3M Company (MMM) Q1 2021 Earnings Report, Transcript and Summary

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 Tuesday, April 27, 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 first quarter earnings conference call. With me today are Mike Roman, 3M's Chairman and Chief Executive Officer; Monish Patolawala, our Chief Financial Officer; along with John Banovetz, our Chief Technology Officer. John is joining us today to discuss our new sustainability goals which we introduced in February. Mike, Monish, and John will make some formal comments, then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3m.com under the heading Quarterly Earnings. Please turn to slide 2. Before we begin, let me remind you of the dates for our upcoming 2021 quarterly earnings conference calls which will be held on July 27 and October 26. Please take a moment to read the forward-looking statement on slide 3. During today's conference call, we will 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 will 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. And finally, as previously disclosed in our Form 8-K dated March 22, 2021, 3M changed its accounting principle for pension and post-retirement plan cost and our measure of segment operating performance. The information provided herein reflects the impact of these changes for all time periods presented. 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. The first quarter was strong for 3M with broad-based organic growth across all business groups and geographic areas. Our team executed well and posted record sales, robust cash flow, and expanded margins along with a double digit increase in earnings per share. We saw encouraging improvement in many of our end markets, while others remained well below pre-pandemic levels. We also faced and addressed ongoing supply chain disruptions due to COVID-19, exacerbated by improving macroeconomic trends and Winter Storm Uri, all of which are increasing the cost of doing business. I am proud of the way 3Mers have stepped up to manage and overcome these challenges, keeping our factories running, expanding our manufacturing capacity, and driving innovation for our customers across our businesses. We have found new ways to engage with customers and create solutions no matter where we are around the world, learnings we will take forward as we come out of the pandemic. Looking ahead, we expect continued strengthening of the global economy, though we anticipate the recovery to be uneven as the trajectory of the pandemic, roll-out of vaccines, and government policies evolve in different stages around the world. We are confident in our business as we navigate COVID-19 uncertainty, and with one quarter behind us, we are maintaining our full year guidance for organic growth, earnings per share, and cash flow. Our team remains focused on driving growth, improving operational performance, and delivering for our customers and shareholders. Please turn to slide 5. Company-wide total sales increased to $8.9 billion with organic growth of 8% and earnings of $2.77 per share up 27% year on year on an adjusted basis. Geographically, organic growth was led by Asia-Pacific up 13% with China up 32%. Growth in the Americas was 6% with the United States up 7%, while EMEA grew 6%. We expanded our adjusted EBITDA margins to nearly 28% with all business groups above 23% and increased free cash flow to $1.4 billion with a conversion rate of 86%. 3M increased our dividend in the first quarter, marking our 63rd straight year of increases. We also continue to build 3M for the long term and prioritize investments in growth, productivity, and sustainability. While we manage end market challenges related to COVID-19, we are investing to capitalize on global growth opportunities in healthcare, electronics, home improvement, personal safety, and other favorable market trends. This includes our priority growth platforms which grew 10% in the quarter as we apply science to advanced growing areas like automotive electrification and biopharma filtration. The fundamental strengths of 3M, our unique technology platforms, advanced manufacturing, global capabilities, and leading brands position us well to win in these markets into the future. We are accelerating digital strategies across 3M and expanding our use of data and data analytics to better serve our customers and improve performance. For example, we are using new cloud-based technologies to provide better insights into our global workflows from raw material purchase through product delivery which is helping us navigate the current supply chain challenges. We are stepping up our leadership in sustainability with significant new commitments that will bend the curve on carbon emissions, water use, and improving water quality. In a similar way, we are implementing a long term plan to advance equity and inclusion as we launch new scholarship programs and a new goal to create 5 million opportunities in STEM education, with initial efforts focused here in the Twin Cities. At the same time, 3M continues to help lead the fight against COVID-19 with 630 million respirators distributed in the first quarter. We are also providing our expertise as we engage with the Biden administration and governments around the world on how to better prepare for future pandemics. Overall, I am pleased with our performance in the first quarter as we remain focused on driving growth, improving productivity, and advancing sustainability. To provide additional insight on that last point, sustainability, I will now turn it over to 3M's Chief Technology Officer, John. John?

Thank you, Mike. Good morning, everyone, and please turn to slide 6. I'm proud to lead 3M's research and development and sustainability teams. Every day, we bring our innovation to bear on tough challenges, which includes applying 3M science to create a more efficient company and a more sustainable world. As you may have seen, in February we announced expanded sustainability goals. We plan to commit approximately $1 billion over the next 20 years through both capital and operating investments to make our operations more efficient and effective with a focus on air, water, and waste. First, we are committing to become carbon-neutral across our global operations. We expect to rapidly bend our curve of emissions with 2019 as our baseline and aggressive milestones along the way: 50% reduction by 2030, 80% by 2040, and 100% by 2050. Second, 3M plans to reduce water use at our facilities by 25% over the next decade, targeting a 10% reduction by 2022 and 20% reduction by 2025. Third, at our largest locations, we are taking action and installing advanced filtration technology that will return even higher quality water to the environment after its use in our operations. These goals are driven by science and a clearly defined path. We have identified the investments and technologies that will enable our success from thermal oxidizers to reverse osmosis, and work is already underway. At 3M's facility in Antwerp, for example, we have expanded our thermal oxidizer system and reduced our carbon emissions by 1 million tons per year. Overall, our thermal oxidizers reduce our carbon footprint by more than 90% when fully installed. And in Decatur, Alabama, we have implemented a water treatment system with granular activated carbon, also known as a GAC system that has improved the quality of water we return to the environment by 90%. We intend to add complementary technology that will further improve water quality by 2024. We will continue to advance new state of the art technologies including through partnerships with customers, governments, communities, and others to further accelerate our progress. Our actions demonstrate 3M's commitment to continuous improvement and our ongoing work to advance our environmental stewardship. Over the last two decades, 3M has reduced our emissions by 70% while doubling revenues. Our headquarters is fully powered by renewable electricity, and 40% of 3M's global electricity use is now renewable; on our way to 100%. Every new 3M product includes a sustainability value commitment, and over the last five years, our innovations have helped customers avoid 75 million tons of emissions. And just last week we committed to reduce our use of new plastic made from petroleum, also known as virgin fossil-based plastic, by 125 million pounds by 2025 through new packaging and innovative product design in our Consumer business. We recognize the urgency of the world's climate and environmental challenges and are focused on making a difference both today and in future generations. I encourage you to read our annual sustainability report to be released in early May for more details on our progress and priorities. Please turn to slide 7, and I'll turn it over to Monish. Monish?

Thank you, John, and I wish you all a very good morning. Company-wide first quarter sales were $8.9 billion, up 9.6% year on year or an increase of 8% on an organic basis. Sales growth combined with operating rigor and disciplined cost management drove adjusted operating income of $2 billion, up 19%, with adjusted operating margins of 22.5%, up 170 basis points year on year. First quarter GAAP and adjusted earnings per share were $2.77, up 27% compared to last year's adjusted results. On this slide, you can see the components that impacted both margins and earnings per share. Organic volume growth along with our ongoing cost management and productivity efforts were the biggest contributors to first quarter operating margins and earnings, adding 150 basis points to margins and $0.34 to earnings per share year on year. Turning to selling prices and raw materials, as Mike mentioned, we experienced increasing cost particularly for raw materials and logistics due to the impacts on the strengthening end markets, ongoing COVID pandemic, along with Winter Storm Uri. As a result, first quarter net selling price and raw materials performance reduced both operating margins and earnings per share by 20 basis points and $0.01, respectively. In our view, we expect global supply chain dynamics to remain fluid and for raw material and logistics headwinds to persist. Therefore, we now anticipate a full year raw materials and logistics headwind of $0.30 to $0.50 per share versus a prior expectation of flat to a $0.10 headwind at the start of the year. Looking at the second quarter, we currently anticipate a net selling price and raw materials headwinds to operating margin in the range of 75 to 125 basis points. We are taking multiple actions to address these increased headwinds including selling price increases, global sourcing efforts, improving yields in our factories, and ongoing demand planning given the dynamic environment. We expect these actions will gain traction as we move through the year, particularly in the second half. Moving to divestiture impacts, the lost income from the drug delivery divestiture in May of last year was neutral to margins, however, was a $0.03 headwind year on year to earnings. Foreign currency net of hedging impacts added 40 basis points to margins and $0.13 to earnings per share as the U.S. dollar weakened against most major currencies year on year. We continue to expect foreign exchange to be an earnings benefit of $0.15 per share for the full year. Three other non-operating items impacted our year on year earnings per share performance. First, our continued strong cash flow and liquidity position give us the opportunity in Q1 to redeem an additional $450 million of debt early that was due to mature in 2022. As a result, we incurred higher net interest expense of approximately $0.02 per share versus Q1 last year. This impact was more than offset by year on year non-operating pension benefit of $0.05 per share. Combined, these items resulted in lower net non-operating expense of $0.03 per share versus last year's first quarter. Secondly, a lower tax rate versus last year provided a $0.14 benefit to earnings per share. The lower tax rate was primarily a function of non-repeating favorable adjustments related to U.S. tax treatment of international income along with regional income mix and equity based compensation. Our full year 2021 tax rate expectations remain unchanged in the range of 20% to 21%. Finally, average diluted shares were up 1% year on year which reduced per share earnings by $0.02. Please turn to slide 8 for a discussion of our cash flow and balance sheet. We delivered another quarter of robust free cash flow with first quarter adjusted free cash flow of $1.4 billion, up 49% year on year, with conversion of 86%. Cash flows in the quarter were primarily driven by robust growth in cash flow from operations along with our ongoing daily management of working capital. First quarter capital expenditures were $310 million. For the full year, we continue to expect CapEx to be in the range of $1.8 billion to $2 billion. During the quarter, we returned $1.1 billion to shareholders through the combination of cash dividends of $858 million and share repurchases of $231 million. Our strong cash flow generation and disciplined capital allocation enabled us to continue to strengthen our capital structure. We ended the quarter with $13 billion in net debt, a reduction of nearly $5 billion since the end of Q1 last year. As a result, our net debt to EBITDA ratio has declined significantly from 2.2 a year ago to 1.4 at the end of Q1. Our net debt position along with our strong cash flow generation capability continues 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 9 where I will summarize the business group performance for Q1. I will start with our Safety and Industrial business which posted organic growth of 10.3% year on year in the first quarter. This result includes a 6.4 percentage point benefit from pandemic-related respirator demand. Looking ahead, we continue to anticipate strong pandemic-related respirator mask demand. However, the year on year contribution to sales growth will decline as we lap last year's quarterly comparison. Overall, general Industrial manufacturing activity continued to improve during Q1, resulting in a pick-up in growth across the portfolio. Personal Safety posted double digit organic growth year on year driven by ongoing demand for respirators. Industrial adhesives and tapes grew low-double digits primarily due to strong demand across Industrial and Electronics end markets. The continued strength in the residential housing market drove good performance in our roofing granules business which was up double digits organically versus Q1 of last year. Turning to the rest of the Safety and Industrial businesses, Automotive Aftermarket grew high-single digits organically, the Electrical Markets business was up mid-single digits, and Abrasives grew low-single digits while our Closure and Masking business declined year on year. Safety and Industrials first quarter segment operating margin were 24.4% up 70 basis points year on year. Operating margins were driven by leverage on sales growth which was partially offset by increase in raw materials, logistics, and legal costs. Moving to Transportation and Electronics, which delivered a strong start to the year with first quarter organic sales growth of 9.8% despite the well-known semiconductor supply chain constraints. Our Electronics-related business was up high-teens organically with continued strength in semiconductor, factory automation, and data centers, along with strong demand for consumer electronic devices, namely tablets and TVs. Our Auto OEM business was up 21% year on year compared to the 14% increase in global car and light truck builds. Looking ahead, we continue to monitor the global semiconductor supply chain and its potential impact on the electronics and automotive industries. Turning to Advanced Materials, which increased mid-single digits largely as a result of the year on year increase in automotive builds and finally, our Transportation Safety business was flat year on year while Commercial Solutions declined slightly. Transportation and Electronics first quarter operating margin were 23.3%, up 260 basis points year on year, benefiting from strong leverage on sales growth and prior-year COVID-related asset write-downs which were partially offset by increases in raw materials and logistics costs. Turning to our Healthcare business, healthcare providers continue to be challenged from the ebbs and flows of COVID-19 cases as elective procedure volume still remains significantly below pre-pandemic levels. At the same time, we continue to experience strong pandemic-related demand for respirators to protect frontline healthcare workers which more than offset the headwinds from the decline in elective procedure volumes. As a result, our Healthcare business delivered first quarter organic sales growth of 9.3% versus last year. The Medical Solutions business grew high-single digits driven by continued strong respirator demand. Excluding respirators, organic growth in this business was down low-single digits due to the ongoing year on year impact of low procedure volumes. Organic sales for our Oral Care business increased double digits year on year. This result is primarily due to last year's COVID related comp as dental offices started closing their doors during Q1 last year. The Separation and Purification business increased low-teens year on year. This business continues to experience solid demand for biopharma filtration solutions for COVID-related vaccines and therapeutic development and manufacturing along with improving demand trends for water filtration solutions. Health Information Systems returned to positive organic growth, up mid-single digits, while Food Safety declined mid-single digits organically versus last year's strong comparison. Healthcare's first quarter operating margins were 22.7%, up 120 basis points year on year. First quarter margins were driven by leverage on sales growth which was partially offset by supply chain disruption and increasing raw materials and logistics costs. Lastly, first quarter organic growth for our Consumer business was 7.8% year on year with strength across most retail channels led by e-commerce. Organic sales growth continued to be led by the Home Improvement business, up double digits organically driven by strong demand for Command adhesives, Filtrete air quality solutions, and ScotchBlue painter's tape. Stationery and Office returned to positive organic growth in Q1, up mid-single digits, with ongoing strength in consumer demand for packaging and shipping products. This business also delivered improved growth in Scotch brand office tapes, as we start to lap the COVID-related impacts from remote work and school trends. And finally, our Home Care business was up low-single digits organically versus last year's strong comparison. Consumer's operating margins were 21.1%, or similar to last year, as leverage on sales growth was offset by increasing costs for raw materials, logistics, outsourced hard goods manufacturing, and increased investments in advertising and merchandising. Please turn to slide 10 for a discussion of our full year 2021 guidance. As you can see from our Q1 results, we are off to a good start to the year. Looking ahead, as Mike mentioned, we expect continued strengthening of the global economy along with increasing opportunities in end markets with favorable trends. However, we foresee that the improvement will remain fluid and uneven as we go through 2021 given the ongoing impact of the pandemic. As a result, we anticipate a number of items that will need to be navigated as we go through the year. For example, starting with evolving impacts from COVID including respirator demand, healthcare elective procedures, supply chains, shutdowns, and government response. Next, the continued constrained supply of semiconductor chips and related impacts to consumer electronics and automotive OEM production. In addition, the expected increase in costs for raw materials and logistics and in some cases constrained availability. And finally, we expect to increase investments through the year in growth, productivity, and sustainability along with managing ongoing legal costs as PFAS and other legal proceedings progress. Thus, taking these items into account, along with it being early in the year, we think it prudent to maintain our full year guidance of 3% to 6% for organic growth, earnings per share of $9.20 to $9.70, and free cash flow conversion of 95% to 105%. Turning to the second quarter, let me highlight a few items of note. First, we expect continued strong execution by the 3M team in the face of a very fluid and uncertain environment. As I mentioned during my remarks, we have increased the expected headwind from raw materials and logistics cost for the full year. We are taking several actions including increasing selling prices to address these headwinds as we go through the year. These actions will take a little time to gain traction. Therefore, we anticipate a second quarter year on year operating margin headwind of 75 basis points to 125 basis points from selling prices net of higher raw materials and logistics costs. And finally, we expect a pretax restructuring charge in the range of $25 million to $50 million as we continue our actions related to our December 2020 announcement. To wrap up, we are off to a good start for the year delivering broad based growth, strong operational execution, and robust cash flows. We are prioritizing capital to our greatest opportunities for growth, productivity, and sustainability while focused on delivering for our customers, improving operating rigor, and enhancing daily management. With that, I thank you for your attention, and we will now take your questions.

[Operator Instructions] Our first question comes from the line of Scott Davis with Melius Research. Please proceed with your question.

Thank you, operator. Good morning, everyone. Thanks for letting me in here. Are you guys seeing any strange order patterns as far as like double ordering or any kind of panic inventory rebuild? Anything? I would imagine you would probably see it in Transportation and Electronics, perhaps equally in Transportation and Electronics of all the segments, but I'll just leave it at that. Anything on the ordering patterns that's unusual?

Scott, I would say we see certainly a pick-up in orders when we see markets recovering and improving, and Transportation and Electronics were strong end markets for us in Q1. I wouldn't say we see anything unusual there. It's what comes with a normal pick-up in the marketplace. When you look at it a good measure for us is what's happening with channel inventories, and I would say we see them very much in line with what you have written about in your reports, that we see the changes due to growth trends. Overall inventory in our Industrial channels remains still relatively low. Transportation Electronics with the supply chain impacts from the semiconductor shortage we're seeing some challenges there, and it's just responding with the disruption from the semiconductor shortage. Healthcare's pretty steady, reacting to the trends still. Elective procedures well below pre-pandemic levels, so that's impacting there. Consumer, it's a mixed case. We have high demand in Home Improvement. We're seeing lower levels there. You see a little lower levels when you see the pick-up, but it's responding to the marketplace. Otherwise, I would say the ordering trends were pretty much in line with what we expected. A little better than we expected in March which was really reflected in our broad based growth but otherwise nothing unusual.

That's helpful. And then just to clarify on the $0.30 to $0.50 supply chain raw material logistics, whatever issues, is that net of what you expect on price for the year? Or is there some opportunity to offset that full amount with price, you're just not certain yet of the magnitude?

Hey, Scott. That's a great question. $0.30 to $0.50 is just pure raw material logistics headwind. As I said in my prepared remarks, we are going after price increase, improving yields in our factories, as well as working with our supply chain partners to reduce the impact as much as we can. You can see in the first quarter we had 70 basis points of price increase, and as I've also said, it's going to take a little bit of time for these actions to gain traction. So we expect that the second half will be better than the first half on the price perspective.

Okay. Good luck. Thank you.

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

Thank you. Good morning, everyone. Probably can be tons of price cost and other questions, but maybe since we have John on the line, if you don't mind, could I throw one at him? Just wondering if you could actually update us on kind of the size of the priority programs currently that were outlined for us when we were in Saint Paul, whenever that was. Seems like a lifetime ago. I think it was 2019. And anything you can tell us on the vitality rate of the portfolio overall? One of the things that I always try to put my finger on, it's always just a little bit difficult, is the flip side of the new product development, what's going on kind of end of life and commoditization at the low end. And so the effort to counter that, if you have any color there, that would be interesting also.

Thanks, Jeff. Thanks for the question. So maybe on the first part around our priority growth platforms and our PGPs or so, they're about 5% of the overall portfolio I would say and growing quite a bit I think, as Mike referenced. We've seen approximately about a 10% growth over the last quarter of those platforms, and they continue to grow. And as you know, they sit in high growth market spaces for us, so we would expect that growth to continue on those platforms as we continue to find customer solutions in those areas. Second comment is kind of around the vitality of the MP value part of it. We've talked about MP value in the past. That's definitely an important metric for 3M without a question, but it's also a secondary metric for us, the primary obviously being growth and our profitability for that. I'd say over the last few years, our MPVI and things have trended to be about in the mid-20s if you take an average over the last five years or so, which is I think roughly a pretty good guide for 3M overall. And obviously COVID's had some of that impact on trends here in the near term as well as we've gone forward. And then kind of as you said the commoditization, I personally don't think a whole lot about that. I think about, are we aligned with our customers? Are we solving customer needs? Are our R&D resources geared toward growth and solving those issues for our customers and making sure that we can deliver our technologies and our solutions to our customers in order to be able to grow and sustain profitable margin and ROIC?

Thanks. Just a quick follow-up. Was that MPVI a mid-20s kind of five-year number or three-year number? What time span?

It's about a five-year number.

Five-year number. Okay. Thanks. Appreciate it. I'll pass it on.

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

Thank you. Good morning, everyone. Hey. I guess if there's a surprise this quarter it's that despite having a solid operating beat you're leaving guidance unchanged. And Monish walked through all the list of headwinds and sized all of them or at least framed them with the exception of the last item about potential legal costs. Could you just either size for us or frame for us what the expectation might be this quarter either in terms of remediation costs or product liability? Because you're certainly signaling that something could be brewing here. Thanks.

Sure, Deane. As I said in my prepared remarks, I think some of this -- I'll just start first with all the headwinds that I've mentioned. At the same time, all the other actions that we are also taking to continue to drive operating rigor, whether it's raising price, driving operating rigor, and continued strong cash flow. So I'll keep all that first with the headwinds, with some partial offsets that will take a little bit of time to implement. As it regards legal cost you can see this more as we file our Q this morning, but there are a couple of things. You'll see the PFAS reserves are up around $50 million between the end of fourth quarter to this quarter, and then the mask respirator accrual is up approximately $20 million. To predict what exactly is going to be in the second half of the year is quite tough. But what we do see is, as we prepare for some of these trials, for example the Combat Arms trial that's also on in Florida right now, with the MDL as well as some of the other cases that will start picking up in PFAS, we expect that our legal fees or legal cost to prepare for these trials will go up during the second half of this year.

Okay. That's very helpful. And then just as a second question, it is interesting we're talking about a -- it's going to be tepid, but the back-to-school, return-to-office is outside of the seasonality. But it is encouraging. Can you frame for us expectations in terms of how much that might contribute in the second quarter?

Yeah, Deane. What we talked about is we did see a return to growth in our Stationery and Office business in first quarter, up mid-single digits, as Monish mentioned. That is the first indication that we're seeing pick-up from return to school and return to the workplace to a degree. It's one of those areas where we're looking at the uncertainties related to COVID, how will it play out. How big a return to school? How big a return to the workplace? And when? That will end up being what drives the answer to your question. So I would say good signs that we saw the pick-up in Q1 back to we expect economy to strengthen, and we're encouraged by the vaccines. We're going to have to wait to see how the return to the workplace and school plays out though.

Appreciate that. Thank you.

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

Thanks. Good morning. Can you hear me, guys? Some of the constraints you've seen in the supply chain, [Indiscernible] et cetera, normally you see 2Q seasonally higher than 1Q. I'm wondering if the combination of [Indiscernible] production, et cetera, might limit the ability to see that normal seasonal ramp [Indiscernible] right now to 2Q seasonality.

Nigel, you were breaking up a little but I think your question was around Q2 seasonality, correct? Is that the question?

Right. Exactly. Yes.

So I'll just start with my three quarters that I've been here in the pandemic that we've seen. I don't think any trend seems to be normal, Nigel. You've seen trends that seem to be completely abnormal compared to what the past has been, compared to monthly cyclicality as well as compared to quarterly cyclicality, so I'll just start with that as the first piece. The second I would say is one thing you can definitely count on us in Q2 is strong execution. We are also confident that end markets are going to pick up, but I think they're going to be uneven. And for the second quarter we're still monitoring quite a few things, one of course Mike just mentioned about what happens with the stationery. How does that return to work come in? The return to work impacts not just the Stationery business, but it impacts our Graphics business. It impacts our Signage business and what happens there. And what people spend I think is going to be important to watch. The second piece is as the pandemic is playing out in parts of the world, elective procedures continue to be below pre-pandemic levels. We'll see how that plays out. The well-known semiconductor chip shortage, how it impacts auto, how it impacts consumer electronics is another piece. When you think about supply chain disruption, one is of course raw material costs and logistics costs that I've talked about quite a bit. The other one of course is product availability and making sure there is product available from our suppliers to continue to keeps us manufacturing. Now, I'll tell you this, that our supply chain team has done an amazing job keeping the factories running, making sure we are delivering to our customers thanks to the relationship they have with the suppliers, and we appreciate all the work the suppliers have also done to partner with us to minimize disruption as much as possible. We are also raising prices, but it's going to take little bit of time. The inflation has come in faster. So you're going to see 75 basis points to 125 basis points of headwind which is the net of price versus inflation and logistics. As I also mentioned, we're going to do restructuring, which was announced in Q4 of 2020. We told you it's somewhere between $250 million to $300 million charge for the year. As of first quarter, we are at $150 million. So we've got approximately $100 million to $150 million to go for the remaining of the year. The second quarter is going to see $25 million to $50 million of restructuring charge. The balance will come in 3Q and 4Q. If this economy continues to go the way it is, outlook is that indirect cost, travel cost, some of the legal costs we talked about will keep going up. Any other one-time headwinds will also go up as it regards compensation. And then our goal is, as Mike has mentioned, we have tremendous areas that we can invest in. And our goal is for the long run we want to keep investing in growth productivity and sustainability and put all that into play. That's why we felt it prudent to maintain guidance. Also, to answer your question, it's hard to follow normal seasonality trends with all these things in play.

Right. Thanks Monish, that's great color. My follow-up question is really just going back to the guidance and I understand all of the uncertainties you just laid out very, very clearly. But seems like the pension change in the way you account for the assets, seems like that's about a $0.20 year-over-year benefit to FY 2020. Was that change in the original guidance range, or was that additive to the [Indiscernible] guidance?

Nigel, I would say, as we have stated, we have restated all the years that are presented. So the year-over-year impact of that is approximately $0.11. So that's to answer your specific question on pension. The offsets to that, a couple of things. We took the opportunity to go redeem $450 million of debt that was due in 2022. That had an impact of $0.02 on interest for the quarter. And then as share prices have gone up, even though we have done share buyback of $231 million or share repurchase, our dilution has gone up, and that impacted $0.02 for the quarter. The total impact for other financials we had originally in our guide was zero. Right now, we are saying it's plus $0.05, to be clear.

Great color. Thanks very much, Monish.

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

Hey, guys. Good morning. Just following up on I think the last couple questions here, just sequentially you guys are usually up 1Q to 2Q, and I think you mentioned a whole host of items that kind of break the normal seasonality. Can you maybe just give us like a total number that you see from 1Q to 2Q that would be the mechanical impacts including the raws and the inflation? That's fine. Just all-in what the headwinds are from 1Q to 2Q? So we can just kind of like -- 1Q is obviously like a big upside, but then 2Q is going to be seasonally weak. So just trying to kind of figure out in total where we should kind of start from mechanically.

That's a great question, Steve. Just same comments that I made before. As you know, volume is the biggest piece that drives margin leverage for 3M. You should assume the normal 30% to 40% margin leverage that you would get. The amount of volume is going to depend on a lot of the uncertainties that I've talked about, whether it's elective procedures, whether it is semiconductor chip availability for Auto and Consumer, whether it is the strength in Stationery remains, whether the oil and gas industry picks up. So a lot of long term, I would say, end markets growing. We'll have to figure out what happens in the second quarter with all of these from an end market perspective. Similarly, on supply chain disruption, there are two pieces. One is of course the inflation that we've told you about which will cost 75 basis points to 125 basis points of headwind between price and inflation and the raw material and logistics cost as well as making sure that we have all the product availability that we have. So that's the other, I would say, headwind to 1Q.

Can you just talk about that headwind sequentially? What that headwind would be? What you've already kind of absorbed in first quarter, and what it is sequentially?

Yes. So a piece of it got absorbed in the first quarter, Steve. I think we'll have to see how April plays itself out, and May. As we look at product availability, making sure that our suppliers continue to be able to provide all the goods over the quarter is something that we're working on. Again, it's too early to say because it's a very dynamic situation that changes every day. And again, the relationship we have with our suppliers helps us get the product as much as we can, but they're also constrained right now with the overall supply chain situation in the world. The other headwind is $25 million to $50 million of restructuring. So this is still a part of the overall restructuring program we announced in Q4. We have done up to $150 million in Q1. We're going to take another $25 million to $50 million in Q2, and the balance will come in Q3 and Q4. Indirect costs. So as the economies are starting to open up, you are going to see hopefully ad merch and travel start to go up. That's a headwind to Q1. As we are starting to see the economies starting to pick up, our investments in growth productivity and sustainability will continue to increase, so that's how I would frame Q1 versus Q2.

Okay. Just it just seems to me like the biggest piece again is this kind of raw material issue, but some of that you absorbed in the first quarter. And on a year-over-year basis, it looks like that's like, I don't know, $0.15 to $0.20 year-over-year?

It's a 75 basis points to 125 basis points headwind.

All right. Thanks for the color. Appreciate it.

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

Hi. Good morning. Just wanted to focus perhaps on Safety and Industrial. The headline organic growth there was slightly lower in Q1 than Q4 even with the improving economy. And that's really that respirator tailwind for your 400 basis points less in Q1 than Q4. So just wanted to understand, what does the guidance for that segment and/or 3M in aggregate reflect for the respirator tailwind over the balance of this year? We've seen some write-downs at certain distributors and so forth for that kind of activity after over-ordering last year. Do you assume that that could become a headwind later this year, or the headwind really comes in 2022?

Julian, thanks for the question. We talked about Q1. We continue to see strong demand that 630 million respirators delivered in Q1. And still in the quarter, 90% going to healthcare workers and I would say first responders and increasingly essential industries. The demand as we move forward, it's going to depend on a few factors. The first is what's going to be the demand in healthcare, and that's going to depend on how the pandemic plays out and I would say how governments respond to dynamics in the pandemic. And there's been changings in protocols in use of respirators, for example, as one of those dynamics. As Monish said, this is one of the areas where we're working through the uncertainties. There's that demand. And we're working on governments all over the world around stockpile strategies and continuing to supply into those. And then there is consumer demand and increasing demand in Industrial as economies recover. So we see some shifting as we go forward over time from the high priority more than 90% into Healthcare shifting more into Industrial and Consumer. And then the demand overall, how much is it going to be relative to the impact on the overall enterprise relative to SIBG? That's going to depend on how each of those play out. But we're expecting to continue to see demand in Industrial and Consumer and Healthcare as we go through the year.

To answer specifically your other question, Julian -- I'm sorry -- on why is the growth rate slowing down, we are starting to lap. So if my memory is right, Q1 of 2020 there was $100 million of disposable respirators that the company had disclosed even before my time. You're going to see actually the amount, if you're looking at the percent, it's going to slow down, as I said in my prepared remarks, because you're starting to lap the pandemic-related respirator demand year on year.

Julian, we disclosed all that last year as we went through the year. So Q2, it's a $225 million year on year comp. So we step from $100 million to [$200 million in a quarter] (ph), then $235 million in Q3. And I think in Q4 we were around $280 million. Last year. So the year on year contribution of growth is going to decline.

Yes. Understood. Thank you very much. And maybe just my second question around the capital deployment aspect. Cash flows been very, very good yet again leverage I think is now around 1.4 times. Any updated thoughts around the balance sheet usage? Or do we think that just given sort of the background leverage is likely to remain fairly low through the rest of the year?

Yeah. It's a great question, Julian. I would go back again to just our capital priorities. Prioritization hasn't changed. Our first priority is always invest in R&D. Mike mentioned the areas that we have as we think about just a few, and even John talked about whether it's Biopharma, Home Improvement, Personal Safety, Digital, Semiconductor, Healthcare they're tremendous opportunities that we believe we can keep investing in. So that's our first priority is I think in the long run that will give us the best return. The second priority is dividends. We did increase dividends 1% this year. It's the 63rd year of consecutive dividend increase. Our third priority is M&A. As you know, we are busy integrating Acelity. It's doing very well and integrating well into 3M. We don't see another acquisition in the size of Acelity in the near future, but we are always looking for opportunities where we believe it's complementary to 3M's strength as well as 3M can add value and synergies. And then our last priority is share repurchase. And as I said in my prepared remarks, we did have $231 million of share repurchases. I think the strength that we have right now, Julian, of 1.4 net leverage gives us a lot of flexibility to go either way as well as gives us strategic opportunities to deploy when needed.

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

Hey. Good morning, guys. So Transportation and Electronics as you know had a very high range of outcomes for the year, low to high-single digits. And obviously starting out at the high end of the range, is there any reason at this point why you wouldn't see the high end of the range in that particular segment given the comps do get a fair amount easier for the next couple quarters? Maybe just could give us more color on how Electronics and Auto really performed versus your expectations? I know you said absolutely that seems like they continue to be strong or even improve despite supply chain concerns.

It's an important question for us too, Andy. We had that wider range at the beginning of the year which really reflected the dynamics in those end markets, the uncertainty we were looking at as we came into the year. And we certainly had a good start to the year. Transportation and Electronics off to a strong start, much like the rest of the company. They're still facing some considerable uncertainties in that marketplace, and we talked about the chip shortage and its impact on both Electronics and Automotive. I think you see kind of changing dynamics in the build rates, much of it reflecting that dynamic. Electronics, I would say Consumer Electronics is off to a strong start. Tablets and TVs really driving a lot of that. So it's how are these trends going to play out through the year? And it still reflects I would say a wider range of outcomes. And it also is going to depend on how the pandemic plays out. Some of these are dynamics being driven by the pandemic and its impact on the economy in general. I would say that wide range that we came into the year, we still have a wide range view of how the uncertainties will impact these key market segments. But again, off to a strong start. Automotive above the build rates of our growth and Consumer Electronics above the build rates there. So we're winning in the marketplace with our solutions, and we're well positioned. We'll see how the market dynamics take us as we go through the year.

Mike, wanted to ask you about your priority growth platforms in the context of -- obviously there was strong growth in the quarter, I think 10%. There's a lot of money out there, whether it's the new Biden American Jobs Plan, focus on automotive electrification continues to increase. How do you sort of change your focus if at all on some of these platforms? Do you shift more money into something like automotive electrification? Do you see more growth in certain areas like that moving forward?

Andy, we talked about it all year last year about what we were doing to invest in the future while we were managing through the big challenges that the pandemic threw at us in 2020. And we are accelerating, I would say, investments not only in our priority growth platforms but other market trends that we were seeing that were opportunities for us, and we talked about things that were going on obviously in Personal Safety but also Home Improvement and other areas that trends were strong. So that's how we're prioritizing growth based on the market trends, where we can create unique and differentiated value. Priority growth platforms tend to represent both of those, strong markets, as John mentioned earlier. These are higher growth market segments. And then we have the investments that we make in the trends coming out of the pandemic, and we're stepping those up as we see the opportunity. So we're really driving those based on the growth opportunity that we see in front of us as we go through 2021, not locked in on a plan that we put together for our priority growth platforms before the year started. So it is what we see as an opportunity to drive the growth and the growth outlook that we had for the year as we came into 2021.

Appreciate it, Mike.

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

Yeah. Good morning. Yeah. I can reassure you that this will be one Consumer stocking up on 3M masks because we have to deal with inferior, inferior Kimberly-Clark product. So I just want to tell you that. Having said that, just the dynamic in the Americas on Safety and Industrial and Transportation and Electronics in the quarter, I think you guys gave very useful breakdown. Just broader dynamic by sub end market, but in America, Safety and Industrial is up 12%. I assume it's because of Safety. But Transportation and Electronics down 4%. One is more OE, one is more channel. Can you just talk about this dynamic? What's happening? I think it does sound there's some pre-stock in OE, but what's happening in the distribution channel?

Yeah. Andrew, you're right. Safety and Industrial business [Indiscernible] in the performance in Americas, a big portion is driven by Personal Safety. It's been a strong growth driver. We talked about it. Monish highlighted some of the other Industrial businesses. We're seeing recovery in the Industrial markets in general. We're seeing increasing demand in industrial adhesives and tapes and industrial mineral products in the U.S. with the strong residential housing growth. All of those are driving what's going on in the Americas across Safety and Industrial business group. Transportation and Electronics, it's driven globally, the strong growth that you saw, by semiconductor fabrication, data centers, what I talked about earlier in Consumer Electronics. Those are not the big drivers obviously in the U.S. at this point. The automotive is the driver in the U.S., and I would say we're seeing good performance on our spec-ins. We're winning additional spec-ins in the OEMs. And as the build rates pick up in the U.S., we'll see TEBG, Transportation business from the automotive side get a strong contribution. Monish talked about some of the areas of uncertainties and things that we're looking at. Commercial solutions and the demand for graphics that are part of that, transportation safety products. Those are still flat year-over-year growth, even in decline in key end market segments, and that's one of the things that is an uncertainty as we look at the year. How are those markets going to recover as economies recover? So that will be part of the answer to Transportation and Electronics picking up as we go in the Americas in particular.

Got you. And just a follow-up question I think Andy touched a little bit on it. But it seems that we have plenty of visibility on semiconductor CapEx going up in the U.S. over the next several years. Given the semi capacity on the margin over the past decade has been added outside of North America, do you need to make any adjustments to your manufacturing footprint in North America to sort of play this growth? Or is it just nature of your process and fungible capacity and just supplies better overall capacity utilization in North America given the assets you already have in place?

Yeah, Andrew. As you know, our strategy is to be close to customers, invest in capacity to meet the demands regionally around the world, and that's true broadly across the enterprise. There are some key product and market segments where we have more of a critical center in key areas of the world. U.S. is one of those areas where in the end we're a net exporter of goods out of the United States because we have a stronger footprint here, and that's also true in much of the portfolio that we serve semiconductor fabrication with. We build that out close to the end users, close to the customers. So we have significant resources in Asia, for example. We also supply a significant portion of it from capacity in the U.S. and even some capacity in Europe. So I think we're well positioned if we see that shift, and it's going to take time to play out. And as has been the case for us throughout history, as we see market dynamics change and shift around the world, we'll invest to build up that capacity where it's needed. So we'll have time to adjust and add capacity, but we start in a good place relative to that market segment.

Thank you for your answer. Thanks a lot.

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

Hi. Good morning. Hey. So a lot of details already around the logistics and the supply chain as it relates to EPS and margin. But curious if there's any sales impact to your ability to kind of get raw feedstock, et cetera, that you want to call out. Just because if you look at even midpoint of your guidance for the full year, just having a little trouble reconciling the two-year and the three-year kind of growth stack deceleration from what you just printed.

So, John, I would just say, back to the point on Q2, there is a lot of uncertainty in the supply chain markets other than of course the raw material and logistics costs we've talked about. It's just making sure that the product is flowing, making sure our suppliers can make the product. As of right now, as I said, it's a very dynamic situation that's changing every day. So that is why that's one of the uncertainties that we have called out in the second quarter and the total year, that we've got to navigate through this and hopefully as we get through the second quarter, we'll be in a better state to see where we are for the year. So hopefully that answers your question. Since you're talking about the second quarter -- and my memory failed me earlier. Sorry. So Steve's question earlier also on if you're looking at Q1 versus Q2, just another point is FX which is $0.13 benefit in Q1 for the year. We still see that to be $0.15. Again, we'll see where currencies move as the world plays itself out. And then from a tax rate perspective, we were at 16.4% for the first quarter, and our plan is 20% to 21% for the year. So those are the other items I would talk about, John, as I talk about the second quarter and its overall impact.

Great. And then maybe a broader question here. You talked a little bit earlier about kind of new product vitality. You're talking about a lot of interesting technologies around enabling your sustainability commitments. Is there a way for 3M to actually commercialize some of the stuff that you're doing to your own operations, either the technology or the material science? Or can you take what you're doing and actually bring that out to other customers and monetize that?

Yeah. And, John, I would say for us being a leader in sustainability is also about helping our customers and making a difference for them, and you see that in our expectations and our requirement that every one of our new products has an improvement, an advantage in sustainability. That's one of the ways we can leverage our technology and our technology platforms to make a difference for customers. Now, we're also investing a lot of innovation in our operations, and you look at our fundamental strengths of the company. Our manufacturing capabilities are foundational there. And about one-third of our intellectual property sits in our manufacturing operations, process technologies, and we leverage that for our own performance and our own product quality as a competitive advantage. There are opportunities as we think about ways that we can really lead forward in sustainability solutions that we can expand our impact, and we certainly expect to be able to be a good example for manufacturing companies leading in sustainability. We'll look at, as we have all along, look at innovation opportunities where we can commercialize those as part of our offerings to customers as well.

Great. Thank you.

Thank you. And our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everybody. So my first question, maybe just going back to 2Q for a moment. And I fully recognize that things are fluid right now, but can you talk a little about maybe the trends that you're seeing so far in 2Q? You've got very easy comps this quarter. So is the expectation that you'll see at least an acceleration in growth versus what you saw in 1Q based on what you're seeing today?

Yeah, Joe, so no major surprises in Q2 so far. So we've started April pretty strong, similar to what we thought it would be. The team continues to execute well. We're working through some of the challenges we have talked about whether it's on the cost or the product availability side. But as you currently pointed out, from a comp basis on the year-over-year basis we will get into the first major quarter of the pandemic. And therefore on a year-over-year basis you should see a higher growth than what you saw in Q1.

Joe, as a reminder, last year in Q1 we were up 20 basis points organically I believe, and we were down lower, 13%, in Q2. So the comp is a fair amount easier.

That makes sense. Just wanted to clarify that and then maybe my second question, Monish, you talked about 30% to 40% type volume incrementals when you have decent volumes. I guess can you clarify that comment? Is that an all-in number, taking into account some of the headwinds that you've already discussed on the raw material side or is that just purely on volumes? Just clarifying those comments.

Joe, it's a great question. So I would say 30% to 40% is in the long term what you should get leverage. 2021 in general is I think unusual. Unusual on multiple fronts, one when we gave you the guide in the beginning of the year we talked about the snapback of indirect costs that should hopefully in 2021 as people start traveling, as we start investing, from an ad merch perspective would go up on a year over. Similarly, at the beginning of the year we reset our comps, so that's a headwind. We also had a property sale in fourth quarter of last year of approximately $50 million of gain that's a non-repeat. So all of those one-time headwinds coming into the year that we talked about. We also talked that we will be increasing our investments in growth, productivity, and sustainability in 2021 as we see some of the trends playing out that can help us continue to grow in the longer term. And so that's the second headwind. And then the third as has come through that I've talked about is the raw material and logistics cost increase, partially offset by the price increases that we are trying to do, increase our yield, and then managing all the other costs that we have whether it's legal costs as PFAS and Combat Arms and some of those proceedings proceed as well as any other investments we want to make as we keep seeing growth opportunities in the long term. That's why I would say 30% to 40% is the normal you should see in the long term, but 2021 is just a little odd for these reasons.

That makes sense. Thank you for clarifying.

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

To wrap up, I am pleased with our first quarter performance as we drove strong growth, earnings, and cash flow. We executed well and continue to build for the future through investments in growth, productivity, and sustainability. We are well positioned for a successful 2021 and remain focused on delivering value for our customers and returns for our 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.