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Patrick D. Campbell Senior Vice President and Chief Financial Officer

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  • 1. Accelerating Growth To Enhance Shareholder Value Patrick D. Campbell Sr. Vice President And Chief Financial Officer 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 2. The Principal Questions We Will Answer Today Can we accelerate growth? Are our current margins sustainable? How will our more aggressive growth plans impact ROIC? How will we deploy the balance sheet? Plans to Drive Higher Earnings & P/E 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 3. Historical Performance 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 4. Total LC Growth, Organic LC Growth, OI & Margins $19,000 $20,000 Total LC Growth Organic LC Growth $18,400 $19,000 % .8 % =4 .8 $17,800 =3 R $18,000 GR AG $17,200 CA C $17,000 $16,600 $16,000 $16,000 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 $5,000 24% Operating Income Operating Margin $4,400 ts 22% 6% p 6.4 =1 $3,800 GR CA 20% $3,200 18% $2,600 16% $2,000 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Leveraging Volume, Productivity, Mix and Fixed Costs to Maximize Profitability 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 5. EPS, EP, Free Cash Flow & ROIC $2,000 $4.00 EPS Econ Profit ($MM) $3.50 % % 6 8 =2 $1,500 =1 GR R $3.00 AG CA C $1,000 $2.50 $2.00 $500 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 25% $4,000 ROIC % FCF pt s 2% =1 6. 2 $3,000 AG R C 20% $2,000 $1,000 15% 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Profitability & Asset Efficiency Improving Economic Profit & ROIC 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 6. Organic LC & EPS Growth LC & EPS Targets Organic LC Growth EPS Growth 12% 24% 22% 10% 20% 21% 21% 21% 18% 8% 16% 8.1% 18% 6% 14% 12% 14% 5.5% 4% 10% 4.5% 4.1% 8% 2% 6% 1.2% 0% 4% 2002 2003 2004 2005 Q1 '06 2002 2003 2004 2005 Q1 '06 Consistently Achieving Financial Goals While Growth Has Been Inconsistent 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 7. Operating & Incremental Margins 3M Peer Average Operating Margins Incremental Margins >100% 25% 80% 70% 20% 60% 50% 15% 40% 44% 43% 10% 37% 30% 29% 20% 25% 5% 21% 16% 15% 10% 5% 0% 0% 2001 2002 2003 2004 2005 2002 2003 2004 2005 '01 - '05 Incr. Chg. *Peers include Avery Dennison, Danaher, Dentsply, DuPont, Eaton, Ecolab, Emerson, GE, Honeywell, ITW, J&J, P&G, SPX, Textron, Tyco, UTX. Source: Factset and Company Filings What Matters is the Conversion of Volume to Profit 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 8. How We Achieved These Results Volume Mix Productivity – Cost out – Overhead cost management 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 9. Improving Sales Mix Margin > Corp. Avg. Margin < Corp. Avg. 2005 2001 70% 38% 30% $6B Sales $6B Sales $10B Sales $15B Sales 62% ~11% CAGR High Margin Sales Growth + Productivity Gains = Quality Earnings Growth 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 10. Productivity - Cost Out & Leverage 3M’s Six Sigma Journey 2001 2002 2003 2004 2005 Six Sigma Learn and Accelerate DMAIC DMAIC in 3 M DNA Build Critical Impact Mass Learn & Build Accelerate Impact DFSS Indirect Costs Critical Mass Sourcing Add Portfolio Management and Lean eP3 • Globally, >40,000 salaried employees trained globally in the Six Sigma way of doing business. GBP • More than 20,000 proje cts closed • Over 16,000+ DMAIC projects underway globally 2001 2002 2003 2004 2005 • 480+ customer projects in place globally $325 $3.0 10.0% Sales/Employee $311 Overhead Cost Leverage $2.5 $297 8.0% $300 $2.0 $ Billions $277 6.0% $275 $1.5 2.1% of margin $255 4.0% $250 $1.0 $234 2.0% $0.5 $225 $0.0 0.0% 2001 2005 $200 Overhead Cost % to Sales 2001 2002 2003 2004 2005 Initiatives Contributed > $400MM Per Year Improvement 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 11. We have built an enviable competitive and financial position but….. We need to accelerate growth! 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 12. Relative Value Of Growth For Different Companies MMM 5.2 GE 11.4 12.0 IBM 3.5 DHR 5.1 PG 7.2 10.0 rowth XOM 2.1 GM 2.4 Relative Value of G W MT 1.6 8.0 #REF! #REF! #REF! #REF! #REF! #REF! 6.0 4.0 2.0 0.0 MMM GE IBM DHR PG XOM GM WMT Company Ticker Growth 5X 1% pt. LT sustainable growth rate = $10B Margin 1% pt. more sustainable margin = $2B Gordon Growth Model = FCF/(WACC – Growth) Expanding Our Long Term Growth Rate Creates More Value Than Margin Expansion Source: HBR April 2005 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 13. Modifying Our Focus – Growth And Productivity Future Past Productivity Growth Need to accelerate focus on growth and leverage our investment in productivity tools to maintain momentum Going Forward Equal Emphasis will be placed on Achievement of Both Top and Bottom Lines 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 14. What’s Changed Change in senior leadership compensation program – ’04 - 60% Economic Profit Growth/40% Working Capital – ’05 - 60% Economic Profit Growth/20% Working Capital/20% Organic Growth vs. IPI – ’06 - 60% Economic Profit Growth/40% Organic Growth vs. IPI New compensation plans for businesses and sales organization Leadership alignment with technical community 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 15. Summary Target Growth Picture 3% - 5% sales growth in market adjacencies, acquisitions and 5% - 8% sales growth in EBOs, 20% incremental margin; traditional 3M core; 40% using new or primary brands incremental leverage; using primary brands International expansion occurs in all three dimensions. Traction and momentum 2% - 4% sales growth in will occur at different rates. subsidiary markets, at peer margins; using secondary brands 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 16. Growing The Traditional Businesses 5% - 8% sales growth in traditional 3M core; 40% incremental leverage; using primary brands International expansion occurs in all three dimensions. Traction and momentum will occur at different rates. Leveraging Growth in the Core 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 17. Growing The Traditional Businesses 5% - 8% sales growth in traditional 3M core; 40% incremental leverage; using primary brands 12% 10% + 10% 8% 5%-8% LC 6% Growth 4% 2% 0% LC Growth OI Growth Leveraging Existing Asset Base to Drive Operating Income 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 18. Near-Term Organic Local Currency Growth Target Organic LC* Target Last 4 Qtr. Avg. 5-8% 4.2% Industrial and Transportation Business 6-8% 4.0% Health Care Business (ex. Pharma) 8%+ 6.7% Display and Graphics 5-8% 5.7% Consumer and Office 8%+ 10.0% Safety, Security and Protection Services 5-8% 7.1% Electro and Communications 5-8% 5.6% 3M *Local Currency Sales Growth = Volume + Price Strong Contributions Across the Portfolio 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 19. The Opportunity of International Growth International growth rates 2X – 3X US 61% of 3M sales are outside the United States today, ≈ 70% in 2011 Focus is on BRICP; double investments there China growing ≈ 35% CAGR, expecting circa $1Bn sales in 2006 India growing at 100%+ CAGR Double digit growth rates in E. Europe and LA W. Europe grows faster on localization strategies Acquire local brands and manufacturing as well as organic expansion 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 20. Productivity Continues 3M’s Six Sigma Journey 2001 2002 2003 2004 2005 2006 Learn and Accelerate DMAIC DMAIC in 3 M DNA Six Sigma + LEAN Build Critical Impact Mass Learn & Build Accelerate Impact DFSS Critical Mass Indirect Costs Lean Add Portfolio Management and Lean Sourcing eP3 • Globally, >40,000 salar ied employees tr ained globally in the Six Sigma way of doing business. • Mor e than 20,000 pr ojects closed GBP • Over 16,000+ DMAIC pr ojects under way globally • 480+ customer pr ojects in place globally 2001 2002 2003 2004 2005 2006 2007 2008 $3.0 10.0% Overhead Cost Leverage $2.5 8.0% 1% more margin $2.0 $ Billions 2.1% margin 6.0% $1.5 4.0% $1.0 2.0% $0.5 $0.0 0.0% 2001 2005 2008 Overhead Cost % to Sales Productivity Continues Through Cost Out & Leverage 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 21. Growth And Leverage In Traditional Core $10.0 28.0% 24.0% $9.0 20.0% $8.0 $ Billions 16.0% Pe nt rce $7.0 GR 2% C A 12.0% 10% -1 $6.0 8.0% $5.0 4.0% $4.0 0.0% 2006e 2007e 2008e Op. Inc. Operating Margin ROIC Assumptions: LC grow th of 6.5%; incremental margin of 40% Continued Growth and Leverage in the Traditional Businesses 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 22. Building Scale To Create Additional Value 5% - 8% sales growth in traditional 3M core; 40% incremental leverage using primary brands International expansion occurs in all three dimensions. 2% - 4% sales growth in Traction and momentum subsidiary markets, at will occur at different rates. peer margins; using secondary brands Building Scale to Become More Important in Our Markets and More Vital to Our Customers 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 23. Using Brands/Technology to Grow Our Market Position Industrial Consumer Use principal brands and differentiated technology or features Diamond Grade™ Use Secondary Brands / Technologies High Intensity Grade Selective private labeling or manufacturing JVs to support partnership customers Engineering Grade 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 24. Future Opportunities to Use Dual Brands/Technology to Grow Our Market Position 3M ESPE Traffic Safety Systems Commercial Care Use principal brands and differentiated technology or features 3M ScotchBrite™ Stamark™ Purple Pavement Scouring Marking Impregum Pad Tape Penta Soft Use Durable Liquid Niagara™ Secondary Markings Scouring Brands / (thermoplastic, Pad epoxy) Technologies Express Garant Selective private labeling or 3M All Private Weather Label manufacturing JVs to Paint support partnership Scouring Pads customers Palgat Plus 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 25. Driving Additional Growth At Peer Margins $10.0 28% 24% $9.0 20% $8.0 illions 16% Percent GR $7.0 3% C A $B 11% -1 12% $6.0 8% $5.0 4% $4.0 0% 2006e 2007e 2008e Op. Inc. Traditional Op. Inc. Subsidiary Op. Inc . Margin ROIC Assumptions: traditional business LC grow th of 6.5%; incremental margin of 40%; additional grow th of 0% ’06; 1.5% ’07; 2.0% ’08 at 15% op. inc. Additional Growth at Peer Margins = Greater Shareholder Value 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 26. Capital Expenditures $1,800 Sub Mkts $ millions 8%+ $1.7B 5%-8% $1.5B $1,500 Traditional Core $1,100 $1,200 $938 $943 $900 $677 $600 $300 $0 2003 2004 2005 2006E 2007E 2008E Capital Expenditures Aimed at Driving Higher Organic Growth 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 27. 2006 Growth Investments Dual Brightness Enhancing Films Tegaderm™ 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 28. Portfolio Management Strategy 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 29. Supplementing Growth Through Acquisitions 5% - 8% sales growth in 3% - 5% sales growth in market traditional 3M core; 40% adjacencies, acquisitions and incremental leverage EBOs, 20% incremental margin; using primary brands using new or primary brands International expansion occurs in all three dimensions. 2% - 4% sales growth in Traction and momentum will subsidiary markets, at occur at different rates. peer margins; using secondary brands 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 30. Growth Acquisitions - Screening Criteria High Growth Market Screen Operating Metrics & Fit Display & Screen Valuation Graphics Inorganic and Safety & Double digit growth Size Growth Protection Potential for margin Opportunities improvement Track & Trace Potential Select Healthcare Ability to leverage Mostly Mid-size across current Targets segments rather than customers transformational Consumer Integration with Early EPS Energy current 3M accretion innovation processes 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 31. M&A Strategy Strategic Intent Economic Needs Will fit tightly defined strategic needs Margin dilutive acquisitions will in the core or in near adjacencies always contribute to net positive shareholder value through higher Majority will be bolt-on acquisitions growth placed in markets we understand Price will always be a factor Channels of distribution will be familiar Tail liabilities will be scrutinized The acquisition may bring Will be EPS accretive or neutral technology, market access or scale end of year 1 excluding purchase accounting Acquisitions will have an ethical fit Majority of acquisitions will be Some acquisitions will be Economic Profit accretive by the international, aimed at gaining end of year 3 market access While top brands are preferred, some will be appropriately chosen secondary brands 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 32. Acquisition Multiples 12% Medical Dental/Orthodontics 10% Consumer CUNO/Filtration Auto Aftermarket Track and Trace Safety/Protection 8% Consumer Electronics Sales Growth Energy Adhesives/Tape Security Infrastructure Abrasives 6% International Chemical Auto OEM 4% Pre-Revenue 2% Emerging Tech/Bus. 0% Multiples End Market Growth Rates Will Determine Deal Multiples 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 33. Acquisition Profile $6.0 $4.0 2.5x Sales 12x EBITDA $2.0 $0.0 '08e Acquired Sales '08e Acquired EBITDA '06e - '08e Cumulative Purchase Price Assumptions: additional 4% grow th through M&A starting in ’07; year 1 op. inc. 0%; 20% EBITDA thereafter. Business Model Provides Significant Financial Flexibility 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 34. Putting It All Together ($ Billions) 2002 2005 2008e $16.3 $21.2 $25 Traditional Core --- --- 1 Subsidiary Mkts --- --- 2 M&A $16.3 $21.2 $28 Total Revenue 1.7% 5.8% 12% % Growth $3.0 $4.9 $6.8 Operating Income 18.7% 22.9% 24% % to Sales $2.34 $4.12 $5.85 EPS 17.6% 15.7% 13% % Increase 18.9% 22.6% 24% ROIC Raising the Bar on Growth While Maintaining Strong Margins and ROIC 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 35. Capital Allocation Model – ’06-’08 Debt Cash Flow + From Ops Capacity ~$4B to $6B ~$14B to $15B Available Cash ~$18B to $21B Cap Ex Retirement Net Share Repurchase Dividends M&A ~$4.0B to Benefits ~$1.5B to $2.0B ~$4.5 ~$4.0B to $5.0B $4.5B ~$0.5B to $1.0B (avoid dilution) Continue Aligned with Aligned to Fully Opportunistically pursue historical track strategic intent higher growth funded status additional shares record Maintaining Flexibility for Growth 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 36. Balanced Model Approach To Increase Shareholder Value Investing in traditional markets – Local-currency growth of 5% to 8% – Operating income growth 10%+ Aggressively pursuing additional growth elsewhere in the pyramid – Additional local-currency growth of 2% to 4% – At peer margins – minimum M&A strategy to improve core growth and fill gaps – Aligned with strategic intent Higher Growth - Higher Earnings - Higher P/E 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
  • 37. 3M Investor Meeting 2006 © 3M 2006 All Rights Reserved