Thank you and good morning everyone. Welcome to our third quarter 2017 business review.

Transcription

1 Q Earnings Call Transcript Inge Thulin & Nicholas Gangestad October 24, 2017 Slide 1, Opening Bruce Jermeland, Director of Investor Relations Thank you and good morning everyone. Welcome to our third quarter 2017 business review. On the call today are Inge Thulin, 3M s chairman, president and CEO, and, our chief financial officer. Each will make some formal comments and then we ll take your questions. Please note that today s earnings release and slide presentation accompanying this call are posted on our investor relations website at 3M.com under the heading quarterly earnings. Before we begin, let me remind you of the dates for our future investor events, please turn to slide 2. First, starting with earnings, our Q4 earnings conference call will be held on January 25 th, and second, our 2018 Outlook Meeting will take place in New York City on December 12 th from 8:00 am to noon. Invitations for this event will be sent this afternoon, so please RSVP as soon as possible. We hope to see you there. Slide 3, Forward Looking Statement Bruce Jermeland Please take a moment to read the forward-looking statement on slide three. During today s conference call, we will make certain predictive statements that reflect our current views about 3M s future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent form 10K lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to slide four and I will hand the call off to Inge. Slide 4, Q Summary highlights Inge Thulin, Chairman of the Board, President and Chief Executive Officer Thank you, Bruce. Good morning everyone, and thank you for joining us. Coming off a strong first half, our team delivered an even more robust performance in the third quarter. Organic growth accelerated to 7 percent, with positive growth across all business groups and all geographic areas. We posted record sales and record earnings, and did so while continuing to invest for the future. Let me take you through the highlights. 1

2 Total sales were $8.2 billion, an all-time high for our enterprise. As I mentioned, we delivered strong, broad-based organic growth of 7 percent led by Electronics and Energy at 13 percent. Health Care grew 7 percent organically, followed by 6 percent growth from both Industrial, and Safety and Graphics. Our Consumer business posted organic growth of 2 percent its second consecutive quarter of positive growth. It was also good to see broad-based growth across all geographic areas. This was true in both developed and developing markets, where our long-standing presence, market position and depth of capabilities enable us to win. Growth in developed markets was 4 percent, with 14 percent growth in developing markets. With respect to EPS, we increased earnings more than 8 percent to $2.33 per share, which is a Q3 record. Companywide, we expanded margins to 25 percent, with all business groups above 22 percent. Turning to free cash flow, we posted a good conversion rate of 100 percent. We continue to invest and grow the business, while also returning significant cash to our shareholders. In the quarter, we returned $1.1 billion through dividends and share repurchases. Please turn to slide 5. Slide 5, Building for the future Inge Thulin Beyond financial results, we are continuing to build an enterprise that is positioned for success both today and into the future. This includes executing our three key levers, which are significant value creators. The first is portfolio management, and earlier this month we finalized our acquisition of Scott Safety. This will complement organic growth, and further enhance our position in the fast-growing global personal safety market. At the same time, we completed the sale of the electronic monitoring business, which no longer aligned with our strategic objectives. Portfolio management a process we have intensified over the last several years is strengthening our competitiveness, and making us more relevant to our customers and the marketplace. Investing in Innovation is the second lever. 2

3 Research and development is the heartbeat of 3M. It is how we deliver premium value to our customers and premium returns to our shareholders. This is why we continue to invest 6 percent of sales into research and development, which totaled $463 million in the quarter. The third lever is business transformation, which starts and ends with our customers. The deployment of the ERP system remains on track, with West Europe nearly complete. We have also started initial deployments in the United States, which you will hear more about at our Outlook meeting on December 12 th. That concludes my remarks and I will now turn the call over to Nick. Nick. Slide 6, Q Sales Recap, Senior Vice President and Chief Financial Officer Thanks, Inge, and good morning everyone. I ll start on slide six with a recap of our third-quarter sales performance. We posted strong organic growth in the quarter of 6.6 percent as we continue to outgrow the markets we serve. Selling prices improved sequentially versus second quarter and were flat year-on-year. Excluding electronics, price was up 20 basis points, which marks our strongest quarterly pricing performance this year. The divestiture of non-strategic businesses over the last twelve months reduced sales in the quarter by 120 basis points. Conversely, foreign currency translation increased sales by 60 basis points. All in, third-quarter sales in U.S. dollars increased 6 percent versus last year. In the U.S., organic growth was 3.6 percent, led by a high-single digit increase in Health Care and a midsingle digit increase in Industrial. Our Safety and Graphics and Consumer businesses also delivered positive growth in the quarter. Asia Pacific led the company with organic growth of 13 percent in Q3. All business groups within Asia Pacific continued to post strong growth in the quarter, including double-digit increases in our Electronics and Energy business and in our Safety and Graphics business. Organic growth was 23 percent in China/Hong Kong and 5 percent in Japan. Excluding electronics, China/Hong Kong grew in the mid-teens and Japan was up 3 percent. Moving to EMEA, organic growth was 4 percent in Q3 with West Europe up 3 percent. Both the Safety and Graphics and Industrial businesses led the growth in EMEA. 3

4 Finally, Q3 organic growth in Latin America/Canada was 5 percent. All businesses posted positive growth, with Health Care leading the way, up high-single digits. At a country level, Canada delivered strong organic growth of 14 percent; Mexico was up 5 percent while Brazil was flat. We continue to generate broad based growth across the globe, giving us confidence in raising our full-year expectations, which Inge will discuss later. Please turn to slide seven for the third-quarter P&L highlights. Slide 7, Q P&L Highlights Nick Gagnestad Companywide, third-quarter sales were $8.2 billion with net income of $1.4 billion, up 7.5 percent. On a GAAP-basis, third-quarter operating margins were 25 percent, which includes a 60 basis point impact from incremental strategic investments. Let s take a closer look at the various components of our margin performance in the third quarter. Gains from organic volume growth and productivity contributed 90 basis points to operating margins. Our continued focus on portfolio management is strengthening our enterprise in many ways including margins, which improved by 40 basis points due to the exit of non-strategic businesses. The combination of lower raw material costs and selling price changes, added another 30 basis points. Foreign currency, net of hedging impacts, brought margins down 40 basis points in the quarter and higher year-on-year pension and OPEB expense decreased margins by 30 basis points. Let s now turn to slide eight for a closer look at earnings per share. Slide 8, Q EPS Third quarter GAAP earnings were $2.33 per share, up 8.4 percent year-over-year. This result includes a 6 cent impact from incremental strategic investments. The combination of organic growth and productivity contributed 23 cents per share to Q3 earnings. Organic growth was the predominant driver along with raw material benefits and the continued positive impact Business Transformation is having on our productivity efforts. Acquisitions and divestitures added a penny to earnings year-over-year. Foreign-currency, net of hedging, reduced earnings by $0.03 a share, and the slightly lower tax rate was a one cent benefit. Finally, lower shares outstanding, net of higher interest expense, was a 2 cent benefit to EPS. Please turn to slide nine for a look at cash flow. 4

5 Slide 9, Q Cash Flow Nick Gagnestad We continue to generate solid operating cash flow as a company, which allows us to consistently invest in the business and return cash to shareholders. Third quarter free cash flow was $1.4 billion with a conversion rate of 100 percent. For the full-year, we expect free cash flow conversion in the range of 95 to 100 percent. Turning to cap-ex, we continue to be encouraged by the numerous opportunities to invest in both growth and disruptive technologies. Third quarter capital expenditures were $325 million and we expect these investments to be approximately $1.4 billion for the year. In addition to investing in our businesses, we returned significant cash to shareholders in Q3 including $701 million in dividends, up $31 million. We also returned $380 million to shareholders through gross share repurchases or $1.6 billion year-to-date. We now expect full-year repurchases to be in the range of $2.0 to $2.5 billion versus $2.0 to $3.5 billion previously. Let s now review our performance by business group, please turn to slide ten. Slide 10, Industrial Industrial, our largest business group, continued its strong growth up 6.1 percent organically in the thirdquarter. Industrial s growth was once again broad based across all geographic areas and all businesses. Our Heartland businesses within Industrial, namely, industrial adhesives and tapes, abrasives and automotive aftermarket, all delivered mid-single digit growth in the quarter. Our auto OEM business was up 6%, outpacing global car and light truck builds by approximately 400 basis points as we continue to drive increased penetration on automotive OEM platforms across the globe. Finally, advanced materials led the way with mid-teens growth in the quarter with strong performance across its portfolio while also benefitting from favorable year-on-year comps. On a geographic basis, organic growth was led by a high-single digit increase in Asia Pacific, while all other areas grew mid-single digits. Industrial delivered third quarter operating income of $614 million, with an operating margin of 22.2 percent. Adjusting for incremental strategic investments, operating margins were 22.6 percent, a 110 basis point improvement from Q2 levels. Please turn to slide eleven. 5

6 Slide 11, Safety and Graphics Third-quarter Safety and Graphics sales grew 6.0 percent organically. Growth was led by our personal safety business which accelerated to double-digit growth in the quarter. We continue to experience strong demand for our personal safety solutions and look to build on this strength with the integration of Scott Safety starting here in the fourth quarter. Our roofing granules business grew solidly, up mid-single digits on top of a tough year-on-year comp. Lastly, transportation safety posted positive organic growth in Q3, as we continue to evolve its portfolio with the sale of the electronic monitoring business earlier this month. Geographically, Safety and Graphics grew organically across all areas, led by an 11 percent increase in Asia Pacific and an 8 percent increase in EMEA. Third quarter profits in Safety and Graphics were up 11 percent year-on-year to $410 million, with operating margins of nearly 27 percent. Please turn to slide twelve. Slide 12, Health Care Our Health Care business in the third quarter grew 6.9 percent organically. Health Care delivered broad-based growth across all businesses and geographies. Our medical consumables business, which is our largest segment within Health Care, posted high-single digit growth as worldwide demand for 3M s products and solutions remained strong. Oral care delivered 3 percent organic growth in the quarter as we continued to deliver strong international growth, particularly in Asia Pacific, Latin America and West Europe. Organic growth in Health Care was led by a double-digit increase in our drug delivery business. Geographically, organic growth was led by high-single digit growth in Asia Pacific, Latin America/Canada and the U.S. We saw notable strength in Health Care across developing markets, particularly in China/Hong Kong, which was up double-digits in the quarter. Health Care s operating income was $471 million, and operating margins were 31.9 percent. Please turn to slide thirteen. 6

7 Slide 13, Electronics and Energy Electronics and Energy third-quarter organic sales growth was up 13 percent, and is up 11 percent year-todate. We are on-track to deliver 10 percent organic growth for the year. This business continues to benefit from our portfolio management efforts over the past few years to streamline the business, enhance customer relevance, and drive improved efficiencies. The electronics side of the business grew 18 percent organically as our team continued to increase penetration on many OEM platforms globally, including semiconductor manufacturing, electronic assembly, data centers and automotive electrification. Our energy-related businesses were up 2 percent organically, with electrical markets up mid-single digits, partially offset by a decline in telecom. On a geographic basis, organic growth was led by a 20 percent increase in Asia Pacific while Latin America/Canada and EMEA also delivered positive growth. Third-quarter operating income for Electronics and Energy was $394 million with operating margins of 27.9 percent. Please turn to slide fourteen. Slide 14 Consumer Third-quarter sales in Consumer grew organically 1.9 percent, which was a continued improvement versus recent quarters. We saw positive organic growth in three of our four Consumer businesses, namely, home improvement, home care and consumer health care, while stationery and office declined. Category-defining brands in Consumer continue to be a strength for 3M. We delivered strong double-digit growth in both Command damage-free mounting products and ScotchBlue painter s tape. Filtrete home filtration products grew mid-single digits globally. Geographically, organic growth in Consumer was led by Asia Pacific, up high-single digits while Latin America/Canada and the U.S. also delivered positive growth. Finally, operating income was $307 million, with an operating margin of 24.8 percent. Adjusting for strategic investments year-on-year, operating margins were nearly 26 percent. Please turn to slide 15. Slide 15, 2017 Guidance planning Before turning the call back over to Inge, I want to cover a few items that will impact the fourth quarter. 7

8 First, the completed divestiture of the electronic monitoring business is expected to have a net positive impact of 12 cents to earnings in Q4. Second, the Scott Safety income, net of acquisition and integration costs, is expected to reduce earnings per share by 8 cents. Third, we recently closed a debt tender offer to retire some of our higher coupon debt. This will result in a non-operating charge estimated to be an 11-cent impact to earnings per share in the fourth quarter. Lastly, as we have discussed throughout the year, we plan to continue to take actions in Q4 to strengthen our portfolio and better optimize our footprint. We estimate that these incremental investments will negatively impact fourth quarter per share earnings by approximately 6 to 10 cents. Please turn to slide 16 and I will now turn the call back over to Inge. Inge. Slide 16, 2017 Guidance Inge Thulin Thank you, Nick. As I look across our enterprise, I am very pleased with our performance in the quarter and throughout the year. As a result, today we are increasing our expectations for 2017 in terms of both organic growth and earnings per share. We now anticipate organic growth of 4 to 5 percent, versus a prior range of 3 to 5 percent. With respect to EPS, we expect earnings of $9.00 to $9.10 per share, versus a prior range of $8.80 to $9.05. This is a 10 to 12 percent increase year-on-year. And as you can see, we continue to expect strong performances in terms of both return on invested capital and free cash flow conversion. With that, I thank you for your attention and we will now take your questions. Slide 17, Q&A Q&A Conclude and Sign off Inge Thulin Thank you. To wrap up, our team executed very well across the enterprise and delivered another strong performance in the third quarter, including: Robust organic growth, 8

9 Increased earnings per share, And rising margins. The 3M playbook is working, and we are well-positioned going into Thank you for joining us, and I look forward to seeing you all in New York on December 12 th for our Outlook meeting. Have a good day. 9