MMM - Earnings call transcript Q1 2019

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Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 3M First 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. [Operator Instructions] As a reminder, this conference is being recorded Thursday, April 25, 2019. to of call Investor like Jermeland, to now President Vice Relations would turn over the Bruce I at XM.

Bruce Jermeland

good our at accompanying review. are and questions. earnings Nick and quarter Gangestad, our release comments Executive you morning under make Officer. today’s to Nick Welcome this are Thank Quarterly and Mike turn Financial our Officer, XXXX that and business Roman, call some With then Mike today Earnings. will website Chief Please to we’ll me note Investor XM’s Chief everyone. posted first the heading, Slide on take Xm.com slide presentation Relations your Please and X. formal

you the Before Slide Please October calendars mark XX. your earnings forward-looking X. a XX, we me for to moment statement and begin, take remind on read to calls let upcoming on July

that make today’s of Xa financial performance predictive Form of our factors to certain are statements we that These from could the future of cause certain our uncertainties. important results. and that most differ call, statements on During our XM’s Item and lists and some views recent events actual XX-K based predictions. assumptions conference about most results to risks will current reflect future are subject risk expectations

Mike? non-GAAP measures hand Slide significant and I’ll we Finally, of impact the certain of be X, presentation, litigation-related presentation note to Mike. In please that references which throughout press Jobs appendix off the exclude charges. turn today’s the to it Tax in and will to particular Act making be Please Reconciliations today’s non-GAAP and measures can financial found measures. the release. of and Cuts

Michael Roman

joining everyone you for Bruce. and Good us. morning Thank you, thank

a the The disappointing start XM. to first quarter for year was

ourselves. in to challenges are and operational as for reduce slowing face in some drive end both expectations I costs and and a number actions markets, fell manage growth key flow, we will taking improve margins, aggressive of impacted of through our we out execution short our have markets. the Today cash lay several to end of which continued We productivity, we

discussed of will operational will growth quarter litigation affected Electronics, I turn our groups numbers. to in provide the and month and I provide our the minus efficiency. quarter. growth saw year. also addition, last In that update that we on softness market have Automotive of updated discuss lower greater will issues guidance results. X full business our We company-wide which realignment enable announced Organic affect summary an the for slide than And we two a China, for throughout Please X%, anticipated. was end we which first even

related charges will quarter, XXX litigation channel significant negatively and adjusted to also posted several excludes my adjustments, with later in were With down PFAS billion. basis earnings respect of XX% EPS, remarks. discuss share I year-over-year. We respirators, Underlying impacted which in margins adjusted This to the down of which faced of the $X.X we income per businesses. $X.XX our points inventory XX%

due Our combination of earnings to shortfall things. and a was margin two

Industrial the in and weak and growth our States. within the organic United businesses First quarter Pacific second especially the negative in related productivity, Asia

Please sufficient As faced as the slide we we in offset were turn the those quarter softening to took broad-based the actions markets X. progressed. not to

on the this we slide quickly challenges We are our underway. face the and to are and address moving performance strengthen actions

the enterprise us million, with this underperforming areas through positions, are are but approximately functions will pre-tax move of charge reducing $XXX approximately more Reductions X,XXX stronger both groups, to emphasis and a expect never will $XXX on forward. corporate savings all annual to On actions. year. structure are involuntary Job basis voluntary of competitive approximately a million and business make necessary geographies easy, we we $XXX million we portfolio. in we XXXX, million with as they First, and and span reductions $XXX a take and of

cash restructuring, driving are Beyond we accelerating actions reducing indirect on flow also by inventory and costs. levels

we short our are to execute value success we we focused shareholders of remain playbook a term programs. our Please market as for recover. on us slowdowns it positioning will through and customers know these Importantly, for the while our to priority markets will us is strong how turn slide our long-term growth balancing investments X. growth, confident and with and and which maximize the related our pressures we XM. we is and why we in actions, work as enable development This includes take research actions continue That growth to

and mentioned in all a As address West our increased respiratory resulted per litigation million $XXX related PFAS and by to share. significant two impacted total $XXX resolving current matters We quarter our I in to $X.XX respirators of lawsuits Kentucky the earlier, of mine reserve Virginia. expected: or dust million coal costs charge and and

to in This PFAS million certain litigation States product any claims include and We of related PFAS. not $XXX reserve and United the XM five does the in cover and including a established facilities, matters two of three also at to reserve related disposal manufacture to environmental PFAS Europe.

regulations with We continue to other regulatory of EPA bodies these work chemistries. closely to and science-based the support

serve update the turn additional our in upcoming an in drinking will ensure XXXX We the communities for can filing. also slide with details on confidence to water, to available our they be continue guidance. X their quality to XX-Q of work have we Please

conditions positive we slower macroeconomic year. growth on anticipated the certain than markets global remain While going into been environment, have the in

to the minus range X%. the X% for to one As to X%, of prior a result, today organic updating against range we top plus one are growth our

per we capital XX$ includes against the of earnings to to We anticipate prior impact restructuring addition, versus previous share on return expect range of the XX% to adjusted $XX.XX. which XX%. the invested In $X.XX of to range XX% $XX.XX of a $X.XX now

takes to details of make We some comments you back flow Nick come free XX% Nick cash continue group to business the anticipate quarter. new I'll rate to on through of a the our alignment after conversion XXX%.

Nicholas Gangestad

you, XXX selling down reduced basis Thank sales basis quarter, X.X% slide impact the X. up net morning, and XX Please basis everyone. in declined turn acquisitions XX by divestitures and with points. of points. Organic and points Mike volumes good to first The sales prices

While points and low-single foreign and All-in, grew point headwind quarter to sales the an percentage decreased while X.X U.S. was Care declined. Health additional in sales. translation currency and last Industrial, basis dollars Electronics first Geographically year. versus and declined Safety X% Graphics XX Energy organically, digits, Consumer U.S.

while X%, Pacific Electronics the Organic and P&L Electronics XX% quarter Health grew high the Company-wide and Kong and operating positive an growth against increased margins down Care X.X% X% Consumer Energy down by declined growth Electronics XX first $X.X impacted markets. in XX.X%. Asia Automotive single-digit QX, X% Industrial, was Japan $X.X highlights. with and the and in quarter. a declined. operating year ago. in was delivered growth slide of excluding X%. organically America/Canada in first sales organic quarter, EMEA China, quarter adjusted to Latin organically slowdown in comparison for Please the China/Hong adjusted billion or billion, each were of turn organic income

basis within foreign XX organic most basis Pacific Asia which combined year-on-year. driven Acquisitions this performance United finally, points points, see prices volume quarter in of side margin Higher than XXX our in points And were right-hand the and our by closed material in States. first margins. first raw margins Productivity of impacts the reduced our of February. margins the Declines margins brought quarter. and and down continued basis an basis the can challenges related inflation primarily more additional components weak businesses in acquisition contributing hedging divestitures XX to pronounced currency productivity increased you selling by by of slide, to M*Modal On offset points. XX Industrial net

to for share. a earnings at slide turn now XX Let's look closer per

First quarter XX% adjusted share, $X.XX were earnings down year-over-year. per

our organic impacted As Most a in This quarter share and versus productivity combined outlook see, last in line first factors earnings and per $X.XX our reduced expectations. negative year. quarter by factors earnings rest from first Acquisitions number $X.XX by quarter. EPS are our January. in growth original weak was share per you The notably with the earnings. different of reduced divestitures of significantly,

the was $X.XX headwind currency an net in of hedging Foreign additional quarter. share per

our And XX for slide shares outstanding finally, to versus which year, diluted reduced at QX adding underlying turn last year-on-year, look rate As average increased X% $X.XX flow $by cash to we expected, Please $X.XX. a earnings reduced QX per earnings. our tax share performance.

the million, which point First of a quarter was free benefit XX charges. flow percentage with litigation-related cash free cash rate $XXX from includes conversion flow a XX%,

were quarter $XXX up million, year-on-year. expenditures capital million $XX First

repurchases $XXX first Gross in year, to of the $X.X $X.X quarter now share billion. prior shareholders For We anticipate X%, range resulting by million versus repurchases the in increased in to $X.X quarter. billion X.X the dividends share we dividend CapEx our during range a to full cash full business of quarter, investments QX. summarize billion per paid million billion of in group where be $XXX were year to note will $X in the this to in expect details presentation. and the additional of performance the continue the Please performance can range XX, business found $X for Please we slide turn billion. I billion group to appendix

trends continued Graphics, in Energy we primarily along impacted earlier, These and market and adjustments. Industrial, and Safety soft with to channel As Electronics inventory the and end China, throughout mentioned our Automotive see quarter trends businesses. Electronics,

year. organic slowdown broad-based of portfolio, sales business was an to across X.X% the growth pronounced saw a This business. slow its our automotive organic Industrial in Our of Industrial within most most start decline posting

with X% quarter, Latin geographic points, a and note, X% America/Canada continued growth car down increases the and and XXX by growth advanced high On along builds, margins first led business declines first Pacific declined X% basis particularly A weak declined quarter strong in Asia automotive channel were to light China. deliver productivity. impacted positive year-on-year, by X%. down X% organic was in while single XX%, truck inventory reductions, was Our organic basis EMEA, global by digits. Industrial's in Industrial's a in OEM up and decline quarter the U.S. sales operating impacted both materials

solid sales X% organically up while each Geographically, each X%. to X% the against and growth three last organic Safety Moving Personal organically, quarter in Graphics, Latin other was businesses and up were QX, to led comparison. flat of EMEA, continued Safety declined. America/Canada year's first by deliver results

margin U.S. with The included basis while negative growth Safety productivity. Pacific Graphics X%. operating slow flat, decline point gain on XX.X%, basis a was along were XXX XXX divestiture down margins a points. last a impact year-on-year quarter weak down and Asia operating was year, and the from first

up Holding negatively up growth X% impacted X% systems by low-single information by Next digits, quarter, our drug overall solutions organically nearly in On was Health continued The our led health were in in Asia first Care which the mid-single high with factory up inventory both increase in XX% operating followed delivery food the related and declined a was the basis, and softness each U.S., Energy while Health X business, single channel negative digits nearly up care Care's X%. by digits acquisition first automation, businesses up impacted soft up market X%. organic demand basis X%, the U.S. margins Organic growth oral led solutions. Electronics impact while declined growth quarter. percentage business, while declined the the first Pacific X%, down Electronics first side safety, Energy Care and business QX down which organically Care with systems in was led were drug the growth to organically. impacted grew Health Consumer was back EMEA of X%, Health by delivery. the basis, included M*Modal. medical organic by related and way points. the business a a declines sales along geographic organic was Electronics Pacific with XXX X% by in a Electronics On in XX.X% growth from X% Shifting quarter. adjustments. quarter were The in of point the end material display geographic Electronics Asia material

First quarter points XXX were down XX.X%, operating basis margins year-over-year.

for growth home care improvement up consumer care organic Sales while business, Consumer health business our in quarter and first the organically, grew declined. home X% Lastly, was X%.

discuss slide with declined quarter. operating lower for command first X% declined review a Pacific solutions. increase and the respiratory by our brands. hand geographically, Filtrete particular I'll up at the portfolio this Please first was in continued to Consumer results. realignment. over our adjust were EMEA U.S., Asia as organic our to Consumer to in we growth by wraps XX.X% strength impacted X% Looking turn of it X% region in group led the to demand Consumer's in back and quarter That XX, business Mike margins Mike? and

Michael Roman

and same time to long taking X, I near-term and streamline models to challenges. will achieve markets. will value maximize enable order the and At we This from and of of Industrial, us XM are are The align that the five-year to continuing Thank four you, XXX the business organization Effective to Electronics, out Nick. groups businesses help across part to the Transportation as customers and build November portfolio, Health we basis new XXX include expansion Earlier our also out are realignment customers our in further groups for our accelerate address actions progress. greater laid the better business us better serve Consumer. organized go-to-market Safety and take It and margin we growth, plan. and moved five our transformation Care, laid our to April run. we last of points to advantage their around

in to quarter. structure business XX, the and We this will take guidance will results slide our for under second groups. XXXX new I the you turn start Please reporting through

disappointing, our and we minus now up We to expect is to X%, plus a led to recent at strong Health making organic in Thank future. of our the with minus at by questions. X%. XM expected of remarks. flat. Safety is X% to summary, remains your And range & X% by X%, range while in accelerate to wraps changes followed growth be Consumer with stronger you. prepared are & business necessary Transportation Organic the In Industrial take That model Electronics X% Care performance growth to a into we X% will our

Operator

our with comes question proceed [Operator line from Instructions] of the Obin Bank America. your of question. Andrew of Please first And

Andrew Obin

Good morning, guys.

Michael Roman

Andrew. Morning,

Andrew Obin

margins. a Just question on

think time I sort you operating last was ‘XX impact revenue was up. the I kind lot actually look a as of ‘XX and think margins ‘XX had sort of model I XQ of this XQ less at decline, XQ leverage and my in went the

the to had gross the surprised ‘XX, XQ as you. I that odd? again what also, looking just XQ or what me so model, once decline look I last ’XX happened gross I'm trying you understand in think the Thank that’s the with at So specifically and time margin quarter my at margins was very margin, low

Michael Roman

we detailed start I'll ask margin one Maybe more growth by two to Automotive talked about Thank us I’ll of and the as led which are you, China, for Andrew. the l Nick growth is was and that, give The businesses organic comments. drivers and gross some globally. organic Electronics, strong

growth didn't for of it. one So our the And production drove that those came factors. channel, but our adjust the costs in we the markets, of along adjustments challenges And that took levels then get to the contributing was productivity in with in us actions plants. in that that there, and slowing we ahead

that a that those were slowing driven of big of markets those So couple majority really the the off slowing of contributor from end

Nicholas Gangestad

to Yes. Andrew, add a things couple there. in

seeing lower factories. out quarter coming we our As the and going through of and the volumes output we adjusted of course were

to and compared seeing Unfortunately we our pull in were spending X%. proportionately. factories X% the output did first down quarter, down quarter first the not for between the year, we So last

on of about Our our spending a our margins, negative a had Asia X% Also impact the impact Pacific declines outsized higher make time. quarter. margin. you lower we there on - And factories was margin during the where the that of look had in our was geographic down an if margins impact that a at we in saw bit on this in mix, and that

Michael Roman

we we in would to were aggressively I seeing. speech, didn't my Andrew, enough as I add, also - we respond said what

with quarter. the in And we're came as aggressively are… why curve that That's the actions behind stepping we we the so we’re through

Andrew Obin

I we the We top were customer-facing you Asia us rolling are productivity ERP was surprised America growth ask continued sort Let you - the much North the on you - you think Japan I give telegraphed, in factories manufacturing is but maybe you. wondering, question the times. key ERP me. well multiple and factories fairly line also little Thank bit, Are another sort that finished note just disruptive? surprised your rolling an weak did floor, rollout. that update? on And you a America, decline just I and maybe in surprised of it's how know Can American way. was of the out And me North North

Michael Roman

pleased Andrew, to to at level our just the success U.S., every actually It's can what on very improving the we we've has the customers. to deliver deployed we've the performance update point. been this in and had the not around in businesses with the and ERP, that and in our it month factory deployment been

look for & business, going the at aftermarket Safety was and been the the well growth led some organic you OEM growth, So U.S. in automotive that's and that's Industrial us. pockets the When been something Graphics. by in businesses. are U.S., - There really

of what in And growth of There in as the other get with background are gives didn't part our the important in that that and so of There in delivery you contributed some slowing is U.S. drug I the are productivity the of channel it, we kind the the had production also comments to same was that. Care we saw and saw But U.S. pockets. reactions, some U.S. an Health and ahead pockets that levels our some

Andrew Obin

you. thank Okay,

Operator

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

Joe Ritchie

Thanks. everyone. Good morning,

Michael Roman

Good morning, Joe.

Joe Ritchie

plus comps that year year. – you start just get of towards start just I'm slower So guess, we as growth year. exited I'm progress to how range organic context thinking trends year. towards guide obviously of the tougher that I'm actually any guys the to curious about guidance for trying the quarter? minus the I'm we the year? some through end put progress thinking the just just for I'm around did to higher the we know end as like better as one two, the I as get get low the through I about, like

Nicholas Gangestad

Yes.

it markets led end action. that the all to year an being that happens we channel called start. out of up that. something some the I'll Joe is quickly. So reaction maybe doesn't by That That The was – and pretty

So as go year. we necessarily don't we through contributor that see be a the

some being markets. the we the we strong. year. with we of Graphics, year in talked for Health in and the us delivery challenge, see bottom improvements of sellout we and a – drug there. through for and Care their some half about those in do Safety And And a that first gets headwind see have remain we the at have better as Consumers basically end the range go pockets of outlook couple

Our personnel to safety the to business a start year. is off strong

low- so mid-single And to digits we to digits that expect up or and mid-single continue.

The and pockets project to year. particular through businesses are those more expect we we other the as delays go in improve

So where each of a fits at and the we businesses of really that then gave we QX the those taking it's those with look see and year. the rest to guidance

Michael Roman

second third a easiest we primarily related our consistent had comp as comp what our year to what on talked and timing Joe our the by quarter And about go the driven toughest U.S. as saying with ago live. comp been we've that's far the issue quarter revenue and we ERP as see of as

the year growth saw quarter almost X% second third quarter. So X.X% we followed in last in organic by

the see first slightly us than year. two half are the we we comp see half the in comps All-in differentiating. to tougher saw the as – a where the continue of we we second for saw those So and the

Joe Ritchie

helpful. That's the a if Got margins follow And could I up just second. just Okay. it. for on

into And hallmark were look and in a growth response lower have I responded go that a cost-out want guys history bit as at your the it gross you the level. just it's you factory for perspective historically the executed. a environment where from how the time taking margins this to gross when year-over-year. to quarter. referred just hard because Nick little me bit of a hasn't you little a understand to your better part of to much It's see back down So for margins at

Nicholas Gangestad

Yes Joe.

charge margin think I need In everyone. sure with GAAP thing to one PFAS. with Just clear is the basis related make gross is on I and $XXX a million to you

numbers that your all Andrew margin. seeing other GAAP you're So on And that there in not go A may results, that back recorded is the earlier in to our hit gross question SG& that XXX too. of of

still primarily in margin when maybe you're seeing. out looking about our points. decline at So talked by one about margin Pulling in volumes declines said, the thing spending. that's what percentage, declines our saw lower I not results we XXX with the gross PFAS at underlying GAAP are saw basis gross That offset the driven just charge we you're commensurate

Joe Ritchie

that from with comes proceed for Thanks Our clarification. your next Please the line of Operator Andrew Kaplowitz Okay. question of question. Citi.

Andrew Kaplowitz

guys. morning, Hey, good

Michael Roman

Good morning, Andy.

Andrew Kaplowitz

issue a talked was Nick, back you Asia industrial Pacific. and over issue, the struggled America consistently in time we North productivity XM big is a grow mentioned about segment in to go productivity has where worse margin we Industrial obviously If has and QX. been in

your So improvement about but mentioned in to talk you've Europe improve know America? mean about you an helping, of and that margin the forward. you expectation where North confidence the could helping can in big talk quarters, talked I productivity America especially it's you North it's you going about see. transformation can I hard

Nicholas Gangestad

Yes.

the is when automotive more we end that and getting that around of we're the first in -- So especially broad things that U.S. Industrial and it's line of markets OEM, do that the net the than our the are aggressive getting U.S. productivity. at a support on world one business those And a of in in business. terms we're and there's But in the top we Asia. focused growth out in around particular especially are of we it because exporter automotive on. look see challenged Andy, productivity is in couple you aftermarket And with

by as we're softness broader markets And in so a those impacted well.

the but challenge bigger So broadly. particular in it's more in Industrial in U.S. productivity a

the is things Business it's ahead all we're those. so a that of And greater that for big one levers And about then that, they're targeting speak. focused talked of advantage actions getting And taking Transformation on other curve the value. the creating to we've the of so

and improving U.S. out good including of the we're the what more there continue that in since deployed margins in broadly the But good we with has plants. ERP Now and live, haven't we've and and benefits we the the year in see progress go last into made to of go deployment doing Canada EMEA. part Transformation. industrial of Business And value coming in our been because live

that's end be in as lever ahead. impact term an ahead the of markets going slowing is the channel of So to we and the important But move the near getting and productivity line. getting our

Andrew Kaplowitz

Mike. about what the shifting like about cadence to can cuts our Okay China in or help that maybe markets that performance And an in business been gears. increase tax quarter could places you the electronics. there's April. like seen more Theoretically, your the given China enthusiasm auto of Can talk through you've talked in and extent you

So over any in few two? weeks your of any have you seen a improvements or month the short or cycle businesses last

Nicholas Gangestad

went the first through led quarter the talked a certainly and China that we of as markets, the really, right that through went through by those about bit end the it And quarter. slowing we Andy, quarter we saw as Yes, automotive, electronics. continued

all are haven't areas, the is about. outlook the to better. the we've listen been we think economic that that. you gets seen I When ones is, those those in and projections projections talking – There So the

the think, I into we into quarter, on further basically out with market we'll get year the answer see But is April as Our for what – move second we'll quarter. guidance. improvement our those an we're markets, total seeing laying track in a

Andrew Kaplowitz

Thanks, guys.

Nicholas Gangestad

Thanks, Andy.

Operator

John Our question proceed the Haskett. next Gordon with your of from Inch comes of line question. Please

John Inch

Thank you. Good morning, everybody.

Michael Roman

morning, Good John.

John Inch

the to – I'm a a to bottoming. But understand, you morning, talking macro. opened electronics that future? of degree apart not been I hedge much auto question, things are implicitly X,XXX hopeful and improvement you, be on degree call were so in of even a positive the forth, foreseeable fall of that don't are there action to the an China signaling Why Or before to markets to there are Good sort actually Mike, is is and were would should have? and now? you in maybe guys. trying the going something remain have of this about think you China were just back global maybe, catch-up you take right, going that positive you they from Asia, of, mean, evidence, you you doing Andy's kind kind

Michael Roman

we an growth a point expectation your be broader about that in a there so of terms macro macro is is In into bit the gets But in markets have global the have John, maybe better we through that industrial global as view global people will certainly the the they a talking slower second it There production and we're Yes. about, in year right. slowed. been particular. that get the as half. come

action markets lead position this we realign realign playbook. sure, – taking If the is and of a of working I When QX. end degree take slowdown, come realigning realigning we're ourselves. our we been it's operations, our some end the good in kind QX out. what we've for restructuring costs, think, through we what as we're we our actions a ourselves recover, The then to we to through see a in of, we is with we see or the market targeted and

what this with then us lead we today, and of really we in it. on order positions I do So what us to think need to aligns our to out deliver commitments

second well these taking. with in lead see the we we'll even that we're positioned be half, And improvement so, actions if that out, to do

John Inch

that other you... words, don't back Is people what hire have turn? to you things if In

Michael Roman

of we advantage taking that. aligning go to ourselves some as think, leverage that to of we're we're I forward, the doing – things No, with transformation business

And growth think going do need it for we're very never we do And and question in invest taking position on programs this. we've it's opportunities what and – continue growth So the R&D very into around something to term about that And R&D you're we this do priority and is near to long to think really term. to broadly. ourselves growth easy to is got I more – am hard personally, asking about.

we what what this through. we making sure restructuring and to So to have targeted we're to manage make realignment

people will so, we course. future? in of hire And Yes, the to need

opportunities we realign go statements. we we've got the in we see we'll will, invest. to on As ready and to the to term, those be ourselves deliver forward But where near

John Inch

Got it. PFAS. I want to gears shift to

If years you couple be definitely rising. lot of out. to past the reasons seems the litigation that thrown over a K, go by There's people have the potentially of

want insurance First, these you costs. to confirm to context have litigation I any not pay of for that do any in

and is what XXX out then I are sense bundle us going Minnesota a thing And concurrently? with to to going you paid just was right? litigate exactly think you of cash, dealing and second is could for to Or your playbook this the the you try Are of just deal this isn't I that from up give this? guys that two be asbestos unfortunately where it's -- I you helpful. it? why will could just we potentially don't bankrupting but situation And with dozens an ended anything companies. round U.S. to of in right to that say stand know think hard you're

Nicholas Gangestad

-- those discussions insurance insurance think That's I'll happen In to for and the are for have for insurance John in start take broader that play with we regarding short-term front. we for and talking that that's to to going claim such have coverage look insurance on regards that for John. time we carriers out, something matters. question. in But don't over that PFAS, I'll it we and your do Hey, environmental coverage just then Mike to to pass places about where for as

Michael Roman

related Yes. just And difficult and we the ourselves all I able outcome to And to with matters. is activity. what the disposal. quarter our do litigation were it's know And is to were timing say defendant to us depending litigation. environmental resolve direct in this help I of the around particular the establish would manufacturing And a litigation. regarding of any reserve that litigation that really reserves John we actively this are mean, litigation

that litigation I product have As product comments, is view where my it's estimable. And in is defending litigation. against PFAS probable this ourselves the not when not other related said estimable, an at the and covering in probable point it were manufacturing any you

and as update will we as clarity so get on And some appropriate that. we

managing. we're of are aspects two there it it's that So really different there --

John Inch

be even on that that something fair to say fair It is to Is potentially the any or is stops articulate looks out a potentially like that. don't this EPA years. like guidelines come with regulations milestone it for event thing? going more Would a see there. going or I

Michael Roman

EPA matters something And Yes, with with being a to We the plan the a what we'll EPA. foundation we approach go the management or support supportive here work work that regulations we're of are working a forward for there. with and actually we regulatory it federal on is where that's announced I that like with approach said, them and are up state-by-state this of and to approach. and patch course, our bodies litigation end of continue continue other about come. EPA, be we on for will the that don't of different appropriate. But we'll kind as help you is part so evolving to update and talked

John Inch

Got it. Thanks much. Appreciate very it.

Operator

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

Julian Mitchell

Hi, good morning.

Michael Roman

morning, Good Julian.

Julian Mitchell

Mike. Maybe question for Morning. a first

months to XM. trying last about few just So think the at

had restructuring You today and goals. re-segmentation a in with recently, another some meeting sort more alongside you outlook then Then had of guidance medium-term November the reduction.

I the what we guidance Then the segments. case understand has R&D restructuring heard else trying to that I'm same But changed. linked. changed steady-state a it the high So high November like that meeting sounded being where segments the of understand closely obviously, since very and reduction, CapEx,

wavering Now, morning. be the the seems CapEx this commitment CapEx to per cut

and managing and changed in broadly have So, thoughts maybe through the us your organizing just few talk how running XM past months. own more about

Michael Roman

for us I'll would implement in XXX best improvements that. But our to I it as that to realignment all, leverage to business of expectations talked business of part of XXX that at was our ready points margin. to it. announce point. There even -- help And about, is I the the get transformation that Investor back group We were customers. end-to-end to part will weren't do really go we of thinking of it's us was November connection say it our in set to our And things of and our it and streamline drive up part basis Sure. Day. that ready first to have

So, term strategy. of it's longer part the

some our as go in severe came we to through the in, in As -- certainly earnings of year, we we even came quarter as seeing in key walk call we're the slowing end earnings we acknowledge we call got the that as It more into -- January. those QX markets.

we way additional we're that the February, As and we we we things. curve. were doing adjust through And went slowing are were taking saw we We didn't seeing, address and things way. been talking but slowing about We've it. ahead of to get along along actions all the the doing

now. And do other to so the that the is actions restructuring taking we're and really

I So, that these very there set markets. in kind how had we to ahead. it. got know execute about strong. became and the we're part and talked as that seeing step confident But that into line would of us we XM rallying in again model rooted near-term end the in go five-year I'm we be it's will and around -- what still of plan We've we're our get R&D of strategies we as still and And through team We'll to much with is is commitment it it The that the we of is say to we execute that next investments into in growth doing I go say, and new, actions the step days would this that. couple to playbook. and

Julian Mitchell

M*Modal Should divestments? on any as the any that things we you let's is we portfolio. maybe then case Or door closed? think the of That's helpful. and question more the to pruning internal make reduction view some think next second around expect side it ledger, fix, my needed? M&A re-segmentation Does first is the thoughts are those that on acquisitions fix to other opening more maybe should has of year? of about now a the And more there maybe updated portfolio And guidance the

Michael Roman

first start I'll Organic do. priority. as is always here our growth I Julian

said flexibility we maintain But continue through still go So, this as restructuring. enterprise. to of to long-term as value I we're we even focus investments there the going to invest the in

that. our And for as attractive that the future. capabilities make And so in most We driver our strong still fundamental in acquisitions built fit executing see fit us to acquisitions value have a been strengths that that we've markets. we with

into And strategy going compelling value. We're that so at looking capabilities acquisitions create continue we to leverage and step acquisitions. that have to we that continue stay active to to

side, at manage On of the And been we'll do the we're how three we on do we really regardless how last we're as we'll we've portfolio. for always ongoing focused over we do XXXX. do well. that we parts It maximize a years, looking go the divestiture maximize size on the how actively to our we've actively that with it's process of portfolio. managing since continue a businesses looking and around portfolio case strengths at was strengthened with value we an as and forward. It's value it be fit company the fundamental and and creating our And

Julian Mitchell

Great. Thank you.

Operator

comes question the with Pokrzywinski of proceed Please next question. Stanley. Josh Our of from line Morgan your

Josh Pokrzywinski

Hi. guys. Good morning,

Michael Roman

Good morning, Josh.

Josh Pokrzywinski

the have Just on you in you inventory cost a and do for on the sense Mike might quarter? have Nick, comment that what destocking,

Nicholas Gangestad

we quarter for built Josh, the still so inventory.

Josh Pokrzywinski

sorry. mean, customer's your I'm I destocking.

Nicholas Gangestad

sorry. I'm

revenue very impacted I basis think have it easily points. by our XXX total could

Josh Pokrzywinski

Got That's helpful. it.

Michael Roman

channel. particular our significant The we color in was Josh just one impact slowdown saw a automotive to China in from too. where little growth case give you

through where you it's chain. value a a everything accompanied in see inventory, slowdown particular change electronics from finished or automotive And in with so like market, the a goods back

those – clearly that's cases. in that so a And is visible

Josh Pokrzywinski

four. to a maybe question is some other settlement. And why of answer? an the than hey Or a digestible But it it. obvious XXX reason folks with lot and non-attorney Got of there's is litigation, just it then Minnesota four on in one more differences? kind lot XXX that as in be this earlier depends not a other of given you the myself. already to times of Is might example have an easily a PFAS adding fight pivoting just there of Is a there it kind back

Michael Roman

footprint manufacture that's sites I sites our is, one Well, times – those different that this guess, it can and We've probable face in of – the math But estimable take – as of now those from it's so and with not is of multiplying in it. for we if five part you really reserve. – this simply simple five. not litigation that we every define

So have way across – that. that estimable what is is we had determine our the

Josh Pokrzywinski

expect re-segmentation. same with And of Got one I some Thanks this of the it. that. the side as ERP last But just quite on of then restructuring is was understand Thanks. sort thing some year. some re-segmentation the disruption we the the customer last one implemented? being and could for to not

Michael Roman

key and the is the of businesses customer really us the to the the of was the aligning realignment really go-to-market segments to – for The and and customer really type aligning customer model. focus them

actually and Transformation. it go-to-market So – been that some moving we've capabilities we've we the even This leverage are towards place been this steps more. with Business we putting model, the of way actually forward in

aligned to I focused a the as them customers step it see positive is better see we'll the will And not ahead. So we on this as this I think move globally only forward. as customer as think we

Josh Pokrzywinski

Mike. Thanks Okay.

Operator

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

Deane Dray

morning, Good you. everyone. Thank

Michael Roman

Hey, Deane.

Deane Dray

of can very any But of was how times, inventory the topic then. channel XQ of had we've much beginning inventory factor question getting of a touched you also in ahead tariffs, pull-in ERP missed getting of Josh's kind a with pull-in of well. that I some adjustment And And of terms How different clarify this intro price comments. ahead Hey, on is increases? as adjustment? this maybe you just couple just this much

Michael Roman

the into we changes some into well Electronics as it's certainly bigger Electronics And a few out playing the Automotive delays. when like as in had some tail and came this into year transportation pockets well channel and hard tail We was into inventory. -- to about Safety impacts in that balanced some areas of The we the see sell-out, sell-in, a through as at it, Deane we as channel that saw the led more come small the But QX. But The the we bit maybe Health as well our really tell pull-ahead driven I U.S. view. be QX between Care a look that's of was the be we It we were call. would I ERP there impact. We And and of QX. and QX/QX; may to consumer. We say quarter, even Graphics QX areas. balanced. saw where which kind Industrial saw year. Yes in balance talked a a our largely project went on in channels would as are didn't

and very that So, response went was direct along the very, and quarter QX. saw we developed the in as that

Deane Dray

you can You I just and down look cost so terms companies see of can't that. put with lower that Got visibility; this that about typically your the demand it. responsiveness? through well It comments don't that decremental XM XX% costs ramp quarter. in the quickly. to down was to that you back about inherent at in the the cost Does -- your therefore, time. a this you -- your And here lag response you're interesting short -- what be business? from would you than structure have When hearing disadvantage about lower will go quickly, to different the at realigning cycle the then on a Is just is ramp decrimentals,

So, like away get it did be you, color it some but will from there helpful. look

Michael Roman

adjusting view. as matter we react. Yes. challenges. with Deane down trying clear of but growth, And one the And And our in a we actions the clear end in slowing say we our demand we how I produced get was our our volume went we the ahead that organic line It was costs view. did didn't. saw as a production we're pretty plants, fast take much growth. of And look that took obviously in can a we actions to can into as businesses, we we're customers reducing would plan. direct We're got

do need is to And that of of cost some some we both those. of costs on is fixed something that and variable

And in the where in in that's industrial business in that XXXX. so And thing I XXXX-XXXX; targeting is even situations face these same not leading restructuring in that. the unusual the and that's slowdown

is here. We really have in bigger what into step that's most a and actions to markets to particular restructuring taking slowdown take

And so the get we'll curve. the ahead steps of we took now

Deane Dray

you. Thank it. Got

Operator

Research. Our proceed. next question line from Please Scott Melius comes of Davis the of

Scott Davis

guys. morning good Hi,

Michael Roman

Hey Scott.

Scott Davis

group, on money GDP time bit you to productivity really think little fix people and Hi. growth do get how period really, the at? of about of Industrial type peers I higher there a don't by a R&D rate Obviously I that? almost kind which gears outgrown of you XM the that is accelerate little R&D. over talk certainly out But are the from that. over end structure to these most issues. think just to any lot there's undergrown higher change point think -- spent How I want and the supported bit it a to look back seemed do in historically this margin basically fact, just I the you get really levels, levels at time because want because envelope, some But payback a the have I has

Michael Roman

Yes, Scott, you're so right.

innovation R&D fundamental macro would business that. strong is broadly and say is we what is And more to premium deliver that to our innovation over in outgrows and margins, growth. investment Growth investors promised ROIC. cycles I the and deliver fundamental premium our that Our

as well. it's I over our the really focused demonstrateability our been is And aspect that. from investment challenge through innovation. capacity In two of come cycle doing One differentiator this our has And I and are and important that. macro we the in to going would factors. time do say what in outgrow on fact, that it's a this is ability even right the to growth in our that like think we've And quarter our

opportunities deliver platforms we as new new innovation, Our our ability with growth priority to talk penetration about.

that's those we're focus that attractive a are that prioritizing we're us. to for management. sure our are spaces. important that much most so that market very the do also It's And And in accretive Make macro in we the markets choosing. portfolio

are and in we be. really organic is often the to to X% when attractive. what to to X%, and we that to And approximately growth where do R&D focus. capital -- is And It so priorities But talked needed in That's X% talk about. the that what allocation about it in that growth prioritizing CapEx. markets about and prioritize invest we that's that. in talking we our sales that's in continuing get that X.X% we did growth important that most I That’s we I'm

Scott Davis

Fair you as I to I And brand-new, need to enough I there you've add, you Or that in scheme board aligned is all? many seems restructuring on incentives really but the more at when far do covered go if almost this mean. new you're faster Mike. execution, be And get you're stock. comparison bit change think behind. curve you to you I've ahead. one But even as don't or with And something the mean, to about because XM CEOs. not be right the compensation been getting every your relatively now you're mean this and think still XX back always if think never behind on years little a so

you do faster? So incentives the little around scheme move to or of leaders your to to a change anything need some compensation get

Michael Roman

EPS talking And in updated really our look we cash to an We're were what I we and that particular, course think we're at that? as growth, our growth, you're time are we've we're free take compensation And do for should They our modified it aligned. our -- just to doing, compensation normal doing promises. is would well. that's an us. our is leaders important going at with what That this. to deliver. promise part stock look they're our four need investors, flow. compensation I ROIC, about to of to align how piece of take the our and we to our say over our is another important how what organic and aligned we And

Scott Davis

Good Thank guys. luck Okay. you.

Operator

of the with Please from comes your of proceed Alexander line question Jefferies. question. next Laurence Our

Laurence Alexander

morning. Good

to So, just wanted things. touch on two

First, when any ago. in you of think have sequencing, your actual way order seen be -- about episode, down about talked this call of stabilization? I'm sequential the about I years mean kind it -- affects -- think quarter churn -- the multi you Can [indiscernible] the a is I as you there it's patents? the thinking just you it clear, you is Or slice a just like about few usually

Michael Roman

the that not Do last that indication Lawrence, can that question. I kind and or got expected bit, turning I mean sometimes are seeing. asking of… not we I'm softening about a I sure a But you the broke we're They you're slowdowns last long, see longer. think the any so is up those

Laurence Alexander

order is see back turns you Did in you really it Right. seen therefore? more actual Or -- – any forecasting patterns? have half just everybody's the

Michael Roman

in Well, line as that maybe sharp slowing to April would tend macro I mean, second unless with stronger we don't we we expectations. say particular see be and markets. haven't a see that seen into -- that quickly. that would down. quarter the there's turn drives our it. markets event of what inventory softening I say we these a I we don’t and That another will of pretty We're those go the adjustments in seeing we half as we're forward. electronics. signs adopt Those some forecasting, maybe go don't But automotive early They're yet. certainly see indication fourth

days I degree it what not of they're April seen have we a but to makes talking sense that. early about, think

Laurence Alexander

sometimes done litigation the How just the after a when have secondly fact. the debates you mean, have exposures? side. then scientific scientific And on the I look scrub -- full you much debate you different have a culture -- of

there's just that as have the so scrubbed within the So firms the handled no the litigation were gone you way through surprises proceeds? and debates

Michael Roman

priority, organization our invested issue our we we've we issues forward part a say and are take together company. we capability it formed I this because it, people But brought are and that reputation how we in as among us look -- this a how an reputation bigger strategy taking Lawrence, think focused would we of how a we of are they the with brand take it, And that on we it really a brand do for how top have -- do and we there's is at that around in as lot a an -- that manage Really affairs as working broader and realignment. on. I business corporate do enterprise have mind. other

it stepping certainly So well. up it. issue and emerging lot last And has the with answer through It we good with is to went gotten is the bigger capability as as into I counsel would of that we're year. we every are stepping say a

Laurence Alexander

Thank you.

Operator

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

Steve Tusa

morning. good Hey,

Michael Roman

Steve. Good morning,

Steve Tusa

are planning productivity So when this isolated and on from to those I look guys you those tailwind. items? about you $X.XX at I bridge the still pension EPS, transformation on track? on -- were Are annual still year $X.XX Are think

Nicholas Gangestad

Yes. all on Steve, lower the that are are the business actions. well the productivity, footprint components two changing that those But lower impact, anticipating track. underlying the restructuring growth transformation the as savings, for action the part and that are other in pension we're that QX as charge productivity, the the all bringing those with growth, two down, things

Steve Tusa

Yes. that Okay. in And is entire QX. charge coming

that or run to that take going You're EPS? through

Nicholas Gangestad

be think all will could majority it majority that it, We of but – of think we that be in the the there.

Steve Tusa

margins? all us quarter, of what better Can of the detail color bit the Okay. so reset kind ourselves is, call you kind give it's second level, margins. this operating year, I of now it we and you calibrate expect on more just a mean, Whether from for little the

Nicholas Gangestad

these even a we to different, expecting it's this take the the productivity, accretive later. down over be we just with restructuring when be that's are decline account The of from up. contributing items And seeing those We margins going were into to Steve, we will M*Modal, total with year. think recent our margins we ago, three yet come think into don't this Yes. points underlying when our margins actions that saying XXX months that to likely year, acquisition margins. account charge, where, two for we take half of basis in core

Steve Tusa

one last one. quick And Right.

guys you it? mentioned Minnesota. in So stuff. took incremental – already charge, that was for just the thought on charge we're already Minnesota you reminding I you so we a Minnesota? that of saying, you Or are an took charge Was PFAS there

Michael Roman

it was Steve, I was let of it those – part was in of was of is just a – as Minnesota part it this – ahead. we vast that you XXX majority the was just – it There a Yes. look faced the of to bit But the facilities. is -- there – what encompasses we reminder. small know, majority say, a would But Minnesota.

Nicholas Gangestad

Yes. the last year, Steve. That -- the is charge XXX

Michael Roman

Yes.

Steve Tusa

– kind for don't of, know I'm a I ring-fenced – I I trying thought kind Yes. just lack I the like, XXX was whether just the No, of to, a no. – of better it, term.

that I in how the another lawyer, a charge So to fact done trying to kind kind Minnesota, definitely on I'm – this. of – not I'm just there's know I work of haven't don't

So Minnesota. I care thought took XXX of kind the of

Michael Roman

think Steve. it, We… way to the that's about And Yes.

Steve Tusa

Okay.

Michael Roman

and This then it complete, make it we kind that was so have leave of just to question out by didn't Minnesota exception.

Steve Tusa

Yes.

Thanks Okay, guys. detail. Thanks a great. lot, for

Operator

proceed. from next the Our Research. question comes Please line of Coe Nigel of Wolfe

Nigel Coe

morning, Hi. Thanks. guys. Good

Michael Roman

morning, Good Nigel.

Nigel Coe

and the the know NRD Was net point was something there Or New ruling else this I charge a just that trigger point Yes. was we're Hi. in probable missing? point? submitable? to there. there trigger pick What on make up Jersey. I sole that to Steve's was want

Michael Roman

the year a really is NRD talking what ago. I you're With think Nigel about

on. sites, all us I to have the And settlements visibility a asking did the on across estimate litigation quarter. stood is, been going parties, those felt liability. where more progression working quarter, of gave cases our that triggering point with settlements, we reached better broadly and how that where we what the in charge which really a based we've we now our manufacturing first we of some us we those, And have on think where occur in the this you're what's number taking is facts be the actually for see point first to on in what we potential with

Nigel Coe

Okay.

Michael Roman

And by the way…

Nicholas Gangestad

The of sites of different manufacture. places a New the manufacturing use we one not to lawsuit That's the Jersey Nigel. is where the five and product our not related to related

Nigel Coe

one two quick just Okay setup. on key great. then one kind of And that's

this XXX headwind we've then of comp day would to a of or XQ type got have XQ, single-digit about moves range? points talked to but decline Would [ph] low you in you've got of basis remain You selling maybe away points. XQ sort about the channel, three expect two that

Nicholas Gangestad

negative it Nigel, quarter. would in not surprise organic me we were at second growth if looking the

Nigel Coe

Good guys. Thanks luck. Okay.

Operator

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

John Walsh

Hi. Good morning.

Michael Roman

John. Hi

John Walsh

in follow-up going just assume I back of some balance guess at year? there that they point contemplated that inventory. for as Or refill some point your XXXX? i.e., maybe to on that that Does Nigel's these inventories is question just comes guidance the where now of remain is to are are about the

Michael Roman

latter. the is really it's John Yes,

remains. of more a So it's model that

be we in For through that with outlook that's adjustment of inventory noticeable what market levels there but and half for as upturn level year. be that second we're to the would some could we out looking at. the at not down the back at a come the and have that possible, go We're the looking to manage we

John Walsh

in of the Got on, an you. a this then sales focus did us lot on billion growth they an quarter? Can bucket give Day the $X us platforms. give there you update was at update guess can of what Analyst I you of priority And

Michael Roman

this, and in more And we saw see disappointing, some measure. spots. in milestones contributors When our broadly. and across is, been the there at spots second very priority platform two bright QX those stronger. are existing but the spec specifications. like electrification as lot our is growth and and and significant this saw quarter revenue There we look of had the you would to say businesses business of maybe we've are to growth priority strong performance things I we wins a there you that progress portfolio. in good the and One in across positive one we'll count good we is businesses We are detail the so growth And challenges that it's in bright has one some the are update even the product portfolios in growth John, we and continue platforms. the and and new growth forward. go double-digit automotive and priority progress even as of new making you certainly launches we single products take upper But platforms business those more would

We're where when – we programs individual So tracking and we to plans I'm talk can we to with you. update we are. our pleased

John Walsh

you. Okay. Thank

Operator

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

Michael Roman

we we Okay. get our future. know taking of our our performance and with in enterprise in strengthen the us. in credibility. world-class confident expectations are the To back for to our while action Thank you. wrap-up, capabilities and investors. you urgency of line investing XM our Thank I moving with we for to XXXX, in model. We performance have rebuild confident I'm joining will our the remain,

Operator

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

3M (MMM) 25 Apr 192019 Q1 Earnings call transcript