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3M Co Earnings - Analysis & Highlights for Q4 2024
Overview
PositivesNegativesOutlook
- The company is confident in its ability to deliver in 2025, with organic sales growth expected to be in the range of 2 to 3%, adjusted EPS in the range of $7.60 to $7.90, and FCF conversion of approximately 100%.
- The company is pleased with the acceleration of new product introductions, which came in above expectations.
- The company expects EPS growth of $0.20 to $0.25 in Q1 due to good flow-through from volume, lower restructuring costs, TSA absorption, productivity, and growth investments.
- The company's EPS growth is anchored by margin expansion in a range of 130 to 190 bps, reflecting operational excellence.
- EMEA was down 1.3% due to the decline in auto builds and the weak industrial and manufacturing environment.
- The TEBG could be a little bit lighter than the other two, because of the PFAS stranded costs, a large part of it is in TEBG.
- The company expects its business in China to be slower in 2025 than it was in 2024, probably in the low-single-digit range is what the company expects for revenue for 3M in China.
- The company expects margins to be lower in Q4, seasonally, between Q3 and Q4 due to under-absorption as it clears out inventory.
- The company expects organic sales growth in the range of 2 to 3% for 2025.
- The company expects adjusted EPS in the range of $7.60 to $7.90.
- The company expects FCF conversion of approximately 100%.
- The company expects EPS growth of 4% to 8%, driven by operational performance.
- The company expects good margin expansion across all the three business groups.
Q&A Highlights from 3M Co Earnings Call Q4 2024
- Analyst asked about the bridge item of $0.70 to $1 and how it relates to restructuring investments and stranded costs.
- Anurag Maheshwari explained that the bridge item is composed of three factors: sales volume, lower restructuring costs, and net productivity. Sales volume creates significant volume leverage and incrementals, with a 2.5% volume growth at the midpoint of the guidance and 35% incrementals. Lower restructuring costs provide a $200 million tailwind into 2025. Net productivity, including PFAS stranded cost, growth investments, and overall net productivity through factories and SG&A, is about $150 million. The total margin improvement is $550 million, with FX offsetting $125 million, resulting in a midpoint of about 160 basis points of margin expansion.
- Anurag Maheshwari explained that the bridge item is composed of three factors: sales volume, lower restructuring costs, and net productivity. Sales volume creates significant volume leverage and incrementals, with a 2.5% volume growth at the midpoint of the guidance and 35% incrementals. Lower restructuring costs provide a $200 million tailwind into 2025. Net productivity, including PFAS stranded cost, growth investments, and overall net productivity through factories and SG&A, is about $150 million. The total margin improvement is $550 million, with FX offsetting $125 million, resulting in a midpoint of about 160 basis points of margin expansion.
- Analyst asked about the impact of 100% On-Time In-Full on the company's growth rate.
- William M. Brown acknowledged that running at 88% is not where the company needs to be, and they are aiming for the high-90s. They are doing better in Consumer and Transportation, but Safety and Industrial business is in the low-80s, causing them to lose business due to not meeting customer expectations. The company needs to improve its supply chain and exercise it better to meet customer demands and avoid losing sales.
- William M. Brown acknowledged that running at 88% is not where the company needs to be, and they are aiming for the high-90s. They are doing better in Consumer and Transportation, but Safety and Industrial business is in the low-80s, causing them to lose business due to not meeting customer expectations. The company needs to improve its supply chain and exercise it better to meet customer demands and avoid losing sales.
- Analyst asked about the 1.9% IPI forecast for 2025, which is lower than the company's expectations at the beginning of the year.
- William M. Brown, the company's CEO, explained that the 1.9% forecast is based on indicators such as auto build expectations, which have softened in the back half of 2024. He also mentioned that the company has done a bottoms-up review of its business and feels confident that 2% to 3% is the right place to be. He noted that the company's IPI is about 80% weighted to IPI and 20% to GDP, and the blended macro is around 2.1%. He also mentioned that the company is two to three weeks into the year and has a new administration in Washington, which could impact tariffs. He concluded by saying that the company feels good about 2% to 3% as the right place to start in 2025.
- William M. Brown, the company's CEO, explained that the 1.9% forecast is based on indicators such as auto build expectations, which have softened in the back half of 2024. He also mentioned that the company has done a bottoms-up review of its business and feels confident that 2% to 3% is the right place to be. He noted that the company's IPI is about 80% weighted to IPI and 20% to GDP, and the blended macro is around 2.1%. He also mentioned that the company is two to three weeks into the year and has a new administration in Washington, which could impact tariffs. He concluded by saying that the company feels good about 2% to 3% as the right place to start in 2025.
- Analyst asked about the increase in order rates in the industrial part of the portfolio, and whether it was related to pre-buying ahead of tariffs or a reflection of modest recovery in short-cycle markets.
- William M. Brown explained that the company did see order rates increase in the industrial part of the portfolio, but not in the consumer side. He noted that the order rates were higher than the organic growth rate in the quarter, which built up a small backlog. He also mentioned that the company is a shorter-cycle business and doesn't rely on backlog, but it's a positive indicator. He contrasted the current situation with Q4 of 2023, where there was a dramatic tail-off in orders towards the back end of December, which got the team shaken. He concluded by saying that the increase in order rates is a good indicator of modestly improvements in the industrial markets, but it's still early days.
- William M. Brown explained that the company did see order rates increase in the industrial part of the portfolio, but not in the consumer side. He noted that the order rates were higher than the organic growth rate in the quarter, which built up a small backlog. He also mentioned that the company is a shorter-cycle business and doesn't rely on backlog, but it's a positive indicator. He contrasted the current situation with Q4 of 2023, where there was a dramatic tail-off in orders towards the back end of December, which got the team shaken. He concluded by saying that the increase in order rates is a good indicator of modestly improvements in the industrial markets, but it's still early days.
- Analyst asked about the company's free cash flow conversion and the impact of working capital on its cash flow.
- The company had a good improvement in free cash flow conversion in 2024, with a 111% conversion rate. They improved the cash conversion cycle by 8 days, which contributed to the improved conversion rate. For 2025, the company aims to maintain a 100% conversion rate, as CapEx will be in line with depreciation. They plan to invest in growth and sustainability, but also offset any working capital impact by managing inventory. The goal is to get to a 75-day inventory turnaround, which will help offset the DSO impact.
- The company had a good improvement in free cash flow conversion in 2024, with a 111% conversion rate. They improved the cash conversion cycle by 8 days, which contributed to the improved conversion rate. For 2025, the company aims to maintain a 100% conversion rate, as CapEx will be in line with depreciation. They plan to invest in growth and sustainability, but also offset any working capital impact by managing inventory. The goal is to get to a 75-day inventory turnaround, which will help offset the DSO impact.
- Analyst asked about the sustainability of the company's high level of incrementals and the possibility of excess cash flow growth over earnings growth in the future.
- The company will provide a framework on the Investor Day to outline how sales growth and gross margin expansion will flow through to the bottom line. They expect cash flow to grow in excess of earnings growth over the next several years, driven by revenue growth and inventory management. The company aims to maintain a 100% conversion rate, but expects to exceed that rate over time as revenue grows and they continue to manage inventory.
- The company will provide a framework on the Investor Day to outline how sales growth and gross margin expansion will flow through to the bottom line. They expect cash flow to grow in excess of earnings growth over the next several years, driven by revenue growth and inventory management. The company aims to maintain a 100% conversion rate, but expects to exceed that rate over time as revenue grows and they continue to manage inventory.
- Analyst asked about the expected slowdown in China and the impact on 3M's revenue.
- William M. Brown explained that China is expected to slow down both from a GDP and IPI perspective, but the impact on 3M's revenue will depend on the forecasts and assumptions used. He noted that tariffs could have an effect on China's export business, and the company is closely monitoring the situation. He also mentioned that China is about 10% of 3M's revenue globally, and it grew by 10% in 2023, with half of the business being export and the other half being domestic. The company expects its business in China to be slower in 2025 than it was in 2024, with revenue growth expected to be in the low-single-digit range.
- William M. Brown explained that China is expected to slow down both from a GDP and IPI perspective, but the impact on 3M's revenue will depend on the forecasts and assumptions used. He noted that tariffs could have an effect on China's export business, and the company is closely monitoring the situation. He also mentioned that China is about 10% of 3M's revenue globally, and it grew by 10% in 2023, with half of the business being export and the other half being domestic. The company expects its business in China to be slower in 2025 than it was in 2024, with revenue growth expected to be in the low-single-digit range.
- Analyst asked about the company's approach to ramping up innovation and its long-standing policy of providing 15% of unbudgeted time for senior scientists.
- William M. Brown stated that 15% of time is a hallmark of the company's culture, and it gives employees the opportunity to step back and think and ponder. He mentioned that there are plenty of ideas and concepts for where the company can innovate, and the pipeline is full. The focus is on unleashing the energy and motivation of the innovation teams, eliminating bottlenecks in processes, and investing more in R&D for lab equipment and prototype equipment. The company is also working to get closer to innovation partners and create a strategic relationship with them. The ultimate goal is to grow faster than the market, gain share, and drive margin expansion by offering better products than the competition.
- William M. Brown stated that 15% of time is a hallmark of the company's culture, and it gives employees the opportunity to step back and think and ponder. He mentioned that there are plenty of ideas and concepts for where the company can innovate, and the pipeline is full. The focus is on unleashing the energy and motivation of the innovation teams, eliminating bottlenecks in processes, and investing more in R&D for lab equipment and prototype equipment. The company is also working to get closer to innovation partners and create a strategic relationship with them. The ultimate goal is to grow faster than the market, gain share, and drive margin expansion by offering better products than the competition.
- Analyst asked about the plan for reducing inventory days and its impact on service levels.
- The company is monitoring the inventory reduction plan closely and is prioritizing OTIF (on-time in-full delivery) over inventory. The company believes that there are opportunities to eliminate waste in inventory and that prioritizing OTIF will allow them to achieve their goal of 75 days of inventory and over 90% OTIF. The company acknowledges that the reduction in inventory days in Q4 did not have a linear impact on OTIF, but they are committed to achieving their goals and will prioritize OTIF over inventory.
- The company is monitoring the inventory reduction plan closely and is prioritizing OTIF (on-time in-full delivery) over inventory. The company believes that there are opportunities to eliminate waste in inventory and that prioritizing OTIF will allow them to achieve their goal of 75 days of inventory and over 90% OTIF. The company acknowledges that the reduction in inventory days in Q4 did not have a linear impact on OTIF, but they are committed to achieving their goals and will prioritize OTIF over inventory.
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