Ladies and gentlemen, thank you for standing by. Welcome to the 3M Second 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, July 26, 2022. 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 second quarter earnings conference call. With me today are Mike Roman, 3M’s Chairman and Chief Executive Officer; Monish Patolawala, our Chief Financial and Transformation Officer; and Kevin Rhodes, our Chief Legal Affairs Officer. Please note, that Mike's and Monish's formal comments this morning will be longer than past quarters given the announcements that we made this morning. Therefore, when we get to Q&A, please keep it to one question and 1 follow-up so that we can try and get to everyone as efficiently as possible. Also note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3m.com. Please turn to Slide 2. Please take a moment to read the forward-looking statement. During today's conference call, we will be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K and 8-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 appendix to these slides and in the attachments to today's press release. With that, please turn to Slide 3, and I'll now hand the call off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. Today is an exciting and important day for 3M. We are positioning our company for future success by creating more opportunity while reducing uncertainty. We plan to spin off our healthcare business, which will result in two world-class public companies that are global leaders with significant growth opportunities in the respective markets. We intend to execute a tax free spin-off creating a global diversified healthcare technology leader. New 3M will remain a leading global material science innovator, serving customers across a range of diverse and attractive end markets. Each company will be well capitalized, more agile and focused and well positioned for long-term success. Also, we are proactively taking steps to resolve litigation related to Combat Arms earplugs. Aero Technologies, a 3M subsidiary has voluntarily elected to initiate Chapter 11 proceedings. This process is intended to resolve claims related to Combat Arms in a manner that is efficient and equitable. 3M has not filed for Chapter 11. Both 3M and Aero expect to continue to operate in the ordinary course. And as we announced earlier in our earnings press release, 3M continues to deliver in a challenging environment with adjusted earnings per share of $2.48 in the second quarter. We also posted organic growth of nearly 5%, excluding the impact of disposable respirators and COVID-related lockdowns in China. Monish will cover our Q2 results in detail after my remarks. Please turn to slide four. Now, is the right time for 3M to act as we position our company to win in a rapidly changing world. As I shared at our investor meeting in February, disciplined portfolio management is foundational to our growth strategy. Our Board and management team actively evaluate strategic options to drive long-term sustainable growth. The…

Thank you, Mike, and I wish you all a very good morning. Please turn to slide 17. The 3M team executed well and delivered solid Q2 results by remaining focused on serving our customers, while navigating continued supply chain challenges, inflationary pressures along with the geopolitical and COVID dynamics. Second quarter total sales were $8.7 billion, which increased 1% on an organic basis versus last year's 21% comparison. Adjusted operating income was $1.8 billion, with adjusted operating margins of 21% and adjusted earnings per share of $2.48. We continue to experience strong demand across most end markets. However, a couple of items had a negative impact on overall Q2 results which we had highlighted during the quarter. First, as forecasted, we experienced a year-on-year decline in disposable respirator sales of approximately $150 million; and second, the Greater China region's COVID-related lockdowns resulted in a sales decline of approximately $140 million year-on-year. The impact was lower than the $300 million headwind we had anticipated as the reopening of our facilities in June went better than anticipated. Our China team did a tremendous job adding additional shifts to ramp up production, distribution, and drive productivity to serve our customers. Adjusting for these two impacts, organic revenue growth was nearly 5% for the rest of 3M in the quarter. Also, the continued strengthening of the US dollar resulted in a foreign currency translation impact of minus four percentage points to Q2 total sales growth. This FX impact, combined with the China COVID-related lockdown, negatively impacted second quarter operating margins by nearly one percentage point and earnings by $0.24 per share versus our expectation of $0.30 as discussed during a conference in early June. We also continue to support our people and manage the business and supply chain impacts from the ongoing Russia-Ukraine conflict.…

[Operator Instructions] Our first question comes from Andrew Obin with Bank of America. You may proceed with your question.

Yes. Good morning.

Hey, Andrew.

Yes. First of all, congratulations on achieving these key milestones. I'm sure the team worked incredibly hard to achieve that. So congrats.

Thank you, Andrew.

My first question, so maybe not for Mike, not for Monish, Kevin is on the phone as well. So we're getting a lot of questions about just the structure for the Combat Arms. Kevin, could you just talk about the process for sort of ring fencing the Combat Arms liability. You highlighted an estimator -- how much of it is sort of this -- how much of this estimate is sort of discretionary in nature? How much of it is based on precedents? Just maybe explain the process a little bit better to us, because my understanding is that it is a fairly complex process to come up with a number, but any help would be useful. Thank you.

Yes. Maybe, Andrew, maybe I'll start with it, and Kevin can add some details as well. So as we talked about in the prepared remarks, Aearo Technologies operating entity in 3M is voluntarily taking on this liability. And it's really about us, 3M stepping up to do what's right here. Do right by veterans and drive more certainty, drive better clarity for everyone involved. As we talked about, we are committed to fund the trust, and this is based on the analysis by an experienced estimator of claims. The third-party that we're working with an economic consulting firm, Bates White is the one that developed the estimate for us. We believe the $1 billion is the appropriate amount based on that expert analysis. And we are -- as part of this process, we'll provide additional funding if required under the terms of the agreement, so that's the basis for that $1 billion. Kevin, I don't know if you have anything to add to that?

Yes. Thanks, Mike. I'll just add that the analysis will be explained in the next report that will be reviewed as part of the Chapter 11 proceeding. It's important to note that the Chapter 11 court will oversee this process and the claimants will be represented as well. And the goal is to have the court help Aearo establish this trust funded by 3M, as Mike said, and those seeking compensation can present their claims to the trust rather than going through the litigation process on a case-by-case basis.

And does this number get updated on a regular basis in the Q or intra-quarter, or it's just we're going to get big updates as things evolve or no updates at all?

So this is the commitment to fund the trust of $1 billion at the end of the process when the trust is established, that's when the proceeding will be concluded.

Got you. Thank you. And just a follow-up question. I guess this question is for Mike. There's a lot of talk about recession, right? There are headlines that we're technically in a recession. You did address inflation, consumer slowing. But just from your perspective, you have such broad exposure to the economy. What do you think we are in the economic cycle? And how does it sort of figure in your planning for the second half of the year and as you start initial budgeting process for 2023? Thanks a lot.

Yes. Andrew, maybe I'll start. In Q2, we saw most of our end markets remain strong. And like everybody else, we saw some softening in the macro, both IPI and GDP. As we look forward, it's really important in the current backdrop -- economic backdrop to look at individual markets. And we're seeing some positive signs. We see elective procedures continuing to improve kind of sequentially as we go. We'll see a second half improvement in build rates for automotive versus first half. There's some areas of softness in our individual markets. We're looking at consumer electronics for example that has now an outlook for the total year that will be negative growth for that segment. We're watching, I would say, consumer and retail spending closely with the focus on inventory and the retail customers and also just the general dynamic around spending is some of the challenges with inflation causing some shifts and where consumers are spending their money. So we're watching that closely. There's a few other areas that really are looking at it. We see Europe and really broadly EMEA down in the second quarter and impacted by geopolitical impacts, COVID, I would say, inflation impacting. So just general, some softness there as well. So all of this, when you put it together, it's leaving us with some uncertainty around the economic outlook. So that's the way I would wrap it up as we go into the second half, we're cautious about where the economy is going. We're watching it closely.

Andrew, I have to add FX, foreign exchange, down 4% for the year, down 5% for the third quarter. As you know, that strong dollar does impact our earnings. And that's why 80% of our guide down was due to FX. So that's the other piece I would add to Mike's comments.

Really appreciate it. Thanks a lot.

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

Good morning guys, and congrats on the health care spin announcement. That seems like a smart move. I hate to chime in Monish here. But on slide 18, since you guys don't give us price anymore, can you just give us at least some sense of what -- you've got a $0.36 raw material impact, if price came close to offsetting that, or just give us a little bit of sense of the progress you've made on the price cost?

Sure, Scott. I'll take that. As I've mentioned before, the teams have done a very disciplined approach to pricing actions across multiple markets, multiple geographies. As you know, we don't do just cost plus pricing. So we take into account our competitive position. We take into account market situations, the inflation that has by commodity. So when you put all that together, I would say, between the businesses and the product line, that's somewhere between low single digits to high single digits. But if I do a weighted average of that, I would say mid-single digits, Scott, is where we came in on price. So we did offset inflation. As I mentioned in my prepared remarks, we are managing inflation through pricing actions. And in the second half, we continue to see broad-based inflation. So we updated our inflation guide to nearly 750 to 850 versus the earlier range we had, which was in the 350 to 450 range. And even there, we continue to manage that inflation, we continue to take price. I don't know if I answered your question, but I think that was your question.

Yeah. No, that's helpful, Monish. And just going back to Andrew's question on slide 15, where you talk about Aearo Technology is being always operated as a wholly-owned subsidiary. Is there some sort of -- is there a litmus test there on whether it was truly integrated or funds coming, or the ERP systems coming old? I mean, I just remember and effetely from the asbestos days that there were lines it couldn't cross to be able to keep something separate and put a liability into a separate entity like this?

Yeah. So Aearo, I'll take this. So Aearo has been a wholly-owned subsidiary since the 2008 acquisition. It has continued to operate and it's important to note that the Aero entities have been involved in the Combat Arms litigation from the beginning. They are named as co-defendants in the litigation and they launched, manufactured and actually sold the majority of the Combat Arms Earplugs that issued before the 2008 acquisition by 3M.

And Scott, we don't see a reason why we can't have our systems, especially your question on ERPs, separate the two entities up.

Okay. So ultimately, there will be a judge's ruling on that, I would assume, perhaps. Is that correct?

Yes, it's correct.

Okay. Thank you. I appreciate it.

Yeah. Thanks Scott.

Our next question comes from Andrew Kaplowitz with Citi. You may proceed with your question.

Hey, good morning guys.

Good morning.

Good morning.

Mike, can you give a little more color on what you're seeing by region? I know you mentioned Europe and potential weakness there in the second half. But you also talked about China and stronger-than-expected improvement in June, and it was down 8% in Q2. So what do you think growth looks like for the rest of the year there? And how worried are you about a bigger slowdown in Europe?

Yeah. It's maybe just to give you those two areas in particular. So China, as Monish highlighted in his prepared remarks, we saw better-than-expected recovery in June to the lockdowns that we were seeing than the soft start to April, May that we talked a bit about in China. So, as we go forward and for the quarter, you're right, it's down high single-digits year-on-year. GDP still looks positive in Q2. As we go forward, part of the answer is going to be how quickly does it recover? What is the impact going forward of COVID as any potential additional lockdown. So, it's really looking at where we go there. I mean China continues to be an important market for 3M. It's -- the macro backdrop shows a good positive backdrop, but it's really going to be how all things progress relative to COVID and the recovery from COVID than what else comes our way as we go through the quarter and through the rest of the year. Back to Europe, our declines there were really led by Consumer and Safety and Industrial. Healthcare was still growing strong in the quarter. We saw some strong growth in individual market segments. Back to my comments, the current outlook and the current growth is market-dependent as opposed to broad-based one view of everything. And so I think Europe is at it. We've got the geopolitical risks there. We've got the impact of the supply chain issues and challenges and inflation as well. So, down in the quarter and we think a soft outlook as we look at the second half.

That's helpful, Mike. And then maybe you could give a little more color into how the change in you're approaching the Combat Arms situations impacting your total litigation costs. Does it lower 3M's overall litigation costs even in the short to longer term? How does it work in terms of -- because you've been spending call it, 5% to 6% of EPS has been -- you've separated that for us. Does that now go down, up? How do we think about that with the change today?

Yes. So the way we work, Andrew, is when we came into the year, we had told you approximately $0.60 of adjusted earnings of litigation-related expenses. That number has been updated for three items. Item number one is the pretax charge that we will take as a part of the Combat Arms litigation, which is approximately $1.2 billion. The second one is the charge that we announced earlier in the quarter about our Zwijndrecht thing, which is $355 million. And for the year, that will be approximately $500 million. And then the item which was around $0.60 of litigation-related expenses now with the way this transaction will work out is around $0.55. So put all that together, that's approximately $2.2 billion of adjusted earnings for litigation-related and Zwijndrecht-related items. So hopefully, that answers your question.

Thanks for that Monish.

Our next question comes from Stephen Tusa with JPMorgan Securities. You may proceed with your question.

Hey guys. good morning.

Hi Steve.

Are there any -- what are the risks around creating the structure for this entity? How do you kind of gauge the in this political environment, any kind of risk to not being able to kind of execute on this, or your lawyers kind of tell you it's pretty iron-clad?

Yes, Steve, there's certainly -- there are process steps that we will go through as we file today for the Aearo Technologies. And so there are -- we have to work through each of those steps. So, there's always decisions that are made along the way. So, I think that's part of gaining certainty as we go and we'll keep everybody updated. I don't know, Kevin, do you want to make any comments specifically?

Yes. Certainly, while most Chapter 11 proceedings are contested, Steven. We've -- we're prepared to move forward and we believe the applicable law supports our position as we move forward into this process. And the goal, again, is to remove uncertainty to set up a more efficient and equitable process for establishing a fund to compensate claimants who are entitled to compensation as opposed to the process of continuing to litigate on a claim-by-claim basis.

Got it. Helpful. And then just one quick follow-up on, how you're kind of preparing for a potential pullback in demand more broadly. When you look at what happened in COVID, all you guys took a lot of temporary cost out able to defend the margins pretty nicely. What are kind of the contingencies this time around? Did the things -- are things going to be a little bit different or should we look at COVID as kind of like the same playbook if we do see a significant macro pullback in the next couple of quarters?

Yes, Steve, I think as you've seen, we manage into recessions and through any kind of slowdowns with a broad-based approach. And we'll do what's needed given the economic conditions. As I said, we're watching how each of the market demand areas are developing, how the overall macro is developing, what's going on, on the global economic outlook. And we'll take actions as required and it will be -- in what we do in our factories and how we manage our commercial businesses and how we operate the company. So, we'll keep you updated as we get a better view.

Excellent. Thanks.

Definitely, Steve.

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

Thanks. Good morning, everyone.

Good morning, Nigel.

Yeah, thanks. Just wanted to go back to the bankruptcy filing. So when you put Aearo into Chapter 11, do you move EBITDA in that business? How does that work?

Yes, Nigel. Depending on how the bankruptcy proceeding goes, the plan will be to deconsolidate that entity, but the overall revenue and earnings are immaterial in the grand scheme of things.

Okay. Okay. We'll move off-line there. And then is the -- I mean there is controversy around the structure and those appeals and the congressional bickering about it. But how contingent is the Healthcare separation on a successful filing for Aearo? I mean is one continent in the other? So, can you still go ahead and separate Healthcare even if the filing for Aearo is unresolved?

Yes. Nigel, we did announce both actions today. They're really the result of separate kind of strategies and decisions. Healthcare spin was based on, as you know, we actively manage our portfolio. We look at broadly where to invest in our portfolio where acquisitions make sense and how do we get the most value out of it and that's what was behind the decision to ultimately spin the Healthcare. We've invested in strategies to create a stronger Healthcare company. It's is well positioned to succeed and have a great future as a stand-alone company and that really drove that decision. The decision to really take the steps related to Combat Arms Litigation came out of really, first and foremost, the result of the bellwether trial. They were highly variable. We believe it would take years to litigate those claims. And so given a choice between a costly litigation process, we -- in a better, fair, more efficient resolution. That's what drove the decision to step into the new actions that we're taking. So they were -- they happened to be announced in the same day, but they're really based on separate strategies. And both really helping to set us up for, I think, well positioned for, as we said at the top, greater opportunity with the spin and more certainty with the actions we're taking related to Combat Arms.

Thanks Mike. And then if I can just follow up. We get a lot of questions from investors around, obviously, the $1 billion is what you put in initially. But obviously, the plaintiffs will be at a much, much higher level. So a seam in the structure is approved. How does that gap get bridged between the $1 billion you putting in and, obviously, the plaintiffs are at a much, much higher level? How does that get resolved?

Well, based on what we're doing, there will be a separate process that will be a different process. Kevin can talk about how that proceeds. But there will be -- in the court that takes responsibility for these proceedings, they will oversee a process there. But we believe that, as I said, we're committed to a fund that was based on, we think, appropriate analysis from an expert outside firm. But Kevin can talk about the steps of that process and how that resolves.

Yes. As part of the Chapter 11 proceeding, there will be a claims estimation process where the court oversees that process. And we believe that the $1 billion that we have committed based on the external analysis is sufficient to fund a trust for those claimants who are entitled to compensation. The proceedings will be the subject of expert reports overseen by the court. The claimants will be represented as well. And we believe this is a number that is required, the funding agreement. If necessary, 3M is prepared to provide additional funding to resolve this matter at the end of the process.

Thanks, Kevin. Very helpful.

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

Thanks. Good morning, everyone and congrats on both announcements.

Good morning, Joe.

Good morning, Joe.

Yes. My question is for Kevin, actually, because this is all fairly new to us. I'm just curious. Like, is there some kind of likelihood that the plaintiffs will come back and want their lawsuits to be heard outside of bankruptcy court?

So, once the Chapter 11 filing is made, there's an automatic state as to the debtor entity, which, in this case, is Aearo Technologies. We are also asking for that automatic state to be extended to 3M. We are funding, according to the terms of the funding, indemnification agreement. We're committing to fund the trust to help the court set up a mechanism for compensation for those claimants entitled to compensation. We're providing that funding through Aearo. So we think we are entitled to as 3M and hope the court will extend the state of litigation to 3M, and that would put a stay on the existing litigation in state and federal court.

Got it. Okay. That's helpful. And then can you guys maybe just provide a little bit more color around the timing, like how this structure actually helps to expedite the timing in getting the resolution with the potential payments?

Yes. So the Chapter 11 case was just filed this morning. The court has not set a schedule yet. There have been a wide range of duration for other Chapter 11 filings to resolve litigation matters. We're hoping to work through the process and resolve the matter as quickly as possible. We hope that all parties will share that goal and move it along as expeditiously as the court's procedures permit. We'll certainly provide updates as the case progresses. And if you think about this in context, we've participated in the MDL process for the past three years, taking 16 cases through bellwether trials. We're now at the next step, which is to pair 1,500 cases for trials around the country while we await the outcomes of our appeals. So as compared to the process ahead to litigate each of these cases on a case-by-case basis, we believe that the Chapter 11 proceeding will be more expeditious and certainly, will provide more clarity and a way to more efficiently and equitably provide compensation to those who are entitled to it.

Okay. Got it. Thank you very much.

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

Hi, good morning. So maybe just wanted to kind of clarify a couple of things on healthcare as there's been a lot of focus on Combat Arms. On the healthcare side, you've had margins down for several quarters now. I know Monish, you always say that volume leverage is the main driver of margins, but at healthcare, that hasn't seemed to be the case most recently. So just wondering kind of when those healthcare margins turn around? Are they going to be up year-on-year in the back half? And also on healthcare, is the plan that -- it's levered at 3, 3.5 times, is the plan you'd get that sort of step one the big dividend back to the RemainCo at that point when it spins out and then step to a year late, so you can start to monetize that just under 20% stake. Is that the way to think about the cash sort of from healthcare?

Yes. I think both great questions, Julian. I'd start with the first question on margins. As we told you, the EBITDA margins for the second quarter were 30%. As we have talked about before, when you compare to prior, you have to take into account the Acelity acquisition and its impact on purchase accounting, et cetera, which depresses the margins. And that's why I would look at EBITDA, which is 30% in the second quarter. For the year 2021, we ended at 31% EBITDA. So hopefully, that answers your question on that range. Back to, do we see it continuing to improve? Absolutely. I mean this is something that the business is doing a really nice job of continuing to manage inflation with price actions. They continue to drive productivity actions. And as the volume starts, which is back to your point, which is volumes drive the biggest leverage, as we are seeing elective procedures starting to go back up and hopefully, it doesn't get impacted by another wave of COVID, you're going to start seeing that business continue to drive the growth in that area. So that answers your question on margin. The team is quite focused on margin, quite focused on driving organizational efficiency through root cause. On your second question about how the dividend works, I'll start by saying, this is still 15, 18 months away. But the way it will work at that moment in time when that spin happens, there will be a dividend payout from healthcare, which currently we are saying is going to be levered 3 to 3.5 times with positioning for rapid deleveraging because of the strong cash flow that healthcare itself generate. As a part of that transaction, 3M will also retain 19.9% equity stake in our healthcare business that we can monetize over time. The whole purpose of -- the whole intent of this transaction is to be as tax efficient and tax-free, for which we will go ahead and file all the requirements that needed to make it tax-free -- and -- but we are in no rush right now to sell the stake once the spin happens, and we'll monetize it over time. And I think that gives us a lot more flexibility for us to pursue strategic options between the dividend that we get as well as the retained stake that we can monetize over time. Hope that helps, Julian.

That's great. Thanks Monish. And then maybe a sort of more reskin of operating guidance question. So if I look at the new guidance, I think it implies 270-ish of earnings per quarter in the second half. You did about 250 in Q2. I don't think FX is getting easier in the back half. Organic volumes probably not better in the second half given the macros. So just trying to understand, what do you think is getting better in that back half versus the second quarter or the first half run rate? Because you're starting out with that FX headwind, maybe there's a little bit less of that in China $0.11 COVID hit. But anything else you'd call out to drive that step-up in earnings?

Sure, Julian. And I'll give you all the pieces, and I'll try to give you data between sequential and year-on-year. So it's confusing, my apologies upfront. But I'll just start first by saying, yes, FX, you're right, continues to be a pressure. As I've said in my prepared remarks, for the third quarter, FX is at 5%. For the year, it is at 4%. So that actually adds additional pressure first half to second half. But back to your points on the positives and negatives. So we'll start by one, again, in my prepared remarks, I said China, we still came in with a backlog that we expect to clear in the second half. You'll see that in the third and fourth quarter. We came in $140 million down on a year-over-year basis. So there's recovery there. Secondly, if you look at build rates in automotive, first half versus second half, they are up nearly 9%. However, for the year, they are up 5% versus earlier we thought the whole year would be up 9%. You're continuing to see strong demand in semiconductor data centers and factory automation. Third, elective procedures, which were in that range of 85% to 90% in the first quarter moved up to 90% to 95%, we expect that to come back to 100% by the end of fourth quarter. And then lastly, GDP and IPI is still forecasted to be up 3% to 4% -- 3% for the year versus when we started the year, it was 4%. So for the second half, they're still protecting -- projecting a GDP up. On the flip side, on the things, to your point, that have become negative, we talked about FX, we are still seeing the stubborn and evolving impacts of COVID. Supply chain and logistics pressures…

Thank you for the details.

Our next question comes from Josh Pokrzywinski with Morgan Stanley. You may proceed with your question.

Hi, good morning everyone. Thanks for all the details this morning.

Good morning Josh.

Just a question on maybe kind of the perspective capital allocation strategy for RemainCo. You said kind of through the separation, no real change, but just given kind of the focus of the liabilities and the cash coming out with healthcare free cash flow margins being pretty high. Any change in the way folks should think about something like a dividend policy going forward?

Yes, Josh, I would say I'd start with we're continuing to focus on driving growth and our capital allocation priorities reflect that. And then they will remain unchanged. It's first and foremost, about investing in our business. It's about paying an attractive dividend, a high priority for us and continues to be so looking at strategic M&A that can add value and deliver on greater opportunities for the company. And then it's returning capital to shareholders through share repurchases. And we continue to see that as our set of priorities as we go forward. When you look at new 3M, it's going to be a very strong, focused, well-capitalized business, a leader in highly attractive markets, as we've been talking about on the call. We'll have tremendous cash flow in that business, a strong balance sheet. And as Monish just highlighted, with the proceeds from the spin and the 19.9% retained stake that we can monetize over time, it will get stronger. So, we are -- we will be well positioned to continue to execute those capital priorities and continue to create value.

Got it. That's helpful. And then just -- I know the historical kind of framework on 3M or the portfolio rationale was that a lot of the IP was domiciled at corporate. I think there's some more diverse assets in Health Care, maybe than some of the other industrial businesses. But are there any dissynergies by virtue of either some of the IP or manufacturing process sourcing that kind of gets separated there when Health Care leaves?

Yes, Josh, we've long talked about the benefit our businesses have in leveraging the fundamental strengths of 3M. And they've certainly been important to building the Healthcare business, the technologies that we have are unique and differentiated technologies, our manufacturing capabilities, our global capabilities and our brands. And Healthcare as you touched on, with our portfolio strategies, we've built a stronger Healthcare business. We've done it with organic investments and sometimes leveraging some of those key technologies. We've added acquisitions, significant part of the business now with Acelity and M*Modal coming in as part of the business. We've also stepped in to really focus that business through the divestiture of drug delivery and soon the separation of the food safety business. So, all of that has positioned Healthcare not only to be a strong stand-alone company, well positioned to be able to execute those same strategies moving forward. There's always some connectivity to the technologies manufacturing at 3M. The – I would say, the connection between Healthcare and the rest of the company is more limited than the three businesses that will make up new 3M. We'll be able to manage that separation well, we think, especially with the focus that Healthcare has on those specific markets. So -- it's been an important part of building it. We think it's well positioned with what we can do in the spin to be able to take it forward.

Josh, I just want to add a few more things to what Mike just said. We're going to have dedicated teams that are going to drive the separation. Also, just looking at precedent of other sprints publicly, plus some of the experience that we have had with our divestitures in the healthcare space, we believe the separation cost is going to be somewhere in the range of $1 billion to $1.5 billion that will get played out overtime. Some of it will start now and some of it will play out over the next 24 months. But again, it's quite early in the process. The teams are starting to get ramped up as we get and learn more, we'll definitely keep you posted.

That’s great. All the best guys.

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

Thank you. Good morning, everyone.

Good morning, Deane.

A couple of cleanup questions here. The first, just -- this wasn't clear, but is the Board considering any other divestitures or spin or is Remainco 3M portfolio going to be as is on a go-forward basis?

Yes, Deane, our portfolio strategy, it's a continual strategy. We're always evaluating where we want to make change in our portfolio, adding through M&A, managing to optimize the value. So that's something I will continue really as we go forward. I talk a lot about new 3M. We really believe the three businesses that make up that new 3M company will be strong, well positioned for success in their markets. They will leverage well the technology, I guess the heart of 3M, the fundamental strengths of 3M. So, it's -- it will be a continual process that we -- and strategy that's important. I think our portfolio strategy really complementing what we do with innovation. We're driving innovation, creating new solutions for customers, building new businesses. At the same time, portfolio management make sure we're looking broadly at where we're creating the greatest value and how do we need to think differently about it. So that's not going to change as we execute through the spin.

Got it. And then just want to understand, is there a scenario similar to what you're doing in combat arms for PFAS, where you would consider a similar bankruptcy structure. Is this related to this, it wasn't clear in the filing today. Maybe this is a technical question for Kevin. But are you – is this being filed under a 105A bankruptcy structure? Because it certainly sounds that because that would require all of those sign-ups and approvals, which would suggest there's going to be an extended process there to get to the finish line?

Yes, Deane maybe I'll take the PFAS part of that question, and then I'll let Kevin answer the 105A question. So, on PFAS, we continue to be focused on practically managing our environmental stewardship and stepping up and following through on our commitments there. We're vigorously defending ourselves in the cases that we have with PFAS. And we're looking to reasonably resolve, remediate where we can. We expect PFAS is going to play out over years. And I would probably leave it at we're well advised of our options.

Understood. And Kevin?

Yes. So we believe that 105(a) does provide authority as well as other provisions of the bankruptcy code, given the Aero technologies liabilities that are included. And so our filings are being completed today, and those will spell out the various bases for seeking the relief that we've asked the Chapter 11 court to provide.

Will you also pledge your insurance assets?

So our insurance assets are part of the ability to -- of funds that we can tap into to fund the trust. If those assets will be the provided, as well as other assets from the company to provide the trust. And I just -- one point to clarify that, it's the Combat Arms liabilities as well as the -- some legacy, some discontinued Aearo Technologies respirator and mask claims, which are part of the filing as well. Some of those are for asbestos exposure, which are under 24G of the code as well.

Got it. That’s really helpful. Thank you.

Our next question comes from Nicole DeBlase with Deutsche Bank. You may proceed with your question.

Yes. Thanks. Good morning, guys.

Good morning, Nicole.

Just maybe a couple of questions on the business. I mean, looking at inventory, how would you categorize inventory in the channel versus what's ideal? And I think probably the biggest question would be around how you would view your consumer inventory?

Yes. Nicole, it's something we watch closely always. It's something that gives us a good indication of the sell-through of each of our businesses. There are certainly some areas that we've seen some inventory build up there related to COVID lockdowns, as an example. We've added some inventory and built some inventory ahead of some ERP go-live actions that we're taking. When we look at the channel inventory, it's been relatively stable. It's having to react to the same kind of supply chain challenges that we are seeing and react to it, disruptions in supply, logistics challenges. So it's a little more dynamic than usual, but pretty well aligned with what we're seeing in terms of demand. We're watching consumer closely. There was elevated inventory in the channel as part of that. That's something that has been very publicly talked about that retail leaders are working through. We're seeing some of that as well. We still see strong sell-out point-of-sale demand there, so something that we're watching closely. And again, it's -- I would say it's more dynamic, but maybe except for something like retail inventory pretty well in line with expected demand.

Got it. Thank you. And then just a follow-up on price cost. So some kind of key commodities have started to come down. At what point could that start to impact your margin positively. Like is that as soon as could impact the back half of 2022, or is that more of a 2023 margin dynamic at this stage?

Yes, Nicole. And we watch this closely. As you know, we have exposure to multiple feedstocks, luckily not one of them is overly material. You look at polypropylene, you look at resin, you look at logistics, airfreight costs, et cetera. The thing that we haven't yet seen is sustained reduction. So you get data points like you've seen the data points of oil come down. But how that translates down to the feedstocks because we don't buy crude oil is going to play itself out. So that's what we are watching. And so I don't know whether it impacts 2022 or 2023. But what we do see still right now is there's broad-based inflation all around that is getting pushed down as tiers are getting involved. And as I told you, we have updated our guidance to 750 to 850 of inflation for the year, which is higher than what we thought coming into the year. But at the same time, we are managing that inflation through price. And I think what we'll have to watch is to supply chains get sustainably improved versus one or two data points.

Understand. You shall pass it on.

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

Hi. Good morning, all and congrats on today's announcements.

Thanks, Brett.

I appreciate the color on the separation cost, the $1 billion to $1.5 billion. But I was hoping you could provide some color, insight on what the go-forward standup corporate structure costs will be for the two entities?

Yes. Sure, Brett. So again, I'll give you benchmark data. So we have a placeholder for the healthcare business, there's a bench using standup costs that's approximately $100 million is what we said is public company cost for that size of company. Similarly, right now, what we have penciled in is for new 3M to have around 1.5% of revenue as incremental cost or stranded costs. However, as Mike and I have told you all multiple times, we are all focused on org efficiency. We are still very early in the process, and we're going to keep working this down. We got time until the spin gets done. So we're going to keep trying to be as efficient as we can and make both companies continue to grow above macro pre -- having margin expansion and strong cash.

Okay. Got it. Thanks. And just one last one on the Bellevue facility. So you reached the agreement in early July on some of the actions, the new commitments. Could you just provide us with an update how that facility production is ramping? And are you still partnering with a third party there? Are you going to get back to kind of full run rate in terms of your internal sourcing strategy by the end of the year?

Yes. Brett, we are in the process of restarting the manufacturing operates in there. It takes some weeks to do that. We reached the agreement. We were pleased with the outcome of the cooperation that we've had with the local authorities there to resolve the matters and move ahead. So we'll be ramping up the full production here soon. So we're staying in touch with our customers, making sure everybody is aware of our time lines, but it's -- we're in the middle of that ramp up.

Okay. Great. Best of luck.

Okay. 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.

In summary, we are positioning 3M for the future to create more opportunity and greater certainty. There will be two world-class, well-capitalized public companies. We will work to efficiently and equitably resolve our Combat Arms litigation, and we will maintain our relentless focus on delivering for our customers and shareholders. We remain focused on driving growth and margin expansion and generating strong cash flow. We're excited about the new opportunities to apply 3M Science to life. 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 lines.