3M Earnings Preview: Foreign Exchange Headwinds In Focus

3M (NYSE:MMM) is set to announce its first quarter results on Thursday, April 23. We expect 3M’s strong organic sales growth trend to continue into the first quarter with growth across all five of its business segments – Industrial, Safety and Graphics, Health Care, Electronics & Energy, and Consumer. However, currency headwinds will likely temper reported sales, as was seen in the previous quarter. Industrial companies such as Honeywell (NYSE:HON) and GE (NYSE:GE) have already reported poor first quarter results, primarily due to the impact of a strong dollar. In the previous quarter, 3M announced that it has taken certain measures that will help reduce the impact of the foreign currency headwinds. In its first quarter results, we will keep an eye on how these strategies have played out for the company.

In the fourth quarter, 3M reported a 2% increase in revenues, crossing $7.7 billion. ^[1] However, 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 expenses 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’s Strategies To Counter FX Headwinds

3M’s fourth quarter revenues suffered heavily due to weak foreign currencies such as the Euro and Japanese yen. These foreign currency headwinds are likely to persist through 2015. At its previous earnings meeting, 3M announced that it has taken steps in order to counter the impact of the foreign exchange translations. ^[2] 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.

Health Care Sales Will Benefit From Drug Delivery Products, Information Systems

3M’ Health Care segments caters to the drug delivery, infection prevention, disposable medical supplies, health care systems, food safety, and dental and orthodontic markets. We expect that growth in drug delivery products and healthcare information systems will help drive the segment’s revenues in the first quarter. Drug delivery products are used to deliver drugs to a patient’s body, such as inhalers and injections. With increased focus on health insurance and awareness, the demand for such products has increased. This is expected to drive the drug delivery market to $198 billion by 2017. ^[3] 3M has a large number of drug delivery products that will enable it to cater to this growing market.

Information technology is used in the healthcare sector for the storage, retrieval and transfer of patient medical information through digital means. This helps in increasing efficiency and also leads to considerable financial benefits, which is encouraging hospitals to invest in healthcare IT. A growing complexity of healthcare operations, the shift towards paperless environments, and a proliferation of smart devices are driving the demand for healthcare IT systems. The market for healthcare IT systems is projected to reach $66 billion by 2020. ^[4] In order to strengthen its position in the healthcare IT market 3M acquired Treo Solution, ^[5] a healthcare data analytics and business intelligence provider, in April 2014. Sales from Treo Solutions added 0.6% growth to 3M’s Health Care segment in the fourth quarter.

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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. GLOBAL DRUG DELIVERY TECHNOLOGY MARKET WILL REACH $198.4 BILLION IN 2017, www.visiongain.com [↩]
4. Healthcare IT Market, www.prweb.com [↩]
5. 3M Completes Acquisition of Treo Solutions, April 1 2014, www.3m.com [↩]