Volume Growth In Developing Markets And Price Increases Drive 3M’s Sales

3M (NYSE:MMM), a multinational conglomerate, reported moderate growth of 2.6% year-on-year in its sales for the first quarter of 2014, to reach $7.8 billion. ^[1] On an organic local currency basis, sales increased 4.6%, well within 3M’s sales growth guidance of 3%-6% for 2014. Organic local currency sales do not include the impact of acquisitions or currency fluctuations. Foreign currency translation tempered growth by 2%, whereas 3M was expecting an impact of neutral to -1%. Overall volumes grew 3.4% and pricing increased 1.2%. All five of 3M’s business segments – Industrial, Safety and Graphics, Health Care, Electronics and Energy and Consumer – posted positive sales growth in the quarter.

Developing markets account for 35% of 3M’s sales and the number is expected to rise to 40%-45% by 2017, driven by economic progress and growth in disposable incomes in these markets. In the third quarter, the majority of 3M’s sales growth came from developing markets in the Asia Pacific and Latin American regions.  The Asia Pacific region posted the highest organic local currency growth followed by Latin America and Canada. Despite turbulence in Venezuela, 3M managed to post positive growth in the Latin American region. ^[2] Continued growth in the U.S. and European economies also contributed to 3M’s sales.

Higher selling, general and administrative (SG&A) costs and R&D expense drove up 3M’s operating expenses by 2.1%. ^[1] However, lower growth rate of raw material and SG&A costs compared to revenue growth, led to a 0.3% increase in operating margins which reached 21.9%. Moderate price increases driven by new products should continue to help improve 3M’s margins. 3M’s net profits grew 7% to reach $1.2 billion.

During its first quarter meet, 3M reaffirmed its full year earnings per share guidance range of $7.30 to $7.55. ^[2] However, due to the currency impact on the quarter’s results, the full year’s foreign currency impact guidance has been revised to approximately -1%. The company plans to spend $2.5 billion towards capital investments in 2014. 3M reiterated its intention to invest $5 billion to $10 billion in acquisitions through 2017.

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Asia Pacific and Latin America Lead 3M’s Sales Growth; China Disappoints

In the first quarter, 3M’s organic local currency sales in Asia Pacific grew 6.9% and in Latin America and Canada grew 6.8%. ^[1] In Asia Pacific, sales volume grew 6.4% driven by double digit-growth in Japan, partially tempered by a slow growth rate of 2% in China. This makes it the second consecutive quarter of low single digit growth from China, primarily due to depressed electronics sales. ^[3] The end of government subsidies for consumer electronics in China in May 2013, led to a decline in demand for consumer electronics, thereby negatively impacting shipments and consumer electronics manufacturers. ^[4] We believe that the low growth rate in China will definitely impact 3M’s expectation of around 15% growth in revenue per year from the country. ^[5] All of 3M’s business segments performed well in the Asia Pacific region, led by 3M’s Health Care and Safety and Graphics segments, which grew 10% and 9% respectively.

In the fourth quarter of 2013, organic local currency growth in Latin America and Canada slowed down to 2.2% due to political unrest and weak economic conditions in Venezuela and Argentina. Fewer government tenders and low retail demand also impacted sales. However, in the first quarter of 2014, organic local currency sales grew 6.8% driven by 6.4% increase in selling price. The majority of the growth came from Brazil and Mexico, where sales grew 11% and 15% respectively. ^[2] Even though sales have picked up from the disappointing results in the fourth quarter of 2013, the growth rate is still far off from the company’s guidance of 8%-11% for the region in the year 2014. ^[6] In order to meet the lower end of the guidance, the growth rate will have to average ~8.5% over the next three quarters.

Sales were down in Venezuela again in the first quarter of 2014 due to the continued political and economic turbulence. 3M has been trying to maintain a neutral position in the country by matching its monetary assets to monetary liabilities in order to offset any risk arising due to the economic and political situation. ^[6] Monetary assets or liabilities are assets or liabilities which have fixed numerical values, for example, cash.

3M’s Health Care Segment Posts Highest Growth Driven By Sales In Developing Markets

In the first quarter of 2014, 3M’s Health Care organic local currency sales grew 6.2% to reach $1.37 billion, driven by a 10% growth in developing markets. ^[1] Within its health care portfolio, sales for 3M’s inhalers, health information systems and infection prevention products were the highest. Rising consumer income levels in developing markets encourages these regions to focus on improving their living standards and healthcare. We believe that growing income levels and economic progress in the developing markets will continue to present growth opportunity for 3M’s Health Care segment.

3M recently acquired Treo Solution, ^[7] a healthcare data analytics and business intelligence provider. This acquisition will enhance 3M’s healthcare information systems business by enabling it to provide low cost data analytics solutions.

3M expects its healthcare segment to grow 7%-10% in 2014, the highest of all its segments, driven by increasing disposable incomes, growing awareness and health reforms in developing markets.

Industrial Segment Grows Driven By Purification Systems And Automotive OEMs

3M’s Industrials segment sales grew 3.1% driven by double digit growth in its purification and automotive original equipment manufacturers (OEM) businesses. ^[1] 3M’s purification business offers air and water filtration products for residential, commercial and industrial use. Growing awareness and need for clean water in developing countries like India and China are driving growth in the demand for water purification equipment, the global market for which is expected to grow 10% every year till 2018. ^[8] 3M may be able to benefit from this growth given that its water purification products were the first to be certified by the Water Quality Association, ^[9] a trade association representing the water treatment industry in the U.S., which adds to the credibility of 3M’s products and assures consumers of effective water purification.

In 2009, the North American light vehicle production fell to 8.6 million units due to the global economic slowdown. ^[10] However, due to recovery in the economy, the U.S. automotive industry is back on a growth path with 15.5 million light vehicles produced in 2013. ^[11] These trends have been driving growth in sales of 3M’s automotive OEMs. North American light vehicle production is expected to grow at a rate of 4% in 2014 driven by increase in consumer spending and high average vehicular age. Continued growth in vehicle production will help sustain sales of 3M’s automotive OEMs.

3M expects its industrial segment to grow 3%-6% in 2014. We believe this growth will be driven by continued strengthening in the global economy and growth in end markets such as automotives, chemicals, industrials, construction and packaging.

Personal Safety Products And Roofing Granules Drive Growth In 3M’s Safety & Graphics Segment

3M’s Safety and Graphics sales grew 1.7% driven by growth in sales of its personal safety products and roofing granules. ^[1] 3M’s personal safety products portfolio includes maintenance-free and reusable respirators, personal protective equipment, head and face protection, body protection, hearing protection and protective eyewear and are used to protect workers’ health and ensure their safety in an industrial environment. Industrial activity in the U.S grew 4.4% in the first quarter of 2014, slightly higher than the previous quarter, driving growth in sales of 3M’s personal safety products. ^[12] Additionally, industrial activity in the European Union grew 0.2% and 0.4% in January and February, respectively creating favorable sales conditions. ^[13]

3M sells roofing granules directly to roof shingles manufacturers. Sales of granules are directly linked to the construction industry, which has been booming in the U.S. Housing starts grew 18% in 2013 to reach 923,400 units ^[14] and are estimated to reach 1.15 million units in 2014. ^[15] Though the construction activity was slow during the first quarter of 2014 due to the harsh winter weather, the outlook still remains optimistic. 3M expects its Safety & Graphics segment to grow 3%-6% in 2014.

Price Increase Bolsters 3M’s Sales

3M’s 4.6% organic local currency revenue growth was partially driven by 1.2% increase in prices. Price increases were primarily driven by new products and the need to offset impact of weaker currencies. 3M generates a third of its revenues through products that have been developed in the past 5 years. ^[16] These new products are priced at premium rates and generate higher margins. The company’s continued focus on research and development enables it to frequently provide customers with new and innovative products. It has decided to gradually increase its annual investment in R&D from 5.0-5.5% to 6% of total sales by 2017. This will help sustain base level organic growth and continue to drive moderate increase in overall pricing.

Weak currencies, compared to the U.S. dollar, have a negative translation effect on 3M’s overall sales. 3M increase its prices in regions with weak currencies in order to offset the negative impact. In the first quarter of 2014, weak emerging market currencies tempered the company’s organic local currency sales growth by 2%.

In order to offset weak Latin American currencies such as Brazil’s Real and Mexico’s Peso, 3M increased prices by 6.4% in the region. Similarly, prices were increased 0.5% in the Asia Pacific region. However, Latin American and Asian currencies were weaker than anticipated, tempering sales growth in the regions. ^[1] The Euro strengthen 1.5% in the first quarter of 2014 ^[17] leading to a favorable translation effect which added to the region’s sales growth.

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1. 3M’s First Quarter 8-K SEC Filing, April 24 2014, www.3m.com [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. 3M’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, April 24 2014, www.seekingalpha.com [↩] [↩] [↩]
3. 3M Announces Fourth-Quarter Results, January 30 2014, www.3m.com [↩]
4. Consumer Electronics Market Tumbles in China as Major Device Shipments Slide in 2013, March 10 2014, www.ihs.com [↩]
5. 3M Sees China’s Sales Growth Triple Global Pace CEO Says, March 18 2014, www.bloomberg.com [↩]
6. 3M’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, January 30 2014, www.seekingalpha.com [↩] [↩]
7. 3M Completes Acquisition of Treo Solutions, April 1 2014, www.3m.com [↩]
8. Global Water Purifiers Market Forecast & Opportunities 2018, October 29 2013, www.prnewswire.com [↩]
9. 3M is First to Gain WQA Sustainability Certification, September 16 2013, www.3m.com [↩]
10. IHA Automotive Production Barometer, January 2011, www.ihs.com [↩]
11. North America Production Summary February 2014, www.wardsauto.com [↩]
12. Industrial Production and Capacity Utilization, April 16 2014, www.federalreserve.gov [↩]
13. Eurostat News Release, April 14 2014, epp.eurostat.ec.europa.eu [↩]
14. Housing Starts Forecast For 2014 Past Is Not Prologue, January 17 2014, www.wsj.com [↩]
15. Strong Single-Family Growth will Fuel Housing in 2014, February 4 2014, www.nahb.org [↩]
16. 3M’s Morgan Stanley Industrials & Autos Conference Presentation, September 18 2013, www.3m.com [↩]
17. Euro-US Dollar Exchange Rate, www.bloomberg.com [↩]