Thank you and good morning everyone. Welcome to our second quarter 2015 business review.

Transcription

1 Q Earnings Call Transcript Inge Thulin & Nicholas Gangestad July 23, 2015 Slide 1, Opening Matt Ginter, Treasurer and Vice President, Investor Relations Thank you and good morning everyone. Welcome to our second quarter 2015 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. As a reminder, please mark your calendars for upcoming earnings call dates, October 22 nd and January 26 th. Also, take note of our next investor meeting scheduled for December 15 th. More details will be available as we get closer to that date. Today s earnings release and the slide presentation accompanying this call are posted on our investor relations website at 3M.com. Slide 2, Forward Looking Statement Matt Ginter Please take a moment to read the forward-looking statement on slide two. 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 three and I will hand off to Inge. Slide 3, Q Highlights Inge Thulin, Chairman, President and CEO Thank you, Matt and good morning, everyone and thank you for joining us today. Overall this was a good quarter for 3M, marked by broad-based organic growth and margin expansion. We continued to operate in an uncertain global economic environment, which softened growth. 1

2 At the same time, we grew organically in all geographic areas, expanded margins a full percentage point and increased net income. Most importantly, we maintained our commitment to managing 3M for the long term with strong investments in our portfolio. Let s go through a few of the second-quarter numbers. Earnings per share rose to $2.02, a 5.8 percent increase year-over-year. Our team posted local-currency sales growth of 2 percent companywide. On an ex-electronics basis, growth was 2.2 percent, the same as Q1. And I will talk more about our electronics business shortly. Organic growth was positive in all geographic areas, paced by the United States at 4 percent. Four of our five business groups grew organically, led by Safety and Graphics at 5 percent, followed by Consumer and Health Care businesses at 3 percent. Growth in Industrial slowed a bit to 1 percent as we experienced channel inventory adjustments in general industrial markets. Electronics and Energy declined 3 percent organically in the quarter. This business group faced a tough year-on-year comparison, and we also saw somewhat softer consumer demand in the electronics market. However, even in softer market conditions, we increased margins in Electronics and Energy to more than 21 percent for the second straight quarter. As you recall, last year we consolidated a number of businesses within Electronics and Energy to better align to customers and generate efficiencies, and that portfolio work is paying off. I am pleased with the progress of this business, and going forward the team is focused on driving spec-in wins, increasing productivity and advancing our technology capabilities. In the second quarter, we saw continued strength of the U.S. dollar which reduced companywide sales by 7.3 percent. As a result, total sales declined 5.5 percent, to $7.7 billion. We increased 3M s operating margins to 23.9 percent, up 1.1 percentage points. This marks the seventh consecutive quarter of year-on-year margin expansion companywide. 2

3 Our margins remain strong and broad-based, as all business groups posted margins greater than 21 percent. This is a testament to the strength of our portfolio and business model, and our business teams around the world driving productivity each and every day. In the second quarter we also continued to actively deploy capital, in order to improve the business and return cash to shareholders. We returned $2.3 billion to shareholders through dividends and share repurchases. And just last month, we announced the acquisition of Capital Safety. Capital Safety is a leading global provider of fall protection equipment, and will bolster 3M s personal safety business which is a strategic priority in our portfolio. This acquisition builds upon a number of other portfolio actions we have taken to strengthen our portfolio. Please turn to slide number 4. Slide 4, 2015 Portfolio Actions Inge Thulin Portfolio Management is one of our three strategic levers, and is vital to our success. To succeed in the long-term, we must constantly evolve to meet the changing demands of our customers and the global economy. Back in 2012 we began a comprehensive review of 3M s portfolio and started to make changes to better align our portfolio to our long-term strategic objectives. This includes reallocation of resources to our best opportunities. It also means taking actions to create greater value, such as: Combining businesses within our company to increase customer relevance, scale and productivity. Acquiring businesses that align with 3M s fundamental strengths and strategic objectives, and, Divesting businesses that no longer align with those strengths or objectives. In the first half of 2015, we took action on all fronts. Earlier this month, for example, we combined two of our Health Care businesses. Our dental and orthodontic businesses, which are both recognized for their strong technology and brands, were merged to form a single Oral Care Solutions business. 3

4 Now, through a seamless and single partnership, we can offer customers an entire suite of oral care innovations, thus increasing our relevance and generating efficiencies. In fact, since 2012 we have consolidated businesses within each of our business groups. As a result, we have moved from six business groups to five, and from 40 businesses to 26. Next are acquisitions. Earlier I talked about last month s announcement of Capital Safety. In February we also announced the $1 billion acquisition of Polypore s Separations Media Business, which will enhance 3M s core filtration platform. And in March we acquired Ivera Medical, a strategic addition to our Health Care business group. At the same time, in January we sold our Static Control business after a thorough strategic review. Because of our team s work, 3M is now leaner, more focused and better positioned to win big opportunities, and create greater value for our customers and ultimately for our shareholders today and even more into the future. Thank you, and now I will turn the call over to Nick for more details on the quarter. Nick. Slide 5, Q Sales Recap, Senior Vice President and Chief Financial Officer Thank you, Inge and good morning everyone. Let s begin on slide five where I will describe the elements of second-quarter sales growth. We generated organic local currency growth of 1.8 percent with volumes contributing 0.8 percent to our growth and selling prices adding 1 percent. The sales impact from acquisitions, net of divestitures, was neutral in the quarter. Positive growth related to the Ivera Medical acquisition was offset by our divestiture of the static control business. Foreign exchange impacts reduced sales by 7.3 percentage points in the second quarter. The most notable currencies impacting sales were the Euro, Yen and Brazilian Real, which devalued versus the U.S. dollar by 20 percent, 17 percent and 28 percent, respectively In dollar terms, worldwide sales declined 5.5 percent versus second quarter of On a geographic basis, the United States led the way with organic local-currency growth of 4.1 percent. U.S. growth was broad-based led by Safety and Graphics and Consumer at 6 percent, Health Care at 4 percent and Industrial at 3 percent. 4

5 Latin America/Canada posted organic growth of 0.8 percent in the quarter. Growth was positive in our Health Care and Industrial businesses, while Safety and Graphics and Electronics and Energy both declined organically. Mexico delivered another outstanding result, with 17 percent organic growth in the quarter, and Brazil turned positive with 1 percent growth. The impact of year-on-year sales declines in Venezuela reduced organic growth in Latin America/Canada by 4 percentage points in the quarter. This headwind is behind us starting in Q3. Organic local-currency growth in Asia Pacific was 0.5 percent in the quarter, with Health Care and Safety and Graphics each growing 9 percent and Consumer growing 3 percent. Electronics and Energy declined 4 percent organically in Asia Pacific. Organic growth was down 2 percent in China/Hong Kong in the second quarter. Health Care delivered strong growth which was offset by declines in Safety and Graphics, Electronics and Energy and Consumer. We continue to see the Chinese economy adjusting to new growth levels, and we saw channel adjustments in some key end-markets which impacted our growth. For the full year 2015, we now expect organic growth in China/Hong Kong to be in the mid-single digit range versus mid- to high-single digits previously. Japan delivered another good quarter with second-quarter organic growth of 2 percent or up 7 percent excluding electronics. Health Care and Safety and Graphics posted strong organic growth followed by steady growth in our Consumer and Industrial businesses. Turning to EMEA, organic growth was 0.4 percent in Q2 with West Europe declining 1 percent. Organic growth in Central/East Europe increased high-single digits while Middle East/Africa was down mid-single digits. Organic growth in EMEA was led by Safety and Graphics at 4 percent, Health Care was flat and Industrial, Consumer and Electronics and Energy each declined 1 percent. Please turn to slide six for the second-quarter P&L highlights. Slide 6, Q P&L Highlights Second-quarter sales were $7.7 billion dollars. Operating margins improved by 1.1 percentage points year-on-year to 23.9 percent. Strong gross margin improvements along with productivity drove the second-quarter operating margin performance. Let me cover the primary components of the change in margin. On the positive side, the combination of lower raw material costs and higher selling prices contributed 150 basis points of margin expansion. 5

6 Pricing performance in the second quarter remained steady driven by continued new product flow across our businesses and price increases in select countries to help mitigate the impact of currency devaluations. We continue to benefit from lower raw material costs and expect this trend to continue throughout the year. Commodity prices remain favorable and our global sourcing teams continue to generate additional cost reductions. Productivity remained strong in the second quarter adding 50 basis points to margins, driven by lean six sigma efforts, returns on past portfolio actions and continuing to prioritize investments. Strategic investments reduced margins by 30 basis points. This includes our ERP and business transformation effort, increased R&D investments aimed at disruptive innovation along with portfolio management actions. These investments will strengthen 3M for the future. Finally, higher pension and OPEB expense reduced second-quarter operating margins by 60 basis points. As a reminder, this year s pension expense increase is due to the adoption of new mortality tables, along with a lower discount rate. For the full-year, we continue to expect operating margins to increase by approximately 1 percentage point. Let s now turn to slide seven for a closer look at earnings per share. Slide 7, Q EPS Earnings-per-share for the second quarter was two dollars and two cents, a year-on-year increase of 5.8 percent. Organic growth and margin expansion contributed $0.12 to the EPS increase in the quarter. This result includes a negative $0.05 impact from higher year-on-year pension and OPEB expense. Foreign-currency impacts net of hedging reduced pre-tax earnings by $110 million or the equivalent of $0.12 a share. The second quarter tax rate was 28.1 percent versus 29.5 percent in last year s comparable quarter, which increased earnings by $0.04 per share. The reduction in the tax rate versus last year s Q2 was driven by adjustments to tax reserves which were partially offset by geographic profit mix. Reserve adjustments were anticipated in our tax rate guidance. Finally, average diluted shares outstanding declined by 3 percent versus last year s second quarter which added $0.07 to second-quarter earnings per share. Let s now review cash flow, please turn to slide number eight. 6

7 Slide 8, Q Cash Flow Second quarter operating cash flow was $1.3 billion, down $300 million year-on-year. The majority of the year-on-year decline was due to higher cash taxes. We invested $370 million in capital expenditures during the second quarter, up $29 million year-onyear. For the full year, we continue to expect capital expenditures in the range of $1.4 to $1.6 billion. Second-quarter free cash flow was $1.0 billion and we converted 74 percent of net income to cash. For the full year, we continue to expect free cash flow conversion in the range of 90 to 100 percent. Cash dividends paid were $646 million in the second quarter, up $90 million year-on-year. As a reminder, we increased the per-share dividend by 20 percent this past February, which marks the 57th consecutive year of dividend increases. Gross share repurchases were $1.7 billion in the second quarter, up $269 million compared to Q Through the first half of 2015, we have repurchased $2.6 billion dollars of our own shares. We now expect full-year gross share repurchases to be in the range of $4 to $5 billion dollars versus a prior expectation of $3 to $5 billion. Let s now review our second-quarter performance on a business-by-business basis starting with our Industrial business. Please turn to slide number nine. Slide 9, Industrial Industrial posted sales of $2.6 billion in the quarter, with organic local-currency growth of 1.4 percent. Industrial s organic growth was led by 3M Purification and aerospace and commercial transportation each generating double-digit growth in the quarter. The automotive OEM business posted mid-single digit growth in the quarter versus a slight yearon-year decline in global car and light truck builds. We continue to improve our market share in this large and important market. We also delivered positive organic growth in automotive aftermarket in Q2, while the industrial adhesives and tapes business was flat. On a geographic basis, the U.S. and Latin America/Canada set the pace, with each posting organic growth of 3 percent. Asia Pacific was flat, while EMEA declined 1 percent. The Industrial business delivered operating income of $609 million in the second quarter. Operating margins were a strong 23.1 percent, up 120 basis points year-over-year, boosted by positive price/raw materials. 7

8 Let s now turn to Safety and Graphics on slide ten. Slide 10, Safety and Graphics Second-quarter sales in Safety and Graphics were $1.4 billion, increasing 4.9 percent organically. All businesses within the portfolio grew organically, led by the roofing granules business, which posted strong double-digit growth in the quarter. Personal safety, one of 3M s heartland businesses, grew mid-single digits in the quarter. This business is a strategic priority for 3M for several reasons including our strong product portfolio, fast-growing end markets and increasing regulatory standards across developed and developing markets. As Inge mentioned, the Capital Safety acquisition will strengthen this business even further. Geographically, organic sales growth in Safety and Graphics was 9 percent in Asia Pacific, 6 percent in the U.S. and 4 percent in EMEA. Latin America/Canada declined 2 percent. Operating income was $364 million and operating margins increased 1.8 percentage points to 25.4 percent. Margin improvements were driven by price/raw material benefits, along with productivity and portfolio management actions. Let s now turn to Health Care. Please turn to slide eleven. Slide 11, Health Care Health Care delivered sales of $1.4 billion in the second quarter, with organic growth of 3.4 percent. We continued to see broad-based organic growth across much of the Health Care portfolio, including food safety, health information systems, oral care, critical and chronic care, and infection prevention. Drug delivery systems, which is a project-based business, declined year-on-year. The Ivera Medical acquisition added 70 basis points to Health Care sales growth in the quarter. Geographically, organic growth in Health Care was led by Asia Pacific at 9 percent, with strong contributions from both Japan and China/Hong Kong. Latin America/Canada grew 5 percent, the U.S. was up 4 percent and EMEA was flat. Health Care s operating income was $440 million and margins rose 160 basis points to 32.3 percent. Primary drivers of margin expansion included strong productivity and price/raw material benefits. 8

9 Next we will look at Electronics and Energy on slide twelve. Slide 12, Electronics and Energy In Electronics and Energy, sales were $1.3 billion for the quarter, down 3 percent in organic local currency. Operating margins increased 60 basis points to 21.2 percent and operating income was $277 million in the quarter. Our portfolio management actions in this business continue to yield benefits for our customers and improve productivity, which is leading to strong operating margin performance. Organic local-currency sales declined 2 percent on the electronics side of the business. As Inge commented, we experienced softer conditions in the electronics market for the quarter. The business remains focused on continuing to drive successful spec-in wins with electronic OEM s. In our energy-related businesses, organic local-currency sales were down 3 percent, consistent with first quarter growth patterns. On a geographic basis, organic sales growth in Electronics and Energy increased 1 percent in the U.S. EMEA declined 1 percent, Asia Pacific was down 4 percent and Latin America/Canada declined 7 percent. The divestiture of the Static Control business reduced sales by 70 basis points in the second quarter. Please turn to slide thirteen. Slide 13, Consumer Second-quarter sales in Consumer were $1.1 billion, with organic growth of 3.4 percent. We grew organically across the portfolio, with particular strength in the do-it-yourself business, led by strong growth of Scotch Blue painter s tape. Our stationery and office supply, home care and consumer health care businesses also delivered positive organic growth in the quarter. Second quarter is typically when we begin to see the impact of the back-to-school season. Growth has been encouraging to this point, most notably in our line of Scotch brand home and office tapes and Command solutions which eliminate the need to pound nails into walls when hanging pictures, decorations or other items. 9

10 Looking at the Consumer business geographically, organic growth was led by the U.S. at 6 percent and Asia Pacific at 3 percent. Latin America/Canada was flat and EMEA declined 1 percent. Operating income increased to $259 million and margins were 23.3 percent, up 2.2 percentage points year-over-year. Margins were boosted by lower raw material costs, portfolio prioritization, strong productivity and timing of promotional programs. That wraps up our review of the second-quarter business results. I will turn it back over to Inge for an update on our 2015 planning estimates. Slide 14, 2015 Planning Estimates Inge Thulin Thank you, Nick. Overall, 3M delivered a good second-quarter performance. Organic growth remained broad-based, and we continued to generate premium margins across the portfolio. Looking across 3M s entire team, I am very pleased with our execution and discipline in an uncertain economic environment, which is evident in our strong productivity. Going forward, we expect that economic uncertainty to remain through the year. In fact, external growth forecasts have continued to moderate over the last several months. As a result, today we are updating our guidance for the full year. We now expect organic growth of 2.5 to 4 percent, versus a prior expectation of 3 to 6 percent. With respect to earnings, we now anticipate EPS in the range of $7.80 to $8.00, versus a prior range of $7.80 to $8.10. The rest of the guidance remains in place. As you can see, we still expect currency to reduce sales by 6 to 7 percent. Our tax rate guidance is unchanged at 28.5 to 29.5 percent. And we continue to expect a free cash flow conversion rate of 90 to 100 percent. Like always, our 3M teams are focused on executing our plan, making investments for the future and managing those things within our control, in other words, controlling the controllable. 10

11 As I described earlier, our portfolio is strong, and getting stronger as a result of our recent investments. Going forward, each of our businesses will continue to be bolstered by 3M s four fundamental strengths: technology, manufacturing, global capabilities and our brand. Those strengths are leveraged across our company, and will allow us to gain market share, maintain world-class margins and generate efficient growth into the future. Thank you for your attention, and we will now take your questions. 11