3M CEO talks fourth quarter earnings, inflation, and supply chain disruptions

3M CEO Michael Roman joins Yahoo Finance Live to discuss the company's fourth quarter earnings.

Video Transcript

- Well, better than expected quarterly results failing to lift the stock for 3M, hitting a new 52-week low in the session today. I want to bring in Yahoo Finance's Brian Sozzi, who's standing by with a special guest. Brian?

BRIAN SOZZI: All right. Thanks so much, Akiko. Joining me now is 3M CEO, Mike Roman. Mike, always nice to see you here.

Within your earnings report, something caught my attention-- not hearing it from a lot of other folks. You said you had notable strength in December. What did you see in your business last month? And has that strength continued into this year?

MICHAEL ROMAN: Well, good morning, Brian. Thank you for having me on today. Yeah, we talked about that. We had a solid finish to Q4, capping a strong year for 3M Company. And that was really better than expected growth across each of our four business groups, with some strength in December. And that included each of those businesses coming in a little better and some increase in N95 respirator demand that was part of that, as well, in the month of December-- so little stronger than expected on the top line.

We continued to effectively manage our production operations in the middle of some of the ongoing supply chain challenges, delivered for our customers, continued to get some traction on our pricing actions. All of that combined enabled us to deliver better than expected result-- both top line, bottom line-- and some strong cash flow, as well-- so a solid finish and, for the year, you know, strong, broad-based growth across our businesses, you know, strong performance both in margins and an increase in adjusted EPS-- so, again, capping a strong year for 3M Company.

BRIAN SOZZI: Mike, it's been a volatile few days for the markets. I'm sure you saw what happened yesterday in the markets, just stunning reversal things, under pressure here, talk now about a potential recession later this year because of interest rate hikes. How do you see it? Are you cautious to start the year?

MICHAEL ROMAN: Well, there's a lot of uncertainty as we come into 2022. I would say there are some positives. We have-- we're well-positioned as a company to deliver on growth in the new year. We've got that strong performance that we delivered in Q4 on top of the total year. We've been investing in areas for growth. We have some fast-growing trends that we're investing in. We've got areas, like our automotive electrification, up 30%. And in 2021, our biopharma business is up 26%.

Our home improvement business continues to grow at double digits. In fact, we're investing. We announced this past week that we're investing almost $500 million in a new factory in Clinton, Tennessee, to support that growth in demand. So we're well-positioned from what we've been investing in from a growth standpoint and those trends that we're seeing in those end markets that can leverage 3M capabilities and strengths.

Now, the outlook for the year-- there-- the macroeconomic outlook for the year still looks fairly positive, both industrial production and GDP-- I would say even down to some of the individual markets, like build rates for automobiles. It's the uncertainty in the near term that is really the challenge. What's going to happen in supply chains? How-- we managed through challenges in Q4. It's still with us. We're still seeing constraints and disruptions in supply chains. And now you have some questions in, you know, the outlook for the overall market as we go into the new year.

I would say we saw in Q4 and that strength in December that I talked about strong demand in our end markets. Our customers were still-- you know, still demanding product. And focused on serving them was really a priority. And that's got us positioned well, not to take away anything from the uncertainty related to the pandemic, the supply chains, the challenges that we might face in the markets as we go into the year.

BRIAN SOZZI: Mike, are you seeing anything in your business that would suggest we have-- that we have hit a peak in inflation and things might cool down a bit?

MICHAEL ROMAN: Yeah. We talked a little bit about this, Brian, on our call this morning. We saw inflation continue to step up in Q4, although the rate of increase slowed-- so maybe the first indicator that inflation is slowing as we get through the end of the year. The increase of inflation is slowing.

Just a reminder-- when you look into 2022, we called out inflation as having a bigger impact on us at the end of Q1 in 2021. So we were saying it's coming. And we saw it step up in Q2 of last year, Q3, and then again in Q4 at a slower rate. So the year-over-year comp is going to be significant as you get into 2022. And so we'll-- we expect to see an impact from inflation even at a slower stepped up rate.

So that continues to be one of the challenges. We also continue to see, you know, disruptions in the supply chain. So that serves up challenges in logistics and getting products. And we're investing either in how we run our factories or how we get product to our customers. That's another part of increased costs in our supply chain that we have been investing as we've gone through the year to really deliver for those customers.

BRIAN SOZZI: The supply chains challenges you're still dealing with since we last spoke. So many folks say this will be the year things get better. By mid-year, the supply chains will be back to some form of normal. How do you see it?

MICHAEL ROMAN: Yeah. I think there's-- estimating the duration of some of the impacts-- that we do expect it to get better as we go through 2022. We're seeing a convergence of COVID-19 snapback in demand. And I would say just some of the constraints that are on raw materials and labor as we have worked through some of those same issues-- and we would expect that to get better as we go forward.

Starting the year, we are anticipating continuing to having to manage through that. So it's a matter of how soon and how much better it's going to get as we move through the year. And we're-- we didn't do a lot with guidance on our call this morning. We're going to come back on February 14. We've got an outlook meeting with investors. We'll lay it out in more detail how we look at the year and how we look at, you know, the impact as we progress.

BRIAN SOZZI: And I have to give you a hat tip, Mike. You and your team are investing $500 million to build some new manufacturing capacity in Tennessee. And that comes, really, hot on the heels of Intel investing $20 billion in Ohio to build out its manufacturing capabilities for its chips. You know, as you take a step back and talk to your peers in the manufacturing industry, do you think we're seeing a American revival in manufacturing?

MICHAEL ROMAN: Well, for 3M Company, we've always been an investor in the region of the world where we do business. So we invest to serve our customers from production in the regions of the world that they are-- their markets are. And that's true for the US. We have about 40% of our revenue in the US. We actually produce about 55% of our supply out of factories in the US. That's maybe the one exception where we do export. So we're one of the top 100 company exporters out of the US as a result.

And so we've always invested in the US to serve our customers here as well as around the world. We do produce the majority of what we sell in Europe, Asia in factories in those parts of the world as well. We don't export out of those regions very much. So our supply chain challenges as we've gone through 2021 are often getting product from our US factories to customers overseas. That's-- we have challenges getting product from our factories to customers in the US, but also in getting them overseas.

So we've had that idea of investing where we can deliver the greatest value for our customers globally. And the investment in Clinton, Tennessee, that you mentioned-- that's related to our iconic brands and home improvement, our Command damage-free hanging, our home filtration products. That-- those are strong growth drivers for us as a company. There is a-- trends in the US that create increasing demand. And so that's really an opportunity to invest in a factory in the US to serve customers in the US.

So we're excited to make that announcement, where it's one of the areas that we prioritize coming through the pandemic. And it is helping to position us well as we go into driving growth in 2022.

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