3M Delivers A Surprise In Its First Quarter

3M (NYSE:MMM) delivered a surprise in its first quarter of 2017, posting a 5.4% growth in its EPS to $2.16, and revenues of $7.69 billion, a rise of almost 4% over the same period a year prior.

Strong quarterly results and an improved outlook also resulted in the company lifting its guidance for the year, with a 2% to 5% growth in organic local currency sales anticipated, as opposed to an expectation of 1% to 3% earlier, as well as an EPS estimated to be in the range of $8.70 to $9.05, implying a growth of 7% to 11% year-on-year. The prior guidance of the EPS was between $8.45 and $8.80. The shares in the company were up in pre-market trading following the release of the upbeat earnings.

Growth Led By Industrial, Electronics & Energy Segments

3M delivered sales growth in four of its five business segments in the quarter. However, what is most surprising is that its best performing segment was Electronics & Energy, which underwent a major decline in 2016 as a result of the softness in the electronics market. This time around the segment posted revenue growth exceeding 11%, with a 70 basis points improvement in the margins. The Industrial segment had another stellar quarter, with 6% growth. The automotive OEM business continued to lead sales growth in the segment, increasing double digits organically, and also outpacing the rate of global car and light truck builds by more than 400 basis points.

Even Safety & Graphics and Health Care segments published a rise in sales, by 3.4% and 2.3%, respectively. Personal safety and roofing granules helped to deliver growth in Safety & Graphics, while for Health Care, it was the double digit growth in both drug delivery systems and food safety that helped to spur the sales. The Consumer segment was the only weak point for the company, with sales declining almost 1%, wherein a fall in the stationery and office supplies business weighed down the sales.

Geographically the growth was broad-based across all areas, with Asia Pacific leading the company, particularly China, Hong Kong, and Japan. In Europe, Middle East, and Africa, while an organic growth of 4% was reported, negative foreign currency translations resulted in a marginal decline in sales of 0.1%. Focusing on the margins, a 100 basis points decline was noted. However, the company made investments to the tune of $136 million of strategic investments to strengthen the company for the future. This resulted in the drop, as excluding this, the margins were up 80 basis points over the last year, driven by strong organic growth and a sound operational performance.

Focus On The Three Levers

3M continues to execute on its three levers, which will help ensure growth in the long term.

1. Portfolio Management- The company announced the agreement for the purchase of Scott Safety from Johnson Controls in the quarter, which will help to strengthen its position in the attractive personal safety market.

2. Investing in Innovation- The company invested $471 million in R&D in the quarter, or 6.1% of the sales, up from $450 million in the year ago period. This includes increasing the resources in the field to bring the scientists and application engineers closer to the customers.

3. Business Transformation- The roll-out of the new ERP (Enterprise Resource Planning) system in Western Europe is said to be almost complete.

In addition to these, the company also undertook an investment of $136 million, as mentioned earlier, which includes $36 million to accelerate growth in the core platforms. These growth investments are expected to continue throughout the year, contributing to 50 to 100 basis points of growth in 2017.

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