3M Earnings Preview: Sluggish Global Economy Mars Company Growth

Industrial conglomerate 3M (NYSE:MMM) is scheduled to announce Q4 and full-year results on January 26. The company was forced to reduce its forecast for earnings and sales growth as a result of sluggish growth in the global economy. Slowing demand in the consumer electronics market is negatively impacting the company’s Electronics and Energy business, and a poor global end market demand, as evidenced by soft macroeconomic forecasts, has had a pronounced effect on the Industrial business. Consequently, the earnings guidance was updated downwards — full year GAAP earnings are estimated to be $7.55 per share, as opposed to a prior range of $7.60 to $7.65, and organic growth is expected to be 1%, versus an earlier estimate of 1.5%-2%. ^[1]

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Restructuring Plan To Strengthen Its Competitiveness

In 2012, 3M began its process of restructuring. Since then the company has realigned from 6 sectors to 5 business groups, and from 40 businesses to 26. In 2015, the dental and orthodontic businesses were combined with the Health Care business group. This has been done to deliver greater benefits, particularly to customers, by way of greater customer relevance, scale, productivity, and speed. It has also made resource allocation more efficient, for purposes of organic growth, as well as through acquisitions.

3M was very active on the M&A front in 2015, making a number of significant acquisitions and selling businesses that do not fit within the portfolio. A corporate restructuring plan, announced in the Q3 earnings, which was to be completed by the end of 2015, will result in a pre-tax charge of $100 million, or ~$0.14 per share. This involved plans to reduce structural overheads in the United States and other slow growing markets such as Europe, Middle East-Africa, and Latin America, by eliminating 1,500 jobs, or 1.7% of the company’s total, which would produce pre-tax savings of $130 million in 2016. ^[2]

3M is also moving towards a more efficient business model and is rolling out a global ERP system. This will help the company to optimize the delivery of transactional services, resulting in lower costs and greater value creation. According to Inge Thulin, 3M Chairman, President and CEO, annual operational savings of $500-$700 million are expected by 2020, along with another half-a-billion in the annual reduction of working capital.

Focus On R&D To Drive Organic Growth

Research and development is at the core of the company, aiding the company in maintaining higher margins and greater returns on invested capital. Going forward, 3M intends to invest $1.8 billion in R&D, or about 5.8% of the total sales. The company tries to leverage insights from consumers and the marketplace in order to connect the 46 technology platforms to real world needs and opportunities. Global trends are used to build new products. For example, rapid population growth in urban areas is driving a need for greater energy efficiency, clean water, and environmental protection. Consequently, as mentioned in the 2016 outlook presentation, 3M is building an ‘Urban Solutions’ lab in Singapore to develop relevant solutions.

Some Cause For Optimism With 2016 Projected Earnings

In 2016 as well, the company expects positive but slow economic growth. Hence, according to Nick Gangestad, Senior Vice President and Chief Financial Officer, the focus will be on operating efficiency to deliver growth. Earnings per share are expected to grow 7%-12% to $8.10 to $8.45 per share. However, foreign currency headwinds will continue to create problems and will negatively affect the sales in Dollar terms by 1% to 3%. This warrants a need for optimizing supply chains, as well as financial hedging.  3M hedges close to 50% of its economic exposure on a rolling 12-month basis and also has additional hedges as far as 36 months in some of the liquid currencies. Acquisitions, net of divestitures, will improve the sales level by 1%. The free cash flow conversion rate is expected to be 95% to 105%, similar to the 100% in 2015. The organic local currency growth will be 1% to 3%, which translates to an increase in earnings by $0.10 to $0.25 per share.

The Health Care, with 3%-5% growth, and Consumer businesses, with 2%-4% growth, are anticipated to lead the organic growth. The corresponding figure for the Electronics and Energy business is forecasted to be in the range of minus two percent to plus two percent, while that of Industrials is a flat 3%, and for Safety and Graphics, it is estimated to be 1%-3%. ^[3] 3M seems to be poised for a successful 2016 in the face of a challenging global economy, with continued investment in R&D, as well as strategic investments.

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1. 3M Updates Full-Year 2015 Guidance [↩]
2. 3M Q3 2015 Results- Earnings Call Transcript [↩]
3. 3M 2016 Outlook Meeting Transcript [↩]