Monish Patolawala
President and Chief Financial Officer at 3M
Thank you, Mike, and I wish you all a very good morning.
Please turn to Slide 6. We continue to build upon the strong foundation we laid in 2023. We remain focused on our priorities and the team continues to deliver improving results. We posted strong adjusted results in the quarter, including sales of $7.7 billion, operating margin of 21.9%, earnings per share of $2.39, and free cash flow of over $800 million.
These results were better than our expectations as we continue to drive strong operational execution and spending discipline. We also benefited from significant operating leverage, particularly in Transportation & Electronics, which was driven by strong organic volume growth in electronics and automotive. Our results also benefited from the acceleration of certain nonrecurring actions, which I will go through in more detail on the next slide.
Our first quarter adjusted sales of $7.7 billion exceeded our expectations of $7.6 billion as we delivered improved organic growth, which was partially offset by a headwind from foreign currency translation. We delivered adjusted organic growth of nearly 1% or up 2.4% excluding geographic prioritization, product portfolio initiatives, and last year's disposable respirator comp. Organic growth was driven by our Transportation & Electronics business as the team won share gains from spec-in wins and new product introductions with automotive and consumer electronics OEMS. This drove strong organic growth as the OEMs ramped production for new launches for end customers.
Geographically, year-on-year strength in China and EMEA was driven by strength in electronics and automotive. Sales in the U.S. were flat year-on-year, with industrial and health care end markets showing relative strength, offset by consumer retail softness.
Please turn to Slide 7 for details of the components that drove our year-on-year operating margin and earnings performance. As mentioned, on an adjusted basis, we delivered operating margins of 21.9%, up 400 basis points and earnings of $2.39 per share, up 21% versus last year's first quarter. Our first quarter performance was driven by improved organic growth, particularly in Transportation & Electronics, along with a continued focus on operations, restructuring actions and spending discipline, which drove better than expected improvements in operating margins of 340 basis points and earnings of $0.42 per share.
As disclosed in our Form 10-K and as factored into our 1Q guidance that we provided in January, our year-on-year margins and earnings were benefited from the delay of our stock-based compensation grants from a normal timing in the first quarter to the second quarter due to the Solventum spin. This timing adjustment added 140 basis points to margins and $0.15 to earnings per share as compared to last year's first quarter.
We also accelerated certain nonrecurring benefits, including property sales, as we progressed on our asset-light strategy. This benefited first quarter year-on-year operating margins by approximately 70 basis points and earnings by $0.08 per share. We accelerated restructuring actions in the quarter, incurring pretax charges of $122 million, which was higher than our guidance of $75 million to $100 million. This compared to last year's restructuring charge of $52 million, resulting in a negative year-on-year impact to margins of 90 basis points and $0.10 to earnings.
Foreign currency negatively impacted adjusted margins by 60 basis points, or a negative $0.09 per share, as a result of the strong U.S. dollar. This headwind was larger than we had expected. The reconsolidation of Aearo Technologies in Q2 2023 resulted in a $0.01 benefit year-on-year to earnings per share and was neutral to margins. As expected, our adjusted tax rate was 20.5% this year, which was higher than when compared to 17.7% in last year's first quarter, resulting in a $0.09 headwind to earnings.
And finally, other financial items and shares outstanding netted to a positive $0.04 per share year-on-year impact. This benefit was primarily driven by interest income on proceeds from Solventum's issuance of $8.4 billion in debt prior to the separation, partially offset by a non-op pension headwind.
Please turn to Slide 8. First quarter adjusted free cash flow was over $800 million. Adjusted free cash flow conversion was 63%; in line with our historical first quarter trends. We continue to focus on driving working capital efficiency, including improved cash conversion cycle times. I am pleased with the progress we have made, yet there remains significant opportunity to further improve performance in all aspects of working capital.
Adjusted capital expenditures were $355 million in the quarter, down 20% year-on-year. The lower year-on-year spend is primarily due to nearing completion on water filtration investments at our manufacturing facilities. And finally, we returned $835 million to shareholders via dividends.
Turning to the balance sheet, net debt at the end of Q1 stood at $10.4 billion, a decline of 13% year-on-year, driven by strong free cash flow generation of our businesses. Also of note, in late February, Solventum issued debt of $8.4 billion, for which the repayment obligation went with Solventum while 3M kept approximately $7.7 billion in proceeds upon spin on April 1. These proceeds, combined with our businesses' strong and reliable cash generation, have further strengthened our balance sheet. In addition, the retained 19.9% equity stake in Solventum will provide additional future liquidity. Also, during the quarter, we retired $2.9 billion of debt.
Our strong capital structure and robust cash generation provides us with the financial flexibility to continue to invest in our business, return capital to shareholders and meet the cash flow needs related to legal matters.
Now please turn to Slide 10 for a discussion on our business group performance, starting with our Safety & Industrial business, which posted sales of $2.7 billion, down 1.4% organically, Industrial end market demand remained mixed in the quarter. We delivered strong double-digit growth in roofing granules, driven by replacement demand and storm repair. Industrial adhesives and tapes posted low single-digit organic growth driven by spec-in wins in new bonding solutions for consumer electronics devices. The personal safety business declined low single digits as strong demand for self contained breathing apparatus for the first responder market was more than offset by year-on-year comp headwind from disposable respirators. And finally, we experienced year-on-year organic sales declines in electrical markets, abrasives, automotive aftermarket and industrial specialties. Geographically, industrial markets in the United States were up 1%, while China remained challenged.
Adjusted operating income was $664 million, up 18% versus last year. Adjusted operating margins were 24.3%, up 410 basis points year-on-year. This performance was driven by benefits from ongoing productivity actions, timing of stock-based compensation, and strong spending discipline. These benefits more than offset headwinds from lower sales volume and higher restructuring costs.
Moving to Transportation & Electronics on Slide 11, which posted adjusted sales of $1.8 billion, or up 6.7% organically. Consumer electronics end markets were stable in the quarter while the semiconductor market remained soft. Our electronics business outperformed the market, up mid-teens organically year-on-year. The introduction of new products continues to be well received in the market as evidenced by recent spec-in wins. In addition, we also experienced continued channel inventory normalization as electronics demand stabilizes.
Our auto OEM business increased 13% in Q1 versus a 1% decline in global car and light truck builds. We continue to win increased penetration, including strong momentum in automotive electrification, which was up over 30% year-on-year in Q1. We also saw an increase in channel inventory at tier suppliers during the quarter, given the forecasted 8% sequential increase in the auto OEM builds from Q1 to Q2.
Looking at the rest of Transportation & Electronics, commercial branding and transportation grew low single digits organically and advanced materials was flat year-on-year. While our Transportation & Electronics business is off to a good start to the year, we estimate that approximately two-thirds of the strong first quarter organic growth was driven by initial buy-ahead by customers as they ramped production and introduced new products along with channel inventory normalization.
Transportation & Electronics delivered $479 million in adjusted operating income, up 68% year-on-year. Adjusted operating margins were 26.3%, up 960 basis points versus Q1 last year. The team achieved this result through strong leverage on improved electronics volumes, ongoing productivity actions, strong spending discipline, and the previously mentioned timing of stock-based compensation grants. Partially offsetting these benefits were headwinds from restructuring costs.
Turning to Slide 12. The Consumer business posted first quarter sales of $1.1 billion. Organic sales declined 3.9% year-on-year, with continued softness in consumer discretionary spending, which included a 2.4 percentage point impact from portfolio and geographic prioritization. Home improvement and consumer safety and well-being declined low single digits, and home and auto care declined mid single digits, while packaging and expression declined high single digits organically.
We continue to invest in the business, including supporting successful new product launches such as Command Heavyweight hanging products and sustainably-focused Scotch Brite cleaning tools and Scotch home and office tapes. Organic growth declined across all geographies. The U.S. was down low single digits; Asia Pacific mid single digits; and EMEA high single digits.
Consumer's first quarter operating income was $216 million, up 21% compared to last year, with operating margins of 19%, up 400 basis points year-on-year. The improvement in operating margins was driven by benefits from productivity actions, portfolio initiatives, strong spending discipline, and the previously mentioned timing of stock-based compensation grants. Partially offsetting these benefits were headwinds from lower sales volume and higher restructuring costs.
Finally, included in the appendix is a slide on the first quarter performance for Health Care. The business delivered results within our expectations with organic growth of 1% and operating margins of 17.5%.
Now turning to guidance for the year on Slide 14. As Bruce mentioned at the beginning of the call, our full year 2024 outlook initiated today is on a continuing operations basis, reflecting Health Care as discontinued operations for the full year including the first quarter. We have confidence in the momentum we have built throughout 2023. We continue to deliver strong results including the first quarter, which was better than expectations.
The guidance initiated today represents a return to growth, adjusted margins up 200 to 275 basis points year-on-year, versus the illustrative midpoint of 18.7% for 2023 and over 15% earnings per share growth at the midpoint. We anticipate full year adjusted organic growth of flat to up 2% or up 1% to 3% excluding the impact from geographic prioritization and product portfolio initiatives we are taking. This estimated organic growth rate incorporates full year external forecasts for major end markets, including: an expectation of continued mix growth in industrial end markets; automotive OEM build rates are currently forecasted to be down slightly; consumer electronics are expected to grow low single digits for the year while semiconductor market is currently forecasted to start the year slow and improve as the year progresses; and finally, consumer retail discretionary spending is expected to remain muted for the year.
As mentioned, we expect a strong expansion in adjusted operating margins of approximately 200 to 275 basis points year-on-year, up from an estimated midpoint of 18.7% in 2023. With respect to adjusted EPS, we anticipate full year 2024 earnings in the range of $6.80 to $7.30 per share on a continuing operations basis or over 15% year-on-year growth at the midpoint.
Turning to cash. Our businesses continue to deliver strong and consistent free cash flow. Our expectation is that adjusted free cash flow conversion performance post-spin will remain in the range of 90% to 110%.
Please turn to Slide 15 for more details on our full year guidance. Included in our outlook is for normal sequential patterns through the year coupled with the end market trends just discussed. As a result, we anticipate that our second half of the year sales will be slightly stronger than the first half. Our expectations also include a 1% foreign currency headwind to sales, given the strength of the U.S. dollar at current spot rates or a negative $0.20 to earnings per share.
We also anticipate an approximately 75 basis point benefit to sales from the commercial agreement with Solventum. Please note that this benefit will be reflected within acquisition and divestitures from an external reporting perspective. We expect adjusted operating income and earnings per share to show relative strength in the second half of the year. This is primarily due to the impact from the timing of the Solventum spin on April 1 along with our pre tax restructuring charges of $250 million to $300 million that are weighted 70% to the first half of the year. We will continue to benefit from productivity and restructuring actions, partially offset by increased investments in the business as we progress through the year.
Looking at below-the-line items, we estimate full year other expense net will be in the range of $75 million to $100 million, mostly weighted to the second half of the year. And our 2024 adjusted tax rate is expected to be in the range of 19% to 20%, with the first half of the year coming in at the high end of the range.
As Bruce mentioned earlier and detailed further on Slide 26 in the appendix, the new operating category named Other is forecasted to have a net operating loss of approximately neutral to $25 million. This range includes first quarter net operating loss of approximately $65 million on a continuing operations basis. Beginning in April, transition service agreements costs plus a markup will be reimbursed to 3M and therefore, we will generate modest income in the remaining three quarters of the year.
Finally, Corporate & Unallocated includes full year 2024 sales in the range of $225 million to $275 million for commercial agreements with Solventum beginning in April. We expect full year Corporate & Unallocated net operating loss in the range of $125 million to $175 million. These ranges include first quarter revenue of approximately $25 million and net operating loss of approximately $75 million.
As we have previously discussed, we estimate annualized dis-synergies of approximately $150 million to $175 million. These costs were previously associated with Solventum and will now be allocated to Safety & Industrial, Transportation & Electronics and Consumer starting in April.
Specific to Q2, we expect continued strong execution to drive operating performance. As disclosed in our Form 10-K, stock-based compensation grants were delayed to Q2. As a result, we expect to incur $125 million to $150 million in expense in Q2. We will also increase investments to support end market demand and drive growth and productivity.
Please turn to Slide 16 for more details by business group. Taking into account my earlier comments regarding current full year macroeconomic and major end market forecasts, we estimate organic sales growth in Safety & Industrial to be flat to up low single digits. Adjusted organic sales growth for Transportation & Electronics is forecasted to be up low single digits. This is better than our estimated range of flat to up low single digits provided in January, recognizing our strong Q1 growth performance. And in Consumer, we estimate organic sales to be down low single digits, which includes our ongoing product portfolio initiatives. These actions are estimated to create a year-on-year organic growth headwind for the Consumer business of approximately 2 percentage points.
I want to take a moment to thank our team for the work they have done in successfully executing across our three strategic priorities. Their disciplined work has created value and returned capital to shareholders with a successful spinout of our Health Care business. They have also helped reduce risk by reaching two large settlements while making progress on the exit of PFAS manufacturing. And most importantly, our teams have made tremendous progress on fundamentally improving how we work, which is driving better performance across the business.
In closing, we delivered a strong start to the year. As we look ahead, we are focused on building on our momentum, supporting expectations for a return to organic top line growth, margin expansion, investments in high-growth and attractive end markets, and continued strong cash generation. This leaves us well positioned for long term success and consistent value creation for our customers and shareholders.
Please turn to Slide 17 and I will turn it back over to Mike. Mike?
