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3M Company Q1 2010 Earnings Call Transcript

3M Company Q1 2010 Earnings Call Transcript

3M Company (MMM)

Q1 2010 Earnings Call

April 27, 2010, 8:00 am ET


Matt Ginter - VP of IR

George Buckley - Chairman, President and CEO

Patrick Campbell - SVP and CFO


Scott Davis - Morgan Stanley

Jeff Sprague - Vertical Research Partners

Terry Darling - Goldman Sachs

Laurence Alexander - Jefferies & Company

Bob Cornell - Barclays Capital

Steven Winoker - Bernstein

Stephen Tusa - JPMorgan


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As a reminder, this conference is being recorded, Tuesday, April 27, 2010.

I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Matt Ginter

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Welcome to our first quarter earnings call and business review. Before we address this quarter’s results, I want to mention two up coming events. First is our up coming Plant Tour and Consumer and Office Business Review, scheduled for the morning of June 29th, at our posted manufacturing facility in Cynthiana, Kentucky.

A formal invite will be sent out shortly. In the meantime please hold the date. Also as I mentioned on the January earnings call, we have set aside the morning of Tuesday, December 7th for our Annual Outlook Meeting in New York City. Complete details regarding timing and location will be available later this year.

Before I turn things over to George, please take a moment to read the forward-looking statements on slide 2. During today’s conference call, we will make certain predictive statements that reflect our current views about out future performance and financial results. Those statements are based 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 actual results to differ from our predictions.

So, let's begin today's review. Turn to slide number three and I’ll turn it over to George.

George Buckley

Thank you very much, Matt and good morning everybody. By now, you’ve all seeing the numbers and we hope that investors are happy with our progress in first quarter. Last quarter, I told you that I’ve never been more confident in our growth prospects and the first quarter is exhibit Asia we call and just the reason why we feel that way.

It was spectacular quarter of many contribute especially gratifying as an affirmation of both our strategic direction and of implementation of our plan. A few highlights if I may please.

Sales grew by 25% in the quarter this was the largest single percentage quarter increase in any memory or record yet, with organic volume improvement over 19%. Adjusting for special items in this case Medicare Part D earning was $1.40 per share, an all time 3Mregard for the first quarter.

We maintain our best-in-class margins at 22.8%. up 700 basis points year-on-year. I can think of no better way to refuse some of the collection margin doubt in (inaudible). The strong performance was across the board, all of business posted double digit sales growth along with 20% plus operating income margins and some like display and graphics, electrco and communications and industrial and transportation were particularly outstanding.

Geographically, sales growth were strongest in emerging economies where sales expanded by 47% versus the first quarter 2009. We are trying to posting a huge volume gain at 63%, Korea 74% and Taiwan whopping 88% gain. (inaudible) in March we had 16 countries across the world by the sales growth was 50% or better, yes 16 countries. Korea and Taiwan were 75% in March and these are not small businesses.

United States was no slouch either in this growth rates. Sales were up over 11% in the quarter and up 18% in March. This was done even while we committed to accelerate R&D spent this year by apparent $100 million. Over the next two years, there’s no doubt in our mind that this additional spend is going to accelerate our growth rate substantially, is a proven formula for us and we intend to ride it.

Across the total line, this raises a number of key questions, for us, why do we see [segment] interest in growth in the quarter? Where is it coming from, and what is it mean for this year and the years beyond. Second, why do we feel confident in raising our guidance by $0.50 on both the low end and high ends of the range, which is a very healthy increase only three months into the year?

We’re seeing improving numbers in most company earnings report so far this quarter with high growth rates in Asia. So that far of it is not surprised to anyone, but this quarter’s growth rate exceeds any conventional market expansion explanation we have. Let me take you through our best thinking about, where the 25% sales increase came from. Understanding, that in a company like ours with so many moving parts in markets, decision is always a new elusive animal to apprehend.

There is what we know with reasonable certainty, acquisitions, net of divestitures added 0.3%, crossing in aggregate added 4.2% and currency translation added five percentage points. The remainder of course is a super organic growth number of over 19%. I’d like now to try to help you understand where the growth came from. So let’s spend a minute as to analyzing the 19% jump.

We now said with you (inaudible) geographic breakdown, where a leader of wholly IPI not a wholly GDP company, though we have elements at both in our mix. To a rough approximation, $6 billion of our annual sales worldwide GDP dependent, $11.5 billion our worldwide IPI dependent, $3.6 billion our Asia IPI, and $5 billion our US GDP.

While we use the Global Insight forecast numbers on slide 3, we get a blended customer market index of about 7.2%, pretty close to the 7.3% worldwide IPI number for the quarter. So that explains 7.2% in our market growth, leaving 12% still to be explained.

I see more cushy numbers inventory restocking. Some commentaries from our industrial peers suggest that this part of the growth dynamic is over. Well across, we’re not sure we have the (inaudible) get started. Moreover quite a few of our supply chains, consumer electronics in particular and automotive too for that matter have a little or no channel inventory to speak off, so they are not really a factor involved in driven by supply chain transient..

In the US, if you look at the census for your data on inventories, they haven’t moved up a lot. Last day they showed US inventories moving up by less than 1% year-over-year. Historically, (inaudible) sales transients was just 1% factor is, we see the sales result magnified in the channel by various factor. So we would expect some of our US sales to be impacted by this condition.

Given our roughly, one-third mix of US sales are practically would spread above 1% of the quarter's sales growth, but we are also conservative, are going to extend it globally saying the amounted to the same total worldwide. That would explain 3% of the growth with 9% still to be explained.

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