All right. Good afternoon, everyone, again. We'll let a few stragglers come in here, but we'll get started here. We're extremely excited to have 3M with us today. We've got Mike Roman, who is the chairman and CEO, and Monish Patolawala, who is the EVP, CFO, and transformation officer. Mike became CEO in July 2018, Monish, CFO in July 2020. Mike, as I walk over to you, I know you wanna talk about a few things, so I'll just turn it over to you, and then we'll get into fireside chat.
Yeah. Thanks, Andy.
Mm-hmm.
Thanks for hosting us. It's a pleasure to be here. I thought I'd just do a quick review of 2022, and then I'll look into 2023 and kinda kick things off. 2022 was a pivotal year for 3M. We not only took actions to manage through some challenges during the year, we also made some big strategic decisions and initiated strategies that are gonna be foundational for the future of 3M. You know, like everyone, we were managing inflation with pricing actions and cost management and sourcing strategies. We, you know, we navigated the supply chain disruptions.
Really with a focus on our customers, something we talked about during the year, we spent money on to make sure we delivered for customers, including adding a distribution center on the East Coast so that we could access some of the logistics alternatives that we needed. We also navigated the COVID lockdowns in China. We worked with Flemish authorities to reopen and restart our operations in Zwijndrecht, and we exited our business in Russia. A lot of actions during the year. We took some big strategic decisions too. We divested our food safety business, which we received $1 billion in cash and retired 16 million outstanding shares as part of that process.
We continue to make progress on our spin of our healthcare business, and as I've noted before, this is still subject to regulatory approval and tax rulings and board approval and other customary closing, but our team's making good progress there. We continue to support Aearo Technologies, as was in the press last week in confidential mediation, in their Chapter 11 proceedings and negotiations. We continue to manage PFAS, the PFAS litigation, defending ourselves in court and resolving and through negotiation where appropriate. Notably, at the end of the year, we made an announcement to exit all PFAS manufacturing by the end of 2025. Really important year.
As I turn to 2023, we, you know, we look at the year as seeing some of the same dynamics that we saw coming into the end of 2022, so a challenging year. We came out in our earnings call in January with a guidance organic growth of -3% to flat. This is reflecting the end market dynamics. It's also reflecting about 200 basis points of headwinds from disposable respirators coming off of the Omicron surge in demand a year ago and coming off the pandemic demand for disposable respirators to more of a more normalized safety business. Then we also had that exit of Russia. So that's about 200 basis points.
We have overall EPS in the $8.50-$9.00 a share, that includes a number of items that are headwinds. We have the Russia and disposable respirator headwinds on the top line and the impact on the bottom line. We have FX in $0.10-$0.20 range on FX, we have the divestitures I talked about hitting us with about $0.15. Puts us in that guidance range. We expect to deliver 90%-100% of free cash flow. It also reflects, I would say, what we see as a challenging first quarter to the year. We see some of the same dynamics that we called out at the end of the year hitting us in the first quarter.
The consumer electronics end market's down, you know, negative growth in those end markets and continued to play out in the first quarter and first half of the year. Consumer retail spending, while retail spending has been holding up, you see that in the news, it's shifting to food and experiential spending and away from discretionary products. We were seeing that. At the same time, retailers are taking action as they see that shift, and they're driving out inventory. We saw that in end of 2022 and carrying into 2024. Those are dynamics. We actually don't do this, as a regular course, but we guided first quarter because it was, you know, such a challenging first quarter.
Excluding PFAS, we are in a range of $7.2 billion-$7.6 billion in revenue. We have EPS between $1.25 and $1.65, midpoint of $1.45. You know, really some of those same challenges in the first quarter impacted even more heavily by disposable respirators and Russia. We suspended operations in Russia and eventually exited as we went through the year, but first quarter, we had that business as one of the, you know, the headwinds this year. Challenging first quarter. We have been taking actions as we saw the slowdown last year. We're not satisfied with where our performance is today, so we continue to take additional actions.
We announced in our earnings call, a reduction of 2,500 positions in manufacturing to adjust to that volume outlook that we're talking about. Flexing as we see the volume demand and really taking action to take that on directly in those costs. We, you know, we said that we will be looking at everything we do as we work through the spin. This is an opportunity for us to look at how we focus on ParentCo. At the same time, we focus on SpinCo. We're looking at all the things that we can do to simplify, streamline, and get closer to the customer, and we expect to take additional actions as we go through the year.
It's, you know, we will lean into additional actions as we go. At the same time, we continue to invest in innovation and growth. We see opportunities, high growth market spaces that can leverage our innovation areas like automotive electrification, industrial automation, biopharma processing, home improvement, all areas that are opportunities to take advantage of 3M invention and innovation and enable us to grow. Really delivering, you know, improving our performance, a big part of it's gonna be our ability to drive volume. It's an important part of what we do.
I sit here today, I'm really confident in our future, and I, as I said in our earnings call, we expect to as we go through the year and exit 2023 will be a stronger, leaner, and more focused 3M going forward. Frame a little bit from the earnings call, but I think also really frame up of what we're doing and how we're focused on execution in 2023. Andy, I'll turn it back to you for questions for Monish and myself.
Yeah. Mike, very helpful color. You basically answered my first question, but I'll ask it to you maybe just in a quick follow-up. You know, you kind of reiterated the guidance, you know, for the year and for Q1. Just in terms of the nuance here, I know when you report you said industrial was mixed, you know, with some weakness in destocking, especially related to electronics markets. You know, you said January overall started slow. Could you give us a little update on whether February continued with slower activity? You know, any sort of commentary from customers and how you're thinking, you know, about sort of the overall environment, you know, as you go through the quarter.
Yeah. Seven weeks into the quarter, I would say it's playing out as we expected. The dynamics I talked about, consumer electronics, consumer retail, those are continue to be soft. Consumer electronics, if anything, is getting, the end markets are getting softer in demand. We did start off with a slow January. China had decelerated in Q4 and was soft in January as well. We did see mixed high performance across our industrial markets, I would say. Some of that, we did see some destocking in industrial channel. Most of it is really around caution, ahead of the outlook for the year. There's some specific areas where we saw destocking Asia with some of the industrial demand softening there. We saw destocking there.
We also saw some specific end markets, not the largest end markets, but we saw some destocking areas like specialty vehicles and construction and a few areas like that where we, you know, saw a soft start to the year. We're areas like China, where like everybody else, we're looking at and watching closely what happens in the economy and the market segments that we play in as we come out of Chinese New Year. You know, there's some hope is that will get better. Certainly, the projections are for the macro GDP IPI to improve in China as you go through the year, so we'll be watching that closely.
You know, there are some spots that are continuing to perform automotive build rates, you know, sequentially down from Q4, but, you know, it's a build rate, projection for build rate growth, you know, almost 4% in a year and continue to, you know, see that as something that is a positive in the end markets. I would say soft start in line with what we had expected.
Got it. Maybe just two quick follow-ups, and I'll leave the near term alone. Like, have you seen any broadening, though, in destocking in industrial? Is it kinda still kinda nichey? China, have you seen anything post-Chinese New Year's? It's still too early to know of, like-
Yeah. In China, it's too early to tell. It's, you know, like I said, we're watching it closely and looking for kind of a better.
Yeah.
Indication. Destocking, I, you know, we started Q4 in pretty good position. The one notable was retail was destocking hard at that point, and we were in the middle of that. That has continued. I think that'll play out through the first half.
Yeah.
I think there was a lot of focus on that going into the end of the quarter for the retailers, but it's gonna continue to play out. The destocking in industrial, I talked about it. It is not when you look broad-based, it's not a deep restocking.
Yeah.
I think it's cautious against the outlook. other places are balanced. You know, I would say healthcare against the elective procedure is expecting to improve is pretty well in line. It was the notable ones were the ones I talked about.
Got it. Okay. Let's step back. You know, priority is like, I think your number one priority is to grow faster than your markets, right? You know, if I look at you guys since 2019, you know, since before the pandemic, like, you grew, but you averaged kind of less than 1% growth, you know, your competitors were kind of 2%-3%. Again, that includes a lot of volatility around the pandemic. What do you think 3M needs to do to improve, to accelerate growth?
Yeah. I think it's, it is what we do in our model and doing it better all the time. I would just to level set, you know, I would say if you look at since 2019, so if you're 2019 to 2022, we were about 2% growth-
Okay.
XDR.
Okay.
Almost 3% with DR in the ups and downs that we saw in the pandemic. Since 2020, we are, you know, more like, 3% growth.
Okay.
XDR and over almost, 6% growth with excuse me, 3% including DR and 6% XDR.
Yeah.
There's been good growth dynamics. The point is, the last couple of years we've been, you know, performing well in our growth dynamics. We certainly saw the impact of those end markets last year. The pandemic certainly had some ups and downs in that. Within all that, there is examples of what I would say we're doing to drive growth. That's investing in the high growth market spaces and the attractive parts of our portfolio where we can differentiate ourselves with our innovation. We've got a number of large commercial-Platform areas that we talked about as we went through the last couple of years that we're investing-
Mm-hmm.
-in organic growth and driving that organic growth. Areas like automotive electrification. You and I Andy, had a conversation.
Yep. For sure.
You said when automotive electrification gets to be a billion-dollar business.
Yeah.
I start to think it could be a $2 billion business.
Yeah.
It's interesting.
Yeah.
Well, it got to be a half a billion dollar business last year with 30% growth.
Yeah.
That's a example of where we can invest and drive market growth and create value for our customers. We have our home improvement platforms that are more than a half a dollars billion each in key areas and key trends. They're going through some of the same retail spending dynamics, but our Filtrete home filtration products have normalized and are You know, we see these as areas where our science and innovation makes a difference, and we can drive growth and value. We have other areas that we are investing in: electronics, safety. In healthcare, we have areas like biopharma processing, which I mentioned, but also advanced wound care. These are all significant commercial platforms that leverage 3M innovation and enable us to add up more of the portfolio that can help drive us GDP plus, IPI plus.
Yeah.
Deliver above the macro growth and give us an opportunity to leverage that into margin improvements and strong cash flow.
Let me just ask a follow-up there. Like, you know, so you had your investor day, you know, what was it, like early...
February, yeah.
Yeah.
Almost a year ago.
Like, you highlighted a lot of markets. You talked about home improvement, healthcare IT, automotive, wound care, electronic materials. We already talked about automotive electrification. You know, I assume that one is at or above sort of what you thought it would be. Any others that you would say, you know, have accelerated more than you thought, and any others that have been harder to really sort of move up on the growth?
Yeah, maybe I'll talk about both sides of that. If you look at healthcare, a couple of things. I mean, we talked about healthcare IT, I think, in that call. Our, you know, our revenue cycle management, our 360 Encompass product had strong performance. There's, you know, budgets and hospitals are impacted, so market growth dynamics aren't as strong, but we're well positioned with that and our, I would say, our clinical and computer-aided documentation capabilities, natural language processing, AI capabilities in our products that we've invested in. We see that as providing a strong growth trend.
Mm-hmm.
As you see, you know, healthcare markets get back to pre-pandemic kinds of performance. Same on our wound care management. We, you know, we had a wound care business. We made the acquisition of Acelity. You know, middle of the pandemic, the procedures were down and that impacted those wound care businesses. One area of notable exception is surgical site management.
Mm-hmm.
We have a solution that has been performing extremely well and helping to drive growth. We expect that to perform well.
Mm-hmm.
We expect that to continue. Our home improvement, just one other thing to note, even as the market trends have been strong during the pandemic, double-digit growth in those home improvement, and now seeing the impact of the shift of retail spending.
Mm-hmm.
We've been a category share leader and continue to be. That's an encouraging part of that. Other areas, general manufacturing, there's, you know, industrial automation is an interesting space. We have products in our Safety and Industrial business, our RepairStack product in our automotive aftermarket, our Finesse-it abrasives in our abrasive systems business, our extrudable very high bond tape.
Mm-hmm. Mm-hmm.
Non-extrudable version, that lend themselves to automation. They're, you know, working with robotics and system integrators to really penetrate new solutions. We're excited about the growth opportunities that our differentiated performance in our material science enable in more of a digital automation kind of space. There are other areas, our, you know, electrical and electronics. You know, we talk about the importance of winning in consumer electronics and continuing to innovate there.
Mm-hmm.
When you look at the end market dynamics, even when we get through this slowdown, the build rates are gonna be fairly nominal.
Yeah.
The innovation is high value, and you can continue to keep your business growing at a nominal rate in that marketplace. The key is moving into other electronic segments. We talked about automotive electrification, which is one of them, but data centers with our interconnect solutions, and you look at semiconductor manufacturing and our pad conditioners, the technology, the material science technology we bring into that really enable, you know, the next generation of semiconductor fabrication. Those are all areas that we called out, I think, a year ago.
Yeah. Yeah.
They're all areas that still are exciting for innovation and we see as growth drivers. They aren't all at-
Yeah.
a half a billion plus.
Yeah.
Electronics, the VR, AR, XR space, it's the next.
Sounds good.
it's the next horizon for our material science film technologies.
Yeah.
We'll be a fast grower starting, you know, at a relatively, you know, lower level today than other display technology, but going to grow very rapidly.
Interesting. I already asked you about China. Like, just if I step back and think about the regions, you've said, you know, China, EMEA, like, you know, geopolitical challenges, you know, will continue in Q1. you know, if I step back, North America, EMEA, like, what do you bake into guidance for 2023?
Yeah. the U.S., you know, the dynamics we talked about are part of that, the macro. You know, if you look at the macro for the U.S., it's going from 3% last year, GDP, IPI, to 1.5% this year. It gets a little bit better as you go through the year. we bake in that projection of the macro into what we're thinking about, that we've got those specific markets that we called out in our earnings call as kind of part of how we were thinking about the whole year.
Mm-hmm.
That's certainly true for the U.S. markets as well. EMEA, you know, it's, I would say the uncertainty around the geopolitics, the energy, you know, issues that they've been facing. Now we've had a warm winter, so that's helping.
Yeah.
It's, you know, just watching that and, you know, making sure that we are keeping track of how that evolves and not just judging it by a macro projection. I would say that in almost in our markets, in our macro, we really build our view of the year around those kinds of projections, but then we watch them closely because they can change very quickly.
Yeah.
I would say with Europe, that's also. Europe, interestingly enough, starting the year with a strong performance in automotive build rates.
Mm-hmm.
We're seeing some opportunity there.
Interesting. This one might be for Monish, but you can certainly chime in too. It's around margin. You know, Monish, we asked you again at the same analyst day about some incrementals. You talked about 30%-40% incrementals, you know, through the cycle. You know, can you sort of do that? Like, this year, you know, there's some utilization issues, you know, in Q1 2023. Can you do that in a world where you're getting out of PFAS, which I think, you know, can put some pressure on utilization, you tell me, and where supply chain is still a little choppy. Then I think you said in your investor day that you're focused on value stream simplification, portfolio to increase margin. You know, again, there's a lot of macro noise. Update us on where you are on those things.
Yeah. Andy, I would start first by just saying mathematically when we say 30%-40%, I'd just break it out. You've got growth margin, give or take 45%-50%.
Mm-hmm.
For every dollar of extra revenue you get, you get $0.45.
Mm-hmm.
You say a piece of it I reinvest back.
Mm-hmm.
That's why the 30%-40% incremental is doable.
Yeah.
To that, you add the supply chain efficiencies that we get, whether it's using data analytics, whether it is helping to drive yield and efficiency in our factories, better utilization in our factories, all of them will add to that 30 %- 40%. You also sit back and say, "I can drive dual sourcing, better sourcing benefits.
Mm-hmm.
Then you take some of that savings, and you say, "I continue to reinvest in the business with growth, productivity, and sustainability." That's why in the long term, the 30%-40% is doable.
Mm-hmm.
What has happened in the short term, as you all know, is with the supply chain inefficiencies, most supply chains have gone through some pain.
Yep.
We decided through the pandemic that we would first focus on our customers than worrying about our own bottom line.
Mm-hmm.
We felt it was important that we had to take care of our customers. We air freighted stuff, we had short runs. All of that have impacted how our margins have shown.
Mm-hmm.
As supply chains heal, and it's gonna be 2023 and beyond, the first half is gonna be tougher than the second half.
Mm-hmm.
You should start seeing the benefits of some of these things starting to come through. That's why in the long run, I would say 30%-40% is doable. The teams made good progress. The teams have continued to drive yield and efficiency in many of our lines. To answer your specific question on will PFAS have an impact, yes, it has an impact only on factories that are multimodal. As we have disclosed, and you all should read the 8-K that we filed yesterday, which actually gives you the breakout of PFAS by year, exit of PFAS manufacturing by year and the margin, you will see actually it's margin dilutive. Exiting that also should help.
The margin rate has diluted over the last few years because the investments that we have to make to keep that business running, the regulatory trends, et cetera, which is one of the factors that we factored in from a PFAS exit of exit of PFAS manufacturing. I would say that to answer your question, that should be margin accretive when we are done with that.
Very helpful, Monish. Maybe just I'll ask the related question now because it's around selling prices and price versus cost, right? I think you mentioned 2% selling prices in your guide. You know, commodities kinda all over the place, maybe rising again a little, you know. Is there any pressure to sort of, you know, continue with price increases? You know, how do you think about the stickiness of prices if we go the other way? Then, you know, just again, talking about the PFAS chemistries that you're getting out of, I felt like you guys provided good value in quotes with your PFAS chemistries. If you get out of it, can you still provide value to the customer so that price versus cost stays green?
To reiterate, so in our guide, we said 2% selling price is built in. At the same time, we said the carryover impact of inflation, because remember, first half of last year was very inflationary, plus the higher utility costs we're gonna see in Europe was a range of 150 to 250.
Mm-hmm.
Price, we are managing inflation through price. If there turns out to be more inflation, the teams have the playbook that'll allow you to go after more price. I think, Andy, what we'll all have to think through is if there's strong deflation very quickly, which I don't know it will be, because it's inflation so far has been persistent and sticky, I think price elasticity discussions will start coming into many markets, not just with 3M.
Mm-hmm.
What I would go back and say we add value to our customers, when I've seen the history of 3M, and certainly when you look at the P&L, historically, 3M has always been able to add value and get a range of anywhere between 50 basis points - 70 basis points of margin expansion due to price cost.
Mm-hmm.
You have to exclude electronics and auto because historically, those businesses have always been a price down business.
Mm-hmm.
You get spec'd in, and there's always. That's just that whole industry is based on that thing. That's where innovation comes in.
Mm-hmm.
Because the more you can innovate, the more you can maintain margin. That's back to Mike's words of portfolio innovation. They all are part of that whole exercise. I would say time will play itself out on how much inflation is there this year. This is what we see right now. We are prepared to act either way, depending on how it goes. I don't think it's just PFAS that adds all the value, and therefore our customers are paying us. The exit of PFAS is a 4% of our total business.
Mm-hmm.
We add value to our customers in many ways. It's through our quality, it's through the product, it's through the innovation, and most importantly, the partnership that we bring with solutions.
Mm-hmm.
I feel pretty confident that that's not going to change. Therefore, as long as we add value, we should see the price cost equation play itself out to the positive.
Helpful. Then maybe another question on margin just in healthcare specifically, right? I mean, healthcare was a very high margin business, still a high margin business, but, you know, maybe over the last few quarters, it's been ticking down again. That's a little bit lower than it was a few years ago. You know, we know you sold the food business. That was high margin. You know, so portfolio's been changing. Help us think about, you know, where does the margin go from here? Can it start to improve from here? You know, what are you doing to make sure that it does improve from here?
Yeah. I'll start by first saying you got OI, but you need to look at EBITDA.
Mm-hmm.
For healthcare, because you've got two big acquisitions that were made, Acelity and M*Modal. Both of them had pretty good pressure. If you just use 2019 as.
Mm-hmm.
The OI, the EBITDA is somewhere in that 29%-30%. I think it was 29.5%.
Mm-hmm.
If you look over the pandemic in 2020, it was, I think, 29.2%. 2021 was a little higher. 2022 was in the 29%.
Mm-hmm.
If you take the quarter where Acelity got exited, which is third quarter, so the end of second quarter, EBITDA was also 29.5%. We have remained in that range of 29.5%-30%. All this data is available in the press releases that we give you all. It's, it's, you all should go and look at that. With that said, that business has got impacted by some of the raw material costs, the supply chain inefficiencies, inflation. They've managed it through price, but that's where the opportunity lies in the supply chain side.
Mm-hmm.
With the gross margin that exists in that business, the volume will be the best leverage.
Mm-hmm.
Mike already talked about it. We've seen elective procedures have been 90% of pre-pandemic levels. Hospital budgets have been impacted by COVID. They are all running in negative many of them, negative operating margin. The oral care business gets impacted by consumer sentiment because it's a consumer-ish facing business, but that's where the volume comes in. When we look at healthcare in the long run, that industry is a GDP plus industry.
Mm-hmm.
As you get the volume come in, plus all the other things the teams are doing, you should be able to see that margin rate pick up. What I would tell you, as I've mentioned through the pandemic, if you look at it EBITDA, we have managed to at least maintain the margins in pretty much the ranges that I talked about. Would we like more? I think so. I think as they keep using daily management, driving operating rigor, better factory productivity, you'll keep seeing that grow.
Monish, just following up on that, you mentioned daily management. You know, that's one of your priorities as you came in, that you kinda told us day one, digitization is probably the other. What have those two things done for 3M so far? Maybe, you know, to use the American baseball analogy, what inning are you in of those two?
First thing is I watch baseball, but I love cricket.
All right.
I'll still try to use the baseball analogy.
We got an international crowd.
The best as I can.
That's right.
Let me start by just saying that we have laid this out. Our operating framework is based on two things. One is operating rigor, daily management, and two is making sure that most importantly, we're taking care of customers solutions. That gives us the best growth. What operating rigor is based around is daily management talks about you gotta embrace the red, which is you admit you have a problem.
Mm-hmm.
You bring teams together, and you get sustainable solutions. In that, as we have gone through the framework, we have said the teams have got much better at calling out their issues early.
Mm-hmm.
Which allows us as a team to all work together to find sustainable solutions. We also have said digital is a multiplier for us. If you ask me where digital is in its innings of baseball, you're in the second innings to the third innings. There's a lot we can do.
Mm-hmm.
There's a lot of good data available at 3M, we break our digital into three or four different pieces. The easiest one is to talk about digital enterprise, which is ERP. Most companies talk about that and say, "Do you have an ERP? Does it work?" The second is digital operations, which is how do you use data and analytics to improve your factory yield and productivity? For just as an example, the pandemic, when we were able to increase the output of disposable respirators manifold, we were using digital twins that told us, how do you run these factories better? You go into digital product. Take our health information systems business, which is basically providing a product as a solution to help customers with billing cycles in hospitals.
The last one is digital customer, where you're actually making sure it's easier for customers to do business. Think about the omni-channel in our Safety and Industrial business. Think about e-commerce, where we sell on Amazon through CB, through our consumer business, et cetera. In my view, that is clearly an area that as long as you can use data and data analytics and provide solution to customers, digital will be a multiplier. Operating rigor is a place that I would say our daily management never stops, Andy. That's a part of this whole continuous improvement. You've always got to be able to look and say, "There's more we can do, we will do." There are pockets of the company that do it very well. There are pockets of the company that are continuing to get there.
I think we have got better at agility. We've got better at predicting. We've got better at bringing teams together and mapping end to end. With all that said, as Mike said, I mean, there's tremendous opportunity. We are not happy where we are. There's a lot more we can do, and we'll keep doing it, and we'll keep driving it.
It's very helpful, Monish. Mike, you said, I think you took the restructuring in Q4, as you said, could you elaborate on what you meant by saying that you're examining all aspects of the business in preparation for the healthcare spin and what further actions you could take? I mean, you said you see an opportunity to further streamline supply chain, how to further simplify. What does that all mean?
Yeah, I would say, you know, some of the actions like the 2,500 in manufacturing, that's really about the macro and what we face and the volume that we're looking at. What I was talking about in terms of looking at everything we do, As part of the spin, we are looking at what is the path to standing up a successful standalone healthcare company? That's a big part of the separation team's efforts and focus. At the same time, we are learning and focusing on what is going to be important to do in terms of positioning ParentCo for success as we move forward. Those are future-looking and not that far in the future as you think about working through the preparation of the spin.
They're future-looking, and they're giving us insights into the kinds of things that we can do to improve our supply chain. You know, if you look at the opportunities that we have to deliver improved performance as we go through there, volume, driving greater volume is important. That's our best leverage of improving margins and cash flow. We think we have a lot of opportunity in supply chain. We have an opportunity in just optimizing what we do, and I would say the work we've done in preparing for spin is giving us insights into how to think about the supply chain. And our team made some changes even as we restructured and focused on addressing the macro as we came through the end of last year.
They were looking at the things that we can do to position ourselves better for the future. Plan, source, make, deliver. How do we optimize that even better? That, that'll require also to some degree that we streamline the company and it's pointing at opportunities we have to streamline the company and some of the things that we historically have done in our commercial operations, in our supply chain operations. Also, how do we get closer to customers? These are actions, you know, restructuring actions, I would say. It's actions to improve processes that we have. It's, it's, you know, making changes that optimize what we do in our model. We've got great strengths at the heart of our model, delivering those to customers, delivering that value in terms of our performance for shareholders.
That's what we're looking to do, and we're learning from the process on the spin on things that we can step into.
Mike, I'll ask you one more question, we'll open up to the audience, maybe I'll have a couple more after that. Just focusing on cash flow for a second. you know, guidance is 90% to 100% versus 82%, I think, in 2022. You know, leverage you can pull to get back to that. We have received many questions over the last year, let's say. What circumstances would you pull back on things like, you know, CapEx, R&D, dividend to conserve cash? I mean, obviously, you're spending on separation costs, getting out of PFAS, you know, have a drag from continued liabilities. We all know that. like, you know, I get the question a lot of, you know, what does 3M do with all of these sort of whether it's CapEx, didn't know.
How do you respond?
Yeah, I think there's two parts of that maybe I'll touch on. One is I'll take us back to the announcement of the spin of healthcare. An important part of that announcement that, you know, we talked about we are going to create two world-class companies, and it was important that we position both those companies for success and a successful future. Part of that was making sure they were well-capitalized to execute their strategies, the capital allocation. We talked about our plans to have 3x- 3.5 x leverage on healthcare and also to take an equity stake in ParentCo. What that did was, you know, that sort of leverage positioned healthcare to be able to execute the capital allocation strategies. They're a strong cash flow driver. They'll de-lever quickly. They'll be able to manage that and be successful in executing.
At the same time, it takes a strong balance sheet in 3M and ParentCo and makes it even stronger.
Mm-hmm.
We position ourselves to execute the capital allocation strategies that we talk about. Our priorities, I don't see them changing. I mean, they are first and foremost investing in organic growth of the business and continue to drive R&D, CapEx as we move forward, and that strong balance sheet will position us to be able to do that. Now, near term, we're focused on going back to your 82% and our plan for 90%-100%. We have an opportunity to improve our free cash flow conversion, and one of the biggest opportunities we have is in working capital. Back to our discussion about what are the things that we see as an opportunity this year to improve our performance, it's addressing the opportunity we have to do better in working capital, days inventory outstanding.
That certainly the disruptions in the supply chain have contributed to some of the challenges there. We made some progress at the end of last year. We took down inventory. Even in a tough fourth quarter, we took down inventory and made progress in our supply chain there. There's more to do there. There's more opportunity there. That gives us a position to continue to drive even stronger cash flow, which gives us, you know, more flexibility in our capital allocation priorities.
Questions in the audience. Any questions? All right. I said that four minutes. Maybe just can you update us on how much of your cash, like, ended up being spent in liabilities? I probably should know that number in 2022, but, like, how much was it? Separately, can you update us on the timeline? You know, you talked a little bit about Aearo Technologies, you know, in terms of Combat Arms, PFAS litigation milestones. I just wanted to ask you one. Maybe I'll ask those two, then I'll ask one specific one after that.
Well, I know Monish already answered the first one once today. Are you gonna answer it?
Yeah. It's $900 million is the amount of cash.
Timeline, and I'll ask the other question here. Basically, Combat Arms will begin to be heard on May first. I think the appeals for, you know, those, that's what I have in my notes. You tell me. Thoughts on a reasonable time for the Seventh Circuit to rule on, you know, the Aearo bankruptcy case. Finally, I'm getting a little in the weeds, so forgive me, why is the Seventh Circuit potentially different than the Third Circuit in terms of using the Texas two-step rule?
Yeah. Maybe I'll start there just to differentiate it 'cause there's a good level setting there, too. What we have done with Aearo Technologies is not a Texas two-step. It's Aearo Technologies is an existing independent business in 3M. It really represents the business we acquired when we acquired it, Aearo Technologies in 2008. They entered Chapter 11, and we have been supporting them in the mediation as part of that Chapter 11 process. I would say the difference between Seventh and Third Circuit, there's a ruling in Third Circuit Court on the J&J LTL case.
Right. That's what I was going to.
You know, there's still a lot of discussion about what the implications of that ruling are. We are, you know, as we learn more about that, we'll update as we go. Right now we are continuing to support Aearo in the mediation process, and that's our focus. We have appeals pending on both, the extending the state to 3M in the Seventh Circuit and also the appeals in our original MDL bellwether cases. We had some appeals related to that. Those are both pending and to come yet this year.
Got it. PFAS later this summer is-
PFAS, the next trials targeted and scheduled is the MDL.
Yeah.
The AFFF MDL that in Federal Circuit Court in South Carolina, which is scheduled for June.
June. Let me ask you one more question I've been asking all companies. What are the top two or three innovations, mega trends, or structural changes affecting your company over the next five years? Are there any emerging industry trends that are perhaps being overlooked?
Well, I would frame it up this way. Wherever there's disruptive innovation in our customers is a tremendous opportunity for us in material science. You see that in the answer to your question, and I've talked about a number of these already. Automotive electrification is the electrification of transportation is a disruptive trend.
Mm-hmm.
I, you know, there's a lot of projections on how it's gonna play out. It's a lot of innovation is gonna come to bear on this. We see, you know, opportunities. We see this as a growth opportunity. We've been able to outgrow the build rate consistently of automotive build rates year over year by 300 basis points-500 basis points.
Mm-hmm.
The opportunities that come from that disruptive innovation enable us to continue to do that and continue to do that with our innovation and create value. We see other areas that are exciting, other areas, growth areas in electronics. We see, you know, electronics continues to be at the leading edge of material science innovation.
Mm-hmm.
We participate in that, moving into those growth segments. We also are able to leverage that back into our company and into other areas, and notably industrial kinds of applications. I think, areas like industrial automation is an interest space. If you click down a little deeper, you look at something like film technology and electronics, and we've talked a lot about consumer electronics. Build rates aren't growing as fast as they once did. We talk a lot about our solutions into TVs, tablets, notebooks, mobile handheld. You look at the next generation, AR, VR, XR.
Mm-hmm.
The requirements on film technology goes to the next, you know, one-thousandth of the structure in size. So you're talking metamaterials. You're talking about flat optics for AR, VR to really improve the performance and drive the viability and the effectiveness of those. Those are some of the exciting areas where you're seeing disruption, and our material science can play a role. You see those in every one of our businesses. Healthcare, even as you prepare for the standalone company, biopharma processing, the material science opportunity is there. Wound care management, material science opportunity is there. Oral care and digital dentistry, the material science opportunity is there. They're all spaces that are, you know, disrupting and creating opportunities for new solutions...
Mm-hmm.
New penetration, even new businesses being built.
Sounds like a lot of opportunity. Well, we appreciate it, Mike, Monish. Thank you very much.
All right. Thanks, Andy.