M&A, R&D, Centers Of Excellence Are Key Growth Drivers for 3M

3M (NYSE: MMM) is currently going through a rough patch, primarily due to foreign currency headwinds. In the first quarter, the company reported a 3.2% decline in revenues, reaching $7.6 billion, as a result of foreign currency headwinds, which more than offset increased volume and pricing benefits. ^[1] Unfavorable exchange rates have also forced the company to revise its annual outlook. At its first quarter earnings call, 3M revised its reported revenue guidance to a 6-7% decline in revenues, compared to its earlier estimates of a reduction of 4-5%, and estimates earnings per share of $7.80-8.10, compared to its previous guidance of $8.00-8.30.

However, 3M has maintained its expectations of 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 also continues to expect free cash flow conversion of 90−100%. In this article, we take a look at the key factors that will continue to propel 3M in 2015, as well as in the coming years.

See our complete analysis of 3M here

Restructuring, M&A Improve 3M’s Portfolio

As a result of 3M’s extensive restructuring efforts, the company now consists of only five business segments. Before 2013, 3M was divided into six 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 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 February, 3M entered into a definitive agreement to acquire Polypore International’s Separations Media business for a total purchase price of $1 billion. ^[3] The acquisition of Polypore’s Separations Media business will help enhance 3M’s filtration products portfolio and increase its exposure to the fast-growing filters market, which is forecast to grow to $80 billion, or 6.2% annually, through 2018, driven by growth in manufacturing activity and healthcare awareness in developing countries. ^[4] In July 2014, 3M announced that it had completed the acquisition of Sumitomo 3M after purchasing the 25% stake of Sumitomo Electric. ^[5] 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.

Research & Development Is Key To Product Growth And Pricing Power

3M frequently reports a metric known as the New Product Vitality Index (NPVI), which indicates what portion of the company’s sales come from products that have been developed in the past five years. Recently, 3M reported a NPVI of 33% in 2014. ^[6] The company’s ability to regularly introduce new products stems from its heavy R&D spending. 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. ^[7] This will help in sustaining organic growth for the company.

3M commands considerable pricing power because of the innovative and differentiated nature of its products (as well as established brands for many products). 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. ^[8] With a higher number of newer products accounting for sales, 3M’s pricing power and margins will likely continue to improve.

Centers Of Excellence Drive Productivity

3M has set up ‘Centers of Excellence’ globally in order to help consolidate and manage its operations. These centers of excellence 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. 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. ^[7] These centers have integrated and dedicated Enterprise Resource Planning solutions that help maximize productivity and efficiency within the region.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. 3M’s Q1 2015 Earnings Press Release, April 23, 2015, www.3m.com [↩]
2. 3M to Sell Static Control Business to Desco Industries, December 15, 2014, www.3m.com [↩]
3. 3M to Acquire Polypore’s Separations Media Business, February 23, 2015, 3M’s News Release [↩]
4. World Filters, July 2014, Freedonia Group [↩]
5. 3M, via Sumitomo 3M Ltd., Completes Acquisition of Sumitomo Electric Industries Ltd.’s Interest in Sumitomo 3M, August 31, 2014, 3M’s News Release [↩]
6. CFO’s Presentation At 3M Company 2015 Outlook Meeting, December 16, 2015, 3M’s Website [↩]
7. Deutsche bank Global Industrials and Basic Materials Conference 2015, June 4 2015, 3M’s Website [↩] [↩]
8. 3M’s Goldman Sachs Industrials Conference Presentation, November 13, 2014, 3M’s Website [↩]