3M (MMM)

Q1 2011 Earnings Call

April 26, 2011 9:00 am ET

Executives

David Meline - Chief Financial Officer and Senior Vice President of Finance

Matt Ginter - VP, IR and Financial Planning & Analysis

George Buckley - Chairman, Chief Executive Officer and President

Analysts

Scott Davis - Morgan Stanley

Terry Darling - Goldman Sachs Group Inc.

David Begleiter - Deutsche Bank AG

Steven Winoker - Sanford C. Bernstein & Co., Inc.

Robert Cornell - Barclays Capital

John Roberts - Buckingham Research Group, Inc.

Ajay Kejriwal - FBR Capital Markets & Co.

Jeffrey Sprague - Citigroup

Laurence Alexander - Jefferies & Company, Inc.

Deane Dray - Citigroup Inc

Presentation

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Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the 3M First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, April 26, 2011. I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Matt Ginter

Hello, everyone, and welcome to our first quarter 2011 business review. With me today are George Buckley, 3M Chairman, President and Chief Executive Officer; and David Meline, our recently appointed Senior Vice President of Finance and Chief Financial Officer.

Today, we will review our first quarter results, along with an updated for the rest of this year. A PowerPoint presentation accompanies today's conference call, which you can access on 3M's Investor Relations website at 3m.com. Today's slide presentation and the audio replay will be well archived on our website for an extended period of time. Take a moment, if you would, 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 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 our most important risk factors that could cause actual results to differ from our predictions.

So let's begin today's review. I'll turn the program over to George, and please turn to Slide #3.

George Buckley

Thank you very much, Matt, and good morning, everybody. Thanks for joining us today. From the numbers, you'll clearly see that first quarter was again a very good for 3M. We posted over 15% top line growth, and if we correct for Japan and H1N1 effects, organic growth was running at about 10.5%. So we continue to post growth rates which are among the highest in the company's long history.

We delivered $1.49 EPS in Q1, which is an all-time high for the company and the first quarter, and all of this was done in time when Japan's troubles cost us about $0.03 per share or about 70 bps net of sales growth, all of which was organic, plus of course the additional challenges that we saw in the Middle East. The unrest there cost us a little under $10 million in sales but nothing significant.

The growth rates were high across the board, with E&C, Electro and Communications, leading the way at 21% growth; and Industrial transportation almost equaling at 20% growth. I&TB will be about $10 billion segment for us in 2011, and to see a unique growth this fast in industrial space is quite remarkable. 5 of our 6 reporting segments reported double-digit sales increases in the quarter, with Display and Graphics also very close to double digits at 9% total growth.

Currency clearly helped us to be sure, but even without that, 4 of the 6 reporting segments reported double-digit local currency growth. Emerging markets were again stellar, with sales up 24% led by developing Asia. We saw double-digit sales growth in all geographic regions, including 10.2% in the United States. We had 47 countries in our portfolio, including United States that reported double-digit sales growth. And can you believe that Germany's sales growth came in at 24.3% in March, just slightly behind China.

This is, I think, a real testament to the progress that we are making toward being a higher growth company. We've now had growth in excess of 9% for 6 consecutive quarters, which is a firm indication that we're tracking the growth curve. Unlike most other experiments in growth, I think we've proven we can grow multiple businesses at once, not just those that happened to be in naturally high growth spaces. This is being done by innovation of our people. I think we're also proving that we can grow all the way to the incoming cycle. Companies can acquire growth, yes, but I'm still very much a believer that organic growth is the true test of the company's long-term innate value and capability.

Unless there are no unforeseen geopolitical problems, it seems we will exceed $30 billion in sales in 2011 for the first time in our history. Our acquisition strategy continue to advance, too. In the first quarter, we closed 2 sizable deals, Alpha Beta, which is Taiwanese manufacturer; and Winterthur Technologies AG, a supplier of precision bounded grinding technologies. Both will give us new competitive capabilities that will help customers and make us even more competitive. Other recent acquisitions such as Cogent, Attenti, and Arizant are all progressing very nicely and all ahead of plan. In the quarter, acquisitions added 3% to our sales growth total.

It wasn't all plain sailing in the quarter, as pensions, OPEB, purchase accounting, damage in Japan and raw material prices have chipped away a bit of our growth margins, but most of these items we knew ahead of time, and they will ease or pass away as the year goes on. I'll just remind you again quickly here that optical systems has an industry normal annual price down environment that is baked into these numbers. Selling prices turned positive inside the quarter for the company in total.

Turning to the first quarter highlights. Organic volumes are up 9% even with the adjustment that I mentioned earlier. We maintained operating margins at 21.6%, with all businesses coming in at or above 21%, a phenomenal result inconsistency. Operating income was up 9% on the year to $1.6 billion, another first quarter record, or up 17% on an underlying basis when we eliminate nonoperational items such as Japan, H1N1 and pensions. David will address this topic in detail in a few minutes.

The quarter also included the announcement of 3M's 53rd consecutive annual dividend increase. And in addition, the board authorized a $7 billion share repurchase in February. For the quarter, our gross share repurchases were $680 million, a great start. Again, it was a tremendous start for the year. Let me quickly take you through some of the performances of our business.

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