3M Co Q3 FY2021 Earnings Call

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. 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, October 26th, 2021. I would now like to turn the call over to Bruce Jermeland, Senior Vice President of Investor Relations at 3M.

Thank you and good morning, everyone and welcome to our Third 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 and 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. As we have done throughout the year, I'd like to remind you to mark your calendars for our next earnings conference call, which will take place on Tuesday, January 25th, 2022. Please take a moment to read the forward-looking statement on Slide 3. During today's conference call, we'll make 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. 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. 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. Please turn to Slide 4, and I'll now hand it off to Mike. Mike?

Thank you, Bruce. Good morning, everyone. And thank you for joining us. In a dynamic environment, our performance throughout 2021 has shown the skill of our people around the world, the resiliency of our business model, and the relevance of our technologies. In the third quarter and year-to-date, we have delivered broad-based organic growth across all business groups and geographic areas, along with good margins and strong cash flow. Q3 organic growth was over 6% as we drove innovation across our market-leading businesses with margins of 20% and earnings of $2.45 per share. Geographically, growth in the quarter was led by the Americas, up 7% with the U.S. up 6%. Growth in APAC was 6% with China up 3% and Japan up 6%, while EMEA grew 4%. With respect to the macro-environment, overall end-market demand remains strong, though the semiconductor shortage continues to impact many markets, most visibly in electronics and automotive. As we navigate near-term uncertainty, we continue to invest in growth, productivity, and sustainability, which I will discuss shortly. We are also actively managing disruptions in the global supply chain with a relentless focus on customer service. Looking at our performance through nine months, we have executed well and delivered 11% organic growth, with all business groups about 10%, along with margins of 22% and earnings of $7.81 per share. Today, we are updating full-year expectations for organic growth to a range of 8% to 9% and EPS to a range of $9.70 to $9.90, reflecting our results to date and ongoing supply chain challenges. I would like to make a few comments on how 3M is actively managing those challenges. As you know, many companies are facing supply chain disruptions. The result of a convergence of issues includes the Delta variant, strong demand, energy and labor shortages, and extreme weather events. For example, ocean freight costs have more than doubled over the last year, and the number of containers on the water is up 70% because of port congestion. Suppliers are challenged to provide consistent and predictable supply. On any given day we are working with more than 300 suppliers with critical constraints. With manufacturing sites in 35 countries around the world, and as a $5 billion annual exporter out of the U.S., we are working tirelessly to serve our customers. The cornerstone of 3M's response is our expertise and deep relationships across the supply chain along with our local-for-local managed sourcing and supply chain strategy, which helps us move with agility and keep our factories running. We have daily meetings with suppliers to strengthen our planning, and in some instances, are strategically prioritizing geographies, markets, and portfolios. These are hard but necessary decisions to ensure we meet the most critical needs of our customers. We are moving product in different ways, such as expanding our use of rail, shipping out of more flexible ports, and increasing our use of charter flights by over 40%, while deploying new capabilities to better track our flow of goods in real time. Maintaining talent is also key and we are using several tactics to attract new workers while protecting the health and safety of all of our employees. Some of our actions have impacted our productivity and gross margins, which Monish will touch on. But we will do what is necessary to take care of customers. The combination of strong demand along with supply chain challenges is also contributing to broad-based inflation. We're taking multiple actions to help offset inflationary pressures, including price increases, dual-sourcing, and improving factory yields, with more work to do. Ultimately, the duration of these supply chain challenges is difficult to predict. We remain focused on serving customers, managing backlogs, and making good on our commitments, delivering the unique, high-quality products that are the hallmark of 3M. Please turn to Slide 5. While we execute day-to-day, we are investing to drive long-term growth and capitalize on trends in large, attractive markets. In home improvement, for example, we have multiple $0.5 billion-plus franchises that keep families healthier and more productive, including our fast-growing Command damage-free hanging solutions and Filtrete home filtration products. These brands leverage 3M's deep expertise in adhesives and non-woven materials. The same technologies are helping drive success in our automotive business, which consistently outgrows build rates. Auto electrification sales are up 40% year-to-date on the strength of new innovations, including advanced display technologies as automobiles become the next consumer electronic device. In healthcare, the biopharma market is growing more than 10% annually, with our business up more than 30% year-to-date as 3M Science has supported the unprecedented pace of advancement over the past 18 months to develop therapeutics and vaccines, and scale manufacturing to help address the pandemic. The fundamental strengths of 3M — our unique technology platforms, advanced manufacturing, global capabilities, and leading brands — position us to win. And we will continue to invest in these areas. In a similar way, we're driving productivity by advancing digital capabilities across our operations, allowing us to expand our use of data and data analytics. In sustainability, we have achieved 50% renewable electricity use in our operations, four years ahead of our timeline, on our way to 100%. We are advancing the environmental goals we announced earlier in the year, making the investments to accelerate our ability to achieve carbon neutrality, reduced water use, and improved quality of water returned to the environment from our industrial processes. In addition, we are proactively managing PFAS, making our factories and communities stronger and more sustainable. In Cottage Grove, Minnesota, we recently announced that we are closing our incinerator and partnering with a leading disposal company to more efficiently manage our waste streams. We just broke ground to add new filtration technology in Cordova, Illinois. In Belgium, we're working with government officials to resolve issues related to PFAS, and we will invest up to 125 million euros over the next three years to improve water quality around our factories. These proactive initiatives and others are accelerating 3M's ability to go beyond current regulatory standards and deliver on our commitments. With respect to the PFAS strategic roadmap announced last week, 3M remains committed to working with the Biden administration, EPA, and others, and taking a science-based approach to managing PFAS. Let me also touch on a few litigation updates. Last week, we announced a collaborative agreement to resolve litigation related to PFAS at our facility in Alabama. The impact is included in our previously disclosed reserves. On Combat Arms, there have been four bellwether trials so far, with six additional trials here in the fourth quarter; we are early in this litigation and will continue to actively defend ourselves, including through the appeal process. As always, we encourage you to read our 10-Q for updates on all litigation matters. To wrap up, we are driving strong results in a challenging environment, investing in attractive end markets and positioning 3M for continued growth. I'm proud of our 3M team, which is united by a common purpose: unlocking the power of people, ideas, and science to re-imagine what's possible and create what's next. Now, we will turn it over to Monish, who will cover the details of the quarter. Monish.

Thank you, Mike. And I wish you all a very good morning. Please turn to Slide 6. As I look back on the quarter, the 3M team demonstrated the resilience of our business model and the relevance of our technologies as we executed well in a very challenging environment, effectively navigating the supply-chain disruptions while serving and innovating for our customers. Though manufacturing, raw materials, and logistics challenges persisted throughout the quarter, we continued to invest in the business while driving operating rigor and managing costs. Turning to the third quarter financial results, sales were $8.9 billion, up 7.1% year-on-year, or an increase of 6.3% on an organic basis. Operating income was $1.8 billion, down 6% with operating margins of 20% coming in at the top end of the range we had previously communicated in mid-September. Third quarter earnings per share were $2.45, which was similar to last year. On this slide, you can see the components that impacted both operating margins and earnings per share as compared to Q3 last year. Our strong year-on-year organic volume growth was more than offset by the headwinds resulting from the global supply chain challenges, investments in growth and sustainability, and litigation-related costs. Combined, these impacts lowered operating margins by 1.4 percentage points, and earnings per share by $0.02 year-on-year. The restructuring program we announced in Q4 of last year remains on track. As part of this program we incurred a pretax restructuring charge of $50 million in the third quarter. This charge was offset by the benefits we achieved this quarter. Moving to price and raw materials. As expected, increases in selling price gained traction as we went through the quarter with year-on-year selling prices up 140 basis points in Q3 versus 10 basis points in Q2. However, we continue to experience higher costs for raw materials, logistics, and outsourced manufacturing, which outpaced the increase in selling prices. Thus, third-quarter net selling price and raw materials performance reduced both operating margins and earnings by 130 basis points and $0.12 per share, respectively, versus Q3 last year. Looking at Q4, we expect our selling price actions to continue to gain traction as we work to mitigate the raw material and logistics inflationary pressures we have experienced throughout the year. Next, foreign currency net of hedging impacts reduced margins 20 basis points and earnings by $0.01 per share. Also, three other non-operating items impacted our year-on-year earnings per share performance. First, lower other expenses resulted in a $0.08 earnings benefit. Consistent with prior quarters, non-operating pension was a $0.05 benefit, along with the $0.02 benefit from net interest due to our proactive early redemption of debt. Secondly, a lower tax rate versus last year provided a $0.09 benefit to earnings per share. The tax rate was lower due to favorable adjustments this year related to impacts of U.S. international tax provisions. Our year-to-date tax rate is 18.8%. Therefore, we now expect our full-year tax rate in the range of 18.5% to 19.5% versus 20% to 21% previously. And finally, average diluted shares outstanding increased 1% versus Q3 last year, lowering per share earnings by $0.02. Please turn to Slide 7 for a discussion of our cash flow and balance sheet. Third-quarter adjusted free cash flow of $1.5 billion was down 29% year-on-year with conversion of 107%. Adjusted free cash flow year-to-date was $4.5 billion, which was similar to last year, with free cash flow conversion of 98%. The decline in our year-on-year free cash flow performance was primarily driven by higher inventory balances due to strong customer demand, along with raw material inflation, and more goods in transit as a result of the ongoing global supply chain challenges. Third quarter capital expenditures were $343 million and $1 billion year-to-date. For the full year, we now expect CapEx investments in the range of $1.5 to $1.6 billion versus being at the low end of our prior range of $1.8 to $2 billion. We continue to step up investments in growth, productivity, and sustainability. However, the pace of projects continues to be impacted by supply chain and vendor constraints. During the quarter, we returned $1.4 billion to shareholders through the combination of cash dividends of $856 million and share repurchases of $527 million year-to-date. We have returned $3.8 billion to shareholders in the form of dividends and share repurchases. Our net debt position, strong cash flow generation capability, and disciplined capital allocation continue to provide us 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 8, where I will summarize the business group performance for Q3. I will start with our Safety & Industrial business, which posted organic growth of 6.1% year-on-year in the third quarter. Organic growth was driven by continued robust industrial manufacturing activities, along with prior-year pandemic-related impacts. First, our Personal Safety business declined 4% organically, up against a 40% pandemic-driven comparison a year ago. Third quarter disposable respirator sales decreased 7% organically year-on-year, and 15% sequentially. Looking ahead, we anticipate continued deceleration in disposable respirator demand through the balance of this year and into 2022. Turning to the rest of Safety & Industrial, organic growth was led by double-digit increases in Adhesives & Tapes, Abrasives, and Electrical markets. In addition, Closure and Masking Systems was up high single digits. Automotive aftermarket was up low single digits, while roofing granules declined against a strong comparison from last year. Safety & Industrial's third quarter operating income was $620 million, down 20% versus last year. Operating margins were 19.2% down 650 basis points year-on-year, as leverage on sales growth was more than offset by ongoing increases in raw materials, logistics, and litigation-related costs, along with manufacturing productivity impacts. Moving to Transportation & Electronics which grew 5.1% organically despite the continued impact of semiconductor supply chain constraints. Our Auto OEM business was flat year-on-year, compared to the 20% decline in global car and light truck builds. This outperformance was due to a few factors. First, we continue to grow our penetration by driving 3M innovation onto new automotive platforms. Second, we saw a notable increase in channel inventories at tier suppliers given the dramatic reductions in OEM build forecasts through the quarter. Lastly, we benefited from vehicle model mix as auto OEMs produced more premium vehicles, which tend to have higher 3M content. Our electronics-related business declined low single digits organically, with declines across consumer electronics, particularly smartphones and TVs, as OEMs face production challenges due to ongoing semiconductor constraints and COVID-related impacts. These declines were partially offset by continued strong demand for our products and solutions in semiconductor and factory automation end markets. Turning to the rest of Transportation & Electronics, Advanced Materials and Commercial Solutions each grew double digits year-on-year, while Transportation Safety grew low single digits. Third quarter operating income was $465 million, down 9% year-on-year. Operating margins were 19% down 320 basis points year-on-year, driven by strong leverage on sales growth, which was more than offset by increases in raw materials and logistics costs, along with manufacturing productivity impacts. Turning to our Healthcare business, which delivered third quarter organic sales growth of 3.3%. Our Medical Solutions business declined low single digits organically, impacted by the continued decline in demand for disposable respirators, along with the pace of hospital elective procedure volumes, which came in at the low end of industry expectations of 90% to 95% for the quarter. Our Oral Care business grew low double digits year-on-year as dental procedures continued to be near pre-COVID levels. The Separation and Purification business increased high single digits year-on-year due to ongoing demand for biopharma filtration solutions for COVID-related vaccines and therapeutics. Health Information Systems grew low double digits driven by strong growth in clinician solutions. And finally, Food Safety increased double digits as food service activity returns. Healthcare's third quarter operating income was $529 million, up 7% year-on-year. Operating margins were 23.5% up 70 basis points. Third quarter margins were driven by leverage on sales growth, which was partially offset by the increasing raw materials and logistics cost, manufacturing productivity impacts, along with increased investments in growth. Lastly, third quarter organic growth for our Consumer business was 7.6% year-on-year with continued strong sell-in and sell-out trends across most retail channels. Our Home Improvement business continues to perform well, up high single digits on top of a strong comparison from a year ago. This business continued to experience strong demand, particularly in our Command and Filtrete categories, leading franchises. Stationery and Office grew double digits organically in Q3, as this business laps last year's COVID-related comparisons. We also had strong back-to-school consumer demand and holiday-related sell-in for Scotch-branded packaging and shipping products and Scotch-branded home and office tapes. Our Home Care business was up low single digits versus last year's strong COVID-driven comparison. And finally, our Consumer Health & Safety business was up high single digits as we lap COVID-related impacts from a year ago. Consumers operating income was $332 million, down 3% year-on-year. Operating margins were 21.7% down basis points, as increased costs for raw materials, logistics, and outsourced hard goods manufacturing more than offset leverage from sales growth. Please turn to Slide 9 for a discussion of our full-year 2021 guidance. As we reflect on the macroeconomic environment, we expect demand to remain strong across most end markets. However, uncertainty persists given the ongoing impacts of the pandemic, along with the well-known global supply chain, raw materials, and logistics challenges that all companies are working through. Looking ahead, we remain focused on our customers and doing what is necessary to solve for them as we continue to navigate the fluid environment. Turning to guidance, we're increasing the bottom end of our expectations for organic growth. We now project our full-year organic growth to be in the range of 8% to 9% versus our prior range of 6% to 9%. With respect to earnings, we anticipate a range of $9.70 to $9.90 per share as compared to our prior range of $9.70 to $10.10. And finally, we expect to continue to generate strong free cash flow, therefore, we are maintaining our free cash flow conversion range of 90% to 100%. This updated outlook implies a wider-than-normal fourth quarter range accounting for ongoing impacts of COVID and the uncertain supply chain environment. For example, from a growth perspective, the well-known constraints in semiconductor chip supply are impacting more and more end markets, most notably automotive and consumer electronics, as reflected in the low production forecast for the year. We anticipate global elective healthcare procedure volumes to stabilize with recent trends. Relative to disposable respirator, we expect continued impacts from the decline in healthcare-related demand along with elevated inventory levels in the industrial channel. And finally, we expect our pricing actions to continue to gain traction as we work to mitigate raw material and logistics cost pressures. Turning to operations. As we have discussed, we are actively managing inefficiencies in global supply chains with a relentless focus on customer service. Therefore, we are adjusting demand plans with greater frequency, and as a result incurring more manufacturing production changeovers along with expediting shipments. All of these actions are impacting both costs and productivity, but we're taking the necessary steps to ensure we meet the most critical needs of our customers. We continue to make progress relative to the December 2020 restructuring announcement. To date, we have incurred over $240 million in pretax restructuring charges and anticipate an additional $25 to $50 million in Q4. We now expect total pretax restructuring charges of $300 to $325 million versus our original expectations of $250 to $300 million. We expect the remaining actions under this program to be initiated by the first quarter of 2022. In addition, we expect to incur higher costs related to our ongoing litigation matters, along with increases in our other indirect related costs like travel expense. And finally, we continue to invest in the business for the long term and therefore anticipate increased investments in growth, productivity, and sustainability. To close, I would like to take a moment to thank our customers who have placed their faith in us, our vendors who are tirelessly working with us to ensure continuity of supply, and most importantly our 90,000-plus 3Mers who continue to deliver for our customers. We have a very steady eye on the long term to deliver growth, margin, and cash through strong operating rigor, while continuing to navigate the uncertainty in the short run. With that, I thank you for your attention and we will now take your questions.

First question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.

Thanks. Good morning and thanks for the details on the quarter. So Monish, you mentioned the 19% to 20% margin for Q3. You came in at the high end of that range. Obviously, you'd like to be conservative, but I'm just curious what's better or maybe not quite as bad as you expected or saw back in mid-September?

That's a great question, Nigel. I think when I gave you the range of 19% to 20%, as we have said in my prepared remarks, we were facing a lot of inflation. At the same time, there was a lot of uncertainty as regards volumes and supply chain flow. Third, I'd also mentioned that as we were facing all those items, we were also doing our own self-help versus just letting these things go through, whether it was dual-sourcing, whether it was controlling some of our expenses, etc. Put all that together, we came in at 20%. If you look at where we ended up, I would say inflation came in pretty much where we thought it was going to be. We executed on price; we moved from 10 basis points of price increase in Q2 to 140 basis points in Q3. So that was pretty much in line, and we were able to execute more volume with flow of supply. We were able to get good flow supply. There's strong demand, as Mike said, and we were able to execute the demand, as well as we controlled our expenses across the corporation to make sure that we were prioritizing serving our customers and trying to mitigate the impact of inflation as much as we could. So put all that in, we came in at 20% versus the range of 19% to 20% that I mentioned earlier.

That's great. Thank you. On the margin bridge, based on your Q4 full-year guidance, it looks like Q4 margins are in the 18s. Maybe my math is off, but I'd be curious if you can talk to that and maybe the two major margin budget items: the volume productivity and price-cost. You had 100 to 180 basis points negative on volume productivity and 130 on price-cost this quarter. How does that look in a broad sense for Q4 year-over-year?

So I would start by saying, Nigel, a couple of things. Your math is directionally very close to the implied guide that we gave you. I think a couple of things on just the items you talked about, which is price and raw. We expect to continue to have momentum in price in the fourth quarter. You saw us again go up from 10 to 140 basis points and we should see that go up as price continues to take hold across the various geographies and product lines. I would say we don't see the raw material or the inflation environment slowing down in any way. I think you're going to see that volatility. It's going to depend on what the holiday season does. It depends on what logistics costs are going to be. Our goal is to get to neutral. The question is going to be how raw materials at some point play themselves out, and do we see a turn in some of the commodities like polypropylene, ethylene, etc., where we have seen a lot of inflation? That would be number one on your question. I think there was another point on the bridge on revenue. If you're looking at 3Q to 4Q, just remember there are a couple of things that impact 3M. There's one less billing day from 3Q to 4Q and secondly, you have a normal seasonality that you have in 3M as many of the factories with our industrial customers slow down during the holidays and that's the impact. So I think you've answered your question, but if there's anything else I'm happy to answer, Nigel.

No, that's perfect Monish.

Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Please proceed with your question.

Thank you. Good morning, everyone.

Hey, Jeff. Good morning.

Just want to pick up a touch on auto a little bit. Kind of extraordinary divergence in the numbers there as you laid out. I just wondered, does that create some kind of significant headwind for you now as you look forward? Obviously, we should have volumes going up, but manufacturers and suppliers may burn off inventory and mix shifts back. I was wondering if you could give us a little more perspective on what's going on there.

Maybe there's a couple of parts to that I'll talk about. If you look at what we've done year-to-date, it's really been reflective of our innovation, something we've been talking about for some time: we outgrow the build rates even in a dynamic like this year where the build rates are swinging down as there were some challenges in OEM production plans for Q3 and the outlook for Q4 being similar. We're continuing to drive our innovations when spec-ins and design-in opportunities occur. Then Monish mentioned the mix of vehicles in this demand environment is more premium, where we have a higher level of penetration in those vehicles. We also have very good growth in our Auto electrification priority growth platform broadly, and we're getting good traction, 40% year-to-date. So those are all driving that performance as we come through year-to-date and we expect to be able to continue to perform as build rates recover going forward. The channel — everybody is challenged with matching up to the changes in production plans, and these are changing quickly and the dynamic has been challenging for supply chains. That said, we see inventory trying to track pretty well with that. We don't see in our results a year-to-date impact from excess inventory, so it's really about matching up with where the mix is going, where the build rates are going, and again, we see good momentum in our portfolio versus those build rates.

And just on your CapEx and what you are seeing your customers do. When I heard Monish talk about seasonal slowdown with everybody trying to get caught up, do you actually think it's possible we don't have a normal seasonal slowdown as people try to execute on some of these backlogs and run more? And a little bit unrelated, what sort of projects did you have planned that are sliding to the right?

Yeah, good question Jeff. Listen, as we're trying to be helpful by giving you what we're seeing right now, is there a possibility customers continue to keep running 24/7 and that there's more production that comes out from them? Absolutely possible and as Mike mentioned, we will do whatever it takes to make sure that we keep serving our customers. Overall, I would still say this is a short-term phenomenon. Long-term, we're seeing good end-market trends. That's why you're seeing us continue to invest. On the CapEx piece, the areas where we're looking to keep investing are across all three buckets: growth, productivity, and sustainability. The cycle times to get CapEx raw material for these projects is just taking longer than we had originally thought, and that's why we had to adjust guidance down to $1.5 to $1.6 billion, but I would end by saying Jeff, we are not done with the quarter. This team knows how to fight; we are going to keep doing whatever it takes to keep serving our customers as long as demand is there. At the same time, the teams are furiously working to make sure that we mitigate some of the raw material pressure that we have, as well as keep investing for growth, productivity, and sustainability because we see the long term to be very bright where we can grow above the macro, get margin expansion and keep having strong cash.

Great, thanks for the color.

Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.

Hi, good morning. Maybe first question around China and Hong Kong demand. 3M has a very large presence in the region. The growth rate slowed to 3% in Q3, down from low double digits last quarter and low thirties in Q1. Do you think China and Hong Kong may be down in the fourth quarter and maybe describe how you see what's going on there as being idiosyncratic or a template for elsewhere as demand recovery matures?

Yes, Julian. If you step back and look at year-to-date, China is up mid-teens for us, which reflects strong growth through the year. As you pointed out, we saw 3% in the quarter. That was impacted by the same things we've been talking about: supply chain, logistics, and port closures. Those are impacting our business. As a reminder, our business in China manufactures most of what we sell in China in factories in China. We sell to customers — about 50% are exposed to exports and about 50% to the domestic market. The exports are probably one of the areas that have been hardest hit, down about 10% in the quarter. Looking forward, that's the expectation as we go into Q4, and that will be one of the impacts being hurt most by the supply chain challenges for us. Our focus in China has really been very much in line with what we've been talking about: we see market segments that are high-growth and we've been prioritizing investments there. We see those growth trends continuing. That's where we're focused — where we have the winning solutions. We do see opportunities across each of our businesses year-to-date, led by strong growth in our Home Care and Healthcare businesses in Q3 and we expect that to continue into Q4.

Julian, just to add to Mike's point on all the macro items you mentioned. On a year-over-year basis for the quarter at 3%, you also have to look at the comp from last year. We had very strong growth in China in Q3 of last year as China came out of the pandemic earlier, so their order patterns were higher in late June and into the third quarter. That's another reason you see a 3% quarter-over-quarter comparison.

That's helpful. Thank you. Maybe just a follow-up around Safety & Industrial margins. I understand supply chain constraints' impact. Could you provide color on the impact of legal costs and also as the respirator business moves slower sequentially? How should we think about those effects on margins and do you expect those to bleed into next year as well?

Yes, Julian. There are two items. On legal, the Combat Arms litigation costs show up in the CBG margins. As Mike mentioned, we are continuing to defend ourselves in that litigation. There's an acceleration in the fourth quarter; we will have five more of these trials for which we're going to prepare. Depending on how the litigation goes, you could see it bleed into 2022 because not all matters will be resolved by Q4 2021. On disposable respirators, as we've talked about, it depends on how the pandemic plays out. We felt Q1 was peak. We had mentioned that even in our last earnings call, we have seen revenue consistently come down sequentially. We came down nearly 6% in the respirator business in the third quarter. We see further declines of 75 to 125 basis points year-over-year or 25 to 75 basis points sequentially. Depending on where the pandemic goes, that will have an impact into 2022. But again, it's dynamic: in some pockets cases rise and demand goes up, in others demand comes down. We have capacity to ramp up to 2.5 billion respirators if needed, and the team has done a nice job of managing this environment. In certain cases we've temporarily shut manufacturing lines; in other cases we're managing inventory levels, but we'll be ready for any future demand event.

Great. Thank you.

Our next question comes from the line of Scott Davis with Millios Research. Please proceed with your question.

Good morning, everybody.

Hi, Scott.

The price increase in the quarter was a pretty dramatic quarter-to-quarter sequential change, but we've clearly seen pretty big step-ups in CPI and PPI. When you think about Q4 and ramp into 2022, do you continue with this aggressive ramp? Is there any mitigating factor that holds you back from getting price? I don't remember you guys being as far below CPI before. These are strange times. Some color on that ramp would be helpful. Thank you.

Sure, Scott. As I mentioned in my prepared remarks, you will see us continue to gain price in the fourth quarter. I know there have been a few questions around why it has taken us this long to get price. We follow a methodical approach of taking consistent price across geographies and working with our customers. In some cases we are working with contracts that have constraints and notification periods. We put a thoughtful approach to how we go after price increases. How it goes into 2022 will also depend on where we see inflation going in 2022 and beyond. Right now, we're comfortable with the price increases we've taken and we'll keep doing it as long as we need to. Our goal is to get to neutral, but it will highly depend upon what happens with inflation. We try to be thoughtful and methodical in how we approach customers — it's a partnership. You have different dynamics across businesses: spec-in OEM businesses, healthcare where it's easier to take price, industrial distributor-led businesses, and consumer businesses where we work with large retailers. Each has a different dynamic and we factor that in. You've seen progress in Q3 and we'll keep making progress in Q4 and beyond.

As a follow-up, the China comments were helpful. Can you talk about other major emerging markets and what you've seen as far as improvements or decrements over the quarter and outlook? Thank you.

Sure. As a reminder, since 2019 we've aligned our businesses around four go-to-market models globally. Those businesses execute global strategies locally and each has a view of regions. At a high level: Americas were up 7% in the quarter and low double digits year-to-date, with highest growth in Latin America and Canada up double digits across business groups. For the year, Americas are in a strong position. EMEA is growing high single digits for the year, 9%, and 4% in the quarter; we haven't seen as strong a rebound there but we are seeing recovery in Healthcare and Transportation & Electronics starting to help drive growth. Asia-Pacific has grown mid-teens year-to-date with double-digit growth across business groups. Japan is an improving area, trending up, and driven by Healthcare. We're seeing recovery of elective procedures around the world helping to drive improving growth.

Thanks, Scott.

Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning everyone.

Hi, Deane.

We've heard specifics on material cost inflation. I'd like to hear some color on labor costs and labor shortages. Mike highlighted initiatives for recruiting, and I'd imagine higher comp and benefits are among those. Is this more of a U.S.-centered headwind or how do labor costs and shortages look globally? Start there, please.

I would say it's a global item but more pronounced right now in the U.S. We are seeing higher costs driven by items Mike mentioned as well as the demand we have; we are spending more on overtime. We are also seeing labor-inflation embedded in outsourced manufacturing hard goods that we buy. But I want to recognize all the 3M employees who are tirelessly working to deliver for customers in this tough demand and supply environment. We're confident we'll get through this.

Do you have a year-over-year labor cost figure or specifics you can share?

I don't have a specific figure on hand; I can ask Bruce to follow up and give you an answer. But if you go back to the bridge in Q3, you can see there's 140 basis points of pressure due to organic volume and productivity. Some of that is driven by labor constraints — higher labor-related cost — as well as more changeovers because raw material has not been flowing properly.

Got it. As a follow-up on the Copaxone litigation, could you comment on the strength of your insurance coverage? For example, PFAS specifically might see headline settlements; we don't always have line of sight on insurance. Are there coverage limits and how should we frame the strength of coverage?

We do have insurance coverage and we are working with our various insurance providers through multiple dialogues. Some of these things take time. When we reach settlements, we'll disclose what is appropriate in our filings and updates.

Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question.

Good morning.

Hey, Andrew.

There's a bigger-picture question for Mike and maybe Monish. 3M has a fairly unique integrated model and a global internal supply chain. Do the current supply chain and shipping constraints give you an opportunity to re-evaluate how your internal supply chain is constructed?

Andrew, it's one of our fundamental strengths. As Monish mentioned, we're leveraging the strengths of our 3M model: local-for-local manufacturing and a regional strategy that has allowed us to be agile in responding to production changes. We have flexibility built into our operations and we're always evaluating how to better serve customers, improve our lean value streams, and take new strategies to improve cycle times. The model has served us well through the pandemic and continues to be a foundation as we look to improve operational efficiency and performance.

Thank you, Mike. Just a follow-up: on elective procedures, with falling COVID cases in the U.S., what's the most likely trajectory for procedures over the next six months?

We watch this closely. For the quarter, the industry ended up at the low end of the 90% to 95% range originally forecasted; September was a tougher month as many countries saw a spike in COVID cases. Our belief, and the industry's belief, is that volumes should stabilize in Q4 and hopefully get back to the 90% to 95% range as we head into the fourth quarter. The bigger question for 2022 is the timing of full recovery; many elective procedures are time-sensitive. It depends on hospital capacity and patient readiness. Hospitals are better equipped and more prepared now, so our hope is elective procedures come back to 2019 levels in 2022, though timing will vary by region. We would welcome the volume recovery when it happens.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.

Yes, thanks. Good morning, guys. I wanted to dig into what you're seeing from a supply chain perspective a bit more. If you could talk about any changes in the key bottlenecks versus last quarter's update, is there any sense that there are green shoots and that supply chain headwinds have peaked?

Nicole, it's a convergence of multiple factors. Strong demand will continue to put pressure on supply chains. We've seen labor shortages, pandemic-related production impacts, semiconductor shortages, and extreme weather events which interrupted raw material supply. Some raw material supply issues are getting better. We do expect supply chains to improve, but it's difficult to predict the duration of each factor and how they interact. We're carefully watching logistics congestion and whether we move back to more normal logistics patterns. That would be a good sign that broad supply chain disruptions are improving. We're optimistic and hopeful as we get into 2022 we'll see continued improvements.

Nicole, we also have a control tower that is constantly watching whether it's port congestion, airport shutdowns, or suppliers reporting raw material delays. That's why we have changes in our factories faster to keep other products moving so we can meet customer demand, which itself is variable right now. The control tower watches demand and adjusts supply as needed.

Got it. Thanks. For Q4, thinking about expectations by segment: we've discussed elective procedures in Healthcare and Safety & Industrial dynamics. Both Consumer and Transportation & Electronics face tougher comps in Q4. Is the expectation those businesses can still grow organically or is there a risk they could be down year-over-year?

Transportation & Electronics has been most impacted by auto and electronics due to semiconductor shortages; the IHS forecast for auto builds is down about 20% year-over-year. Electronics are also expected to be down year-over-year. Ashish and the team are fighting hard to serve customers. On Consumer, you're right about tough comps, but our Consumer platforms like Command and Filtrete have shown strong growth in the first nine months. Stationery and holiday-related products had a strong sell-in. Whether that continues is something we'll keep watching.

Got it. Thanks. I'll pass it on.

Our next question comes from the line of Steve Tusa with JP Morgan. Please proceed with your question.

Hi. Good morning.

Hi Steve.

So what is the underlying leverage this quarter if you back out price and costs? The restructuring costs and temporary costs mask things a little bit. If I back into it, it looks negative on revenue growth. Was underlying leverage positive this quarter on the 5% growth or negative because of the supply and inflation? Help me unpack that.

You're breaking up a little bit, Steve, but I think I got your question. It's hard to X everything out from restructuring and other items and then give you a pure leverage number. If you look at the bridge, we did see volume growth, but that was offset by productivity impacts from global supply chain issues, and increased litigation costs. Combined, those factors hurt us about 1.4 percentage points on margins. It's challenging to isolate a single underlying leverage number because our view is all-in: the reported results reflect the total environment rather than excluding items.

Right. Is there a reason why you wouldn't be able to convert more normally in 2022 if these things stabilize? Is this still a 30% to 40% incremental margin business?

I would say yes, Steve. Long term, it's a 30% to 40% leverage business. I don't see that changing. It will come down to how supply chain trends look in 2022. Many peers expect constraints to go into 2022, but long term we are confident we can grow above the macro, get margin expansion, and maintain strong cash generation. This is a short, uncertain period.

Appreciate it. Thanks.

Our next question comes from the line of John Walsh with Credit Suisse. Please proceed with your question.

Hi, good morning.

Hey John.

Hi John.

Maybe first on restructuring, you used the term 'on track.' I wanted to confirm the numbers. The prior program was $275 million in costs and $225 million of savings, and now you've taken it higher. How do we think about conversion on the savings and the payback on those new actions?

I'll reiterate: our program was going to cost somewhere between $250 to $300 million and benefits of somewhere between $200 and $250 million. Year-to-date we have spent $240 million against the $250 to $300 estimate and we are updating the total cost to $300 to $325 million; we expect the program actions to be initiated by the end of Q1 2022. On the benefit side, we set benefits of $200 to $250 million. We now see ourselves at the higher end of that range — between $225 and $250 million — with about half showing up in 2021 by the end of Q4 and the balance in 2022.

John, I just want to clarify one thing. Monish said year-to-date we've had $240 million of charges; just to be clear, that is program-to-date.

Yes, that's correct. And as you know, John, we don't remove restructuring charges from our results; they're included in the numbers we report.

Thanks for the extra details. Maybe as a follow-up, you mentioned polypropylene and other chemical supply issues. Can you help us understand what you're seeing in that part of the supply chain and how long the duration might be?

We're seeing inflation in resins like polypropylene and ethylene. These are not perfectly tied to crude oil but they were impacted by supply disruptions from weather events earlier this year and then increased demand from the pandemic. We saw a jump in prices in August and they came down a bit in September, but it's a demand-supply equation. The pressure started with Hurricane Ida and was amplified by global supply chain congestion. It's volatile and we'll continue to monitor how commodity prices evolve.

Great. Appreciate it.

Our next question comes from the line of Andrew Kaplowitz with Citigroup. Please proceed with your question.

Hey, good morning, guys.

Morning.

Maybe an update on how you're thinking about cash deployment. I understand priorities start with organic investments. At what point do you ramp up buybacks if the stock continues to languish and at what point might 3M be better equipped to do a larger deal again?

I'll reiterate our capital allocation priorities. First priority is organic investment — growth, productivity, and sustainability — which we believe is the best use of capital. We were going to spend $1.8 to $2 billion this year but adjusted to $1.5 to $1.6 billion given supply chain constraints. We also announced $1 billion for sustainability investments which is being spent over multiple years but front-end loaded. Dividend is a priority and we continue to return cash. Third priority is M&A; we are integrating Acelity and the team is doing a nice job. We have an active pipeline and we'll execute if we find targets that add shareholder value and where we can add value through our global capabilities. The last priority is share buybacks; you've seen $527 million in repurchases this year. Our net debt-to-EBITDA is about 1.3, which gives us financial strength and optionality. We'll deploy capital when it makes strategic sense.

Could you give more color on Healthcare margins? It seems Healthcare margin performance is relatively strong versus other segments. How much did the Acelity integration help and how are you thinking about margin trajectory there?

I look at Healthcare on an EBITDA basis. Year-to-date we're approximately 31% EBITDA for the Healthcare group. The team has done a nice job continuing to drive margin; we increased margins 70 basis points in the third quarter. Oral Care and the snapback in dental procedures has helped with volume and factory leverage. Excluding the disposable respirator decline, Medical Solutions grew nicely. Acelity was impacted in Q3 by low elective procedures but the integration is going well and we're finding synergies in cross-selling between Acelity's wound care and our existing portfolio. We're pleased with progress and will continue to focus on driving growth and margin.

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

Thanks for fitting me in. Maybe on the price-cost equation, it's rare to see the price-cost equation negative. Do you think we're at the peak of pain that a 140 basis point impact on price-cost represents? Also, you talked about some businesses going through contracts. What portion of your business is tougher to re-price in this environment?

We have made progress on price — from 10 basis points to 140 basis points. We said you'd see a ramp through the year because of our methodical approach to driving price across multiple geographies and channels. We should continue to see progress in Q4 as the price actions taken in Q3 gain traction. Inflation has been coming faster than expected and the team is working to drive price increases; the goal is to get to neutral but that depends on how inflation evolves. On contracts, price increases are handled by working with customers. We have contracts with many customers, in some cases with 90 to 120 days' notice, and some longer contracts. We also have spec-in businesses working with OEMs. It's hard to give one percentage for how much is tougher to re-price because it varies by day, business, and customer.

Got it. Thank you very much.

To wrap up, our team is performing well in a challenging environment, delivering broad-based growth, good margins, and strong cash flow. We will stay focused on managing supply chain constraints, investing in attractive market trends to drive our growth, and creating greater value for our customers and shareholders. Thank you for joining us.

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