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Q1 2015 Earnings Call Transcript
Inge Thulin & Nicholas Gangestad
April 23, 2015
Slide 1, Opening
Matt Ginter, Vice President, Investor Relations
Thank you, good morning everyone. Welcome to our first quarter 2015 business review.
On the call today are Inge Thulin, 3M’s chairman, president and CEO, and Nick Gangestad, 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, July 23rd, October
22nd and January 26th. Also, take note of our next investor meeting which is scheduled for
December 15th. 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, Q1 2015 Highlights
Inge Thulin, Chairman, President and CEO
Thank you, Matt and good morning everyone. I appreciate you joining us today.
3M executed well and delivered another solid quarter of operational performance.
We once again posted broad-based organic sales growth, and continued to improve profitability.
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Importantly, we achieved this against a more challenging first-quarter economic backdrop.
The rising U.S. dollar negatively impacted revenues and profits, offset in part by hedging gains.
In addition, global economic growth slowed, which we saw a bit in our growth figures.
As 3M always does, we continued to manage those things within our control, execute our plan and
build for the future.
I’ll take you through the first-quarter highlights.
Earnings were $1.85 per share, up 3 percent year-over-year.
Sales were $7.6 billion in the quarter, down 3 percent versus last year.
Organic local currency growth was 3.3 percent.
For the seventh consecutive quarter, 3M posted organic growth in every business group, as well as
across all geographic areas.
As I mentioned, the U.S. dollar strengthened significantly against a number of currencies, reducing
sales by 6.5 percent.
We expanded companywide margins to 23 percent, up nearly a full percentage point from last year
and all business groups delivered margins greater than 21 percent.
Rising margins and broad-based organic growth are more evidence that our portfolio actions over
the last three years are paying off.
This quarter, 3M took a number of additional steps to strengthen our portfolio.
We announced plans to acquire Polypore’s Separations Media business for $1 billion, which will
enhance our core filtration platform.
Last month, we completed the acquisition of Ivera Medical, a good addition to our health care
business. And at the same time, we completed the sale of our Static Control business in January.
Also in the quarter, we returned $1.5 billion to shareholders through dividends and share
repurchases.
And finally, we increased the first-quarter dividend by 20 percent, on top of a 35 percent increase
last year.
Nick will now go through the details of the quarter. Nick.
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Slide 4, Q1 2015 Sales Recap
Nick Gangestad, 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 first-quarter sales change.
As Inge mentioned, in the quarter we delivered positive organic growth in all business groups and
geographic areas. Worldwide organic local-currency growth was 3.3 percent with volumes up 2.3
percent and selling prices up 1.0 percent.
Two health care-related acquisitions, namely Treo Solutions and Ivera Medical added 10 basis
points to growth. This impact was offset by the divestiture of the static control business, which
reduced sales by 10 basis points.
The stronger U.S. dollar reduced sales by 6.5 percent. In U.S. dollars, total sales declined 3.2
percent versus the first quarter of 2014.
The U.S. dollar strengthened significantly versus several foreign currencies during the first quarter
continuing a trend that began in 2014. In particular, the average Euro rate declined 18 percent
versus the U.S. dollar year-on-year. The Yen declined 14 percent and the Brazilian Real 19
percent.
Looking more closely at organic local-currency growth, Asia Pacific led the way at 5.6 percent.
Safety & Graphics again posted the strongest growth in APAC at 9 percent, followed by Health
Care at 8 percent and Electronics & Energy at 7 percent.
Organic growth was 7 percent in China/Hong Kong or 8 percent excluding electronics, similar to
recent quarters. Japan was up against a challenging comp. Recall that Japan’s organic growth was
20 percent in the first quarter of last year leading up to the April 1, 2014 consumption tax increase.
EMEA organic growth was slightly positive in the first quarter with West Europe flat, Central/East
Europe up mid-single digits and Middle East/Africa down slightly.
Organic growth in EMEA was led by Electronics & Energy and Safety & Graphics at 4 percent and
1 percent, respectively.
We posted 4 percent organic growth in Latin America/Canada, where Industrial, Safety & Graphics
and Health Care all grew 5 percent.
Mexico delivered another outstanding result, with 15 percent organic growth in the quarter and
Brazil was down 2 percent.
The United States grew 3.1 percent organically with Industrial, Health Care and Consumer each
growing 4 percent. Safety & Graphics and Electronics & Energy each grew 3 percent.
Please turn to slide five for the first-quarter P&L highlights.
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Slide 5, Q1 2015 P&L Highlights
Nick Gangestad
First-quarter sales were $7.6 billion dollars, down 3.2 percent. Operating income, on the other
hand, increased nearly one percent to $1.7 billion and earnings rose over 3 percent to $1.85 per
share.
Early in the year it became apparent that business conditions would be more uncertain particularly
given that the U.S. dollar was moving higher. As always, we had contingency plans in place and
we executed those plans as Q1 played out.
Gross margin improvements and strong SG&A productivity allowed us to increase first-quarter
operating margins by 90 basis points year-on-year to 22.8 percent. For the full year, we expect
operating margins to increase by a minimum of 1 percentage point.
Let’s take a closer look at this quarter’s margin improvement.
Organic volume leverage added 20 basis points to operating margins, and the combination of lower
raw material costs and higher selling prices contributed 120 basis points of margin expansion.
We continued to generate positive selling price changes across our businesses, boosted by 3M’s
world-class material science and strong new product flow both of which are important elements of
our business model. In addition, we have been raising prices in select countries to help mitigate the
impact of currency devaluations.
On the raw material front, we are benefitting from both lower commodity prices and from our
Sourcing team’s ongoing negotiation efforts. We expect raw material benefits to gain momentum
as the year progresses.
Productivity added 30 basis points to margins as spending remained under good control in the
quarter. And foreign currency impacts net of hedge gains were neutral to margins.
First-year acquisitions were 10 basis points dilutive to our operating margin in the quarter.
In addition, we continue to make other strategic investments including disruptive R&D programs
along with business transformation and ERP. These investments reduced operating margins by 20
basis points year-on-year.
Finally, higher pension and OPEB expense reduced first-quarter operating margins by 50 basis
points. As a reminder this year’s pension increase is due to the adoption of new mortality tables,
along with a lower discount rate.
Summarizing the first quarter P&L, our teams executed well in the face of currency headwinds and
a more mixed economic backdrop. EPS expanded year-on-year and margins increased by nearly
one percentage point.
Now let’s turn to slide six for a closer look at earnings per share.
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Slide 6, Q1 2015 EPS
Nick Gangestad
Earnings for the first quarter were $1.85 per share an increase of 3.4 percent.
Organic growth and margin expansion contributed $0.14 to the EPS increase in the quarter. This
included a $0.04 headwind from higher pension and OPEB expense.
Foreign-currency impacts net of hedging reduced pre-tax earnings by $90 million or the equivalent
of 10 cents a share.
The first quarter tax rate was 29.5 percent versus 27.4 percent in the comparable quarter which
reduced per share earnings by 5 cents. The increase was due to geographic mix which was
influenced by the strong U.S. dollar. In addition, Q1 2014 included a one-time benefit that did not
repeat.
Average diluted shares outstanding declined by 4 percent versus last year’s first quarter which
added 7 cents to first-quarter earnings per share.
Now let’s review cash flow performance on slide number seven.
Slide 7, Q1 2015 Cash Flow
Nick Gangestad
We generated $1.1 billion of operating cash flow in the quarter, in line with Q1 2014.
Capital expenditures were $291 million, consistent with last year’s first quarter. Our full-year
expected cap ex range is $1.4 to $1.6 billion, down $100 million versus prior estimates, all due to
the stronger U.S. dollar.
First-quarter free cash flow was $789 million and we converted 66 percent of net income to cash, in
line with last year’s first quarter. Note that first quarter is typically our seasonal low. For the full
year, we continue to expect to be in the range of 90 to 100 percent.
As Inge mentioned earlier, we increased our first-quarter per-share dividend by 20 percent. We
paid out $652 million in cash dividends during the quarter.
Gross share repurchases were $886 million in the first quarter and we continue to plan $3 to $5
billion for the full year.
Now let’s review our first-quarter performance on a business-by-business basis. Please go to slide
number eight.
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Slide 8, Industrial
Nick Gangestad
Industrial, with sales of $2.7 billion, delivered organic local-currency growth of 3 percent in the
quarter.
Our aerospace and commercial transportation, automotive OEM and 3M Purification businesses all
generated high single-digit growth. We also posted positive organic growth in advanced materials
and industrial adhesives and tapes.
On a geographic basis, Latin America/Canada set the pace with organic growth of 5 percent. The
U.S. was up 4 percent, Asia Pacific increased 3 percent and EMEA was flat.
We continue to invest for the future within Industrial. During the quarter we announced our intent to
acquire Polypore’s Separations Media business for $1 billion. This business is a leading provider of
microporous membranes and modules for filtration in the life sciences, industrial and specialty
segments. The acquisition will enhance 3M’s core filtration platform and help generate new growth
opportunities across the company.
Wrapping up on Industrial’s first-quarter performance operating income was $598 million and
operating margins were 22.5 percent, up 20 basis points versus last year's Q1.
Let’s now turn to Safety & Graphics on slide nine.
Slide 9, Safety and Graphics
Nick Gangestad
First-quarter sales in Safety & Graphics were $1.4 billion, increasing 4 percent organically.
Personal safety grew high-single digits in the quarter. Worker safety remains a high priority for
manufacturers globally, and we are gaining share. In addition, our respiratory products are
continuing to sell well in China where air quality is an ongoing concern.
Commercial solutions and traffic safety and security each posted positive organic growth while
roofing granules declined year-on-year.
Asia Pacific delivered 9 percent organic growth, Latin America/Canada increased 5 percent, the
U.S. was up 3 percent, and EMEA increased 1 percent.
Operating income was $335 million and operating margins increased 2.1 percentage points to 24.4
percent. Margins in this business continue to be boosted by strong productivity and a keen focus
on prioritization and portfolio management.
Let’s now turn to Health Care on slide ten.
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Slide 10, Health Care
Nick Gangestad
Health Care delivered sales of $1.3 billion and organic growth of 3 percent.
Growth was strongest in food safety, critical and chronic care, and health information systems. Our
infection prevention and oral care businesses also posted positive growth in the quarter. The drug
delivery systems business declined year-over-year.
Geographically, organic growth in Asia Pacific was 8 percent, while Latin America/Canada and the
U.S. each grew 4 percent. EMEA declined 1 percent.
In developing markets, health care grew 10 percent organically, marking the 13th consecutive
quarter of double-digit growth. This has been a high priority investment area of ours for some time
as health care markets rapidly evolve in developing countries.
In March, we successfully closed the acquisition of Ivera Medical Corporation. This business will
enhance 3M’s vascular access product offerings to health care facilities. Integration is going
smoothly, and we look forward to expanding this business globally.
Health Care’s operating income was $408 million and margins remained strong at 30.7 percent.
Note that first quarter margins absorbed 40 basis points of dilution from the Ivera and Treo
acquisitions; therefore underlying margins were 31.1 percent.
Next we will look at Electronics & Energy on slide eleven.
Slide 11, Electronics and Energy
Nick Gangestad
Electronics & Energy delivered 6 percent organic local currency growth in the first quarter with
sales of $1.3 billion.
Organic local-currency sales grew 12 percent in our electronics-related businesses as we continue
to see strong consumer demand enhanced by spec-in wins at several OEMs.
In our energy-related businesses, organic local-currency sales declined 3 percent. The electrical
markets business was flat while telecom and renewable energy both declined year-on-year.
On a geographic basis, organic growth in Electronics & Energy increased 7 percent in Asia Pacific,
4 percent in EMEA, and 3 percent in both the U.S. and Latin America/Canada.
The divestiture of the Static Control business, which closed on January 2, 2015 reduced sales by
90 basis points in the first quarter. As a reminder sales for this business were $46 million in 2014.
Operating income for Electronics and Energy was $283 million and margins increased 4.1
percentage points year-over-year to 21.4 percent. Recent portfolio management actions are
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improving our relevance with customers, enhancing our growth capabilities and contributing to
higher productivity and margins.
Please turn to slide twelve.
Slide 12, Consumer
Nick Gangestad
First-quarter sales in Consumer were $1.0 billion, with organic growth of 2 percent.
All four businesses in Consumer grew organically, led by do-it-yourself and home care each
growing mid-single digits.
Looking by geography, the U.S. grew 4 percent and Asia Pacific increased 2 percent. EMEA and
Latin America/Canada declined slightly year-on-year.
Operating income increased to $240 million and margins were 22.9 percent. Margins rose 1.7
percentage points year-over-year.
The business continues to drive efficiencies through investment prioritization and executing on
productivity programs.
Before turning to our 2015 outlook, let me comment on Corporate and Unallocated. Net expense
was $100 million in the first quarter versus $72 million in Q1 of 2014, with U.S. pension and post
retirement expenses being the primary reason for the increase. For the full year, we estimate
Corporate and Unallocated net expense to be approximately $400 million.
That wraps up our first-quarter results. Please turn to slide thirteen where I will address our fullyear planning estimates.
Slide 13, 2015 Planning Estimates
Nick Gangestad
On organic growth, we expect 3 to 6 percent for the year, so no change versus prior thinking.
Foreign currency translation is forecasted to reduce 2015 U.S. dollar sales by 6 to 7 percent, up
from a previous range of 4 to 5 percent. For the second quarter specifically we expect FX to reduce
sales by 8 percent.
With respect to earnings, we now anticipate full year EPS of $7.80 to $8.10 per share versus a
previous estimate of eight dollars to 8.30 per share. In our fourth-quarter business review on
January 27th, recall that we estimated our foreign currency impacts would reduce 2015 earnings by
approximately $0.20 per share. Of course, since then the dollar has strengthened further.
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Today we estimate that foreign currency impacts will reduce 2015 full-year earnings by $0.35 to
$0.40 per share, or an incremental headwind of $0.15 to $0.20 per share versus our January
estimates. These figures are net of hedging.
For Q2 in particular, we anticipate that foreign currency impacts will reduce earnings by $0.13 per
share.
For the tax rate, we anticipate a range of 28.5 to 29.5 percent versus 28 to 29 percent prior. The
stronger U.S. dollar is impacting our profit mix by country, which is leading to a higher effective tax
rate.
Finally, no change as it relates to free cash flow conversion. We continue to expect a range of 90
to 100 percent for the year.
I will now turn the call back to Inge for a few final comments.
Slide 14, Final Comments
Inge Thulin
Thank you, Nick.
I am pleased with the performance of our team in the first quarter.
We executed our playbook and delivered solid results in a tougher external environment.
Now more than ever, our teams remain keenly focused on efficient growth. Focused both on
organic growth and of course productivity.
As Nick described, we also took a number of additional steps to carefully manage first-quarter
expenses, in anticipation of a difficult economic environment, clearly necessary given external
realities.
As we navigate short-term challenges, we also continue to invest for long-term success.
This includes portfolio investments, as I mentioned earlier, as well as our ongoing commitment to
building on our core strengths.
I have talked to you before about 3M’s four fundamental strengths, which are leveraged across our
enterprise: technology, manufacturing, global capabilities and our brand.
On technology, for example, we increased R&D investment in the quarter, while at the same time
managing our SG&A investments very carefully.
We expanded 3M’s global capabilities, including breaking ground on a new customer innovation
center in Chengdu, in West China.
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As you heard from Nick, our 3M China team continues to execute well, delivering 7 percent organic
growth.
We remain very optimistic about 3M’s future in China.
And our new innovation center in West China will allow us to collaborate even more closely both
with local and global customers, and help us take advantage of growing opportunities in that region
in China.
In March, we also refreshed our brand platform, which includes our new tagline: 3M Science
Applied to Life™.
Through our brand work, we will enhance awareness of how 3M uses science to solve problems
and improve lives.
So in summary, it was a solid first quarter for 3M.
Our team performed well against tough economical headwinds, and we continue to make
investments for our future.
And by that we are now open to take your questions.
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