2018 Financial Outlook

Transcription

1 2018 Financial Outlook Nick Gangestad Senior Vice President and Chief Financial Officer December 12,

2 Agenda Executing on our plan Tracking to the top-half of 2017 full-year organic growth and earnings ranges 2018: another year of strong growth and operational execution 2

3 Long-term financial objectives plan 100% 8-11% 2-5% 20% Delivering on our five-year plan Our Playbook is working o Portfolio Management EPS Growth e average Organic Local-Currency Growth ROIC Free Cash Flow Conversion o Investing in Innovation o Business Transformation Disciplined capital allocation 9% 2% 24% 101% Refer to appendix for the definition and calculation of ROIC and free cash flow conversion 3

4 Expecting strong finish to 2017 Full-year trending to the top half of 4% to 5% organic growth and $9.00 to $9.10 GAAP EPS ranges Fourth quarter planning items: o Electronic monitoring divestiture gain +$0.12 per share o Scott Safety acquisition -$0.08 per share o Debt tender offer increased interest expense -$0.11 per share o Strategic investments -$0.06 to -$0.10 per share Operations tracking to expectations Strong full-year free cash flow and return on invested capital 4

5 2018 financial headlines GAAP EPS expected to increase 6% to 10% o Strong organic growth, productivity and operational execution Continued effective capital deployment o First priority is investment in the business to fund organic growth and enhance 3M s Fundamental Strengths o Acquisitions strengthen portfolio and underlying growth potential o Maintain long-term track record of returning significant cash to shareholders via dividends and share repurchases 2018 plan funded by strong cash from operations, supplemented by additional leverage Excludes pending sale of Communication Markets business 5

6 2018 capital allocation plan Sources Cash flow from operations (excludes R&D and pension) $9.0B to $9.5B Cash and marketable securities at year-end 2017 ~$4.0B Added leverage $1.5B to $4.0B Total funds available: $14.5B to $17.5B Uses Growth investments R&D ~$1.9B Cap-ex $1.5B to $1.7B M&A Strengthens portfolio, augments organic growth Pension contributions $0.3B to $0.5B Cash to shareholders Dividend Expected to grow in line with earnings over time Share repurchase $2.0B to $4.0B gross Influenced by relative value and other demands on capital 6

7 2018 planning estimates $9.00 to $9.10 6% to 10% $9.60 to $10.00 GAAP EPS estimate of $9.60 to $10.00 Total sales growth of 5% to 7% o Organic local-currency growth of 3% to 5% o Foreign currency translation of approximately +1% o Acquisition, net of divestitures impact of approximately +1% 2017e 2018e Free cash flow conversion of 90% to 100% Refer to appendix for the definition and calculation of free cash flow conversion 7

8 2018 EPS roadmap $0.45 to $0.75 ($0.75) $0.10 $0.10 $0.30 to $0.35 ($0.05) to $0.05 $0.05 to $0.10 $0.15 to $0.25 ($0.05) to $0.05 ($0.10) $0.05 to $0.15 $0.05 to $0.10 6% to 10% $9.60 to $10.00 $9.00 to $9.10 Growth and Portfolio Management Productivity Other Financial 2017e Organic Growth 2017 Divestitures Impact 2017 Acquisition Impact Foreign Currency Portfolio & Footprint Optimization Raw Materials Business Transformation Value Realization Manufacturing and SG&A Productivity Tax Rate Retirement Plans Share Repurchase Net Interest 2018e 8

9 Growth and Portfolio Management 9

10 Delivering growth through prioritization Organic growth R&D Cap-ex Acquisitions Divestitures and exited businesses Enhanced portfolio 10

11 Organic local-currency growth 2018 GAAP EPS impact +$0.45 to +$0.75 Expecting 3% to 5% organic local-currency growth, including positive price o Developed economies 2% to 4% o Developing economies 4% to 8% Global economic indicators expected to be similar to 2017 Organic local-currency = organic volume + price 11

12 2018 organic local-currency growth projections By Business Group Total 3M: 3% to 5% Health Care Safety & Graphics Industrial Electronics & Energy Consumer 4% to 6% 4% to 6% 3% to 5% 1% to 4% 2% to 4% Organic local-currency = organic volume + price 12

13 2018 organic local-currency growth projections By geographic area United States 2% to 5% 1% to 4% Asia Pacific Europe, Middle East and Africa Latin America and Canada 4% to 7% 3% to 5% Organic local-currency = organic volume + price 13

14 R&D: enhancing value for our customers More impactful innovation 2018 R&D investment Approximately $1.9B ~6% to sales Connecting 46 technology platforms to solve customers real world needs Investing in top priorities for growth Enhance global competitiveness with differentiated products Supports premium operating margins and ROIC 14

15 Cap-ex: enabling organic growth and profitability Aligned with portfolio prioritization process 2018 cap-ex investment $1.5B to $1.7B 4.5% to 5.0% to sales Enhances Fundamental Strengths of 3M Increasing investments in: o o Capacity to support higher organic growth Disruptive technology deployment Investments deliver superior returns and support premium ROIC 15

16 Divesting non-strategic businesses * $700M Divested annualized sales $1.4B Total proceeds Divested businesses: Dilutive To company organic growth Below Total company margins *Excludes pending sale of Communication Markets business 16

17 Impact of 2017 divestitures 2018 GAAP EPS impact 2017 divestiture gains not repeating in 2018 Approximately -$0.75 Divestitures a key element of portfolio management Excludes impact from pending divestiture of Communication Markets business 17

18 Acquisitions enhancing shareholder value $6.6B Combined investment Accretive To company organic growth In-line With company margins Membrana = Polypore s separation media business September 30, 2017 trailing twelve month performance 18

19 Impact of 2017 acquisitions Scott Safety: premier provider of innovative safety products 2018 GAAP EPS impact Approximately +$0.10 Revenue of $575M for the 12 months ending September 30, 2017 Products include self-contained breathing apparatus (SCBA) systems, gas and flame detection instruments, and other safety devices Integrating into Personal Safety business within Safety & Graphics Business Group 19

20 Foreign currency 2018 GAAP EPS impact Approximately +$0.10 Expecting foreign currency translation impact on sales of approximately +1% Based on spot rates as of November 30, 2017 o Euro 1.19, RMB 6.61, JPY 113, BRL 3.3 Includes impact of foreign currency on sales and operations, net of year-on-year changes in hedging 20

21 Productivity 21

22 Portfolio and footprint optimization 2018 GAAP EPS impact +$0.30 to +$0.35 Continuing to execute plan announced March 2016 Incurring approximately $0.42 of charges in 2017 related to optimization actions Investment of approximately $0.10 in 2018, net of benefits Net year-over-year benefit of $0.30 to $0.35 in

23 Raw materials 2018 GAAP EPS impact -$0.05 to +$0.05 Sourcing cost reduction projects offsetting increase in raw material market prices Annual spend of approximately $7.5B, including crude-related spend of $1.3B Major feed stocks include propylene, ethylene, wood pulp, fluorspar, butadiene and linerboard 23

24 Business Transformation value realization On-track to deliver $500M to $700M annual pre-tax savings by GAAP EPS impact Standardizing global business processes Value realization through: +$0.05 to +$0.10 o o o Business Services Operations Supply Chain Centers of Expertise Global Service Centers Canada and majority of West Europe deployed; U.S. deployments ramp-up in

25 Manufacturing and SG&A productivity 2018 GAAP EPS impact Reducing structure and driving efficiency +$0.15 to +$0.25 Leveraging Lean Six Sigma across the enterprise Estimated benefit is net of wage inflation 25

26 Effective tax rate 2018 GAAP EPS impact Forecasting 2018 tax rate of 26.0% to 27.0% -$0.05 to +$0.05 Structural rate continues to decline through further supply chain optimization Excludes impact of potential tax reform 26

27 Other Financial 27

28 2018 capital allocation plan Sources Cash flow from operations (excludes R&D and Pension) $9.0B to $9.5B Cash and marketable securities at year-end 2017 ~$4.0B Added leverage $1.5B to $4.0B Total funds available: $14.5B to $17.5B Uses Growth investments R&D ~$1.9B Cap-ex $1.5B to $1.7B M&A Strengthens portfolio, augments organic growth Pension contributions $0.3B to $0.5B Cash to shareholders Dividend Expected to grow in line with earnings over time Share repurchase $2.0B to $4.0B gross Influenced by relative value and other demands on capital 28

29 Retirement plans 2018 GAAP EPS impact Approximately -$ e worldwide pension/opeb funded status of 83%; U.S. pension at 90% 2018 assumptions: o U.S. discount rate 3.8%, down 40 basis points year-on-year o Expected return on assets 7.25% o Cash contributions of $300M to $500M 29

30 Longstanding commitment to raising the dividend $4.8 +6% +8% $4.70 $4.3 $ % +20% $4.10 $4.44 $2.8B in cash dividends paid to shareholders in 2017 $3.3 $2.8 +8% $ consecutive years of per-share increases; have paid without interruption for over 100 years $2.3 $2.54 Expect to grow in-line with earnings over time $ Dividends paid per share ($) 30

31 Share repurchase 2018 GAAP EPS impact +$0.05 to +$0.15 Forecasting $2.0B to $4.0B of gross share repurchases Average diluted shares outstanding to decline by 0.5% to 1.5% Maintaining minimum purchase level, plus additional discretionary purchases based on relative value and other capital needs 31

32 Net interest 2018 GAAP EPS impact +$0.05 to +$0.10 Borrowing at attractive rates to invest in the business Issued $2B of debt in 2017 Early extinguishment of $305M in high coupon bonds; $95M charge in Q Targeting $1.5B to $4.0B incremental debt in

33 2018 EPS roadmap $0.45 to $0.75 ($0.75) $0.10 $0.10 $0.30 to $0.35 ($0.05) to $0.05 $0.05 to $0.10 $0.15 to $0.25 ($0.05) to $0.05 ($0.10) $0.05 to $0.15 $0.05 to $0.10 6% to 10% $9.60 to $10.00 $9.00 to $9.10 Growth and Portfolio Management Productivity Other Financial 2017e Organic Growth 2017 Divestitures Impact 2017 Acquisition Impact Foreign Currency Portfolio & Footprint Optimization Raw Materials Business Transformation Value Realization Manufacturing and SG&A Productivity Tax Rate Retirement Plans Share Repurchase Net Interest 2018e 33

34 Today s meeting highlights Our playbook is working: delivering on our key metrics Ready and well-positioned for outlook o 3-5% total company organic growth o 6-10% EPS growth 34

35 35

36 s Appendix 36

37 Reconciliation of GAAP amounts to free cash flow conversion ($M) Year 2016 ($B) Year 2017 Planning Estimate Year 2018 Planning Estimate Major GAAP cash flow categories: Free cash flow (non-gaap measure): Operating cash flow $6,662 Operating cash flow $6.6 to $7.0 $6.9 to $7.6 Investing cash flow ($1,403) Purchases of property, plant and equipment ~$1.4 $1.5 to $1.7 Financing cash flow Free cash flow (non-gaap measure): Operating cash flow Purchases of property, plant and equipment ($4,626) $6,662 ($1,420) Free cash flow $5.2 to $5.6 Net income attributable to 3M $5.5 to $5.6 Free cash flow conversion 95% to 100% $5.2 to $6.1 $5.8 to $6.1 90% to 100% Free cash flow $5,242 Net income attributable to 3M $5,050 Free cash flow conversion 104% 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. 37

38 Reconciliation of GAAP amounts to return on invested capital ($M) Return on invested capital (non-gaap measure): Net income including non-controlling interest Interest expense (after-tax) (1) Adjusted net income (Return) Year 2016 $5,058 $143 $5,201 Average shareholders equity (including non-controlling interest) (2) $11,316 Average short-term and long-term debt (3) $11,725 Average invested capital $23,041 Return on invested capital (non-gaap measure) 22.6% (1) Effective income tax rate used for interest expense 28.3% (2) Calculation of average equity (includes non-controlling interest) Ending total equity as of: March 31 June 30 September 30 December 31 Average total equity (3) Calculation of average debt Ending short-term and long-term debt as of: March 31 June 30 September 30 December 31 Average total equity $11,495 $11,658 $11,769 $10,343 $11,316 $11,139 $11,749 $12,361 $11,650 $11,725 Return on Invested Capital (ROIC) is not defined under U.S. generally accepted accounting principles. Therefore, ROIC should not be considered a substitute for other measures prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines ROIC as adjusted net income (net income including non-controlling interest plus after-tax interest expense) divided by average invested capital (equity plus debt). The Company believes ROIC is meaningful to investors as it focuses on shareholder value creation. ($B) Return on invested capital (non-gaap measure): Net income including non-controlling interest Interest expense (after-tax)* Adjusted net income (Return) Average shareholders equity (including non-controlling interest) Average short-term and long-term debt Average invested capital Return on invested capital (non-gaap measure) Effective income tax rate used for interest expense Year 2017 Planning Estimate $5.5 to $5.6 ~$0.3 $5.8 to $5.9 $11.5 to $12.0 $11.5 to $12.5 $23.0 to $ % to 25% 26% to 27% 38