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Patrick D. Campbell Senior Vice President and Chief Financial Officer
- 1. Accelerating Growth To
Enhance Shareholder Value
Patrick D. Campbell
Sr. Vice President And
Chief Financial Officer
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- 2. The Principal Questions We Will Answer Today
Can we accelerate growth?
Are our current margins sustainable?
How will our more aggressive growth plans
impact ROIC?
How will we deploy the balance sheet?
Plans to Drive Higher Earnings & P/E
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- 4. Total LC Growth, Organic LC Growth, OI & Margins
$19,000
$20,000
Total LC Growth Organic LC Growth
$18,400
$19,000
%
.8 %
=4 .8
$17,800
=3
R
$18,000
GR
AG $17,200
CA
C
$17,000 $16,600
$16,000
$16,000
2001 2002 2003 2004 2005
2001 2002 2003 2004 2005
$5,000
24%
Operating Income Operating Margin
$4,400
ts
22%
6% p
6.4
=1
$3,800
GR
CA 20%
$3,200
18%
$2,600
16%
$2,000
2001 2002 2003 2004 2005
2001 2002 2003 2004 2005
Leveraging Volume, Productivity, Mix and Fixed Costs to Maximize Profitability
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- 5. EPS, EP, Free Cash Flow & ROIC
$2,000
$4.00
EPS Econ Profit ($MM)
$3.50 %
% 6
8
=2
$1,500
=1
GR
R
$3.00 AG CA
C
$1,000
$2.50
$2.00 $500
2001 2002 2003 2004 2005 2001 2002 2003 2004 2005
25%
$4,000 ROIC %
FCF
pt s
2%
=1 6. 2
$3,000 AG R
C
20%
$2,000
$1,000 15%
2001 2002 2003 2004 2005 2001 2002 2003 2004 2005
Profitability & Asset Efficiency Improving Economic Profit & ROIC
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- 6. Organic LC & EPS Growth
LC & EPS Targets
Organic LC Growth EPS Growth
12% 24%
22%
10% 20%
21% 21%
21%
18%
8%
16%
8.1% 18%
6% 14%
12% 14%
5.5%
4% 10%
4.5%
4.1%
8%
2%
6%
1.2%
0% 4%
2002 2003 2004 2005 Q1 '06 2002 2003 2004 2005 Q1 '06
Consistently Achieving Financial Goals While
Growth Has Been Inconsistent
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- 7. Operating & Incremental Margins
3M Peer Average
Operating Margins Incremental Margins
>100%
25% 80%
70%
20%
60%
50%
15%
40% 44%
43%
10% 37%
30%
29%
20% 25%
5% 21%
16% 15%
10%
5%
0% 0%
2001 2002 2003 2004 2005 2002 2003 2004 2005 '01 - '05 Incr.
Chg.
*Peers include Avery Dennison, Danaher, Dentsply, DuPont, Eaton, Ecolab, Emerson, GE,
Honeywell, ITW, J&J, P&G, SPX, Textron, Tyco, UTX. Source: Factset and Company Filings
What Matters is the Conversion of Volume to Profit
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- 8. How We Achieved These Results
Volume
Mix
Productivity
– Cost out
– Overhead cost management
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- 9. Improving Sales Mix
Margin > Corp. Avg. Margin < Corp. Avg.
2005
2001
70%
38% 30%
$6B Sales $6B Sales
$10B Sales $15B Sales
62%
~11% CAGR
High Margin Sales Growth + Productivity Gains =
Quality Earnings Growth
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- 10. Productivity - Cost Out & Leverage
3M’s Six Sigma Journey
2001 2002 2003 2004 2005
Six Sigma Learn and Accelerate
DMAIC DMAIC in 3 M DNA
Build Critical Impact
Mass
Learn & Build Accelerate Impact
DFSS
Indirect Costs Critical Mass
Sourcing Add Portfolio Management and Lean
eP3
• Globally, >40,000 salaried employees trained globally in the Six Sigma way
of doing business.
GBP
• More than 20,000 proje cts closed
• Over 16,000+ DMAIC projects underway globally
2001 2002 2003 2004 2005
• 480+ customer projects in place globally
$325
$3.0 10.0%
Sales/Employee $311
Overhead Cost Leverage
$2.5 $297
8.0% $300
$2.0
$ Billions
$277
6.0%
$275
$1.5
2.1% of margin $255
4.0%
$250
$1.0
$234
2.0%
$0.5
$225
$0.0 0.0%
2001 2005 $200
Overhead Cost % to Sales 2001 2002 2003 2004 2005
Initiatives Contributed > $400MM Per Year Improvement
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- 11. We have built an enviable competitive and
financial position but…..
We need to accelerate growth!
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- 12. Relative Value Of Growth
For Different Companies
MMM 5.2
GE 11.4
12.0
IBM 3.5
DHR 5.1
PG 7.2
10.0
rowth
XOM 2.1
GM 2.4
Relative Value of G
W MT 1.6
8.0
#REF! #REF!
#REF! #REF!
#REF! #REF!
6.0
4.0
2.0
0.0
MMM GE IBM DHR PG XOM GM WMT
Company Ticker
Growth 5X
1% pt. LT sustainable growth rate = $10B
Margin
1% pt. more sustainable margin = $2B
Gordon Growth Model = FCF/(WACC – Growth)
Expanding Our Long Term Growth Rate
Creates More Value Than Margin Expansion
Source: HBR April 2005
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- 13. Modifying Our Focus – Growth And Productivity
Future
Past
Productivity Growth
Need to accelerate focus on growth and leverage our
investment in productivity tools to maintain momentum
Going Forward Equal Emphasis will be placed on
Achievement of Both Top and Bottom Lines
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- 14. What’s Changed
Change in senior leadership compensation
program
– ’04 - 60% Economic Profit Growth/40% Working Capital
– ’05 - 60% Economic Profit Growth/20% Working
Capital/20% Organic Growth vs. IPI
– ’06 - 60% Economic Profit Growth/40% Organic
Growth vs. IPI
New compensation plans for businesses and sales
organization
Leadership alignment with technical community
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- 15. Summary Target Growth Picture
3% - 5% sales growth in market
adjacencies, acquisitions and
5% - 8% sales growth in
EBOs, 20% incremental margin;
traditional 3M core; 40%
using new or primary brands
incremental leverage;
using primary brands
International expansion
occurs in all three
dimensions.
Traction and momentum
2% - 4% sales growth in will occur at different rates.
subsidiary markets, at
peer margins; using
secondary brands
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- 16. Growing The Traditional Businesses
5% - 8% sales growth in
traditional 3M core; 40%
incremental leverage;
using primary brands International expansion
occurs in all three
dimensions.
Traction and momentum
will occur at different rates.
Leveraging Growth in the Core
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- 17. Growing The Traditional Businesses
5% - 8% sales growth in
traditional 3M core; 40%
incremental leverage;
using primary brands
12%
10% +
10%
8%
5%-8%
LC
6%
Growth
4%
2%
0%
LC Growth OI Growth
Leveraging Existing Asset Base to Drive Operating Income
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- 18. Near-Term Organic Local Currency
Growth Target
Organic
LC* Target Last 4 Qtr. Avg.
5-8% 4.2%
Industrial and Transportation
Business
6-8% 4.0%
Health Care Business (ex. Pharma)
8%+ 6.7%
Display and Graphics
5-8% 5.7%
Consumer and Office
8%+ 10.0%
Safety, Security and Protection
Services
5-8% 7.1%
Electro and Communications
5-8% 5.6%
3M
*Local Currency Sales Growth = Volume + Price
Strong Contributions Across the Portfolio
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- 19. The Opportunity of International Growth
International growth rates 2X – 3X US
61% of 3M sales are outside the
United States today, ≈ 70% in 2011
Focus is on BRICP; double investments there
China growing ≈ 35% CAGR, expecting
circa $1Bn sales in 2006
India growing at 100%+ CAGR
Double digit growth rates in E. Europe and LA
W. Europe grows faster on localization strategies
Acquire local brands and manufacturing as well as
organic expansion
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- 20. Productivity Continues
3M’s Six Sigma Journey
2001 2002 2003 2004 2005 2006
Learn and Accelerate
DMAIC DMAIC in 3 M DNA
Six Sigma + LEAN Build Critical Impact
Mass
Learn & Build
Accelerate Impact
DFSS Critical Mass
Indirect Costs
Lean
Add Portfolio Management and Lean
Sourcing eP3 • Globally, >40,000 salar ied employees tr ained globally in the Six Sigma way
of doing business.
• Mor e than 20,000 pr ojects closed
GBP • Over 16,000+ DMAIC pr ojects under way globally
• 480+ customer pr ojects in place globally
2001 2002 2003 2004 2005 2006 2007 2008
$3.0 10.0%
Overhead Cost Leverage
$2.5 8.0%
1% more margin
$2.0
$ Billions
2.1% margin 6.0%
$1.5
4.0%
$1.0
2.0%
$0.5
$0.0 0.0%
2001 2005 2008
Overhead Cost % to Sales
Productivity Continues Through Cost Out & Leverage
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- 21. Growth And Leverage In Traditional Core
$10.0 28.0%
24.0%
$9.0
20.0%
$8.0
$ Billions
16.0%
Pe nt
rce
$7.0
GR
2% C A 12.0%
10% -1
$6.0
8.0%
$5.0
4.0%
$4.0 0.0%
2006e 2007e 2008e
Op. Inc. Operating Margin ROIC
Assumptions: LC grow th of 6.5%; incremental margin of 40%
Continued Growth and Leverage in the Traditional Businesses
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- 22. Building Scale To Create Additional Value
5% - 8% sales growth in
traditional 3M core; 40%
incremental leverage
using primary brands
International expansion
occurs in all three
dimensions.
2% - 4% sales growth in Traction and momentum
subsidiary markets, at will occur at different rates.
peer margins; using
secondary brands
Building Scale to Become More Important in Our Markets
and More Vital to Our Customers
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- 23. Using Brands/Technology
to Grow Our Market Position
Industrial Consumer
Use principal
brands and
differentiated
technology
or features
Diamond Grade™
Use
Secondary
Brands /
Technologies
High Intensity Grade
Selective private
labeling or
manufacturing JVs to
support partnership
customers
Engineering Grade
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- 24. Future Opportunities to Use Dual Brands/Technology
to Grow Our Market Position
3M ESPE Traffic Safety Systems Commercial Care
Use principal brands and
differentiated technology
or features 3M ScotchBrite™
Stamark™ Purple
Pavement Scouring
Marking
Impregum Pad
Tape
Penta Soft
Use Durable Liquid Niagara™
Secondary Markings
Scouring
Brands / (thermoplastic,
Pad
epoxy)
Technologies
Express
Garant
Selective private
labeling or 3M All Private
Weather Label
manufacturing JVs to Paint
support partnership Scouring
Pads
customers
Palgat Plus
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- 25. Driving Additional Growth At
Peer Margins
$10.0 28%
24%
$9.0
20%
$8.0
illions
16%
Percent
GR
$7.0
3% C A
$B
11% -1 12%
$6.0
8%
$5.0
4%
$4.0 0%
2006e 2007e 2008e
Op. Inc. Traditional Op. Inc. Subsidiary Op. Inc . Margin ROIC
Assumptions: traditional business LC grow th of 6.5%; incremental margin of 40%; additional grow th of 0% ’06; 1.5% ’07; 2.0% ’08 at 15% op. inc.
Additional Growth at Peer Margins = Greater Shareholder Value
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- 26. Capital Expenditures
$1,800
Sub Mkts
$ millions 8%+
$1.7B
5%-8%
$1.5B
$1,500 Traditional
Core
$1,100
$1,200
$938 $943
$900
$677
$600
$300
$0
2003 2004 2005 2006E 2007E 2008E
Capital Expenditures Aimed at Driving Higher Organic Growth
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- 27. 2006 Growth Investments
Dual Brightness Enhancing Films Tegaderm™
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- 29. Supplementing Growth Through Acquisitions
5% - 8% sales growth in 3% - 5% sales growth in market
traditional 3M core; 40% adjacencies, acquisitions and
incremental leverage EBOs, 20% incremental margin;
using primary brands using new or primary brands
International expansion
occurs in all three
dimensions.
2% - 4% sales growth in Traction and momentum will
subsidiary markets, at occur at different rates.
peer margins; using
secondary brands
3M Investor Meeting 2006 © 3M 2006 All Rights Reserved
- 30. Growth Acquisitions - Screening Criteria
High Growth
Market
Screen Operating
Metrics & Fit
Display & Screen
Valuation
Graphics
Inorganic and
Safety & Double digit growth
Size
Growth Protection Potential for margin
Opportunities improvement
Track & Trace
Potential
Select Healthcare Ability to leverage Mostly Mid-size
across current Targets
segments rather than
customers transformational
Consumer
Integration with Early EPS
Energy
current 3M accretion
innovation
processes
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- 31. M&A Strategy
Strategic Intent Economic Needs
Will fit tightly defined strategic needs Margin dilutive acquisitions will
in the core or in near adjacencies always contribute to net positive
shareholder value through higher
Majority will be bolt-on acquisitions
growth
placed in markets we understand
Price will always be a factor
Channels of distribution will be
familiar Tail liabilities will be scrutinized
The acquisition may bring Will be EPS accretive or neutral
technology, market access or scale end of year 1 excluding purchase
accounting
Acquisitions will have an ethical fit
Majority of acquisitions will be
Some acquisitions will be
Economic Profit accretive by the
international, aimed at gaining
end of year 3
market access
While top brands are preferred, some
will be appropriately chosen
secondary brands
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- 32. Acquisition Multiples
12%
Medical
Dental/Orthodontics
10% Consumer CUNO/Filtration
Auto Aftermarket Track and Trace
Safety/Protection
8% Consumer Electronics
Sales Growth
Energy
Adhesives/Tape Security
Infrastructure
Abrasives
6% International
Chemical
Auto OEM
4%
Pre-Revenue
2% Emerging
Tech/Bus.
0%
Multiples
End Market Growth Rates Will Determine Deal Multiples
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- 33. Acquisition Profile
$6.0
$4.0 2.5x
Sales
12x
EBITDA
$2.0
$0.0
'08e Acquired Sales '08e Acquired EBITDA '06e - '08e
Cumulative
Purchase
Price
Assumptions: additional 4% grow th through M&A starting in ’07; year 1 op. inc. 0%; 20% EBITDA thereafter.
Business Model Provides Significant Financial Flexibility
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- 34. Putting It All Together
($ Billions) 2002 2005 2008e
$16.3 $21.2 $25
Traditional Core
--- --- 1
Subsidiary Mkts
--- --- 2
M&A
$16.3 $21.2 $28
Total Revenue
1.7% 5.8% 12%
% Growth
$3.0 $4.9 $6.8
Operating Income
18.7% 22.9% 24%
% to Sales
$2.34 $4.12 $5.85
EPS
17.6% 15.7% 13%
% Increase
18.9% 22.6% 24%
ROIC
Raising the Bar on Growth While Maintaining
Strong Margins and ROIC
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- 35. Capital Allocation Model – ’06-’08
Debt
Cash Flow
+
From Ops Capacity
~$4B to $6B
~$14B to $15B
Available Cash
~$18B to $21B
Cap Ex Retirement Net Share Repurchase Dividends
M&A
~$4.0B to Benefits ~$1.5B to $2.0B ~$4.5
~$4.0B to $5.0B
$4.5B ~$0.5B to $1.0B (avoid dilution) Continue
Aligned with
Aligned to Fully Opportunistically pursue historical track
strategic intent
higher growth funded status additional shares record
Maintaining Flexibility for Growth
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- 36. Balanced Model Approach To Increase
Shareholder Value
Investing in traditional markets
– Local-currency growth of 5% to 8%
– Operating income growth 10%+
Aggressively pursuing additional growth elsewhere
in the pyramid
– Additional local-currency growth of 2% to 4%
– At peer margins – minimum
M&A strategy to improve core growth and fill gaps
– Aligned with strategic intent
Higher Growth - Higher Earnings - Higher P/E
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