2017 Third Quarter Business Review

Transcription

1 2017 Third Quarter Business Review (Unaudited) October 24,

2 Earnings Conference Calls Q4: January 25, Outlook Meeting December 12, :00 a.m. - 12:00 p.m. EST 2

3 Forward looking statement This presentation contains forward-looking information about 3M's financial results and estimates and business prospects that involve substantial risks and uncertainties. You can identify these statements by the use of words such as "anticipate," "estimate," "expect," "aim," "project," "intend," "plan," "believe," "will," "should," "could," "target," "forecast" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans or prospects. Among the factors that could cause actual results to differ materially are the following: (1) worldwide economic, political, and capital markets conditions and other factors beyond the Company's control, including natural and other disasters or climate change affecting the operations of the Company or its customers and suppliers; (2) the Company's credit ratings and its cost of capital; (3) competitive conditions and customer preferences; (4) foreign currency exchange rates and fluctuations in those rates; (5) the timing and market acceptance of new product offerings; (6) the availability and cost of purchased components, compounds, raw materials and energy (including oil and natural gas and their derivatives) due to shortages, increased demand or supply interruptions (including those caused by natural and other disasters and other events); (7) the impact of acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring; (8) generating fewer productivity improvements than estimated; (9) unanticipated problems or delays with the phased implementation of a global enterprise resource planning (ERP) system, or security breaches and other disruptions to the Company's information technology infrastructure; (10) financial market risks that may affect the Company s funding obligations under defined benefit pension and postretirement plans; and (11) legal proceedings, including significant developments that could occur in the legal and regulatory proceedings described in the Company's Annual Report on Form 10-K for the year ended Dec. 31, 2016, and any subsequent quarterly reports on Form 10-Q (the Reports ). Changes in such assumptions or factors could produce significantly different results. A further description of these factors is located in the Reports under "Cautionary Note Concerning Factors That May Affect Future Results" and "Risk Factors" in Part I, Items 1 and 1A (Annual Report) and in Part I, Item 2 and Part II, Item 1A (Quarterly Reports). The information contained in this presentation is as of the date indicated. The Company assumes no obligation to update any forward-looking statements contained in this presentation as a result of new information or future events or developments. 3

4 Q summary Organic local-currency growth +6.6% year-on-year Operating margin 25.0% +30 bps year-on-year GAAP EPS $ % year-on-year Free cash flow conversion 100% Sales of $8.2B, up 6.0% year-on-year Organic sales growth in all business groups and geographic areas Operating income of $2.0B, up 7.2% Incremental strategic investments of $48M, or $0.06 per share, to accelerate growth and increase productivity Operating margin of 25.6%, excluding impact from incremental strategic investments Returned $1.1B to shareholders via dividends and gross share repurchases Refer to 3M s October 24, 2017 press release for full details; refer to the appendix for discussion of non-gaap measures 4

5 Building for the future Portfolio Management Closed acquisition of Scott Safety, a premier safety solutions company (October) Completed sale of electronic monitoring business (October) Investing in Innovation Sustainable, long-term growth in high-value market spaces Business Transformation West Europe ERP deployments nearly complete Began initial deployments in the U.S. 5

6 Q sales recap (year-on-year) Net sales +6.0% Divestitures -1.2% Organic local-currency growth +6.6% volume +6.6%, price 0.0% Foreign currency translation +0.6% Organic local-currency growth: U.S. +3.6% Asia Pacific +12.8% China/Hong Kong +23% Japan +5% Europe/Middle East/Africa +4.0% West Europe +3% Latin America/Canada +5.3% Canada +14% Mexico +5% Brazil 0% Foreign currency translation: RMB 0%, Euro +6%, Yen -8%, Real +2% 6

7 Q P&L Net sales $8.2B +6.0% year-on-year Operating income $2.0B +7.2% year-on-year Gross margin 50.6% +50 bps year-on-year Net income $1.4B +7.5% year-on-year Operating margin of 25.0%, up 30 bps year-on-year Q % Organic volume/productivity +0.9% 6.6% organic volume growth Acquisitions/divestitures* +0.4% Impact from divested businesses Price/raw material +0.3% Raw material benefit, net of price FX -0.4% Net of hedge impact Pension/OPEB -0.3% Higher year-on-year expense Q subtotal 25.6% Strategic investments -0.6% Up $48M year-on-year Q % * Net operating loss from divested businesses : Polymask, prescription eyewear, tolling/alpr, identity management businesses and sale of certain intellectual property 7

8 Q GAAP EPS Earnings per share Q GAAP EPS $2.15 Organic growth/productivity +$0.23 Organic growth, raw material benefits, and Business Transformation value realization Acquisitions/divestitures* +$0.01 Impact from divested businesses FX -$0.03 Pre-tax earnings impact of -$29M Tax rate +$0.01 Q % vs Q % $ % year-on-year Shares outstanding/net interest +$0.02 Q subtotal $2.39 Strategic investments -$0.06 Up $48M year-on-year Q GAAP EPS $ % year-on-year Ave. diluted shares down 1%; increased interest expense *Non-repeating earnings impact from divestitures: Polymask, prescription eyewear, tolling/alpr, identity management businesses and sale of certain intellectual property 8

9 Q cash flow Free cash flow $1.4B Dividends $701M Free cash flow conversion 100% Gross share repurchases $380M Free cash flow of $1.4B, down 9% year-on-year FY 2017 free cash flow conversion estimated range of % Capital expenditures Q3: $325M, down $22M versus last year FY 2017: estimated at approximately $1.4B Returned $1.1B to shareholders via dividends and gross share repurchases FY 2017 gross share repurchases estimated range of $ B Refer to 3M s October 24, 2017 press release for full details; see the appendix for the reconciliation of free cash flow and free cash flow conversion 9

10 Industrial Net sales Organic local-currency growth Organic local-currency growth: $2.8B +6.1% +6.2% year-on-year year-on-year Operating income Operating margin By business: sales grew in all businesses led by advanced materials, industrial adhesives and tapes, and separation and purification By area: sales grew 9% in Asia Pacific, 6% in Latin America/Canada, 5% in both EMEA and the U.S. Foreign currency translation increased sales 0.7% and divestitures reduced sales by 0.6% Continued strong penetration on auto OEM platforms particularly attachment, light weighting and acoustic products and solutions $614M +3.1% year-on-year 22.2% -70 bps year-on-year Operating margin of 22.6%, adjusting for strategic investments year-on-year 10

11 Safety & Graphics Net sales Organic local-currency growth Organic local-currency growth: $1.5B +6.0% +1.9% year-on-year year-on-year Operating income Operating margin By business: sales increased in personal safety, roofing granules, and transportation safety; commercial solutions declined By area: sales grew 11% in Asia Pacific, 8% in EMEA, 4% in Latin America/Canada, and 3% in the U.S. Foreign currency translation increased sales by 0.8% and divestitures reduced sales by 4.9% Enhanced portfolio via acquisition of Scott Safety (closed 10/4/17), a premier safety solutions company; divested electronic monitoring (closed 10/3/17) $410M +10.5% year-on-year 26.8% +200 bps year-on-year Operating margin of 27.4%, adjusting for strategic investments year-on-year 11

12 Health Care Net sales Organic local-currency growth Organic local-currency growth: $1.5B +6.9% +7.7% year-on-year year-on-year By business: sales grew in all businesses led by drug delivery systems, food safety, medical consumables, and oral care By area: sales grew 9% in Asia Pacific, Latin America/ Canada, and the U.S., and 2% in EMEA Foreign currency translation increased sales by 0.8% Operating income $471M +9.3% year-on-year Operating margin 31.9% +40 bps year-on-year Double-digit growth in developing markets led by China/Hong Kong and Latin America Operating margin of 32.2%, adjusting for strategic investments year-on-year 12

13 Electronics & Energy Net sales Organic local-currency growth $1.4B +13.2% +13.1% year-on-year year-on-year Operating income Operating margin $394M 27.9% +29.9% year-on-year +360 bps year-on-year Organic local-currency growth: By business: electronics-related sales were up 18% with growth in both electronics materials solutions, and display materials and systems; energy-related sales increased 2% By area: sales grew 20% in Asia Pacific, 6% in Latin America/Canada, 1% in EMEA; U.S. declined 2% Foreign currency translation was flat year on year and divestitures reduced sales by 0.1% Increased penetration on OEM platforms including semiconductor, electronic assembly, data center and automotive electrification Operating margin of 28.2%, adjusting for strategic investments year-on-year 13

14 Consumer Net sales Organic local-currency growth Organic local-currency growth: $1.2B +1.9% +2.2% year-on-year year-on-year Operating income Operating margin $307M 24.8% -3.2% year-on-year -140 bps year-on-year By business: sales grew in consumer health care, home improvement, and home care; stationery and office declined By area: sales grew 7% in Asia Pacific, 3% in Latin America/Canada, 1% in the U.S.; EMEA declined 2% Foreign currency translation increased sales by 0.3% Solid back-to-school season driven by strong demand for Command and Post-it products Strong growth in ScotchBlue and Filtrete products and solutions Operating margin of 25.9%, adjusting for strategic investments year-on-year 14

15 Fourth quarter 2017 planning items Electronic monitoring divestiture Gain on sale: +$0.12 per share Scott Safety acquisition Income, net of acquisition- and integration-related costs: -$0.08 per share Debt tender offer Increased interest expense: -$0.11 per share Strategic investments Continued growth, footprint, and portfolio investments: -$0.06 to -$0.10 per share Note: Above items included in updated 2017 GAAP EPS guidance on slide 16 and in the third-quarter 2017 earnings press release 15

16 Updating 2017 planning estimates GAAP EPS $9.00 $9.10 ROIC Organic local-currency growth +4 5% Free cash flow conversion GAAP EPS of $9.00 to $9.10, up 10% to 12% year-onyear, vs. prior range of $8.80 to $9.05 Sales growth Organic local-currency growth of +4-5% vs. prior range of +3-5% Acquisitions, net of divestitures, approximately -0.5% Foreign currency translation approximately flat Effective tax rate of % 20% % See appendix for reconciliation of FY 2017E free cash flow conversion and ROIC 16

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18 Q sales recap U.S. APAC EMEA LAC Organic volume +3.8% +13.4% +3.3% +4.4% Price -0.2% -0.6% +0.7% +0.9% Organic local-currency +3.6% +12.8% +4.0% +5.3% Divestiture -1.6% -0.5% -0.8% -2.1% FX % +4.2% +2.4% Total growth +2.0% +10.8% +7.4% +5.6% 18

19 Q P&L ($M) Q Q Change Sales $7,709 $8, % Gross profit $3,862 $4, % % to sales 50.1% 50.6% +0.5 pts SG&A $1,531 $1, % % to sales 19.9% 19.9% ---- R&D & related $427 $ % % to sales 5.5% 5.7% +0.2 pts Operating income $1,904 $2, % % to sales 24.7% 25.0% +0.3 pts Net income $1,329 $1, % GAAP earnings per share $2.15 $ % 19

20 Business segment information ($M) Net Sales Operating Income Business groups Q Q Q Q Industrial $2,603 $2,764 $595 $614 Safety & Graphics $1,500 $1,529 $372 $410 Health Care $1,371 $1,476 $431 $471 Electronics & Energy $1,250 $1,414 $304 $394 Consumer $1,210 $1,236 $317 $307 Corporate and Unallocated $2 $1 ($65) ($100) Elimination of Dual Credit ($227) ($248) ($50) ($55) Total $7,709 $8,172 $1,904 $2,041 Effective first quarter of 2017, 3M realigned a number of its businesses as part of the company s ongoing effort to improve alignment to markets and customers. Those changes are reflected in the segment reporting data above. Refer to 3M s October 24, 2017 press release for full details. 20

21 Reconciliation of GAAP amounts to free cash flow conversion Q results: ($M) Major GAAP cash flow categories: Q Q Change Operating cash flow $1,908 $1,750 ($158) Investing cash flow ($543) ($781) ($238) Financing cash flow ($752) ($843) ($91) Free cash flow (non-gaap measure): Operating cash flow $1,908 $1,750 ($158) Purchases of property, plant and equipment ($347) ($325) $22 Full-year 2017 forecast: ($B) Free cash flow (non-gaap measure): Year 2017 Planning Estimate Operating cash flow $6.3 to $7.0 Purchases of property, plant and equipment ~$1.4 Free cash flow $4.9 to $5.6 Net income attributable to 3M $5.5 to $5.6 Free cash flow conversion 95% to 100% Free cash flow $1,561 $1,425 ($136) Net income attributable to 3M $1,329 $1,429 $100 Free cash flow conversion 117% 100% -17 pts Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they function as useful measures of performance and the Company uses these measures as an indication of the strength of the Company and its ability to generate cash. 21

22 Reconciliation of GAAP amounts to free cash flow conversion Year-to-date 2017 results: ($M) Major GAAP cash flow categories: YTD 2016 YTD 2017 Change Operating cash flow $4,453 $4,380 ($73) Investing cash flow ($1,173) ($354) $819 Financing cash flow ($2,780) ($3,699) ($919) Free cash flow (non-gaap measure): Operating cash flow $4,453 $4,380 ($73) Purchases of property, plant and equipment ($984) ($914) $70 Free cash flow $3,469 $3,466 ($3) Net income attributable to 3M $3,895 $4,335 $440 Free cash flow conversion 89% 80% -9 pts Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they function as useful measures of performance and the Company uses these measures as an indication of the strength of the Company and its ability to generate cash. 22

23 Reconciliation of GAAP amounts to return on invested capital Full-year 2017 forecast: ($B) Return on invested capital (non-gaap measure): Year 2017 Planning Estimate Net income including non-controlling interest $5.5 to $5.6 Interest expense (after-tax)* $0.2 to $0.2 Adjusted net income (return) $5.7 to $5.8 Average shareholder s equity (including non-controlling interest) $11.5 to $12.0 Average short-term and long-term debt $12.5 to $13.5 Average invested capital $24.0 to $25.5 Return on invested capital 20% + Effective income tax rate used for interest expense* 26% to 27% Return on Invested Capital (ROIC) is not defined under U.S. generally accepted accounting principles. Therefore, ROIC should not be considered a substitute for other measures prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines ROIC as adjusted net income (net income including non-controlling interest plus after-tax interest expense) divided by average invested capital (equity plus debt). The Company believes ROIC is meaningful to investors as it focuses on shareholder value creation. 23