3M (MMM)

Q3 2011 Earnings Call

October 25, 2011 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

Patrick D. Campbell - Former Chief Financial Officer and Senior Vice President

Analysts

Alina Khaykin

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

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

Jeffrey Sprague - Citigroup

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

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

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, October 25, 2011. 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 conference call. Before we begin, I've got 2 items just to mention. First, please plan to attend our Annual Outlook Meeting scheduled for the morning of Tuesday, December 6 at the Grand Hyatt Hotel in New York City. An invitation will go out today. Second, we will announce fourth quarter earnings on January 26, so please mark your calendars. Today, we'll discuss our third quarter results, along with an updated outlook for the remainder of this year. The slide presentation and audio replay will be archived on our website for an extended period.

With me today are George Buckley, 3M Chairman, President and Chief Executive Officer; Inge Thulin, Chief Operation Officer; and David Meline, Chief Financial Officer. Please take a moment to read the forward-looking statement 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 the most important risk factors that could cause actual results to differ from our predictions. So with that, I will turn the program over to George.

George W. Buckley

Hi. Good morning, everybody, and welcome. Well, today, David Inge will lead the majority of the formal pieces of the call, but by way of a setup, I'd like to offer a few words at the beginning of the call. The quarter turned out to be very different one than what we expected. The challenges that we faced were primarily 2 causes and 2 effects focus: Cause #1 was words about European sovereign debt and the European economy. Cause #2, was the rapid contraction of the electronics end markets. It began with TV, extended to all the consumer devices and has now crept a bit into factory automation. Effect #1 was a flip in exchange rates as confidence in Europe's ability or willingness to deal with the crisis fell and its economy responded negatively. Foreign-exchange a little more reduced our earnings by up to $0.07 over the balance of Q4. This is the reverse side of having almost 70% U.S. sales outside of the United States. On the second effect, this was simply volume and the under absorption that comes along with it.

In the last few months, worldwide IPI forecast for 2011 have fallen by 4,200 basis points. This a reset down in expectations of the global economy. Those who know our company well know 2 things always happen in these circumstances. First, it changes always amplified in the supply chain, temporarily suppressing net growth. And second, we always see the effect early, typically 1 to 2 quarters before our industrial peers. Without these factors are transients, our underlying organic growth would have been almost 6%, so underlying fundamentals are okay. The best in news is this: Electronics markets always recover quickly and early from these type of slash contractions, as do we.

With that introduction, I'd like to turn the call over now to David to begin with the details. David?

David W. Meline

Thanks, George, and good morning, everyone. Let's turn to Page #3. I'm going to start today with a few brief comments on the quarter along discussion of our current macro view, which has changed since the second quarter call. At the time of our July earnings call, the late quarter data was hinting that global economic growth was beginning to moderate. We felt it in our results and described it as such. But at that early point, it was difficult to ascertain the extent to which that softness might extend into Q3. Signs indicated this was temporary, and that better growth rates would resume in the second half of the year. Japan, of course, further clouded the picture.

In this quarter's results, you will see that several of our businesses grew nicely. We posted worldwide sales of $7.5 billion, a 10% increase over last year's third quarter, and notably, a record for any third quarter in our history. 3 of our 6 businesses posted double-digit increases, namely Industrial and Transportation, Safety Security and Protection and Health Care and our Consumer business expanded their sales as well. Growth in these 4 segments was achieved through a combination of good organic volume, selling price increases and acquisitions, along with a dose of positive currency benefit. So while there is definitely growth to be had in this economy, certain segments clearly hit an inflection point in the quarter and some retreated.

Western Europe is experiencing challenges given the uncertainty around fiscal and monetary policy direction. This is impacting consumer confidence and spreading to the manufacturing sector. Our organic volumes in Western Europe declined 4% in the third quarter after a flat results in the second quarter and a 4% increase in the first.

The consumer electronics markets, excluding handhelds, slowed considerably as the third quarter progressed, which impacted our sales in Electro and Communications, and we also saw it creeping into factory automation too. We sell a broad array of component solutions to all types of electronic OEMs and roughly 1/2 of this business's sales go to the electronics industry. We know from history that electronic cycles are fast so volume declines are deep and short. But the good news is, is they also normalize quickly.

In Display and Graphics, LCD TV remains a story, as OEMs are fighting a battle to lower prices, reduce inventories, and yet still create value for retail customers. By and large, with the exception of Consumer and Office and Health Care, we are component supplier to our customers. Our products are generally consumed in our customer's manufacturing processes or embedded in the customer's end products. So our business is fairly short cycle. This means that when economic trends turn down, our customers alter production schedules, and we feel the impact sooner than most. And those changes are nearly always accompanied by temporary inventory transients, which amplify the impact on our sales.

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