2018 financial outlook€¦ · local-currency growth roic free cash flow conversion 8-11% 2-5% 20%...
TRANSCRIPT
1. All Rights Reserved.11 December 2017© 3M
2018 Financial Outlook
Nick GangestadSenior Vice President and Chief Financial Officer
December 12, 2017
2. All Rights Reserved.11 December 2017© 3M
Agenda
• Executing on our 2016 – 2020 plan
• Tracking to the top-half of 2017 full-year organic growth and earnings ranges
• 2018: another year of strong growth and operational execution
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Long-term financial objectives2016 – 2020 plan
2016 – 2017e average
9% 2% 24% 101%
• Delivering on our five-year plan
• Our Playbook is working
o Portfolio Management
o Investing in Innovation
o Business Transformation
• Disciplined capital allocation
EPS Growth
Organic Local-Currency
Growth
ROIC Free Cash Flow Conversion
8-11%2-5%
20%
100%
Refer to appendix for the definition and calculation of ROIC and free cash flow conversion
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Expecting strong finish to 2017
• Full-year trending to the top half of 4% to 5% organic growth and $9.00 to $9.10 GAAP EPS ranges
• Fourth quarter planning items:
o Electronic monitoring divestiture gain +$0.12 per share
o Scott Safety acquisition -$0.08 per share
o Debt tender offer increased interest expense -$0.11 per share
o Strategic investments -$0.06 to -$0.10 per share
• Operations tracking to expectations
• Strong full-year free cash flow and return on invested capital
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2018 financial headlines
• GAAP EPS expected to increase 6% to 10%
o Strong organic growth, productivity and operational execution
• Continued effective capital deployment
o First priority is investment in the business to fund organic growth and enhance 3M’s Fundamental Strengths
o Acquisitions strengthen portfolio and underlying growth potential
o Maintain long-term track record of returning significant cash to shareholders via dividends and share repurchases
• 2018 plan funded by strong cash from operations, supplemented by additional leverage
Excludes pending sale of Communication Markets business
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2018 capital allocation plan
Cash and marketable securities at year-end 2017~$4.0B
Cash flow from operations(excludes R&D and pension)$9.0B to $9.5B
Added leverage$1.5B to $4.0B
R&D ~$1.9B
Cap-ex $1.5B to $1.7B
DividendExpected to grow in line with earnings over time
$0.3B to $0.5B
M&AStrengthens portfolio, augments organic growth
Share repurchase$2.0B to $4.0B grossInfluenced by relative valueand other demands on capital
Growth investments
Pension contributions
Cash to shareholders
Sources Uses
Total funds available:$14.5B to $17.5B
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2018 planning estimates
$9.00 to $9.10
$9.60 to $10.00
2017e 2018e
• GAAP EPS estimate of $9.60 to $10.00
• Total sales growth of 5% to 7%
o Organic local-currency growth of 3% to 5%
o Foreign currency translation of approximately +1%
o Acquisition, net of divestitures impact of approximately +1%
• Free cash flow conversion of 90% to 100%
6% to 10%
Refer to appendix for the definition and calculation of free cash flow conversion
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2018 EPS roadmap
$9.00 to $9.10
$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
($0.05) to $0.05 ($0.10)
$0.05 to $0.15
$9.60 to
$10.00
2017e 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
6% to 10%
Growth and Portfolio Management
ProductivityOther
Financial
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Growth and Portfolio Management
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Delivering growth through prioritization
Organic growth
R&D
Cap-ex
Divestitures and exited businesses
AcquisitionsEnhanced portfolio
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Organic local-currency growth
2018 GAAP EPS impact
+$0.45 to +$0.75
• Expecting 3% to 5% organic local-currency growth, including positive price
o Developed economies 2% to 4%
o Developing economies 4% to 8%
• Global economic indicators expected to be similar to 2017
Organic local-currency = organic volume + price
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2018 organic local-currency growth projectionsBy Business Group
IndustrialHealth Care ConsumerSafety & Graphics Electronics & Energy
Total 3M: 3% to 5%
3% to 5%4% to 6% 2% to 4%4% to 6% 1% to 4%
Organic local-currency = organic volume + price
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2018 organic local-currency growth projectionsBy geographic area
2% to 5% 1% to 4%
4% to 7% 3% to 5%
United States
Europe, Middle East and Africa
Asia Pacific
Latin America and Canada
Organic local-currency = organic volume + price
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R&D: enhancing value for our customersMore impactful innovation
2018 R&D investment• Connecting 46 technology platforms to solve
customers’ real world needs
• Investing in top priorities for growth
• Enhance global competitiveness with differentiated products
• Supports premium operating margins and ROIC
Approximately $1.9B
~6% to sales
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Cap-ex: enabling organic growth and profitabilityAligned with portfolio prioritization process
• Enhances Fundamental Strengths of 3M
• Increasing investments in:
o Capacity to support higher organic growth
o Disruptive technology deployment
• Investments deliver superior returns and support premium ROIC
2018 cap-ex investment
$1.5B to $1.7B
4.5% to 5.0% to sales
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Divesting non-strategic businesses2013 – 2017*
Divested businesses:
DilutiveTo company organic growth
BelowTotal company margins
$700MDivested annualized sales
$1.4BTotal proceeds
*Excludes pending sale of Communication Markets business
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Impact of 2017 divestitures
2018 GAAP EPS impact
Approximately -$0.75
• 2017 divestiture gains not repeating in 2018
• Divestitures a key element of portfolio management
• Excludes impact from pending divestiture of Communication Markets business
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Acquisitions enhancing shareholder value
$6.6BCombined investment
In-lineWith company margins
AccretiveTo company organic growth
Membrana = Polypore’s separation media business
2013 – 2017
September 30, 2017 trailing twelve month performance
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Impact of 2017 acquisitionsScott Safety: premier provider of innovative safety products
2018 GAAP EPS impact
Approximately +$0.10
• Revenue of $575M for the 12 months ending September 30, 2017
• Products include self-contained breathing apparatus (SCBA) systems, gas and flame detection instruments, and other safety devices
• Integrating into Personal Safety business within Safety & Graphics Business Group
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Foreign currency
2018 GAAP EPS impact • Expecting foreign currency translation impact on sales of approximately +1%
• Based on spot rates as of November 30, 2017
o Euro 1.19, RMB 6.61, JPY 113, BRL 3.3
• Includes impact of foreign currency on sales and operations, net of year-on-year changes in hedging
Approximately +$0.10
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Productivity
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Portfolio and footprint optimization
2018 GAAP EPS impact
+$0.30 to +$0.35
• Continuing to execute plan announced March 2016
• Incurring approximately $0.42 of charges in 2017 related to optimization actions
• Investment of approximately $0.10 in 2018, net of benefits
• Net year-over-year benefit of $0.30 to $0.35 in 2018
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Raw materials
2018 GAAP EPS impact
-$0.05 to +$0.05
• Sourcing cost reduction projects offsetting increase in raw material market prices
• Annual spend of approximately $7.5B, including crude-related spend of $1.3B
• Major feed stocks include propylene, ethylene, wood pulp, fluorspar, butadiene and linerboard
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Business Transformation value realizationOn-track to deliver $500M to $700M annual pre-tax savings by 2020
2018 GAAP EPS impact
+$0.05 to +$0.10
• Standardizing global business processes
• Value realization through:
o Business Services Operations
o Supply Chain Centers of Expertise
o Global Service Centers
• Canada and majority of West Europe deployed; U.S. deployments ramp-up in 2018
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Manufacturing and SG&A productivity
2018 GAAP EPS impact
+$0.15 to +$0.25
• Reducing structure and driving efficiency
• Leveraging Lean Six Sigma across the enterprise
• Estimated benefit is net of wage inflation
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Effective tax rate
2018 GAAP EPS impact
-$0.05 to +$0.05
• Forecasting 2018 tax rate of 26.0% to 27.0%
• Structural rate continues to decline through further supply chain optimization
• Excludes impact of potential tax reform
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Other Financial
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2018 capital allocation plan
Cash and marketable securities at year-end 2017~$4.0B
Cash flow from operations(excludes R&D and Pension)$9.0B to $9.5B
Added leverage$1.5B to $4.0B
R&D ~$1.9B
Cap-ex $1.5B to $1.7B
DividendExpected to grow in line with earnings over time
$0.3B to $0.5B
M&AStrengthens portfolio, augments organic growth
Share repurchase$2.0B to $4.0B grossInfluenced by relative valueand other demands on capital
Growth investments
Cash to shareholders
Sources Uses
Total funds available:$14.5B to $17.5B
Pension contributions
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Retirement plans
2018 GAAP EPS impact
Approximately -$0.10
• 2017e worldwide pension/OPEB funded status of 83%; U.S. pension at 90%
• 2018 assumptions:
o U.S. discount rate 3.8%, down 40 basis points year-on-year
o Expected return on assets 7.25%
o Cash contributions of $300M to $500M
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Longstanding commitment to raising the dividend
• $2.8B in cash dividends paid to shareholders in 2017
• 59 consecutive years of per-share increases; have paid without interruption for over 100 years
• Expect to grow in-line with earnings over time
$2.54
$3.42
$4.10
$4.44
$4.70
$1.8
$2.3
$2.8
$3.3
$3.8
$4.3
$4.8
2013 2014 2015 2016 2017
+8%
+20%
+35%
+8%
Dividends paid per share ($)
+6%
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Share repurchase
2018 GAAP EPS impact
+$0.05 to +$0.15
• Forecasting $2.0B to $4.0B of gross share repurchases
• Average diluted shares outstanding to decline by 0.5% to 1.5%
• Maintaining minimum purchase level, plus additional discretionary purchases based on relative value and other capital needs
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Net interest
2018 GAAP EPS impact
+$0.05 to +$0.10
• Borrowing at attractive rates to invest in the business
• Issued $2B of debt in 2017
• Early extinguishment of $305M in high coupon bonds; $95M charge in Q4 2017
• Targeting $1.5B to $4.0B incremental debt in 2018
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2018 EPS roadmap
$9.00 to $9.10
$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
($0.05) to $0.05 ($0.10)
$0.05 to $0.15
$9.60 to
$10.00
2017e 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 $0.10
6% to 10%
Growth and Portfolio Management
ProductivityOther
Financial
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Today’s meeting highlights
• Our playbook is working: delivering on our key metrics
• Ready and well-positioned for 2018
• 2018 outlook
o 3-5% total company organic growth
o 6-10% EPS growth
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s
Appendix
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Reconciliation of GAAP amounts to free cash flow conversion
($M)Year2016
Major GAAP cash flow categories:
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 a substitute forincome or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flowas net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow is available for discretionaryexpenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flowconversion are meaningful to investors as they function as useful measures of performance and the Company uses these measures as an indication of the strength of the Company and itsability to generate cash.
($B)Year 2017PlanningEstimate
Free cash flow (non-GAAP measure):
Operating cash flow $6.6 to $7.0
Purchases of property, plant and equipment ~$1.4
$5.2 to $5.6
Net income attributable to 3M $5.5 to $5.6
95% to 100%
$6.9 to $7.6
$5.2 to $6.1
$5.8 to $6.1
90% to 100%
Free cash flow
Free cash flow conversion
Operating cash flow
Investing cash flow
Financing cash flow
Free cash flow (non-GAAP measure):
$6,662
($1,403)
($4,626)
Operating cash flow
Purchases of property, plant and equipment
Free cash flow
Net income attributable to 3M
Free cash flow conversion
$6,662
($1,420)
$5,242
$5,050
104%
Year 2018PlanningEstimate
$1.5 to $1.7
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Reconciliation of GAAP amounts to return on invested capital
($M)
Return on invested capital (non-GAAP measure):
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.
Net income including non-controlling interestInterest expense (after-tax) (1)Adjusted net income (Return)
$5,058$143
$5,201
Average shareholders’ equity (including non-controlling interest) (2) $11,316
Year 2016
Average short-term and long-term debt (3) $11,725Average invested capital $23,041
Return on invested capital (non-GAAP measure) 22.6%
(1) Effective income tax rate used for interest expense 28.3%
(2) Calculation of average equity (includes non-controlling interest)Ending total equity as of:
March 31June 30September 30December 31
Average total equity
(3) Calculation of average debtEnding short-term and long-term debt as of:
March 31June 30September 30December 31
Average total equity
$11,495$11,658$11,769$10,343$11,316
$11,139$11,749$12,361$11,650$11,725
Year 2017 Planning Estimate
($B)
Return on invested capital (non-GAAP measure):
Net income including non-controlling interestInterest expense (after-tax)*Adjusted net income (Return)
Average shareholders’ equity (including non-controlling interest)Average short-term and long-term debtAverage invested capital
Return on invested capital (non-GAAP measure)
Effective income tax rate used for interest expense
$5.5 to $5.6~$0.3
$5.8 to $5.9
$11.5 to $12.0$11.5 to $12.5
$23.0 to $24.5
24% to 25%
26% to 27%