3M Company (NYSE:MMM) Credit Suisse 6th Annual Industrials Conference November 28, 2018 9:30 AM ET
Michael Roman - CEO
John Walsh - Credit Suisse
All right. Well, good morning, everybody. My name is John Walsh. I am with Credit Suisse. And I'm the Electrical Equipment and Multi-Industry analyst here. We are very excited to have on the stage with me, 3M's CEO, Mike Roman, and Bruce Jermeland, Head of Investor Relations.
3M's just coming off of their big Analyst Day where Mike had laid out his five year vision for the company. And maybe before we go into Q&A, I don't know if there's any other finer points you'd like to put on that or maybe just re-familiarize everybody with what you said.
Yes, just, at a high level, we really talked about three things in our Investor Day. And we highlighted examples across our businesses, but it was really talking about the 3M value model. What it is that we do that it makes us unique among companies and our marketplace that really differentiates our performance.
And it's really important that we build an understanding of what it is that creates an enterprise that's greater than the sum of the parts. What is that, the synergies that we leverage across the enterprise, and we talked about the key components of the strength behind that, our technology and how we apply technology and innovation, our manufacturing intellectual property and capabilities, our global ability to stand up multiple business models and our brand, and our brand plays.
And then we spent time on the four priorities, four strategic priorities that are going to be the value creators for us as we move ahead. And not huge surprises in this space, its portfolio and what we do in portfolio. We got more to do. We've been creating value in portfolio. You've seen it through some of our businesses, our Safety and Graphics business performance, our Electronics and Energy business performance, portfolio really playing a big role and we can do more. And there's much more to do there.
What we can do with our transformation efforts broadly and where we are in that journey. I spent some time talking about what we're doing to take advantage of what we've deployed globally and the value we can create there, talked about where we go with innovation. And we spent, as you would expect from 3M, we spent time talking about where our priority growth platforms are and we highlighted a lot of that with the folks that attended.
And then, the fourth priority I spent some time on too, which is people and culture. In this age and companies, nothing in 3M's model, our value model moves ahead without people. It's science applied to life, it's technology, it's innovation, that's all people based. And so thinking about how do we focus on helping our people be the best that they can be? And how do we put together an enterprise and continue to advance a culture that attracts people to it, makes 3M in the future, the place it is to be today.
And we've always done a lot in advancing a culture, everything from how we think about innovation, what we came out with this, a long time ago, 15% [ph] time, but more that you need to do. And so that's a very important priority for me as CEO coming into that focus there.
And then we laid out our objectives, ou financial objectives for the next five years. We talked about our outlook for 2019 and we spent some time on what I would characterize as a balanced and disciplined approach to our capital allocation. And really how I think about is where we prioritize and how we how we plan to deploy it and all that.
Q - John Walsh
Great. You can't have a discussion about 3M about without talking about organic growth and innovation. So not to be too rear view mirror looking here, but as we think about how the fourth quarter is playing out, the expectations you've set for 2019 with the 2% to 4% organic growth rate, I can't help, when I kind of just look at your benchmark of global IP, not seeing that kind of normal multiplier, right, that we would think is attributable to 3M, your kind of 1.5 times entitlement. I think if you look at the two year stack for the midpoint of your guidance this year in '19, we're kind of looking in line with that global IP number.
Is this related to kind of where we are in the cycle? Do you think it ticks back-up as some of those growth platforms you talked about start to accelerate or is this just wanting to set a very achievable bar that you know, you can deliver on, how should we think about that?
Well, I'd start with our five year outlook, I think that reflects really where we are in that whole model that we have, where we are in our portfolio, how we look at the macro. Against the macro over the next five years, we expect on average to outgrow the industrial production GDP, and that's historically what we've demonstrated that we do.
I would say we've got a more cautious outlook in 2019, and so we are 3% to 5% organic [local currency] [ph] growth for the 5-year plan, 2% to 4% in 2019. It's really a cautious outlook on some of the markets that the market dynamics that we've seen coming through the second half of ‘18, what we see in those markets as we move ahead. And I would say just some caution around the economic backdrop. You know that three to five is really on average what we do over five years over a cycle of business, is it because of where we are in a cycle of overall business. I'm not sure everything's synced up the same way it was in 2009.
I think you see some markets performing very well and we have very good performance in parts of our portfolio. We have other parts we're a little more cautious about. So I think that caution played into 2019.
Got you, and then maybe thinking about two end markets in particular, automotive right and electronics. And in terms of automotive right, I think sometimes we forget there's really two businesses there. There's your OE business and your aftermarket business and you demonstrated an ability to outgrow OE production. One, I guess what's your confidence that, that continues to sustain. And then can you just remind us really the breadth and depth of the portfolio and really not being tied to any one OE and how we think about that?
Yeah. You kind of broke it down well. We have the larger of the two automotive businesses in name is our OEM business. And we provide solutions and specify innovation into the bill of materials typically in automotive OEMs and we've demonstrated an ability to outgrow the build rate, 300 to 500 basis points, 400 basis points year-to-date. That's really a reflection of the opportunity for innovation in that space, continues to be a pretty big opportunity.
And if you look at it we're in a $15 to $20 range per car in the bill of materials. We don't have a huge footprint but we have a big opportunity in innovation and that's only getting more I think a more disruptive innovation coming in.
You're seeing automotive electrification gets a lot of focus but it's -- there's a lot of dynamics and innovation in automotive that's going to continue to create opportunities for us. So yes, I expect we can continue to outgrow build rates, because there is a big opportunity for innovation.
The other aspect of that is the build rate itself. And we've certainly seen some -- in third quarter we saw actually negative build rates globally. It was always going to be, I think a very moderate growth for the year at a little less than 2%. Now it's more closer to 1%, as we update the view of the production build rate for the world. But we're still outgrowing it. So we still see that opportunity in that. We see that in our specifications, our design and future models and so on.
The other part of the automotive business for us is our automotive aftermarket business that we call it. It's got two pieces, one is collision repair, which has been the business where we've seen some up and downs through the quarters that we expect that to be about flat for the year and that's a reflection on collision repair marketplace today, primarily in developed economies. You see a little different dynamic in developing economies but a smaller market opportunity.
We also have an auto care business piece there and that's performing quite well. So it's a little bit of a couple of different portfolios that we bring into that, that automotive aftermarket space.
I guess at the Analyst Day you had two displays, your kind of 3M Trade show around automotive, one kind of a heads up display what you're doing with your optical films in the windshield and then the other one around electric vehicles and protecting the batteries and vibration.
One of the things I found very interesting was around the EV portion of the portfolio and the opportunity there, you're actually taking several different -- trying to think the correct word is sub businesses almost product categories throughout different parts of 3M. But you're getting them to talk to the customer all as a one organization. When you do that you have to kind of get everyone to buy into that, all those different stakeholders. Can you kind of talk about you know the genesis of that and if there's other opportunities to do that across the portfolio.
Yes. I guess what you describe is a reflection of the way we create businesses, the way we create innovation that turns into priority growth platforms as we call them, areas where we can really grow from. Automotive electrification has been very visible. We've made it visible. It's one of our priority areas and we put it up there. We have a number of other spaces like that across the enterprise, some that cut across multiple portfolios where we have an opportunity. But it gets back to that value model. Maybe that's the place to start.
The value model is about engaging with customers, helping them to solve their problems and helping them to understand the solutions available that we can bring in our technology combining multiple technologies and those technologies are not owned by businesses or portfolio. They are owned by the enterprise and so everybody is free to bring that together. Often that takes multiple areas of domain expertise, electronics and automotive OEM in this case and they come together.
We do that with one point of contact with the customer and you saw a little bit of that in our discussions with the people that we had our business people and our technical people at those trade booths talking about how they do that. It’s one face to the OEMs and they are doing whether they’re a large established OEM globally or they’re a new electric vehicle OEM. We are one face to them, point of contact bring multiple technologies and we’re doing that in automotive today. We’ve done that in electronics in the past. We’ve done that in general industrial where we bring to [together] [ph] safety products and tapes and adhesives and bracelets and solve peoples challenges.
So it is the way we build businesses. That’s why we end up in multiple markets as we go where we can create differentiated value through that value model. Automotive electrification is pretty obvious place. There’s a lot of innovation opportunity for us to combine what we know about in electronics and how to do that in consumer electronics. The displays you talked about, one of the dynamics whether it’s electric vehicles or internal combustion engine vehicles, all of them are adding a great, a big portion of their value is in electronics as we move ahead.
Greater and greater penetration of electronics into the cockpit of the vehicle, into the sensors in the vehicle, into the overall platform. That’s a place for us to bring our electronics solution capabilities, combine it with what we know about being successful in automotive OEM world. It is a pretty normal way for us to build business and that often turns into a new business model that we will then build out in order to scale as the market or the industry evolves.
And maybe that’s a good segue into thinking about the electronics business, right, obviously a lot of investor focus, particularly around what we’re hearing with smartphones and handset demand, how do you think about the demand near term versus longer term in that business and what are some of the things that you’re doing, 3M specific to attack that market. I mean a while ago or a couple of years ago it was easy to kind of reengineer the specification engine to get on the platforms and how do we think about it today?
Yes, it’s a good place to start. Over the last several years we’ve done a lot of work in portfolio, really prioritizing where we bring the greatest value and where the industry is going. And so we have a large a part of our electronics businesses in consumer electronics. So a big portion of that comes through in mobile devices. And so that the device build rates and mobile devices isn’t growing at kind of exceeding ITI growth I mean it’s a more moderate growth rate. And so you look at that and say okay, what do we do?
Well we still bring innovation to that, and it’s still a place for us to innovate, drive penetration. It’s not to the same scale of the automotive bill of materials but there’s opportunities for us to continue to add innovation and that space is at the forefront of the innovation. That really demands leading edge innovation. So it’s a great place for us to bring value. So we continue to -- I think the portfolio we align ourselves better to where that market place is going.
At the same time we recognize electronics growth rates, there’s a lot of high growth segments in electronics that we had even larger opportunities to drive penetrations. So automotive electrification's one of those areas. Another area for us is in data centers. The growth in data centers and the demand for innovation that they have has led to significant opportunities for us. There’s places in energy that have more electronics coming into.
So there’s other high growth segments in electronics that -- so when we look at that overall business and the reason we believe we can continue to outgrow the overall opportunity, our market place that we play into, those high growth segment add significant accelerators to that innovation that we can continue to bring to consumer electronics.
Got you and then maybe switching topics a little bit here so thinking about 3M and their business you have multiple channels to market right and so one of the questions we often get a lot is e-commerce. The opportunity but then also whether or not it’s a risk on the consumer side. How do you think about e-commerce in the impact and obviously there’s different dynamics and maybe about some of the margin opportunity as you put more through that channel?
So back to the engagement of the customers, it starts on the innovation and we leverage the things that differentiate us in the marketplace. But it's important for us that the commerce end of that model is vital. We've got to stay focused on the end users. A majority of our sales, when you look at our total revenue, majority of our sales is specified or designed in, often by us in a bill of materials but often by our end use customers and what they're doing with it.
That plays out more in the B2B space, I would say than B2C. But the brand is important part of that. People specify 3M brand. So if we stay focused on the end user, we create demand for whatever commerce channel they use. And that has been changing for decades.
Bricks and mortar and changes in B2C and B2B and now e-commerce is the big disruptor. And I would say you know I'd start e-commerce is driving significant changes across channels. And it's requiring everybody from the OEMs to the people that are operating in those channels to up their game. You have to -- there's cycle times are changing, demand on data is changing. The -- I would say how you manage your portfolio, how you drive demand generation you really have to change and adapt to it.
Now, e-commerce has been an exciting space for us. We stay focused on our end users and we are -- I would say just doing what I just described, upping our game in terms of demand generation, how we engage with those end users and we see e-commerce is a very exciting space for us, a high growth space for us in reaching our customers. That's where they want to purchase, that's where they want it, when they want it, how they want it and where they want it and e-commerce is often the solution.
So it's a big focus for us. It has been. It's not just the B2C space but the B2B space as well. And actually I think one of the big benefits we have in being -- having our innovation in a retail space is that we -- that's at the forefront of this and we're learning from that in the B2B space. We are taking what we've learned in demand generation and managing categories or departments as they think about them in e-commerce, we're doing that in the B2B space, benefiting from our retail experience.
And so it's a very -- right now we see it as a very significant opportunity. We can keep our value. We've got to be managing our new capabilities, but we see our value playing through there, focus on the end user, keep your value there. If we are going to have a problem, it's because we don't keep our brand and our innovation vital at the end user. The commerce channel facilitates getting to them.
And then I guess that brings into kind of a discussion around business transformation and cycle time. So when we think about business transformation there's a lot of benefits because it's a pretty broad defined term. But how does that play into the cycle times? And then maybe also into pricing, I think part of what you've been doing as you've been moving all your sales under a common E or PE write [ph] is also getting better price transparency discovery. So maybe help us understand some of those dynamics.
Yes, it is an entire conference for another company on business transformation and thinking off through that. So it's a -- there's a lot to talk about there. But I would boil it down to we are we are transforming the company. We are deploying a new ERP at the center of it but it's much more than that. We're simplifying standardizing redesigning business processes and it's creating capabilities for us as we often talk about and we keep it front and center for us as a company. It's about our customers. It starts and ends with our customers.
We have to be creating a competitive advantage for them and for ourselves and engaging our customers. So we don't lose sight of the fact that the business transformation is about streamlining simplifying redesigning to enable better engagement of our customers. We're asking them to change a lot with us as we go through this journey. That's asking a lot. They've got to go with us on that. So we've got to deliver better service shorter cycle times, more automation better price management.
The things that come out of it, you get down into the details of business transformation. We're simplifying the front end, the sales portals that our customers come through have been greatly simplified. And in the process of that you simplify your price structures and you do that on a global basis. And so you end up in a much better position to make it easier for your customers, and I would say better manage in the face of the competitive marketplace. You're always managing against any cycle time improvements.
You have got to be tight on your price management. You can't have different prices around the world anymore even in your portfolio, even for different periods of time. You got to manage your price value very effectively across your market. So I -- it makes us better, but that focus on the end user is what keeps us, and our customer keeps us pulling it all through to them.
When we talk about value realization, it comes because we're improving what we do for our customers. Then we get greater efficiency in our business, either through capital or in our productivity. We're seeing both of those come through.
I guess, thinking about pricing, I mean, I think you've talked about a natural entitlement of 30 to 50 basis points for the innovation you bring, does business transformation that's been kind of talked to that, pushed that to the upper end of that, does it actually take it higher or is that not the right way to think about the impact it has on price?
Well, it for sure supports that model, and you could say, if you aren't transforming your business and you start to fall behind, it gets tougher to realize the value that you have in your innovation. So it's part of making sure we realize that. Do you get some benefits from managing your price better, yes, you always do. And I -- but I think it's really about continuing to drive that price value that we have. I don't -- I think if you look at our margin performance overtime, if you look at our price performance overtime, we've done a pretty good job of managing price.
So I don't want you to think that we are going from, kind of disjointed management of price to like a very tight management. We've always been pretty tight in management. That's why we deliver that price value. We have -- we are our own self critics about our own processes. But when you step back and look at our performance, I think we've been very good at -- on the marketing side and on the price management side, but going forward, you've got to up your game, that's just where the world is going, the marketplace is going.
Got you. And then maybe switching gears again and then we'll see if there's any questions on the floor, but thinking about acquisitions, and in your 8% to 11% EPS CAGR plan, acquisitions are one to three. Can you talk about where the big priorities are in terms of that, and then maybe give us some clarity into the pipeline either by size, I think you've historically targeted this $1 billion to $3 billion range. And then anything around timing and what our expectations should be about deploying the balance sheet?
Yes. And just to frame it up to we talked about our capital allocation and our first priority is organic growth. So we allocate to R&D and CapEx organic growth. We allocate to the dividend, the returning value to our shareholders through dividends. And we've been long track record of that and that's a priority for us. Then we have the capital that we have left that we called flexible capital allocation. It's between M&A and share repurchases primarily.
And I would say -- and when we've said that M&A is our priority there. We -- and for a couple of reasons, one is we've demonstrated ourselves that we can create differentiated value through acquisitions, leveraging the 3M value model, being disciplined around that strategy. And we've done fewer larger relative to our history of smaller bolt-on acquisitions. And we're building a track record of performance with that, which we are not only are we able to leverage the 3M value model, but we've built up a capability to integrate successfully acquisitions, larger acquisitions for us in the $1 billion to $3 billion range more recently.
And so that's that encourages us as well, that this is a good place for us to go. We can create value. So we would like to increase the amount of that flexible allocation that goes to M&A prioritize that. So we've been very active, been active across our portfolio, building a pipeline around that strategy, around that discipline. And we've got areas that we prioritize, we look at, we've been active in safety and graphic space. We continue to see that as a priority area.
Healthcare and industrial are the other areas. But we're active broadly. There's opportunities in each of our different businesses that can leverage that strategy and that rigor. So we see -- that $1 billion to $3 billion has been a good range for us to demonstrate that we can create that value. But the size is not the driver. It's really the strategy that drives it.
So could we go a little larger from those? Sure, we aren't going to do something transformational with enterprise. We're going to leverage that view of where we can leverage our fundamental strengths and that value that we create and markets that we can be a leader.
So I think it forms up around now will we -- how much will we act on the 1% to 3% in year one versus year two. That’s a bit of a guess because we are engaging in actively managing our pipeline and trying to move those forward. So when those come that has other dynamics that control that.
Are there questions in the audience? So I guess speaking about the recent acquisitions and this is one thing that I’ve always found interesting with 3M and how it’s different than the other industrial companies like I cover is this ability to do -- you’ve done product deals, you’ve done technology deals and I look at some of the stuff you’ve done in safety and graphics, it's been more around products. And then I think you’re taking your technology and your applications in science and haven’t improved the product through that.
How do we think about the acquisitions going forward? I mean are they more product or they are more technology ones and it’s not a perfect example but like for Ceradyne, when you brought ceramics into the portfolio I mean conceptually how do we think about that?
Yes I think you’ve hit it. I mean we have really have if you want to categorize our acquisitions we’ve had some that are more heavily value based on our technology we have some that are more heavily valued on the sum of the parts, the fact that we can together we are greater than we are separately with those acquisitions, taking part of that technology but it could be manufacturing processes.
Membrana is a good example. We acquired Membrana portfolio and one of the things that we knew that we would be able to do and it’s playing out is we can leverage our manufacturing process capabilities to take products and technologies that they had to market.
So our ability to manage surface modification of their membrane technologies creates new performance windows and new product solutions and it’s enabling us to grow into some of the solutions in biopharma drug manufacturing development and manufacturing so that’s kind of a sum of the parts kind of view that’s focused on their portfolio.
And then you get in to market leadership. As we take our model into our market and we build a business organically you see where else we can add value and where you can add value in terms of your global reach, in terms of your brand.
There’s other aspects of our value model that add to technology and manufacturing and capital safety, stock safety are great examples. We added high value leading brands in those safety markets where we are already a leader in respiratory protection head, eye, ear, face protection and we bring in false safety and we bring in self-contained breathing apparatus.
And we actually open ourselves up to new segments in the market to bring our existing portfolio. So it’s a different version of sum of the parts. We can bring now the leading brands into that so we will look at so how we will proportionate those, we look at all three strategies. We see opportunity to create differentiated value, when we can bring in technology that we can leverage broadly across the enterprise. We see it when we can get one plus one greater than two and we see it when we can do that in a market leadership position.
So I like all three spaces. We’ve demonstrated we can create differentiated value. This really shows up in the bottom line of our integrated operations as we go abroad, that’s where we’ve been performing well with these more recent acquisitions. We can -- we’ve demonstrated we can leverage those.
So I hesitate to say a third, a third, a third, or two-thirds, one-six, one-six but it’s all three are part of that strategy.
Got you, and then the other part of the plan you laid out, is around margin has been right and actually putting the 200 to 300 basis points out there. One of the things that was interesting about that we talked a little bit about this earlier was the composition of that was different than I had expected. It was more weighted towards the gross margin and the SG&A side and we had looked at how 3M stacks up against other companies if you adjust for R&D, where you are outspending the broader industrial peer set in my coverage.
Why is that a larger opportunity as you see it today more than that 200 [ph] basis points?
Yeah so we’ve got 200 to 300, 100 to 200 in COGS, let's say and a 100 in SG&A. So we see opportunities for productivity broadly. So I would say all of it and if you take a look at COGS that’s half of our P&L. It’s that a big opportunity for us. We of course have business transformation affecting both of those. If you if you look at what's common, what we're doing in business transformation is enabling greater efficiencies in our supply chain and manufacturing, it's enabling greater productivity in our SG&A. And that's a big driver of where we're going.
Now in COGS we also see the benefit from innovation and we'll continue to see the benefit and we've been demonstrating margin improvements. A lot of that comes from our innovation. We are also -- we continue to move ahead with our strategy on footprint optimization. So we are -- we've been we've been moving to more efficient supply chain manufacturing operations. So we've been reducing our footprint of plants especially small plants globally, small manufacturing facilities globally. So we continue to drive that. So that helps COGs.
We also see disruptive technology going into manufacturing and creating a benefit in quality performance cost all of those, and so there's probably a basket of levers that impact COGS significantly. It's a bigger -- it's got a bigger denominator to start with. And so you can -- you can see a benefit there. So I see -- we continue to see opportunities to drive productivity broadly, SG&A is part of it. And it's -- so it's a -- do we see an opportunity to continue to get more efficient. Do we see -- I believe that we will see greater and greater productivity in our economic growth going forward. That's been the missing component of economic growth in recent years.
But I do see with what you see with technology automation business transformation kinds of capability you continue to see an opportunity to drive productivity the next five years. We see a little more of it in COGS than we do in SG&A. But I see it broadly continuing.
Question here in the audience. Is there a microphone.
Are there any particular technologies that you think will transform your supply chain, taking say a five year horizon.
Yes. There's -- at a high level automation continues to do it. It's -- automation isn't a cliff at all -- you go from not being automated to automated. It's really an evolution. John you were talking about it a little bit. He was in one of our plants 10 years ago and then he was in it more recently. And when you look at it in a 10 year interval you see a lot of automation coming in. But it's all the time adding automation. So that's going to continue to drive productivity. We are on a long journey on automation.
We actually have done a lot with automation over the years because of the nature of our manufacturing processes. We've rolled the role large -- we've had a significant component of automation but there's so much more we can do. So I think that's one big factor that you'll see and it shows up in a lot of different aspects. It's not just robotics, it's broader automation than that.
The other one is really data and data analytics broadly speaking. That is driving -- having part of our business transformation is deploying the capabilities to get better visibility on data across our supply chain. So I would say the ability to have better analytics, better visibility on data that and it's actually broader than just supply chain. It's the digitalization of business. We can leverage that.
So that's going to be also a driver of productivity and efficiency. So it's going to drive efficiencies in how you plan and in your production operations is going to drive efficiencies in how you operate your supply chain even without footprint optimization without moving plants around you can drive a lot of efficiencies through that digital twin capability that you build with data.
So those are the big ones for us and it'll improve service and delivery. It'll reduce cycle times it increases the amount of automation in our processes. By the way automation shows up in our service models too. We -- our transactional service models that support our business operations, automation shows up there as well. So automation has a broader impact than just supply chain. It can impact SG&A as well.
Maybe if I can piggyback off of that question and kind of take it up even higher and maybe we can use like an actual example. So if I was a customer of 3M ordering something five years ago versus today, what's actually changed, right and maybe what's changed for 3M and then what's changed for that customer's experience.
So from five years ago you would have you -- if you were a customer you could buy through multiple portals. So you would be dealing with multiple selling arms. You would have mostly manual interface. You'd be talking to a customer service rep, you would be ordering -- you know you might be using EDI, but you would be sending your orders in. You would have visibility some information but not a lot.
You would have a complex service model coming at to multiple locations and it would be manual touch point. You would have in your journey through 3M, you would have a lot of manual touch points.
Today, one of the things as you transform -- as we deploy business transformation one of the best benefits is that a larger percentage of our customers are like solid order processing. They have an automated loop through 3M. We've got a business communications front end. A portal that if there's a manual connection that's them accessing the portal. They are not interfacing typically with customer service reps throughout their process. They are using their portal to do that. They're getting essentially a light out [ph] order processing -- the cycle time goes way down.
We've simplified the structure, our sales orgs have ones -- they have one organization -- one portal that they go through, not multiple portals, doesn't matter what they buy from 3M. It could be a channel partner that buys broadly and I'll see it through one portal. So it's much more automated, much more streamlined. It's -- we're in the chain, so some of our customers globally are on legacy systems. Some are on -- and we have now 70% of our revenue deployed on the new capabilities, and we're still getting the gains from all that.
We're still moving -- every week we move more people to lights out order processing. And that's one of the things that we can do with that. So that's -- it's not a change that's done. We're in the middle of it. But it's a big -- and it's not just us. I mean, this is industry and commerce more broadly, but it's certainly a big benefit for us when we touch that many customers.
Is there an point where if we hit a soft patch from a macro standpoint that it changes the historical construct where, 3M has an end demand impact, and then meet the inventory right, where you sit in the supply chain impact. Are we at a point where this changes that or is that -- that's still the right way to think of that?
Yeah, we had a little discussion about this too, is it more -- I think the dynamics still there. You have a lot of our revenue goes through distribution. So you have inventory and distribution less than you did before.
I would say, one of the dynamics we've talked about quarter-to-quarter, is that a lot of the channels that have been historically noisy, up and down, quarter-to-quarter, they overbuy and then they restructure and they take inventory back out and you see those swings. They've gotten better. Everybody's getting better at managing that. So it's not just us, everybody is getting better at managing it.
But that said, you still have us and channel and then the value chain of the customer. Sometimes that's an end user directly. Sometimes it's -- say at a value added reseller, and somebody that would use it, move it on to them.
So when you go into a slowdown economically inventory comes out of every stuff. And we tend to see that early. We tend to see that -- we tend to be an early indicator of that kidding. I don't see that changing, but it seems like it will be muted. Cycle times are shorter, inventory managements a little tighter. So I think you'll see the response that maybe won't have the unexpected swing. It'll be more predictable.
We'll see how -- as we see a slowdown in individual markets or a broader macro, we'll see how that really plays out. But certainly there's -- I would say it's much more efficient than it has been in the past in my experience, over my career it's much more efficient.
Any last questions in the room. All right, and then maybe I'll just sneak one in here where we have a couple of seconds left, but when you laid out your CapEx plan. I think Nick had mentioned that there was some growth CapEx. And then there was also obviously the transformation rate, the disruptive manufacturing portion of it. Where is that growth CapEx actually going within the portfolio?
Portfolio is a great way to think about it. We just like everything else. And when we think -- organic growth, so our first priority investing organic growth -- within organic growth, we are investing where we see our highest value opportunities. So that's a portfolio view. At Investor Day, I shared an updated view of how we think about our businesses in terms of strategic attractiveness, long-term and financial attractiveness.
In terms of their markets and the growth and the returns that we can get off those. So we use that in our capital too I mean we’ve prioritized our capital so that model six plus five to 5.5, 6% to R&D, of R&D to sales 5 to 5.5 in CapEx within both of those we prioritize and we don’t have 6% across every business. Some get more some get less depends on the returns and the value that we can create. CapEx is the same thing.
So I would say we’re going. For sure we’re prioritizing the two things we talked about. Growth capital for differentiated performance in the market place and that gets the first priority. We don’t want to constraint our capacity to deliver on those business portfolio that we want to grow in the future and the same time we -- disruptive technology can have a broader impact. So if I would say disruptive technology maybe it's broader across the portfolio then the growth capital which is more prioritized within the portfolio.
Great we are at the end of the time. So thank you Mike and thank you, Bruce.
Okay, thanks John.