3M Q3 2024 Earnings Report

3M EPS Results

• Actual EPS: $1.98
• Consensus EPS: $1.93
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: $2.68

3M Revenue Results

• Actual Revenue: $6.29 billion
• Expected Revenue: $6.06 billion
• Beat/Miss: Beat by +$234.20 million
• YoY Revenue Growth: -24.30%

3M Announcement Details

• Quarter: Q3 2024
• Date: 10/22/2024
• Time: Before Market Opens
• Conference Call Date: Tuesday, October 22, 2024
• Conference Call Time: 9:00AM ET

3M (NYSE:MMM) is a diversified technology and manufacturing company headquartered in St. Paul, Minnesota. Founded in 1902 as Minnesota Mining and Manufacturing Company, it initially supplied abrasives and other materials before expanding into a broad range of science-based products and technologies.

The company develops products for industrial, transportation, electronics, safety and consumer markets. Its offerings include personal protective equipment, industrial adhesives and tapes, abrasives, filtration products, electrical materials, automotive solutions, medical and dental products, and consumer brands such as Post-it Notes and Scotch products. Following the 2024 separation of its health care business into Solventum, 3M is primarily organized around its Safety and Industrial, Transportation and Electronics, and Consumer businesses.

3M serves customers in markets around the world through manufacturing, research and development, sales and distribution operations across multiple geographic regions. William M. Brown has served as the company's chief executive officer since May 2024.

3M Q3 2024 Earnings Call Transcript

Key Takeaways

• In Q3, 3M delivered non-GAAP EPS of $1.98 (up 18%), expanded margins by 140 bps, generated $1.5 B in free cash flow (141% conversion) and returned $1.1 B to shareholders.
• The company raised the lower end of its full-year EPS guidance by $0.20 to a $7.20–$7.30 range, reflecting strong operational performance and disciplined capital deployment.
• Although on-time-in-full (OTIF) improved to 89% (up 10 pts vs. Q4 2022), 3M still faces elevated inventory (100 days of supply), sub-optimal supplier OTIF (~70%) and factory utilization (~50%) well below best-in-class.
• 3M is ramping up R&D effectiveness and pipeline velocity with new product introductions set to rise ~10% in 2024, facility upgrades to scale lab-to-plant output and 50+ engineers added in Q4.
• A 15-week initiative to overhaul demand forecasting aims to boost accuracy (mid-60% currently) and deliver ~2% net productivity gains (~$260 M/year), supporting inventory reduction and improved delivery.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the 3M third quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you do have a question, please press star one on your telephone keypad. As a reminder, this call is being recorded Tuesday, October twenty-second, twenty twenty-four. I would now like to turn the call over to Bruce Jermeland, Senior Vice President of Investor Relations at 3M.

[Bruce Jermeland, SVP of Investor Relations at 3M]

Thank you, and good morning, everyone, and welcome to our third quarter earnings conference call. With me today are Bill Brown, 3M's Chief Executive Officer, and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag will make some formal comments, then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our investor relations website at 3m.com. Please turn to slide two. Please take a moment to read the forward-looking statement.

[Bruce Jermeland, SVP of Investor Relations at 3M]

During today's conference call, we'll be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties.

[Bruce Jermeland, SVP of Investor Relations at 3M]

Item 1A of our most recent Form 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note, throughout today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to slide three. I'll hand the call off to Bill. Bill?

[Bill Brown, CEO at 3M]

Thank you, Bruce, and good morning, everyone. First, I'd like to take a moment and welcome Anurag to his first 3M earnings call. Anurag recently joined 3M in early September after serving as CFO of Otis. I've had the pleasure of working with Anurag off and on over the past 20 years and look forward to his leadership and partnership as 3M's CFO. Earlier today, we reported strong third-quarter results, with non-GAAP earnings per share of $1.98, up 18% on 1% organic revenue growth.

[Bill Brown, CEO at 3M]

Our overall company margins increased 140 basis points to 23%, and free cash flow was $1.5 billion, with a conversion of 141%, and we returned $1.1 billion to shareholders during the quarter via dividends and share repurchases. These results extend our strong 2024 operating performance, with non-GAAP earnings per share over the first three quarters up 30% on 1% organic revenue growth.

[Bill Brown, CEO at 3M]

As a result of the team's strong operational performance and disciplined capital deployment, we raised the bottom end of our full-year earnings guidance by $0.20 to a range of $7.20-$7.30, versus a prior range of $7-$7.30 per share. During our Q2 earnings call, I described our top three priorities. Number one, driving sustained top-line organic growth through both reinvigorating innovation and improving commercial excellence. Two, improving operational performance across the enterprise. And three, effectively deploying capital.

[Bill Brown, CEO at 3M]

As I mentioned in July, getting more productivity out of our R&D investments is going to take some time, but we're beginning to make progress on both R&D effectiveness and efficiency. A lot of our recent efforts have focused on the basic blocking and tackling and improving the fundamentals of our R&D and commercialization processes. For example, we've taken actions to improve enterprise-wide visibility on specific investments in our product development pipeline, and we're driving a new rigor and discipline into product launch calendars and raising accountability for post-launch sales performance.

[Bill Brown, CEO at 3M]

We're fast-tracking projects for low-risk product line extensions, eliminating non-value-added activity from our engineers' workload by offloading or outsourcing administrative tasks, and increasing pipeline velocity through efforts as simple as reducing the time to set up an SKU from 100 days on average last year to about 60 days this year, and to address bottlenecks and drive productivity in the product development process, we're shifting capital spending within our existing budget to fund upgrades of R&D facilities to allow us to scale rapidly from lab to pilot to manufacturing.

[Bill Brown, CEO at 3M]

And finally, we're shifting about 100 people within R&D to focus on new product development, including those who are rolling off PFAS-related projects, and adding more than 50 new engineers in the fourth quarter to high-priority focus areas such as specialty materials and films for the automotive, aerospace, electronics, and semiconductor markets. After a decade-long slide in new product introductions, we bottomed out and are starting to turn the corner, with new product launches expected to be up about 10% this year, with a further acceleration next year.

[Bill Brown, CEO at 3M]

I recognize these are only initial steps on a long journey toward bending the organic growth curve, and in the meantime, we have to improve how we execute at the customer interface. We're working through the details of how we staff, train, and incentivize our sales force.... price our products, leverage our distribution network, and capture cross-sell opportunities, and we'll share those details as they evolve. But one area where we've seen continued progress is delivering on on-time in full, or OTIF, to our customers.

[Bill Brown, CEO at 3M]

I know we've lost business and have paid fines due to poor delivery performance, and I'm encouraged by the steady improvement we're making, ending Q3 at 89% OTIF, up five points since the beginning of the year and ten points above Q4 of 2022. As we push harder on OTIF, we're getting more visibility on the weak links in the value chain, from the performance in our factories, to our suppliers, and to our logistics providers.

[Bill Brown, CEO at 3M]

In our factories, we're looking harder at the reliability of our assets and our capacity to surge, and we've now implemented a common metric to measure operating equipment efficiency, or OEE, across the major assets in our thirty-eight largest facilities. Utilization on these machines going back to the beginning of the year averages around 50%, well short of best-in-class companies and pointing to opportunities to free up capacity to better respond to quick turn orders by optimizing changeovers and improving maintenance practices.

[Bill Brown, CEO at 3M]

When it comes to our suppliers and contract manufacturers, we're implementing more rigorous standards and expectations for on-time performance, which has been running in the low 60% range for the past few years and is now in the low 70s.

[Bill Brown, CEO at 3M]

A common theme in all of these discussions is the need for significantly higher demand visibility and forecast accuracy, which has been running in the mid-60% range, 10-15 points below expectation and well below best-in-class companies.

[Bill Brown, CEO at 3M]

We recently kicked off a project to redesign our forecasting process and we're in the early stages of a 15-week sprint to test and tune our demand plan for two large divisions using different analytical tools. Initial results through the new model show a lot of promise in improving forecast accuracy, which will allow us to level load our factories, reduce inventory throughout the value chain, and improve on-time delivery to customers. As I mentioned in July, this is a back-to-basics, focus-on-fundamental approach that lays the groundwork for a more holistic look at network complexity.

[Bill Brown, CEO at 3M]

While we've closed facilities in the past and have a few more in flight today, gaining maturity in our OEE metric will allow us to take a fresh look at consolidation opportunities at both the site and the work cell level over time. A critical enabler of our OpEx agenda is the depth and capacity of our operations leadership team, and we continue to onboard new talent, particularly in the areas of quality, materials planning, and continuous improvement. These efforts are all part of a broad operational transformation at 3M, the foundation of which is a safety-first culture.

[Bill Brown, CEO at 3M]

While our injury rate has improved versus last year, it's not where we want it to be. Earlier this month, we launched a company-wide campaign called Journey to Zero, that engages every employee in our drive towards an injury-free workplace. Turning to capital deployment, through nine months, we've generated $3.5 billion of adjusted free cash flow, with conversion of 102%, after investing $1.7 billion in R&D and CapEx. We've returned $2.7 billion to shareholders, including share repurchases of $1.1 billion.

[Bill Brown, CEO at 3M]

Our balance sheet remains strong, and we're actively reviewing our portfolio with a few small businesses now in the early stages of a sale process. So overall, we're making progress on the three priorities that I've laid out, and I'm encouraged by the energy and desire of our team to win by delivering for our customers and creating value for our shareholders. With that, let me turn it over to Anurag to provide more details on the quarter and our updated guidance. Anurag?

[Anurag Maheshwari, CFO at 3M]

Thank you, Bill. Starting with overall company third quarter performance on slide four, total adjusted sales were $6.1 billion, with organic growth up 1% or up 2%, excluding geographic prioritization and product portfolio initiatives. These results reflect end market trends that were largely in line with expectations, including mixed industrial markets, strong growth in electronics, a decline in automotive OEM build rates, and continued softness in consumer retail discretionary spending.

[Anurag Maheshwari, CFO at 3M]

Looking geographically, adjusted organic growth was led by Asia Pacific, up mid-single digits, driven by our electronics business. The U.S. was flat, with strength in home Improvement and Commercial Branding and Transportation, offset by a tough comp in personal safety as self-contained breathing apparatus benefited from significant supply recovery last year, and EMEA was down low single digits due to the decline in global car and light truck builds. Adjusted operating margins expanded 140 basis points to 23%, driven by benefits from improved organic growth, continued productivity, and restructuring.

[Anurag Maheshwari, CFO at 3M]

This strong operating performance, along with benefits from below-the-line items, resulted in adjusted EPS of $1.98, up 18% or 30 cents. Turning to revenue by business group on slide five. Safety and Industrial sales were $2.8 billion, with organic growth of 0.9%. The growth was primarily driven by the Industrial Adhesives and Tapes Division, which saw particular strength in bonding solutions for electronic devices. In addition, we saw growth in roofing granules and electrical markets, while the balance of the divisions was down slightly due to ongoing market softness and unfavorable prior year comps.

[Anurag Maheshwari, CFO at 3M]

Transportation and Electronics adjusted sales were $1.9 billion, up 2% organically. Our electronics business delivered high single-digit organic growth as consumer electronics OEM customers ramped production volumes ahead of the upcoming holiday season. Automotive and Aerospace Division organic growth was down mid-single digits in the third quarter. The auto OEM business declined in line with global car and light truck builds, while aerospace delivered strong growth, driven by bonding and acoustic solutions.

[Anurag Maheshwari, CFO at 3M]

Year to date, our total auto OEM business was up 4% versus a 2% decline in global car and light truck build rates. We continue to gain penetration with adhesives, tapes, display films, and electronic materials on multiple new auto OEM platforms. Looking at the rest of the transportation electronics, Advanced Materials grew high single digits, with strong Glass Bubbles demand for lightweighting applications in transportation and oil and gas markets. Commercial Branding and transportation was up low single digits, driven by demand for graphics and pavement markings.

[Anurag Maheshwari, CFO at 3M]

Finally, the Consumer business sales were $1.3 billion. Organic sales declined 0.7%, which included a 2.3 percentage point headwind from portfolio prioritization. Home improvement delivered mid-single-digit growth, driven by new products in our Command portfolio introduced for the back-to-school and holiday seasons. The remaining divisions within the Consumer business declined due to portfolio prioritization actions, as well as retail customers continuing to be price sensitive and value-focused.

[Anurag Maheshwari, CFO at 3M]

Through the course of the year, the Consumer business has improved, and we expect the trend to continue in the fourth quarter. Turning to Slide six. As mentioned, on an adjusted basis, we delivered Q3 operating margins of 23%, up 140 basis points, and earnings per share of $1.98, or an increase of $0.30. Operational performance, including organic growth, along with ongoing benefits from productivity and restructuring, contributed 160 basis points to margins, while foreign currency was a headwind of 20 basis points.

[Anurag Maheshwari, CFO at 3M]

These items, combined with acquisition and divestiture impacts, contributed $0.14 to earnings. The remaining $0.16 of EPS growth was driven by last year's high tax comp, along with benefits from net interest and a lower share count. Turning to cash, we generated solid adjusted free cash flow of $1.5 billion in the quarter, driven by strong income generation and positive working capital flows, while continuing to invest capital to support growth and sustainability. Conversion for the quarter was 141%.

[Anurag Maheshwari, CFO at 3M]

Overall, we have had very strong year-to-date operating performance. We have expanded margin 380 basis points, grew EPS by 30% on 1% organic growth, and generated $3.5 billion of free cash flow with conversion of 102%. Based on this performance, we are updating our full-year 2024 guidance on slide 7. We expect our full-year adjusted organic growth to be approximately 1%, with business group estimates unchanged, with safety and industrial flat to up low single digits, transportation and electronics up low single digits, and consumer down low single digits.

[Anurag Maheshwari, CFO at 3M]

Full-year adjusted operating margins are expected to be up 250-275 basis points versus the prior range of 225-275, driven by continued momentum from productivity. The operational benefit, combined with lower net interest expense and share count, gives us confidence to raise the lower end of our EPS guidance by $0.20 to a range of $7.20-$7.30. Finally, our expectation is that we will continue to deliver robust cash flow with strong working capital performance in the fourth quarter.

[Anurag Maheshwari, CFO at 3M]

With year-to-date conversion at 102%, we expect that the adjusted free cash flow conversion performance will be 100% plus for the full year. Before we turn to Q&A, I want to take a moment to thank the 3M team for the warm welcome. I'm excited for the opportunity ahead of us and look forward to working with the team as we execute the priorities Bill has laid out. With that, let's open the call for questions.

[Operator]

Thank you. Ladies and gentlemen, if you would like to register a question, please press star one on your telephone keypad. If your question has been answered and you would like to withdraw, please press star two. If you are using a speakerphone, please lift up your handset before entering your request. Please limit your participation to one question and one follow-up. ... Our first question comes from Scott Davis of Melius Research.

[Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Hey, good morning, everybody, Bill, Anurag, and Bruce.

[Bill Brown, CEO at 3M]

Morning, Scott.

[Anurag Maheshwari, CFO at 3M]

Good morning.

[Scott Davis, Chairman and CEO at Melius Research]

Congrats to all on a good start here. Guys, I want to talk a little bit about this operational transformation. It seems like a pretty heavy lift, but obviously, you're making some progress. Last quarter, you spent some time on supply chain, not as much in prepared remarks this quarter. How big of an opportunity is that kind of step two or step three down the road in kind of getting the supply chain reoriented? How big of an opportunity do you think that is, Bill, now that you've had a little bit more time in the seat?

[Bill Brown, CEO at 3M]

So, Scott, thanks for the question. Look, we continue to make good progress across all of the elements in our operations. You know, our cost of goods sold is $13 billion. A piece of it, a big piece of it, is supply chain, so obviously, that is a high degree of focus. You know, we're looking to drive 2% net productivity, so 2% net of inflation across all those elements, including in supply chain. We have about 25,000 direct suppliers, including 4,000 contract manufacturers. Our teams are working hard to consolidate that, drive performance, and we continue to do a good job on this.

[Bill Brown, CEO at 3M]

I think we're at the front end of what I would say to be a long journey. I think we get a lot of value out of basic negotiations. I think we have a lot more opportunity, you know, as we think more about value engineering in our product. That's a relatively small component of our overall supply savings. So the teams are working, I think, very, very hard on this. Again, as I step back across all the $13 billion, you know, if you drive and get 2% net, you know, you're talking $650 million, more or less, of, you know, $250 million, $260 million dollars worth of net productivity.

[Bill Brown, CEO at 3M]

You know, there's a lot of value there that we can capture year-over-year. I spent a little time in my prepared remarks talking about one of the key levers, because I think it's both a growth and an operations lever, and that's delivering on time in full. And we're doing very well, very good job in our factories.

[Bill Brown, CEO at 3M]

The team is performing well, but it's pointing out some opportunities to drive better supplier performance, and we're really, really focused on that. We've seen some improvements over the last year, but I think a lot more to do in terms of driving the full value chain, performance improvement, including with our supply base.

[Scott Davis, Chairman and CEO at Melius Research]

Yeah, that's helpful. Bill, you talked a little bit about needing to change the incentive structure a little bit. Do you think you'll have a new incentive structure and comp plan in place for 2025? What does that really mean? Does that mean kind of increasing the variable component? Can you really dial it in kind of, you know, to where you want it this quickly?

[Bill Brown, CEO at 3M]

So good question, Scott. I think, look, before we get to the comp plan, I think what's going to be more important for us is to make sure we have very clear objectives across the management team, deep into the organization, so we all understand what we're accountable to achieve, to shareholders and to one another. I think that's step one. And I do think we have an opportunity to get a little more crisp on our objective-setting process. You know, but of course, the back-end of that is comp plans. I think you will see some adjustments in our 2025 comp plan.

[Bill Brown, CEO at 3M]

We are out speaking with shareholders about that based on the results we had earlier this year in our AGM. But, but yeah, we'll continue to look at our comp plans, not just at executives, but as it flows into the organization. And importantly, with our between five and six thousand salespeople out there, we'll continue to look at: Do we have the right incentive structure to drive the right behaviors across the full sixty thousand-plus people in the company? So Scott, there's gonna be changes that'll be made. We'll talk about more about that as they come to fruition in the coming months.

[Scott Davis, Chairman and CEO at Melius Research]

Okay. Thank you, Bill.

[Bill Brown, CEO at 3M]

You bet.

[Scott Davis, Chairman and CEO at Melius Research]

Best of luck, guys.

[Bill Brown, CEO at 3M]

Thank you, Scott.

[Operator]

We'll go next now to Andrew Obin with Bank of America.

[Andrew Obin, Equity Research Analyst at Bank of America]

Yes, good morning. I guess I'll ask two questions. Follow up on Scott's questions. Just Bill, what are your views on centralization inside 3M? I know Mike pushed for a lot of centralization, which was a departure from what his predecessor, Inge Thulin, has done, which ran the company in very, very decentralized ways. So just would love to hear how your operating philosophy has evolved since you joined the company. That's part one.

[Andrew Obin, Equity Research Analyst at Bank of America]

Part two, we're just getting a lot of questions on insurance recovery related to PFAS and Combat Arms, particularly given the news out of Carrier, where they indicated that perhaps they could recover insurance in excess of their costs. These are public statements, so any sort of-... Publicly available updates on where you are in the process on insurance recovery would be helpful. Thanks so much, and congratulations on a good quarter.

[Bill Brown, CEO at 3M]

Great, Andrew. Thanks, thanks for the questions. I mean, first of all, I think, about two and a half years ago, Mike did consolidate all of our factories and supply chains under a common leader, under Peter Gibbons, and I think it was the right thing to do. It allows us to look across 110, plus or minus, factories and, you know, close to 100, between 80 and 100 distribution centers and really look at performance, performance metrics, how they compare with one another. It's a network. They flow together, so artificially separating them out by a business group or by geography did not make a lot of sense.

[Bill Brown, CEO at 3M]

So you'll get the power of the whole by looking at all of the operations together. So if you call it centralization, I call that global coordination. I do think that was the right step and it was smart to do that, and we're reaping the benefits of that. And I think going forward, you know, the value we'll be able to get out of operations is because of that operational, that organizational change. So I think it was the right step. I think the move to globally coordinating business units, depending upon the business, some we run globally, some we run regionally, but all within those three broad business groups.

[Bill Brown, CEO at 3M]

I also think that was good. There'll probably be some adjustments in how we structure the BGs over time, perhaps within the three business groups. You know, there's certain geographies that stand out that we're really focusing heavily on, and we'll want to put a little more attention on. But generally, I think Mike was taking the right steps, and particularly in the supply chain area. So that's on that piece on sort of your point about centralization. On insurance recoveries, just quickly, you'll see this in the Q. In Q3, we've covered $54 million in insurance recoveries between Combat Arms and public water suppliers.

[Bill Brown, CEO at 3M]

Year to date, it's over $175 million. Recovery efforts continue. I know it's top of mind, given what other folks are talking about. You know, we're active in arbitration and litigation with multiple insurers. You know, we intend to ramp up our recovery efforts in the coming days and weeks, and we do expect our insurers to honor their policy obligations to us in full.

[Bill Brown, CEO at 3M]

You know, the difference with others is our liability that we settle for is quite a bit higher than our insurance total insurance value, so it's a little bit different than others. But we're ramping up our efforts, and we're starting to recover, and we'll recover more over time. We'll update investors each quarter and through our 10-Qs as we recover more on insurance.

[Andrew Obin, Equity Research Analyst at Bank of America]

Thank you very much.

[Bill Brown, CEO at 3M]

You bet.

[Operator]

We'll go next now to Nigel Coe with Wolfe Research.

[Nigel Coe, Managing Director at Wolfe Research]

Thanks. Good morning, and Bill, thanks for the updates. These are really helpful. On the insurance point, I just wondered, could you maybe clarify what the total coverage would be from a price perspective, and understand that you're working on ramping up the recoveries there. But, my first question is really around the two points of net productivity. You've got a lot of initiatives in play here.

[Nigel Coe, Managing Director at Wolfe Research]

You've got the supply chain nationalization, OTIF targets improvements, OEE improvements, and a lot of other things as well. Any sense on what's more important here? You know, what is the supply chain driving the bulk of that two points in the next two or three years? I mean, any sense there, and do we need some heavy lift restructuring to achieve those targets?

[Bill Brown, CEO at 3M]

So, thanks for the question, Nigel. I don't think I can say much more on the insurance recoveries or how much we're getting. I mean, other than what we've captured to date. I think we'll update you on that, as we go. We expect that to ramp a bit better. But, you know, look, when I step back, I mean, look, at $13 billion worth of cost of goods, you know, half of that is going to be roughly supply chain. So you'd expect, you know, the bigger parts of our productivity is gonna come out of supply chain. We have seen restructuring benefits flow through in our factories. That is also a factor.

[Bill Brown, CEO at 3M]

We continue, you know, to drive lean activities in our factories, and you're seeing the, you know, the benefits of lean production, lean operations across our factory network. We're seeing benefits in our transportation costs and our logistics expense that's running through our distribution centers. You know, last time I spoke quite a bit about the amount of waste we generate in our company. It's or yield loss, however you want to characterize it, 5% of cost of goods, so it's quite substantial. You know, we are getting at that.

[Bill Brown, CEO at 3M]

You're not going to get big, big dollars every year. You get it in tens of millions in chunks over time, you know, but we're at it. We're running Kaizen events continuously to go get it. You know, we've more than doubled the number of Kaizen events this year over last, and we expect that to continue going into next year. You know, so all of these pieces, you know, will drive that net productivity. You know, the teams are at it. We're pushing hard. You know, I would say, stepping back, the biggest part is gonna come out of the biggest part of cost base, which is supply chain.

[Nigel Coe, Managing Director at Wolfe Research]

Okay, Bill, that's helpful. And then maybe, Anurag, congratulations on the new role. Just wanted to maybe get a bit more color on 4Q, especially, you know, look, looks like 1% organic growth, very much on trend, but looks like the 4Q margin's coming in about 20.5% at the high end. Quite a big step down Q to Q. Just want to make sure that's the right math, and any below-the-line color would be helpful.

[Anurag Maheshwari, CFO at 3M]

Great. Hey, thanks a lot, Nigel. I think you covered it. The Q4 margins are pretty much in line with what we expected. Sequentially, Q4 has been lighter than Q3 margins by about 300-350 basis points due to seasonality, which translates into lower sequential revenue of about $200 million, lower under absorption in the factories due to shutdowns, inventory management, and timing of costs and investments. So overall, it's pretty much in line with what we expected.

[Anurag Maheshwari, CFO at 3M]

But if you kind of take a step back, we raised the bottom end of the guide by $0.20 or the midpoint by $0.10, and that is largely because of the focus on productivity-... seeing good, good, really good progress on that, plus the share repurchase benefits of share repurchase and the higher cash flow generation, which is leading to a higher interest income or lower net interest expense. So putting all of that together, you know, making progress across all these areas, and Q4 pretty much in line.

[Nigel Coe, Managing Director at Wolfe Research]

Great. Thank you.

[Operator]

We'll go next now to Jeff Sprague with Vertical Research Partners.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

Hey, thanks. Good morning, everyone, and welcome aboard, Anurag. Hey, I just wanted to come back a little bit in the neighborhood of some of these earlier questions. Predominantly, just wanted to get a sense of the fact, you know, we're kind of at the tail end of the prior restructuring. I think you did $165 million of spending in the first half and had something like 110 to go in the second half. So I'm trying to get a sense if that is still on track.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

And then, Bill, of these, you know, very numerous and granular things that, you know, you're laying out here, are we seeing much benefit from that in 2024? Or is this really sort of laying the groundwork for 2025, and a lot of the margin expansion in 2024 is really the underlying prior restructuring plan?

[Bill Brown, CEO at 3M]

Hey, Jeff, that's good, good questions. I mean, first, on the restructuring, we are on track. Your numbers are right, 165 in the front half and, you know, about 110 or so in the back half of the guidance, so 275 for the year. That's about where we're at. There's a little bit more that'll tail into next year, you know, to complete the program. You know, and, yeah, some of the gross margin and net margin improvements this year are coming from restructuring. You know, they're coming from a lot of productivity programs that have been in flight.

[Bill Brown, CEO at 3M]

Some are ramping up and have more focus and effort in the last five or six months. You know, but a lot of these things are going to be realized over time. This is, you know, the football metaphor. It's a couple of yards and a pile of dust in lots of ways to get you know, ground game going on operational excellence. It's a multi-quarter, multi-year journey.

[Bill Brown, CEO at 3M]

So, you know, the way I look at this, I think we're still, Jeff, in the early innings of becoming operationally excellent, and I think the bulk of the opportunities are ahead of us, which is why I think as I look out the next one-to-three years, you know, we should continue to see margin growth coming out of a lot of what's happening across our factory network. There's a lot of levers to pull.

[Bill Brown, CEO at 3M]

You know, there's no big winners, no big hitters here that drive a big one-timer in a particular quarter, but it's getting better at all of these things, you know, every quarter, quarter after quarter, and then extending that sort of philosophy on operational excellence across the rest of the enterprise. There's no reason why being good and reducing waste and improving throughput doesn't extend to how we run R&D, how you run a legal function, HR function, finance.

[Bill Brown, CEO at 3M]

And I think when you do it across the whole enterprise, you really start to become a much better company. And I think between now and then, we've got a lot of room to go and a lot of opportunity ahead of us.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

Great, understood. And then, just thinking about, you know, kind of the capital deployment question, you know, you stepped up on buyback a bit in the quarter, you know, in spite of writing a sizable liability check. You know, how should we think about just managing, you know, kind of the outflow of cash on, you know, repo and/or dividend against the backdrop of, you know, sort of the schedule of liability payments? I mean, maybe it's kind of a question about, you know, what's the comfort level on minimum cash or something like that as you're operating going forward.

[Bill Brown, CEO at 3M]

I'll start on this, Jeff, and I'll turn it over to Anurag, as the new CFO, to offer his thoughts because I know he's been, you know, putting a lot of time on this. But yeah, I mean, we did step up here in Q3 on repurchases, you know, at about $700 million. You know, it's $1.1 billion year to date. You know, look, we're generating good cash flow. You know, we don't see, you know, on the horizon going out through next year, you know, big liability payments that aren't already on our balance sheet. So we've got an opportunity to deploy capital. I think we were smart in doing that here in Q3.

[Bill Brown, CEO at 3M]

You know, we've got capacity. We end Q3 with pretty hefty cash balance. You know, our leverage ratios remain pretty attractive. We've got an open authorization from the board. So look, we took advantage of that here in the third quarter. We've got more capacity to do more and, you know, so I feel pretty good about where we stand today, but maybe Anurag, as the new CFO, can comment on his thoughts on just the strength of the balance sheet.

[Anurag Maheshwari, CFO at 3M]

Sure. Jeff, really believe that our capital structure is actually solid from a cash balance, leverage, cash flow generation, and optionality perspective, which allows the optimal capital deployment and allocation. As Bill mentioned, we have a very hefty, good cash balance. We end the third quarter at $7.3 billion, which is more than 2x of the working capital requirements of the business. On leverage, it was a net leverage of 0.8x at the end of the third quarter, and more importantly, maintaining a strong investment-grade rating with ratings of A3 or A-minus.

[Anurag Maheshwari, CFO at 3M]

And as you've seen through the quarter in the course of the year, the cash flow generation has been robust. For the first nine months, we generated $3.5 billion of cash flow, and that's after investing $1.7 billion on R&D and CapEx. And we do expect in years to come, the cap, as earnings grow, we make progress in working capital, especially in the area of inventory. This will increase our cash flow and keep the conversion higher than 100%. Also, we have optionality in terms of the 19.9% stake in Solventum and any other future portfolio reshaping we do.

[Anurag Maheshwari, CFO at 3M]

So putting all of that together, it's a strong capital structure. We have optionality, flexibility to invest in the business, to drive growth, and also to return capital to shareholders. So you know, that's an active discussion we're having, and we'll probably talk more about it over the next few months.

[Jeff Sprague, Founder and Managing Partner at Vertical Research Partners]

Great. Appreciate the color. Thanks a lot, guys.

[Operator]

... We're next now to Julian Mitchell with Barclays.

[Julian Mitchell, Managing Director and Equity Research Analyst at Barclays]

Thanks. Good morning, and welcome, Anurag. Maybe, Bill, a lot of very good color on the, some specific sort of tools around, driving operational excellence, but maybe trying to tie it together. I think, at a conference forum, about six weeks ago or so, you talked about getting gross margins for 3M into the high forties. Right now, you're sort of forty-two-ish, or so, rate, including some charges.

[Julian Mitchell, Managing Director and Equity Research Analyst at Barclays]

So is the right way to think about the medium term, maybe sort of four or five hundred points of gross margin uplift on the sort of total enterprise level, and then operating expense, inclusive of SG&A and R&D, that's sort of staying relatively stable in the low twenties as a share of sales, as you sort of squeeze out more efficiency and returns from the R&D?

[Bill Brown, CEO at 3M]

Yeah. So Julian, it's a good question, and we are running kind of in the low-to-mid 40s right now on gross margin, in the 43%-44% range, plus or minus. There are points in time in the past where we were, you know, high 40s, you know, that's excluding healthcare. So it, in the way we have our business structured today, it's certainly achievable. As I laid out sort of the math there and earlier in this conversation, $13 billion worth of cost of goods. If we do 2% net productivity, it's, you know, more or less $260 million. If we did that every year, it's sort of a point a year of gross margin. Of course, there's lots of dynamics here.

[Bill Brown, CEO at 3M]

You've got mix happening in the business. You've new products coming in. You know, we've got to. As next year, middle of next year, as we exit PFAS manufacturing, you have some under-absorbed cost within those factories we've got to take care of. You know, eventually, Solventum is gonna move some of their production away, or, and the TSAs will wind down. We've got to absorb that. So there's gonna be lots of puts and takes, so it won't be a linear journey over the next number of years, a growing gross margin, but I do see that that's a big focus of ours.

[Bill Brown, CEO at 3M]

We've got to be really pushing that hard to drive gross margin improvement over time. You know, our R&D level is about 4.3-4.4%. I mean, it could drift up, could drift down a little bit in the tenths of basis points. It's not in or tens of basis points. It's not, you know, a big mover. You know, SG&A could see some leverage over time just based on volume, but I think the bigger driver in the future is going to be coming out of gross margin.

[Bill Brown, CEO at 3M]

And I remind you, I'm focusing on growth and margin expansion for sure, working the paddles across both of them, but as I step back, driving growth is also a margin driver because of a high drop through we get on incremental volume. So that's kind of the way I see the future playing itself out, and I don't think today I'll get much more specific.

[Bill Brown, CEO at 3M]

You know, we'll lay this out a little bit more clearly to investors as we turn the corner in 2025 and come back and host an investor day towards the end of February. I think we'll have a little more clarity in laying this out a lot more clearly to investors at that point, but anyway, that's the math as I see it today, Julian.

[Julian Mitchell, Managing Director and Equity Research Analyst at Barclays]

That's helpful. Thank you. And just circling back on your top line comment just there. So you're moving at about sort of a point of organic growth through the second half year on year. Just wondered how you're looking at the overall sort of demand environment into next year. And when we think about the netting off of NPIs picking up versus your pruning efforts, you know, about a hundred points this year, how are we thinking about the net of those two items over the next twelve months?

[Bill Brown, CEO at 3M]

Look, 1% organic this year isn't what we should be aspiring to. Again, it's the middle of the range we set, you know, a couple of months ago. You know, it's traveling in, in the order of where the market happens to be. IPI is running around 1.1%. It's 1.2% for the year, steps up a little bit going into next year. You know, GDP is in the 2.5-2.7% range. Again, that's kind of in the same line next year, so low single digits. And I think overall, you know, we're performing kind of in line with that, including auto build, semis, electronics, all this consumer, all that together, you know, trending in line.

[Bill Brown, CEO at 3M]

I look at NPVI, and as that matures, you know, early good signals, we're up 10% on numbers of launches this year over last. We see that rate accelerating in 2025. You know, but stepping back, we're still an order of magnitude less than we were at the peak days in terms of how many products we've launched in the marketplace. So we've got to get that R&D engine moving again. You know, that is going to be essential to improving on our growth rate and starting to hit and then outgrow the market. You know, that'll start to bear fruit into next year, maybe the end of next year and into 2026.

[Bill Brown, CEO at 3M]

And that's why I took a lot of care last time and earlier to say, we, we've got to get better at selling what we have on the market today, which means we got to work our sales force and all those pieces of it. You know, do we have gaps in our sales force coverage? Do we have the right incentive structures, the right training, the right people in the field, the right distributors? Are we pricing correctly? Do we have cross-sell opportunities? All of these things will drive growth, and I think we've got to pull all those levers.

[Bill Brown, CEO at 3M]

And it's why I came back earlier on in ths conversation and really, you know, doubled down on OTIF, because we are losing business if we're not delivering it on time, in full to customers. We know it, we see it every single day. So that is the nearest term lever we can pull, is getting better on time in full. And as I step back and you put all that stuff together and turn the quarter into 2025, we should see better growth. That would be my expectation, but it's not gonna happen overnight. These efforts do take some time, and you know, we'll lay this out a lot more clearly to investors as we turn the corner into 2025.

[Julian Mitchell, Managing Director and Equity Research Analyst at Barclays]

Great. Thank you.

[Bill Brown, CEO at 3M]

You bet.

[Operator]

... We'll go next now to Nicole DeBlase with Deutsche Bank.

[Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Yeah, thanks. Good morning, guys.

[Bill Brown, CEO at 3M]

Good morning.

[Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Maybe just a little bit more on some of the portfolio review comments you made at the beginning, Bill. I guess any thoughts on, like, what types of businesses could be considered non-core, and if there's anything chunky coming, or if these are all kind of like smaller divisions or businesses that you're looking at?

[Bill Brown, CEO at 3M]

Yeah, Nicole, thanks for the question. Look, I mentioned last time, I did it very purposely, that we're gonna take a fresh, dispassionate look at the portfolio, as you would expect I would do coming into this new company. But, you know, let me step back. I mean, the lens that I'm looking through is a strategic lens at the moment to think about the portfolio, and it's really on where we can leverage technology and innovation to differentiate, to win at the customer interface.

[Bill Brown, CEO at 3M]

When it came to 3M, it's very clear to me, it's very clear to all those 60,000 people that have been here, that technology is what differentiates 3M. People join the company because of innovation. So I'm really looking through a lens of: Can we leverage investments and the capabilities we have in material science and technology to make something different versus competitors and solve a need that others can't? And that's the lens that I'm really looking at here. So, you know, we have a few businesses, they're small.

[Bill Brown, CEO at 3M]

You know, if and when we transact on them, you won't notice it in the overall report. You know, there are a couple points of revenue, so it's relatively small, you know, but it's a start. It's the things that I thought were nearer term, and the ones that, you know, we could take advantage of today. But our evaluation continues. You know, again, as I turn next year, we come up in front of investors.

[Bill Brown, CEO at 3M]

You know, I'm expecting that I'll be standing there talking about a matrix which has something looking like what parts of our portfolio, you know, perhaps don't fit to us over time, and at the same time, it's not for today, but looking at, well, what other things, you know, do belong with us that aren't currently owned by 3M, so it's a pretty holistic assessment. We're in the very, very early days, Nicole. You know, but the couple of, couple of deals that we're pushing on right now, early stages, but it's the direction we want to head in over time.

[Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Okay, got it. That's clear. Thanks, Bill. And then maybe just on the business trends, what did you guys see in China in the quarter? And any thoughts on, you know, 3M's ability to benefit from stimulus activity happening there?

[Bill Brown, CEO at 3M]

So China for us is a pretty good-sized market. It's about 10% of our sales. Year to date, we're up about 11%, more or less, a little bit higher than that in the first half. A lot of it driven by automotive, you know, up mid-single digits here in the third quarter. You know, pretty much in line with, I think, where the market is in China, so we feel pretty good about what what's happening there. A lot. Again, a lot of it's driven by automotive. Roughly half of what we do in China is for export out of the country, and roughly half stays within China, and both are performing reasonably well.

[Bill Brown, CEO at 3M]

You know, we'll see as we get into next year, you know, the outlook for the overall economy. You know, we can read where the GDP happens to be forecast for next year. But there's a lot of stimulus activity, a lot of conversations around geopolitical issues. You know, we'll see as we turn the corner where China's going to be, but we're bullish on the economy there. We're bullish on our team there, our ability to compete. We have more than five thousand people on the ground, seven factories, and I think we have a good ability to be a strong participant over time in China.

[Bruce Jermeland, SVP of Investor Relations at 3M]

Hey, Nicole, just to clar-

[Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Thank you.

[Bruce Jermeland, SVP of Investor Relations at 3M]

Nicole, just to quickly clarify, the strength has been in electronics in China, not automotive. All in, we're up about 11% year to date. Ex electronics, we're up roughly about 3% organically.

[Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Thanks, Bruce. I'll pass it on.

[Bruce Jermeland, SVP of Investor Relations at 3M]

Yeah.

[Operator]

line is open. You might be on mute.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

Sorry, didn't come through very clearly. Can you hear me now?

[Bruce Jermeland, SVP of Investor Relations at 3M]

Yep.

[Bill Brown, CEO at 3M]

Yeah, we hear you, Steve.

[Operator]

We got Steve.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

Hey. Sorry, sorry about that. Anurag, thanks, congratulations and looking forward to working with you here. Just wanted to delve into price a little bit more. In this algorithm of, you know, productivity and gross margin, where does price play into that? And are you expecting to get back to that kind of a positive margin price cost spread going forward?

[Bill Brown, CEO at 3M]

See, that's a good, good question. I mean, this year, we are seeing positive price. It's about half our organic growth, more or less, you know, plus or minus 5% or thereabouts. We are covering material inflation. You know, this year, it. We're back to where we were kind of pre-pandemic levels, a little bit higher than that in during pandemic, because, you know, obviously inflation was spiking there. But, as I step back on this, we should get pricing, particularly as we drive new product introductions and bring differentiated products into the marketplace.

[Bill Brown, CEO at 3M]

You know, we do expect that. You know, I see it in two pieces. I think one is, you know, we have an opportunity to, you know, get better at more surgical pricing, so pricing to volume generated. I made a comment last time that, you know, we've got some opportunities to tie volume rebates, discounts, et cetera, to price, and that's something that we're working very, very hard on, as well as tightening down on what we call gross to net, you know, and all the pieces between that: volume discounts, market development funds, rebates, those kinds of things.

[Bill Brown, CEO at 3M]

You know, they can be quite substantial, and I think we have a better opportunity to get pricing. But as I look forward into next year, you know, we should continue to be able to cover at least the material cost inflation in our price.

[Bruce Jermeland, SVP of Investor Relations at 3M]

And just to add to that.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

Is that-

[Anurag Maheshwari, CFO at 3M]

Just to add to that, Steve, yeah, as Bill mentioned, our price should cover cost and inflation for us, well, inflation and the cost going forward. The one way to kind of think about the margin expansion moving forward, clearly volume is the biggest driver for us in terms of operating leverage that we have and the net productivity that we are driving. So volume and net productivity should be the critical margin expansion drivers.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

That you view price cost as separate from that productivity, I would assume?

[Bruce Jermeland, SVP of Investor Relations at 3M]

Yes, correct.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

In the bridge?

[Bruce Jermeland, SVP of Investor Relations at 3M]

Yes.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

I'm just wondering, like, if you got all these kind of like good guys going your way and assuming, like, the economy, you know, doesn't like go to hell, what is the... Like, in R&D's flat, you should get SG&A leverage. You're talking about this productivity. Price cost is not a headwind. Like, what is the headwind to margins going forward?

[Anurag Maheshwari, CFO at 3M]

Yeah.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

Like, what's the negatives?

[Anurag Maheshwari, CFO at 3M]

Yeah. So the negative is essentially inflation that we will see over there, which is a wage inflation, moving forward. But besides that, you shouldn't see any more. Of course, FX is there, which we don't know which way that could move. But if you look at overall margin, even for the year, right, it's basically four pieces. It's a quarter of volume, a quarter of the restructuring cost that which came down lower compared to last year. It's a quarter of the TSA reimbursement, a quarter of net productivity.

[Anurag Maheshwari, CFO at 3M]

If you go into next year, they'll be a little bit lower on the restructuring cost charges, but again, it's gonna be more volume, and it's gonna be more on the productivity side, with the biggest headwind being on inflation and potentially FX. Depends where, which way it goes.

[Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank]

Sorry, one last one. How much is labor as a percentage of your cost again?

[Anurag Maheshwari, CFO at 3M]

Labor as a % of our cost is close to $10-ish billion. Yeah. $8-$10 billion, yeah.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

$8-$10 billion

[Anurag Maheshwari, CFO at 3M]

Yeah.

[Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan]

Okay. All right, thanks a lot.

[Operator]

We'll next now to Andy Kaplowitz at Citi.

[Andy Kaplowitz, Managing Director and the US Industrial Sector Head at Citi]

Hey, good morning, everyone.

[Anurag Maheshwari, CFO at 3M]

Good morning.

[Bill Brown, CEO at 3M]

Good morning.

[Andy Kaplowitz, Managing Director and the US Industrial Sector Head at Citi]

Could you give us a little more color into your Consumer business? I think you talked about that it's getting a bit better. Could you elaborate on what you're seeing there? As I think that business tends to be first in, first out in historical cycles, and I know you're focused on pricing in that segment. Maybe that segment could be the most competitive in terms of pricing. Can you make the pricing improvement you need in that segment?

[Bill Brown, CEO at 3M]

On consumer, we were down about 3% in the first half, down about 70 basis points in the third quarter. But keep in mind, it has about 230 basis points of headwind associated with some of the portfolio prioritization efforts that the team is working on. And if you go back Q1 to Q2 to Q3, and then head into Q4, it is becoming less negative in terms of organic growth, and it's trending to, you know, perhaps be positive in the fourth quarter. For the full year, you know, down low single digits. You know, for the overall, it's mostly a USAC business, a USAC retail business.

[Bill Brown, CEO at 3M]

USAC retail sales, you know, is down about 50 basis points, you know, for the year, down about 80 basis points. It's sort of trending in line with where USAC retail sales happen to be. You know, when you look at the parts of the portfolio in the quarter, we had pretty good growth in our Command strips, Home Improvement, but Command strip business, you know, that was up. It's partly due to some new product introductions in that space, and that they're performing pretty well there. The other parts of the portfolio were a bit weaker, were flat to down, so they offset the positive trend in Home Improvement.

[Bill Brown, CEO at 3M]

But we see good improvement trends going into the fourth quarter. All depends upon what happens in holiday season as we get through the next couple of months. But, the trend line is moving up in terms of its organic growth rate.

[Andy Kaplowitz, Managing Director and the US Industrial Sector Head at Citi]

Helpful. And then, Bill, maybe just stepping back. You've talked a lot about growth through innovation, but how far are you pushing 3Mers to focus their innovation on maybe, you know, what I would call the right markets? Because it strikes me that there are just a few big global markets that are driving growth right now.

[Bill Brown, CEO at 3M]

So yeah, we're spending a lot of time thinking about where we spend our precious $1 billion in R&D for sure, and making sure it's going after the right areas as part of our overall governance process and how we're developing our strategic plan. You know, to focus on those markets where we have a right to win, where we can actually earn value, we have our strong return on investment in the spaces.

[Bill Brown, CEO at 3M]

And look, the team is pushing on this, and this is a big focus of mine, it's a big focus of the team. So more to come on that, but you know, it's certainly part of the lens and the calculus that we're looking at on where we're spending or investing our R&D dollars.

[Andy Kaplowitz, Managing Director and the US Industrial Sector Head at Citi]

Thanks.

[Operator]

We'll go next now to Brett Linzey with Mizuho Securities.

[Brett Linzey, Managing Director and Senior US Industrials Equity Research Analyst at Mizuho Securities]

Hi, good morning, all, and welcome to Anurag. Just wanted to come back to the rationalization efforts. I think it was a point of drag in the quarter, a point for the year. Perhaps just isolating rationalization and leaving out some of the new product launches and other growth, should we be thinking about another point of headwind next year as you continue the simplification efforts, or is it something less as we proceed and advance forward here?

[Bill Brown, CEO at 3M]

No, Brett, it should be declined substantially going into next year. I mean, we'll lap the year, so there'll be a little bit of drag on effect for things that happen in the course of 2024. But, you know, we shouldn't see significant headwind from portfolio or geographic prioritization going into next year. And, you know, our intention, you know, and Anurag, I haven't talked about this, but our intention would likely be to not speak so much about that in our 2025 results.

[Bill Brown, CEO at 3M]

You know, it's something that really people do, companies do, just at a normal practice, as you continue to look at your portfolio, you know, and you add some things, you take some things out, you replace things. And, you know, I would expect that going into next year, it'd be less part of our conversation than this year.

[Brett Linzey, Managing Director and Senior US Industrials Equity Research Analyst at Mizuho Securities]

All right, makes sense. And then just a follow-up on NPI and the launching of the new products, 10% growth next year. Just wanted to better understand the associated costs and where those introductions are aimed at the segment level. Should we be thinking of a commensurate level of R&D step-up, or are you able to achieve this with repurposing the spending base?

[Bill Brown, CEO at 3M]

No, so it's within the existing spending base. As we go into 2025, we'll come back and talk more about where we see R&D. But, you know, a couple things are happening. One is just, it's a shift within where we spend our R&D. You know, it really comes in kind of three buckets. I mean, it's about a third that goes into corporate research, longer-term horizon things, you know, basic technologies. There's kind of a third that's, you know, at incremental line extensions, new product introductions. There's a third that, that's going after, cost reduction, PFAS, fixes, all those kinds of things.

[Bill Brown, CEO at 3M]

So there's gonna be some shift that's going on between those pieces. That middle bucket, you know, used to be around 40%; it dropped below 30. You know, that piece is coming back up. It's now above th... It's now around a third, around 32-33%. But that middle bucket on new products, new product line extensions, is where we're shifting money to drive new product introductions. To, to be clear, the number of new product introductions this year in 2024 is up 10% over last year, and we expect that that 10% will accelerate, you know, in 2025 through those pieces I just, I just mentioned a couple of minutes ago.

[Bill Brown, CEO at 3M]

You know, the large part of our investment in new product introduction is gonna be mostly in our, you know, safety and industrial business and transportation electronics business. There is some that goes into the Consumer business. You'll see more going into next year. You'll see more introductions coming out of new product investment.

[Bill Brown, CEO at 3M]

But the lion's part of it is really in those other two businesses, and that's where a lot of the launches that I talked about a minute ago are occurring. You know, we'll share more information as we get into next year, not just the numbers, but where we're investing, what verticals we're investing, where we're gonna prioritize our spend in the future, and why we think we can win, and we'll lay that out very clearly with investors as we get into February.

[Brett Linzey, Managing Director and Senior US Industrials Equity Research Analyst at Mizuho Securities]

Great. Congrats on the performance.

[Bill Brown, CEO at 3M]

Thank you.

[Brett Linzey, Managing Director and Senior US Industrials Equity Research Analyst at Mizuho Securities]

Best of luck.

[Operator]

We'll go next now to Joe O'Dea with Wells Fargo Securities.

[Joe O'Dea, Managing Director and Senior Equity Analyst at Wells Fargo]

Hi, good morning. Bill, I wonder if you can elaborate a little bit more on the operating equipment efficiency comments you made and when you talked about 50% utilization, well short of best-in-class, just in terms of, you know, any clarification of what kind of best-in-class would look like, as well as, you know, what your targets are over, call it, the next six or 12 months there?

[Bill Brown, CEO at 3M]

Sure, yeah. Look, operating equipment efficiency is really. It's a fundamental metric. You know, companies that do manufacturing have implemented this over many, many years. It's a relatively new concept. We have 38 large factories. It's about 75% of our volume. You know, in about 140, about 80% of the assets that are in those factories, we implemented OEE. I mean, you can implement it, but to actually build it into the way the machine runs, you know, takes some time to do that. So it's not a manual process. It's actually built into the way, you know, the machine runs.

[Bill Brown, CEO at 3M]

And look, if it's running 50%, you know, the reality is, we should be running. Best-in-class companies are in 80% range or north of that. So we're well short of that. So the implication of this is that, first off, what's driving that underutilization? Is it a lot of changeovers? 'Cause that's idled capacity. Is it poor maintenance practices, so the machine is down? Is it volume or capacity? But it's sort of fundamental to figuring out how do you handle surge volume?

[Bill Brown, CEO at 3M]

More longer term, once that metric gets matured and we come back and talk about a more holistic look at our network and the complexity we have in our network, you know, it'll allow us to say, "Well, where can we consolidate sites or cells or assets in our factories based on the utilization that happens to be out there?" You know, it's also more than theoretically possible, we're spending capital for capacity expansion, you know, yet we're running 50% utilization on certain assets.

[Bill Brown, CEO at 3M]

Longer term, we should also be looking at this as a way to make sure we're spending capital in the right places. It's really fundamental. We're started. You know, we've got a measure for where we've been year to date, and it'll mature as we get into 2025. Probably will be 80% done by as you get to, you know, second quarter of next year. But it's a fundamental way of looking at how you're performing, you know, and I'm really proud of what the team has done in the last couple of months to drive that into our factories.

[Joe O'Dea, Managing Director and Senior Equity Analyst at Wells Fargo]

And then also just wanted to ask on electronics demand trends. I think you commented that organically up high single digits, so earlier in the year, some spec-in tailwinds, but it seems like, you know, still growing at a good clip as you move later into the year. And so any color there, whether, you know, what you're seeing is trending with the market, if you're seeing any sort of share gain or taking advantage of pricing opportunities out there, with the electronics growth?

[Bill Brown, CEO at 3M]

Yeah, so electronics was up pretty good, year to date in the quarter. We did have some back-end wins. I think we're growing at slightly higher than the market. We're watching pretty carefully what happens in the holiday trends here and what happens in the fourth quarter going into next year. So we're pretty pleased with where we've been so far. It comes from, you know, a lot of the sophisticated films that, you know, we've created that are going into a variety of electronic devices. They're very sophisticated things, you know, multilayer optical films, you know, optical adhesives, things that allow, you know...

[Bill Brown, CEO at 3M]

LCDs to look like OLEDs in terms of screen performance, you know, gives you privacy and other things that you can then extend into the larger screens, larger displays in cars. That's what we drives our Auto E business. So, you know, it's a pretty important technology. It's allowing us to perform well in electronics as a whole. So, we like the trends. You know, we're watching what happens in the holiday season, and we'll see what happens going into next year. So, doing pretty well, actually, in semiconductors as well. It's, you know, we're growing way above the market.

[Bill Brown, CEO at 3M]

You know, that's been a pretty important trend for us this year. We're doing pretty well in data centers. Not a big part of our business at the moment, but pretty pleased with that. But specific to electronics, outgrowing the market, and it's because of the spec and wins and technology we have.

[Joe O'Dea, Managing Director and Senior Equity Analyst at Wells Fargo]

I appreciate it. Thank you.

[Operator]

Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.

[Joe Ritchie, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Thanks, good morning, everyone, and welcome, Anurag. Bill, I think you mentioned earlier that you were honing in on, you know, redesigning your forecasting and demand planning across, I think, two of your businesses. I'm just curious, like, what are some kind of initial thoughts on improvements you think you can make? And then why not focus a little bit more holistically across the entire portfolio at this point?

[Bill Brown, CEO at 3M]

You know, this will eventually go across the entire portfolio, but, you know, like, stepping back, you know, we are sitting there where we're not delivering to where we wanna be on time and full to customers. We're proud of where it's gotten to, but it's not where it needs to be. We're not delivering on time, yet we're sitting on 100 days of inventory, you know, at the same time, and so how do you fix this? And we're looking at the assets in our factories, you know, on average, and the ones we're measuring running at roughly 50% utilization across the largest ones.

[Bill Brown, CEO at 3M]

And you run that calculus, and there's something wrong in this whole value chain. And I go back to the suppliers. Suppliers delivering on time in full to us, we're running in the low 60s% now, in the low 70s%, but that there's a range. That's an average, so it's below 50% to up to 80%. And what's happening is, it's just how you manage the flow through that, through that supply chain. You know, and it starts with the front end of it. It starts with the demand signal.

[Bill Brown, CEO at 3M]

So what are we using to, to tell the factory what to produce at a SKU level, and then how does that translate based on stock on hand to what you tell the suppliers to do based on their OTIF performance, the lead time on logistics? This whole chain has to work incredibly smoothly because it's, it's very complicated. So it really comes back to this fundamental of what is, what is that forecast demand signal? You know, and the reality is, as we've dug into it, in a couple of divisions where we struggled with on time in full, our forecast accuracy is not very good.

[Bill Brown, CEO at 3M]

You know, so there are analytical tools that are available that we are starting to look at. It takes some time to implement them. You've got to data cleanse. You've got to look at what are the right parameters you ought to be building into the model. You know, is there a manual overlay or not based on unique circumstances, having for a SKU? You know what? That whole process has to run well. And if your forecast accuracy is not good, you cannot run your factory very well. Your inventory will be high, your suppliers won't perform, your logistics providers won't be available.

[Bill Brown, CEO at 3M]

So it has to run like a smooth-running clock, and, you know, it's clear we have opportunity to do better here. As we refine the model, you know, yeah, we'll roll that out to the rest of the business as appropriate. You know, but this is really looking at two big divisions where we need, you know, a really high degree of focus early on. So it'll roll out over time as we get success here.

[Joe Ritchie, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Yeah, that's super helpful, Bill, and in detail. I'm curious, do you think that by February you'll have some kind of sense for what type of opportunity this presents for the organization?

[Bill Brown, CEO at 3M]

Yeah, you know, look, we'll certainly know by February, you know, the results of the couple of divisions we're in. They're big divisions, not, like, small pieces. You know, but we can estimate from that. We could probably estimate what's gonna happen as we roll it out to other divisions.

[Bill Brown, CEO at 3M]

So yeah, we can sort of lay out a lot more where I think you wanna go, which is, it's nice to talk about forecast accuracy, but tell me a little bit about how it's gonna affect, you know, delivery performance, cost performance, inventory level. And I think we can kind of connect the dots on this, you know, as we get further mature in this particular area, Joe.

[Joe Ritchie, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Okay, great. Thank you.

[Bill Brown, CEO at 3M]

You bet.

[Operator]

Our next question comes from the line of Chris Snyder of Morgan Stanley. Please proceed with your question.

[Chris Snyder, Executive Director and US Multi-Industry Analyst at Morgan Stanley]

Thanks for getting me in here. You know, Bill, on the last call, you talked about how you believe the business should be growing in excess of GDP. And I think to a prior question, you talked about, you know, better growth maybe into the back half of 2025 and into 2026. So, you know, is that just simply a function of the investments that you guys are making, and innovation is gonna allow you to start outgrowing the end market, and it just takes time? Or is there also an assumption that maybe the consumer, just the served end markets, get better into the back half of 2025 as we kind of see that pickup in growth?

[Bill Brown, CEO at 3M]

So, Chris, our crystal ball is not gonna be any better than what the, you know, various prognosticators out there are looking at in terms of what happens with industrial production, GDP, consumer behavior. You know, I look back at the end of last year for what was predicted on IPI this year, and I think it was predicted 1.7-1.2. So, you know, I'm not sure these indicators are all that powerful to predict what might happen in the market or the macro, year out or year and a half out. You know, look, first off, we gotta grow with the market, and I think we're doing a good job with doing that this year at about 1%.

[Bill Brown, CEO at 3M]

You know, as I said last time, and I think at your conference, the 1%'s not where we wanna be. You know, to actually grow that and be performing better, without putting a timeframe on it, it comes in these two levers. One, we've got to get this R&D machine running. As I mentioned then, and I'll say it again today, that's gonna take time. You know, our dwell time, our development cycle is a year or more on developing and commercializing, launching a new product. So there's a timeframe that's going to take to turn that piece around.

[Bill Brown, CEO at 3M]

You know, but there's some initiatives that we've got to get at today, and that's a lot more aggressiveness at the customer interface, selling, pricing, these other things, which has a nearer term effect. When you put all that stuff together, you know, is it growing half GDP or more than that, you know, we'll describe that more over time. Let's. I wanna sort of walk before I run here, and, you know, that's kind of where I'm standing as we speak today, Chris.

[Anurag Maheshwari, CFO at 3M]

Yeah, just to-

[Chris Snyder, Executive Director and US Multi-Industry Analyst at Morgan Stanley]

Yeah

[Anurag Maheshwari, CFO at 3M]

... just to add, right, we've grown three quarters, consistently 1%. As Bill said, we'll give more color, as time goes by over there. You know, to Steve's question, earlier, we said, you know, we can grow operating margin at a pretty healthy clip, given all the levers we have. As we go into next year, as you're aware, we do have certain, headwinds from higher pension expense, lower interest income. Of course, we mitigate that through share repurchases, but that's a $0.30 headwind that we see from below-the-line items.

[Anurag Maheshwari, CFO at 3M]

But if I kinda look at what we are driving in terms of all the discussion we just had around the factory, the supply chain, looking at the indirect cost, and all the productivity along with that, along with the tailwind we can see with the reduction in restructuring charges, it gives us confidence to expand operating margins next year while driving top-line growth, and we'll give more specific details next year.

[Chris Snyder, Executive Director and US Multi-Industry Analyst at Morgan Stanley]

Appreciate that. And then if I could just follow up on maybe some of the portfolio pruning. You know, is it fair to assume that whatever business the company decides to leave, you know, they will get paid for it? i.e., you know, not no more organic exits, or at least nothing, you know, very sizable in terms of organic exit. I understand maybe certain SKUs or product lines can come and go.

[Bill Brown, CEO at 3M]

Yeah, look, I think there's going to be, over time, natural portfolio pruning in terms of SKUs. As you bring new products on, you know, it may obsolete other things that need to go out. That churn, that part of that, that's a normal part of business, and that should all be sort of absorbed within your normal organic growth contributions that we should be growing at the market for. So that is, as you just pointed out, Chris, distinct from, you know, a selling a business, which, you know, we're gonna look at. That's an inorganic exit. You know, we'll look hard at cash effects, dilution effects, all those pieces.

[Bill Brown, CEO at 3M]

We'll make sure we get paid more value for that business than we would've assumed today within 3M. I think your question was really on organic, and as I turn next year, like I said, I think we'll probably talk less about kind of the portfolio shifting that's going on inside the company on SKUs and geographies and things like that, so.

[Chris Snyder, Executive Director and US Multi-Industry Analyst at Morgan Stanley]

Appreciate that. Thank you.

[Bill Brown, CEO at 3M]

You bet.

[Operator]

And our last question comes from the line of Deane Dray of RBC Capital Markets. Please proceed with your question.

[Deane Dray, Managing Director and Senior Equity Analyst at RBC Capital Markets]

Thank you. Good morning, everyone. Thanks for fitting me in, and welcome to Anurag.

[Anurag Maheshwari, CFO at 3M]

Thank you.

[Deane Dray, Managing Director and Senior Equity Analyst at RBC Capital Markets]

Bill, this came up in the local paper, but it'd be interesting hearing your thoughts on the challenges you're facing, both operationally and culturally, to get the 3M employees back to the office. You all have been fully remote for longer than most companies. I know you've announced some initiatives, but would love to hear some color there.

[Bill Brown, CEO at 3M]

Look, I mean, it's, you know, we need to grow our business. We need to innovate. You know, part of that is we need to solve problems for customers. I do think that you problem-solve, innovate, you know, better in person. You know, we're gonna maintain flexibility in our workforce. What we've done is, for our largest sites that are most senior people, we've asked those individuals to be on the site, wherever they would report, on Tuesday through Thursday, with some flexibility on Monday and Friday.

[Bill Brown, CEO at 3M]

You know, this is an opportunity for us to, you know, continue to build our culture, build our relationships, problem-solve as a team, and I think it's the right step. I know a lot of our customers have moved in this direction in the past. Maintaining some flexibility in our workforce is really important to me. It's important to our employees, and we're allowing that.

[Bill Brown, CEO at 3M]

You know, but it gives us an opportunity to be able to look across the table from one another and really dig in and problem solve in a better way than I think you can over Teams or Zoom or some other format like that. So that's why we're leaning in a little bit more on bringing people back at sort of our larger sites, including here at 3M Center.

[Deane Dray, Managing Director and Senior Equity Analyst at RBC Capital Markets]

Got it. And then just a last question. A lot of discussion today about new product introductions, efficiencies, and R&D. Will you be bringing back the new product vitality index? Is that one of the measures, and 3M had at one time, but then went away from it? You know, what's your thought there?

[Bill Brown, CEO at 3M]

No, I'm happy to talk about it. I know there was reasons why we pulled away from it. We don't want to get that to be oversold or built into a comp metric or whatever, but the reality is, it's an important metric. You know, because you know, we've pulled back from introducing new products to the marketplace, we know that. I talked at some detail as to how many NPIs have come down over time and where we were at last year, going up 10% this year. You know, the net effect of that is our product portfolio in the marketplace is aging for sure.

[Bill Brown, CEO at 3M]

Our NPVI, you know, on a five-year basis, is running just over double digits, 10-11%. We used to be 25-30%. For the more super innovative companies, they're in that range. I'm not gonna say when we get back there, but it's one that's on my mind. We need to have more fresh offerings on the marketplace, so we ought to be better than, you know, low double digit in terms of, vitality index.

[Bill Brown, CEO at 3M]

And I'm happy to talk about that over time in terms of the metric, what's happening to it, why I think it's important, but I don't wanna overuse it, you know, with investors or here with employees, you know, because there's lots of other metrics, a lot, a lot of measures that drives are we becoming effective at driving innovation in the company? That just happens to be one of them.

[Deane Dray, Managing Director and Senior Equity Analyst at RBC Capital Markets]

Thank you.

[Bill Brown, CEO at 3M]

You bet.

[Operator]

This concludes the question and answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments.

[Bill Brown, CEO at 3M]

Thank you very much to all of the analysts for joining today and asking a number of very, very good questions. I wanna importantly thank all 3Mers for their dedication, their hard work on behalf of our customers and our shareholders throughout the quarter, throughout the year, and I look forward to speaking with all of the investors as we get into late January, issue our Q4 results, and in late February, probably the last week of February, as we host an Investor Day, likely here in Minneapolis. Have a very good day, everybody. Thank you so much.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line at this time.

Participants

Executives

• Bruce Jermeland, SVP of Investor Relations
• Bill Brown, CEO
• Anurag Maheshwari, CFO

Analysts

• Scott Davis, Chairman and CEO at Melius Research
• Stephen Tusa, Managing Director and Senior Equity Analyst at JP Morgan
• Brett Linzey, Managing Director and Senior US Industrials Equity Research Analyst at Mizuho Securities
• Jeff Sprague, Founder and Managing Partner at Vertical Research Partners
• Nigel Coe, Managing Director at Wolfe Research
• Andrew Obin, Equity Research Analyst at Bank of America
• Chris Snyder, Executive Director and US Multi-Industry Analyst at Morgan Stanley
• Deane Dray, Managing Director and Senior Equity Analyst at RBC Capital Markets
• Julian Mitchell, Managing Director and Equity Research Analyst at Barclays
• Joe Ritchie, Managing Director and Senior Equity Research Analyst at Goldman Sachs
• Nicole DeBlase, Managing Director and Senior Equity Research Analyst at Deutsche Bank
• Joe O'Dea, Managing Director and Senior Equity Analyst at Wells Fargo
• Andy Kaplowitz, Managing Director and the US Industrial Sector Head at Citi