3M’s Key Growth Levers: Portfolio Management, R&D, Business Transformation

3M (NYSE: MMM) recently held its annual outlook meeting and discussed its guidance for 2015 and also reiterated its long-term outlook. 3M expects organic local currency sales growth of 3−6% in 2015. Organic local currency sales do not include the impact of acquisitions or currency fluctuations. It expects earnings per share to be in the range of $8.00-8.30 in 2015 with free cash flow conversion of 90−100%. At the meeting, 3M also discussed “three key levers” that will continue to propel the company’s value in the coming years. In this article we take a look at these three levers – Portfolio Management, Research & Development and Business Transformation. ^[1]

See our complete analysis of 3M here

Portfolio Management: Reorganization, Acquisition and Divestitures

3M’s current company structure is the result of its portfolio management. Earlier, the company was divided into six business segments. However, in 2013, they reorganized it into five segments. This reorganization helped 3M achieve cost reductions through increased efficiency, productivity and scale. It also helped the company effectively identify businesses that truly drive growth in the company and ones that are lagging. It is this identification that led to 3M’s recent announcement that it is divesting its static control business so it can focus on other high growth and core businesses. ^[2]

Because of its portfolio management strategies, 3M’s acquisition activities have also become more focused. In July, 3M announced that it had completed the acquisition of Sumitomo 3M after purchasing the 25% stake of Sumitomo Electric. ^[3] Sumitomo 3M offers products that could cater to an $800 million addressable market in Japan and will therefore play a major role in 3M’s growth in the country.  In April, 3M acquired Treo Solutions in order to strengthen its presence in the healthcare IT market, which is projected to reach $66 billion by 2020. ^[4] Such acquisitions help drive growth by expanding its product portfolio and strengthening its geographic presence. To this end, 3M intends to invest $5 billion to $10 billion on acquisitions through 2017. ^[5]

Research & Development: Product Growth And Pricing Power

As indicated by its New Product Vitality Index (NVPI), a third of 3M’s sales come from products that have been developed in the past five years. ^[6] It is able to regularly introduce new products by spending heavily on R&D. In 2013, 3M spent 5.6% of its revenues on R&D, up 0.1% from 2012. The company has decided to gradually increase its annual investment in R&D to 6.0% of total sales by 2017. This will help in sustaining organic growth for the company.

Because of the innovative and differentiated nature of its products (as well as established brands for many products) 3M commands considerable pricing power. It is able to charge premium rates for products that have been introduced recently, which helps in improving margins. Meanwhile, older products have to be priced competitively due to the availability of cheaper alternatives. As 3M continues to increase its R&D spending, it expects to see its NVPI increase to 37% by 2017. With a higher number of newer products accounting for sales, 3M’s pricing power and margins will likely continue to improve.

Business Transformation: Driving Productivity

3M has deployed its ‘Centers of Excellence’ globally to help consolidate and manage operations. These centers of excellence not only help consolidate the supply chain across the region but also promote more effective management of manufacturing and engineering activities and distribution channels. As a result, there are improvements in working capital requirements, overhead costs and tax rates. These centers have integrated and dedicated Enterprise Resource Planning solutions that help maximize productivity and efficiency within the region. 3M estimates that these Centers of Excellence will help generate operational savings of $500-700 million and working capital improvements of $500 million by 2020. ^[1]

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1. 3M Company 2015 Outlook Meeting, December 16, 2014, www.3m.com [↩] [↩]
2. 3M to Sell Static Control Business to Desco Industries, December 15, 2014, www.3m.com [↩]
3. 3M, via Sumitomo 3M Ltd., Completes Acquisition of Sumitomo Electric Industries Ltd.’s Interest in Sumitomo 3M, August 31, 2014, www.3m.com [↩]
4. Healthcare IT Market, www.prweb.com [↩]
5. 3M’s (MMM) CEO Inge Thulin on Q3 2014 Results – Earnings Call Transcript, October 23 2014, www.seekingalpha.com [↩]
6. 3M’s Goldman Sachs Industrials Conference Presentation, November 13, 2014, www.3m.com [↩]