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3 Q3 2010 Earnings Call Transcript

3 Q3 2010 Earnings Call Transcript

3 (MMM)

Q3 2010 Earnings Call

October 28, 2010 9:00 am ET


Patrick Campbell - Chief Financial Officer and Senior Vice President

Matt Ginter - VP, IR and Financial Planning & Analysis

George Buckley - Chairman, Chief Executive Officer and President


Scott Davis - Morgan Stanley

David Begleiter - Deutsche Bank AG

Terry Darling - Goldman Sachs Group Inc.

Steven Winoker - Bernstein Research

C. Stephen Tusa - JP Morgan Chase & Co

Robert Cornell - Barclays Capital

Ajay Kejriwal - FBR Capital Markets & Co.

Lucy Watson - Jefferies & Co.

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John Roberts - Buckingham Research Associations

Jeffrey Sprague - Citigroup

Deane Dray - Citigroup Inc



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Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Matt Ginter

Good morning, everyone, and welcome to our third quarter earnings call. Before we begin, just a quick reminder. On the morning of Tuesday, December 7, we'll host our annual outlook meeting at the Grand Hyatt Hotel in New York City. Those of you that are on our e-mail distribution list should've received an invitation earlier this week. Please RSVP as soon as you can and for those of you who are not on our list who would wish to go, just drop a note or call and we'll take care of you. Take a moment if you would to read the forward-looking statement on Slide 2. During today's conference call, we'll make certain predictive statements that reflect our current views about our future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause the actual results to differ from our predictions. So let's begin today's review. I'll turn the program over to George Buckley. Please turn to Slide 3.

George Buckley

Thank you very much, Matt. And good morning, everybody and thank you very much for joining us on our third quarter call. It was another very strong quarter for 3M as we continue to drive our growth plan and overall, Q3 sales and earnings were in line with our expectations. And if you can imagine, I'm especially pleased with the 11% increase in organic volume because of the backdrop of continued economic uncertainty and tougher comps. Organic volumes are now up 16% through September and we continue to set sales and profit records. Q3 sales brought in a new record for 3M, with the strongest growth coming in E&C -- Electro and Communications business, where sales were up 25%; Display and Graphic, where sales were up 19% and Industrial and Transportation, where they were up 14% and Consumer & Office, which was up an impressive 11%. And they, for example, exceeded $1 billion in sales for the first time ever in a quarter. Health Care and Safety and Security is still robust, but both had some peculiarities to deal with in the quarter, which I'll explain in a minute.

We continue to grow across all geographies, once again reinforcing our international growth strategy. Sales in emerging markets as a whole were up 25% in the quarter and now exceeds 34% of total company sales. Asia Pacific grew 28%, Latin America grew 14% and Canada, 13%. Korea was up 48%, India 39%, Russia 32% and the China region was up 31%, with Brazil up 25% as well. Operating margins remain strong at 23%, with all businesses staying at operating margins of 20% or higher. EPS was $1.53, up 13%, another all-time Q3 record for 3M. Free cash flow was $1.1 billion, with nearly 100% conversion rate.

We also continued our accelerated investments in the future. We consider that this is extraordinary important in solving the puzzle of higher growth rates longer term. So, for example, we increased R&D investment by 6% year on year and we supported our brands with increased advertising and merchandising expense of more than 30%. The business venture investments, which are those investments outside R&D, continue to track at about $100 million additional annual spend year-over-year. We put more capital work by closing the acquisitions of Arizant and Attenti Holdings and we acquired a majority stake in Cogent Inc. and in early October, we also announced the acquisition of Alpha Beta, which is expected to close in the first quarter of next year. I'll address those acquisitions in more detail in a few moments.

Overall, the strength of 3M's portfolio was again evident in the third quarter. Industrial and Transportation, which is the giant of 3M's businesses, where sales rose a huge 14% with broad-based double-digit local currency growth in every single unit led by Renewables Energy division, which was up 83% in sales and limited solely by manufacturing capacity, which we're adding as fast as we can. The growth is everywhere in industrial. As examples, Energy and Advanced Materials rose to 25%, Abrasives was up 18%, Automotive OEM was up 17% and Industrial Adhesives and Tapes, which is our largest business, was up 13%. As evidenced in our success in Automotive, Q3 will ride Automotive growth of up 10% while 3M's organic volumes are up 18%. Year-to-date, worldwide automotive builds are up 29%, while 3M's organic volumes are up 40%. Operating income for the sector rose by 14% to $446 million, with operating margins at 20.2%.

A remarkable reinvention of this heartland of 3M's business by AC Shen [ph] and his team is nothing short of stunning.

Health Care. Sales rose there by 1.5% in local currency, which is much slower than we've seen in recent quarters. The most evident impact in the quarter was the reduced H1N1 related demand, which lowered year-on-year growth rates by full two percentage points. You recall that H1N1 demand was the highest in the third quarter of last year. Low-core demand seems to be related to the uncertainty surrounding of Obama care. You've seen that pattern reflected in pretty much every company reporting so far in the Health Care space. Hospital admissions and treatments are down at many U.S. hospitals so distributors are wary and evidently running down inventories.

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