3M (MMM)

Q4 2011 Earnings Call

January 26, 2012 9:00 am ET

Executives

Inge G. Thulin - Chief Operating Officer and Executive Vice President

Matt Ginter - Manager-Investor Relations

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

George W. Buckley - Chairman of the Board, Chief Executive Officer and President

Analysts

Abhiram Rajendran - Crédit Suisse AG, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Nigel Coe - Morgan Stanley, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

Scott R. Davis - Barclays Capital, Research Division

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

John E. Roberts - Buckingham Research Group, Inc.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Terry Darling - Goldman Sachs Group Inc., Research Division

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Deane M. Dray - Citigroup Inc, Research Division

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the 3M Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, January 26, 2012.

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

Matt Ginter

Thank you. Good morning, everyone, and welcome to our fourth quarter business review. With me today are George Buckley, 3M Chairman, President and Chief Executive Officer; Inge Thulin, Chief Operating Officer; and David Meline, Chief Financial Officer. Please take a moment to read the forward-looking statements 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 and 10-Q lists some of the most important risk factors that could cause actual results to differ from our predictions.

Let's begin today's review. And I'll turn the program over to David.

David W. Meline

Thanks, Matt, and good morning, everyone. Please turn to Slide #3. First, a brief summary of the first quarter, which I felt was a good finish to the year. We drove record sales and good returns and things finished largely as we expected. We once again saw some real strength in our many industrial-oriented businesses, along with steady growth in Consumer and Health Care. On a geographic basis, Latin America and the United States were the fourth quarter stalwarts.

Consumer electronics industry continued to adjust production levels during the quarter to better match demand and supply, much as we had described in our third quarter call in October, and again at our December investor meeting in New York. This had an impact on our Display and Graphics and Electro and Communications businesses, particularly within Asia Pacific. The flooding in Thailand hurt fourth quarter sales by an estimated $35 million and an operating profit impact of $20 million, which was in line with our estimates. On the positive side, we recorded $23 million in insurance recoveries related to last year's earthquake and tsunami in Japan. Therefore, from a profit standpoint, these 2 items largely offset one another.

We once again drove strong double-digit growth in Central Eastern Europe and the Middle East, which more than offset weakness in the West. We have yet to see significant signs of recovery in Western Europe. Inge will talk more about our businesses in just a minute.

Income rose 5% year-on-year and operating margins finished at 19.2%. Free cash flow was $1.2 billion, and we converted 128% of net income to cash, a good result and typical for a fourth quarter at 3M. So the business continues to generate significant profit and cash flow. Finally, in early January, we announced the acquisition of Avery Dennison's office and consumer products business. Inge will describe this in more detail in a moment.

Let's take a closer look at sales for the quarter. So please go to Slide #4. Quarterly sales were $7.1 billion, up nearly 6% year-on-year. The combined Latin America/Canada region was up a strong 10%, with organic growth more than offsetting nearly 4 points of negative currency. United States also had an excellent quarter, with 7% organic growth. U.S. organic volumes have now grown for several quarters consecutively. Sales in Asia Pacific rose 3% in the quarter, slower than we have seen in recent quarters. Part of this, of course, was due to consumer electronics, where the market continued to sink bottom. We expect the market to turn positive sometime in the second quarter.

Clearly, China was also a factor in the fourth quarter as the Chinese government successfully slowed activity to stem inflation. Our China team anticipates continued below-trend growth in the first half of 2012, with stronger growth returning in the second half. Europe rose 4%, with strength in Middle East, Africa, and Central East Europe more than offsetting weakness in Western Europe. Selling prices rose 2% in the quarter, which exceeded raw material inflation. And for the full year, the net impact was neutral. Acquisitions added 2.3% to sales in the quarter and foreign exchange impacts were basically flat.

Please turn to Slide 5 for a more detailed look at our income statement for the quarter. During this period of slower economic growth, we were paying increased attention to protect the bottom line. For example, we have implemented hiring freezes in developed countries and replacements are being limited to key positions that are typically closest to the customers. Our businesses have also triggered contingency plans with respect to indirect costs. These costs total over $4 billion in annual spending for the company. The early results were encouraging, as fourth quarter indirect spending was down both year-on-year and sequentially. So we are getting some traction here.

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