2018 Third Quarter Business Review (Unaudited)

Transcription

1 2018 Third Quarter Business Review (Unaudited) October 23, 2018

2 3M Investor Day Welcome reception: November 14, 2018 Formal program: November 15, 2018 Earnings Conference Calls Q4: January 29,

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, 2017, 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. Note on non-gaap financial measures This presentation refers to certain non-gaap financial measures including free cash flow, free cash flow conversion, return on invested capital (ROIC), and various measures excluding the impact of the Communications Markets divestiture gain and related restructuring actions, the legal settlement and the measurement period adjustment relative to the accounting for the 2017 enactment of the Tax Cuts and Jobs Act (TCJA). These non-gaap measures are not in accordance with, nor are they a substitute for, GAAP measures. Reconciliations of these non-gaap financial measures to the most directly comparable GAAP financial measures can be found in the appendix to this presentation. 3

4 Q summary +1.3% year-on-year $ % year-on-year Organic localcurrency growth Earnings per share Sales of $8.2B, down -0.2% year-on-year Foreign currency translation -1.7% Acquisition/divestiture, net +0.2% GAAP EPS of $2.58, up 11% year-on-year income of $2.0B, up 0.4% year-on-year margin of 24.7%, up 10 basis points 24.7% +10 bps year-on-year margin Free cash flow of $1.8B, up 24% year-on-year Returned $1.9B to shareholders via dividends and gross share repurchases 4

5 Q3 and YTD 2018 organic local-currency growth Q3/year-to-date (YTD) Total 3M: +1% / +3% Health Care Safety & Graphics Industrial Electronics & Energy Consumer -1% / +2% +2% / +6% +2% / +3% +2% / +3% -2% / +1% Organic local-currency = organic volume + price 5

6 Q sales recap (year-on-year) $8.2B -0.2% year-on-year +1.3% year-on-year volume +0.1%, price +1.2% Net sales Organic-local currency growth Organic local-currency growth by area: U.S. +0.5% Latin America/Canada +2.1% Europe/Middle East/Africa -0.9% Asia Pacific +3.2% Organic local-currency growth by key countries/regions: +0.2% year-on-year Acquisitions/ Divestitures China/Hong Kong +10% West Europe -2% Japan -7% Brazil +5% Mexico +3% Canada flat -1.7% year-on-year Foreign currency translation Foreign-currency translation: Euro -2%, RMB -2%, Yen -1%, Real -20% 6

7 Q P&L $8.2B -0.2% year-on-year 49.0% -130 bps year-on-year $2.0B +0.4% year-on-year $1.5B +8.0% year-on-year Net sales Gross margin Income Net income income margin reconciliation: Q % Organic volume/ productivity/other +0.7% +0.1% organic volume growth; lower portfolio & footprint actions $23M Acquisitions -0.3% Primarily Scott Safety Communication Markets divestiture (Q2 2018) Price/raw material +0.3% -0.1% Stranded costs Selling price benefits net of higher raw materials FX -0.5% Net of hedge impact Q % 7

8 Q EPS Earnings per share: $ % year-on-year Q GAAP EPS $2.33 Organic growth/productivity/other +$ % Benefits from organic growth, Business Transformation and productivity; lower portfolio and footprint (Q $0.01 vs. Q $0.04) Acquisitions +$0.01 Primarily Scott Safety Communication Markets divestiture (Q2 2018) FX -$0.08 -$0.03 Divested income; stranded costs Pre-tax earnings impact -$66M; FY 2018 estimate: -$0.05 vs. +$0.10, previously Other expense -$0.05 Higher retirement expense and net interest Tax rate +$0.22 Q %, in-line with expectations Shares outstanding +$0.06 Average diluted shares down 2.3% Q GAAP EPS $2.58 8

9 Q cash flow $1.8B Free cash flow Free cash flow of $1.8B, up 24% year-on-year Free cash flow conversion of 114% $794M $1.1B Dividends Gross share repurchases Capital expenditures: Q3 2018: $377M, up $52M year-on-year FY 2018: ~$1.6B Returned $1.9B to shareholders via dividends and gross share repurchases in Q3 FY 2018 gross share repurchases: $4B to $5B 9

10 Industrial $3.0B flat year-on-year +2.2% year-on-year $667M -0.7% year-on-year Net sales Organic localcurrency growth income Organic local-currency growth by business, year-on-year: Sales growth led by advanced materials, automotive and aerospace solutions, and industrial adhesives and tapes; automotive aftermarket declined Organic local-currency growth by area, year-on-year: Sales grew +3% in APAC, +2% in the U.S., +1% in Latin America/Canada and EMEA Foreign currency translation decreased sales by -2.1% and divestitures decreased sales by 0.1% 22.1% -10 bps year-on-year margin Q operating margin included -30 bps from portfolio and footprint actions 10

11 Safety & Graphics $1.7B +7.0% year-on-year Net sales Organic local-currency growth by business, year-on-year: Sales grew in personal safety, transportation safety, and commercial solutions; roofing granules declined +2.2% year-on-year $412M +0.4% year-on-year Organic localcurrency growth income Organic local-currency growth by area, year-on-year: Sales grew +5% in APAC, +1% in the U.S, Latin America/Canada, and EMEA Foreign currency translation decreased sales by -2.2% and acquisitions, net of divestitures, increased sales by +7.0% Strong growth across all personal safety segments; Scott Safety performance and integration on-track 24.8% -160 bps year-on-year margin margins impacted by: Q3 2017: -40 ppts from portfolio and footprint actions Q3 2018: -150 bps from Scott Safety acquisition 11

12 Health Care $1.4B -2.8% year-on-year -1.1% year-on-year $446M -4.4% year-on-year 30.9% -50 bps year-on-year Net sales Organic localcurrency growth income margin Organic local-currency growth by business, year-on-year: Sales grew in food safety, health information systems, oral care; drug delivery declined Organic local-currency growth by area, year-on-year: Sales grew +10% in Asia Pacific, +4% in Latin America/ Canada; sales declined -1% in EMEA and -6% in the U.S. Foreign currency translation decreased sales by -1.7% Developing market organic growth of +9% led by double-digit increases in China/Hong Kong 12

13 Electronics & Energy $1.4B -4.8% year-on-year +2.3% year-on-year $457M +6.2% year-on-year 31.7% +330 bps year-on-year Net sales Organic localcurrency growth income margin Organic local-currency growth by business, year-on-year: Energy-related sales grew +6%; electronics-related sales grew +1% led by electronics materials solutions Organic local-currency growth by area, year-on-year: Sales grew +5% in the U.S., +3% in APAC, and +1% in Latin America/Canada; sales declined -5% in EMEA Foreign currency translation decreased sales by -1.0% and divestitures reduced sales by -6.1% margins impacted by: Q3 2018: +80 bps mix benefit from Q divestiture of communication markets business 13

14 Consumer $1.2B -3.4% year-on-year -2.0% year-on-year Net sales Organic localcurrency growth Organic local-currency growth by business, year-on-year: Sales grew in home improvement; declined in stationery and office supplies, home care, and consumer health care Organic local-currency growth by area, year-on-year: Sales grew +5% in Latin America/Canada; sales declined -1% in the U.S., -5% in EMEA, and -7% in APAC $291M -6.7% year-on-year income Foreign currency translation decreased sales by -1.4% Continued strong 3M point-of-sale growth amongst major retail customers 23.5% -80 bps year-on-year margin Q operating margins included -70 bps from portfolio and footprint actions 14

15 2018 planning estimates ~3% year-on-year $9.90 to $ %+ 90% to 95% Organic localcurrency growth Earnings per share, ex. TCJA adj.; legal settlement; CMD, net Return on invested capital Free cash flow conversion GAAP EPS of $8.78 to $8.93 vs. $9.08 to $9.38, previously, up 11% to 13% year-on-year Adjusted EPS of $9.90 to $10.00 vs. $10.20 to $10.45, previously; adjusted EPS range excludes: First quarter 2018 measurement adjustments to TCJA ($0.36) and legal settlement ($1.16) CMD divestiture gain, net of related actions +$0.40 to +$0.45 Sales components: Organic local-currency growth ~3% vs. 3-4%, previously Acquisitions, net of divestitures flat vs. ~1%, previously Foreign currency translation flat vs. ~1%, previously Effective tax rate of 20-21% vs %, previously, excluding: Measurement adjustments to TCJA, legal settlement and communications business gain on sale net of related actions See appendix for reconciliation of FY 2018e free cash flow conversion, ROIC, adjusted EPS and adjusted effective tax rate 15

16 Q&A Participants Mike Roman Chief Executive Officer Nick Gangestad Senior Vice President and Chief Financial Officer Bruce Jermeland Director, Investor Relations 16

17 Appendix 17

18 Q sales recap U.S. APAC EMEA LAC Organic volume -0.9% +3.0% -2.5% -0.1% Price +1.4% +0.2% +1.6% +2.2% Organic local-currency +0.5% +3.2% -0.9% +2.1% Acquisitions/Divestitures +0.8% -0.1% % FX % -3.0% -6.9% Total growth +1.3% +1.6% -3.9% -5.5% 18

19 Q P&L ($M) Q Q Change Sales $8,172 $8, % Gross profit $4,113 $3, % % to sales 50.3% 49.0% -1.3 pts SG&A $1,637 $1, % % to sales 19.9% 19.0% -0.9 pts R&D & related $468 $ % % to sales 5.7% 5.3% -0.4 pts income $2,008 $2, % % to sales 24.6% 24.7% +0.1 pts Net income $1,429 $1, % GAAP earnings per share $2.33 $ % 19

20 Business segment information ($M) Net Sales Income Business groups Q Q Q Q Industrial $3,023 $3,024 $672 $667 Safety & Graphics $1,551 $1,660 $411 $412 Health Care $1,485 $1,445 $467 $446 Electronics & Energy $1,515 $1,443 $430 $457 Consumer $1,279 $1,235 $311 $291 Corporate and Unallocated $3 $35 ($112) ($77) Elimination of Dual Credit ($684) ($689) ($171) ($180) Total $8,172 $8,152 $2,008 $2,016 Effective first quarter of 2018, 3M adopted Accounting Standards Update (ASU) No and made certain business segment reporting changes. Those changes are reflected in the segment reporting data above. Refer to 3M s October 23, 2018 press release for full details. 20

21 Estimated Full Year 2018 TCJA measurement adjustment, legal settlement, CMD divestiture impact ($B, except EPS) GAAP measure TCJA measurement adjustment Estimated Full Year 2018 Legal settlement CMD divestiture, net of actions Adjusted Non- GAAP measure Income before taxes $7.0 to $7.1 $0.9 ($0.4) $7.5 to $7.6 Provision for income taxes $1.6 to $1.7 ($0.2) $0.2 ($0.1) $1.5 to $1.6 Effective tax rate 23% to 25% 20% to 21% Net income attributable to 3M $5.3 to $5.5 $0.2 $0.7 ($0.3) $5.9 to $6.1 Earnings per diluted share $8.78 to $8.93 $0.36 $1.16 ($0.40-$0.45) $9.90 to $10.00 In February 2018, 3M reached an agreement with the State of Minnesota that resolved the previously disclosed Natural Resource Damages (NRD) lawsuit filed by the State against the Company related to certain PFCs present in the environment. Under the terms of the settlement, 3M agreed to provide an $850 million grant to the State for a special 3M Water Quality and Sustainability Fund. This Fund will enable projects that support water sustainability in the Twin Cities East Metro region, such as continued delivery of water to residents and enhancing groundwater recharge to support sustainable growth. The projects will also result in habitat and recreation improvements, such as fishing piers, trails, and open space preservation. 3M recorded a pre-tax charge of $897 million, inclusive of legal fees and other related obligations, in the first quarter of 2018 associated with the resolution of this matter. Also during the first quarter of 2018, 3M recorded a tax expense of $217 million related to a measurement period adjustment to the provisional amounts recorded in December 2017, from the enactment of the Tax Cuts and Jobs Act (TCJA). 3M s provisional accounting continues to be subject to adjustment during the measurement period of up to one year following the December 2017 enactment of TCJA. In the second quarter of 2018, 3M completed the sale of substantially all of its Communication Markets Division and reflected a pretax gain of $494 million as a result of this divestiture. During the second quarter of 2018, management approved and committed to undertake certain restructuring actions related to addressing corporate functional costs following the Communication Markets Division divestiture. These actions resulted in a second quarter 2018 pre-tax charge of $105 million. In addition to providing full-year estimated 2018 financial results in accordance with U.S. GAAP, the Company also provides non-gaap measures that adjust for the impacts of the NRD resolution, measurement period adjustment to the impact of enactment of the TCJA, and the impact of the Communication Markets Division divestiture gain, net of restructuring actions. These items represent significant charges/benefits that impacted the Company s financial results. Income before taxes, provision for income taxes, net income, earnings per share, and the effective tax rate are all measures for which 3M provides the estimated GAAP measure and an adjusted measure. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. The Company considers these non-gaap measures in evaluating and managing the Company s operations. The Company believes that discussion of results adjusted for this item is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of these items may not be comparable to similarly titled measures used by other companies. 21

22 Reconciliation of GAAP amounts to free cash flow conversion Third-quarter 2018 results: ($M) Major GAAP cash flow categories: Q Q Change cash flow $1,750 $2,139 $389 Investing cash flow $781 ($269) ($1,050) Financing cash flow ($843) ($1,453) ($610) Free cash flow (non-gaap measure): cash flow $1,750 $2,139 $389 Purchases of property, plant and equipment ($325) ($377) ($52) Full-year 2018 forecast: ($B) Free cash flow (non-gaap measure): Year 2018 Planning Estimate cash flow $6.4 to $6.8 Purchases of property, plant and equipment ($1.6) Free cash flow $4.8 to $5.2 Net income attributable to 3M $5.3 to $5.5 Free cash flow conversion 90% to 95% Free cash flow $1,425 $1,762 $337 Net income attributable to 3M $1,429 $1,543 $114 Free cash flow conversion 100% 114% 14 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 results: Full-year 2018 forecast: ($B) Year 2017 Results ($B) Year 2018 Planning Estimate Return on invested capital (non-gaap measure): Return on invested capital (non-gaap measure): Net income including non-controlling interest $4.9 Interest expense (after-tax)* $0.2 Adjusted net income (return) $5.1 Net income including non-controlling interest $5.3 to $5.5 Interest expense (after-tax)** $0.3 Adjusted net income (return) $5.6 to $5.8 Ave. shareholder s equity (including non-controlling interest) $11.6 Ave. short-term and long-term debt $12.2 Ave. invested capital $23.8 Ave. shareholder s equity (including non-controlling interest) $10.5 to $11.5 Ave. short-term and long-term debt $14.5 to $15.5 Ave. invested capital $25.0 to $27.0 Return on invested capital 21% *Effective income tax rate used for interest expense 35.5% Return on invested capital 20% + **Effective income tax rate used for interest expense 23% to 25% 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