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Earnings Results: 3M says inflation has seen a ‘little moderation,’ while smartphone demand has been soft

3M Co. has its hands in so many markets, including consumer products, electronics, health care, safety and transportation, that when it talks about the economy and demand trends, investors should listen.

The maker of Post-it Notes, N95 face masks, Scotch adhesives and electronic films and coatings reported before Tuesday’s opening bell third-quarter profit that topped expectations but revenue that fell a bit short, while lowering its full-year outlook.

3M’s stock
MMM,
+0.09%

slipped 0.5% in afternoon trading but pared earlier intraday losses of as much as 4.4%. It has dropped 12.2% over the past three months, while the Dow Jones Industrial Average
DJIA,
+1.07%

has eased 0.6%.

In the post-earnings conference call with analysts, the company had a lot to say about what it’s seeing in terms of inflation and consumer demand:

Inflation

Chief Financial Officer and Transformation Officer Monish Patolawala said inflation remains “persistent and broad based,” and prices for intermediate finished goods and specialty raw materials are still “pretty high.” But there has been some improvement.

“Raw material, logistics and labor inflation are starting to show some signs of moderation, and we are starting to see some evidence of global supply chain stabilization,” Patolawala said, according to a FactSet transcript.

While there is moderation, he said it hasn’t been consistent.

“So I would say if you look at what inflation we had in the third quarter, it was $225 million, and the fourth quarter, we are seeing somewhere between $100 million-$150 million,” Patolawala said. “So there’s a little moderation.”

Consumer spending

While industrial end demand remained “steady,” Patolawala said ongoing inflationary pressures led to a decline in consumer demand as the quarter progressed, particularly in consumer electronics, oral care and consumer retail.

Within consumer electronics, there was near-term softness in “particularly smartphones, tablets and TVs,” Patolawala said.

Read: Apple stock may not be a ‘safe haven’ for much longer, Bank of America warns in downgrade.

Apple Inc.
AAPL,
+1.93%

will provide its rebuttal on smartphone and tablet demand when the technology behemoth reports fiscal fourth-quarter results on Oct. 27.

He added that the back-to-school season was “softer than expected,” hurt not only by inflation reducing consumer spend, but also by retailers “aggressively” cutting prices to address excess inventory.

Also read: Here’s why Target was willing to pay so much to sell off excess inventory.

The company said it also witnessed “softening demand” in the home improvement market.

Back-to-school and home improvement retailers will get their chance to respond next month, as most report for quarters that extend through October. Walmart Inc.
WMT,
+0.46%

and Home Depot Inc.
HD,
+2.49%

are both slated to report fiscal third-quarter results on Nov. 15, and Target Corp.
TGT,
+2.53%

and Lowe’s Companies Inc.
LOW,
+3.37%

are set to report on Nov. 16.

Looking ahead

For the fourth quarter, 3M said it expects total sales to be in the range of $7.9 billion to $8.2 billion, which was below the FactSet consensus of $8.49 billion. The continued decline in disposable face mask demand is expected to act as a headwind to results of $150 million to $200 million, while exiting Russia should act as a $70 million headwind.

CFO Patolawala said he expects consumer electronics demand to remain soft, while elective medical procedure volume are expected to improve slightly to 90% to 95% of pre-COVID levels from about 90% in the third quarter.

He expects consumer spending to continue to be weighed down by inflation, and retailers should keep taking action to reduce inventory.

For 2023, the company expects some items currently weighing on results to continue, while some challenges may ease.

“We expect the macroeconomic environment to continue to moderate while geopolitical uncertainties persist, impacting energy costs and end-market demand, particularly in Europe,” Patolawala said.

Meanwhile, the pace of secular industry trends should accelerate, particularly in the automotive, electronics, safety, digitization and sustainability markets. “Each of these markets have tremendous opportunities for long-term growth as we continue to innovate and invest in these areas,” Patolawala said.

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