Thank you and good morning everyone. Welcome to our second quarter 2018 business review.

Transcription

1 Q Earnings Call Transcript Inge Thulin, Michael Roman & Nicholas Gangestad July 24, 2018 Slide 1, Cover Page Slide 2, Upcoming Investor Events Bruce Jermeland, Director of Investor Relations Thank you and good morning everyone. Welcome to our second quarter 2018 business review. On the call today are Inge Thulin, 3M s executive chairman, Mike Roman, our chief executive officer, and Nick Gangestad, our chief financial officer. Inge, Mike and Nick will make some formal comments and then we ll take your questions. Please note that today s earnings release and slide presentation accompanying this call are posted on our investor relations website at 3M.com under the heading quarterly earnings. Before we begin, let me remind you of the dates for our upcoming investor events in 2018 found on slide two. Please mark your calendars for our Q3 earnings call on October 23th. Also, our next investor day which will be held at our headquarters in St. Paul, Minnesota with a welcome reception the evening of Wednesday, November 14 th and the formal presentation program on Thursday, November 15 th. More details will be available as we get closer to the event. Slide 3, Forward Looking Statement Bruce Jermeland Please take a moment to read the forward-looking statement on slide three. 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 note that throughout today s presentation we will be making references to certain non-gaap financial measures. Reconciliations of the non-gaap measures can be found in the appendixes of today s presentation and press release. Please turn to slide four and I will hand off to Inge. Inge. Slide 4 Inge Thulin, Executive Chairman Thank you, Bruce, and good morning, everyone. 1

2 As you all are aware, Q2 was my last quarter as the CEO, and I have now moved onto my new role as executive chairman of the 3M Board. Mike Roman is our new CEO, and I am pleased with the orderly transition between me and Mike, which we have worked on for the last year. In a moment I will turn the call over to Mike and our CFO, and you will see that once again we had a very strong quarter, with robust organic growth, margin expansion, EPS growth and good cash flow. But before doing that, I would like to make a few comments. First, I would like to recognize all of you who have covered, analyzed and invested in 3M. I have enjoyed our many interactions and I have always appreciated your input, along with your integrity and professionalism. I would also like to thank all of our 91,000 3Mers around the world for your contributions and support. Working together, I am pleased at what we have accomplished over the last six years. We have enhanced and focused our portfolio, and as a result, today we are far more relevant to our customers and the marketplace. We have strengthened our innovation engine, improved our cost structure and begun to transform 3M for the future. We have reached for our Vision of advancing every company, enhancing every home and improving every life. All of this is reflected in our financial results, and in the premium value we have created for our customers, and premium returns for our shareholders. At the same time, I am equally confident in our future. The Board of Directors and I have no doubt that Mike is the right person to lead our company as CEO, and continue building strength-on-strength. As I look across our enterprise, it is clear that we have the leadership, market position and capabilities to continue to build on the fundamental strengths of 3M. With that, I will turn the call over to Mike, for a summary of our second quarter. Mike. Slide 5, Q Summary Mike Roman, Chief Executive Officer Thanks, Inge, and good morning, everyone. Let me begin by saying that I am honored to serve as the chief executive officer of this incredible enterprise, and lead our team into the future. 2

3 I would like to express my gratitude to Inge for his vision, leadership and ongoing partnership in his new role as executive chairman. Over the last six years, we ve made great progress in building out the 3M Playbook, which has created a tremendous foundation for us. Moving ahead, we are focused on continuing our momentum, generating extraordinary value for our customers and premium returns for our shareholders. Now, let s review our second-quarter results, starting on slide 5. We had a strong quarter highlighted by broad-based organic growth and a double-digit increase in earnings-per-share, along with record sales and rising margins. Looking at the numbers, total sales were $8.4 billion, an all-time high for 3M. We delivered strong organic growth of 6 percent, with positive growth across all business groups and all geographic areas. Please note that we have an upcoming ERP rollout in the United States, and in anticipation of that deployment, some of our customers decided to accelerate their purchases. We estimate that this added approximately 50 to 100 basis points of growth in the second quarter, all of it in the US results. Moving onto earnings, we posted GAAP earnings of $3.07 per share, up 19 percent year-on-year. Adjusted earnings were $2.59 per share, compared to $2.25 a year ago; this demonstrates that our teams around the world continue to execute well. Underlying margins were strong at 24 percent, with all business groups above 21 percent. Beyond financial results, we are committed to building 3M for the long run, while returning cash to our shareholders. In the second quarter we invested $468 million in research and development, and another $365 million in cap-ex. We also returned $2.4 billion to shareholders, including both dividends and share repurchases. Please turn to slide 6. Slide 6, Business Highlights Mike Roman There is a lot to like this quarter across our entire portfolio. Our Industrial team posted good organic growth of 6 percent, a nice pick-up from the first quarter. Growth was broad-based, with particular strength in our filtration platform, where we are leveraging our Membrana acquisition to accelerate penetration in Bio Pharma and life sciences. Safety and Graphics delivered another outstanding quarter of 9 percent organic growth, along with robust margins. 3

4 For the 4 th consecutive quarter, our personal safety business grew double-digits as we continue to build and extend our industry leading portfolio in this market. In Health Care, we continued to expand worldwide with organic growth of 4 percent, led by our medical solutions business with mid-single-digit growth. Health Care also posted double-digit growth in developing markets, as investments in those areas are paying off. This is a great business for 3M, and we will continue to invest to strengthen it for the future. Organic growth in Electronics and Energy was 5 percent, on top of 10 percent growth in last year s second quarter. Within this business group, we have done a lot of portfolio work over the last several years to improve our relevance to customers and the marketplace; this has led to improved growth and a sustained improvement in margins. Last month, we continued to build on this portfolio work with the sale of our communication markets business. After a thorough review, we decided that selling this business will result in the greatest value creation for 3M and our shareholders; this is a good example of how we are actively managing our portfolio to best utilize the 3M model. Going forward, we will continue to prioritize high-growth opportunities in Electronics and Energy, such as automotive electrification, data centers and semiconductor fabrication. Finally, organic growth in Consumer was 4 percent, which included good performances across our leading brands. We saw continued strength in home improvement, along with a strong start to the back-to-school season. In summary, I m pleased with our performance in the second quarter, and I thank our teams for their many contributions. Our Playbook is working, and we are just getting started. We are well positioned to grow into an even stronger and more successful company. Looking ahead, we ll continue to optimize our portfolio, strengthen our innovation and accelerate our transformation, while developing our people. Nick will now take you through the details of the quarter. Nick. Slide 7, Q Sales Recap, Senior Vice President and Chief Financial Officer Thank you, Mike, and good morning everyone. Please turn to slide 7. Sales grew 5.6 percent organically in the second quarter. Increases in selling prices contributed 110 basis points to sales growth in the quarter and were positive across all geographic areas. The net impact of acquisitions and divestitures contributed 80 basis points to sales growth in the quarter. 4

5 Foreign currency translation increased sales by 1.0 percentage point. All in, second-quarter sales in U.S. dollars increased 7.4 percent versus last year. In the U.S., organic growth was 5.6 percent led by Electronics and Energy, Safety and Graphics and Consumer. EMEA increased 5.8 percent in Q2 driven by strong growth in West Europe that was led by Electronics and Energy, Industrial, and Safety and Graphics. Asia Pacific delivered 5.5 percent organic growth led by Health Care, and Safety and Graphics. Organic growth was 12 percent in both China/Hong Kong and India while Japan was down 2 percent. Finally, Q2 organic growth in Latin America/Canada was 6.0 percent led by Health Care, and Safety and Graphics. At a country level, Canada was up high-single digits while Mexico and Brazil both delivered mid-single digit organic growth. Please turn to slide eight for the second-quarter P&L highlights. Slide 8, Q P&L Highlights Companywide, second-quarter sales were $8.4 billion. Operating income in the second quarter was $2.4 billion which included a $400 million benefit from the communication markets divestiture gain, net of related actions. Second quarter underlying operating margins were 24 percent, excluding the net benefit from the communication markets divestiture. Let s take a closer look at the components of our margin performance in the second quarter. Leverage on organic growth improved productivity and lower year-on-year portfolio and footprint actions contributed a combined 290 basis points to margins. Selling price benefits more than offset raw material inflation adding 30 basis points to operating margins. Foreign currency, net of hedging impacts, reduced margins by 20 basis points. Lastly, during the second quarter we settled several respiratory and oral care-related lawsuits, which decreased margins by 70 basis points. Let s now turn to slide nine for a closer look at earnings per share. Slide 9, Q EPS Second-quarter GAAP earnings were $3.07 per share, up 19 percent year-over-year. Underlying earnings were $2.59 per share when adjusting for the communication markets divestiture gain, net of related actions. Let me now discuss the primary drivers of the year-on-year increase in Q2 earnings per share. 5

6 The benefits of organic growth, productivity and lower year-on-year portfolio and footprint actions added a combined 47 cents to per share earnings in the quarter. The previously mentioned legal settlements reduced Q2 earnings by $0.07 per share. Higher year-on-year net interest expense and retirement benefit expense decreased earnings by $0.06 per share. Our underlying Q2 tax rate was 19.8 percent which increased earnings by 16 cents per share. The lower tax rate was driven primarily by U.S. tax reform and the continued benefits from our supply chain centers of expertise. Lastly, lower shares outstanding added $0.04 to per share earnings. Please turn to slide ten for a look at our cash flow performance. Slide 10, Q Cash Flow Second-quarter free cash flow was $1.5 billion, up 14.5% year-on-year. Free cash flow conversion was 83 percent in the quarter. This includes a 16-percentage point headwind from the divestiture gain of the communication markets business and related actions. Second quarter capital expenditures were $365 million, up $63 million year-on-year. For the full year, we continue to anticipate cap-ex investments in the range of $1.5 to $1.8 billion. During the quarter we paid $802 million in cash dividends to shareholders and returned $1.6 billion to shareholders through gross share repurchases. Through the first half of the year we repurchased $2.5 billion of stock and now expect full-year repurchases to be in the range of $4.0 to $5.0 billion versus $3.0 to $5.0 billion previously. Let s now review our business group performance, starting with Industrial on slide eleven. Slide 11, Industrial The Industrial business group delivered second-quarter sales of $3.1 billion, up 5.7 percent organically. Industrial s growth was broad based across all geographic areas and businesses. Our advanced materials, abrasives, and separation and purification businesses led the way with high-single digit growth in the quarter. Looking at the rest of the Industrial portfolio, our industrial adhesives and tapes, auto and aerospace, and automotive aftermarket businesses all delivered mid-single digit growth in the quarter. On a geographic basis, Industrial s organic growth was led by a 7 percent increase in EMEA followed by mid-single digit growth in each of the other areas. Industrial delivered second quarter operating income of $724 million. Operating margins were 23.0% with underlying margins up 180 basis points excluding the impact of last year s second quarter portfolio and footprint actions. Please turn to slide twelve. 6

7 Slide 12, Safety and Graphics Second quarter Safety and Graphics sales were $1.8 billion, up 8.5 percent organically with strong growth across all businesses and geographies. As Mike mentioned, our personal safety business continued to post excellent growth up double digits in the quarter. The integration of our Scott Safety business is performing well and we are pleased with the performance of the business. Commercial solutions was up high-single digits while transportation safety and roofing granules businesses were both up mid-single digits. Geographically, organic growth was led by 10 percent growth in EMEA, with high-single digit increases in both the U.S. and Asia Pacific. Latin America/Canada grew 6 percent organically in the quarter. Operating income was $480 million with operating margins of 26.4 percent. Please turn to slide thirteen. Slide 13, Health Care Our Health Care business generated second quarter sales of $1.5 billion, up 3.8 percent organically. Our medical solutions business which is our largest segment in Health Care grew mid-single digits in Q2. Oral care was up 3 percent with continued good growth internationally, particularly in developing markets. Food safety grew high-single digits while health information systems grew mid-single digits. Finally, our project-based drug delivery business declined low-single digits year-over-year. On a geographic basis, Asia Pacific and Latin America/Canada led the way, both up high-single digits. EMEA grew 5 percent followed by 1 percent in the U.S. We saw continued strength in developing markets, up double digits led by China/Hong Kong growing in the high-teens. Health Care s second quarter operating income increased 7 percent to $435 million and underlying operating margins were just over 30 percent adjusting for the impacts of a legal settlement and the commercialization investments for our new Clarity aligners. Next, let s cover Electronics and Energy on slide fourteen. Slide 14, Electronics and Energy Electronics and Energy organic sales growth was 5.2 percent in the second quarter. Sales were $1.3 billion. The electronics side of the business grew 4 percent organically, led by mid-single digit growth in electronics materials solutions. 7

8 Our energy-related businesses were up 9 percent organically, led by electrical markets up double digits. As mentioned, we closed on the sale of substantially all of the communication markets business in the quarter and expect to close the remaining portion by the end of the year. On a geographic basis, the U.S. led with high-single digit organic growth followed by mid-single digit growth in both EMEA and Asia Pacific. Latin America/Canada was up low-single digits. Second-quarter operating income for Electronics and Energy was $865 million with underlying operating margins of nearly 28 percent. Please turn to slide fifteen. Slide 15, Consumer Second-quarter sales in Consumer were $1.2 billion, and organic growth was 4.3 percent year-on-year. Our home improvement business grew double digits organically continuing its track record of strong performance. Our leading brands continue to win in the marketplace, particularly Command and Filtrete, both up double-digits. The home care business and stationary and office supply business each delivered low-single digit growth in the quarter while consumer health care declined. Looking at Consumer geographically, growth was led by a 7 percent increase in the U.S. followed by mid-single digit growth in Latin America/Canada. In the second quarter, we continued to see strong consumer demand for our products in the U.S., particularly in the e-commerce channel. Finally, operating income was $261 million, with operating margins of 21.4 percent. That wraps up our review of second-quarter results. Please turn to slide sixteen, and I ll cover our updated 2018 guidance. Slide 16, 2018 Guidance Our full-year organic growth expectations remain unchanged in the range of 3 to 4 percent. With respect to earnings, we now expect full-year adjusted EPS to be in the range of $10.20 to $10.45 versus a prior range of $10.20 to $ The update to the range reflects the impact of the divested income associated with the communication markets business. Finally, please note that we now expect that foreign currency translation will add approximately 1 percent to full-year sales growth versus a prior expectation of 2 percent. With that, we thank you for your attention and will now take your questions. 8

9 Slide 17, Q&Q Conclude and Sign-off Michael Roman To wrap up, we had a strong performance in the second quarter, led by broad-based organic growth, expanded margins, and a double-digit increase in earnings per share. We are executing our Playbook, and are positioned to deliver a successful Thank you again for joining us this morning, and have a good day. 9