3M 'seeing inflation in a number of categories,' CEO says

Yahoo Finance's Brian Sozzi talks to 3M CEO Mike Roman about the company's latest earnings report and outlook amid supply chain issues.

Video transcript

AKIKO FUJITA: --session on the back of their quarterly results. 3M ending the quarter with $2, or reporting $2.45 a share on revenue of $8.9 billion in the quarter. But the firm warned about cost pressures stemming from disruptions in the supply chain. Let's bring in Yahoo Finance's Brian Sozzi, who is standing by with the CEO of 3M, Mike Roman. Brian.

BRIAN SOZZI: Thanks, Akiko. Mike, always nice to see you. I know you just wrapped up your conference call. Thanks for hopping on with us. What inning--

MIKE ROMAN: Great to be with you, Brian. Good morning.

BRIAN SOZZI: Appreciate it. What inning are you in, in terms of the recovery from the very worst of the pandemic?

MIKE ROMAN: Well, I would say it starts with how we're looking at growth. We had strong growth again in Q3 broadly across our business group, across our areas around the world. And year-to-date, we're up double digits organically. So 11% growth across the company, 6% in Q3. So we're seeing strong demand in our end markets. And that's signaling a recovery of broad-based markets.

We're executing and delivering on that strong demand, navigating the supply chain disruptions that we've all been talking about in recent days. Our teams continue to stay focused on customers and delivering really the service that they require and driving performance in the face of some of those challenges. So I would say we're in the middle of the recovery as we come through the year. The outlook as we go through the rest of the year has continued, and market demand. And we're in the middle of managing some of these supply chain challenges. And it's a testament to our teams and the model that we have at 3M that we're able to be agile and continue to do both.

BRIAN SOZZI: Mike, these operational challenges, I mean, you were the operations guy before you took over at 3M as CEO. Is this one of the most difficult situations to manage you have ever seen in your career?

MIKE ROMAN: Well, it's-- I termed it a convergence of multiple factors this morning on our earnings call-- a convergence of that demand, we're seeing an increase and a snapback in demand as we've gone through the year, and then we've seen multiple challenges in the supply chain. Certainly the semiconductor shortage has been talked about a lot. That's impacting our end markets. We serve the electronics markets. We serve the automobile markets. And so their build rates have been adjusting to some of that shortage of demand.

And then we've seen everything from logistics challenges to labor challenges to really inflation coming into our supply chains. And it's something that, again, back to our model, we are local for local. So we have manufacturing capability around the world close to our customers. Gives us a chance to work locally, respond quickly.

We are engaging with hundreds of suppliers every day to navigate the ups and downs in the supply chain and the supply of raw materials. And you can throw into it, in the United States, for us, as a material science manufacturer, we saw an impact from the hurricanes and the impact on the refining of really oil products, fossil fuel products into things like polypropylene, which is an important input into some of our manufacturing processes, like our film technologies going into automotive electrification.

BRIAN SOZZI: Where do you stand, Mike, in terms of inflation? Have we reached peak inflation for this cycle?

MIKE ROMAN: Well, we've been talking about inflation since first quarter. We called out what we thought the impact was. We put a range around it. As we came into Q3, we updated that range. We were about in the middle, maybe to the higher end of our range. So we continue to see inflation increasing as we come through the year. And I would say, as we look out, it's difficult to estimate where it's going to go.

We are working to manage that a number of different ways. We're working to manage that with our efficiencies in our factories. Even in the face of that challenging dynamic I was talking about, we are driving efficiencies and improving yields. We're working to get dual sourcing across our raw material supply, and then we're working to take price increases to help offset that inflation. So I think we're still looking ahead, getting traction and working to get traction on each of those strategies in anticipation that inflation can continue.

BRIAN SOZZI: I really got raked over the coals this morning, Mike, by my colleagues because I think we are seeing signs of hyperinflation. Where do you fall in that debate? Are we seeing traditional inflation, or is this hyperinflation?

MIKE ROMAN: Well, it's-- we're seeing inflation in a number of categories. I guess that's the way I would start to look at it. So again, back to our model, we see it in raw materials. And I think that's going to be driven by demand and supply. And we are seeing some improvements in the supply side. So back to the weather impacts, for example, we're seeing recovery and starting to see some improvements in supply. We saw some of those key feed stocks go down in price briefly. Now, they're back up a little bit. So it's a dynamic that we're watching closely.

We-- I would say we're seeing increased costs in logistics. Everybody's been talking about the port congestion and the cost of containers coming across the ocean. Those are costs that are, you know, at highs relative to where they were at the beginning of the year. And so we're seeing inflation in those categories. And labor inflation, we're-- among other tactics in attracting talent, we're actually paying higher labor rates. So it's-- those are each categories that look like they're going to persist, at least in the near term.

BRIAN SOZZI: Mike, I was surprised to see your stock, just from a valuation perspective, trading at, I believe, close to a 30% discount to some of your peers. I mean, do you think that's because of the environmental issues that you and I have talked about in the past? I mean, how do you cut through that and tell investors, hey, we have the opportunity to raise our profits and we can handle these liabilities?

MIKE ROMAN: Well I would say, first of all, I'm very proud of how 3Mers around the world have navigated through the pandemic and now through 2021, which is, in many ways, more challenging in our supply chains because of the demand increase that's coming through. And so we're focused on execution. We're focused on what we can control.

And that is delivering for our customers, driving really the strength of 3M's model, taking our innovation, really making a difference, driving high-value solutions to our customers in attractive markets. And so we can do that and drive growth better than the economies, drive growth at or above the macros, deliver improving margins, and a hallmark of 3M, delivering strong cash flow. That's what we will do to drive value for our investors. And I think that will really drive long-term shareholder returns.

BRIAN SOZZI: What's the state of your workforce, Mike? Are they all back in the office?

MIKE ROMAN: Well, we-- looking at our global workforce, we have more than 90,000 employees. And a little over half of those people are in factories. So our people in the factories never left. They've been working all the way through the pandemic. We've been running our factories nearly non-stop through 2020, and of course, in the face of the increased demand here in 2021.

The other half of our workforce at some point all went virtual during the pandemic. Some places around the world, they've return to the workplace, in whole or in part. In the United States, a majority of our people are still working remotely. So we are-- we're working to be ready for returning to the office. We introduced a new work your way model for our people in the United States, really globally. And as we get back to the office in the US, we'll be able to implement it.

So it's a flexible model, really based on trust, based on driving performance the way that's most efficient for everybody. It's been, I think, very well received by our employees to have that flexibility. And again, back to our factories, I'm very proud of how they continued to operate safely throughout the pandemic, and now in the face of these challenges, really stepping up to deliver despite all of those different issues that are converging on us.

BRIAN SOZZI: Well, thank you for keeping that Scotch tape on the shelves. I know it's a challenging situation out there. I have certainly been a buyer. 3M chairman and CEO Mike Roman, always good to see you. We'll talk to you soon.