2017 fourth quarter business review · q4 2017 23.0% vs. q4 2016 28.2%; benefitting from supply...

1. All Rights Reserved.25 January 2018© 3M

2017 Fourth Quarter Business Review

January 25, 2018

(Unaudited)


Earnings Conference Calls

Q1: April 24, 2018

Q2: July 24, 2018

Q3: October 23, 2018


Forward looking statementThis presentation contains forward-looking information about 3M's financial results and estimates and business prospects that involve substantial risks anduncertainties. You can identify these statements by the use of words such as "anticipate," "estimate," "expect," "aim," "project," "intend," "plan," "believe," "will,""should," "could," "target," "forecast" and other words and terms of similar meaning in connection with any discussion of future operating or financial performanceor business plans or prospects. Among the factors that could cause actual results to differ materially are the following: (1) worldwide economic, political, and capitalmarkets conditions and other factors beyond the Company's control, including natural and other disasters or climate change affecting the operations of theCompany or its customers and suppliers; (2) the Company's credit ratings and its cost of capital; (3) competitive conditions and customer preferences; (4) foreigncurrency exchange rates and fluctuations in those rates; (5) the timing and market acceptance of new product offerings; (6) the availability and cost of purchasedcomponents, compounds, raw materials and energy (including oil and natural gas and their derivatives) due to shortages, increased demand or supply interruptions(including those caused by natural and other disasters and other events); (7) the impact of acquisitions, strategic alliances, divestitures, and other unusual eventsresulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring; (8) generating fewer productivityimprovements than estimated; (9) unanticipated problems or delays with the phased implementation of a global enterprise resource planning (ERP) system, orsecurity breaches and other disruptions to the Company's information technology infrastructure; (10) financial market risks that may affect the Company’s fundingobligations under defined benefit pension and postretirement plans; and (11) legal proceedings, including significant developments that could occur in the legal andregulatory proceedings described in the Company's Annual Report on Form 10-K for the year ended Dec. 31, 2016, and any subsequent quarterly reports on Form10-Q (the “Reports”). Changes in such assumptions or factors could produce significantly different results. A further description of these factors is located in theReports under "Cautionary Note Concerning Factors That May Affect Future Results" and "Risk Factors" in Part I, Items 1 and 1A (Annual Report) and in Part I, Item 2and Part II, Item 1A (Quarterly Reports). The information contained in this presentation is as of the date indicated. The Company assumes no obligation to updateany forward-looking statements contained in this presentation as a result of new information or future events or developments.

This presentation refers to certain non-GAAP financial measures including free cash flow, free cash flow conversion, return on invested capital (ROIC), and various measures excluding the 2017 net impact of the enactment of the Tax Cuts and Jobs Act (TCJA). These non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the appendix to this presentation.

Note on non-GAAP financial measures


22.8%

Operating margin

Up 10 bps year-on-year

Organic local-currency growth

+6.0%year-on-year

$2.10

EPS, ex. TCJA

+11.7% year-on-year

Q4 2017 summary

Free cash flow conversion

268%

• Sales of $8.0B, up 9.0% year-on-year

• Organic sales growth across all businesses and geographic areas

• GAAP EPS of $0.85, down 55%, including impact of Tax Cuts and Jobs Act (TCJA)

• Operating income of $1.8B, up 9.4%

• Operating margin of 23.8%, excluding the year-on-year impact from Scott Safety acquisition, divestitures, and incremental strategic investments

• Returned $1.2B to shareholders via dividends and gross share repurchases

+112 pts TCJA and pension impact


Q4 2017 Tax Cuts and Jobs Act (TCJA) net impact

Q4 2016 Q4 2017

($M, except EPS) GAAP GAAP Adj. for TCJA Adjusted

Operating income $1,665 $1,821 $1,821

Income before taxes $1,610 $1,672 $1,672

Provision for income taxes $454 $1,147 ($762) $385

Effective tax rate 28.2% 68.6% 23.0%

Net income $1,155 $523 $762 $1,285

Earnings per share $1.88 $0.85 $1.25 $2.10

% Change -54.8% +11.7%


Net sales Organic local-currency growth

Foreign currency translationAcquisition/Divestitures

+9.0%

Q4 2017 sales recap(year-on-year)

Organic local-currency growth:

• U.S. +2.8%

• Asia Pacific +11.9%

• China/Hong Kong +18%

• Japan +7%

• Europe/Middle East/Africa +6.8%

• West Europe +5%

• Latin America/Canada +2.5%

• Canada +8%

• Mexico +3%

• Brazil +3%

Foreign currency translation:

• RMB +4%, Euro +11%, Yen -1%, Real +1%+0.3%

+6.0%volume +5.8%, price 0.2%

+2.7%

€


Q4 2017 P&L

Q4 2016 22.7%

Organic volume/productivity +1.5% 6.0% organic volume growth

Acquisitions/divestitures* -0.6% Scott Safety -0.9% impact

Price/raw material +0.4% Raw materials and price benefits

FX -0.6% Net of hedge impact

Pension/OPEB -0.2% Higher year-on-year expense

Q4 2017 subtotal 23.2%

Strategic investments -0.7% Up $51M year-on-year

Divestiture gains +0.3% Q4 2017 $96M vs. Q4 2016 $71M

Q4 2017 22.8%

Operating margin of 22.8%, up 10 bps year-on-year

+9.0% year-on-year

$1.3B

Net income, ex. TCJA

+11.3% year-on-year

48.9%

Gross margin

-30 bps year-on-year

$1.8B

Operating income

+9.4%year-on-year

$8.0B

Net sales

* Includes net impact from Scott Safety acquisition and operating loss from divested businesses (Polymask, prescription eyewear, tolling/ALPR, identity management businesses, electronic monitoring business and sale of certain intellectual property)

TCJA = Tax Cuts and Jobs Act


Q4 2017 EPS

$2.10

Earnings per share(ex. TCJA)

+11.7% year-on-year

Q4 2016 GAAP EPS $1.88

Organic growth/productivity +$0.33Benefits from organic growth, raw materials and Business Transformation

Scott Safety acquisition -$0.07 Transaction, integration and financing costs

Strategic investments -$0.06 Up $51M year-on-year

Gain on sale of businesses +$0.05 Q4 17 $0.12 (electronic monitoring) vs. Q4 16 $0.07

Other net interest -$0.09 High coupon debt tender offer -$0.11 per share

Legal – respirator mask -$0.07 Increased actuarial reserve (incl. in Corp. & Unallocated)

Tax rate (excluding TCJA) +$0.13Q4 2017 23.0% vs. Q4 2016 28.2%; benefitting from supply chain COEs and geographic profit mix

Q4 2017 EPS Ex. TCJA $2.10

Tax Cuts and Jobs Act -$1.25 Net tax expense of $762M

Q4 2017 GAAP EPS $0.85



• Q4 2017 free cash flow of $1.4B, down $372M year-on-year, impacted by $600M discretionary U.S. pension contribution

• FY 2017 free cash flow conversion of 100%

• Capital expenditures

• Q4 2017: $459M; FY 2017: $1.4B

• FY 2018: $1.5 to $1.8B vs. $1.5 to $1.7B, previously

• Returned $1.2B to shareholders via dividends and gross share repurchases in Q4

• FY 2017 dividends of $2.8B; gross share repurchases of $2.1B

• FY 2018 gross share repurchases: $2B to $5B vs. $2B to $4B, previously

Dividends

Free cash flow Free cash flow conversion

Gross share repurchases

$1.4B

$699M

268%

$504M

Q4 2017 cash flow

+112 pts TCJA and pension impact




Operating margin

Industrial

+6.9% year-on-year

-5.5% year-on-year

$2.7B +3.9%

$527M

Operating income

19.4%-250 bps year-on-year

• Organic local-currency growth:

• By business: sales grew in abrasives, automotive and aerospace, industrial adhesives and tapes, automotive aftermarket, and separation and purification sciences; advanced materials declined

• By area: sales grew 8% in Asia Pacific, 6% in EMEA, 5% in Latin America/Canada, and 1% in the U.S.

• Foreign currency translation increased sales 3.0%

• Underlying operating margins up 50 bps year-on-year:

• Q4 2017 incremental strategic investments decreased operating margins by 150 basis points

• Gain on sale of temporary protective films business increased Q4 2016 operating margins by 150 basis points

year-on-year


Operating margin


Safety & Graphics


• By business: sales grew in all businesses, led by personal safety, roofing granules and transportation safety

• By area: sales grew 18% in Asia Pacific, 12% in EMEA, 9% in the U.S., and 1% in Latin America/ Canada

• Foreign currency translation increased sales by 3.2% and acquisitions, net of divestitures, increased sales by 1.1%

• Enhanced portfolio with acquisition of Scott Safety, a premier safety solutions company, and divestiture of electronic monitoring business

• Underlying operating margins up 370 basis points year-on-year adjusting for acquisitions/divestitures and incremental strategic investments

+15.0% year-on-year

+50.0% year-on-year

$1.5B +10.7%

$406M

Operating income

26.3%+610 bps year-on-year

year-on-year


Operating margin

Organic local-currency growthNet sales

Health Care


• By business: sales grew in food safety, health information systems, medical consumables, and oral care; drug delivery systems declined

• By area: sales grew 11% in Asia Pacific, 4% in Latin America/Canada, 3% in EMEA and 1% in the U.S.

• Foreign currency translation increased sales by 2.8% and acquisitions increased sales by 0.1%

• Developing market organic growth of 15% led by double-digit increases in Southeast Asia, Mexico and China/Hong Kong

• Launched new Tegaderm™ Silicone Foam Dressing and Cavilon™ Advanced Skin Protectant

+6.0% year-on-year

+12.3% year-on-year

$1.5B +3.1%

$464M

Operating income


year-on-year


Operating margin

Organic local-currency growthNet sales

Electronics & Energy


• By business: electronics-related sales were up 14% with growth in both electronics materials solutions, and display materials and systems; energy-related sales increased 4%

• By area: sales grew 15% in Asia Pacific, 7% in the U.S., and 6% in EMEA; Latin America/Canada declined 2%

• Foreign currency translation increased sales by 1.8% and divestitures reduced sales by 0.3%

• Announced sale of communications markets business

• Underlying operating margins up 80 bps year-on-year adjusting for Q4 2016 gain on sale of intellectual property and Q4 2017 incremental strategic investments

+12.5% year-on-year

+2.6% year-on-year

$1.3B +11.0%

$334M

Operating income

25.2%-250 bps year-on-year

year-on-year



Operating margin

Consumer


• By business: sales grew in all businesses, led by consumer health care, home improvement, and stationery and office

• By area: sales grew 8% in EMEA and Asia Pacific, and 5% in Latin America/Canada and the U.S.

• Foreign currency translation increased sales by 1.9%

• Accelerated growth investments continued to drive strong growth in Command™ and ScotchBlue™ products and solutions

• Strong growth amongst major retail customers, particularly e-commerce

+7.3% year-on-year

+17.6% year-on-year

$1.2B +5.4%

$269M

Operating income


year-on-year


2017 Full-Year Performance

• EPS of $9.17, up 12.4% year-on-year, excluding net impact of TCJA

• GAAP EPS of $7.93, down 2.8% year-on-year

• Organic local-currency growth up +5%

• Organic growth across all businesses and geographic areas

• Operating margins of 24.7%, up 70 basis points

• Free cash flow conversion of 100%, including +3 pts net impact from TCJA and U.S. pension contribution

• Return on invested capital of 21%, including -3 pts net impact from TCJA and U.S. pension contribution

• Returned $4.9 billion to shareholders via dividends and share repurchases; over 100 consecutive years of paying dividends

• Continued progress on three key levers – Portfolio Management, Investing in Innovation, and Business Transformation



Outlook Meeting (12/12/17)

Updated Guidance (1/25/18)

GAAP EPS% change year-on-year (incl. TCJA)% change year-on-year (excl. TCJA)

$9.60 to $10.00 $10.20 to $10.7029% to 35%11% to 17%

Sales components:

Organic local-currency growth 3% to 5% 3% to 5%

Acquisitions, net of divestitures ~ 1% ~ 1%

Foreign currency translation ~ 1% ~ 1%

ROIC 20%+ 20%+

Free cash flow conversion 90% to 100% 90% to 100%

Effective tax rate 26% to 27% 20% to 22%

Updating 2018 planning estimates



3M Board of Directors approved

first-quarter 2018 dividend of $1.36,

up 16% year-on-year


Q4 2017 sales recap

U.S. APAC EMEA LAC

Organic volume +3.1% +12.0% +5.4% +1.2%

Price -0.3% -0.1% +1.4% +1.3%

Organic local-currency +2.8% +11.9% +6.8% +2.5%

Acquisitions/Divestitures +0.2% ---- +1.5% -0.8%

FX ---- +2.5% +8.8% +2.3%

Total growth +3.0% +14.4% +17.1% +4.0%


Q4 2017 P&L

($M)Q4

2016Q4

2017 Change

Sales $7,329 $7,990 +9.0%

Gross profit $3,613 $3,910 +8.2%

% to sales 49.2% 48.9% -0.3 pts

SG&A $1,598 $1,742 +9.0%

% to sales 21.8% 21.8% -----

R&D & related $421 $443 +5.2%

% to sales 5.7% 5.5% -0.2 pts

Gain on sale of businesses ($71) ($96) -35.2%

% to sales (1.0%) (1.2%) -0.2 pts

Operating income $1,665 $1,821 +9.4%

% to sales 22.7% 22.8% +0.1 pts

Net income $1,155 $523 -54.7%

GAAP earnings per share $1.88 $0.85 -54.8%


Business segment information

($M) Net Sales Operating Income

Business groups Q4

2016Q4

2017Q4

2016Q4

2017

Industrial $2,543 $2,718 $558 $527

Safety & Graphics $1,343 $1,545 $271 $406

Health Care $1,390 $1,474 $413 $464

Electronics & Energy $1,175 $1,321 $325 $334

Consumer $1,094 $1,174 $229 $269

Corporate and Unallocated $2 ($4) ($83) ($127)

Elimination of Dual Credit ($218) ($238) ($48) ($52)

Total $7,329 $7,990 $1,665 $1,821

Effective first quarter of 2017, 3M realigned a number of its businesses as part of the company’s ongoing effort to improve alignment to markets and customers. Those changes are reflected in the segment reporting data above. Refer to 3M’s January 25, 2018 press release for full details.


Reconciliation of GAAP amounts to measures excluding net impact of enactment of TCJA

Net impact from Tax Cuts and Jobs Act (TCJA):During the fourth quarter of 2017, 3M recorded a net tax expense of $762 million related to the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily related to the TCJA’s transition tax on previously unremitted earnings of non-U.S. subsidiaries and is net of remeasurement of 3M’s deferred tax assets and liabilities considering the TCJA’s newly enacted tax rates and certain other impacts. This provisional amount is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance.

*In addition to reporting financial results in accordance with U.S. GAAP, the Company also provides non-GAAP measures that adjust for the net impact of enactment of the TCJA. This item represents a significant charge that impacted the Company’s financial results. Income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and an adjusted measure. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. The Company considers these non-GAAP measures in evaluating and managing the Company’s operations. The Company believes that discussion of results adjusted for this item is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of this item may not be comparable to similarly titled measures used by other companies.

Q4 2016 Q4 2017 FY 2016 FY 2017

($M, except EPS) GAAP GAAP Adj. for TCJA Adjusted* GAAP GAAP Adj. for TCJA Adjusted*

Operating income $1,665 $1,821 $1,821 $7,223 $7,820 $7,820

Income before taxes $1,610 $1,672 $1,672 $7,053 $7,548 $7,548

Provision for income taxes $454 $1,147 ($762) $385 $1,995 $2,679 ($762) $1,917

Effective tax rate 28.2% 68.6% 23.0% 28.3% 35.5% 25.4%

Net income $1,155 $523 $762 $1,285 $5,050 $4,858 $762 $5,620

Earnings per share $1.88 $0.85 $1.25 $2.10 $8.16 $7.93 $1.24 $9.17

% Change -54.8% +11.7% -2.8% +12.4%


Reconciliation of GAAP amounts to free cash flow conversion

Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered asubstitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. TheCompany defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire freecash flow is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. TheCompany believes free cash flow and free cash flow conversion are meaningful to investors as they function as useful measures of performance and the Company uses thesemeasures as an indication of the strength of the Company and its ability to generate cash.

Q4 2017 results:

($M)Q4

2016Q4

2017 Change

Major GAAP cash flow categories:

Operating cash flow $2,209 $1,860 ($349)

Investing cash flow ($230) ($2,732) ($2,502)

Financing cash flow ($1,846) $1,044 $2,890

Free cash flow (non-GAAP measure):


Purchases of property, plant and equipment ($436) ($459) ($23)

Free cash flow $1,773 $1,401 ($372)

Net income attributable to 3M $1,155 $523 ($632)

Free cash flow conversion 154% 268% +114 pts


Reconciliation of GAAP amounts to free cash flow conversionFull-year 2017 results:

($M)FY

2016FY

2017 Change

Major GAAP cash flow categories:


Investing cash flow ($1,403) ($3,086) ($1,683)

Financing cash flow ($4,626) ($2,655) $1,971



Purchases of property, plant and equipment ($1,420) ($1,373) $47

Free cash flow $5,242 $4,867 ($375)

Net income attributable to 3M $5,050 $4,858 ($192)

Free cash flow conversion 104% 100% -4 pts

Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered asubstitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. TheCompany defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire freecash flow is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. TheCompany believes free cash flow and free cash flow conversion are meaningful to investors as they function as useful measures of performance and the Company uses thesemeasures as an indication of the strength of the Company and its ability to generate cash.

Full-year 2018 forecast:

($B)

Year 2018 Planning Estimate


Operating cash flow $7.4 to $8.1

Purchases of property, plant and equipment $1.5 to $1.8

Free cash flow $5.6 to $6.6

Net income attributable to 3M $6.2 to $6.6

Free cash flow conversion 90% to 100%


Reconciliation of GAAP amounts to return on invested capital

Return on Invested Capital (ROIC) is not defined under U.S. generally accepted accounting principles. Therefore, ROIC should not be considered a substitute for other measures prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines ROIC as adjusted net income (net income including non-controlling interest plus after-tax interest expense) divided by average invested capital (equity plus debt). The Company believes ROIC is meaningful to investors as it focuses on shareholder value creation.

Full-year 2017 results:

($B)Year 2017

Results

Return on invested capital (non-GAAP measure):

Net income including non-controlling interest $4.9

Interest expense (after-tax)* $0.2

Adjusted net income (return) $5.1

Ave. shareholder’s equity (including non-controlling interest) $11.6

Ave. short-term and long-term debt $12.2

Ave. invested capital $23.8

Return on invested capital 21%

Effective income tax rate used for interest expense* 35.5%

Full-year 2018 forecast:

($B)

Year 2018 Planning Estimate

Return on invested capital (non-GAAP measure):

Net income including non-controlling interest $6.2 to $6.6

Interest expense (after-tax)* $0.2 to $0.2

Adjusted net income (return) $6.4 to $6.8

Ave. shareholder’s equity (including non-controlling interest) $11.5 to $12.0

Ave. short-term and long-term debt $13.0 to $15.0

Ave. invested capital $24.5 to $27.0

Return on invested capital 20% +

Effective income tax rate used for interest expense* 20% to 22%


2018 EPS roadmap

$9.17 ex. TCJA

$0.45 to $0.75 ($0.75)

$0.10

$0.10

$0.30 to $0.35

$0.15 to $0.25

$0.05 to $0.10($0.05) to

$0.05

$0.45 to $0.65 ($0.10)

$0.05 to $0.15

$10.20 to

$10.70

2017 OrganicGrowth

2017Divestitures

Impact

2017Acquisition

Impact

ForeignCurrency

Portfolio &Footprint

Optimization

RawMaterials

BusinessTransformation

ValueRealization

Manufacturingand SG&A

Productivity

Tax Rate RetirementPlans

ShareRepurchase

NetInterest

2018e

$0.05 to $0.10

11% to 17%

GAAP$7.93

2017 GAAP EPS of $7.93; $9.17 adjusted for Tax Cuts and Jobs Act impact

Growth and Portfolio Management

ProductivityOther

Financial

2017 fourth quarter business review · q4 2017 23.0% vs. q4 2016 28.2%; benefitting from supply...

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