Good morning, everyone. Welcome back to day two of Laguna. Thanks for making day one a success. I think a success. Had some pretty good feedback and some good conversations with companies. I think to keep the momentum going here, we're starting off with, I think, a great bellwether to have a good conversation. Certainly a lot going on with 3M these days. Monish Patolawala, the CFO, Bruce Jermeland in IR, thank you both for joining us. Good to see you guys, as always. Monish, maybe, you know, just kind of start us off, what you're seeing, you know, any other observations you want to make upfront, and then we'll dive into some questions, if that's all right.
Sounds good.
Excellent.
Thanks for having us, and it's always a great conference to come to, and thanks to all of you who attend because it's great to have the one-on-one dialogues too. I just thought I'll give a quick update on 3M's strategy. I'll make it into three pillars to make it easier for people. In no particular order at all, one is the spin of healthcare. As you know, the teams are doing an amazing job. It's pretty much on track from a process perspective. Effective September first, we announced a new CEO for our healthcare business. Bryan Hanson, who's a seasoned MedTech leader, came to us from Zimmer Biomet. He was the chairman, CEO of Zimmer, Zimmer Biomet. He's also had experience with Covidien, Medtronic.
He's on the ground, he's starting to get to know the teams, he's immersed himself in the business, and already quickly working through all the different steps that he needs to take to make sure we have a successful spin. But, you know, to be fair to him, we want to make sure we give him a little bit of time to immerse himself in the business, understand the business a little better. So practically, I think our spin is sometime first half 2024. Of course, it's subject to regulatory and board approval, but the work streams are all on track, and as we get the perfect date, we'll let you know on what that is.
As we go into the second strategy, which is reducing risk and trying to give more certainty to stakeholders when it comes to our litigation, you all have all seen we've had two big announcements recently that hopefully has started to give some more clarity and certainty to the litigation exposure. The most recent one was a settlement, a broad settlement to resolve our issues in Combat Arms litigation. It's a settlement that's approximately $6 billion. It's $5 billion in cash, $1 billion in 3M equity that will get paid over seven years. It's intended to resolve all our Combat Arms cases, both in MDL and in Minnesota State Court, as well as future claims that could come in. We are in preliminary approval.
The judge had a hearing last Friday about it, gave plaintiffs a chance to hear on how they can participate in the settlement. The court has also passed an order to set up the settlement fund. We have gone ahead and funded the settlement fund that we had to do, as well as we've got releases from the 13 of the successful cases that were there through the MDL. So we've got their releases too. So I would say the case is in progress, and hopefully that'll get resolved because it's good for all parties. The second one was our PFAS settlement. So we have had a broad class settlement with public water authorities in the United States, who provide I would say majority of the drinking water for citizens in the United States.
It's a settlement that is, present value of $10.3 billion, payable over 13 years. It's a settlement that takes care of PFAS at any level found now or in the future, takes care of any PFAS found now or in the future, and it's not only related to the couple of compounds that were under litigation, in the past few years. That's also moving to preliminary approval. We are happy that the court approved it preliminarily. We are happy that we were able to address the questions the AGs had, and they have also supported the movement of this settlement.
The dates that, there's an opt-out period for PWS authorities, bodies who don't want to be a part of it, which is December 2nd, and then December 11th, and then the judge has a final fairness hearing in early February of 2024. I forgot to mention, when it comes to Combat Arms, we will be taking a charge this quarter of $4.2 billion. The present value of that $6 billion is $5.3 billion, and our intent there is to make it as an adjusted, to our earnings when we provide adjusted earnings net of, unusual items, and this will be one of that.
When I then go to our third big pillar, which is continuing to make sure that we can successfully and sustainably deliver on the 3M promise or deliver the 3M model, you have seen, based on what you've seen with our first half results, the team has executed well. They're starting to make progress, whether it is in our supply chain, whether it is making sure that we are taking care of customers, et cetera. And you can see in the first half. When we came into the year, Josh, we had said we see weakness in electronics, we see weakness in consumer, and China was a watch item. As we now look at first half in third and fourth quarter, we are still seeing significant slowness in electronics, consumers. I would say that destocking, I think we have got through the worst of it.
Of course, what's going to happen is we'll see how the back to school and holiday season play itself out, but we believe that that weakness in consumer will continue through the year. China has been slower. It was slower in the first half. We are continuing to see it slower in the third quarter. But when you put all that together, in the first half, we actually came in higher than where we wanted or where we said we would be on a revenue basis, mainly driven by FX, but at the same time, we have done a great job of making sure that we are taking care of our customers, continuing to work, lead times, et cetera, that's helping customers out. At the same time, of course, it helps our revenue out.
Then when I go to the margin side of it, we have done a much better job, I would say, of controlling our destiny. Supply chains are starting to heal. That's definitely helping. But I would say even the supply chain teams are delivering better productivity, better yield and efficiency. The restructuring that we announced in the second quarter is pretty much on track. You saw us delivering a little more than we thought we would in the second quarter on restructuring benefits. Third quarter, we have laid out a schedule that's available in all our SEC documents that will show you Q3 and Q4, and that's also pretty much on track.
So the teams are making very good progress on the supply chain side, on the litigation side, making progress on restructuring, which also allowed us to take our guidance up for the year on EPS, which was originally $8.50-$9. We took it up to $8.60-$9.10 for the year. And then on the revenue side, I would just say, based on what we are seeing, and most of these trends are moving sideways and China a little weaker, I would say we are still in the range that we told you during earnings, which is at the lower end of our guide that we'd given you at the beginning of the year of 0% to -3% with organic growth.
And included in that is our disposable respirators, which is also running at the lower end of the year-on-year decrease, or on the higher end, which is down $550 million. When I come into the third quarter, I would say same trends: electronics, consumer weakness, and, and China is a little weaker. When I put all that together, two months in, looking at where we are, and of course, September is a very big month for us, and we- the teams are very focused on delivering. I would say based on China and FX, we are a little down from where we said. We had said we'd be approximately $8 billion. I would say we are somewhere in the $7.9 billion-$8 billion, so it's nothing major from, from a reduction basis.
But the good news, as we have done all year, is we have made sure that the teams are very focused on controlling costs, at the same time, controlling supply chains where they can, so the EPS guide still remains at the $2.25-$2.40 that we had said before. I would also say this is not just a this-year play, this is a long-term play for 3M, and you look at the areas that we can invest in, whether it is climate tech, industrial package, industrial automation, next-generation electronics, AR/VR, sustainable packaging, all areas that we believe that material science and our increasing digital capabilities makes 3M pole position to keep winning in those areas. All of them are GDP plus segments growth. We see a great opportunity to invest. We're going to keep investing in there.
We've done it this year, and we are going to keep doing all of that. In summary, Josh, when I look at it, I would say, huge thanks to my team. We had a plan coming in, we are executing to it. Those actions are getting translated into our results. You're seeing that in the first half. As supply chains heal, as all these actions take momentum, I would tell you, you're going to see this momentum keep building in 2024 and 2025 and beyond. I would also be remiss if I didn't talk about cash. Again, the teams have done a really nice job in managing cash in the first half. We had a conversion ratio of 105%.
That's an area, as I've said before, working capital as supply chains heal, can definitely be another catalyst for us continuing to deliver on cash. I would say the model that we have, the cash flow that we generate, the proven access we have to capital markets, allows us to do a lot in making sure we meet our capital allocation priorities, but also take care of the payments that are coming due because of the PFAS and Combat Arms settlement. I would just summarize by saying this is our year of execution. I've said that before, I'll say it now. The teams over the last two, three years have done a really, really heavy lift. We went through the pandemic. We've had supply chain disruptions.
We've had a lot of things that have happened, and the team has hopefully weathered that storm, and you're starting to see us execute. This is our year of execution, and we just keep building on that. With that, I'll turn it back to you.
Excellent. Super comprehensive overview there. A couple of things I want to kind of pick up on, that you mentioned before we get into some other questions. I guess on the macro front, a lot of familiar end markets that you mentioned in China, regionally, I think is not a surprise, certainly something that we've heard elsewhere as well. How would you characterize sort of the core 3M industrial markets? I know there's some tangential exposure to things like auto and electronics buried in there as well, but any sense of how the more industrial pieces of the business are going?
Listen, I would say coming into the year, we had talked about the softness in these industrial markets, and you're seeing it. So I would go around the globe or businesses and say, electronics, everybody knows, is soft, and I would say consumer electronics is soft too. But flip side, we have great investments in the long term that go, that not only rely on consumer electronics, but as you think about the future, semiconductor fabs, next-generation electronics, AR/VR, and of course, auto electrification, where you think about how these cars are becoming computer on wheels, are all great areas of opportunity, that as those volumes come back up or as we build more cars, you're going to see that growth. When you go to consumer, the consumer has shifted spending from discretionary to staples and other experimental activities.
As long as the economy starts coming back up, the brand that we are investing in, whether it's our Filtrete brand or our Damage-Free Hanging, which many people know as Command, areas that we feel will keep growing. The age of the house in the U.S., if my memory is right, is over 20 years. So there is a lot of demand for home improvement, that as the consumer has the money, we're going to see that growth, and we'll continue to innovate in that space. Then I'll come to safety and industrial. We have exposure again there in electronics. We have exposure in China, but areas that are coming up, industrial automation, using more and more, more adhesives for bonding from a structural perspective, are all high-growth areas that we can play.
As industrial activity is starting to come back up, not just in one region, but multiple regions of the world. Workers are concerned about their safety, employers are concerned about their worker safety, and so therefore, that's another area that we think about it and say, our, our, PSD division basically is well suited to, to continue to win in that space. That's just current business. And then as you think about the areas I've talked about, whether it's sustainable packaging, climate tech, these are large, large markets that are quite undefined and unstructured, and this is where 3M's strength comes in. The ability to partner with customers, the ability to be a part of the early technical roadmaps, just like we have seen in auto electrification, are areas that we believe that material science plus digital can play a role.
So, I would say we love the healthcare business, but once that business is spun out too, the other three franchises that we have are all can take advantage of GDP plus trends. And at the same time, we'll continue to deliver on the margin and cash equation, which allows us to keep reinvesting for growth and keep driving that. So, Bruce, anything else you would add there?
Yeah, the other thing I'd say, Josh, relative to China specifically, is watching export data.
Mm-hmm.
You know, export data has been somewhat soft, and our revenue is about 10%-11% of overall company in China. About half of that goes into local domestic markets, half of it ends up going through export. So we're watching both. China, for us, through the first six months, was down about 11% organically. And third quarter is most difficult comp because we're lapping into their reopening from a year ago, following the lockdown in the second quarter. So we remain cautious relative to what we're seeing there.
Got it. Maybe just to kind of tease out something you mentioned earlier, Monish, on, you know, sort of the pro forma exposure here once the healthcare separation is done. A little under half of the business is gonna be electronics, auto, and I guess consumer. Is that a mix you're comfortable with? Is anything that you can generalize about those businesses, either collectively or individually, about things like speed of pricing, inventory turns, R&D intensity? I think, you know, with that much concentration, do the characteristics change relative to what we've you know, come to expect out of 3M?
So I would, listen, when I, I said it before, I'll say these three franchises are all geared to take part in segments that we believe are going to be GDP-plus areas. At the same time, we have to execute and make sure that we are also being active in portfolio management, that as we start seeing slower growth, how do we move away to higher growth segments? And some of them I've talked about, auto electrification. I would say electrification is here to stay. Sustainability is here to stay. That business is a $600 million business already that grew 30% last year, so it's an area that we can play in. I talked about climate tech, I've talked about damage-free hanging, home filters, bonding, personal safety.
I would say industrial automation, Josh, is another area that when we think about the knowledge we have on material science, when you start marrying that with robots, and, and we've got a few partnerships going, that's another area that we believe in the long term plays itself out. So we are, we are pleased with, with the franchises we have. There's a lot of synergy between these three businesses. For example, you asked a question on R&D. You know, we invest 5%-6% of our revenue in R&D. Some of it goes, it's not 5% or 6% peanut butter spread across all these businesses. Consumer, for example, spends less than 5%-6%, but what they take advantage is some of the industrial applications that we create, they use it to take it to the consumer market.
Healthcare has been higher than 5%-6% because that industry demands us to be higher than 5%-6%. So we are, I would say, pretty thoughtful in the capital allocation, making sure that the R&D that we spend is actually giving us a return. Many a time people say, "But I don't see that all the time in your growth numbers, so where is it?" Well, you see it in multiple places. You see it in pricing. The value that we create for our customers allows us to get the price. You see it in margin, because the new products usually are margin accretive, and it's helpful. And of course, you see it in volume as volume comes through. But you also see it in applications.
So when 3M products are spec'd in, and 70% of our business is either going to be designed in, spec'd in, or regulated, and our engineering teams are working very closely with our customers to make sure that we are spec'd in or designed it into their product, and all of that helps. So I would say put all that together, long term, we see good franchise, but I would also tell you, we will always keep looking at portfolio. We have to keep looking. You have to move from slower growth markets to higher growth markets. And my general philosophy has been: if there's a market and we have a right to win, we'll put our money to work there.
I guess in that same line of thinking, what are the new, or I guess, you know, as the portfolio evolves, what are the new, quote, unquote, "defensive areas?" Healthcare sort of filled that role. Obviously, not overly defensive, still a decent grower, but should be fairly consistent. Are there areas that you would deem sort of the defensive areas or areas that you want to invest in, that capture sort of that, you know, historical 3M, you know, kind of more consistent GDP-ish, GDP plus-ish type, low volatility growth?
So I'll, I'll start and I'll have Bruce add on. I would say back to the point I made, 70% of our revenue is going to be designed in, spec'd in, or in a regulated industry, and so that itself is defense number one. I would say we need to continue to invest in areas which are GDP plus. So industrial automation, auto electrification, I would say, is a trend that will continue. Home safety or personal safety is another trend, and then home improvement could be a trend, depends on the consumer, whether they spend or not. But as long as the age of these homes increase, that's also defensive to some extent. But you could argue consumer exposure always could have its ups and downs. I would say electronics, Josh, is another area. When I think about where the world is moving, it's electronics.
Whether you think about semiconductor fabs, you think about these cars that are becoming computers on wheels, where our display technologies or human-machine interface is areas that we can win in. It's an area that we have started winning in auto electrification, and that's agnostic to whether it's an internal combustion engine, whether it's an electrified car. It's another area that as long as people are commuting, you're going to have the need for cars, and you're going to have us go there.
So all of these, as I look at it, and say these are opportunities that are defensive, they are areas that are GDP plus growth we can play in, and then, of course, there are new emerging areas like climate tech, that I've talked about in industrial automation that we would invest in, which further are trends that I think are going to continue. So anything else you would add, Bruce?
Yeah. To me, Josh, we have platform businesses that go into many, many end markets, whether it's braces, adhesives, tapes, the film business that Monish talked about. So while we may start in one market, eventually, like our film business, everybody focuses on displays, consumer electronics. We're seeing opportunities open up in automotive, in AR/VR. So to me, with the diversity of the portfolio and the diversity of our technology base, you know, we develop a technology for one end market, but eventually it finds itself someplace else. So when you saw that, like N95 respirators before the pandemic, the vast majority of our product was going into industrial manufacturing. Obviously, in the midst of the pandemic, a lot of our respirators found their way into the healthcare channel. So I think it's that diversity of the portfolio base that lends itself to some defensiveness, if you will.
Less about end market, more about application.
Right. Yep.
Understood. I'd like to pivot over to margins, and I guess Q2 specifically was just very impressive on the margin front. A lot of moving pieces, obviously, with restructuring in some of the end markets, but I guess where were you surprised?
So I wouldn't say surprised as much as a huge thanks to my team for continuing to drive and making sure we've taken care of customers, making sure that the restructuring benefits hit, and as supply chain started healing, we took advantage of it. So my view is it was good performance from an operating perspective that delivered those margins. Revenue pretty much came into where we said revenue was going to come in at. We came in higher end of our range on 2Q, partly driven by effects, but partly driven by the fact that we made sure we took care of our customers. So the teams were able to dial in revenue better. The use of data and data analytics helps us do better planning, helps us do more efficient production runs. Raw materials are flowing better.
They're not 100% there than they used to be during the pandemic, and that allowed us to get the efficiency, too. And as I see Q3, I would say as these chains, supply chains keep healing, you can see the momentum. As these restructuring benefits take hold, you're going to see that, that margin rate continue to grow. I would tell you on inflation, which may be on many people's mind, I would say we are in a disinflation environment, not a deflationary environment. You saw the CPI data that came out today, too. Inflation is still sticky. For us, where we are seeing it being sticky is labor cost is still quite sticky-
Yep.
When we see it from suppliers. So the teams know how to do that. As you know, we're managing it through price, where we, where we need to, and then we've got dual sourcing, and we've got a lot of other opportunities. Logistics costs, you've seen it come down. You can see that in our P&L, too. So that was another thing in 2Q, is as logistics costs have come down, we don't have to fly as many planes as we were flying to deliver to our customers. Also helps, so.
Understood. On the restructuring front, 3M has done a lot more restructuring than I think most industrial companies the last few years. Obviously, a lot of things going on, but how much of that would you say is sort of a demand volatility response to, you know, levels of demand versus transformation, and you're reaching milestones where maybe you can tack layers of cost because of some of the, you know, digital tools and other, you know, other efficiencies you've unlocked?
I would say it's both, Josh. I would say over the last few years, prior to my time, too, the company had transformed itself into four business units.
Mm-hmm
And then supply chain went horizontal across. The reason they did that was they said, "This is the only way we can scale at 3M," and they were right in that. But then the pandemic hit, so we couldn't go through all the changes we wanted to make. In the same time, we have continued to evolve our digital capabilities. We have continued to understand better the markets and the reaction, better how customers want us to interact, and we started predicting better. So coming into 2024, we said we are seeing a slow growth environment. We need to make sure we're agile versus being rosy about what an environment could be, but then it's too late to adjust for production. So the teams have got more agile.
We did announce a restructuring early 2023 of taking our 2,500 jobs in our factories, mainly driven by the fact that we were seeing lower volume coming. So that was one. Then as we have gone through it, and Mike had said that during earnings, we're relooking at everything. So the spin out of healthcare allowed us to completely relook at our everything in our business, because every time you have such a big event, it gives you an opportunity to really go deep and say: What else should we be doing, not doing? We decided that we are gonna reduce the size of the corporate center or structure. So the teams went through that restructuring. As a part of that, we said, "Let's reduce the structure," and you're seeing those savings start coming through. We also said we got to simplify our supply chains.
The world has evolved. We are starting to see healing of supply chains. The complexity we had, we don't need to have post-pandemic, so we've done that. We also said we got to get closer to our customers, and so we took out some layers and some of the BGs. So a lot of management layers were taken out because we said that's where the efficiency or sometimes the largeness of a company slows down decision-making, and we said, "Let's relook at management layers." We also said, "Let's relook at our go-to-market model in many countries." So in 30 countries, we said we're gonna move from a in-local country presence with our people to moving to an export model, but still using local distribution. But that allows you to take structure out. So I would say it's both.
We've continued to invest in digital, as you're, you're seeing, and the data analytics that's allowing us. But our success is going to be finishing out that program, taking advantage of a healing supply chain. At some point, deflation comes, capturing that deflation while investing so that we can get the growth. And Bruce reminds everyone a lot, volume does give us the best leverage, so we do have to get the volume. And our view is once this year plays itself out, I think you're still in a slow growth environment in the long run. I don't think you're gonna see, like, a rocket ship increase in 2024. I think most of, most companies would tell you the same, that you're gonna see us grow. GDP, I think next year, is predicted, like, 2.5%-3%. IPI is in that same range.
So I think we'll see where it goes, but we, I think we have great opportunities. We can grow, and the momentum is there in the company. Bruce, anything you would add?
No, I think as you think about the 8,500 jobs that we're taking, we're going after this year, Josh, 2,500 is in regards to what we're seeing on markets.
Mm-hmm.
The other $6,000 is a structural reduction in our cost structure.
Got it. That's helpful. That's good context. So transformation's been going on for a while now, and you mentioned, you know, there are some changes that have been put in place before you stepped in, Monish. What inning are we at? I mean, obviously, it's a journey, so you would never say you're done, but when does the heavy lifting wind down? I guess, is this current restructuring phase kind of one of the bigger last phases that we should expect?
So again, everything depends on what markets turned out to be and, you know, where we decide to invest. But I would say we are decisively taking action where we felt we needed to take the action, both on predicting what volume is going to be, but at the same time, doing the transformation that Bruce mentioned. The benefit of this is somewhere between $700 million-$900 million once all these actions are done. It's gonna cost us $700 million-$900 million to get those done, but in the long run, that becomes sustainable margin improvement. Now, our hope is we take some of that saving, and we continue to, continue to drive it in these areas that I talked about of new investment opportunities that allows 3M to keep growing in the future.
The actions that we are taking set us up for the long term well. At the end, we are always going to remain agile. I think the teams learned how to be agile, better prediction using data, data analytics, and as digital continues to take hold, you're gonna find us continuing to lean in to do what we need to do to get a good return.
Excellent. I want to spend our remaining time here, we don't have much left, but I do want to pivot over to some of the liability comments you made. Good helpful color upfront there, so maybe not a ton to go over, but sounds like we should be keeping our eyes open for December eleventh just to see how the, the opt-in, opt-out goes for, the PFAS settlement. I guess stepping back outside of public water suppliers, PFAS has a few other elements, maybe a little bit more fragmented than the PWS piece, but is there an opportunity to, you know, handle those en masse the same way? It might be multiple stages, but is that something that we could expect at some point in time, or does this have a longer tail?
Yeah. First, actually, I would just start by saying, you know, the company has done a good job of managing PFAS, and one of the settlement is a step in it. This was the company that decided to get out of PFO and PFOS in 2001 voluntarily. We have also invested a lot of money in state-of-the-art water filtration equipment in our facilities. We also announced the exit of PFAS by 2025, of manufacture of PFAS, and trying to find alternatives for our customers, and finding alternatives in our products that move our portfolio from being reliant on a PFAS sub-product. And then this was another piece in that whole transition or management of PFAS.
I would say, Josh, and I would never say no, but I just look at where the portfolio was from a litigation maturity perspective. PWS was much closer to getting a settlement done. I think some of the other things will play itself out over time, whether it is the AG settlements or personal injury. I think it's gonna take time to play itself out. But again, at the end of the day, you know, if there is a need to do it, we'll do it. If there's a need for us to defend ourselves in court from a litigation strategy perspective, we will. So it depends on situation by situation, and we'll take it from there. So based on what I see right now, it's been good progress on the front, and we've tried to give you all as much certainty and clarity.
I would also encourage all of you, please, if you're not ready, just make sure you're going through all our SEC documents that we file quarterly. We are very transparent with all the situations of what the cases are, where they are, et cetera, and that will give you also an update on where this journey goes.
Understood. Helpful color. Great to see you both as always. Appreciate the time.
Thanks for having us.
Appreciate it very much.