6 Prudential's "Inside Our Best Ideas" Conference


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6 Prudential's "Inside Our Best Ideas" Conference

  1. 1. Growth & Customer Engagement George W. Buckley Chairman, President and Chief Executive Officer September 28th, 2006 © 3M 2006 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,” 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 the outcome of pending Congressional action concerning asbestos-related litigation and other 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, 2005 (the “Report”). 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, “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. © 3M 2006 All Rights Reserved
  3. 3. Topics We Will Address Today Historical performance 1 Describing 3M’s strategy for growth through Customer 2 Value Enhancement Continued commitment to operational excellence 3 Summary – bringing it all together 4 Plans to Drive Higher Earnings & P/E © 3M 2006 All Rights Reserved
  4. 4. Historical Performance © 3M 2006 All Rights Reserved
  5. 5. Total LC Growth, Margins, EPS & ROIC 10.0% 24% pts Total LC Growth Operating Margin +6.9 % 4.8 = 22% 8.0% GR CA 6.0% 20% 18% 4.0% 16% 2.0% 14% 0.0% 2001 2002 2003 2004 2005 1H06 2001 2002 2003 2004 2005 1H06 -2.0% 25% $5.00 ROIC % EPS % = 18 pts 6.8 23% $4.00 R CAG + $3.00 21% $2.00 19% $1.00 17% $0.00 15% 2001 2002 2003 2004 2005 1H06 2001 2002 2003 2004 2005 1H06 Leveraging Volume, Productivity, Mix and Fixed Costs to Maximize Profitability © 3M 2006 All Rights Reserved
  6. 6. Productivity - Cost Out & Leverage > 55,000 total employees trained ► $3.0 10.0% Overhead Cost Leverage in Six Sigma $2.5 8.0% $ Billions $2.0 6.0% > 20,000 projects closed $1.5 ► 2.1% of margin 4.0% $1.0 2.0% >15,000 projects underway $0.5 ► $0.0 0.0% globally 2001 2005 Overhead Cost % to Sales Lean methods being added to ► $325 $304 Sales/Employee (000’s) the Six Sigma toolbox $300 $292 $275 $264 Systemic areas of supply chain ► $250 $232 and working capital our next $225 $212 target area $200 2001 2002 2003 2004 2005 Initiatives Contributed > $400MM Per Year Improvement © 3M 2006 All Rights Reserved
  7. 7. Gradually Improving Our Sales Mix Margin > Corp. Avg. Margin < Corp. Avg. 2005 2001 70% 30% 38% $6B Sales $6B Sales $10B Sales $15B Sales 62% ~11% CAGR © 3M 2006 All Rights Reserved
  8. 8. Embracing Our Customers © 3M 2006 All Rights Reserved
  9. 9. Customer Value Enhancement 3M’s Value Proposition to Customers Innovative and Practical Solutions from a Diversified Technology Company © 3M 2006 All Rights Reserved
  10. 10. Customer Value Enhancement 3M’s Exceptional Value Drives Share Gain Value Flexibility Competition over- 3M pricing and under delivering Price 3M 3M Market Share Secondary Competitors Gains Through CVE Brands Customer Perceived Value © 3M 2006 All Rights Reserved
  11. 11. Customer Value Enhancement 3M Creates Customer Value in Three Dimensions by Leveraging Our Innovation Engine Enhancing Our Customers’ Competitiveness ► 1 By using innovation to provide performance-differentiated products ● By making our customers more efficient in their competitive battle ● Building Our Customers’ Business Returns ► 2 By providing generally better selling margins for customers ● By using our Six Sigma skills and technologists to solve their problems ● Leveraging Our Power Brands for Customer Value Creation ► 3 By providing better brand recognition ● © 3M 2006 All Rights Reserved
  12. 12. Customer Value Enhancement Communicating Our Value Position >200 Six Sigma Projects at the Customer 50 Million Web 15,000 Sales and Contacts Marketing Professionals 7,000 Design for Thousands of Customers Six Sigma Trained Annual Customer Lab Visits 160 Customer 1,700 Technical Contact Employees Service Employees 2,200 Customer Service Employees Innovative Two-Way Process for Addressing Customer Needs © 3M 2006 All Rights Reserved
  13. 13. 3M Solves Customer Needs in Multiple Markets 3M Technology Platforms Markets Adhesives Architecture & Const. Abrasives Auto. & Aerospace Ceramics Electronics Manuf. Electronic packaging Graphic arts Micro replication Health care Optics Home and Leisure Specialty materials Industrial OEM Non-woven Materials Consumer & Office Polymer melting Safety & Security Telecoms and Utilities © 3M 2006 All Rights Reserved
  14. 14. Customer Value Enhancement; Making Customers More Efficient Transforming Orthodontics Significantly reduces treatment time Reducing Capital Needs In The Power Industry 2-3x kVA transmission with same infrastructure Improving Safety With Less Investment Eliminates need for additional lighting Enhancing Security Systems © 3M 2006 All Rights Reserved
  15. 15. Customer Value Enhancement; Enhancing Competitiveness Through Superior Products Enhancing Display Performance Uniform brightness plus significant power reduction Building Premium Margin In DIY Improves performance and productivity for professionals and DIY’ers Improving Physicians' Analysis Ambient noise reduction/18x amplification © 3M 2006 All Rights Reserved
  16. 16. 3M’s Subsidiary Network: A Platform For Customer Value Enhancement 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 Zimbabwe Manufacturing/Converting Technical Capabilities © 3M 2006 All Rights Reserved
  17. 17. 3M - LG.Philips (LPL) Global Collaboration Business Partnership • 3M Korea Supports LPL Business on a Global Basis • Simultaneous Investment in Poland • Total Solution Provider with 3M Technology Platforms • Exchange Business/ Technology Roadmap • Executive Engagement for Strategic Collaborations Technical Partnership Borderless Customer Success • Timely Technical Service Supports on Site • Dedicated Technical & Business Teams Support • Quality Engineers on LPL Sites LPL Global Operations in Korea, China & Poland • Quarterly Lab-to-Lab Meetings • 3M Korea Transnational Account Team Supports • Collaboration for New Product Development 3M China & 3M Poland teams and LPL Global • Testing, Optical Simulation & Design Supports Suppliers • Annual Technical Fair at LG © 3M 2006 All Rights Reserved
  18. 18. But Sustainable Growth Is The Biggest Single Assured Value Creator So How Do We Intend To Grow? © 3M 2006 All Rights Reserved
  19. 19. First You Must Create the Environment for Growth Profitable Efficiency Products Growth • Stimulating a • Lean Methods creative • Six Sigma environment • Foster Imagination • Systemic Product Operational Supply Chain • Increased R&D Innovation Excellence Improvements spend in the core • IT Systems • Technology Focus • Better S&OP • See it through the Process customers’ eyes • Market Expansion • Mix in a little magic • White space fill in • Geographic expansion Customers • Adjacencies and EBOs © 3M 2006 All Rights Reserved
  20. 20. Start By Growing The Current Core Grow the Current Core Invent a Extend The Core New Future Build key customer partnerships Customization as tool Constant reinvention; drill down Imagine, dream and invent Build first where we’re strong Localization and differentiation Beat competitors to the future Get scale & build relative share Plan for cannibalization Fill in the product “white spaces” Licensing as a route Build Broad Long Become important to customers Avoid NIH syndrome Use dual branding Term Competencies International product localization Local acquisitions Private labeling Develop broad based long-term capabilities Acquire supporting core technology with quality brands Build volume and scale © 3M 2006 All Rights Reserved
  21. 21. And Then Extend It With Simple Concepts Market Expansion Grow the Current Complementary Build New International Core Business Acquisitions Business via EBOs Growth Defend and extend the core Follows core BRICP Adjacency Mega Trends strategy Build scale Eastern Europe Seeded by small M&A Supports Build relative share Western Europe Electronics and software adjacencies Emphasize localization Japan Targeted areas Mostly tuck-ins Disruptive technologies Australasia RFID/Wireless/GPS Build long term competency Growth everywhere Minerals extraction Oil & Gas Food safety Customer Focus Critical on All Four Fronts © 3M 2006 All Rights Reserved
  22. 22. Growth Needs To Be Built On A Firm Foundation How We Compete ……. Six Competitive Platforms 1 Cost .. The ultimate competitive deadly weapon 1. Technology and innovation … Being better than the competition 2 2. Distribution ... Securing the best in the world 3 3. Customer service … Built on a foundation of high quality 4. 4 Marketing and brand management … just being better 5. 5 People … Leading, training and motivating our people better 6. 6 © 3M 2006 All Rights Reserved
  23. 23. Using Differentiated Brands & Technology to Grow Our Market Industrial Consumer Principal brands and differentiated features Diamond Grade™ Use Secondary Brands / Technologies High Intensity Grade Selective private labeling or manufacturing JVs to support partnership customers Engineering Grade © 3M 2006 All Rights Reserved
  24. 24. Customer Value Enhancement Leveraging Brands and Improving our Presence Expanding with Acquisitions and EBOs Traditional 3M Primary Customer Segment 3% - 5% growth 20% leverage 5% - 8% growth 40% incremental margin Add Secondary Customer Segment No Participation in Low Value Added Price 2 %- 4% growth at Focused Segments 15% peer margins International Expansion Occurs in All Three Dimensions © 3M 2006 All Rights Reserved
  25. 25. Near-Term Organic Local Currency Growth Targets Organic LC* Target Last 4 Qtr. Avg. Industrial and Transportation Business 5-8% 4.1% Health Care Business (ex. Pharma) 6-8% 6.7% Display and Graphics 8%+ 8.8% Consumer and Office 5-8% 5.0% Safety, Security and Protection 8%+ 10.4% Services Electro and Communications 5-8% 8.0% 3M 5-8% 5.9% *Local Currency Sales Growth = Volume + Price Strong Contributions Across the Portfolio © 3M 2006 All Rights Reserved
  26. 26. M&A Strategy Strategic Intent Economic Needs ► Fits tightly defined strategic needs in the core ► Margin dilutive acquisitions will or near adjacencies contribute to positive value creation through higher growth ► Majority will be bolt-on acquisitions 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 technology, market ► EPS accretive or neutral end of year 1 access or scale exc. purchase accounting ► International acquisitions will mostly be aimed ► Majority of acquisitions will be EP at gaining market access accretive by the end of year 3 ► While top brands are preferred, some will be appropriately chosen secondary brands © 3M 2006 All Rights Reserved
  27. 27. Stepped Up M & A Activity in 2006 Display & Graphics Healthcare Electro & Communications Acquired Annual Sales of $350MM- $400MM Safety, Security, & Protection Svcs at an Investment of $500MM-$600MM Industrial & Transportation Consumer & Office © 3M 2006 All Rights Reserved
  28. 28. EBO Adjacencies “EBOs” are Emerging Business Opportunities used to drive faster growth Concept Enhanced focus on emerging business opportunities with high growth ► Concept used where capability exists with ready adjacencies but no current focus ► Methodology Initial EBO Candidates Collect all related activities into a single entity ► ► “Housed” in a Segment Filtration 1 ► ► Leader reports directly to the EVP Track & Trace 2 ► ► Acquisitions and additional resources provide support Energy & minerals extraction 3 ► ► Growth and speed are the focus Food Safety 4 © 3M 2006 All Rights Reserved
  29. 29. 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 40%+ 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 2006 All Rights Reserved
  30. 30. Summary- Bringing it all Together © 3M 2006 All Rights Reserved
  31. 31. 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 ► Medical, Dental & Orthodontics Tactics ►Divestiture of Pharmaceuticals Tactics ► Display & Graphics (Optics & Films) ►Examine others for divestiture ► Track & Trace (RFID/Wireless/GPS) ► Wider Offerings; White Space Organic Selected Growth Divestiture 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 share buybacks with higher growth, cost and Tactics Tactics revenue synergies © 3M 2006 All Rights Reserved
  32. 32. Increasing Shareholder Value At Peer Margins 1.4 9.0% $10.0 28% 8.0% 1.2 24% $9.0 7.0% = 2.1% margin 1.0 20% 6.0% $8.0 0.8 16% $ B illio n s $ B illio n s 5.0% P e rc e n t P e rc e n t AGR 3% C $7.0 11-1 = 1% more margin 4.0% 0.6 12% $6.0 3.0% 0.4 8% 2.0% $5.0 4% 0.2 1.0% $4.0 0% 0.0 0.0% 2006e 2007e 2008e 2001 2005 2008e Op. Inc. Traditional Op. Inc. Subsidiary Op. Inc. Margin ROIC Overhead Cost % to Sales Assumptions: traditional business LC growth of 6.5%; incremental margin of 40%; additional growth of 0% ’06; 1.5% ’07; 2.0% ’08 at 15% op. inc. Additional Growth at Peer Margins = Greater Shareholder Value © 3M 2006 All Rights Reserved
  33. 33. Balanced Model Approach To Increase Shareholder Value Investing in traditional core markets ► 1 ● Local-currency growth of 5% to 8% ● Operating income growth 10%+ Intelligently pursuing additional growth elsewhere in the pyramid ► 2 ● Additional local-currency growth of 2% to 4% ● At peer margins – as a minimum M&A strategy to improve core growth and fill gaps 3 ► ● Aligned with strategic intent Increased share repurchase authorization ► 4 Higher Growth - Higher Earnings - Higher P/E © 3M 2006 All Rights Reserved
  34. 34. 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 ► Move towards higher relative share in smaller markets ► Heavy up on globalization ► Technology remains part of who we are Investment Organic Sales EPS ► Careful tradeoffs of share and Returns Growth Growth growth to maintain value creation momentum ►Technology lattice protects the downsides and ensures upsides ► Building on brands, technology, ►Investment through the economic cycles people, service & distribution ►Driving growth as a way of doing business © 3M 2006 All Rights Reserved
  35. 35. © 3M 2006 All Rights Reserved