3M Earnings: Weak Foreign Currencies Temper Revenue

3M (NYSE:MMM) announced its fourth quarter results on Tuesday, January 27. The company reported a 2% increase in revenues, crossing $7.7 billion, driven by growth across all five business segments – Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. ^[1] Revenue growth was severely impeded by weak foreign currencies, as organic local currency revenue increased 6.3%, but was offset by unfavorable foreign exchange impact of 4.4%. Organic local currency sales do not include the impact of acquisitions or currency fluctuations.

3M’s net profits increased 7.0% as higher sales volume, better pricing and lower retirement benefits expense helped improve operating margins by 60 basis points year-on-year, to reach 21.5%. Higher profits and lower share count drove up earnings per share by 11.7%, to reach $1.81.

For 2015, 3M expects its earnings to be in the range of $8.00-8.30 per share with organic local-currency sales growth of 3-6%. However, the impact of weak foreign currencies will likely temper revenue growth by 4-5%.

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3M To Counter FX Through Hedging, Pricing, Supply Chain Management

3M’s fourth quarter revenues suffered due to weak foreign currencies such as the Euro and Japanese yen. The impact is likely to continue through 2015. At its 2015 Outlook Meeting held on December 16, 3M provided guidance of foreign currency headwinds in the range of $0.10-0.20 per share. ^[2] However, looking at the strength of the U.S. dollar, the company now expects the impact to track at the upper end of the guidance.

During its earnings meeting, 3M announced that it has taken steps in order to counter the impact of the foreign exchange translations. Generally, 3M enters currency hedging contracts with a tenor of 12 months. But looking at the present situation, the company has extended the tenor to 24 months. This should offer some protection against unexpected changes in foreign exchange rates. Another strategy that 3M will employ to safeguard itself from the impact of weak foreign currencies is to raise product prices to offset that currency. 3M has used this strategy in the past as well and is one of the driving factors behind its pricing.

Additionally, the company may look to localize production. For example, in order to cater to its customers in Europe, it could utilize its production capacity in Europe and avoid having to import from regions with stronger currencies compared to the euro. 3M may also try sourcing materials from suppliers located in regions with weaker currencies. This should help reduce the cost of raw materials when translating the foreign currency to U.S. dollars.

Revenue Grows On Safety And Graphics, Electronics And Energy

In the fourth quarter, 3M’s Safety and Graphics, and Electronics and Energy were the strongest performing segments, reporting revenue growth of 3.4% and 3.3%, respectively. ^[1] 

Safety and Graphics’ sales were primarily driven by personal safety products such as respirators, personal protective equipment, head and face protection, body protection, hearing protection and protective eye-wear. ^[3] Since these products are primarily used to protect workers’ health and ensure their safety in an industrial environment, sales are largely dependent on industrial activity. As per preliminary estimates, industrial activity in the U.S grew 5.6% year-on-year in the fourth quarter of 2014, which helped drive a 7% increase in 3M’s Safety and Graphics sales in the country. ^[4] Deteriorating air conditions in China bolstered sales of respirators.

Sales of 3M’s Electronics and Energy segment increased primarily due to display materials. ^[5] 3M’s display materials include films that help enhance viewing pleasure on devices with displays and adhesives that help bonding display parts, lenses, LCDs, and touch screens. The sales of these products are highly dependent on consumer electronics sales. In 2014, the U.S. Consumer Electronics industry generated $217 billion. ^[6] Growing demand for smartphones, tablets, and LCD, UHD and OLED TVs will continue to drive growth in the U.S. Consumer Electronics industry, sales for which are expected to cross $223 billion in 2015.

We expect to see continued growth in these segments in 2015 driven by current trends. Declining oil prices should help increase consumers’ disposable income leading to higher sales of consumer electronics. Continued strengthening in the U.S. economy should bolster industrial output. For 2015, 3M forecasts 2-6% growth in its Electronics and Energy segment and 3-6% growth in its Safety and Graphics segment. ^[7]

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1. 3M Q4 2014 Earnings Press Release, January 27, 2015, www.3m.com [↩] [↩]
2. 3M’s (MMM) CEO Inge Thulin on Q4 2014 Results – Earnings Call Transcript, January 27, 2015, www.seekingalpha.com [↩]
3. 3M Q4 2014 Earnings Slides, January 27, 2015, www.3m.com [↩]
4. Industrial Production and Capacity Utilization, July 16 2014, www.federalreserve.gov [↩]
5. ref:1 [↩]
6. Industry Sales Data, www.ce.org [↩]
7. 3M Company’s (MMM) Management Presents 2015 Outlook Meeting – Transcript, December 16, 2014, www.seekingalpha.com [↩]