Credit Suisse 16th Annual Chemical Conference

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Credit Suisse 16th Annual Chemical Conference

  1. 1. George Buckley September 26, 2007 3M Innovation and Growth CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  2. 2. Forward-Looking Statements This presentation contains forward-looking information (within the meaning of the Private Securities Litigation Reform Act of 1995) about the company’s financial results and estimates, business prospects, and products under development that involve substantial risks and uncertainties. You can identify these statements by the use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Among the factors that could cause actual results to differ materially are the following: (1) worldwide economic conditions; (2) competitive conditions and customer preferences; (3) foreign currency exchange rates and fluctuations in those rates; (4) the timing and acceptance of new product offerings; (5) 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); (6) 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; (7) generating less productivity improvements than estimated; and (8) 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, 2006 and its 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 Part I, Item 1A (Annual Report) and Part II, Item 1A (Quarterly Report), “Risk Factors.” 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. 2 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  3. 3. Outstanding Second Quarter +11.8% +23.0% ex. pharma ex. pharma $1.23 $6.1 Billion +8% +17.1% Sales EPS* *Excludes special items. Refer to 3M’s July 26, 2007 press release for a complete list and explanation of these items. 3 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  4. 4. Sales Recap Q2 2007 vs. Q2 2006 WW U.S. Int’l Volume - organic 6.9% 2.1% 9.9% Volume - acquired 2.8% 2.8% 2.8% Price (0.4%) 1.3% (1.4%) Total Local Currency* 9.3% 6.2% 11.3% Divestiture (3.8%) (4.0%) (3.7%) Translation 2.5% -- 4.1% Total Sales Growth 8.0% 2.2% 11.7% *Total Local Currency = Volume + Price + Acquisitions 4 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  5. 5. Balance Sheet & Cash Flow Q2 2006 Q1 2007 Q2 2007 ($ in Millions) Free Cash Flow $539 $670(a) $866(a) Net W/C Turns 5.2 5.0 5.0 Inventories $2,557 $2,714 $2,779 Receivables-Net $3,171 $3,444 $3,620 Cap-ex $261 $304 $348 Dividends Paid $348 $350 $346 Share Repurchases $527 $1,164 $1,035 Excludes certain special items that impacted cash flow. Refer to 3M's July 26, 2007 press release for an explanation of these items. (a) Note: Refer to 3M’s July 26, 2007 press release for a complete discussion of net working capital turns and free cash flow (non-GAAP measures). 5 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  6. 6. Our Principal Mission Driving Growth CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  7. 7. Great Opportunities Remain for 3M Comparative Tax Rate (3M at 34% in 2007) Built firm Six Sigma and Lean Processes Margin Tax Rate Advantage in manufacturing Ingersoll Rand 16% 2150 bps Tyco 21% 1450 bps ITW 31.5% 150 bps Fundamental principles remain Danaher 27.3% 920 bps UTX 26.8% 994 bps J&J 23.8% 1449 bps Avery 20.4% 1943 bps Protect our premium margins 3M 34% 0 bps Conclusion; We fight to maintain high margins, and we reduce our competitiveness and growth rates, but waste it all in paying higher taxes Defend our premium ROIC Innovation (#) Reemphasize innovation Relative Value Of Growth Leverage central overhead MMM 5.2 GE 11.4 12.0 IBM 3.5 DHR 5.1 PG 7.2 10.0 e tiv a e f ro th XOM 2.1 R la eV lu o G w GM 2.4 Adding growth, taxes and supply chain as WMT 1.6 8.0 #REF! #REF! #REF! #REF! #REF! #REF! 6.0 4.0 new value creators 2.0 0.0 MMM GE IBM DHR PG XOM GM WMT Company Ticker Build on 3M’s enduring franchises ► Ratio of value creation from 100 bps of growth to 100 bps of margin ► Acquisitions add value by blending the value lost from margin dilution and the value added from incremental growth and mass Building value and margin for our Value Of Growth Vastly Exceeds Value Of Margin Expansion For 3M customers Source:HBR April 2005 © 3M 2006 All Rights Reserved 7 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  8. 8. Plan Essentials Higher Growth remains fundamental to our long term success Rebuilding R&D to improve new product flow and impact Financing the growth through supply chain re-engineering Developing a more entrepreneurial and responsive culture 8 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  9. 9. Growth Inspired by Customers’ Needs, Balanced with Operational Excellence Growth Operational Excellence Protect and Adjacency Grow the Core Build Out 3. Solve Low 1. Factory Cost 2. Control Price 1. New Technology 2. New Products 3. M&A Turns Inventory Reduction Leakage 5. Breakthrough 4. Service & Quality 6. Localized, Simplified 7. Go to 5. Sourcing 6. Lean Six Sigma Opportunities Revolution Supply Chains Market (BTO’s) Organizational excellence within a growth culture essential 9 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  10. 10. Reducing Growth To Its Simplest Form Think of growth as a pipeline; work the inputs and the outputs and clear the pipe of pluggage and obstructions At the “sending end” of the pipe: Invent and develop more products Get scientists and engineers back in the business of inventing new products At the “receiving end” of the pipe; sell and market better More feet on the street, and more advertising and merchandising Stop unnecessary complexity in SKUs Acquire local brands to penetrate distribution faster The pipe itself Provide a large enough diameter pipe: Capacity Keep the pipe as short and simple as possible Stop the pipe leaking Price giveaways and market share loss 10 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  11. 11. So We Tailor Made A Growth Program For 3M Rebuilding & extending the core; lowest risk and fastest results Protect and defend the core; inventing a new future Fixing chronic capacity issues Broaden the product portfolio to become more important to customers Invest in the future R&D spending increases, protecting our flanks and reengaging the labs Acquisitions, Break Through Opportunities (BTOs) and “feet on the street” Improving supply chain speed and efficiency Shortening most of our supply chains Driving growth by going “local” with regional brands and manufacturing Releasing working capital and lowering entropy costs and effective tax rate Experiment with new markets Emerging Business Opportunities (EBOs) and other adjacencies Greater emphasis on International markets growth 11 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  12. 12. A Visual Of Our Basic Strategy Strategic Thrust Grow the Current Complementary Build New International Core Business Acquisitions Businesses Growth • Defend and extend the core • Follows core strategy • Seeded by small M&A • BRICP • Build scale • Supports adjacencies • No country left behind • Mega Trends • Build relative share • Mostly tuck-ins • Track and Trace • Localization • Occasional transformation • Minerals extraction • Disruptive technologies • Oil & Gas • Build long term competency • Food safety 12 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  13. 13. Core Growth Remains The First Mission Grow the Current Core Invent a Extend The Core New Future • Constant reinvention • Localization • Imagine, dream and invent • Differentiation • Build first where we’re strong • Beat competitors to the future • Build key partnerships • Build scale & relative share • Plan for cannibalization • Fill product “white spaces” • Licensing • Be important to customers • Avoid NIH syndrome Build Broad Long • Use dual branding Term Competencies • International localization • Local acquisitions • Private labeling • Develop broad based long-term capabilities • Acquire supporting technology with quality brands • Build volume and scale 13 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  14. 14. We Made Solid Progress in 2007 Reinvigorating R&D 11% increase over 2006* Building on EBOs New product vitality index up from 20% to 24% Accelerated International Growth Building local/regional brands Pursued profitable adjacencies Invest in a better Supply Chain 28% increase in Capex over 2006 Improving local source of supply • Korea – New respiratory facility • Poland – New optical facility • Canada – New CHIM tape facility • China – New Industrial tapes facility Seed Further Growth in the Core via acquisitions 13 acquisitions YTD in 2007 *ex-pharma, Brontes in 2006 14 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  15. 15. The 3M Growth Strategy Is Taking Hold 8.0% 2.3% 5.8% 3M LC Revenue Growth 1.1% Acquisition Oil And Housing Headwinds Plus a Slowing 5.6% 4.7% Organic GDP in US and Asia 03-05 06-07 YTD Increasing growth, without favorable economic conditions 15 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  16. 16. We Are Making The Necessary Growth Investments 2005 2006 2Q07 YTD Change ($MM) ($MM) ($MM) 2005-2006 (%) 20% R&D investment 1,274 1,522* 677 24% Capex 943 1,168 652 Acquisitions - 1,293 793 194 technology * Includes Brontes acquisition and other special items Investments in critical growth elements 16 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  17. 17. Historical Capital Spending $1,600 Growth Capital increase 53% Decline in almost all Optical Films Capital Spending $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sustain Strategic Growth Optical Since 2000, Optical spending equaled all other growth capital combined 17 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  18. 18. Acquisitions Higher organic growth results from more frequent acquisitions Acquisitions are not only about bulk, but can be helpful in: Acquisitions 1. Strengthening the base by filling in white spaces 2. May facilitate growth through Growth entry into a new market 3. May provide a key new Base technology or brand 4. Fast capacity acquisition 18 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  19. 19. The Expanding Impact of M&A ~20 18 4 2005 2006 2007 10% Increase in acquisitions in 2007 following 350% increase in 2006 19 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  20. 20. Thoughtful Acquisitions Help Drive Core Growth High Jump 20% Info-X Siemen's Interchemall Dom Interconnect Target Growth Rate % 15% Mercury CUNO Omni Hornell 10% Gen'l Ind'l Diamond 5% 3M Historical Growth ~4% 0% 2004 2005 2006 Less than $100MM Greater than $100MM 20 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  21. 21. The International Growth Opportunity Remains Large International growth rates 2X – 3X US 62% of 3M sales are outside the United States today, ~ 65% in 2012 Continued focus on BRICP and high growth countries; adding ~31% of International growth BRICP adding ~$2.5 Billion → 2012 (China $1.1 Bn) Next growth focus – “Plus” (Vietnam, Indonesia, Kazakhstan, Ukraine, Gulf/UAE, Turkey) “Plus” adding ~$0.5 Billion China growing ~ 21% CAGR, W. Europe continues increased growth Acquire local brands and manufacturing as well as organic expansion 21 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  22. 22. 3M’s Subsidiary Network: A Platform For Growth Poland Switzerland Hungary Norway Ukraine Canada East Czech Trinidad Austria Romania Finland Republic Sweden & Tobago Puerto Rico Russia Germany Dominican Republic Denmark Jamaica Korea Netherlands Belgium Japan Ireland Mexico China United Guatemala Kingdom Hong Kong El Salvador Portugal Taiwan Costa Rica Pakistan Spain Vietnam Panama France UAE Colombia Philippines Morocco Kuwait Indonesia Venezuela Thailand Saudi Tunisia Arabia Ecuador Malaysia Singapore Italy Lebanon Peru Sri New Zealand Greece Australia Lanka Brazil Israel India Turkey Chile Egypt Key South Africa Kenya Uruguay Argentina Sales & Marketing Manufacturing/Converting Technical Capabilities 22 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  23. 23. International Sales Growth (Billions) $15.0 $14.1 $12.9 13.0 $12.1 $10.7 11.0 $8.9 $8.9 9.0 $8.5 $8.2 $7.8 7.0 5.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 23 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  24. 24. Operational Excellence CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  25. 25. Challenges in Working Capital Management Q4 2006 Q1 2007 (YoY Growth in Millions) Total sales growth $457 $342 Change in WC $557 $575 Streamlining of our supply chain is essential 25 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  26. 26. Supply Chain Improvements 3M’s history led to very complex supply chains Average time to traverse the global supply chain is 125 days Multiple plant hops, often backward and forward across continents, is the norm at 3M • Structure drives up inventory and working capital usage and lowers fill rates →Led to expensive, if flexible, machine tools →Frequent machine set ups and high Excess and Obsolete inventory Air freight, manual intervention and expediting are normal Large numbers of SKUs complicate the picture, compounded by chronic capacity shortages 26 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  27. 27. 3M’s Convoluted Supply Chain • Any plant may have up to eight Plant A Plant B “owners” in 40 combinations Six Owners Four Owners • Lead owner varies plant to plant Raw Material In Distribution Center Plant D Plant C Four Owners Eight Owners 27 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  28. 28. And Here’s What We Are Beginning To Do Plant A Plant B Six Owners Four Owners Raw Material In Distribution Center Plant D Plant C Four Owners Eight Owners 28 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  29. 29. Supply Chain – Focused Factories Plant C Plant A Eight Product Lines Six Product Lines Raw Distribution Material In Center Plant B Plant D Four Product Lines Four Product Lines 29 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  30. 30. Supply Chain – Focused Factories Plant A Plant C Six Product Lines Eight Product Lines Raw Distribution Focused Factory Material In Center Plant B Plant D Four Product Lines Four Product Lines 30 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  31. 31. Capacity And Supply Chain Improvements In Progress CANADA CHIM Tape Medical: M6 Solvent Coater-Brookings, SD USA Northridge DDSD Automotive Acrylic MEXICO Packaging Line Tape-Aberdeen, SD Polyester CHIM: LFBMF Lines, D11 MOF Line Greenville, NC Aberdeen, SD Filtrete Mfg. Decatur, AL 31 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  32. 32. Capacity And Supply Chain Improvements In Progress RUSSIA OHES Manufacturing POLAND CHINA KOREA INDIA Optical Suzhou LCD II Tapes CHJ III Mfg Industrial Tapes Medical Mfg. GuangZhou 32 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  33. 33. Getting Closer to the Customer – New Korean Plant Example Maintenance Free Laminating Respirators (4350) Adhesives (2470) Weighted Ave Miles to Weighted Ave Miles to Customer (Worldwide) Customer (Worldwide) With With % Closer Korea Korea to % Closer to Before Supplying Before Supplying Customer Customer Korea APAC Korea APAC (With Korea) (With Korea) 2012 1757 13% 4900 2394 51% Hutchinson Aberdeen 4555 3128 31% 1119 1119 Nil Knoxville Valley 1706 1305 24% Aycliffe Korea operations shortens WW supply chains by ~30% for key product lines 33 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  34. 34. It’s Not Just a Global Issue; Division Example Automotive Regional Paint Protection Film 2012Regional PPF 2007 Hutchinson Trient $7.7MM Brady Brookings Knoxville CAPEX Nevada 5 Year Benefits Service - LOT From 96% to >99% Lead Time From 150 to 45 days Inventory Reduction $4 Million Material Cost Savings $20.5 Million Freight Savings $2 Million 34 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  35. 35. Brontes Technologies 35 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  36. 36. Track & Trace Has Broad-Based Opportunities Existing and Potential 3M Solution Spaces Improve and Advantage Me! Location-Based Services How Am I? Supply Chain Optimization Sensor Networks Competitive “Superiority” Where Am I? Sensors in Order Fulfillment Temp Supply Chain Tracking Software Who Am I? Vibration Distribution RFID Network Humidity RFID Wireless Location Light BarCode RTLS Contaminants Database GPS Road Tolling 36 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  37. 37. Electrical Power Transmission 37 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  38. 38. New Consumer Products 38 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  39. 39. Summary CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  40. 40. 3M’s Strategy Reduces to Five Principal Elements Get our labs back in the business of developing and releasing new products faster Better prioritization of what we do, and don’t do, and where we do it Go local (or regional) in brands and sales coverage to drive growth Get all elements of the supply chain closer to customers to facilitate growth and reduce costs and W/C demands Accelerate technological capability, distribution penetration, customer satisfaction and manufacturing capacity through acquisitions Becoming more important to customers Leverage the growth Stop price leakage and share losses Trim non-essential corporate services 40 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  41. 41. Cash Back to Shareholders 2500 For The Period 2001-06: Stock Repurchases $'000s 2000 1500 $8.9 billion in share 1000 repurchases 500 $6.7 billion in dividends paid 0 2001 2002 2003 2004 2005 2006 Dividend CAGR of 9% 1400 Dividends $'000s No equity dilution policy 1200 Returned ~103% of reported 1000 net income via dividends and share repurchases 800 600 41 2001 2002 2003 2004 2005 2006 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  42. 42. 3M’s Summary Longer Term Strategy 20%+ Drill into the core. Build 12 -15% 2X IPI ≈ 8% scale where markets are large and up Innovation remains vital Move towards higher relative share in smaller markets Heavy up on globalization Investment Organic Sales EPS Accelerated M&A to improve Returns Growth Growth core growth and fill gaps Technology ensures upsides Careful tradeoffs of share and growth Investment through the economic cycles Building brands and technology Driving growth as a way of doing business 42 CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.
  43. 43. CSFB 16th Annual Chemical Conference © 3M 2007. All Rights Reserved.

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