and improve our organic growth margins and cash flow performance into the future.
I want to thank our customers and suppliers for their partnership.
And the three employees for their hard work and dedication as they continue to deliver for our customers and shareholders.
I am confident in our future.
As we have said as we exit 2023 we will be a stronger leaner and more focused three a M.
That concludes my remarks, we will now take your questions.
Ladies and gentlemen, if you would like to register a question using a landline phone. Please press the one followed by the four on your keypad.
You will hear about three Tom prompt to acknowledge your request.
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Please limit your participation to one question and one follow up.
One moment, please while we compile the Q&A roster.
Our first question comes from the line of Andrew Open with Bank of America. Please proceed with your question.
Yes. Good morning can you hear me good morning, Andrew Andrew.
Yeah, just a question on the outlook you know I think operationally our second quarter was quite strong and I. Appreciate your commentary on organic growth, but you know, whereas the caution in terms of operational results in the second half.
What segments, what verticals are you, particularly sort of conservative you know concerned about as I said not to raise guidance more given the strength in the second quarter. Thank you.
Thanks, Andrew So as I've mentioned in my.
Prepared remarks.
When we came into the we thought we would have end markets would remain uncertain as well as economic uncertainty would exist looking at very in the first half as I've called out electronics continued to remain soft.
Nearly down 30% in the first half.
We had consumer spending continued to remain soft or consumer discretionary spending continue to remain soft.
China remained soft in the first half.
And then when you put all that together you look at it and say what are the trends we're looking for in the second half and so what we are watching is electronics and see whether that has hit its bottom or not we believe that electronic softness will remain its still going to be negative for the year, but less negative in the second half.
Tumor spending has remained soft in the first half we believe it will remain soft in the second half. So we are watching back to school season and holiday season.
Industrial activity has remained mixed there are certain markets that continue to remain strong there are certain markets that we are seeing a little bit of destocking in there.
Health care elective procedures, we believe will continue to go up on a sequential basis at the same time Biopharma and health information systems are still constrained biopharma is going through COVID-19 related demand and hits, our health information systems is impacted by stressed.
With budgets.
As I've also mentioned in my prepared remarks D are right now it looks like it's going to be at the worse end of a range of down 550 million worse as we thought it was going to be $4 52 to $5 50 coming into the year.
And in China, We have second quarter was down 4% on lower comps and we currently have not seen much of the recovery show up in China, plus as a reminder, it was a tough comp in Q3 Q of last year as China was coming out of Covid.
So when you put all that together Q through Q3 is very similar to Q and overall the trends that we see make us feel that where we are right now in the first half and maybe see trends going in the second half we feel that from a revenue guide basis will be at the lower end of our guide that we had given which was flat to minus three.
<unk> coming into the year.
With that said, Andrew if markets change, we will definitely be there to serve it the teams are executing well as you've seen in the results that we've announced.
We've got momentum on supply chain and supply chain execution. The team is doing a great job on restructuring and driving the cost as well as the team has hyper focus on making sure. We are continuing to be prudent on our cost spending but as we see these markets start to evolve in the second half and into 2024 and beyond.
We won't hesitate to invest in growth in the high growth markets. Because ultimately we are in for the long run.
Hope I answered your question Andrew.
Yeah, No I mean, it's still sort of a margin was pretty solid, but let me drill down on consumer electronics, maybe a little bit more.
What would it take for this business to finally turn positive or is this just some time early next year. The comps gets so easy that it can't decline anymore, but what kpis in terms of end markets are you watching thank you.
Andrew maybe I'll pick up on more initiatives description on what we're looking at in the second half and if you look.
Little further at the consumer electronics.
We saw a soft first half and across all consumer electronics category smartphones Tvs notebooks.
Tablets.
You just saw.
It was impacting our results as monish outlined and as we look into the second half.
Maybe there starts to be projected recovery in our markets in fourth quarter, but really third quarter looks like the first half and and I would say picking up on.
Inventory in the channel, we see Destocking in a slowdown like this and so we expect some destocking to continue in the electronics channels. So as we go into third quarter.
That's kind of forming the view that we have now what would we need to see we would need to see a turnaround in demand and in those particular build rates in those end markets and and we'll see.
I think confidence show up in AR and the inventory in the channel as well. So we're watching each of those categories closely in consumer electronics, and we also keep an eye on semiconductor.
<unk> as well and how thats being how production is changing there that gives you an indication of demand as well.
Thanks, a lot.
Yes, Thanks, Andrew.
Our next question is from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.
Morning, everyone.
And.
So I just wanted to delve in a little more into your margin performance in Q2, and what it means for second half I mean, obviously you had a nice step up in sequential margin. Despite absorbing the two 7% of pre tax charges. So how do we think about the durability of the productivity actions and positive price versus cost. It looked like it was going on in the quarter and how do you think about margin.
<unk> performance in bed in Q3 monies in second half is it looks like it looks like you're forecasting margin below.
In Q2 and Q3.
Yeah, Andy I'll just start first with your question on sustainability et cetera, there would've been there've been a few questions on cadence of restructuring charges and benefits.
And we have attached in the appendix that shows you by quarter, where we expect to be for 2023, which is charges in the range of $400 million to $450 million in benefits in the range of $400 million to $450 million So self funding.
Total program as a reminder is between $700 million to $900 million of charge of 700 to 9 million $900 million of benefits from a cadence perspective, depending on how the restructuring announcements play itself out we have given you. A 2023, we expect 2024 charges by the end of 2024 to a pretty much taken most of the <unk>.
Structuring charges the benefits of course show up in 'twenty, five and beyond and once all these charges come to an end the benefit is between $700 million to $900 million.
The second piece on where are we starting to see margin as you have seen coming into the second quarter. One of the reasons for us able to beat expectations in the second quarter was driving supply chain.
Efficiency, so factories, starting to heal better raw materials, starting to flow better which allowed us to have longer runs but at the same time. The work that the supply chain team has done under Peter Gibbons is starting to drive the execution and we are starting to see that in the results and then of course the team is hyper focused on cost control.
So to answer the question on second half and how this plays out one is you do have to adjust for the restructuring cost by quarter and you will see that the margin rate is climbing secondly, when we came into the year, we had said.
Our operating margin will be somewhere in that 18, 5% to 19% range sitting right now with the lower revenue number with a higher EPS number we believe that will be somewhere in that 19.5% to 20% range, which includes all the charges and all the benefits.
What we are watching also is as Duane so some other of your points raw material and energy cost inflation coming into the year was $1 52 to 50, we have now changed that to $1 $50 million to $200 million. So we are starting to see the benefit there what we have seen so far and he's is disinflate.
<unk>, which is lower inflation than last dealer, we are seeing the benefit in logistics, but however, some of our commodities still continue to be inflation inflationary and labor frankly is sticky from an inflation perspective in those commodities, but that also will play itself out as as events play out.
Through this year and into 2024 and beyond and then we will continue to be focused on cost and other item for us in the second quarter. Our second half is as we are getting ready for the spinoff health care will be of course standing up the new management team, Mike already talked about that in his prepared remarks.
There will be some cost incurred from a as these as as we have management teams appointed that start getting ready to be have helped get be a standalone company.
And then on.
I would just say on another housekeeping item is other financial when we came into the year. We had said it would be minus tend to flat on a year over year basis be at updating that too.
Minus five to flat minus five to plus five which on the midpoint is zero first half we got benefited by 11 cents second half it would be a negative 11, but that's on a year over year basis. So I gave you a lot Andy just to make sure that you have enough information as you build your models out and you look at look at us in total in totality.
No. It's very helpful. Monies and then just for the next question, maybe just a little more color into industrial businesses within our safety and industrial I think you had guided to download single digits for the year and you're continuing to be down mid single digits. In Q2, I know last quarter. You described industrial markets as mixed same description this quarter, but maybe you can characterize mark.
That's for US do you still see a.
Low single digit decline for the year in industrial.
Yeah Andy.
The quarter down mid single digits.
That was also impacted by disposable respirator is down.
As we talked about so about flat for the quarter.
Outside of a disposable respirator isn't as Monish outlined we're going to see more.
More to the high end of our range of what we expected for disposable respirator declines of the year, which means in third quarter, we will see an impact from that as well and when we talked about mixed it's really across the portfolio, we're seeing some strengths in our.
Our roofing granules, our automotive aftermarket business.
The demand for car repair and around that business is strong.
We saw some softness in electrical markets and in abrasives and.
Industrial adhesives and tapes business is impacted by electronics, so that's feeding into.
The industrial business as well personal safety.
Excluding disposal respirators has been showing strength up high high single digits in the quarter. So that's kind of a mixed picture.
And we're also in the channel we are seeing some caution from distributors. They are cautious about the outlook for industrial markets. They're also seeing the benefit of them proving and healing supply chain those cycle times are improving and there. They are pulling back on some inventory. So that's having some impact on our businesses as we come through the quarter in <unk>.
Our outlook for the second half.
It's a mix.
The impact from China as part of that as well, we're seeing the slowdown in the markets there or the slow first half and not yet seeing an.
Upturn in that and looking for that as we go into the second half so.
It gives you a view across the what we mean by mixed markets.
I appreciate the color guys.
Okay.
Sure.
Our next question is from the line of Scott Davis with Melius Research. Please go ahead.
Good morning, Mike and donation Bruce and Kevin Good morning, Good morning, Scott.
I'm curious just overall are you seeing areas or particular.
Yeah.
Products or markets, where youre getting some pressure to drop your prices, particularly given some of the weaker demand or do you feel like you can hold onto some of those price increases.
Increases that you've got in the last couple of years.
So, yes, Scott I would say.
As you see monitors called the disinflation moderating of inflation youre going to start to have discussions around impact on price I would say when we look at it our price values and the right place, where we are where we face our markets.
I would say the area, where you have the most discussion typically our retail markets. It's an ongoing discussion always is even in the times of high inflation.
Strong discussion, but prices are <unk>.
Everywhere we are.
Were confident that were priced in the right place as we come through this market dynamic broadly. So we're not we're not looking at pressure specific in one segment or the other but I would say to that.
The conversation is something that we anticipate as we see disinflation and then eventually we see it.
Deflation, then we would expect it to ramp up.
Okay. That's helpful.
You guys are a little bit bigger picture question, when you talk about supply chain streamlining.
Sure.
What do you mean exactly I mean, how do you how do you balance kind of.
Assuming that means kind of localization but.
Between balancing between resiliency and not being relying on any particular supply partner, but sometimes there's added costs that come into resiliency. So how do you think about streamlining and the cost benefit of streamlining and maybe you can give us a more concrete example of that too.
To help us understand what that means specifically.
Yes, Scott maybe.
I will step back for a second you know as we came through the pandemic.
We saw a lot of factors impacting our supply chain inflation labor shortages raw material availability all of that was impacting our production runs and really creating inefficiency in our factories impacting yields.
And as we came into this year, we started to see supply chain healing, we're seeing labor availability, improving our munis highlighted we're still seeing inflation in labor raw material availability has improved and we put a lot of focus during the most difficult times and in the supply chain disruptions on multiple sources for raw materials and we were.
Beijing with many suppliers hundreds of suppliers on a monthly basis to try to manage those raw material interruptions as they appealed that that's become much more focused on a few raw materials, we're seeing much better availability. All of this is helping us run our factories, a little more efficiently we're seeing.
Improvements in yields we're seeing improvements in logistics as as supply chains heal more broadly and so as we stepped into the restructuring we were taking stock of what we learned during the pandemic what we learned during restructuring also what we learned as we move to our global operating model and so streamlining is really taking advantage of.
All of those learnings and I would say also taking advantage of investments in data and data analytics, our digital strategies investing in productivity more broadly in our manufacturing models.
So streamlining is as focused broadly across our supply chain I talked about we're working to improve every aspect of it better more disciplined planning taking advantage of data and analytics.
Stronger focus on sourcing that dual sourcing taking advantage of that strategy. What we can learn and the plants are all running more efficiently and how we can manage logistics more efficiently. So plan source make deliver we're streamlining across that really taking advantage of the learnings and I would also say stepping into aligning to customers and our business models.
And it's going to continue to be an opportunity for improvement we will continue to evolve this but the restructuring actions really tried to incorporate those learnings and it wasn't a top down we're going to take out so much head count. It was how do we restructure realign streamline our supply chain our plan source make deliver to take advantage of all that and position us.
And the markets that we're in but also position us to be ready for a stronger performance as we go forward in the future.
Very helpful. Best of luck the rest of the year guys. Thank you.
Ed.
Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Thanks, Good morning, everybody and I appreciate the additional details on the restructuring.
Hi, just.
My first question really just around that deflationary point or you think things are getting things are getting a little bit better or better than you originally expected.
It seems like most of the inflationary headwinds that have already occurred for the year and so do you expect that to turn positive I guess by <unk> or is that something that could turn positive in the <unk> numbers.
Yes, So Joe I think you have to break this up into multiple pieces, but what I've said before is what we are seeing is lower inflation than a year over year. Our headwinds are somewhere in the range of $1 50 to 200 between electricity and carrying over of raw material inflation you have done.
Hundred in the first quarter and we have done I would say between 25 and the second so we still got a little to go on caddy over.
Let me talk about new inflation I'll break this up into logistics costs are seeing in.
Lower costs, partly driven by we are also reducing the amount of premium freight that we used during the pandemic because raw materials are flowing better.
You are still seeing inflationary items in downstream. So upstream materials have started to show signs of moderation of inflation, but from an <unk>.
Downstream perspective labor cost is still pretty sticky in inflation. So what I would say is we will have to look commodity by commodity market by market and as things evolved in the third and fourth quarter you should start seeing some of the cost on a year over year basis get better if you recall last year.
It was I would say October November was when you started hitting peak of inflation and then you saw market starting to moderate it will also of course depend on ultimately what happens with monetary policy. It would also impact depends on demand that youre going to get from China and the rest of the end markets that would be playing so all put together.
Our current view is that things have gotten better, especially logistics material is flowing better which is definitely helping us run our factories better we are seeing cost out and the teams are doing a nice job of driving it but it will take a little bit of time for it to show up depending on a year over year comp and how much of that material be actually consumers.
On the volume we produce long answer to your question, but it's multiple materials. So it's not one that we buy unfortunately.
Yeah. That's super helpful. Thank you for that and I guess my follow up question I know, we've talked a little bit about the weakness in electronics, but I want to go back to that for a second.
Is there a way to maybe just kind of parse out exactly what youre seeing in that end market and then specifically I know that.
Apple considering rolling out like in all OLED iPad next year.
We went through that transition a few years ago on smartphones.
That was a hot topic for your company I, just any thoughts around.
That specifically and how that impacts your business.
Yes, Joe.
I'll go back to my earlier comments.
The decline that we've seen in the first half has really been driven by reduced demand in smartphones tablets Tvs those different categories.
There is an ongoing shift in the display technology from.
From LCD to OLED.
We had talked about is as you noted we talked about it a number of years ago anticipating it we continue to innovate on the OLED platforms, but we do see some impact from that shift as we as we see the continued movement away from LCD to OLED and a few of those categories. So there is there is some impact from that the bigger impact.
Again as the demand in the end markets smartphones Tvs tablets and laptops, a few of those categories.
Okay. Thank you.
Our next question comes from the line of Chris Snyder with UBS. Please proceed with your question.
Thank you I wanted to ask.
On the restructuring program. So for Q3, if we just annualize the expected savings.
It's about five to 600 million, which isn't far off the $7 million to $900 million range, which it sounds like we shouldn't expect in 2025 so.
Another 4% to $500 million of spend coming post Q4 'twenty three.
There any reason that the savings are maybe tracking a little bit ahead is there anything thats front weighted that we should be aware about here. Thank.
Thank you.
Yeah, Chris a great question. So your math is right I would also look at fourth quarter, where we have said $185 to 35, you take that midpoint and you annualize that you'll get to closer to the overall annual range.
But when you look at the way out.
Charges or some of it is rooftops some of this is non.
Cash charges and some of it is restructuring people all of that put together and the first half we have done 262.
What is left to go which is I think your question in 'twenty four and beyond what happens with the cost that a couple of things geography by geography. We go through negotiations make sure. We are following all the regulations in there so there'll be a cost for that and then we've got some other rooftops et cetera that take a little longer for us to exit that.
Also happen in 2024 and beyond so that's why you are seeing.
The way it is right now.
Okay.
I appreciate that and then certainly feels like the saving here coming in.
A bit quicker maybe than previously thought I do not think there is anything in the golfer tiki restructuring savings, which obviously came through.
Does that change the way you think about the plan over the next couple of years into 2025, just seeing the savings come through faster than you thought.
Yeah, I would say listen on Q2, the teams knew that we had to execute well and early and they've done a nice job.
Some of the benefit came from head count, but a lot of the other benefits that we've got is as Mike mentioned about streamlining the corporate.
We're able to go after a lot of indirect cost in those areas, including exiting some of the rooftops that'd be wanted to that we were planning to early so again it goes back to a lot of focus on cost control, making sure that where we are spending our money on an indirect perspective.
Also as well focused on and that's why we were able to get Q2 to be off to a better start than we expected. So I give the team a lot of credits they are going through very granular level of detail, making sure that we're doing the right amount of spend and focusing in the right places we get the best return so.
My credit to the team.
Yeah.
Thank you.
Okay.
Our next question comes from the line of Nicole to play with Deutsche Bank. Please proceed with your question.
Thanks, Good morning, guys good morning Marshall.
Maybe just starting with Biopharma. So this is an area, where we've seen weakness post COVID-19 for some time now has there been any green shoots there I don't know if you know if you think about like orders or what customers are saying about spending to the second half.
Nicole.
Our highlight of Biopharma is as being one of the impacts on on solar growth in healthcare is really a reflection of the post COVID-19 dynamic. So we saw a strong demand in biopharma for vaccines and therapeutics and we ramped up to serve that and the industry did in broadly.
And what Youre seeing is a.
The other side of that demand and also the inventory working off the inventory that was built up in trying to respond to that demand. So we're seeing both aspects of that the space.
<unk> that we see for for innovation and for US growing the business. We see this as a long term growth driver, we have new solutions that and one of the reasons, we had value as we came through the opportunity of vaccines and therapeutics as we could combine steps and the processing multiple steps into one and so that that <unk>.
There's going to be there as we look forward.
Recombinant protein therapeutics are an opportunity going forward or just near term working through that post COVID-19 dynamic both end market demand and inventory in AR.
The broader channel Nick.
Nicole I'll add one more is we are very confident and bullish about this business. In fact, we have added capacity to continue to have more production output out of that as the demand comes back.
Got it and just to clarify in your second half outlook like what's baked into the health care business have you embedded any improvement in biopharma or is the expectation that that's more of a 2020 for dynamic.
So as I've mentioned, there is slight improvement that youre going to see in overall and in health.
Healthcare, one as elective procedures should go up biopharma demand should start settling down.
Hospital budgets are hopefully starting to bottom, but we don't know that so we'll have to see what happens with elective procedures, but overall I would say there is improvement from our first half to second half and in the market in general in health care that we've embedded into our guide on the <unk>.
Other hand, the thing we are watching also as oral care Nicole orthodontics, because as you know if the economy slows down that's an area that people will control their spending on and so that's the other thing we are watching and of course, China and seeing how the recovery in China plays itself out, but as I mentioned in my prepared remarks, Mike.
It multiple times too this is a great business in the long term. This will continue to have very good growth. We are working through some comps from last year, which was COVID-19 as well as capital.
Budgets in hospitals, but all of those trends in the long term.
Turning themselves at home.
Thanks, Ronny I'll pass it on.
Our next question comes from the line of Steve Tusa with Jpmorgan. Please proceed with your question.
Hey, good morning.
Thanks for taking the call here late.
Can we just calibrate because theres a lot of moving parts around.
The adjusted sales numbers I think your guidance implies roughly like seven 9 billion in sales like a modest sequential step down from the third quarter just on an absolute basis is that right.
It's $8 billion.
For Q3 is that to your question I am sorry, No Q4, Q4 Q4, what's implied yeah. It would be around that range between it's somewhere in that range right Yep, Okay and can you just give us an idea of the range of the absolute margin I mean, we could probably do a lot of backing into it but.
What you now expect for the year from a just a range and an absolute margin basis.
Between 19.5% to 20% Steve versus the 19 that we had told you coming into the year.
That's great. Thanks, and then just one last one on these on these liabilities. So what what was the change in the mindset from.
But really drawing a bit of a hard line and talking about.
You know how the science.
Made you guys look at this stuff.
And then you know taking what is still a pretty sizable 10 to 12 billion dollar charge like what like that's a pretty significant change in mindset.
Yes.
Rove that internally.
I think you know.
Over the last several years, we've been talking about taking a proactive approach to managing our litigation and that includes the whole PFS docket and and it's been part of our strategy and we talk about it kind of in short form that we're going to proactively manage it defend ourselves in court and work too.
Resolved through mediation as appropriate and that's that's been really the guiding strategy and how we've looked at it so as things evolve.
Are making decisions around that frame.
Does it matter, where the stock prices and what thats, reflecting when it come to you or how you think about this stuff.
Addressing litigation our strategy there is independent of what the share price is doing I mean, certainly there is an overhang in the stock price and the uncertainty around that and where we are focused on doing what we can to address litigation help address that uncertainty that's something we've been discussing with investors.
For multiple years, and so that certainly plays into it from that standpoint, we don't like the overhang on the stock and we want to manage it but we've got to as we move forward. We've got to do what's in the best interests of the company for the long term and so that gets back to we're going to defend ourselves in court and we're going to work to resolve as appropriate.
Yeah, absolutely makes sense all right. Thanks, a lot. Thanks.
Thanks, Steve.
Our next question is from the line of Laurence Alexander with Jefferies. Please proceed with your question.
This is Dan Rizzo on for Lawrence and Thanks for fitting me in just a quick question on inventories. So these madison well, how should we think about it.
To return over in the long run I mean over the next few years, what is kind of the.
Go forward thought process.
Yes.
As I've said before our supply chain start to heal one of our big opportunities are opportunities to continue driving cash flow as inventories. The teams have done a really nice job of starting to use data and data analytics, we are getting better at doing demand planning. So I would say in the long term you should see trends continued to improve.
From an inventory turns turns perspective.
Because our supply chain heel as we get better and demand planning, that's why you're going to see it. So you will see it get better in the long run.
Thank you very much.
Yeah.
That does conclude the question and answer portion for our conference call I will now turn the call back over to Mike Roman for some closing remarks.
To wrap up we continue to execute in a dynamic environment, while we see progress and positive momentum we have more work to do and we'll continue to advance our restructuring actions control costs strengthen our supply chain at the same time, we will drive our strategic priorities improving operational execution successfully spinning off our health care business.
Ms and addressing litigation.
<unk> for their contributions and commitment, especially as we continue to lead through significant change we will stay focused on driving growth improving operational performance and delivering value to customers and shareholders. Thank you for joining us.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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