All right, good morning, everyone. We are excited to get the Wells Fargo 2024 Industrials Conference underway and thrilled to have 3M with us this morning. From the company, we have CFO Monish Patolawala. I'm Joe O'Dea. I cover the multi-industry sector here at Wells. To kick it off, I'll turn it over to you, Monish, with some prepared remarks, and then we'll jump into Q&A.
Sounds good. Listen, thanks for having us, Joe. It's great to be here and talk about what the company's been doing. As you saw, Q1 good start to the year. We're back to organic growth. We had good margin expansion, good EPS growth on a year-over-year basis. We successfully spun out Solventum as of April 1st, and we've reduced risk and uncertainty by bringing two large litigations to settlement. At the same time, you can see that we also reinitiated guidance for the year, taking out healthcare, so post-healthcare. We reinitiated guidance for the year, which is flat to plus 2% on revenue, organic growth, which includes 100 basis points of headwind due to the portfolio actions that we're taking that we have already discussed before. And good execution, good margin expansion.
The guide implies a 200-275 basis points of margin expansion on a year-over-year basis and strong free cash flow conversion and continuing to drive that. We are thrilled to have Bill as the CEO. He joined us on May 1st. He's been, I know all of you are very curious to hear from him. You will hear from him during second quarter earnings. He's been very busy. He's been looking at, he's been visiting labs. He's been visiting factories, spending a lot of time on drivers of organic growth. Where can we grow? Where should we invest? And at the same time, helping to continue to assess driving performance for all the continuing to make sure that we have sustained performance. So he's spending a lot of time with the team around that.
I would tell you, you know, his assessment is similar to what I've said before. There's a lot of opportunity for growth, margin, and cash at 3M, and I think it's great to have his perspective and see how we continue to build on the momentum that we have had over the last few years as we've been making some of those changes at 3M. When you come to 2Q, what you'll find is the end market trends are pretty consistent to what we told you at 1Q earnings call, which was pretty much saying electronics are stabilizing and continuing to grow, and it'll continue to grow in the second half. Of course, we'll have to watch the trends as we go there.
Industrial markets have been weak, as in some cases you've still got customers that are a little cautious, but again, nothing major to talk about different from what we told you in April. And then consumer market continues to remain muted, especially in hardline categories that we play in. And I would say continued good execution from the team. So we've continued to make good progress on all the items that we had talked about at 1Q. So overall, I would say teams well focused, taking care of our customers first, and secondly, continuing to be focused to drive margin, growth margin, and cash, and at the same time, continuing to build on the momentum that we have created. So overall, stable, positive, moving ahead.
Maybe just to stay on Bill Brown for a second, in terms of, you know, what are your observations of his initial impact? What has been sort of the key message to the organization as he's taken the CEO seat?
Yeah, so, you know, Bill's also been out. You can find his public comments on this topic if you search the internet. But Bill's come in two big things, I would say, as his priority. Number one, how do we get the growth to where the growth rate should be for 3M? And two, is sustained operating performance. So those are the two things he's focused on. He's messaged the team on that. He's also talked about making sure that our employees and plants remain safe. So that's another big item from his perspective. He comes with a lot of experience, a lot of different industry experience, so he's bringing that into account. But you're going to hear from him during second quarter earnings. I don't want to front-run it, but excited to see so far what he's been here.
As I said in my opening remarks, he would say the same as I've said, which is there's tremendous opportunity for 3M for growth, margin, and cash, and we'll keep driving that.
Then I wanted to touch on sort of cost and capability synergies across 3M and to understand that leverage. So when you think about sort of the intellectual property, how deeply does it run sort of across the different segments or different divisions versus in more of a silo pattern?
Sure. You know, when you think about 3M and in general, you can look at innovations at the core of what we do at 3M. What happens is you go out, you meet a customer, you understand their problem, and you help solve the problem, and that creates a platform. The IP or innovation is centrally accessible to everybody in the organization. Different divisions of business groups will combine multiple platforms together to provide innovative solutions. Similarly, you can also look at, if you look at our basket of platforms that we have, we also have a lot of manufacturing synergies. One third, for example, one third of our innovation platforms are around precision coating, micro replication. There's tremendous synergy across the company. You would also have us, you know, so we take all that into account.
At the end of the day, we measure innovation through growth. You've got to show it in growth. You've got to show it in margin. And that's what we are trying to do. So our goal through innovation is, one is, of course, we are solving customer problems, which is the first thing. The second is to keep investing in areas that we believe there's a good market and we have a right to win. You can take auto for an example. We have historically beaten auto build rates by 300-500 basis points over a number of years. So strong auto franchise. But then at the same time, we are always looking at investing in emerging technologies that also we believe we have a right to win.
So whether you take climate tech, whether you take next generation electronics like virtual reality, that's another area that we believe material science can play a big role. So our goal always is invest for growth, both organically and inorganically, and make sure that over the long run, we are beating the market that we are playing in.
Can you dig into that a little bit more in terms of how you measure that ROI on R&D? Because you touched on growth is most important, but whether you're looking at one year, you're looking at three years, and how you're able to identify this is growth associated with R&D and it's been successful, or this is growth we would have gotten anyway?
So, you know, at the end of the day, you have to look at growth about market to make sure that we are delivering on that growth. And when you break that up into pieces, we have a lot of metrics. So you would look at growth as one metric. You look at number of NPIs. You look at cycle time of NPIs. There are certain that are short horizon NPIs. There are certain like climate tech that are long horizon NPIs that will take time to play itself out. We also use a measure called NPVI, which is a vitality index. It's basically five years sales of new products. So that's another metric that we use that. We also look at margin rate of these new NPIs to make sure that we are actually capturing the value that we are adding to customers.
So we put all of that and we measure all of that in multiple different ways. The other calculus for growth, if you ask me, is also portfolio management. So the teams do a good job there of saying which portfolios continue to add value for customers, which don't. For example, the headwind you're seeing in consumer this year that we have talked about, the portfolio moves that we are making there was basically taking into account that there are certain products that we don't believe we should be in. We don't add as much value, and it may be time to go invest that money in something else. So it's an iterative, constant process. The R&D teams are so well connected centrally, so they're always talking to each other across the business groups to make sure that they're sharing any emerging technologies that are coming out there.
Then I wanted to touch on the restructuring efforts that you started talking about in kind of middle of 2023. When we think about some of the comments and you said it's changed the way we've worked, can you dig into that a little bit in terms of what's happened over the course of the past year that's in process and changing the way kind of 3M operates?
Yeah, so this, as you all know, was one of the largest restructuring that we've done at 3M. Some of the changes that we have made is we're using a lot more data and data analytics that we've used in the past. So that's helping us to visualize issues early. It allows you to do anomaly detection early and then allows you to fix it early. So that's one big thing. The other piece is we have, I would say, streamlined the organization. We have reduced a lot of spans and layers. We have reduced stranded cost or inefficiencies due to the spin of Solventum. At the same time, we have got closer to the customer again by taking out the matrix that existed in certain geographies as well as combined divisions so that we were not having unnecessary overhead.
Just to give you a few examples, Joe, supply chain was being run in three different areas. Now it's a global supply chain. So we are able, using data and data analytics, able to see inventory across the network. At the same time, you can see when a decision is made for a business group, the supply chain teams are able to see end to end for that business group. So that's a big change. We have timed out the center. You've seen some of the actions that we have taken to reduce the cost there. The goal of all of this at the end was to make it easier for customers to do business with us. At the same time, this was our ability to create the oxygen to keep investing the business to get the margin expansion.
For me, at the end, the test is, are you seeing these actions show up in your growth, show up in your margin, and show up in your cash? So for the EPS guidance, which we have given for this year, 680-730, that implied in that is a 200-275 basis points of margin expansion on a year-over-year basis. In the first quarter, we returned to organic growth. So those are our proof points that say this thing is working and we'll continue to build on it. There's always more to do. I'll tell you all, there's always more opportunities to drive growth, margin, and cash. I would say Bill would say exactly the same, and that's what the team will keep doing.
This is still underway. When you think about the next 12 months, if you sit here a year from now, what are those sort of major achievements that you're looking at moving forward with over the next 12 months or what you've already accomplished in the last 12?
So I would say the teams this year have made very good progress on all the items I mentioned. We will be post Solventum effectively this quarter. So the team needs to continue to keep investing in areas that we believe have good long-term secular trends, areas that we believe can give us long-term growth. We need to continue to sustain the performance that we have got on the margin rate side. And on cash, we've made very good progress on inventory. You can see the cash conversion we've had over the years, but we need to continue that momentum.
So, I would say all the work the team's doing, we just need to keep continuing on that journey, making sure we are executing on that, while, of course, managing risk and uncertainty that will happen in the environment, which I would say, again, the teams over the last few years figured that out on how to manage uncertainty. I mean, high interest rate environment, low interest rate environment, the team's done a pretty good job of managing the macro, and I think we'll keep doing that.
Then, to shift to growth, how do you think about 3M's growth algorithm and what sort of that right target rate of growth through a cycle should be, and maybe touching on areas where you think you've lived up to your potential, areas where you think there's opportunity?
Yeah, so you know at the end of the day, organic growth gives us the best leverage. So even if growth and margin go hand in hand for us from that perspective, our desire always is our first priority of investment is investing in growth, whether it's organically or inorganically. If you just go down to where we invest and areas we invest, I go back to what I said before, which is when we look at our market and we have our right to win, we're going to say we will definitely put money or capital against it. Example, you take our auto franchise. You said, tell us examples where we have done well. The auto franchise has delivered 300-500 basis points above build rate for years. And that's because we are close to the auto OEMs.
We are able to give a lot of solutions to the customers as and when. Similarly, we also invest in emerging technologies that we believe are trends in the future. Climate tech is one, but I'll take auto electrification as another one. That touches all of 3M. It doesn't just touch the auto division. It also touches SIBG or safety industrial. There our business, for example, in the first quarter grew 31% in auto electrification. So again, you saw that we grew similarly in 2023 and 2022. We have had double-digit growth. That's another franchise that with all the platforms we have, with all the technologies we have across 3M, we are able to partner very successfully. If you look at our consumer business, there are areas that haven't performed that well.
That's why this year we made an announcement that we are going to exit some of the products or portfolios that we sell. And yes, it's a headwind for the year, but it sets you up in the long term to actually invest in products that we believe are going to be successful. So you can talk about two of just two in the CBG space or consumer space is the brand Filtrete or Command, both very large household names. And by moving away from certain portfolios that are not performing, we can put more money against those two and continue to drive innovation. Like in the first quarter, despite a down consumer market, we have continued to launch new products in that space.
Then I go to the SIBG space and in the adhesive space, for example, which we have been market leader for a long, long time, we had some very nice wins when it comes to some of the electronics business that we have, especially with next generation electronics. So you can see that our priority always is to invest in areas where we have a market and right to win. And at the same time, in emerging markets that we believe long term will be sub-markets that will beat the overall macro. And therefore, you get long-term growth above macro.
And then on the consumer side, when you identify portfolios where you say it makes more sense to exit or wind down and move forward, what is it about what's happened within the market? Is it a lack of investment on the 3M side? Is it more commoditization of is it new entrants coming in? When you look at maybe 5% of consumer and what is about the evaluation of that that says it doesn't make sense for us to be here anymore?
So, you know, we looked at all those products, again, those portfolios, and we put it against the lens of all the items you mentioned, which is, is there a market? What's the growth rate of those products? Do we have a right to win? And if we don't have a right to win, why? It could be price points. It could be competition. It could be commoditization of these technologies where you say, I could add more value if I moved my money to something better. So these portfolios that we have announced, they had below average growth rates compared to CBG and below average margins compared to CBG. So in our view, that's something we should be doing every day. We need to keep doing it. We've been doing it, but we haven't been doing it at the speed we would like to do it.
I think that's one thing we just got to keep making sure that we are always testing the market between what value are we adding, how do we keep winning in the market, and how are we solving customer problems.
Let's touch on litigation for just a minute. There's been a lot of progress over the course of the past year in terms of Combat Arms, PWS. Still some things out in the future. Who knows the timeline on that? But just how you're evaluating what is still in front of you, how you think about those timelines, any important mile markers for people to be mindful of?
Yeah, so as you said, the team's done a very nice job of reducing risk and uncertainty by bringing these two large settlements to closure. We would say under the AFFF MDL, I think our next cases that are being prepared for the Bellwether is personal injury. Kevin Rhodes, who leads our legal organization, has a fantastic team of internal litigators as well as external counsel. They're managing the overall litigation docket. I would say just we will keep you all posted as appropriate as time elapses. Please make sure you'll all read our SEC disclosures that we put in. I think it's quite comprehensive, and it should give you an update, if any, on the litigation front.
Then wanted to spend some time on segments. So if we start on Safety and Industrial, we look at the Personal Safety part of that. That's the largest division within the segment. To what degree has that stabilized when you think about the mix within that? Has that normalized? Just any color there.
So safety for everyone's benefit, personal safety has also the disposable respirators, the N95s in it. Q1 was the last year of the last quarter of the headwind that we think we have had from the pandemic and all the sales that we had with N95. So I would say as we stabilize that, as long as the demand continues at the level that we have projected, there is no more headwind, hopefully, from the pandemic on that ground. The other side of PSD is FCBA, which is breathing apparatus, which the sales are going very, very strong. So it's great to see that the innovation that we have in there and what the teams have done is continuing to play out the way we thought, and we'll continue to grow revenue in that area.
Then another part of that segment, you've talked about industrial demand trends being mixed, and it sounds like it's been mixed for some time. Can you just elaborate on within that sort of what's good, maybe what's a little bit more challenged, and how that's developed over the course of the past year or so?
So I would say in general, when you look at safety and industrial, the industrial markets have been mixed, and they've been mixed because consumers have been a little cautious. But then if you break that up, roofing granules has grown mid-single digits in Q1, and then our adhesives business, we've had some nice spec-in wins in Q1 in consumer electronics, and that business continues to perform well. We have seen low single-digit declines in our EMD or our Energy Markets Division. We have seen it in abrasives. And I would say the way we look at that is that the markets have just been a little soft because consumers are being a little hesitant.
But I think overall, when we look at how industrial trends need to continue over the long run, what the teams are doing, there's no reason why we can't continue winning because we've had some good innovations in all these areas. For example, in the abrasive space, we launched a new product called Cubitron 3, which for those who are watching that, there's less dust. We collect more dust, better abrasion, et cetera. So we have continued to invest in all these areas. I think it's a matter of time as industrial markets turn around.
Then shifting to Transportation and Electronics, we look at the electronics piece of that really solid growth in the first quarter up mid-teens. You did talk about some spec wins, some inventory build. So as we sort of extend that to full year, how are you thinking about the growth potential within electronics?
Yeah, so I'll first start by saying the spec-ins. So we are thrilled. The team's done a fantastic job. We got some really nice spec-ins in the first quarter. You saw very strong growth from us in that segment in the first quarter. Some of it was because of the spec-ins and a little buy ahead by customers who are getting their end devices for consumers set up. So you see a little bit of that. I would say two-thirds of our growth in Q1 was driven by some of the buy ahead, some of the inventory normalization from last year. If you remember, electronic markets were down. When we look at overall electronics, I would say the trend, as we have said during earnings, and we still believe it's the same, is that you're going to see the growth continuing to happen. There's stabilization now in electronics.
You're going to see, hopefully, the second half continue to keep growing. We'll have to watch how it plays out. Semiconductor started, I would say, pretty slow. You can see it through people who actually make fabs. So they started a little slow in Q1. But again, there is a projection that second half is going to be much better as the growth comes through. We also believe electronics, we have a lot that we can contribute when it comes to the next generation electronics. So whether you talk about virtual reality or you talk of human-machine interface in your cars with the display technologies that we have, the teams are pinning a lot of good specs in the car business. So it's a great space. It has been a good space for us.
We're happy to see some stabilization, and the teams have got some really nice products for which we've been able to get some spec-ins. So good job by the team.
And then you've touched on it a bit this morning, but the automotive electrification and the momentum behind that and just how you think about that over a multi-year period of time and sort of the growth potential that you see regionally where some of the drivers of that are as well.
Yeah, so for us, Joe, I would say the auto franchise has been such a strong franchise. We've been in that business for a very long time. The benefit we have or the advantage we have is we are with the auto OEM. So we are right there. When they see a problem, they approach us, and we work with them to go figure out the problem. So in the auto space, we play in multiple areas starting from adhesion technology, display technology, light weighting, acoustics or noise management, noise vibration, et cetera. So we've got a lot of products, and a lot of these are actually powertrain agnostic. So when we do that between auto or auto, it doesn't matter if it's an electrified car or not, but it allows us to start taking those solutions we offer in an internal combustion engine and attach it for electrified cars.
So for example, the noise, the road noise you get in an ICE internal combustion engine versus an electrified car is very different. But we have technologies that allow you to reduce, dampen the noise. So that's a simple example. But then we also have products that we make only for electrified cars. So we have a product called Thermal Runaway Barrier that allows you to prevent battery fires, that also was created based on one of the OEMs approaching us saying, how would you solve this issue? So we put all that together. It's a great franchise that's continuing to grow double digits. We grew 30% in Q1. And for us, success continues to be partner with the OEMs regionally, whether it is India, China, Europe, the U.S. We are there with all your big OEMs that exist.
How do you continue to partner with them so you can get more penetration per car? That's what the teams are working on. You have seen us continuing to grow that franchise. In the first quarter, we grew our auto business 13%, even though build rates were much lower. Some of it was driven by the fact that 2Q has more builds of 8% builds on a year-over-year basis sequentially. So there was a little inventory build. But if you look over time, we have grown this franchise 300-500 basis points above build rate.
When you're partnering with a customer and designing a solution for a need that they have, is it most often the case that you have the ability to leverage that across other customers as well? Or how often is it unique to a particular customer?
So I would say in general, we can leverage. Of course, each solution is a little unique depending on how the customer makes the product. But that's been the success of 3M's model is you go in, you solve an issue for a customer. You can take that and then build a slightly bigger platform. Then you start looking and saying, with that platform, are there other customer needs that we can solve? And then over time, you start merging these platforms or using cross-platforms to say, can I go solve other problems? So for example, I use the micro-blown fiber that you see in your Filtrete or in the filter. It's the same technology that is used in the N95 mask to completely different endpoints, but you've got similar technology. Similarly, look at our display technologies in the space. You're doing it on our phones, tablets, TVs.
You're now using those display and light management technologies in the cars. And so as these cars, and Bruce calls it computers on wheels, as these cars are becoming computer on wheels, we can bring in the light management, the display technology. So this is the power where you start in one place, and you can actually use that technology to solve a problem in another space.
It's interesting when you think about the compounding value of the portfolio because I think that there's some sort of speculation out there questioning around there's been the move with Solventum, kind of what's next. But when we think about the segments, it's not siloed in terms of these capabilities. And so it seems hard to envision you can add more value by pulling them apart because there's a lot of value by having them together.
Yeah, so I would. Listen, I would tell you portfolio management for us has always been an active event. Some are large, like Solventum or the food safety divestiture that we did. But every day, our teams are looking at saying, where's the best value we add? Is there a better owner of an asset somewhere else? And I would say as a team, we'll continue evaluating that. And you want us to keep evaluating that, that we want to make sure we are always adding value to our customers. We're making sure we are adding value to shareholders. So that's an active management discussion all the time is, are you in the right portfolio? Do you have the right doing? Do you have a market? And we'll continue to keep sharpening that skill.
And then transitioning to consumer, when we look at kind of cycle, I think trending toward a low double-digit kind of peak to trough decline in consumer, obviously 2024, you've got some portfolio headwinds. But just where do you see that from a cycle perspective? How confident are you that that exposure has kind of hit a bottom?
Yeah, so everyone reads as much as I do in the newspapers. The consumer market is muted, especially for us in the hardline good categories that we play in. Consumers are spending more money on groceries. They're also spending more money on experiences like travel, et cetera. So our view is right now we'll have to watch how the economy plays itself out and how the global economy plays itself out. We have continued to invest in that business. We have continued to make sure that we keep launching new products because at the end of the day, that's important for the consumer and for the consumer business. So if my memory is right, we have launched a double-digit number of NPIs in Q1. And so we'll keep investing in that space. You saw us looking at our portfolio.
This was a good chance for us to say, are there products that we shouldn't be in? As the market recovers, we want to be ready. We have some fantastic brands that are out there, whether you take Command, Filtrete, Scotch-Brite, Meguiar's, all market-leading brands. Our view was we can better utilize some of these dollars towards those products so that as the market comes back, you have fantastic new products that consumers can buy and as a result, keep growing that franchise. I would also say the teams done a nice job on margin expansion in consumer. Over the pandemic, if you look at it, we did lose some of the margin in that business. That business got hurt quite heavy with some of the supply chain issues that we had, with some of the inflation we had with third-party manufacturing goods.
In Q1, you can see the margin expansion is pretty strong. Karina and the team have done a really nice job of one, focusing the team, focusing the business, investing in growth, but at the same time making sure that the margin rate starts to recover.
I want to touch on China for a minute just in terms of now post-Solventum spend, how big China is, the percent of revenue. And then if you can talk about some of the key exposures you have within China, if you think about electronics, think about auto, just what you're seeing in the market.
So, China is approximately 10% of our revenue. In there, we have exposure with all the three business groups there. For us, when you talk about China, 50% of what we sell into China actually gets exported back out. So for example, when we sell into an auto OEM, ultimately that car comes back out of China. So we are selling in but going out. For the remaining 50%, that approximate 50% that remains in China, there's a lot of local factories that we have. So the end product is made in China and delivered in China. I would say in the first quarter, again, China was mixed, but you saw an outsized growth for us due to electronics. So some of the spec-in wins that we've talked about are products that are manufactured in China.
I would say right now we are seeing pretty much what we told you at earnings call of where we think China is going to be. I think we'll have to see how China plays out from an economy perspective and what the growth rate is. But our teams are very focused in China. So we are not saying we're going to do everything in China. The teams, whether it is consumer, more importantly, safety and industrial and transportation electronics, they're saying we're going to be very focused in the areas that we play in China. Whether it is industrial safety, that's an area that we believe we can continue to win in.
Auto, when you think about all the car companies in China that are there, not just the global OEMs, but some of the Chinese OEMs like BYD, our teams are partnering very closely with them, driving growth there. So the teams are very focused in the areas that we believe we can add a lot of value, and that's what they're investing in.
And then wanted to shift to mega projects. There's a lot of enthusiasm about sort of potential pipeline of activity there. I think the exposure that I think about for you in terms of kind of headlines and where you'd have some of the best opportunities when we think about EVs, when we think about semi-fabs, but also tied more to the production activity as opposed to anything on the construction side of things. So just what are you seeing? What are you hearing from customers? Are customers out there trying to work with you to say, look, there's going to be a big uptick in demand as these things come online? Your general assessment of mega project opportunities for 3M?
Yeah, so for us, listen, if there's more manufacturing capacity put in near shore, it's always good for us. We don't play as much in those mega projects in the CapEx side of the house. We play it on the OpEx side of the house. So for us, more production is always good for us because the products that we make add a lot of value. And so we are in constant discussions with all the big players that you all talk about who are talking about capacity plans. And if and when those capacity plans come true and they start producing, we'll be ready. We would love the extra volume. So wherever there's global growth and more production, we are excited.
And then just a couple of things in terms of I want to touch on election, want to touch on interest rates. If we start on election, any degree to which that uncertainty is having an apparent impact on things moving forward where you're seeing people say, you know what, we're just going to stay on the sidelines until we have a little bit more clarity? And both sort of externally from a customer side, but also internally, how 3M is approaching that.
Yeah, so we have not had customers, at least that I've talked to, that tell us that they're doing something because of election results. I think the industrial market is just cautious, making sure that the demand is real, as well as they are seeing inventory cycle times reduce. They're saying, let's buy when we need it. So I'm not heard as much. Internally, we have been successfully partnering with all governments over the 100 years. So for us, as long as you have global growth, we'd be happy to partner with anyone to make sure that the products that we have can be used to better the world. And that's what we are focused on.
And then same type of question on interest rates and sort of the expectation that at some point you're going to see some easing there. Is that creating any kind of sideline mentality?
So for us, again, we look at it and say, we don't have any businesses that are directly connected to interest rates. So there's not that much direct exposure. For us, the main exposure comes from strength of global economy. So as long as the global economy continues to grow, we can play in that space. So we don't have very direct exposure on interest rates.
Terrific. So, I think that's time. So, thank you very much. Really appreciate you being here.
Thanks. Thanks for having me.