pmorgan basics & industrials conference
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Innovation and Growth at 3M
George W. BuckleyChairman, President and Chief Executive Officer2007 JPMorgan Basics and Industrials ConferenceJune 12, 2007
(#)Innovation
Forward-Looking StatementsThis presentation contains forward-looking information (within the meaning of the Private Securities
Litigation Reform Act of 1995) about the company’s financial results and estimates, business prospects, and products under development that involve substantial risks and uncertainties. You can identify these
statements by the use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”“believe,” “will,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Among the factors that could cause actual results to differ materially
are the following: (1) worldwide economic conditions; (2) competitive conditions and customer preferences; (3) foreign currency exchange rates and fluctuations in those rates; (4) the timing and acceptance of new product offerings; (5) the availability and cost of purchased components, compounds, raw materials and
energy (including oil and natural gas and their derivatives) due to shortages, increased demand or supply interruptions (including those caused by natural and other disasters and other events); (6) the impact of
acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring; (7) generating less productivity improvements than estimated; and (8) legal proceedings, including significant developments that could occur in the legal and regulatory proceedings described in the company’s Annual Report on Form 10-K for the year ended Dec. 31, 2006 and its subsequent Quarterly Reports on Form 10Q
(the “Reports”). Changes in such assumptions or factors could produce significantly different results. A further description of these factors is located in the Report under Part I, Item 1A (Annual Report) and Part II, Item 1A (Quarterly Report), “Risk Factors.” The information contained in this presentation is as of the
date indicated. The company assumes no obligation to update any forward-looking statements contained in this presentation as a result of new information or future events or developments.
(#)Innovation
Q1 2007 Highlights Excluding Pharmaceuticals & Special Items
● Sales of $5.9 billion, up nearly 10 percentAll businesses posted positive sales growth Local-currency sales, up 7.4 % from 2006, including 2.6 % from acquisitionsForeign exchange impacts added 2.5 percent
● Operating income of $1.4 billion, up 10.6 percentOperating income margin of 24.4 vs. 24.2% Q1 2006All businesses delivered year-on-year operating income growth Net income of $946 million, up 10.1 percent
● Reported EPS of $1.28, up 14.3 percentExcludes a $0.57 per share benefit from Pharma divestiture and other special items
● Free Cash Flow of $670 million● Announced 49th dividend increase and 2-year, $7 billion share repurchase
Returned $1.5 billion to shareholders through cash dividend and repurchase of shares
*Excludes divestiture of pharmaceuticals and other special items.
(#)Innovation
Sales Recap; Q1 2007 vs. Q1 2006
*Total Local Currency = Volume + Price + Acquisitions
(1.8%)0.8%(0.8%)Price
2.4%3.1%2.6%Volume - acquired
7.6%2.3%5.6%Volume - organic
(3.5%)(4.2%)(3.8%)Divestiture
4.0%--2.5%Translation
8.7%2.0%6.1%Total Sales Growth
8.2%6.2%7.4%Total Local Currency*
U.S.WW Int’l
(#)Innovation
Balance Sheet & Cash Flow
$251
$347
$428
$190
$3,105
$2,379
5.4
Q1 2006
$330
$339
$1,012(a)
$405
$3,102
$2,601
5.4
Q4 2006
$350Dividends Paid
5.0Net W/C Turns
$3,444Receivables-Net
$1,164Share Repurchases
$670(a)Free Cash Flow
$304Cap-ex
$2,714Inventories
Q1 2007($ in Millions)
(a) Excludes certain special items that impacted cash flow. Refer to 3M's April 26, 2007 press release for an explanation of these items.Note: Refer to 3M’s April 26, 2007 press release for a complete discussion of net working capital turns and free cash flow
(non-GAAP measures).
Great Opportunities Remain For 3M
► Built firm Six Sigma and Lean Processes in manufacturing
► Fundamental principles remain● Protect our premium margins● Defend our premium ROIC● Reemphasize innovation● Leverage central overhead● Adding growth, taxes and supply
chain as new value creators
► Build on 3M’s enduring franchises● Building value and margin for our
customers
(#)Innovation
Comparative Tax Rate (3M at 34% in 2007)
Ingersoll Rand 16% 2150 bpsTyco 21% 1450 bpsITW 31.5% 150 bpsDanaher 27.3% 920 bpsUTX 26.8% 994 bpsJ&J 23.8% 1449 bpsAvery 20.4% 1943 bps3M 34% 0 bps
Tax Rate Margin Advantage
Conclusion; We fight to maintain high margins, and we reduce our competitiveness and growth rates, but waste it all in paying higher taxes
© 3M 2006 All Rights Reserved
Relative Value Of Growth
MMM 5.2GE 11.4
IBM 3.5DHR 5.1
PG 7.2XOM 2.1GM 2.4
WMT 1.6#REF! #REF!#REF! #REF!#REF! #REF!
0.0
2.0
4.0
6.0
8.0
10.0
12.0
MMM GE IBM DHR PG XOM GM WMT
Company Ticker
Rel
ativ
e Va
lue
of G
rowth
► Ratio of value creation from 100 bps of growth to 100 bps of margin► Acquisitions add value by blending the value lost from margin dilution
and the value added from incremental growth and mass
Value Of Growth Vastly Exceeds Value Of Margin Expansion For 3M
Source:HBR April 2005
(#)Innovation
● Build where we’re strong● Get scale & relative share● Fill in the “white spaces”● Define markets broadly● Become important to
customers● Dual branding● Local acquisitions● Private labeling
Start By Growing The Current Core
● Imagine, dream and invent● Beat competitors to the
future● Plan for cannibalization● Licensing as a route● Avoid NIH syndrome
Invent a New Future
Build Broad LongTerm Competencies
● Develop broad based long-term capabilities● Acquire supporting core technology ● Build volume and scale
● Constant reinvention● Localization and
differentiation● Key customer partnerships
Grow the Current Core
Extend The Core
(#)Innovation
● Go “local” in brands and manufacturing
● BRICP emphasis● Gulf and LA● Eastern Europe● Growth everywhere
● Follow Mega Trends ● Seeded by small M&A● Targeted areas
● RFID/Wireless/GPS● Minerals extraction● Oil & Gas● Food safety
● Follows core strategy● Supports adjacencies● Mostly tuck-ins● Technology, capacity,
distribution and local brands
● Defend and extend the core
● Build scale and relative share
● Localization● Disruptive technologies● Build long term
competencies
And Then Extend It With Simple Concepts
Grow the Current Core
Grow the Current Core
Build New Business via EBOs
Build New Business via EBOs
MarketExpansion
Complementary Acquisitions
Complementary Acquisitions
International Growth
International Growth
Customer Focus Critical on All Four FrontsCustomer Focus Critical on All Four Fronts
(#)Innovation
First You Must Create the Environment for Growth
Operational Excellence
Product Innovation
● Lean Methods● Six Sigma● Systemic Supply
Chain Improvements
● IT Systems● Better S&OP
Process
● Stimulating a creative environment
● Foster Imagination● Increased R&D spend
in the core● Technology Focus● See it through the
customers’ eyes● Mix in a little magic
● Market Expansion● White space fill in● Geographic expansion● Adjacencies and EBOs
Products Efficiency
Customers
Profitable Growth
(#)Innovation
Our Foundational Beliefs on Competitiveness
It’s not just about efficiency or just about invention
● We compete on six platforms● Low cost is the ultimate competitive
deadly weapon● Scale and relative share are vital for
efficiency and competitiveness ● Follow the customer value chain● Pristine service and brands can
overcome price in some markets
People
Cost
Marketing & Brands
Service
Technology
Distribution
6σ & LeanGlobal sourcingLow Factory costsTaxes
Secure the bestSecure the broadest
Build on a firm foundationDifferentiation
OTIF fill ratesQualitySpeed to market
Inspire and guideDevelop leadershipContinuing education
Build on our enduring franchisesSecondary for local
(#)Innovation
3M’s Convoluted Supply Chain
Plant A
Six OwnersPlant B
Four Owners
Plant C
Eight Owners
Plant D
Four Owners
• Any plant may have up to eight “owners” in 40 combinations
• Lead owner varies plant to plant
• Under absorbed costs in one business impacts another
Raw Material In
Distribution Center
(#)Innovation
And Here’s What We Are Beginning To Do
Plant A
Six OwnersPlant B
Four Owners
Plant C
Eight Owners
Plant D
Four Owners
Distribution Center
(#)Innovation
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Sustain Strategic Growth Optical
Historical Capital Spending
Since 2000, Optical spending equaled all other growth capital combined
Growth Capital increase almost all Optical Films53% Decline in
Capital Spending
(#)Innovation
Supply Chain – Focused Factories
Plant ASix Product Lines
Plant CEight Product Lines
Plant BFour Product Lines
RawMaterial In
DistributionCenter
Plant DFour Product Lines
(#)Innovation
Supply Chain – Focused Factories
Plant ASix Product Lines Plant C
Eight Product Lines
Plant BFour Product Lines
RawMaterial In
DistributionCenterFocused Factory
Plant DFour Product Lines
(#)Innovation
Stretched Supply Chains Drive Working Capital Use
United States65% Product Source35% Consumption
International35% Product Source65% Consumption
(#)Innovation
Reducing To Its Simplest Form, What Must We Do?
● Growth is a pipeline; repair the inputs and outputs and clear the pipe of pluggage ● At the “sending end” of the pipe: Invent more things
Prioritize R&D spending, focus and inspire our peopleGet scientists and engineers back in the business of inventing new products
● At the “receiving end” of the pipe; Sell and market betterPut more feet of the street, and more advertising and merchandisingBring increased competency and professionalism to marketingStop unnecessary complexity in SKUs and specificationsAcquire local brands to penetrate distribution faster
● The pipe itselfProvide a large enough diameter pipe: CapacityKeep the pipe as short and simple as possible
● Stop the pipe leakingPrice giveawaysMarket share loss
(#)Innovation
CANADA
Capacity And Supply Chain Improvements In Progress
USA
MEXICO
Filtrete Mfg.
CHIM TapeMedical: M6 Solvent
Coater-Brookings, SD
Automotive Acrylic Tape-Aberdeen, SD
CHIM: LFBMF Lines, Aberdeen, SD
Northridge DDSD Packaging Line
PolyesterGreenville, NC
D11 MOF LineDecatur, AL
(#)Innovation
RUSSIA
Tapes
Optical
POLANDManufacturing
KOREAINDIA
CHINA
Industrial Tapes
OHES
Suzhou LCD II
CHJ III Mfg
Medical Mfg. GuangZhou
Capacity And Supply Chain Improvements In Progress
(#)Innovation
3M Market Dynamics and Defense
The objective is to bulwark and defend the markets that we created, not just to grow
Shouldn’t we exit the Scotch Tape
market? It’s commoditized! Push into upper
middle level market
Competitors push into the lower market … we refuse to defend
(#)Innovation
Differentiated Brands & Technology to Grow Category
Selective privatelabeling or
manufacturing JVs to support partnership
customers
Principal brands and differentiated
features
Secondary Brands &
Technologies
Industrial Consumer
Diamond Grade™
High Intensity Grade
Engineering Grade
(#)Innovation
● Go “local” in brands and manufacturing
● BRICP emphasis● Gulf and LA● Eastern Europe● Growth everywhere
● Follow Mega Trends ● Seeded by small M&A● Targeted areas
● RFID/Wireless/GPS● Minerals extraction● Oil & Gas● Food safety
● Follows core strategy● Supports adjacencies● Mostly tuck-ins● Technology, capacity,
distribution and local brands
● Defend and extend the core
● Build scale and relative share
● Localization● Disruptive technologies● Build long term
competencies
And Then Extend It With Simple Concepts
Grow the Current Core
Grow the Current Core
Build New Business via EBOs
Build New Business via EBOs
MarketExpansion
Complementary Acquisitions
Complementary Acquisitions
International Growth
International Growth
Customer Focus Critical on All Four FrontsCustomer Focus Critical on All Four Fronts
(#)Innovation
Acquisitions
Higher organic growth results from more frequent acquisitions
Base
Growth
Acquisitions
Acquisitions are not only about bulk, but can be helpful in:
1. Strengthening the base by filling in white spaces
2. May facilitate growth through entry into a new market
3. May provide a key new technology or brand
4. Fast capacity acquisition
(#)Innovation
High Jump
HornellCUNO
Gen'l Ind'l Diamond
Omni
Mercury
Info-XSiemen's
Interconnect Interchemall Dom
0%
5%
10%
15%
20%
2004 2005 2006
Targ
et G
row
th R
ate
%Thoughtful Acquisitions Help Drive Core Growth
3M Historical Growth ~4%
Less than $100MM Greater than $100MM
(#)Innovation
Brontes Technologies
(#)Innovation
● Go “local” in brands and manufacturing
● BRICP emphasis● Gulf and LA● Eastern Europe● Growth everywhere
● Follow Mega Trends ● Seeded by small M&A● Targeted areas
● RFID/Wireless/GPS● Minerals extraction● Oil & Gas● Food safety
● Follows core strategy● Supports adjacencies● Mostly tuck-ins● Technology, capacity,
distribution and local brands
● Defend and extend the core
● Build scale and relative share
● Localization● Disruptive technologies● Build long term
competencies
And Then Extend It With Simple Concepts
Grow the Current Core
Grow the Current Core
Build New Business via EBOs
Build New Business via EBOs
MarketExpansion
Complementary Acquisitions
Complementary Acquisitions
International Growth
International Growth
Customer Focus Critical on All Four FrontsCustomer Focus Critical on All Four Fronts
(#)Innovation
Track & Trace Has Broad-Based Opportunities
Existing and Potential 3M Solution Spaces
How Am I?
Where Am I? Sensor Networks SensorsTempVibrationHumidityLightContaminants
Who Am I?RFIDBarCodeDatabase
Tracking Software RFID NetworkWireless LocationRTLSGPS Road Tolling
Improve and Advantage Me!Location-Based ServicesSupply Chain OptimizationCompetitive “Superiority”in Order Fulfillment
Supply ChainDistribution
(#)Innovation
Electrical Power Transmission
(#)Innovation
New Consumer Products
(#)Innovation
● Go “local” in brands and manufacturing
● BRICP emphasis● Gulf and LA● Eastern Europe● Growth everywhere
● Follow Mega Trends ● Seeded by small M&A● Targeted areas
● RFID/Wireless/GPS● Minerals extraction● Oil & Gas● Food safety
● Follows core strategy● Supports adjacencies● Mostly tuck-ins● Technology, capacity,
distribution and local brands
● Defend and extend the core
● Build scale and relative share
● Localization● Disruptive technologies● Build long term
competencies
And Then Extend It With Simple Concepts
Grow the Current Core
Grow the Current Core
Build New Business via EBOs
Build New Business via EBOs
MarketExpansion
Complementary Acquisitions
Complementary Acquisitions
International Growth
International Growth
Customer Focus Critical on All Four FrontsCustomer Focus Critical on All Four Fronts
(#)Innovation
3M’s Subsidiary Network: A Platform For Growth
KeySales & MarketingManufacturing/ConvertingTechnical Capabilities
Canada
Puerto Rico
Trinidad& Tobago
Brazil
Uruguay Argentina
Venezuela
Chile
Peru
Colombia
Ecuador
Panama
Jamaica
Costa RicaEl Salvador
Guatemala
Dominican Republic
Mexico
UAE
Switzerland
Austria
Greece
Italy
Pakistan
SaudiArabia
Lebanon
Kuwait
Egypt
KenyaSouth Africa
Morocco
Tunisia
China
Korea
Japan
Taiwan
Hong Kong
Vietnam
Philippines
Thailand
India
Malaysia
Indonesia
New ZealandAustralia
Singapore
Sri Lanka
France
Germany
United Kingdom
Ireland
Belgium
Netherlands
Denmark
Norway
Sweden Finland
Spain
Portugal
Poland
CzechRepublic
Hungary
Russia
Turkey
Romania
UkraineEast
Israel
(#)Innovation
International Sales Growth(Billions)
$7.8$8.2
$8.9$8.5
$8.9
$10.7
$12.1$12.9
$14.1
5.0
7.0
9.0
11.0
13.0
1998 1999 2000 2001 2002 2003 2004 2005 2006
$15.0
Summary- Bringing it all Together
(#)Innovation
3M’s Strategy Reduces to Five Principal Elements
● Get our labs back in the business of developing and releasing new products faster
Better prioritization of what we do, and don’t do, and where we do it● Go local (or regional) in brands and sales coverage to drive growth● Get all elements of the supply chain closer to customers to facilitate
growth and reduce costs and W/C demands● Accelerate technological capability, distribution penetration,
customer satisfaction and manufacturing capacity through acquisitions
Becoming more important to customers● Leverage the growth
Stop price leakage and share lossesTrim non-essential corporate services
(#)Innovation
Coordinated Value Creation StrategyStrategy ► Review business units by key
metrics including growth and capital efficiency
► Work in high growth spaces with reasonable EPS targets. Value creation orientation. Less margin obsessive
Strategy ► Increase leverage on the balance sheet. Be willing, if necessary, to dip below AA rating to A
Near TermTactics
► Put ongoing review metrics in place► Divestiture of Pharmaceuticals► Examine others for divestiture
► Use cash flow for investment, acquisitions and increased share buybacks
Near TermTactics
Near TermTactics
► Safety & Protection► Display & Graphics (Optics & Films)► Track & Trace (RFID/Wireless/GPS)► Wider Consumer Offerings► Medical, Dental & Orthodontics
Near TermTactics
► Focus on adjacent segments with higher growth, cost and revenue synergies
Strategy ► Focus on mega trends, scale and relative share in core business
Strategy
Selected Divestitures
Organic Growth
Capital StrategyAcquisitions
(#)Innovation
Cash Back to Shareholders
For The Period 2001-06:
● $8.9 billion in share repurchases
● $6.7 billion in dividends paid
● Dividend CAGR of 9%
● No equity dilution policy
● Returned ~103% of reported net income via dividends and share repurchases
0
500
1000
1500
2000
2500
2001 2002 2003 2004 2005 2006
Stock Repurchases $'000s
600
800
1000
1200
1400
2001 2002 2003 2004 2005 2006
Dividends $'000s
(#)Innovation
3M’s Summary Longer Term Strategy
● Technology lattice protects the downsides and ensures upsides
● Investment through the economic cycles● Driving growth as a way of doing business
Organic Sales Growth
EPS Growth
Investment Returns
2X IPI ≈ 8% and up
12 -15%
20%+►Drill into the core. Move towards
scale where markets are large
► Innovation remains vital
►Move towards higher relative share in smaller markets
►Heavy up on globalization
►Accelerated M&A to improve core growth and fill gaps
►Careful tradeoffs of share and growth
►Building brands and technology
© 3M 2007. All Rights Reserved.
Revenue ($ in millions)
$814
$741
$650
$750
$850
Q1 '06 Q1 '07
Operating Income ($ in millions)
$177
$150
$100
$150
$200
Q1 '06 Q1 '07
+9.9%
+18.1%
Q107 Highlights – Consumer & OfficeQ1 Highlights● Local currency growth of 8.2% including 1.2%
from Nylonge acquisition● DIY retail channel rebounds from Q4 with
double digit sales and profit increase● Solid growth in consumer mass retail● Broad-based geographic performance led by
US and Europe● Outstanding leverage, profits up 18.1%
Drivers● Invigorating existing categories with higher-
value innovative products● Introducing products that change consumer
behavior and solve everyday problems● International penetration● Slow U.S. residential housing construction
persistsMargin 20.2% 21.7%
Revenue ($ in millions)
$758
$639
$500
$650
$800
Q1 '06 Q1 '07
Operating Income ($ in millions)
$181
$158
$100
$150
$200
Q1 '06 Q1 '07
+18.7%
+14.9%
Q107 Highlights – Safety, Security & ProtectionQ1 Highlights● Local currency growth of 15%● Acquisitions added 10%, primarily Security
Printing Systems Limited● Broad-based organic growth led by respiratory
protection, cleaning and window film solutions for commercial buildings and corrosion protection
● Sequential rebound in roofing granules but sales still down year-on-year
● Good operational performance drove 14.9% increase in profits
Drivers● Korea respiratory facility starts-up in Q2● Continued global demand for personal protective
equipment● Driving growth in passports, document readers
and access control in security market● Sequential improvement in roofing granules
Margin 24.7% 23.9%
Revenue ($ in millions)
$1,672
$1,785
$1,400
$1,600
$1,800
Q1 '06 Q1 '07
Operating Income ($ in millions)
$411
$380
$300
$360
$420
Q1 '06 Q1 '07
+6.7%
+8.2%
Q107 Highlights – Industrial & TransportationQ1 Highlights● Local currency growth of 4.0% including 0.9%
from acquisitions● Strength in industrial adhesives and tapes,
automotive repair shops and abrasives ● Solid international performance with growth
led by Europe and Asia Pacific ● Complimentary product gap fill acquisitions● Record profit margin of 23.0%
Drivers● Organic new products and complimentary gap
fill acquisitions● Continued emerging market penetration,
particularly BRICP countries● Driving 3M technologies into oil and gas
market to meet needs of energy customers ● Weak US auto OEM & residential housing
Margin 22.7% 23.0%
Revenue ($ in millions)
$668
$645
$575
$625
$675
Q1 '06 Q1 '07
Operating Income ($ in millions)
$130
$120
$100
$120
$140
Q1 '06 Q1 '07
+3.6%
+8.4%
Q107 Highlights – Electro & CommunicationsQ1 Highlights● Local currency growth of 1.2% primarily from
acquisitions● Outstanding sales and profit growth in electrical
markets● Double-digit growth in communications markets● Sales declined in electronic solutions● Relentless focus on productivity drove profits up
8.4% to a record $130 million● Record profit margin of 19.5%
Drivers● Strong bench-to-bench relationships with big
global customers ● Strong flow of new products into adjacent
markets● Continued penetration in consumer electronics
and other electronic devices
Note: Excludes special items in Q1 2007. Refer to 3M’s April 26, 2007 press release for a complete list and explanation of these items.
Margin 18.6% 19.5%
Revenue ($ in millions)
$919 $921
$750
$850
$950
Q1 '06 Q1 '07
Operating Income ($ in millions)
$295$292
$200
$250
$300
Q1 '06 Q1 '07
+0.3%
+0.9%
Q107 Highlights – Display & GraphicsQ1 Highlights● Solid performance from commercial graphics &
traffic safety systems● Optical film business down year-on-year due to
more rational supply chain and tough year-on-year comparison
● LCD industry reduced supply to match seasonal demand
● Strong operational discipline drove 32% margin
Drivers● New products, markets and digital signage drive
growth in commercial graphics● New service business for vehicle registration &
road maintenance● LCD Poland facility starts up in Q2 ● DBEF manufacturing capacity additions for LCD
TV industry on track● LCD industry accelerates back half of year as TV
becomes bigger piece of mixMargin 31.8% 32.0%
Revenue ($ in millions)
$773
$962$193
$300
$600
$900
Q1 '06 Q1 '07
Pharma
Operating Income ($ in millions)
$238$269
$60
$0
$150
$300
Q1 '06 Q1 '07
(0.5%)
(9.7%)
Q107 Highlights – Health CareQ1 Highlights● Local currency growth of 20.4% including 5.6%
from acquisitions● Sales growth was broad-based across Drug
Delivery, Dental, Medical and Health Info Systems
● Geographic growth led by US and Europe ● Operating income increased 12.7%, ex. pharma● 3M ESPE “Most Innovative Company” in dental
industry for second consecutive year ● Pharma divestiture reduced sales by 24.9%
Drivers● Demographics/aging population● Continued technology leadership in medical,
dental, and drug delivery industries● Emerging market penetration
Note: Excludes special items in Q1 2007. Refer to 3M’s April 26, 2007 press release for a complete list and explanation of these items.
24.4%ex. pharma
12.7%ex. pharma
Margin 30.8% 27.9%(ex. pharma)