3M
Q2
| 3M
Q2
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| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) 3M (Minnesota Mining & Mfg.) <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> UNION CITY, Ca., July 29, 1996/FOOLWIRE/ --- 3M reported their Q2 results today. Income totalled $381 million, up 10% from the comparable quarter last year, and was a new 3M record. Earnings for the quarter were $0.91 per share, up $0.09 per share compared to Q2 last year or a gain of 11%, and beat analyst consensus estimates by a penny per share.
Profits were a record for any quarter, despite a significant negative currency hit. Currency effect reduced earnings by about $0.04 per share (5%). So, earnings excluding currency were up approximately 16%.
Earnings benefitted from good unit volume growth, from higher selling prices, and from solid productivity gains -- which, in total, added about $0.12 per share (a 15% improvement).
A lot of very positive change has taken place at 3M in the past year. Following an extensive portfolio review, they determined that it was in the best interest of their shareholders to spin off their data storage and imaging business and to close their audio and video tape business. The spin-off took place very successfully on July 1st. The phase out of their audio tape and professional and consumer video tape business also is proceeding according to plan.
3M consists of two sectors now. Both are leaders in their markets, earn high return on invested capital, and produce solid growth and cash flow.
SALES
Sales increased 3% to $3.5 billion. Their unit sales rose approximately 6% and selling price increased about 1%. A 7% worldwide sales gain in local currency was reduced by the strength in the US dollar, particularly against the Japanese yen. Compared with Q2 last year, the value of the dollar increased about 23% compared to the yen.
In the US, sales totalled nearly $1.7 billion, up about 7% from the same quarter last year and up 5% from Q1 1996. Year-over-year, volume rose about 5% -- outpacing the growth of the market returns. Selling prices in the US were up about 2%, continuing a positive trend. Some of the pricing is a carryover from the price increases that they applied three or four quarters ago when the costs of raw materials went up. So, there is a combination of price as a reaction to raw materials and price due to the business. They may see some fading out in the next few quarters.
In greater detail, the Industrial and Consumer sectors increased about 8.5%. Volume there was up nearly 6% to nearly double the growth of US industrial production on a year-over-year basis. Selling prices added about another 2.5% to the US sales of the I/C sector. The US strength in the Industrial/Consumer sector was broadly based, with gains particularly strong in the automotive, chemical, consumer, and office markets.
In the Life Sciences sector US sales increased about 4.5%, all due to volume. Within Life Sciences, 3M saw solid revenue growth in drug delivery systems, commercial graphics, diaper tapes, dental products, and safety/security systems. Life Sciences overall US growth was held back by softness in 3M's medical products.
Outside the United States, 3M continues to grow faster than the economies they serve. Volume there rose about 7%, while selling prices were up about 1%. Their 2 sectors contribute about equally to this 8% (in local currency) revenue gains. These volume and price increases abroad were offset by substantial strengthening of the US dollar. While the ups and downs of the dollar have pretty much balanced out over the years, currency certainly was burdensome this quarter.
In Japan, 3M's unit sales rose about 11%, continuing a strong performance in that country. Driving these gains were a strong flow of new products tailored for the Japanese market as well as the firmer tone of the economy there. In Asia, outside of Japan, volume was up about 15%. They again posted strong volume gains in many Asian countries. But overall growth there was restrained by the slower pace of growth in the Chinese economic area (Hong Kong, Taiwan, and mainland China).
In Latin America unit sales increased more than 20%. 3M continued to see a good rebound in their business in Mexico as well as strong volume gains in most other Latin American countries.
In Europe, volume increased about 3%. This gain which is similar to what they showed in Q1, was affected by continued sluggishness in the major European economies.
COSTS
Cost of goods sold was 56.3% of sales, down more than 0.5% from Q2 last year and down more than a full point sequentially. They consider this an excellent performance. Cost of goods benefitted from volume, pricing, productivity, and to a lesser extent from raw materials. Raw materials cost, which had a substantial negative effect on gross margins the past several quarters, started to show a more positive effect this quarter and will become more favorable during the next few quarters.
Changes in currency exchange rates reduced gross margins by about 0.3%. This effect relates to the purchases their international companies make from 3M in the US.
SG&A was 25.8% of sales, down 0.2% from the same quarter last year. This rate of SG&A spending was somewhat higher than in the past three quarters. A key factor in this increase was advertising and promotions related to new products.
Operating income was up more than 7% from Q2 last year. In the United States, they leveraged the gain in sales very well. Profit rose 17%. Internationally, profits showed a solid increase in local currencies but were basically flat when reported in dollars. Currency reduced international operating income by about $33 million or nearly 10%.
Looking at margins, operating income was 17.9% of sales, up 0.8% from Q2 last year and up 0.7% from Q1 this year. So, margins were the highest in 5 quarters. In the United States, operating profit was 17.2% of sales, up 1.5% from Q2 last year and up more than 2.5% from Q1 1996. Internationally, operating income was 18.4% of sales, up slightly from the same quarter last year.
3M's two business sectors both contributed to the worldwide increase in profits as well as an improvement in margins. In both sectors, margins were the highestt in 5 quarters. Productivity gains played a significant role in this profit performance. Sales per employee in local currency increased more than 8% from Q2 last year.
Non-operating expenses were almost the same as last year. Interest expenses declined due to several factors including lower interest rates abroad and reduction of debt. Their tax rate was at 36.5% of pre-tax income, same as in Q1.
ITEMS RELATED TO THE RESTRUCTURING
The amount shown in the P&L for discontinued operations for Q2 and first half of the year do not reflect the operating performance of those operations. The amounts shown are due to restructuring charges 3M took in Q4 last year which included an estimate of the operating results of these operations through the date of the spin-off closure. Imation Corporation will be reporting Q2 results on August 2, 1996.
As a result of restructuring, they will be reducing about 1000 positions in continuing 3M operations. At the end of Q2 about 1/2 of those positons have been eliminated. Many of those reductions took place at the end of June when the spin-off company was ready for launch. More than another 500 people in continuing 3M operations have committed to leave toward the end of this year. So, 3M met their target and are achieving this reduction through voluntary separation programs which already have been accrued for.
BALANCE SHEET
Inventory levels remain in very good shape. Their inventory index was unchanged from Q1 and is down about 12% from the peak inventory levels in Q2 last year. Over the past 12 months, 3M has cut inventories by more than $225 million. When adjusted for currency effect, this represents about 13 days of 3M production.
Their accounts receivable also remain under good control. Days Sales Outstanding at 63 days worldwide improved by one day from Q2 last year.
Capital spending totalled $250 million for Q2 and nearly $500 million for the first six months of 1996. For the full year, 3M expects capital spending to total more than $1.1 billion, an increase of about 5% in dollars.
They are investing in growth initiatives including new products that hold the largest sales potential, create a new base of competition, and offer a higher return on capital. These products include a new family of CFC replacement chemicals that offer the best combination of performance, safety, and environmental properties and a new generation of reflective sheetings that greatly improve the visibility of traffic signs.
While they invest to support profitable 3M growth, they also continue to adjust their business portfolio. For example, they are divesting their hearing aid and infusion therapy businesses, two small businesses that do not fit with their strategic plans.
3M recently adopted economic profit as a tool to help build shareholder value. Their return on invested capital for the first half of the year was about 6.5% in excess of their cost of capital, generating economic profit of more than $300 million, continuing a very positive trend. For the full year they expect economic profit of about $600 million, an increase of about 20% from last year. Their net operating cash flow for the first six months totalled more than $600 million.
They have a productivity target of 8% whereby they either achieve increases in sales of 8% with the same number of people or they have to reduce accordingly. Another program involves their supply chain. It reduces the level of inventories by many millions which improves cash flow. A third program involves their procurement process. Just recently they merged their procurement or purchasing department into the finance department and formed a complete procurement process -- receiving, controlling, purchasing, paying -- and they believe that within a couple of years they can cut 50% of their suppliers, control prices better, have better contract power, and probably save many hundreds of millions of dollars.
OUTLOOK FOR THE REST OF 1996
Despite of the likelihood of continued negative currency effect, they remain optimistic for several reasons. They believe they can continue to outpace the growth of the economies they serve. They haven't seen signs of slowing in major world economies versus what they experienced in Q2. They continue to look for solid earnings growth as a whole. Their tax rate may fall to 36.2% or 36.3% for the rest of the year.
They will probably maintain between 1-2% price increases in the Industrial sector in the US and in some selected countries. Life Sciences products will probably be flat in terms of pricing.
They will have a lot of excess cash flow. They just closed the Imation spin-off which had been a question mark in terms of cash utilization. Now they are ready to continue their portfolio analysis, looking outside and inside for appropriate investments and acquisitions. They also have the option to buy back shares of common stock. They are continuing their buy-back program and through last week, year-to-date, have repurchased about 3.2 million shares and are prepared to continue that activity as cash permits. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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The Motley Fool |