Please. So that is, that is part of it. I would say 2023 was an important and pivotal year for us as a company, and it really came from what we did with our focus on three priorities. The first was really improving the performance of the 3M model and what we did to execute there. It's about what we did to progress the spin of our healthcare business, company that's now going to be named Solventum. And it was also about reducing risk and uncertainty for the company. And then the first one, you know, we delivered a strong performance in 2023 because of our focus on improving performance. We, you know, we delivered above our expectations from the beginning of the year on EPS and cash. We expanded margins. When you exclude restructuring, we expanded margins 60 basis points.
EPS was $9.24 against initial guide of $8.50-$9. We grew adjusted free cash flow 30% to $6.3 billion, and free cash flow conversion, 123%, up 37 basis points. You know, just a reflection on the strong, reliable cash generator that, that we are as a company. We took the biggest restructuring in the history of the company, and that wasn't a top-down, eliminate 10% of the headcount. It was to really accomplish some strategies we were driving, streamline the organization end to end, and with a big focus on supply chain and what-- where we were going to drive improved performance in supply chain. And that, that focus on following through on improved performance is a big part of this.
It was about leaning out the center of the company in anticipation of the spin of healthcare, to start to take on some of those stranded costs. It was about aligning our businesses closer to customers, and we are leveraging that into the margin performance that we saw during the year. We also are creating space to invest in growth and sustainability and productivity. So very important progress there, and it brings momentum into 2024. These three priorities are what we're focused on this year. That's why I spent a moment on those. Turning to the spin of healthcare, Solventum, we made great progress. Our teams have done a great job. We've assembled a strong team under Bryan Hanson for Solventum as they become a public company.
Our Form 10 was made public on Tuesday. That highlighted now a targeted date of April 1 for the hard spin. That's subject to board approval, of course, and other conditions that we've laid out in our SEC filings. We are going out with the leverage that was part of our guidance originally, so 3.5 times. We had an investment grade for Solventum. That means they'll be looking to borrow $8.4 billion. They'll retain $600 million in cash, net of fees, approximately $7.7 billion in proceeds coming back to the 3M company. And at the same, we're following through on the guidance that we had at the beginning, that we'll hold a 19.9% stake in the company that we monetize over the first 5 years.
So we're excited. We're, you know, in the final stages here of standing up two world-class public companies, so great progress there. And then the third one, reducing risk uncertainty. We had two important settlements announced last year-
Mm-hmm.
on public water suppliers in June and Combat Arms in August, making very good progress on both of those. Combat Arms, we announced in January that 3M and the plaintiffs had reached an agreement to settle all the settlement requirements in cash, and that was a good step for us. We also had an initial settlement actually assessment of the settlement on January 5, and that—we came out of that talking about we're on track for the 98%. There'll be a final settlement agreement or finalization on March 25. So making good progress on that. All parties are working together towards successful conclusion of the settlement. Public water supply, we continue making good progress on the settlement. We had a final approval meeting on February 2.
We're still awaiting court ruling on that. You know, and one other thing to note is the court or the judge extended the opt back in. So this is-
Mm-hmm.
for any public water suppliers that opted out, they have an opportunity to opt back in between now and March first. So that's a good step-
Yeah.
In terms of progressing through this and getting to that final ruling from the court. Then the other one to note on risk uncertainty, we continue to make very good progress on exiting PFAS manufacturing, something we announced at the end of 2022 for completion by the end of 2025, and we're making good progress. Our volumes are down 20%, which reflects working with customers to transition them and be on track for that exit. So then back to your, you know, your question: How are we looking at 2024? What are we seeing?
Yeah.
You know, we said it at the Q4 earnings call, Q1 looks a lot like Q4.
Yeah.
It's really about the dynamics. We see consumer electronics stabilizing, which we called in Q4-
Mm-hmm.
-kind of flattening out against year-over-year comparisons. Semiconductors, still soft. Both are expected to improve as we go through the year.
Yeah.
But in Q1, we're, you know, we're still seeing those same dynamics. We're seeing mixed end market dynamics in industrial consumer. Retail is still, I would say, muted and soft in as we start the year, so similar to what we saw-
Mm-hmm.
in Q4. Geographically, the U.S. is relatively strong for us. Europe, Asia, China, also, I would say, soft, muted as we start the year. Just watching those closely. China, in particular, we're watching closely as we come out of Lunar New Year.
Yeah.
When you look at the macro, around the world, it's low single digits for GDP, IPI. China is mid-single digits. So we're-
Mm-hmm.
Watching to see how that progresses. You know, we'll update the total year guidance after the hard spin, but just to, I would just confirm what we had said about Q1. We're still seeing at approximately $7.6 billion in revenue.
Yeah.
You know, we're still looking at EPS in $2.15 in that range. And then our operating margin is still looking at the same kind of range, 19.5%-20%, up 250 basis points over the year, reflecting continued improvements in our execution operations. So we're, you know, we're excited about the year. We've committed to-
Mm-hmm
... what we've laid out, and, you know, we are confident we'll have another successful year in 2024. So I give it to you for all the rest of the questions that I haven't answered.
Thanks very much, Mike. No, I think maybe on that organic sales point, you know, any thoughts around sort of inventory levels that customers, particularly in markets like electronics or in safety and industrial, you know, do you get the sense that those could be poised for some restock later this year or pick up in final demand? How do you assess kind of where we are now after what's been, you know, five, six quarters of sort of muted demand?
Yeah, I would say, broadly speaking, the inventory in the channel is pretty stable against that, you know, that dynamic that I just talked about.
Mm-hmm.
And then partially because that dynamic is kind of moving sideways a bit.
Yeah.
Not every market is doing that, but I would say in general, stable. You know, a couple of things that are notable. You know, this time last year, we were talking about significant inventory reductions in retail.
Mm-hmm.
That played out during the year, and that's, you know, relatively stable at this point. Electronics has restarted the downturn, you know, at the end of 2022, really.
Yeah.
They've stabilized-
Yeah
... relatively speaking. You know, before you see an inflection point, you know, in a recovery, you got to see an inflection point in demand.
Mm-hmm.
So that recovery in electronics would have to be there. The one area that we called out in Q4 is some destocking in industrial channels.
Yeah.
Some of it was certainly due to the fact that supply chain's performance was getting better, and they were taking down safety stock. Some of it looks like it's caution, you know, cautious, you know, outlook for... You know, it's hard to tell what's demand and what's-
Yes
... inventory management. That—it's not something that we've been quantifying as something big and material, but it is, you know, it is a dynamic, and I, I would attribute a lot of it to the, just the improving supply chains up to this point. We'll see, they'll react to whatever they think the demand is going to be as they look.
Perfect. And when you think about sort of price versus volume, you know, I know 3M doesn't break it out explicitly, sort of by quarter anymore, but, you know, any thoughts around sort of how much you expect the price tailwind to narrow, just the kind of broader inflation, and the sort of net of price versus raws in your margin this year?
I would just start first, Julian. You know, as we've been through the last few years, the team's done a fantastic job of starting to monitor inflation from multiple sources. We've also had good success in raising prices to offset inflation, which we've done last year and the year before. We would also, as I look at inflation, we are seeing certain commodities continue to be inflationary, and then you've got labor that still has inflation. In 2024, the team is planning to raise prices to offset that, so we should be able to offset those two, and that's our current plan. I would also tell you, the team's doing a lot around fuel sourcing, driving yields and efficiencies in the factories, different ways that you can address the cost of goods sold.
As you know, you've followed 3M for a long time, our prices are not formulaic in every market. We go through multiple channels, we go through markets, we go through competitive position, and we look at all of that and factor that in. In the long term, or even if you look at history and you look at the long term going forward, 3M has always been able to get good price, and part of it is because of the value that they create for customers, and I don't see that changing. So 2024, the plan is to have price that will offset inflation. And long, I always feel with the work that we do, that there's always opportunity for us to keep doing that equation to remain positive.
Mm-hmm. Perfect. And then, you know, when we think about kind of medium-term organic growth for the company, you know, in the past, you talked about, you know, maybe something relative to IPI or, you know, there was a 3%-5% type of ambition from six years ago. You know, how do you see the sort of approximate, you know, through cycle growth rate of the company once Solventum comes out?
Yeah, I would, you know, just to frame up, that 3%-5% was a view of IPI being higher than it is today.
Yes.
For sure, that was part of it. You know, the way we're looking at it, right now, medium term is 2024.
Yeah.
When we guided 2024, if you look at it, we said flat to 2% for organic growth-
Mm-hmm
... which includes portfolio actions that we're taking, and about 100 basis points of portfolio action. So it's 1%-3% organic growth across-
Yeah
... the business X's portfolio actions, which, you know, IPI, GDP is about in the middle of that.
Yeah.
You know, we certainly think about the macro and the outlook for the macro as we guide for the year, but we're looking at markets.
Yeah.
We're looking at where we are, you know, where we are invested, where we are growing, where we are, you know, close to customers. And I would say that's what's driving the guidance in the near term and medium term, is how do we look at those markets? Now, there's been other times, like coming out of the Great Recession, where all markets were synced together.
Mm-hmm.
Even coming out of the pandemic-
Yes.
All markets were synced for a maybe relatively short period of time. You know, that, that's not true today.
Mm-hmm.
Markets are diverging. Just look at how consumer spending has shifted in the last-
Yeah
-you know, 18 months. So it's, it's something that's very market specific. So you look at our major markets, you know, consumer electronics, we've talked a bit about already. Automotive, you know-
Yeah
Had strong growth last year. Beginning of the year, we were looking at build rates of, you know, 3.4%-3.5%.
Yeah.
It wouldn't double that by the end of the year.
Mm-hmm.
We had strong year in build rates, and we continued to outgrow those build rates.
Yes.
As we look at 2024, it's flat to slightly down in build rates projections. We expect to outgrow those build rates. So we're-
Yeah
... you know, we're kind of building our view of medium term off of that, and we look at multi-industrial, you know, the industrial markets-
Mm-hmm
And how are those markets? I say it's mixed. There's some markets geographically and otherwise that are performing better and others that aren't. And so you're... You know, we're taking stock of that all the time. It's what went into that. It happens to kind of have GDP, IPI at the center of it because of the projection there, but it's really built up by those markets.
Got it. And when we think about that sort of, you know, 2% or so underlying organic growth rate this year, is that sort of split... You know, is there minimal kind of volume growth, it's mostly price driven? Is that the way to think about that?
Well, we see volume growth coming back as part of it, and so it gets. You know, that's the range a little bit.
Yeah
What happens in the end markets. So that goes into it. You know, we continue to... You know, our organic growth is driven by our investment in innovation. And to a degree, what I talked about at the beginning, driving improvement in our performance, that is an enabler for organic growth, too. You're improving your margins, your gross margins, you're, you know, driving greater cash efficiency. You're enabling yourself to perform better for your customers.
Mm-hmm
... improving service, and that adds to it as well.
Yeah.
But where we are investing in, you know, significant commercial business-sized opportunities that we have today, where our innovation can play, that in the attractive markets, that's what will really drive that organic-
Yeah
Volume growth improvement as we go.
When we think about the sort of pruning element, you know, is that something that investors should expect as a sort of, you know, maybe several years you have that 100 basis points headwind on the top line? And then on the other side of it, you know, are there some areas where maybe you're taking share that could offset the pruning aspect? I think you talked about outgrowing global auto builds, for example. Any other areas where you think, you know, over three to five years, 3M will take share in these areas? And then any thoughts on the scale of that pruning after this year?
Yeah, I think, maybe I'll start with, sure, it's an important-
Yeah
Strategy. We are... You know, we need to be competitive in our markets and take share, and we do that partly with our innovation. You know-
Mm-hmm
... what I said at the beginning, aligning, aligning our businesses closer to our customers. That's about being competitive and winning share in the marketplace.
Yeah.
So that's an important part of the strategy. We, you know, we also look at where can we leverage our innovation, responding to customers. Our innovation model is, starts with the customer. It's customer back. We're close to them. We understand their businesses. We have close relationships. The majority of what our, our revenue is specified, designed, and regulated with our customers. So there's a very close relationship, and so winning in the market and driving growth, focusing and, and I would say we prioritize our, our investments, capital and R&D.
Yeah
—to the most attractive markets. So we wanna be focused on winning in markets that are attractive, growing better than macro, if you will, and also where we have a strong right to win. So that positions us to try to take share—
Mm-hmm
in those markets broadly. So I think that's, that'll be the driver for us of organic growth as we move ahead. We also are investing in where we can build new businesses. So there's-
Yeah
areas of strength, commercially, safety, home improvement, electronics, automotive, where we-
Yeah
are well positioned, and we see opportunity for our material science.
Mm-hmm.
That's more about new penetration than it is about share, in a sense.
Yeah.
And then we have emerging technology areas that are going to be about building new businesses, and that's-
Yeah
important contributor to our growth, and we've called out climate technology.
Mm-hmm.
For example, we've got opportunities broadly across climate technology, emission reduction-
Yeah
energy transition, adaptation, various areas of, of climate technology. So there's a number of, of strategies there, close to customers.
Mm-hmm
new penetration and building new businesses. That will also be part of how we drive volume growth as we go.
The point on pruning, like is that like 100 bits a year for several years, or do you think like a lot of it is done now as a kind of cleanup?
You know, the other strategy that really complements innovation-
Yeah
is portfolio management, and we've talked a lot about this. It's a continuous process.
Yeah.
There's really, at a simple level, there's three things that we do. We prioritize where we invest organically, like I'm-
Mm-hmm
Just describing. We look at complementary M&A to our portfolio, where we can drive opportunities into more attractive markets, leverage our synergies of 3M.
Mm-hmm
... You know, get greater than the sum of the parts from acquisitions, if you will. And then optimizing the value from our portfolio. And what-
Yeah.
The actions we talked about, you know, at the Q4 earnings call, geographic prioritization and also what we're doing in the consumer business, that's about really focusing on how to best optimize value out of our portfolio.
Yeah.
Geographically, moving to an export model in 30 countries around the world-
Mm-hmm.
- is enabling us to prioritize resources for other parts of the world where we can drive growth.
Yeah.
Strong returns. So it's, there's a near-term headwind in revenue, but it positions us for stronger margins, stronger cash flow.
Mm-hmm.
I believe it will focus us on the areas that we can drive growth, and it'll give us an opportunity to improve growth as well. So it's a strategy. What we have in front of us right now is the two actions that we talked about.
Yeah.
But we're gonna be continuously looking at our portfolio and saying, "Where else can we help ourselves near term in terms of performance?
Yeah.
and returns, if you will, and then longer term, in positioning us for better growth as, as a overall company. Consumer is a good example of that. About 5% of the consumer business we looked at, portfolio in categories we didn't have the strong right to win.
Yeah.
It wasn't being differentiated. We have other parts of those categories and other categories where we have strong right to win, strong differentiation. But by taking those actions, not only do we improve margin and cash flow-
Mm-hmm
... we create space to shift the consumer investments, advertising, merchandising, other investments, to those areas where we do have a strong opportunity to grow.
Yeah.
So you get a-
Okay.
You can build momentum on.
Mm-hmm. Great, and then on the margin front, you know, I think you've talked about, you know, up to 100 basis points of total margin expansion this year. When we think about 2025, let's say, you know, you've got similar tailwinds from savings, you know, less of a headwind from restructuring, and potentially more volume leverage. And so we should expect 2025 to be another very strong margin year, and then after that, we'd settle back into that 30%-40% incremental margin sort of placeholder.
Yeah. So, Julian, we haven't given guidance for 2025. I also would say, you know, a lot of the restructuring benefits, we will re-baseline once the hard spin is done.
Yes.
We'll have the right-
Yeah
Path to go up. What I would start by saying is just what Mike said, three things the team's focused on: organic growth, margin expansion, and cash. How do you get margin expansion? You're gonna get it from supply chain efficiencies, and you're getting it from the restructuring program. The restructuring program is a different way of working, so it's a new way of us working.
Mm-hmm.
It's in everything we do. For example, geographic prioritization, you're seeing the savings in the-
Yeah
Restructuring program. You see some of it show up as a negative in revenue.
Mm-hmm
... because now we're going through distributor margins. So distributors, so the margin is different from what we would have seen in the cost.
Yeah.
So when you look at all of that put together, our equation and our heads are, you've got supply chain efficiencies, volume leverage, restructuring benefits, less headwinds that you saw, as you called out, offset by the appropriate runoff of investments in growth, productivity, sustainability-
Mm-hmm
... and investments in our workforce, which is normal wages, et cetera. When you put that whole equation together, it's where you get good leverage.
Yeah.
The teams are focused on continuing to drive operating leverage and margin expansion, because that not only gets us more cash, but it also allows us to be more competitive, return capital to shareholders, et cetera.
Mm-hmm.
So big, big focus on that, and we'll-- When we come back on investor event after the spin, I think-
Yeah
... we'll just walk you through that and give you the outlook. But as you said, for 2024, with the no-spin scenario, the plan was 75-100 basis points of margin expansion, which is in addition to the 280 basis points year-on-year, last year, on the H2 that we had. So you can see...
Mm-hmm.
You can start seeing these actions showing up in our margin rate.
How do we think about kind of stranded costs now that there's a firm date for the spin?
So we're working through that. Again, as we meet you all post-spin, we'll walk you through that.
Yeah
... and give you clarity. Now, you know, the word stranded costs in our definition, because everyone's got a lift definition, is when you have costs that you can't commensurately reduce with volume-
Yeah
... in our view, that's stranded cost or negative leverage, whichever word you want to use.
Mm-hmm.
Some of the restructuring actions that we have taken allowed us to eat into some of that portion of that stranded cost-
Yeah
- that wouldn't have existed, that we would have had if we had not taken these actions. So we're working through that now that we've got a date locked in. We've just got to work through all the math on who goes where and what the costs look like. We get a clean quarter on what all the moving pieces are, and we'll-
Yeah
come back and give you the whole picture.
On the balance sheet, as you said, some of the big liabilities, there's been very good progress made the last 12 months. You'll get the you know $7.7 billion of cash from Solventum. How should investors think about the capital deployment opportunity at 3M post-spin, you know, dividends, buybacks? So kind of, is M&A likely to stay very low for a year or two, because of the cash out for the settlements? Any thoughts around that?
Yeah, I would, I would start with where I started at the beginning. We had strong cash generation in 2023, and so I think that starts... We're, we're a strong and reliable cash generator as a company. That's really important. We have a strong balance sheet.
... strong cash generator. We are going to receive $7.7 billion, approximately $7.7 billion in proceeds, and we've got the 19.9% stake to-
Yeah.
monetize over time, too. So it's gonna take a strong balance sheet and take a stronger... You know, the strategy behind the spin is to create value for shareholders. That the spin of our healthcare business, Solventum, will create value.
Mm-hmm.
It and part of the value they can, you know, the way they create value is having tailored capital.
Yeah.
allocation strategy for a med tech company.
Mm-hmm.
Same for us. We're gonna have a capital allocation strategy, and it's gonna continue to be first priority, invest in our business.
Yeah.
It's gonna be returning capital to shareholders, including paying an attractive dividend, and it's gonna be being positioned to manage the requirements of the capital for those settlements. Now, those settlements, just a reminder, on that arms, the payments are, you know, they're spread over seven years.
Yes.
Public Water Suppliers is spread over 13 years.
Yeah.
So there's, you know, there's a timeline to that as well. So I think, you know, we're positioning both companies to be successful with their tailored capital allocation strategies.
Got it. When we think about that cash flow generation of remaining core, if you like, without Solventum, you know, any sense of kind of how, what that free cash flow kind of base is, dollars or margin rate or conversion rate?
Solventum is cash flow creative to 3M.
Yes.
As most med tech companies are, so they have a very strong cash profile.
Yeah.
I would tell you, when you look at us and look at 2023, we generated 123% of overall Free Cash Flow Conversion.
Mm-hmm.
As Mike talked about it, the opportunity for us going forward continues to be driving inventory and accounts payable, working capital.
Yeah.
The teams have taken inventory down to 14.8% of sales in 2023, but my view is there's still a lot more we can do. The work that the teams have done through the pandemic on data, data analytics, the ability to visualize where the inventory is, making sure as you're using dual sourcing, you're getting better terms. There's a lot the teams have done, but there's a lot more we can do. So in our view, as I look margin expansion, which allows you to get-
Mm-hmm
... cash plus working capital, and then you invest some of that back in CapEx and R&D, we will continue to be a good cash generator.
Yeah
Like we've done in the past. We'll remain, I would say, fiscally prudent on where we invest to make sure we're getting returns, like I said, organically. So overall, I would just say it's, we see the opportunity there to get machine to keep generating cash.
Perfect. And I think with that, we'll switch to the audience response survey questions. Firstly, do you own 3M today? So generally, a lot of opportunity there. Number two is around general bias towards 3M at the moment. So very balanced. Third one is around through cycle earnings growth versus the sort of multi-industry average. Slightly below. Fourth question is around excess cash usage.