Along With Its Turnaround Plan, 3M Needs To Evolve

Like its peer, ODP Corp ODP, the U.S. industrial conglomerate is also facing lowered sales as consumers reflect on their spending in a difficult macroeconomic environment. With an economic slowdown that is impacting its top lines and manufacturing, 3M MMM is also dealing with a corporate restructuring and lawsuits that could even cost the company its Dow Jones spot. 

Firing Of Recently Promoted Chief Business Officer 

Only a month after his promotion, longtime executive Michael Val was fired on Friday due to’’inappropriate personal conduct and violation of company policy“.

Layoffs

On April 25th, the diversified conglomerate announced it will be cutting 6,000 jobs across the globe as it works on lowering costs amid waning demand for electronics. At the beginning of the year, it already announced one round of layoffs that will impact 2,500 roles. With the most recent announcement, the total global workforce will be trimmed by 10%.  

The Restucturing Plan

As 3M continues its business journey by focusing on high-growth businesses, such as EVs and home improvement, while prioritizing emerging industries such as climate technology and next-generation electronics, 3M will be diluting management layers across all business functions and geographical locations. 

Along with trimming 8,500 jobs and leaning its corporate structure, 3M will also be simplifying its supply chain and adjust its marketing model. 

Total pretax restructuring charges are expected to be in the range between $700 million to $900 million, with half of them occurring this year, and the remaining next year. As a result of these actions, annual operating income is expected to improve also by the above range. 

To sum up, the restructuring plan reflects management is coming to terms with the reality and doing what is necessary to deal with sluggish volume growth.  

Quarter Results

Considering 3M makes electronic displays for smartphones and tablets, the fact alone that the consumer electronics business fell 35% in the first quarter is concerning to say the least. But the latest report for the quarter that ended on March 31st at least topped estimates as adjusted profit amounted to $1.97 per share topping analysts' expectations of $1.58 per share that Refinitiv gathered, with revenue of $8.03 billion also surpassing estimates of $7.49 billion.

But figures alone were not what caught the market’s attention, but rather the announced turnaround plan that gave hope of 3M’s business portfolio being better utilized.

Monsters In The Closet- The PFAS Nightmare

Along with poor macroeconomic conditions, there's also the risk of legal liability from PFAS manufacturing, among other issues. Even The Coca Cola Company KO got sued at the beginning of the year over claims its juice contained forever chemicals. Coca Cola advertised its Simply Tropical juice as „all natural“ with the lawsuit claiming that what Coca Cola actually did was deceive its customers with allegations of this production being made from natural ingredients. Third party testing has revealed that the Coca Cola Company orange drink that was portrayed as being all natural contained high levels of undisclosed PFAS, at levels hundreds of times greater than federal limits for drinking water. By 2025, 3M promised to stop making these man-made forever chemicals. But considering the harm made by these chemicals, this could be considered by many as too late. Not to mention the fact that this discontinuation represents a financial hit in the range between $1.3 billion to $2.3 billion, which is a small of its corporate revenue. By the looks of it, as diversified as its business model is, 3M is being pushed from all sides to dramatically change its identity. 

The Need To Evolve

In order to navigate a slow macroenvironment, 3M is adjusting its cost structure. Undoubtedly, 2023 will be challenging. 3M's R&D hasn't generated the products to be able to boost volume and expand margins in recent years. 3M’s pricing power is no longer strong as it was.3M is a company that is cost-structured for volume growth and that expansion has not been happening lately, so undoubtedly something big needs to change. Even ODP is transitioning away from the traditional commercial business towards a B2B product and services. In its latest earnings report, ODP showed that revenue from business solutions managed to offset the decline in retail revenue. ODP CEO Gerry Smith believes that the recently segmented four units, among which is Office Depot, allowed the company to utilize its assets better and therefore, unlock its potential.

GE Diversified A Bit Better

While 3M is aggressively lowering costs, General Electric GE started 2023 strong. Moreover, General Electric reported its first free positive free cashflow in nearly a decade. Partially owing to the strength of its core aerospace division, General Electric posted stronger-than-expected first-quarter earnings, while also boosting its full-year profit and cash flow guidance. General Electric is also making efforts to make its operations leaner and sharpen its focus, but it is also enjoying robust market demand.

It certainly doesn't help that 3M’s management got known for being overly optimistic with guidance, but at the very least, it is at least taking action so hopefully, 2024 gets to be the year of good earnings growth. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.