3M Q4 2021 Earnings Report

3M EPS Results

• Actual EPS: $2.31
• Consensus EPS: $2.03
• Beat/Miss: Beat by +$0.28
• One Year Ago EPS: $2.38

3M Revenue Results

• Actual Revenue: $8.61 billion
• Expected Revenue: $8.58 billion
• Beat/Miss: Beat by +$34.03 million
• YoY Revenue Growth: +0.30%

3M Announcement Details

• Quarter: Q4 2021
• Date: 1/25/2022
• Time: Before Market Opens
• Conference Call Date: Tuesday, January 25, 2022
• Conference Call Time: 12:54PM 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 Q4 2021 Earnings Call Transcript

Key Takeaways

• Solid Q4 results: Revenue was $8.6 billion (up 0.3% reported, 1.3% organic) with EPS of $2.31, as productivity gains and cost controls offset supply chain and inflation headwinds.
• Pricing momentum: Q4 selling prices rose 2.6% (vs. 1.4% in Q3), providing a tailwind expected to support full-year 2022 margins.
• Respirator cooling: Safety & Industrial saw organic sales drop 1.3%, including a $110 million decline in disposable respirators that shaved nearly 4 pp off growth, with respirator demand projected to decline further.
• Cash flow & balance sheet strength: Q4 adjusted free cash flow was $1.5 billion (110% conversion) and full-year was $6 billion, funding $1.8 billion of Q4 returns and reducing net debt to 1.4× EBITDA.
• Portfolio & ESG actions: 3M plans to divest its food safety unit to Neogen, eliminate dual credit reporting in Q1 2022, and invest in carbon neutrality and PFAS reductions at key sites.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the 3M fourth 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 have a question, please press 1 followed by 4 on your telephone keypad. It is recommended that you use a landline phone if you're going to register for a question. As a reminder, this conference is being recorded Tuesday, January 25, 2022. I would now like to turn the call over to Bruce Jermeland, Senior Vice President of Investor Relations at 3M.

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

Thank you, and good morning, everyone, and welcome to our fourth quarter earnings conference call. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer, and Monish Patolawala, our Chief Financial and Transformation Officer. Mike and Monish 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 our investor relations website at 3m.com under the heading Quarterly Earnings. Please turn to slide 2.

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

Before we begin, I would like to announce our next two investor events. On the morning of February 14, we will be having a virtual investor meeting where we will be providing a near-term strategic update along with our 2022 guidance. Also, please mark your calendars for our first quarter earnings conference call, which will take place on Tuesday, April 26.

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

Please take a moment to read the forward-looking statement on slide 3. During today's conference call, we will 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 risk and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions.

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

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.

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

Before I hand the call over to Mike, I would like to take a moment and highlight a couple of presentation changes we are making in 2022 to simplify our financial reporting and increase understanding of our performance. These changes are a result of discussions we have had with many of you over the last few years, along with recent benchmarking work that we have done.

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

First, we recognize that dual credit reporting has presented some challenges, for example, having a clear understanding of the impact of disposable respirator performance over the past 2 years on our segment results, particularly Safety and Industrial and Health Care. Therefore, we have decided to eliminate dual credit reporting and will no longer report dual credit within our business segments starting in Q1 2022.

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

We will provide a Form 8-K ahead of our February 14 meeting with updated history for the past 3 years reflecting this change. Second, we will be providing organic sales change components in aggregate as opposed to reporting separate volume and price components. With this change, we will also be updating the descriptor to organic sales versus organic local currency sales. Please note this change will be reflected in our 2021 Form 10-K filing.

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

We remain committed to providing strong transparency of reporting our financial performance. Of course, we are always here to address your questions. With that, please turn to slide 4, and I'll now hand the call off to Mike. Mike?

[Mike Roman, Former Chairman and CEO at 3M]

Thank you, Bruce. Good morning, everyone, and thank you for joining us. 3M delivered a solid performance in the fourth quarter, closing out a strong year as we focused on serving customers in a dynamic external environment. Our revenue in the quarter finished better than we expected across all businesses, including an increase in respirator demand due to the impact from the Omicron variant.

[Mike Roman, Former Chairman and CEO at 3M]

Organic growth company-wide was 1% on top of 6% in last year's Q4, with earnings of $2.31 per share, driven by a good December, strong execution, and a lower than anticipated tax rate. I am pleased with how we effectively manage production operations to meet customer demand, despite ongoing logistics and raw material challenges that are impacting many companies.

[Mike Roman, Former Chairman and CEO at 3M]

While focusing on customers, we also saw good benefits from our actions to drive productivity, improve yields, and control costs, which helped offset the margin impact of supply chain disruptions, inflation, and COVID-19. In addition, our selling price actions continued to gain traction with a year-on-year increase of 2.6% in Q4 versus 1.4% in Q3. We expect this to be a tailwind for the full year in 2022.

[Mike Roman, Former Chairman and CEO at 3M]

Overall, demand remains strong across our market-leading businesses, and we are continuing to prioritize growth investments in large, attractive markets. We also took actions to strengthen our portfolio and advance our commitment to sustainability. I will highlight examples of our progress later in the call. In summary, we delivered a good finish to the year and are well-positioned to drive growth in 2022.

[Mike Roman, Former Chairman and CEO at 3M]

As Bruce noted, we will provide full year guidance along with strategic updates from our business leaders at our February fourteenth meeting. Monish will now take you through the details of the quarter. Monish.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Thanks, Mike, and I wish you all a very good morning. Please turn to slide 5. Looking back on the fourth quarter, the 3M team continued to manage through a challenging environment. As Mike noted, revenues for December were better than previously expected across all the businesses, including disposable respirators, as the Omicron variant increased near-term demand. Though manufacturing, raw materials, and logistics challenges persisted throughout the quarter, the 3M team executed well by driving operating rigor and managing costs while continuing to invest in the business.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Turning to the fourth quarter financial results, sales were $8.6 billion, up 0.3% year-on-year or an increase of 1.3% on an organic local currency basis against our toughest quarterly comparison last year.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Operating income was $1.6 billion, with operating margins of 18.8% and earnings per share of $2.31. On this slide, you can see the components that impacted our operating margins and earnings per share performance as compared to Q4 last year. The biggest impact to fourth quarter results was the ongoing effects from the well-known global supply chain, raw materials, and logistics challenges, which persisted throughout the fourth quarter.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Our enterprise operations teams continued to work tirelessly through ever-evolving changes in customer demand while navigating these challenges to keep our factories running, serve our customers, and protect the health and safety of our employees. We continue to experience significant productivity headwinds in our factories due to shorter production runs and more frequent production changeovers throughout the quarter as we focused on serving our customers.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

As forecasted at the start of last year, we also had higher year-on-year compensation and benefits costs. These impacts were partially offset through strong spending discipline, along with benefits from restructuring and lower legal-related expenses versus last year's Q4. We also continue to prioritize investments in growth, productivity, and sustainability to drive long-term performance and capitalize on trends in large, attractive markets, including automotive, home improvement, safety, healthcare, and electronics.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

All in, these impacts lowered operating margins by 2.4 percentage points and earnings per share by $0.33 year-on-year. Moving to price and raw materials, as expected, our selling price actions continued to gain traction as we went through the quarter. On a year-on-year perspective, Q4 selling prices increased 260 basis points as compared to 140 basis points in Q3 and 10 basis points in Q2.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

In dollar terms, higher year-over-year selling prices offset raw material and logistics cost inflation in Q4, which resulted in an increase in earnings of $0.03. However, it remained a headwind of 20 basis points to operating margins. Next, foreign currency net of hedging impacts was a headwind of 10 basis points to margins and $0.04 per share year-over-year. There were three other non-operating items that impacted our year-over-year earnings per share performance. First, a reduction in other expenses resulted in a $0.10 earnings benefit.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

This included a $0.06 benefit from non-operating pension, which was similar to prior quarters. We also have been proactively managing our debt portfolio, including the early redemption of $1.5 billion, which helped drive a $0.04 benefit year-over-year from lower net interest expense. Second, a lower tax rate versus last year provided a $0.12 benefit to earnings per share.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Our Q4 tax rate was benefited by geographic income mix and favorable adjustments related to impacts of U.S. international tax provisions. For the full year, our tax rate was 17.8%. Finally, average diluted shares outstanding decreased 1% versus Q4 last year, increasing per share earnings by $0.02. Please turn to slide 6 for a discussion of our cash flow and balance sheet. Fourth quarter adjusted free cash flow was $1.5 billion or down 30% year-on-year, with conversion of 110%. For the full year, adjusted free cash flow was $6 billion with adjusted free cash flow conversion of 101%.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

The decline in our Q4 year-on-year free cash flow performance was driven primarily by lower non-cash legal and restructuring expenses versus Q4 last year, along with higher litigation-related payments and CapEx investments, which was partially offset by improvements in working capital velocity. Fourth quarter capital expenditures were $556 million, up $134 million year-on-year and $213 million sequentially as we continued to invest in growth, productivity, and sustainability.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Looking at the full year, capital expenditures totaled $1.6 billion. During the quarter, we returned $1.8 billion to shareholders through the combination of cash dividends of $848 million and share repurchases of $938 million. For the full year, we returned $5.6 billion to shareholders in the form of dividends and share repurchases.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Our strong fourth-quarter cash flow generation and disciplined capital allocation enabled us to continue to maintain a strong capital structure. We ended the year with $4.8 billion in cash and marketable securities on hand and reduced net debt by $1.2 billion or 8% versus year-end 2020. As a result, we exited the year with net debt to EBITDA of 1.4 times.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Our strong balance sheet and cash flow generation capability, along with disciplined capital allocation, continues to provide us the financial flexibility to invest in our business, pursue strategic opportunities, and return cash to shareholders while maintaining a strong capital structure. Please turn to slide 7 where I will summarize the business group performance for Q4.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

I will start with our safety and industrial business, which posted an organic sales decline of 1.3% year-on-year in the fourth quarter. This result included a disposable respirator sales decline of approximately $110 million year-on-year which negatively impacted safety and industrial's Q4 organic growth by nearly 4 percentage points. Our personal safety business declined mid-teens organically versus last year's 40% pandemic-driven comparison. Looking ahead, we anticipate that COVID-related disposable respirator demand will decline as we move through 2022.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

However, we remain prepared to respond to changes in demand as COVID-related impacts continue to evolve. Turning to the rest of safety and industrial, organic growth was led by a double-digit increase in Closure and Masking. In addition, the abrasives business was up high single digits. Industrial adhesives and tapes and electrical markets were each up mid-single digits.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Automotive aftermarket was flat, while roofing granules declined against a strong comparison from last year. Safety and Industrial's fourth quarter operating income was $543 million, down 22% versus last year. Operating margins were 17.7%, down 440 basis points versus Q4 last year. Year-on-year operating margin performance was impacted by a decline in sales volumes, higher raw materials, logistics, and litigation-related costs, manufacturing productivity impacts, along with last year's gain on sale of property.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Partially offsetting these impacts were selling price increases, strong spending discipline, net benefits from restructuring, and a smaller increase to our respirator mask reserve. Moving to transportation and electronics, which declined slightly on an organic basis due to the continued impact of the semiconductor supply chain constraints.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Our auto OEM business was down mid-teens organically year-on-year compared to the 13% decline in global car and light truck builds. We mentioned last quarter, we experienced an increase in channel inventory levels with the tier suppliers in Q3 as auto OEM production volumes decelerated from 18.5 million builds in Q2 to 16.3 million in Q3. During the fourth quarter, OEM production volumes increased to 20.2 million builds or up over 20% sequentially.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

This sequential increase in build activity drove a reduction of channel inventory levels with the tier suppliers during the quarter, which negatively impacted Q4 organic growth for our automotive business by approximately 10 percentage points. For the full year, our auto OEM business was up low double digits as compared to global car and light truck builds growth of 2%.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Throughout the year, we continued our track record of success of winning with our customers and gaining penetration on new internal combustion and electric vehicle platforms. Our electronics-related business declined low single digits organically, with declines across consumer electronics, particularly smartphones and TVs. These declines were partially offset by continued strong demand for our products and solutions in semiconductor and factory automation end markets.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Turning to the rest of transportation and electronics, commercial solutions grew low double digits, advanced material was up high single digits, while transportation safety declined high single digits. Fourth quarter operating income was $406 million, down 15% year-over-year. Operating margins were 17.6%, down 270 basis points year-over-year. Operating margins were impacted by higher raw materials and logistics costs, manufacturing productivity impacts, along with an increase in comp and benefits costs.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

These year-on-year headwinds were partially offset by increases in selling price, strong spending discipline, and net benefits from restructuring actions. Turning to our healthcare business, which posted a fourth quarter organic sales increase of 1.6%. This result included a nearly 4 percentage point drag from the year-on-year sales decline in disposable respirators. Our medical solutions business declined low single digits organically, which included a 6 percentage point impact from the year-on-year sales decline in disposable respirators.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Fourth quarter elective medical procedure volumes were approximately 90% of pre-COVID levels, which is similar to Q3 and last year's Q4. Sales in our oral care business grew low single digits year-on-year as patient visits continued to be near pre-COVID levels. The separation and purification business increased high single digits year-on-year, with sustained demand for biopharma filtration solutions for COVID-related vaccines and therapeutics.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Health information systems grew mid-single digits, driven by strong growth in revenue cycle management and clinician solutions. Finally, food safety increased high single digits despite continued COVID-related impacts of the global hospitality industry. In December, we announced the planned separation of this business, which will be combined with Neogen. As disclosed in the December press release, we expect the transaction to close by the end of Q3 of this year. Healthcare's fourth quarter operating income was $536 million, down 2% year-on-year.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Operating margins were 23.6%, down 50 basis points. Year-on-year operating margins were negatively impacted by raw materials and logistics costs, manufacturing productivity, compensation and benefits costs, and food safety deal-related cost. These impacts were partially offset by benefits from leverage on sales growth, strong spending discipline, and restructuring actions.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

For the quarter and full year, healthcare's adjusted EBITDA margins were strong, coming in at nearly 31%. Lastly, our consumer business finished out the year strong, with organic growth of 4.9% year-on-year on top of last year's 10% comparison. Our home improvement business continued to perform well, up low single digits on top of last year's strong double-digit comp. This business continued to deliver strong growth with our home improvement retail customers in our category-leading Filtrete, Command, and ScotchBlue brands.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Stationery and office, along with the consumer health and safety business, each grew low double digits organically in Q4, as both of these businesses continued to lap last year's COVID-related comparisons. The holiday season demand drove strong growth for our Scotch-branded products during the quarter.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We also posted strong growth in Post-it branded products, despite workplace reopenings being pushed out due to the resurgence of COVID cases. Finally, our home care business was up low single digits versus last year's strong COVID-driven comparison. During the quarter, we took a small portfolio action to divest our floor care business in Europe, which is expected to close in Q1. Consumer's operating income was $316 million, flat compared to last year. Operating margins were 21.4%, down 100 basis points year-on-year.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Operating margins were impacted by higher raw materials, logistics, and outsourced hard goods manufacturing costs, manufacturing productivity impacts, along with increased compensation and benefit costs. These impacts were partially offset by leverage on sales growth, which included good price performance, strong spending discipline, and net benefits from restructuring actions. That concludes my remarks for the fourth quarter.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Before I turn it back over to Mike to recap the year, I would like to make a few comments reflecting on our operating performance this past year. The macro environment in 2021 was defined by strong but fluid end markets, semiconductor constraints, supply chain and logistics challenges, along with ever-evolving impacts from COVID-19, particularly on the global healthcare industry. These dynamics were further compounded by Winter Storm Uri in mid-February, which led to significant disruptions to raw material supply and logistics availability, which further disrupted global supply chains.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

All of these factors collectively helped contribute to broad-based and accelerating inflationary pressures throughout the year. Against this backdrop, the 3M team kept a relentless focus on serving customers, ensured continuity of raw material supply, managed ever-changing manufacturing production plans, navigated logistic constraints, and delivered strong full-year organic growth of 9%, with all business segments posting high single-digit growth.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We also worked hard to raise selling prices, control spending, and drive improvements in operating rigor through daily management, leveraging data and data analytics while continuing to execute on our restructuring actions. These actions, combined with strong organic growth, helped to deliver full-year operating margins of 20.8% or down 50 basis points year-on-year on an adjusted basis.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

This result included an 80 basis point headwind from raw materials and logistics inflation net of selling price actions, along with increased spending to advance our sustainability efforts and higher legal related expenses. In addition, we continued to focus on working capital improvement, which helped contribute to another year of robust adjusted free cash flow coming in at $6 billion. I want to thank the 3M employees for delivering for our customers and shareholders in a very uncertain and fluid environment.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

I also want to take a moment to personally thank our customers and suppliers for putting their trust and confidence in us and for maintaining strong and close partnerships that helped us navigate the challenges of the past year. We made good progress in 2021 and are well-positioned for 2022. In the spirit of continuous improvement, there is always more we can do and will do. With that, please turn to slide 8, and I will turn it back over to Mike for his recap of 2021.

[Mike Roman, Former Chairman and CEO at 3M]

Thank you, Monish. As I look back at 2021, I am proud of our team and our performance. Our results demonstrated the strength of the 3M model and our investments in growth, productivity, and sustainability advanced our company. In the face of an uncertain environment, we delivered strong organic growth of 9% with strength across all business groups, along with margins of 21%. This drove a 14% increase in adjusted earnings per share.

[Mike Roman, Former Chairman and CEO at 3M]

These results exceeded our original guidance that we communicated in January 2021 and recent updates to that guidance. We generated robust free cash flow of $6 billion with an adjusted conversion rate of 101%, enabling us to invest in the business, reduce net debt by $1 billion, and return significant cash to shareholders.

[Mike Roman, Former Chairman and CEO at 3M]

All in, 3M returned $5.6 billion to our shareholders through dividends and share repurchases, and 2021 marked our sixty-third consecutive year of dividend increases. We continued to help the world respond to COVID-19 with $2.3 billion respirators distributed last year for a total of $4.3 billion since the onset of the pandemic while engaging with governments on how to prepare for future emergencies. We stepped up our commitments to ESG, including sustainability, as we made progress on new goals to achieve carbon neutrality, reduce water use, improve water quality, and reduce plastics.

[Mike Roman, Former Chairman and CEO at 3M]

As part of our ongoing sustainability commitments, we proactively manage PFAS and deploy capital to make our factories and communities stronger and more sustainable. As one example, we are on track to complete a new water filtration system in Cordova, Illinois, by the end of 2022.

[Mike Roman, Former Chairman and CEO at 3M]

In Zwijndrecht, Belgium, we installed and activated a treatment system last month to reduce PFAS discharges by up to 90%. This is part of a EUR 125 million commitment to improve water quality and support the local community. As disclosed in our 8-K in November, we continue to work with local authorities related to a safety measure that shut down certain operations in Zwijndrecht.

[Mike Roman, Former Chairman and CEO at 3M]

We are also appealing and discussing with local authorities a new change to our wastewater discharge permit that, if implemented, could have a material impact and potentially interrupt production at the entire site, impacting customers and the supply of material to other 3M factories. We are actively working to address current and future potential impacts and will update you as appropriate.

[Mike Roman, Former Chairman and CEO at 3M]

With respect to litigation, we reached settlements last year in certain PFAS cases and continue to vigorously defend ourselves on Combat Arms. As always, we encourage you to read our SEC filings for updates on these matters. As we advance our ESG priorities, we also continue to take actions to improve diversity, equity, and inclusion. This includes multiple programs to make STEM education more available to underrepresented groups and achieve our goal to deliver 5 million learning experiences.

[Mike Roman, Former Chairman and CEO at 3M]

Our businesses have also made commitments. Safety and Industrial, for example, is focusing on access to skilled trades, and we are increasing transparency through an annual diversity, equity, and inclusion report. At the same time, we are advancing our strategic priorities for long-term growth and value creation.

[Mike Roman, Former Chairman and CEO at 3M]

We are innovating faster and differently, including new ways to collaborate with customers and partners virtually while investing $3.6 billion in the combination of R&D and CapEx to strengthen 3M for the future. To make the most of long-term growth opportunities, we also continue to prioritize investments in large, fast-growing areas like automotive, home improvement, safety, healthcare, and electronics. In 2021, for example, our automotive electrification platform grew 30% organically, and our biopharma business grew 26%.

[Mike Roman, Former Chairman and CEO at 3M]

Our home improvement business grew 12% on top of 13% growth in 2020, driven by iconic brands, including our Command damage-free hanging solutions and Filtrete home filtration products.

[Mike Roman, Former Chairman and CEO at 3M]

To accelerate our ability to meet increasing demand for Command and Filtrete, last week we announced a nearly $500 million investment to expand our operations in Clinton, Tennessee, adding nearly 600 manufacturing jobs by 2025. We look forward to sharing more about how we are capitalizing on growth trends and winning in these markets at our February meeting.

[Mike Roman, Former Chairman and CEO at 3M]

Last year, we also continued to reposition our portfolio to maximize value across the enterprise, including an agreement to divest and combine our food safety business with Neogen, creating a global leader that is well-positioned to capture long-term profitable growth.

[Mike Roman, Former Chairman and CEO at 3M]

We continue to make progress in transforming 3M, accelerating our digital capabilities, and expanding our use of data and analytics to better serve customers and improve our operational agility and efficiency. This includes the ongoing deployment of our ERP system, which went live in Japan in Q4. Also moving more than 60% of our enterprise applications and global data center infrastructure to the cloud, while streamlining our business group-led operating model.

[Mike Roman, Former Chairman and CEO at 3M]

To help our people be at their best, we also introduced new employee work models rooted in flexibility and trust, along with investments to support their health and well-being. As we enter 2022, I am confident we will continue to grow our businesses, improve our operational performance, and find new ways to apply science to improve lives, delivering for our customers, shareholders, and all stakeholders who have placed their trust in us.

[Mike Roman, Former Chairman and CEO at 3M]

We are building a stronger 3M, and I want to thank our 95,000 employees for their contributions, including the 50,000 people in our factories who continue to show up day in and day out to make a difference. That wraps up our prepared remarks, and we will now take your questions.

[Operator]

Our first question comes from Nigel Coe with Wolfe Research. You may proceed with your question.

[Nigel Coe, Managing Director at Wolfe Research]

Thanks. Good morning. Wasn't expecting the first question. Good morning. Thanks for that.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Good morning, Nigel.

[Nigel Coe, Managing Director at Wolfe Research]

Some nice upside to your early December guidance, Monish. You called out a number of factors, but didn't call out N95, which, you know, given all the talk we've gotten from the federal government about free masks and the new guidance from the CDC, I'm just curious, you know, what you're seeing from that side of the business, given all the commentary we've seen.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah. Nigel, I would say when we gave you the guidance in December, at that time, we had not seen the pickup of N95s. One of the factors that made us deliver better than what we thought in December was the pickup of the respirator business. We came in $40 million better than what we had originally predicted. We have seen that pickup. I would still say it's volatile. We'll see how this plays itself out. We are pleased with the partnership that we have with the federal government right now as regards this. We've had a lot of dialogue with them. As things evolve, we'll keep you posted.

[Nigel Coe, Managing Director at Wolfe Research]

Okay. I know you're gonna give guidance on February 14, but just curious, you know, just given the, you know, lots of moving parts at the margin line, just wondering how we think about, you know, the takeoff points into 2022, specifically 1Q 2022. Normal seasonality would have you up slightly from 4Q. Just wondering how you think about that. And have we seen the peak of the inflation curve at this point?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Have you seen the peak, I'm sorry, of what?

[Mike Roman, Former Chairman and CEO at 3M]

Of inflation.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Of inflation.

[Nigel Coe, Managing Director at Wolfe Research]

Of the inflation curve.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

I'll start with that first comment, Nigel. That's an item that we constantly keep watching and debating. As you know, we've tried to fine-tune our analysis as much as we can on inflation. What we saw exiting December was the pace of inflation slowed down versus the prior months. It's still inflationary, but we saw the pace slow down. I think that's a positive. It'll depend on how winter plays itself out. It depends on logistics, et cetera, and whether the ports get uncongested.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Just on data points and your other points on margin, et cetera, things to keep in mind as you get into 1Q 2022, first of all, from an inflation perspective, you're gonna find not just us, but most companies have the highest, the toughest comp.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Because if you remember, in the first quarter of 2021, there wasn't as much inflation. We started seeing it in March, and then it accelerated in April onwards. I would factor that one in first. The second I would say is COVID uncertainty. You brought up the respirator demand, but there are other impacts also depending on what happens with COVID, labor shortages that we are seeing from our customers. We are seeing it in our own factories. Our vendors, I'm sure, are facing it too.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

That's something we'll have to watch. The third one is we are gonna continue to invest in growth, productivity, and sustainability. I would say that's an area as we continue to see it, we're gonna keep investing, especially in the areas Mike has already talked about.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

I would say we continue to see a strong market. We saw it in the fourth quarter. We are seeing it right now, and I think 2022 will continue to remain a strong market. The team has done a marvelous job in driving price. Price has gone up from 0.1% to 1.4% to 2.6%. Mike had talked about that also in his opening remarks, that we see that to be a tailwind. Team's done a good job on executing on restructuring, so there's approximately $70 million of carryover of restructuring benefits for the year.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Auto and electronics growth right now sequentially from a build rate is showing flat. For the year of 2022, it's a 9% increase. I think the chip shortage and where that ends up will have an impact on the auto business.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Healthcare elective procedures came in at 90%. There are predictions that says they should be at 100% by Q4 2022. From our end, we are gonna continue driving operating rigor. We're going to continue drive margin expansion as we have said before. We'll also have to watch litigation costs and see where that goes with all the cases that are on. Mike mentioned about Zwijndrecht, and we're working with the authorities in Belgium for our factory, and we'll have to see the impact and when we can start up production in some of those areas that are currently shut down.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

All that put together, I would say again, we are well-positioned, and I know it's a long answer to your question, Nigel, but I just wanted to give you all a full framework. We are well-positioned for 2022.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We closed Q4 pretty well, and we hope to continue that momentum into 2022.

[Nigel Coe, Managing Director at Wolfe Research]

Great. Thanks for details. I needed that. Thanks a lot.

[Operator]

Our next question comes from Jeff Sprague with Vertical Research Partners. You may proceed with your question.

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

Thank you. Good morning, everyone.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Morning.

[Mike Roman, Former Chairman and CEO at 3M]

Morning, Jeff.

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

Morning. A couple here from me. First, just, I was wondering if you could level set us actually now on the actual size of the respirator business. You know, I think we were $600 million pre-COVID. Feel like we're in the $1.5 billion-$2 billion range, but could you put a finer point on where we stand at the end of 2021?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah. Jeff, it's $1.5 billion is what we did in 2021. It was $600 million in 2019, $1.4 billion in 2020, and $1.5 billion in 2021. If you look at it quarter over sequentially, we were down, and we were also down $110 million versus Q4 of 2020. We believe that the peak was Q1 of 2021. Depending on how it goes, we believe in 2022 disposable respirator demand is going to be lower than what we had in 2021.

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

I know you're gonna reserve your guidance for next month, but, you know, you did essentially get the price cost neutrality in the quarter, right? A little negative on margins, a little positive on EPS. Is it your view that that gets better over the course of the year as you think about kinda carryover price? I understand there's a ton of variables in that, but, directionally, I just wonder if you could give us your preliminary thoughts on how that tracks for the year?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah, Jeff, I think we are working through that, but just as Mike mentioned, pricing will continue to remain a tailwind for 2022. Inflation, I think we'll have to watch how the different factors play out back to raw material logistics. I think what you're gonna see is some of your primary feedstocks start stabilizing, which we saw in December, but you are going to see specialty feedstock starting to get more expensive.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We are seeing inflation has gone downstream now, so you're seeing it in much more places than you had seen it before. I think what's also gonna impact inflation is what happens with the labor pool and what goes on there. Then as long as the ports can start getting uncongested, I think you're gonna see logistics costs come down.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

If commercial airline capacity comes back in, you're gonna start seeing air freight start coming down. We are watching all of that. I would say first half in talking to people, our own analysis, et cetera, I think the first half is going to be tougher than the second half of 2022 when it comes to inflation. First half, part of it is, as I mentioned, we are still seeing sequential increases, but slower, so that's good. You're gonna start facing last year's comp when it comes to inflation, and I think that's gonna impact us.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

I think we are well-positioned, and as I've told you before, the team has gone after price. We are managing our price raw equation as best we can, and we're prepared to act as situation evolves.

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

Just lastly for me, if I could, Mike, I think you made a comment about the dramatically reducing PFAS discharges. Perhaps this is my bad, but I didn't know you were still discharging PFAS in places. Is this just at a single location, or is this still an issue that you know, you're addressing in multiple locations?

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, Jeff, this was part of our, you know, really following through on what we committed to do, and we announced back at the beginning of 2021 to make an investment in reducing the water use in our factories, improving the water quality of our largest facilities. Part of that is this discharge, controlling discharges, reducing that as part of that investment. That includes. PFAS is a broad category of chemistries.

[Mike Roman, Former Chairman and CEO at 3M]

We've talked about how we exited, you know, now almost two decades ago, the PFOA, PFOS chemistries, which are a part of a lot of the discussions in PFAS. There are other PFAS chemistries that are used in chemical manufacturing in general in some of our sites. That was the focus.

[Mike Roman, Former Chairman and CEO at 3M]

I mean, we're always in compliance with the regulations that are on our plants. This is a chance to step forward and do even more and reduce further. That was what I talked about with Zwijndrecht. This is reducing further below our requirements at the time, our additional improving the water quality even further.

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

Great. Thank you.

[Mike Roman, Former Chairman and CEO at 3M]

Yep.

[Operator]

Our next question comes from Scott Davis with Melius Research. You may proceed with your question.

[Scott Davis, Chairman and CEO at Melius Research]

Okay. Good morning, everybody.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Hi, Scott.

[Mike Roman, Former Chairman and CEO at 3M]

Morning, Scott.

[Scott Davis, Chairman and CEO at Melius Research]

Just wanted to follow up on Jeff's question on price a little bit. Prices up again in January, meaning did you have a January 1 price increase, or did you implement your last big price increase in 4Q?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We've implemented big price increases in Q4. But again, Scott, as we have said, a lot of these we have pretty coordinated across different geographies, different markets. To the extent we see the need that we have to do in Q1, we'll do the same. In 2022, we'll do the same.

[Scott Davis, Chairman and CEO at Melius Research]

Okay. Fair enough. This Belgium situation, can you give us a little bit of color on how material. You've had a couple months. Your previous disclosure said you can't measure the materiality, but you've had a couple months now. Can you supply out of other factories and meet demand? How disruptive is this, and should we build this into our models in some sort of a headwind in 2022, or do you feel like you're gonna have some remediation here?

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, Scott. Going back to the comments I made in my prepared remarks, you know, we're in the middle of this right now. We continue to work with the local authorities. We're appealing and discussing the change to our wastewater discharge permit there. It could have a material impact and potentially interrupt production at the site. So that's something we wanted to be clear on. It's. We're in the middle of it, and I don't really wanna speculate at this point on what it will ultimately mean.

[Mike Roman, Former Chairman and CEO at 3M]

This is a priority for us. We have our best people working on it, actively working the problem, and we'll update as appropriate as we go forward here, as we work through it.

[Scott Davis, Chairman and CEO at Melius Research]

Okay. Good luck, Mike. Thank you.

[Mike Roman, Former Chairman and CEO at 3M]

Yep. Thanks.

[Scott Davis, Chairman and CEO at Melius Research]

That's it.

[Operator]

Our next question comes from Joe Ritchie with Goldman Sachs. You may proceed with your question.

[Joe Ritchie, Managing Director at Goldman Sachs]

Hi, Good morning, everyone.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Hi, Joe.

[Mike Roman, Former Chairman and CEO at 3M]

Morning, Joe.

[Joe Ritchie, Managing Director at Goldman Sachs]

I know we'll get more details in mid-February, but I guess maybe just kinda thinking about the margin trajectory for both Safety and Industrial and for Transportation and Electronics. You know, both of those segments have been hit pretty hard the last couple quarters. I'm just curious, as you kinda think through the beginning part of 2022, I mean, should we continue to expect the same type of headwinds or, you know, are there certain things that you would call out, you know, perhaps the litigation costs not recurring into 2022 that could be potential tailwinds to margins in the early part of the year?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah, Joe, I, as you said, we'll give you more guidance as we go through. Just to answer your question more specifically, I would say a couple of things, and I've said that before too. Volume has the biggest impact for us on a margin, whether it's SIBG, TBG, healthcare or CBG. I think we'll have to see what volume turns out to be, what headwinds we have or tailwinds. When you think about just the trends that those two businesses are seeing, overall, GDP and IPI is gonna be positive for 2022.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

I think it's volatile in the first quarter, and the second quarter and what that turns out. That'll determine industrial activity. On an auto build, it is flat to down sequentially. It's flat to down on a year-over-year basis too.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

That'll have an impact on TBG. Of course, then we'll have to see smartphone shipments. That's the macroeconomic environment. On our own, you've seen the team's done a good job of raising price. We have seen price go up sequentially through the quarter, and so you should see that price hold or get better. Inflation is another area that, again, I think we'll face a very tough comp from last year. We had very little inflation in the first quarter of last year.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

You are on a year-over-year basis, Joe, going to face that comp. The third piece is on litigation. As we have told you, we are actively working and defending ourselves in the Combat Arms cases. It's a little...

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Right now, I don't know where that goes, and we'll keep doing what's right to keep defending ourselves and see where those expenses land. I think that's the best I can give you at this moment. A little bit of macroeconomic, some of our stuff. Then internally, the last piece before I turn it back to you for another question is from driving supply chain efficiency, driving our factories, improving rigor. That's just something we're gonna keep doing.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We've done it. We'll keep doing it, so that should help. Then supply chain availability or the manufacturing productivity impacts that we've had in the last two quarters, which has impacted SIBG and TBG a lot, we'll have to see how the material flows.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Again, December turned out to be better, and you saw that come through from a leverage perspective, which goes back to the comment that volume gives us the best leverage.

[Joe Ritchie, Managing Director at Goldman Sachs]

That's super helpful. Thank you, Monish. Just maybe my quick follow on, you mentioned the Combat Arms and clearly PFAS being just an important part of the story here for investors. I'm just curious just from a timeline perspective, as you think about 2022, are there certain dates that we should be thinking about or penciling in, just to be paying close attention to any type of progress or resolution on either of those two items?

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, Joe, we try to keep you updated even in these calls on what's coming next, and we don't have any specific trials coming up in PFAS. The next one is related to the MDL, which we're expecting in 2023. There is, as you know, EPA is working on a management plan, and there's a strategic roadmap through the President Biden's administration. So we're, you know, we'll be watching that and updating you as we learn more around that. You know, related to Combat Arms, you know, we just frame this up.

[Mike Roman, Former Chairman and CEO at 3M]

You know, we have great respect for the brave men and women of the military who protect us around the world, and we have a long partnership here. We've been providing products and continue to provide products.

[Mike Roman, Former Chairman and CEO at 3M]

In the matter with the Combat Arms, we believe our product was safe and effective in its use, and we're vigorously defending ourselves, and we've been working through these bellwether trials. We've had 10 trials so far. Five of those were in our favor. Eight actually were dismissed in addition to the 10 trials we've had, and we're in the middle of those bellwethers. There's another 6 bellwethers planned for 2022, and we'll update you as we go through that, and we'll update you as appropriate.

[Julian Mitchell, Equity Research Analyst of US Industrials at Barclays]

Great. Thank you both.

[Operator]

Our next question comes from Julian Mitchell with Barclays. You may proceed with your question.

[Julian Mitchell, Equity Research Analyst of US Industrials at Barclays]

Hi. Thanks very much. Maybe the first question on sort of cash flow and capital deployment. So, you know, cash flow was down double digits in Q4 and the full year, and understood the sort of abnormal basis in 2020. But how should we think about cash flow for this year? You know, how quickly do we get sort of working capital under control? And also, in terms of the sort of disbursement of cash, you paid out around 90% or 95% of free cash flow last year to shareholders. Do we expect a sort of similar type approach in 2022?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah. I'll start, Julian, with just reminding you from a capital allocation perspective, and I'll just for everyone's benefit. Our first is always organic growth, where we believe we'll get the best return. You saw us putting in $1.6 billion from a CapEx perspective in 2021. For 2022 and beyond, we are gonna continue to invest in growth. You've seen us make the big announcement in Clinton. It's a half a billion dollars of investment that we're gonna put over the next couple of years.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We also have given you our goal on sustainability, where we plan to spend $1 billion, you know, part of it CapEx, OpEx, which is front-end loaded.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Third, as we had talked about on CapEx, we had mentioned during our earnings call as well as other updates throughout the quarter, our plan was to spend $1.8 billion-$2 billion. We were not able to, unfortunately, because of raw material and labor availability. To the extent that we have good programs out there, we're gonna keep doing that. That's organic growth. Second is from a dividend perspective. We know it's an important piece for our shareholders.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We're gonna continue to do that. Mike mentioned it was the 63rd year in 2021 that we increased dividend, so we'll see where 2022 goes with that. Third is M&A and portfolio.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We have an active pipeline, and we are always looking for good businesses that can help us, that we can add value, as well as the business that we acquire can add value to 3M and the shareholders. The last piece is share buyback, which we have done, and we stepped up in Q4. We had mentioned that during our earnings call as well, I think, I'm sorry, in certain updates in the quarter, where we said the stock was attractive, and we stepped into it, and that's what we did in Q4. Talking specifically about working capital, working capital continues to remain a big priority for us, using data and data analytics.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

If you actually see and do the math, Julian, and you do cash conversion cycle in Q4 of 2020 versus Q4 of 2021, you're actually gonna see that the velocity of working capital went up. The revenue was higher in total for 2021, so therefore, you do see the drag on working capital. At the same time, if you further split the working capital up, inventory is where, with all the supply chain challenges, that's an area that the team's done a nice job of managing the inventory, but that's where you have much more opportunity as supply stabilizes.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

That's an area I would say we're gonna continue driving cash. There's a lot of opportunity to keep giving strong cash.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

We generated $6 billion, and then from a net debt to EBITDA basis, we are down to 1.4 versus when I started 18 months ago, we were at close to 2.3-2.4. The team's done a really nice job of driving cash, and working capital is a big piece of it.

[Julian Mitchell, Equity Research Analyst of US Industrials at Barclays]

That's helpful. Then, maybe just, you know, as a follow-up, it feels a long time ago, but I suppose it was fairly recent, the food safety divestment, a sort of broad perspective, you know, on the portfolio. The fact that it was one of the 12 priority growth platforms at the company, and is still being divested, does that tell us, you know, at least on the outside, one could interpret that as meaning that there's a much broader sort of remit around potential divestments at 3M, if you're even willing to sell a priority growth business. Is that a sort of reasonable interpretation?

[Mike Roman, Former Chairman and CEO at 3M]

Yeah. Julian, I would say first it reinforces what we've been talking about. Our portfolio strategy is actively, continuously evaluating our portfolio. We do that to make decisions on where we invest organically, more attractive markets that can leverage 3M's capabilities, fundamental strengths. We look at acquisitions that can complement what we do organically and when integrated into 3M, give us attractive markets that can add value and greater than the sum of the parts of the two businesses.

[Mike Roman, Former Chairman and CEO at 3M]

We also are looking how to maximize value all the time, and that is everything from managing our businesses differently to up to and including divestitures. We've done a number of those over time, where we saw better owners or greater value to be really achieved through the divestiture.

[Mike Roman, Former Chairman and CEO at 3M]

Sometimes that's, you know, strengthening the business so that it can deliver greater value to customers. It's always focused on how can we deliver greater value creation through the business, including returns to our shareholders. When you look at food safety, while it was an organic priority for us because it had strong growth opportunities and can leverage some of the capabilities of 3M, we also saw a path to greater value, a combination with Neogen where you can strengthen the two businesses by putting them together and really create greater value for customers and for shareholders.

[Mike Roman, Former Chairman and CEO at 3M]

It's very consistent with what, you know, how we look at our portfolio management, and I think it's an outcome of that continuous process. We're gonna continue to actively manage our portfolio.

[Julian Mitchell, Equity Research Analyst of US Industrials at Barclays]

Great. Thank you.

[Operator]

Our next question comes from Brett Linzey with Mizuho Securities. You may proceed with your question.

[Brett Linzey, Managing Director at Mizuho Securities]

Thanks, and good morning.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Good morning, Brett.

[Brett Linzey, Managing Director at Mizuho Securities]

Yeah, wanted to come back to the margin bridge. You guys called out the manufacturing inefficiencies that occurred in Q4 related to the shorter production runs, more production changeovers, et cetera. Are you able to isolate in size, in dollars or margins how large of a headwind that was in Q4 and on, and on a full year basis in 2021?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah, Brett, it's really hard to do it that way because it has a compounding effect. Unfortunately, it's hard to isolate the number. In total, when we put the manufacturing productivity together, including the spend, you can see it's $0.33 negative in total, which included three things. One is lower volume, which has an impact first on just generally the plants. Second is the material productivity. The third is the wage inflation and the prior headwinds that we had talked about when it comes to variable compensation, and then we continue to invest in growth, productivity and sustainability.

[Brett Linzey, Managing Director at Mizuho Securities]

Yeah, it makes sense. Understandably, inflation logistics pressures continue, but I'm just trying to get a sense, do those resolve, you know, early in Q1 as, you know, some of the demand pulse gets better here?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah. I think we're watching it, Brett. I think our view is we're gonna see a volatile environment in the first half. Things should get better in the second half, but I would not expect a big snap back on stability of supply in 1Q 2022.

[Brett Linzey, Managing Director at Mizuho Securities]

Right. Okay. Just wanted to come back to the comment on prioritizing investments for this year. I think, last year, R&D as a % of sales was at the lower end of what it's been historically. Does the R&D number need to move higher in 2022, or can you keep it at the same level and just, you know, allocate those dollars more effectively?

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, Brett, you know, it's really something we focus on, prioritizing our investments. We talk about prioritizing in growth, productivity and sustainability as we've come through the pandemic, as we came through 2021, accelerating those investments where we saw the best opportunity. That's R&D, that's CapEx, that's commercial investments. Very big focus on R&D as you would expect. It's where we drive our innovation with that investment in R&D.

[Mike Roman, Former Chairman and CEO at 3M]

The overall % to sales that you see at an enterprise level, it wouldn't surprise you that there are parts of our portfolio that are much higher than that and others that are lower than average. We're prioritizing that in some of the areas that I talked about in my prepared remarks. We see attractive investments.

[Mike Roman, Former Chairman and CEO at 3M]

We actually are increasing R&D in some areas and managing it overall pretty well in line with where we've come from. There's a lot going on underneath that. It's really that prioritization where we are targeting stepping up our investments in those most attractive areas. It's true for CapEx as well.

[Brett Linzey, Managing Director at Mizuho Securities]

Mm-hmm. Got it. Makes sense. Best of luck.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Thanks.

[Mike Roman, Former Chairman and CEO at 3M]

Thanks, Brett.

[Operator]

Our next question comes from Deane Dray with RBC Capital Markets. You may proceed with your question.

[Deane Dray, Managing Director at RBC Capital Markets]

Thank you. Good morning, everyone.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Hi, Deane.

[Mike Roman, Former Chairman and CEO at 3M]

Good morning, Deane.

[Deane Dray, Managing Director at RBC Capital Markets]

Hey, just a couple clarifications. Going back to the opening Q&A and Nigel's question on December coming in better, you did clarify that masks were better by $40 million. What were the other businesses that did better or product lines that did better in December?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Yeah. $40 million was for the whole quarter, Deane, just to clarify that. December definitely had a pickup there. Consumer came in strong, and then Health Care came in strong. That, that's the other two I would call out in December.

[Deane Dray, Managing Director at RBC Capital Markets]

Got it. When Bruce made two topics that are gonna change in reporting going forward, could you just clarify the second one? It sounded like you were not gonna report segment volume and price separately. Just clarify what the thinking is there and what will we see going forward.

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

Yeah. Deane, this is Bruce. We have never reported separate segment volume and price by the segments. We have at the total enterprise level and the geography level. We are no longer gonna report separate volume and price going forward, and it's due to a lot of the benchmarking work we have done. Also, the one conversation piece we've had throughout the year relative to price is what's showing up in price is what gets realized in the quarter, and it's not a true reflection of the actions we're taking in the end market. I think it created a lot of confusion relative to is 3M taking price or not?

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, we're taking price, but it really is only showing up relative to what actually got realized in a particular period. Organic growth is our number one objective, and that's what we're gonna report, going forward.

[Deane Dray, Managing Director at RBC Capital Markets]

Slide 12 in the appendix where you break out organic volume by region, and price, does that go away?

[Mike Roman, Former Chairman and CEO at 3M]

Yep. If you re-

[Deane Dray, Managing Director at RBC Capital Markets]

I-

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, if you recall, Deane, when we moved to our new business group-led business model, we're running global businesses now, we no longer have a separate international structure. That's how we're operating the business, driving growth around the world no matter where it's at.

[Deane Dray, Managing Director at RBC Capital Markets]

Got it. Thank you.

[Mike Roman, Former Chairman and CEO at 3M]

Yep.

[Operator]

Our next question comes from Andy Kaplowitz with Citigroup. You may proceed with your question.

[Andy Kaplowitz, Managing Director at Citigroup]

Good morning, guys.

[Mike Roman, Former Chairman and CEO at 3M]

Hi, Andy.

[Mike Roman, Former Chairman and CEO at 3M]

Morning, Andy.

[Andy Kaplowitz, Managing Director at Citigroup]

Can you give us a little more color into what you're seeing in electronics? I think you mentioned in Q4 is down still, and it tends to be quite volatile for you. Without giving specific outlook for 2022, have you seen any improvement in semiconductor availability starting to help that business? How are inventories in the channel? At what point do your businesses, such as data center-focused products, auto electrification, start to become meaningful enough to better support that business?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

I would say, Andy, on—I'll start with your first thing on chips. Production did go up in auto in December versus what was originally planned. For the year, auto ended at +2%. For the quarter, it ended at -13%. I think it came in a little better than what was the original forecast. It did get a little better there. I think what we are seeing is it's still volatile from a supply chain perspective. Our view is that you're gonna see that volatility in the first half of 2022.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

When you take consumer electronics, consumer electronics was down on a year-over-year basis. It's projected to be up from 2021 to 2022 for the year, and we'll have to see when launches happen, et cetera.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

That's the semiconductor of our business. The business has grown very well. We continue to perform very well. We continue to deliver value for our customers, and in 2022, you should expect us to continue doing the same.

[Andy Kaplowitz, Managing Director at Citigroup]

Monish, that's helpful. Then maybe a little more color on what you're seeing regionally. Obviously, you have tougher comparisons in China, as you go into next year into 2022. You know, there's some geopolitical risk out there. Any sort of trends that you're seeing or wanna highlight as we're going into 2022 regionally?

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, Andy, you know, I'd take you to GDP and IPI. I think you know, there's an outlook for 2022 that says we're gonna see, you know, pretty good backdrop globally, you know, led by probably U.S. and Asia in that regard. The stronger areas, IPI, GDP, both. If you you know, go into China in particular, we saw, you know, growth in 2021. We were up low single digits in Q4, which is similar to the overall China macro. For the whole year, we were up low double digits, which was above the macro for China.

[Mike Roman, Former Chairman and CEO at 3M]

Continued to see growth opportunities there. Our growth was led by our healthcare business. We saw growth in our consumer business. Both of those were up, you know, low teens.

[Mike Roman, Former Chairman and CEO at 3M]

Our industrial business was up low single digits in the quarter. Where we saw some weakness was in transportation electronics, really back to the semiconductor chip challenges, some of the supply chain challenges. Those were impacting that in China as well. I paint that picture so you can kind of see where we have a focus on growing at or above the macro in China as well, and the outlook is to be positive. We're prioritizing like everywhere else, where we see the trends. Some of those areas in electronics have continued to stay strong.

[Mike Roman, Former Chairman and CEO at 3M]

While overall consumer electronics challenged with the chip shortage, we saw strength in semiconductor fabrication, factory automation. There, you know, there, we see those as areas that we're well positioned as we come into 2022 as well.

[Andy Kaplowitz, Managing Director at Citigroup]

Appreciate it, guys.

[Operator]

Our next question comes from Steve Tusa with JP Morgan Securities. You may proceed with your question.

[Steve Tusa, Managing Director at JPMorgan]

Hey, guys. Good morning.

[Mike Roman, Former Chairman and CEO at 3M]

Hey, Steve.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Morning, Steve.

[Steve Tusa, Managing Director at JPMorgan]

Just a question on, I know, Monish, you've kind of taken on this, I guess an additional title of kind of transformation, you know, officer. You know, many times that means there's gonna be some kind of major portfolio moves. What, you know, what does this kind of transformation title mean from that perspective? Is it really looking at kind of the structure of the company, or is it, you know, more about, improving processes and, you know, more of an operating-

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, Steve, I

[Steve Tusa, Managing Director at JPMorgan]

-type?

[Mike Roman, Former Chairman and CEO at 3M]

I'm interested in Monish's answer as well, but I thought I'd just frame it up. He's leading transformation, which is really taking responsibility for leading our IT and digital strategy. Overall transformation includes what we've called business transformation. Monish has been driving some of these efforts from his role as CFO, and he led transformation at his prior employer as well. He brings that operating rigor to it. We recently hired a new chief information and digital officer that reports to Monish as part of that.

[Mike Roman, Former Chairman and CEO at 3M]

You think about it's really that business transformation we've talked about for a number of years, focused on deploying new digital capabilities, digital strategy broadly, digital enterprise, capabilities like our ERP and our move to the cloud, also digital operations and even how we're digitizing for our customers.

[Mike Roman, Former Chairman and CEO at 3M]

It's really bringing his leadership to that. Monish can give you his perspective on it.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Listen, I don't have much to add, Steve, other than the fact that when we look at the opportunity at 3M, whether it's growth at or above macro, margin expansion and strong cash. Underneath that, you can tuck in portfolio. Digital is a big opportunity for us, whether it's leveraging data and data analytics. I just view my job is to enable the teams to achieve what 3M can. I'm excited, and we have a great set of people working on this.

[Steve Tusa, Managing Director at JPMorgan]

Right. I think you guys mentioned buyback in the presentation. I might have missed this, but are you guys gonna be stepping up buybacks in a significant way here in the near term? Is it a change in tone on buybacks or pretty consistent what you've said historically?

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

No, Steve, it's pretty consistent. You know, the level of buyback is always our fourth priority in the four priorities. To the extent the amount of buyback will always get determined by the amount of cash we have, what the market is doing, what the opportunities are. As I'd mentioned in the fourth quarter, we saw an opportunity where we thought the stock was attractive, and we felt we should step up buyback in the fourth quarter. No change in tone. That still remains the fourth priority in our list of capital allocation priorities.

[Steve Tusa, Managing Director at JPMorgan]

Okay. Thanks for being

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Thanks.

[Steve Tusa, Managing Director at JPMorgan]

Thank you for being straightforward. Thank you.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Thanks.

[Mike Roman, Former Chairman and CEO at 3M]

Thanks, Steve.

[Operator]

Our next question comes from Andrew Obin with Bank of America. You may proceed with your question.

[Andrew Obin, Managing Director of Equity Research at Bank of America]

Yeah, good morning.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Hi, Andrew.

[Mike Roman, Former Chairman and CEO at 3M]

Morning, Andrew.

[Andrew Obin, Managing Director of Equity Research at Bank of America]

Yeah. My first question is on Asia and specifically, you know, as we see Omicron in China, what's the feedback you're getting on the ground about the scope of shutdowns versus what was expected around the Olympics? You know, how is that gonna play out in the first quarter given what you're seeing right now? Thanks.

[Mike Roman, Former Chairman and CEO at 3M]

Yeah, Andrew, I would say, you know, what we came through December into the new year, there's a lot of uncertainty around Omicron and how it's gonna impact supply chains globally. In China, obviously an important focus there, and with the Olympics coming, a spotlight on that as well. You know, we've been managing supply chain logistics issues there as well. You saw that a little bit play out in the China export numbers in Q4 down like low single digits, I think, for the quarter.

[Mike Roman, Former Chairman and CEO at 3M]

It's something we're focused on. We've been managing through the challenges we've seen, and we'll update you as we get further into, you know, into February and March.

[Andrew Obin, Managing Director of Equity Research at Bank of America]

Just the second question is, you know, almost two years into COVID, and maybe it's a little preview for your Analyst Day, but, you know, almost two years into COVID, what portions of your portfolio sort of look structurally better and what has lagged, and what do you think happens as the world normalizes again? Thanks.

[Mike Roman, Former Chairman and CEO at 3M]

Yeah. Andrew, let me start with accelerated investments in a number of areas as we come through COVID, and it's really recognizing some of the trends maybe even that we came into the pandemic with that accelerated. We talk about investments in automotive electrification, maybe less COVID-related, but certainly a trend that's accelerating. We saw home improvement accelerate during COVID. We're investing in those areas.

[Mike Roman, Former Chairman and CEO at 3M]

We're seeing strong growth as we came through 2021 in those areas, and we see that continuing as we go forward. That's a way we look at it. That's across our portfolio. We've talked often about different parts of our portfolio, how are they doing relative year-over-year, even back to 2019.

[Mike Roman, Former Chairman and CEO at 3M]

I would say, you know, we had strength in broad parts of the portfolio, including those that we're investing in. There's a couple areas that are still, you know, still recovering. Monish even highlighted one in his comments about how elective procedures are still at about 90%, medical procedures that is, at about 90% of where they were in 2019. There's, you know, the impact of COVID on increased hospitalization rates and the knock-on effect on healthcare. We think there's still some, you know, some impact net-net versus 2019 in some of those areas.

[Mike Roman, Former Chairman and CEO at 3M]

It plays out a little differently across our portfolio, even where we saw strong demand in our home care and our cleaning products in 2020, tough comp and a little lower growth as we came through 2021. There's a number of trends that we're watching. Again, prioritizing where we see an opportunity to invest and leverage 3M strengths and managing those other areas in the middle of the supply chain disruptions to serve customers as things recover.

[Andrew Obin, Managing Director of Equity Research at Bank of America]

Thank you very much.

[Mike Roman, Former Chairman and CEO at 3M]

Yep.

[Operator]

Our final question comes from John Walsh with Credit Suisse. You may proceed with your question.

[John Walsh, Former Director at Credit Suisse]

Hi, good morning, and thanks for fitting me in here.

[Mike Roman, Former Chairman and CEO at 3M]

Good morning, John.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Good morning, John.

[John Walsh, Former Director at Credit Suisse]

Maybe just one question from me, and going back, I think, to a comment you made in response to Nigel's question around restructuring. I thought I heard $70 million. Just wanted to make sure that was kinda capturing all the restructuring delta, and ask if that was in line with the Q3 update. 'Cause I guess by my math, I had a little bit higher of a number, but-

[Mike Roman, Former Chairman and CEO at 3M]

Yeah.

[John Walsh, Former Director at Credit Suisse]

Just wanted to ask for clarification there.

[Mike Roman, Former Chairman and CEO at 3M]

Yeah.

[John Walsh, Former Director at Credit Suisse]

Thank you.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

It's a good one, John. You heard it right, it's $70 million. The reason is we achieved more in the fourth quarter than we had previously thought, and that's why you also saw margins came in higher, and because we achieved more. Just to recap the program, in total, we have spent the program that was announced in Q4 of 2020. We had said we have spent 260 to date. We had told you in Q3 that it would be $300 million-$325 million.

[Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer at 3M]

Right now we are saying up to $300 million. We had said benefits would be in the range of $200 million-$250 million. We achieved approximately $180 million in that program, so there's a carryover benefit of $70 million.

[John Walsh, Former Director at Credit Suisse]

Great. Appreciate the clarification. Thank you.

[Mike Roman, Former Chairman and CEO at 3M]

Thanks.

[Operator]

That concludes the question and answer portion of our conference call. I will now turn the call back over to Mike Roman for some closing comments.

[Mike Roman, Former Chairman and CEO at 3M]

Thank you. To wrap up, I am proud of our team's performance in 2021, and we are well-positioned for a successful 2022. I look forward to talking to you again at our February fourteenth meeting. Have a good day.

[Operator]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your lines.

Participants

Executives

• Bruce Jermeland, Former SVP of Investor Relations
• Mike Roman, Former Chairman and CEO
• Monish Patolawala, Former EVP, Chief Financial, and Transformation Officer

Analysts

• Andrew Obin, Managing Director of Equity Research at Bank of America
• Andy Kaplowitz, Managing Director at Citigroup
• Brett Linzey, Managing Director at Mizuho Securities
• Deane Dray, Managing Director at RBC Capital Markets
• Jeff Sprague, Founder and Managing Partner at Vertical Research Partners
• Joe Ritchie, Managing Director at Goldman Sachs
• John Walsh, Former Director at Credit Suisse
• Julian Mitchell, Equity Research Analyst of US Industrials at Barclays
• Nigel Coe, Managing Director at Wolfe Research
• Scott Davis, Chairman and CEO at Melius Research
• Steve Tusa, Managing Director at JPMorgan