Thank you, good morning everyone and welcome to our fourth quarter 2014 business review.

Transcription

1 Q Earnings Call Transcript Inge Thulin & Nicholas Gangestad January 27, 2015 Slide 1, Opening Matt Ginter, Vice President, Investor Relations Thank you, good morning everyone and welcome to our fourth quarter 2014 business review. Let me kick off with a reminder of our upcoming 2015 earnings call dates; April 23 rd, July 23 rd and October 22 nd. Also, mark your calendars for 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 under the heading quarterly earnings. 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. Now if you will please turn to slide three and I will hand off to Inge Thulin, 3M s chairman, president and chief executive officer. Slide 3, Q Highlights Inge Thulin, Chairman, President and CEO Thank you, Matt and good morning everyone. 3M finished the year strong, delivering both record sales and record earnings in the fourth quarter. For the sixth consecutive quarter, we posted organic growth everywhere: in all business groups, and in all geographic areas. 1

2 We did that while expanding margins, increasing profits and investing in our future. I ll take you through a few numbers. Earnings per share rose to $1.81, up 11.7 percent year-over-year. Sales were $7.7 billion, a fourth quarter record. Organic growth companywide was 6 percent, paced by Safety & Graphics at 9 percent. Our other four business groups; Health Care, Electronics & Energy, Industrial, and Consumer each grew a solid 6 percent. We saw organic growth in every geographic area. Both APAC and the United States grew 7 percent; for the United States, that marked its strongest growth of the year. Latin America/Canada grew 9 percent while Europe/Middle East/Africa grew 3 percent. Our team is clearly capable of executing in tough environments, and fighting through tough headwinds. That includes a stronger U.S. dollar, which reduced fourth quarter sales by more than 4 percent. Yet we still delivered good top- and bottom-line growth. Operating margins remain healthy at 21.5 percent, an increase of 60 basis points from last year. We again generated strong cash flow, with a conversion rate of 144 percent. This allows us to invest in the business, and continue rewarding shareholders. We returned $1.8 billion to shareholders through dividends and share repurchases. And in December, we announced a 20 percent per-share increase in our Q1 dividend for 2015, on top of a 35 percent increase in Overall, we finished the year strong, and I thank the entire 3M team for their hard work and execution. Nick will now go through the details. Nick. 2

3 Slide 4, Q Sales Recap, Senior Vice President and Chief Financial Officer Thanks, Inge, and good morning everyone. Please turn to slide four where I ll review the components of our fourth-quarter sales change. Worldwide organic local-currency growth was 6.3 percent with volumes up 5.6 percent and selling prices up 0.7 percent. This was our strongest quarterly organic growth since Q The Treo acquisition added 10 basis points to growth, and the stronger dollar reduced sales by 4.4 percent. All-in, sales rose 2 percent versus the fourth quarter of Leading the way with 9 percent organic growth was Latin America/Canada, where Electronics & Energy, Health Care, and Safety & Graphics all grew double digits. Mexico delivered strong double-digit growth in the quarter and Brazil was up slightly. Asia Pacific grew 6.9 percent. Safety & Graphics and Health Care led the way, with growth of 12 percent and 9 percent, respectively. Organic growth was 9 percent in Japan or 4 percent excluding electronics. China/ Hong Kong grew 4 percent or 6 percent excluding electronics. The United States grew 6.6 percent, led by Industrial at 10 percent. Health Care, Consumer and Safety & Graphics all grew 7 percent. EMEA posted organic growth of 3.3 percent in the quarter. Central/East Europe and Middle East/Africa each grew double-digits while West Europe grew 1 percent. EMEA economies remain soft, but our teams are managing the situation well by growing our market positions and driving continuous productivity across the region. Organic growth within EMEA was positive in four of our five businesses led by Safety & Graphics and Electronics & Energy. Consumer was down slightly in the quarter. Turn to slide five for the fourth-quarter P&L highlights. Slide 5, Q P&L Highlights Fourth-quarter sales were $7.7 billion dollars up 2 percent year-on-year with 6 percent organic growth more than offsetting the stronger dollar. Operating income rose 5 percent to $1.7 billion and earnings per share rose 12 percent year-on-year. We increased operating margins by 60 basis points year on year while continuing to invest for the future. 3

4 I ll now go into more details on our margin improvement. Organic volume leverage added 40 basis points to operating margins, and the combination of lower raw material costs and higher selling prices contributed 60 basis points. Selling prices increased year-on-year across many of our businesses supported by technology innovation, brand and strong new product flow. Raw materials were again lower versus last year s comparable quarter. Commodity prices declined as we closed out Q4 and we expect these tailwinds to accelerate in Lower pension and OPEB expense added 50 basis points to margins. Strategic investments reduced margins by 80 basis points. This includes increases in disruptive R&D programs, business transformation and ERP costs, and restructuring. During Q4 we took portfolio actions totaling $30 million spread across the United States, Western Europe, and Asia Pacific. Foreign currency exchange reduced margins by 10 basis points, and the Treo acquisition was just slightly dilutive. Finally, productivity resulted in a benefit of 10 basis points to margins year-on-year. Earnings were $1.81 per share, an increase of 12 percent. Foreign-currency impacts net of hedging reduced earnings by five cents a share, given the broadbased strength of the dollar. A lower year-on-year tax rate added a penny to per share earnings and average diluted shares outstanding declined by 5 percent versus last year s fourth quarter which added 8 cents to fourthquarter earnings per share. Now I ll review cash flow performance on slide number six. Slide 6, Q Cash Flow Free cash flow was strong in Q4, with 144 percent conversion versus 131 percent in last year s fourth quarter. Operating cash flow increased $190 million, driven by multiple factors including higher net income and improved fixed and working capital efficiencies. For the year, we delivered 104 percent free cash flow conversion. 4

5 We continue to manage toward a better-optimized capital structure by adding balance sheet leverage which we are using for two purposes: first, to invest in our businesses, and second, to increase cash returns to shareholders. Full-year capital expenditures were $1.5 billion an important element as we continue to expand the business organically. We paid $2.2 billion to shareholders in cash dividends during 2014, up $486 million versus As a reminder, on December 16 th we communicated a Q dividend increase of 20 percent per share. And in terms of buybacks, gross share repurchases in 2014 were $5.7 billion, up $440 million year-on-year. Net debt at the end of December was $3.5 billion up $2.3 billion from year-end Next I ll go through the results of our business groups, starting with Industrial on slide seven. Slide 7, Industrial Industrial, with sales of $2.6 billion, delivered strong organic local-currency growth of nearly 6 percent in the quarter. Advanced materials led the way with double-digit growth. Our aerospace and commercial transportation business generated high single-digit growth and we also saw strong growth in industrial adhesives and tapes, automotive aftermarket and auto OEM. All regions delivered growth for Industrial, paced again by the U.S. at 10 percent. The U.S. growth was broad based, with notable performances in the three Industrial Heartland businesses; industrial adhesives and tapes, automotive aftermarket, and abrasives. Latin America/Canada grew 6 percent followed by Asia Pacific at 5 percent and EMEA at 1 percent. Operating income was $538 million and operating margins were 20.5 percent down 90 basis points versus last year's all-time Q4 record margin which was driven by very strong productivity. Investments were higher year on year including efforts to better optimize elements of our U.S. supply chain. Fourth quarter 2014 operating margins were in line with normal seasonal trends. And for the full year, margins were a solid 21.7 percent, up 10 basis points versus Let s now look at Health Care on slide eight. 5

6 Slide 8, Health Care Health Care delivered another very good quarter, with sales of $1.4 billion and organic growth of over 6 percent. Every Health Care business posted positive organic growth. Our large core medical businesses, namely infection prevention and critical and chronic care posted strong growth in the quarter. Health information systems and food safety each grew double-digits. Health care grew organically in all geographic areas, led by Latin America/Canada at 12 percent and Asia Pacific at 9 percent. The U.S. grew 7 percent and EMEA grew 3 percent. In developing markets, Health Care grew 15 percent organically, marking the 12th consecutive quarter of double-digit growth. This has been a high priority investment area of ours for some time, and these investments are paying off. We continue to build our capability to expand even further into the future. Operating income was $431 million and margins remained strong at 31 percent which includes 30 basis points of dilution from the Treo acquisition. Integration efforts are tracking to our expectations and the business continues to exceed sales and profit objectives. Please turn to slide nine. Slide 9, Electronics and Energy Electronics and Energy continued to build momentum with strong fourth quarter results. Sales were $1.4 billion, with organic growth over 6 percent. Operating income was $257 million and margins increased 2 percentage points year-over-year to 18.7 percent. Recent portfolio management actions are enhancing our relevance with customers and generating operational efficiencies which contributed to the growth and margin improvement in the quarter and for the year. Organic local-currency sales grew 9 percent in our electronics related businesses as we continue to see strong end-customer demand enhanced by spec-in wins at several OEMs. In our energy related businesses, organic local-currency sales increased 2 percent. The electrical markets business was up high single-digits, while renewable energy and telecom both declined year-on-year. 6

7 On a geographic basis, organic growth in Electronics & Energy increased 13 percent in Latin America/Canada, 7 percent in Asia Pacific and 5 percent in EMEA. The United States was flat year-on-year. Please turn to slide ten. Slide 10, Safety and Graphics Fourth-quarter sales in Safety & Graphics were $1.4 billion, up a robust 9 percent organically. Personal safety grew double-digits as we continue to see strong demand for 3M safety solutions in the manufacturing sector. In addition, our respiratory products are selling well in China where air quality is an ongoing concern. We also saw a pick-up in sales related to Ebola in the quarter. We estimate this added approximately $30 million to Q4 sales. Elsewhere in Safety & Graphics, commercial solutions grew mid-single digits and organic sales declined slightly in roofing granules, and traffic safety and security. Asia Pacific delivered 12 percent growth for Safety & Graphics, led by personal safety. Growth was 10 percent in Latin America/Canada, 9 percent in EMEA and 7 percent in the United States. Operating income was $285 million and operating margins increased 1.6 percentage points to 20.8 percent. This result was driven by strong organic growth and productivity. I ll finish with the Consumer business group, found on slide eleven. Slide 11, Consumer Fourth-quarter sales in Consumer were $1.1 billion, with organic growth of nearly 6 percent. All four businesses in Consumer grew organically led by a double-digit increase in do-it-yourself. This business continues to win in the market place with leading brands such as Filtrete filters and Command adhesives. We also saw good growth in consumer healthcare with notable strength in our Futuro branded health supports. Looking by geography, U.S. organic growth was 7 percent boosted by a strong holiday sell-in of Scotch and other 3M branded products. 7

8 Elsewhere, organic growth was 8 percent in Latin America/Canada and 5 percent in Asia Pacific. EMEA declined 1 percent year on year. Operating income increased 12 percent to $254 million and margins were 22.5 percent. Margins rose 2.1 percentage points year-over-year. The combination of strong organic growth, productivity and portfolio prioritization continued to drive efficiencies across the business. That wraps up my review of the quarter. I ll hand it back to Inge. Slide 12, 2014 Full-Year Highlights Inge Thulin Thank you, Nick. The fourth quarter was a strong ending to an equally strong year. In 2014, we delivered a record $32 billion in sales. We grew organically in each business group and geographic area, with a good balance between developed and developing markets. We expanded margins, and returned a record $7.9 billion to shareholders. We also made good progress on each of our long-term financial objectives which I laid out at our investor meeting here in St. Paul on November 8 th, On earnings per share, our target is 9 to 11 percent average growth. In 2014, we grew EPS 11.5 percent. On organic growth, our target is 4 to 6 percent. We grew 4.9 percent organically for the year. For Return on Invested Capital, our target is 20 percent. In 2014, we achieved 22 percent. Finally, on free cash flow conversion, our target is 100 percent. For the year, we hit 104 percent. Driving our success is the skill of our people and the strength of our business model which includes three key levers. The first is Portfolio Management. Since 2012 we have realigned our portfolio from six sectors to five business groups and from 40 businesses to 27. 8

9 In 2014 we combined businesses within three of our business groups: Electronics & Energy, Safety & Graphics and Industrial. All in, we invested $90 million in 2014 in portfolio actions to position us for greater future success. We also look to enhance our portfolio and complement organic growth through M&A. In 2014 we invested $1 billion in acquisitions including the remaining 25 percent of our Sumitomo subsidiary, one of 3M s most successful businesses. We also just recently divested our Static Control business. Active portfolio management is delivering significant benefits for 3M, including greater customer relevance, scale and productivity. Investing in innovation is our second lever. 3M s primary growth strategy is organic, and we strive to develop unique solutions that advance, enhance and improve outcomes for customers. That is why research and development is the heartbeat of our company. In 2014 we invested $1.8 billion in research and development. The strength of our innovation engine helped drive organic growth of nearly 5 percent in the year. 3M also earned more than 3,000 patents in 2014; in our history, we have now earned more than 100,000 patents globally. The third lever is Business Transformation. At our investor meeting in December, I laid out our path forward, which includes implementation of a global ERP system. This will create a more agile and efficient 3M, and allow us to better serve customers around the world. Looking at our 2014 performance, I see clear evidence that our playbook, including these three levers, is continuing to drive strong results and value creation. We expect to continue that momentum in Please turn to slide 13, and I will review our outlook for the year. Slide 13, Planning Estimates Inge Thulin 9

10 EPS guidance remains unchanged at $8.00 to $8.30. Organic growth is still expected to be 3 to 6 percent in the range. Given the strengthening U.S. dollar, we are seeing stronger currency headwinds than expected in December. We now estimate FX to reduce sales by 4 to 5 percent versus previous guidance of minus 2 to minus 3 percent. However, as evident in our fourth quarter and full-year results, we know how to operate in this environment. In addition, we see input costs lower versus one month ago, and our sourcing teams are focused on maximizing those benefits. Our tax rate estimate remains 28 to 29 percent, with free cash flow conversion of 90 to 100 percent. As you can see, we look forward to another strong and successful year. With that, I thank you for your attention, and we now welcome your questions. 10