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PMorgan Basics & Industrials Conference
 

PMorgan Basics & Industrials Conference

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    PMorgan Basics & Industrials Conference PMorgan Basics & Industrials Conference Presentation Transcript

    • Innovation and Growth at 3M George W. Buckley Chairman, President and Chief Executive Officer 2007 JPMorgan Basics and Industrials Conference June 12, 2007
    • 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 10Q (the “Reports”). Changes in such assumptions or factors could produce significantly different results. A further description of these factors is located in the Report 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. Innovation (#)
    • Q1 2007 Highlights Excluding Pharmaceuticals & Special Items ● Sales of $5.9 billion, up nearly 10 percent All businesses posted positive sales growth Local-currency sales, up 7.4 % from 2006, including 2.6 % from acquisitions Foreign exchange impacts added 2.5 percent ● Operating income of $1.4 billion, up 10.6 percent Operating income margin of 24.4 vs. 24.2% Q1 2006 All businesses delivered year-on-year operating income growth Net income of $946 million, up 10.1 percent ● Reported EPS of $1.28, up 14.3 percent Excludes a $0.57 per share benefit from Pharma divestiture and other special items ● Free Cash Flow of $670 million ● Announced 49th dividend increase and 2-year, $7 billion share repurchase Returned $1.5 billion to shareholders through cash dividend and repurchase of shares *Excludes divestiture of pharmaceuticals and other special items. Innovation (#)
    • Sales Recap; Q1 2007 vs. Q1 2006 WW U.S. Int’l Volume - organic 5.6% 2.3% 7.6% Volume - acquired 2.6% 3.1% 2.4% Price (0.8%) 0.8% (1.8%) Total Local Currency* 7.4% 6.2% 8.2% Divestiture (3.8%) (4.2%) (3.5%) Translation 2.5% -- 4.0% Total Sales Growth 6.1% 2.0% 8.7% *Total Local Currency = Volume + Price + Acquisitions Innovation (#)
    • Balance Sheet & Cash Flow Q4 2006 Q1 2006 Q1 2007 ($ in Millions) Net W/C Turns 5.4 5.4 5.0 Inventories $2,601 $2,379 $2,714 Receivables-Net $3,102 $3,105 $3,444 Cap-ex $405 $190 $304 Free Cash Flow $1,012(a) $428 $670(a) Dividends Paid $339 $347 $350 Share Repurchases $330 $251 $1,164 Excludes certain special items that impacted cash flow. Refer to 3M's April 26, 2007 press release for an explanation of these items. (a) Note: Refer to 3M’s April 26, 2007 press release for a complete discussion of net working capital turns and free cash flow (non-GAAP measures). Innovation (#)
    • Great Opportunities Remain For 3M Comparative Tax Rate (3M at 34% in 2007) Margin Built firm Six Sigma and Lean Tax Rate ► Advantage Processes in manufacturing Ingersoll Rand 16% 2150 bps Tyco 21% 1450 bps ITW 31.5% 150 bps Danaher 27.3% 920 bps UTX 26.8% 994 bps Fundamental principles remain ► J&J 23.8% 1449 bps Avery 20.4% 1943 bps 3M 34% 0 bps ● Protect our premium margins 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 (#) Relative Value Of Growth ● Reemphasize innovation MMM 5.2 ● Leverage central overhead GE 11.4 12.0 IBM 3.5 DHR 5.1 PG 7.2 e tiv a e f ro th 10.0 XOM 2.1 R la eV lu o G w GM 2.4 WMT 1.6 8.0 #REF! #REF! #REF! #REF! #REF! #REF! 6.0 ● Adding growth, taxes and supply 4.0 2.0 chain as new value creators 0.0 MMM GE IBM DHR PG XOM GM WMT Company Ticker ► Ratio of value creation from 100 bps of growth to 100 bps of margin Build on 3M’s enduring franchises ► Acquisitions add value by blending the value lost from margin dilution ► and the value added from incremental growth and mass Value Of Growth Vastly Exceeds Value Of Margin Expansion For 3M ● Building value and margin for our Source:HBR April 2005 © 3M 2006 All Rights Reserved customers
    • Start By Growing The Current Core Grow the Current Core Invent a Extend The Core ● Constant reinvention New Future ● Localization and differentiation ● Imagine, dream and invent ● Build where we’re strong ● Key customer partnerships ● Beat competitors to the ● Get scale & relative share future ● Fill in the “white spaces” ● Plan for cannibalization Build Broad Long ● Define markets broadly ● Licensing as a route Term Competencies ● Become important to ● Avoid NIH syndrome customers ● Dual branding ● Local acquisitions ● Develop broad based long-term capabilities ● Private labeling ● Acquire supporting core technology ● Build volume and scale Innovation (#)
    • And Then Extend It With Simple Concepts Market Expansion Grow the Current Complementary Build New International Grow the Current Complementary Build New International Core Acquisitions Business via EBOs Growth Core Acquisitions Business via EBOs Growth ● Defend and extend the ● Follows core strategy ● Follow Mega Trends ● Go “local” in brands core and manufacturing ● Supports adjacencies ● Seeded by small M&A ● Build scale and relative ● BRICP emphasis ● Mostly tuck-ins ● Targeted areas share ● Gulf and LA ● Technology, capacity, ● RFID/Wireless/GPS ● Localization distribution and local ● Eastern Europe ● Minerals extraction ● Disruptive technologies brands ● Growth everywhere ● Oil & Gas ● Build long term ● Food safety competencies Customer Focus Critical on All Four Fronts Innovation (#)
    • First You Must Create the Environment for Growth Profitable Growth Products Efficiency ● Stimulating a creative ● Lean Methods environment ● Six Sigma ● Foster Imagination ● Systemic Supply ● Increased R&D spend Chain in the core Product Operational Improvements Innovation Excellence ● Technology Focus ● IT Systems ● See it through the ● Better S&OP customers’ eyes Process ● Mix in a little magic ● Market Expansion ● White space fill in Customers ● Geographic expansion ● Adjacencies and EBOs Innovation (#)
    • Our Foundational Beliefs on Competitiveness 6σ & Lean Cost Global sourcing It’s not just about efficiency or just about Low Factory costs invention Taxes ● We compete on six platforms Build on our enduring Marketing franchises & Brands ● Low cost is the ultimate competitive Secondary for local deadly weapon Secure the best Distribution Secure the broadest ● Scale and relative share are vital for efficiency and competitiveness Build on a firm foundation Technology ● Follow the customer value chain Differentiation OTIF fill rates ● Pristine service and brands can Quality Service overcome price in some markets Speed to market Inspire and guide Develop leadership People Continuing education Innovation (#)
    • 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 • Under absorbed costs in one business impacts another Raw Material In Distribution Center Plant D Plant C Four Owners Eight Owners Innovation (#)
    • And Here’s What We Are Beginning To Do Plant A Plant B Six Owners Four Owners Distribution Center Plant D Plant C Four Owners Eight Owners Innovation (#)
    • Historical Capital Spending $1,600 Growth Capital increase 53% Decline in almost all Optical Films $1,400 Capital Spending $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 Innovation (#)
    • 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 Innovation (#)
    • Supply Chain – Focused Factories Plant A Six Product Lines Plant C Eight Product Lines Raw Distribution Focused Factory Material In Center Plant B Plant D Four Product Lines Four Product Lines Innovation (#)
    • Stretched Supply Chains Drive Working Capital Use United States 65% Product Source 35% Consumption International 35% Product Source 65% Consumption Innovation (#)
    • Reducing To Its Simplest Form, What Must We Do? ● Growth is a pipeline; repair the inputs and outputs and clear the pipe of pluggage ● At the “sending end” of the pipe: Invent more things Prioritize R&D spending, focus and inspire our people Get scientists and engineers back in the business of inventing new products ● At the “receiving end” of the pipe; Sell and market better Put more feet of the street, and more advertising and merchandising Bring increased competency and professionalism to marketing Stop unnecessary complexity in SKUs and specifications 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 Market share loss Innovation (#)
    • Capacity And Supply Chain Improvements In Progress CANADA CHIM Tape Medical: M6 Solvent Coater-Brookings, SD USA Northridge DDSD Packaging Line Automotive Acrylic Tape- MEXICO Aberdeen, SD Polyester Greenville, NC CHIM: LFBMF Lines, D11 MOF Line Aberdeen, SD Filtrete Mfg. Decatur, AL Innovation (#)
    • 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 Innovation (#)
    • 3M Market Dynamics and Defense Shouldn’t we exit the Scotch Tape market? It’s Push into upper commoditized! middle level market Competitors push into the lower market … we refuse to defend The objective is to bulwark and defend the markets that we created, not just to grow Innovation (#)
    • Differentiated Brands & Technology to Grow Category Industrial Consumer Principal brands and differentiated features Diamond Grade™ Secondary Brands & Technologies High Intensity Grade Selective private labeling or manufacturing JVs to support partnership customers Engineering Grade Innovation (#)
    • And Then Extend It With Simple Concepts Market Expansion Grow the Current Complementary Build New International Grow the Current Complementary Build New International Core Acquisitions Business via EBOs Growth Core Acquisitions Business via EBOs Growth ● Defend and extend the ● Follows core strategy ● Follow Mega Trends ● Go “local” in brands core and manufacturing ● Supports adjacencies ● Seeded by small M&A ● Build scale and relative ● BRICP emphasis ● Mostly tuck-ins ● Targeted areas share ● Gulf and LA ● Technology, capacity, ● RFID/Wireless/GPS ● Localization distribution and local ● Eastern Europe ● Minerals extraction ● Disruptive technologies brands ● Growth everywhere ● Oil & Gas ● Build long term ● Food safety competencies Customer Focus Critical on All Four Fronts Innovation (#)
    • 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 Innovation (#)
    • 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 Innovation (#)
    • Brontes Technologies Innovation (#)
    • And Then Extend It With Simple Concepts Market Expansion Grow the Current Complementary Build New International Grow the Current Complementary Build New International Core Acquisitions Business via EBOs Growth Core Acquisitions Business via EBOs Growth ● Defend and extend the ● Follows core strategy ● Follow Mega Trends ● Go “local” in brands core and manufacturing ● Supports adjacencies ● Seeded by small M&A ● Build scale and relative ● BRICP emphasis ● Mostly tuck-ins ● Targeted areas share ● Gulf and LA ● Technology, capacity, ● RFID/Wireless/GPS ● Localization distribution and local ● Eastern Europe ● Minerals extraction ● Disruptive technologies brands ● Growth everywhere ● Oil & Gas ● Build long term ● Food safety competencies Customer Focus Critical on All Four Fronts Innovation (#)
    • 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 Innovation (#)
    • Electrical Power Transmission Innovation (#)
    • New Consumer Products Innovation (#)
    • And Then Extend It With Simple Concepts Market Expansion Grow the Current Complementary Build New International Grow the Current Complementary Build New International Core Acquisitions Business via EBOs Growth Core Acquisitions Business via EBOs Growth ● Defend and extend the ● Follows core strategy ● Follow Mega Trends ● Go “local” in brands core and manufacturing ● Supports adjacencies ● Seeded by small M&A ● Build scale and relative ● BRICP emphasis ● Mostly tuck-ins ● Targeted areas share ● Gulf and LA ● Technology, capacity, ● RFID/Wireless/GPS ● Localization distribution and local ● Eastern Europe ● Minerals extraction ● Disruptive technologies brands ● Growth everywhere ● Oil & Gas ● Build long term ● Food safety competencies Customer Focus Critical on All Four Fronts Innovation (#)
    • 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 South Africa Key Kenya Uruguay Argentina Sales & Marketing Manufacturing/Converting Technical Capabilities Innovation (#)
    • 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 Innovation (#)
    • Summary- Bringing it all Together
    • 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 Innovation (#)
    • Coordinated Value Creation Strategy Strategy ► Focus on mega trends, scale and relative ► Review business units by key Strategy share in core business metrics including growth and capital efficiency ► Safety & Protection Near Term ► Put ongoing review metrics in place Near Term ► Display & Graphics (Optics & Films) Tactics ► Divestiture of Pharmaceuticals Tactics ► Track & Trace (RFID/Wireless/GPS) ► Examine others for divestiture ► Wider Consumer Offerings ► Medical, Dental & Orthodontics Organic Selected Growth Divestitures Capital Acquisitions Strategy ► Increase leverage on the balance Strategy Strategy ► Work in high growth spaces with sheet. Be willing, if necessary, to dip reasonable EPS targets. Value creation below AA rating to A orientation. Less margin obsessive ► Use cash flow for investment, Near Term ► Focus on adjacent segments Near Term acquisitions and increased share with higher growth, cost and Tactics Tactics buybacks revenue synergies Innovation (#)
    • Cash Back to Shareholders 2500 For The Period 2001-06: Stock Repurchases $'000s 2000 $8.9 billion in share ● 1500 repurchases 1000 $6.7 billion in dividends paid 500 ● 0 Dividend CAGR of 9% ● 2001 2002 2003 2004 2005 2006 1400 No equity dilution policy ● Dividends $'000s 1200 Returned ~103% of reported ● net income via dividends and 1000 share repurchases 800 600 2001 2002 2003 2004 2005 2006 Innovation (#)
    • 3M’s Summary Longer Term Strategy 20%+ ► Drill into the core. Move towards 12 -15% scale where markets are large 2X IPI ≈ 8% and up ► Innovation remains vital ► Move towards higher relative share in smaller markets ► Heavy up on globalization ► Accelerated M&A to improve core Investment Organic Sales EPS growth and fill gaps Returns Growth Growth ► Careful tradeoffs of share and ● Technology lattice protects the downsides and ensures growth upsides ● Investment through the economic cycles ► Building brands and technology ● Driving growth as a way of doing business Innovation (#)
    • © 3M 2007. All Rights Reserved.
    • Q107 Highlights – Consumer & Office Q1 Highlights Revenue ($ in millions) Local currency growth of 8.2% including 1.2% ● $850 from Nylonge acquisition +9.9% DIY retail channel rebounds from Q4 with $814 ● double digit sales and profit increase $750 $741 Solid growth in consumer mass retail ● Broad-based geographic performance led by ● $650 US and Europe Q1 '06 Q1 '07 Outstanding leverage, profits up 18.1% ● Drivers Operating Income ($ in millions) Invigorating existing categories with higher- ● $200 value innovative products +18.1% $177 Introducing products that change consumer ● $150 behavior and solve everyday problems $150 International penetration ● $100 Slow U.S. residential housing construction ● Q1 '06 Q1 '07 persists Margin 20.2% 21.7%
    • Q107 Highlights – Safety, Security & Protection Q1 Highlights Revenue ($ in millions) Local currency growth of 15% ● $800 Acquisitions added 10%, primarily Security +18.7% ● $758 Printing Systems Limited Broad-based organic growth led by respiratory ● $650 $639 protection, cleaning and window film solutions for commercial buildings and corrosion protection $500 Sequential rebound in roofing granules but sales ● Q1 '06 Q1 '07 still down year-on-year Good operational performance drove 14.9% ● increase in profits Operating Income ($ in millions) Drivers $200 Korea respiratory facility starts-up in Q2 ● +14.9% $181 Continued global demand for personal protective ● equipment $158 $150 Driving growth in passports, document readers ● and access control in security market $100 Sequential improvement in roofing granules Q1 '06 Q1 '07 ● Margin 24.7% 23.9%
    • Q107 Highlights – Industrial & Transportation Q1 Highlights Revenue ($ in millions) Local currency growth of 4.0% including 0.9% ● +6.7% from acquisitions $1,800 $1,785 Strength in industrial adhesives and tapes, ● automotive repair shops and abrasives $1,672 $1,600 Solid international performance with growth ● led by Europe and Asia Pacific $1,400 Complimentary product gap fill acquisitions ● Q1 '06 Q1 '07 Record profit margin of 23.0% ● Drivers Operating Income ($ in millions) Organic new products and complimentary gap ● fill acquisitions +8.2% $420 $411 Continued emerging market penetration, ● $380 particularly BRICP countries $360 Driving 3M technologies into oil and gas ● market to meet needs of energy customers $300 Weak US auto OEM & residential housing ● Q1 '06 Q1 '07 Margin 22.7% 23.0%
    • Q107 Highlights – Electro & Communications Q1 Highlights Revenue ($ in millions) Local currency growth of 1.2% primarily from ● $675 +3.6% acquisitions $668 Outstanding sales and profit growth in electrical ● $645 markets $625 Double-digit growth in communications markets ● Sales declined in electronic solutions ● $575 Relentless focus on productivity drove profits up ● Q1 '06 Q1 '07 8.4% to a record $130 million Record profit margin of 19.5% ● Operating Income ($ in millions) Drivers Strong bench-to-bench relationships with big ● $140 global customers +8.4% $130 Strong flow of new products into adjacent ● $120 $120 markets Continued penetration in consumer electronics ● $100 and other electronic devices Q1 '06 Q1 '07 Margin 18.6% 19.5% Note: Excludes special items in Q1 2007. Refer to 3M’s April 26, 2007 press release for a complete list and explanation of these items.
    • Q107 Highlights – Display & Graphics Revenue ($ in millions) Q1 Highlights Solid performance from commercial graphics & ● $950 +0.3% traffic safety systems $921 $919 Optical film business down year-on-year due to ● $850 more rational supply chain and tough year-on- year comparison LCD industry reduced supply to match seasonal ● $750 demand Q1 '06 Q1 '07 Strong operational discipline drove 32% margin ● Drivers ● New products, markets and digital signage drive Operating Income ($ in millions) growth in commercial graphics +0.9% $300 ● New service business for vehicle registration & $295 $292 road maintenance ● LCD Poland facility starts up in Q2 $250 ● DBEF manufacturing capacity additions for LCD TV industry on track $200 ● LCD industry accelerates back half of year as TV Q1 '06 Q1 '07 becomes bigger piece of mix Margin 31.8% 32.0%
    • Q107 Highlights – Health Care Q1 Highlights Revenue ($ in millions) Pharma 24.4% Local currency growth of 20.4% including 5.6% ● ex. pharma (0.5%) from acquisitions $962 $900 $193 Sales growth was broad-based across Drug ● $773 Delivery, Dental, Medical and Health Info $600 Systems Geographic growth led by US and Europe ● $300 Operating income increased 12.7%, ex. pharma ● Q1 '06 Q1 '07 3M ESPE “Most Innovative Company” in dental ● industry for second consecutive year Operating Income ($ in millions) Pharma divestiture reduced sales by 24.9% ● 12.7% $300 ex. pharma (9.7%) $60 $269 Drivers $238 Demographics/aging population ● $150 Continued technology leadership in medical, ● dental, and drug delivery industries $0 Emerging market penetration ● Q1 '06 Q1 '07 Margin 30.8% 27.9% (ex. pharma) Note: Excludes special items in Q1 2007. Refer to 3M’s April 26, 2007 press release for a complete list and explanation of these items.