3M (MMM) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3M first-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, April 26, 2016.

I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3M.

Thank you, and good morning, everyone.

Welcome to our first-quarter 2016 business review.

On the call today are Inge Thulin, 3M's Chairman, President and CEO; and Nick Gangestad, our Chief Financial Officer.

Each will make some formal comments, and then we'll take your questions.

As a reminder, please mark your calendars for upcoming earnings call dates July 26 and October 25.

Also take note of our next investor meeting, scheduled for December 13.

More details will be available as we get closer to that date.

Today's earnings call, today's earnings release and the slide presentation accompanying this call are posted on our investor relations website at 3M.com.

Please take a moment to read the forward-looking statement on slide 2. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results.

These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties.

Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions.

Please turn to slide 3, and I will hand it off to Inge.

Thank you, Bruce.

Good morning, everyone, and thank you for joining us again.

We had opportunity to see many of you last month at our Investor Day, where we laid out 3M's new five-year plan.

We also updated you on the 3M play book and how it is being executed across our enterprise to deliver efficient growth, both today and into the future.

In the first quarter, the 3M team continued to execute our play book and deliver another strong operational performance.

We increased margins more than a full percentage point and improved our cash flow generation by 20% year over year.

At the same time, we continued to invest in the business, including opening a new world-class laboratory in the United States, while also returning cash to our shareholders.

Looking at the numbers, we posted first-quarter earnings of $2.05 per share, which is an increase of 11% year over year.

Please note that this includes a $0.10 earnings benefit related to a new accounting standard that 3M adopted in the first quarter, and Nick will provide more details during his comments.

Adjusting for this impact, we delivered Q1 earnings of $1.95 per share.

Company-wide, organic growth was down slightly at minus 1%.

Three of our business groups grew organically in the quarter, led by Health Care at 6%, with strong organic growth across all of its businesses.

Our Consumer business, which is the home to some of 3M's most iconic brands, also delivered a good quarter of organic growth.

I'm very pleased that our two domestic-driven businesses, Health Care and Consumer, continued to do well and are off to a very good start in 2016.

Safety and Graphics also posted solid organic growth, with particular strengths in commercial solutions and personal safety.

Organic growth in our Industrial business was down low-single-digits, which was similar to last quarter.

And as expected, Electronics and Energy declined low-double-digits.

Electronics and Energy continue to be impacted by softness in the consumer electronics markets, which we expect to persist through the first half of the year.

Acquisitions net of divestitures added 2 percentage points to first quarter sales, while foreign exchange reduced sales by 3%.

As a result, our Company total sales was $7.4 billion, down 2% year on year.

Our ability to consistently deliver premium margins remains a hallmark of 3M, and it's an important element of our focus on driving efficient growth.

In the first quarter, we posted margins of 24%, up more than a full percentage point versus last year.

Without the impact from last year's fourth quarter restructuring, we have expanded margins year over year for 10 consecutive quarters.

Also in the quarter, we returned nearly $2 billion to our shareholders through dividends and share repurchases.

This includes an 8% increase in our first-quarter dividend, which marked 3M's 58th consecutive year of dividend increases.

All in all, we had a good start to the year, with results that were in line with our expectations.

Please turn to slide 4. In addition to a strong financial performance in the quarter, we also made good progress on our three key levels, starting with petroleum management.

After strategic review of our health information systems business, we decided that we could create the greatest value by retaining and further invest in that business.

In fact, we plan to accelerate the investment across our entire global health care business in research and development, health economics, and common sense capabilities, to build strengths on strengths in both developed and developing markets.

In February, we sold the Polyfoam business, which was a small non-cost segment within our Industrial business group.

Earlier, I mentioned the ongoing softness in the electronics markets.

As you know, over the last few years, we have consolidated a number of businesses within Electronics and Energy, which has made us more relevant to our customers, more agile, and more efficient.

Today we are announcing further actions to build upon that work.

This action will reduce 250 positions worldwide, with a majority of reductions on the electronics side of the business, and result in an estimated Q2 charge of $20 million.

This will further position Electronics and Energy for long-term success.

And going forward, this business will continue to stay close to customers, advance its technology capabilities, and increase productivity.

Investing in innovation is the second lever, and in the first quarter, we invested nearly $0.5 billion in research and development.

Research and development supports organic growth and premium returns.

And as you recall, we continue to step up investments in R&D from 5.5% of sales, closer to 6%.

In March, we also opened our new laboratory in the United States, which many of you had opportunity to see at our Investor Day.

It will house 750 [of our] scientists, who will leverage our 46 technology platforms to create unique, cutting-edge solutions for our customers.

Finally, in the first quarter, we continue to march forward with business transformation, which is our third lever.

We had a successful ERP deployment in Germany, and remain focused on executing the rollout plan across West Europe.

Business transformation, which starts and ends with our customers, is important to our future, especially as it relates to efficient growth.

We expect these efforts to result in $500 million to $700 million in annual operational savings by 2020, and another $0.5 billion in working capital improvements.

Overall, as I look at the quarter, we continue to execute the 3M play book and deliver the strong performance in terms of both financial results and building our enterprise for the future.

With that, I will turn the call over to Nick, who will take you through the details.

Nick?

Thanks, Inge, and good morning, everyone.

I'll start on slide 5 with a recap of our first-quarter sales change.

Organic local currency sales declined 0.8% in the first quarter, with volumes down 1.7%, partially offset by a 0.9% increase in selling prices.

Acquisitions net of divestitures added 1.6 percentage points to sales.

This impact includes the acquisitions of Capital Safety, Membrana, and Ivera Medical, along with the divestitures of Library Systems, Polyfoam, and a license plate converting business in France.

Finally, foreign currency translation reduced sales by 3%.

In US dollars, total sales declined 2.2% versus the first quarter of 2015.

In the United States, organic growth was up 0.3%, with strong performances in our domestic-oriented businesses, namely Health Care and Consumer.

Industrial production in the US declined 1.3% in Q1, which impacted growth in parts of our industrial business.

Organic growth in Asia Pacific was down 5.6%.

Three of five business groups posted positive growth in the region, again led by Health Care and Consumer.

Soft end-market demands and excess channel inventories in consumer electronics resulted in a double-digit organic growth decline in Electronics and Energy.

Within Asia Pacific, organic growth was down 4% in China/Hong Kong, and declined 8% in Japan.

Excluding our electronics business, Japan and China/Hong Kong were both flat.

Moving to EMEA, organic growth increased 1.7%.

West Europe was up slightly.

And the combination of Central East Europe and Middle East-Africa was up high-single-digits.

Finally, organic growth in Latin America/Canada increased 4.2%.

Mexico again had a strong quarter, with 10% organic growth.

And Brazil also posted positive organic growth of 2%.

Please turn to slide 6 for the first-quarter P&L highlights.

First-quarter sales were $7.4 billion.

Operating income increased more than 3% to $1.8 billion, and earnings rose 10.8% to $2.05 per share.

As Inge mentioned, we had another strong margin performance in the first quarter, up 130 basis points to 24.1%.

Let's take a closer look at the first-quarter margin improvement.

The combination of lower raw materials and higher selling prices added 110 basis points to first-quarter margins.

We continued to benefit from both lower commodity prices and from our global sourcing team's ongoing efforts to reduce costs.

Lower pension and OPEC expense increased margins by 100 basis points.

Productivity gains related to last year's fourth-quarter restructuring contributed 40 basis points to margins.

Strategic investments reduced margins 10 basis points, as we began to take actions on our manufacturing footprint and increased growth investments.

Foreign currency, net of hedge gains, brought margins down another 10 basis points, and first-year acquisitions reduced margins by 20 basis points.

The year-on-year decline in organic volume reduced margins by 30 basis points.

And finally, utilization and other was a net 50-basis point headwind to margins.

This included the impact of lower asset utilization, particularly in our electronics and industrial businesses, which was partially offset by divesture gains in the quarter.

Also, we continue to increase investments across the business to drive growth and strengthen our competitiveness going forward.

All in, we have started the year on a positive note with respect to margins, and continue to expect approximately 150 basis points of margin improvement for the full year, which reflects our focus on delivering efficient growth.

Let's now turn to slide 7 for a closer look at earnings per share.

As stated earlier, earnings for the first quarter were $2.05 per share, an increase of 10.8%.

Margin expansion net of organic sales declines contributed $0.04 to earnings in the quarter.

First-year acquisitions and divestitures added $0.07 to earnings per share.

This result was driven by solid performances from Membrana, Capital Safety and Ivera, along with divesture gains in the quarter.

Foreign currency impacts, net of hedging, reduced pretax earnings by $48 million, or the equivalent of $0.05 a share.

Higher balance sheet leverage led to an increase in net interest expense year on year, reducing per-share earnings by $0.02.

The first-quarter tax rate was 26.8% versus 29.5% in the comparable quarter, which increased Q1 earnings by $0.07 per share.

The lower Q1 tax rate includes the adoption of a new FASB accounting standard, which I'll walk through in a moment.

Finally, average diluted shares outstanding declined by 4% year on year, which added $0.09 to first-quarter earnings per share.

Please turn to slide 8. On March 30 of this year, the Financial Accounting Standards Board issued an accounting standards update related to employee share-based payments.

This new standard changes the recording of additional tax savings or charges when employees realize benefits from stock-based compensation.

The additional tax impact is a result of the change in the value of stock-based compensation from the time it is granted to an employee to the time it is realized by the employee.

Previously, these additional tax impacts were recognized in the equity section on the balance sheet.

Going forward, it will be recognized on the income statement.

All US public companies are required to adopt the new accounting standard no later than FY17 year.

We chose to adopt this new standard in the first quarter of 2016, which created a first-quarter tax benefit of $0.10 per share, net of tax costs related to global cash optimization actions.

For the full year, we expect no impact to our tax rate and earnings per share guidance, as additional actions we chose to implement to further optimize our global cash position will increase our tax expense in the last three quarters of the year.

Let's now turn to our first-quarter cash flow performance on slide 9. Overall, we posted another solid cash flow performance in Q1.

Free cash flow conversion was 74%, up 8 percentage points versus the same period last year.

As a reminder, Q1 is typically our lowest conversion rate of the year.

We generated $1.3 billion of operating cash flow in the quarter, a $180 million increase versus Q1 in 2015.

The primary drivers of the increase were improved inventories and accounts receivable, along with lower cash taxes.

Capital expenditures were $314 million, as we continued to invest in the business to drive efficient growth.

For the full year, we expect CapEx investments in the range of $1.3 billion to $1.5 billion.

The strength of our business model allows us to invest in growth and also return cash to shareholders.

As you heard earlier, we increased our first-quarter per-share dividend by 8%, which increased our payout to $672 million in the quarter.

In addition to dividends, we returned $1.2 billion to shareholders through gross share repurchases.

Let's now review our first-quarter performance on a business-by-business basis.

Please go to slide 10.

Our Industrial business group posted quarterly sales of $2.6 billion.

First-quarter organic growth in our Industrial business was down 1.9%, with mid-single-digit declines in the US and Asia Pacific.

As mentioned earlier, the US industrial production index was down 1.3% in the first quarter, which impacted parts of our Industrial business.

Our advanced materials business declined low-double-digits, impacted by ongoing weakness in the oil and gas end market.

Conversely, our automotive OEM business grew high-single-digits, continuing its strong track record of outpacing global car and light-truck builds.

We also posted positive organic growth in our automotive after-market business in the quarter.

The acquisition of Membrana, net of the Polyfoam divesture, added 1.9% to Industrial sales growth.

We are pleased with the smooth integration of Membrana into 3M, and the business continues to exceed its financial performance objectives.

Industrial increased its margins 150 basis points to 23.9%, posting operating income of $617 million.

Please turn to slide 11.

First-quarter sales in Safety and Graphics were up 2.4% organically, to $1.4 billion.

Commercial Solutions delivered solid organic growth, with particular strength in Latin America and the US.

Personal Safety, one of our heartland businesses, also had a good quarter of organic growth, led by EMEA and Asia Pacific.

Our Roofing Granules business also posted strong growth in the quarter.

Acquisitions net of divestitures added 4.5 percentage points to sales growth in the quarter.

This results includes Capital Safety, along with the impact from the divestitures of Library Systems and the license plate-converting business in France.

Geographically, organic growth in Safety and Graphics was broad-based, paced by a mid--single-digit increase in Asia Pacific.

Operating income for the business was $345 million, and operating margins were a solid 24.5%.

Please turn to slide 12.

Our Health Care business delivered an outstanding quarter from top to bottom.

The business generated sales of 1.4 billion, and led our Company's organic growth at 6.2%.

Growth was broad-based, with all businesses and geographic areas up mid-single-digits or greater year on year.

Health Information Systems and Food Safety both posted strong double-digit growth in the quarter.

And our medical consumables and oral care businesses each delivered solid mid-single-digit growth in Q1.

The Ivera Medical acquisition added 90 basis points to first-quarter sales growth year on year.

This business is performing well and exceeding its financial performance objectives.

Our Health Care business delivered 13% organic growth in developing markets in the quarter, with particular strength in China/Hong Kong, Mexico and Russia.

Operating income was $455 million, up 12% versus last year's first quarter, and margins were strong at 32.9%.

As you can see from this quarter's results, our Health Care business continued its track record of strong performance.

And as Inge mentioned, we are increasing investments across the business to drive efficient growth into the future.

Next let's cover Electronics and Energy on slide 13.

First-quarter sales in Electronics and Energy were $1.1 billion, down 11.7% organically, and in line with what we communicated at our March Investor Day.

On the electronics side of the business, organic sales were down 18%.

The decline was due to a combination of factors, including soft end-market demand, elevated channel inventory and a challenging year-on-year comparison.

Our team remains focused on increasing relevance with customers and driving spec and wins to deliver organic growth as the industry improves.

Our energy-related businesses were down 1% organically, with growth in electrical markets being offset by declines in telcom, as well as renewable energy.

As a reminder, in last year's Q4, we took portfolio actions within the renewable energy business.

These actions negatively impacted Q1 organic growth, but have improved profitability in this business.

Within electrical markets, our ACCR overhead conductor business posted strong double-digit growth.

On a geographic basis, organic growth was down double-digits in Asia Pacific, where our electronics business is concentrated.

First-quarter operating income for Electronics and Energy was $208 million, with margins of 18.2%, down 330 basis points, largely volume-related.

Looking toward the full year, we now expect Electronics and Energy to decline organically in the low- to mid-single-digit range.

As Inge mentioned, we are taking actions in the second quarter to further position the business for long-term success.

I'll finish with our Consumer business on slide 14.

Consumer had another solid quarter, with sales of $1 billion and organic growth increasing 2.8% year on year.

Sales grew organically in three of our four businesses, led by home improvements and consumer health care.

Across the bottom of this slide, you see just a few of the market-leading brands that are powering our consumer portfolio.

Within the home improvement business, our Command damage-free mounting products posted strong double-digit growth, as accelerated investments continue to pay off.

Scotch blue painter's tape and Filtrete filters also delivered strong growth in the quarter.

Our consumer health care business posted solid first-quarter organic growth, as the growing trend of active lifestyles continued to drive strong demand for our ACE and Futuro braces and support products.

Geographically, organic growth was paced by Asia Pacific, driven by double-digit growth in China/Hong Kong, along with solid mid-single-digit growth in the US.

Operating income was $238 million, with operating margins of 22.7%; both similar to last year's first quarter.

On slide 15, we are reaffirming our 2016 planning estimates.

We estimate earnings in the range of $8.10 to $8.45 per share, an increase of 7% to 11% year over year.

Organic growth is expected to be up 1% to 3%, with acquisitions net of divestitures, adding 1% to sales.

We estimate that foreign currency translation will reduce sales by 1% to 3%.

Finally, our tax rate is still expected to be 29.5% to 30.5%, with free cash flow conversion in the range of 95% to 105%.

With that, I thank you for your attention, and we will now take your questions.

(Operator Instructions)

And our first question comes from the line of Joe Ritchie of Goldman Sachs.

Please proceed with your question.

Thank you.

Good morning, everyone.

Good morning, Joe.

Maybe just starting off on electronics, since that seemed to be like the biggest, I guess, surprise in the quarter, at least from our perspective.

Can you talk a little bit about your expectations and the cadence for the remainder of the year, particularly in light of some of the commentary regarding slower smartphone shipments?

That's kind of the near-term question.

The longer-term question is, maybe we can talk about this in the context of our portfolio.

Inge, you've done a lot to restructure the portfolio since you took over.

Just curious whether this is a business that you're going to continue to re-evaluate as we move forward?

Well, good morning, Joe.

Well, first of all, it was a little bit -- the slowest business for us in the quarter.

But not much of a surprise, if you go back and think about our Investor Day, when we talked about it in terms of what we expected for the first quarter.

Now, the electronic part was down 18%, which was, I would say, it's all based on a weaker, near-term demand in terms of consumer electronics.

So from that perspective, not a surprise for us.

But I think as we look out for the next quarter, we have to expect in the second quarter mid- to high-single growth down, and I think for the year, low- to mid-single.

So I think that's how we have to think about the business group.

And I would say that in terms of the portfolio, this is a very, very good business for us.

Because we have all the components in order for us to be competitive in this marketplace, and we have worked on that business in order to be more relevant now, for four years.

And as you can see here in this quarter, we'll take some more actions in order to line up our business model versus what is required in that business.

So I would say, first of all, all businesses -- you know, portfolio management is an ongoing process.

We looked upon that the whole time.

But the fundamentals for us to be in this business is very, very good and very, very strong.

It's just that we have to adjust as we go and on the fly.

And I think that's what we're doing here again, right?

But for me, for us, it's more a near-term, weaker demand in consumer electronics, as we speak.

Okay, fair enough.

Maybe my second question, and turning it to the Health Care group, where you saw accelerating organic growth, the margins now approaching 33%.

Maybe talk a little bit about the expectations for that business now?

Have they been ratcheted up at all as we progress through the year?

And should we start thinking about this business as being, you know, a 32% to 33%-type margin business moving forward?

Well, first of all, you are correct relative to the performance of Health Care over many, many years, right?

This is a very good business for us, and very solid fundamentals.

And I think it's very much based on the value creation for both the providers and the patients in that market.

You saw this quarter again, very solid organic local currency growth, margin expansion.

And it's broad based, it's both in developed and developing markets, and it's in all businesses.

And we will now continue to accelerate that investment as we move ahead.

So it's not only health information systems that we decided to keep in our portfolio.

We will invest in all the businesses.

And as I laid out, it is around research and development, it's about health economics and it's about commercialization capabilities.

Those three things in a combination is very, very powerful for us.

And think about it as well, in terms of developed versus developing.

Our position is very strong in the developed world, and we continue to take market share and we penetrate even deeper there.

In developing, the fields start to open up for us, because key opinion leaders are recommending our protocols, including our products, around the world.

So we have a very strong position there.

And you know, you can think about this in terms of our fastest-growing business, with the highest margin.

We are pleased with the margins, but we are not -- we will accelerate the investment there to get growth up even further.

Okay, great.

Thanks, Inge.

Thank you.

Our next question comes from the line of Julian Mitchell of Credit Suisse.

Please proceed with your questions.

Hi, good morning.

Good morning, Julian.

Good morning.

Just a question firstly on Industrial, and Safety and Graphics, if you had seen any change in demand trend as you went through the quarter in China and in developed markets?

Julian, good morning.

For both China and in US and in Europe, as the quarter went on, we saw no discernable change in the trends.

It was a pretty consistent performance throughout the quarter.

Got it.

Thank you very much.

And then --

You asked to comment on China.

You know, we saw again both Consumer and Health Care with very solid growth in China in this quarter.

So that's, again, a good indication relative to what is happening in those markets, as they are type of expanding their businesses, specifically in China.

They're not shifting, but they're expanding into more domestic-driven businesses.

And we saw terrific growth, both in Consumer and Health Care in China.

Thanks.

And then just my second one would be on Electronics and Energy, you know, if you're seeing any price pressure there or it's all just volume declines?

And also you talked about some portfolio changes recently.

Should we expect, therefore, that the energy-related business could grow this year, actually within that segment?

Julian, first on the price front, we haven't seen any change in the trajectory on pricing.

It's been pretty flat, as it was last year and into this year.

No real changes on the pricing, selling-price environment that we're seeing on the electronics side.

In regards to portfolio movement actions, as I said, on the energy side, we took a portfolio action within our renewable energy business in the fourth quarter, which is having a negative impact on our first-quarter organic growth.

That negative impact will continue throughout all four quarters of 2016, and it's incorporated into our guidance for the total business in the Company.

Thank you.

Our next question comes from the line of Steven Winoker of Bernstein.

Please proceed with your question.

Thanks, and good morning, all.

Good morning, Steven.

Could you maybe just talk a little bit about the pricing raw material dynamic in terms of how that's -- it's still huge, even though it's diminishing.

What are your expectations for that going forward?

And as part of that, how much of that pricing was currency-related this quarter?

Good morning, Steve.

For the first quarter, the combination of price raw materials, that benefited our margin by 110 basis points, the vast majority of that coming from lower raw material prices.

And on the raw material side, we are continuing to expect our tailwinds, driven by lower commodity prices, and with a heavier weighting to the first half of the year than the second half.

Regarding selling prices, we've traditionally been able to achieve about 30 basis points of underlying price growth when we strip out FX.

We continue to see that as our capability, and we project that we will be at that type of core price growth in our Company for the year.

If I look at the price growth that we had in the first quarter of 90 basis points, all of that came in our international operations.

And the majority of that 90 basis points was in response to our pricing actions, in response to FX movements, the majority of that 90 coming from FX reaction.

Okay, that's helpful.

And then in terms of the M&A that you've done -- Capital Safety, et cetera.

What was the organic growth of those businesses?

What were they achieving from an organic basis?

On an organic basis, well, first of all, I'll just level-set the facts here, that what they're adding to 3M's total growth -- our total acquisitions before divestitures added 2.1% to 3M's growth.

And our divestitures reduced 3M's revenue by 50 basis points.

So we had a net 160 basis points growth.

Underlying that, within our Capital Safety business organically, we continued to see strong revenue performance across the board for that business, with the exception of the oil and gas market that the Capital Safety market serves.

In our Membrana business, that business continues to perform well.

But from an organic basis, we typically start measuring the organic once we've lapped ourselves 12 months after we acquire it, Steve.

No, I know, I'm just looking for what the actual -- you know, what they're running at organically.

So that when they do lap 12 months it should be in the third quarter -- how much it's going to add.

That's what I'm trying to get to.

Low-single-digits would be our best estimate right now.

Okay, fantastic.

And if I could, just one last.

Given you guys are holding the one at 3%, what is that?

What are you actually taking up, since Electronics and Energy are down?

We are not changing our guidance at this point in time.

Right.

So there must be some other business that's higher, I guess?

Yes, correct.

Yes, Steve, we continue to see our other four businesses solidly in the range that we laid out in December.

And they will help propel our Company to the guidance we've put out of 1% to 3%.

Fantastic.

Thank you.

Thank you.

Our next question comes from the line of Scott Davis of Barclays.

Please proceed with your question.

Hi, good morning, guys.

Good morning, Scott.

Can you give us a sense, Inge -- you talked about China a little bit.

But can you walk around the world and just talk about what's getting better or what's getting worse out there, geographically?

I don't think since we met at Investor Day that there have been any big changes in the marketplaces, with maybe one slight exception, which is Europe, Middle East, Africa.

I think that, honestly, was a little bit of surprise that we saw slightly better growth there than we had expected.

I think that's the change from a material perspective, if you like, that have changed.

On the positive side, because I think we have to look for positive sides, is in Latin America.

We continue very good growth in Mexico.

We were positive in Brazil as well.

So I think Brazil then, by definition is one country.

I think that's something we could see changing.

But more than that, I don't see any change.

Central East Europe is doing well.

West Europe was actually, as I said, a slight surprise.

Nothing changed in Asia.

Nothing changed for us in the United States, either.

So I think it was very solid, and no ups or downs in terms of -- I think specifically, there was no negative that came at us, as I see it.

There were some slight positives, if you like.

Okay.

I know this is hard to dial down to this kind of detail, but when you think about the 150 basis points full-year guide on margins, how much of that are you guys thinking is price cost?

Priced raw materials, Scott, for the year, we've been expecting that to be 50 basis points, and we still see ourselves lining up closely with that.

Okay.

And just a quick one.

Is your price now fully caught up to currency dislocations in EM?

Yes, going forward with where the dollar is right now, I think the majority of our price increases due to FX are behind us, especially if the dollar stays where it is.

Okay, that's great.

Thank you, guys.

Thank you.

Our next question comes from the line of John Inch of Deutsche Bank.

Please proceed with your question.

Thank you.

Good morning, everyone.

Good morning, John.

Good morning, guys.

Hey, Inge, your history of being able to raise pricing 30 basis points a year may not help you much if these raw costs: metals, gas, oil, keep climbing the way they do.

You've put up very impressive margins.

What's your play book for offsetting a potential margin squeeze, if you could draw on history and your own thoughts toward being able to raise pricing more than you have in your history, to offset some of these cost increases that seem to be about to hit us all?

Yes, John, I'll take that one.

The 30 basis points is when we look over a long period of time of what our capability has been, and it's been fairly sustainable.

In times of commodity price increases, that tends to go up slightly; in times of commodity price declines, that tends to go down.

But it's a fairly constant within 3M.

To answer your question, John, I'd like to take you back to our Investor Day.

As we look to the next few years of where we'll be driving our efficient growth and potential for margin expansion, we're really driving many of our initiatives to be able to do that.

Our initiatives around business transformation, one of our key levers.

Actions we're taking with our footprint to better-optimize our efficiency and effectiveness of our manufacturing supply chain.

That, I see is the heart of what we'll be doing in the coming years to continue our ability to grow efficiently; and part of that involves margin expansion.

Okay.

So you basically, Nick, are saying that it's highly probable you're going to get behind on raw costs versus price increases.

But there's just ample productivity within 3M, and you're taking more restructuring obviously in E&E, that you feel good about, just being able to offset it?

Is that kina of --?

I'm not ready to say and I don't think it would be accurate to say that we see ourselves flipping over to the negative on the price raws.

But it has been a noticeable benefit to us for the last two-plus years.

We're not planning for it to be as positive for us as it has been, and we're relying more on other productivity initiatives to fuel our efficiency and our growth.

That's fair.

I'm just trying to get ahead of this.

Second question is really on -- your own guidance had, if I'm not mistaken, assumed that the economy generally, loosely defined -- I guess the industrial economy was going to meaningfully pick up in the second half.

Your Industrial and E&E numbers are, you know, not showing that.

Parker's numbers are actually -- their orders are worse.

There's a very mixed reporting season in terms of the economy cadence, right?

China is good, but I'm talking kind of North America and other points.

Inge, are you still holding to the fact that you think numbers can get better in the second half?

I realize you've got a lot of margin embedded, so I'm not so worried about your numbers.

I just want your commentary around your thoughts toward the US industrial economy?

Yes, you know, we do.

I think that if we look upon our total portfolio, as I said earlier, this change we see is the weaker near-term demand in consumer electronics.

And maybe that will persist a little bit longer than we thought.

So you could take that as a given.

That is the change, I would say.

But we see in the Industrial that, that model is still working for us, and we are sticking to the plan as we go through the year.

And three of the other businesses will compensate for what I would say a delay of the growth rate coming in the second part for electronics part of our business.

So there's no change there, and I don't see that change coming either, to be honest.

I'm not seeing that as of yet.

I see there is a slight strength actually coming, both for Safety and Graphics, Consumer, and Health Care.

And Industrial stay very much as we laid out, as we met the last time.

And then it looked like there will be a little bit longer persistent in the consumer electronic part, as we thought just two months ago.

That's all right.

So in other words, Industrial flat, and the other businesses are doing a little bit better.

Hey, one last thing, Nick, this accounting change, you say you're basically going to offset it with, I'm assuming, cash repatriation on which you pay taxes.

Do you have a sense of how that's going to break out over the next three quarters?

And if you don't do that, have you actually given yourself, somewhat favorably, a $0.10 tailwind?

Well, I guess it's the accounting change.

But does the accounting change create a $0.10 tailwind heading into 2017, because you may not repatriate or whatever next year, so that's just how the math works?

John, a couple points on that.

As far as the actions we're taking to optimize our global cash position, I don't want you to think of it as a one-time event.

This is a continuation of ongoing efforts we do in our Company to efficiently and effectively manage our cash positions.

And as you look at our balance sheet, our amounts of our global cash has been declining.

And we're always looking for how we can move cash to improve our efficiency and effectiveness, as well as reduce the risk in holding that cash.

It's been an ongoing effort.

We're going to continue to do it.

It did give us an opportunity to take some actions in repatriation, John, as part of that.

In terms of setting up another $0.10 tailwind into 2017, I think that would be going too far.

I think it continues to position us well for 2017, but I wouldn't think of it all as a tailwind going into 2017.

But is the $0.10 equally spread then over the next three quarters, in your tax line, Nick?

Yes, John, it is.

Over the next three quarters, we expect to average approximately a 31% tax rate.

But as you know, and as you look at our results, there's fluctuation.

Some quarters will be higher and some lower.

But over the next three quarters, it averaging around 31%.

Okay, got it.

Thanks very much.

Thank you.

Our next question comes from the line of Andrew Kaplowitz of Citigroup.

Please proceed with your question.

Good morning, guys.

Good morning, Andy.

So if you look at your breakdown of price and you look at the US pricing, you didn't get any price in the US this quarter.

You got 0.6 last year quarter.

And really, you've averaged that 30 to 50 basis points over the last year in the US.

Are you seeing any more competition in the US?

Or is there any more of an issue in any particular segment in the US?

Did something change that it might get tougher to get your usual 350 basis points in the US?

Andy, I'll take that one.

We're not seeing a big change.

There are certain parts of our business in the US where we continue to face good competition and we react with price; but I would call those pockets, not widespread.

Sometimes with pricing, in particular in the US, we saw actions to capture more market share and adjust pricing and that's part of what's leading to that 0% that we posted in price in the US for the first quarter.

Nick, do you think you could still average that 30 to 50 basis points as you go over the next year?

Of underlying price capability?

Yes, in the US.

We still see the 30 basis points as a good reflection of our underlying capability there.

Got it.

And Inge, if I could ask you again about Safety and Graphics, it picked up nicely in 1Q in terms of growth versus 4Q.

But we know you had a very difficult comp in 4Q.

So did you actually see a pick-up in Personal Safety, or was it mostly just easier comps working their magic?

And how do we look at this business going forward?

Yes, we saw it pick up in Personal Safety.

So I think you have to look upon it in a couple of ways.

First of all, if you think about your position in the market, when you add an acquisition like Capital Safety, you are strengthening your position big time in that whole personal safety space.

So I would say that, in my view, this is only the beginning of something big that will come for us.

Because our relevance in that whole personal safety segmentation has increased very, very much.

And so I would say there's clear evidence for us that we moved our positions forward, and that we -- so it's not based on easier comp only.

There was an easier comp but we can also see we start to take better positions, both in respirators and now for protection.

Inge, maybe it's better market share even than better market, is that fair?

Sorry?

Is it better market share than improved market, is that fair?

Market share, yes, market share.

But you have also to look upon it in terms of segmentation, that you expand with Capital Safety.

And as you expand for 3M, expand with Capital Safety, some -- of course, all of our out-of-product portfolios is going with that.

So we're becoming much stronger in that position totally.

Our business there in Safety and Graphic, what is doing very well for us is Commercial Solutions that again, showed 4% organic local currency growth, and have now for many quarters performed really, really well for us.

Thanks.

Thank you.

Our next question comes from the line of Deane Dray of RBC.

Please proceed with your question.

Thank you.

Good morning, everyone.

Good morning, Deane.

For Nick, seeing that the dollar is beginning to be less of a headwind for you guys, would you consider changing or ramping back your hedging plans?

I recall you had moved from a 12-month to a 24-month hedging.

Maybe that's not as required at this stage.

Have you given that some thought?

Yes, Deane, thanks for the question.

The short answer is, no.

But a little longer answer is, our hedging philosophy is meant to help us reduce some of our volatility and to allow time for the businesses to adjust to a sustained change in currencies.

It's not to eliminate all the risk.

And our objective there -- we use oftentimes natural hedges, and when we can't do that, then we use financial hedges to offset some of that risk.

Our strategy of using hedging, and we hedge approximately 50% of that exposure, most currencies out one year, and then a few select currencies out a second and third year; that philosophy isn't changing.

We're going to continue to do that.

And it really lines up with our philosophy of how we think about hedging over time to help take some of that risk and give our businesses time to react.

Okay, that's helpful.

And, Nick, were there divesture gains in the quarter?

Yes, there were.

There were -- we divested of our Polyfoam business during the first quarter.

And of the $0.07 related to M&A, approximately one half of that $0.07 was coming from gains on divestitures.

Got it.

And then for the charge expected in the second quarter, that's all headcount related.

The payback on that -- what's the expected payback on that charge?

We expect that charge to pay for itself by the end of this year.

And do you contemplate other actions in electronics over the near term?

No, not at this point in time, Deane.

Okay, thank you.

Thank you.

Our next question comes from the line of Nigel Coe of Morgan Stanley.

Please proceed with your question.

Thanks, good morning, gents.

Good morning.

Just a quick follow on the over $0.03, Nick, from gains.

Where did that land?

Was that in the segment?

Nigel, the Polyfoam business is in our Industrial business, and that resulted in about half, approximately, approaching half of the $0.07 benefit that we saw for the total Company.

By the way, it was also part of the overall guidance, when we guided for the year, that we expected $0.10 of benefits from M&A.

The sale of our Polyfoam business was included in that estimate.

Okay, that's very clear, thanks.

And then it seems a bit churlish to pick on [your] margins, just given the overall strength in margins.

But they were down 20 bps and, given the tailwinds from pension and rules, it does look -- and I see there's higher upsides in there.

But is there mix there?

Is there pricing?

What can you maybe estimate [more current to] margins this quarter?

Nigel, the primary thing you're seeing there is that we continue to see good opportunities in our Consumer business, and we're investing for continued growth.

So it's some key investments that we're choosing to make now, that we think will propel this into even stronger position in the future.

Okay.

And then I know you're not in the business of giving quarterly guidance, but your comments around 1Q back in January were very helpful in getting our models re-balanced.

I'm just wondering if maybe you could add some color on 2Q, how you see organic sales developing into 2Q?

Yes, for the second quarter, we do see organic growth being slightly better than what we saw in Q1 for the total Company.

And we're also continuing to estimate that the second half is going to be stronger than the first half.

In particular, in Electronics and Energy, we're expecting that second-quarter organic growth is going to be a decline in the mid- to high-single-digits.

So it will go from approximately a 12% decline in the first quarter to a mid- to high-single-digit decline in the second quarter.

And then for the year, we're expecting Electronics and Energy to be down low- to mid-single-digits.

Okay, that's very helpful.

Thanks.

Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners.

Please proceed.

Thank you.

Good morning, everyone.

Good morning, Jeffrey.

Just a couple really quick ones.

Just on tax planning, Nick, obviously you've had an aspiration to drive your tax rate down.

My sense is, a lot of that's been the hubs in Switzerland and Panama and other things.

But is there anything in what the Treasury recently pronounced that thwarts your ambitions to bring the tax rate down over the next couple of years?

Jeff, no, the recent actions being taken there do not thwart our efforts to bring us to a 27% tax rate by 2020.

We're continuing to evaluate those proposals and the impact they could have on 3M.

But we don't contemplate that they would have a material impact on us at this time.

And then just a quick one on Health Care.

Was R&D actually up in the quarter?

I ask that, in that R&D was actually down overall for the Company.

So the comments about increased investment, is that more about ambition and outlook for the rest of the year?

Or is R&D actually moving up in Health Care in the first quarter?

Well, first of all, when you say we will accelerate our investments in terms of both R&D health, economics, and commercialization, that is when we move forward.

You know, our intent on a Company level in order to accelerate investment in R&D is happening, right?

We're 5.5%, we are close to 6% at this point in time.

So we're moving forward, and we're moving forward in all groups, I would say.

So the answer is yes, and acceleration will happen in Health Care specifically.

Thank you.

Thank you.

Our next question comes from the line of Shannon O'Callaghan of UBS.

Please proceed with your question.

Good morning, guys.

Good morning.

Hey, Inge, Health Care and Consumer are two businesses you've been trying to, you know, grow more in developing markets, from their historic position.

You highlighted both the growth in developing markets for both of them this quarter.

I'm just wondering if you feel like you're reaching some kind of a tipping point there?

Or maybe just a little bit of what you're seeing going on there?

Tipping point in terms of more growth coming?

In terms of more developing market, you know, traction for Consumer and Health Care?

Yes.

I think both are strengthening their positions.

And the way we should think about this is, in terms of their acceleration of growth, by definition, will go faster in Health Care than in Consumer.

And the reason for that is, everything you have to do around brand equity in Consumer take a little bit longer time.

So when you compare the two of them, we will see a faster acceleration for Health Care versus Consumer, but both of them are growing very well.

And I would not say that in terms of outcome -- yes, we see both of them coming stronger now than versus a year ago.

But we've been on this for quite some time, and it's often a realization of change of brand equity position for Consumer.

And then it's a question about money availability for Health Care.

So our solutions are very advanced, and it's very much driven based on health economics.

And as countries get bigger budgets, they can spend more into health care, they are shifting from less advanced solutions to solutions like 3M can provide.

So that's why we think that both Health and Consumer have a great future for us in that part of the world.

And as you look upon our mix, those are also two of our businesses that, mixing the portfolio, we have less penetration and less sales in developing versus developed markets for those two businesses.

So the future looks good.

It's up to us now to execute, and do that as fast as possible.

Okay, great.

And just maybe some comments on what the M&A pipeline looks like?

And should we expect anything of size this year?

It looks good.

All business groups have a good pipeline.

We are constantly looking into that.

I would say that, when you think about what we have done the last year, that you saw we did fewer, but more sizeable, versus the past.

And that is strategic relative to our portfolio.

That is what you should expect from 3M going forward.

Okay, thanks.

Thank you.

Our next question comes from the line of Steve Tusa of JPMorgan.

Please proceed with your question.

Hi, guys, good morning.

Good morning, Steve.

So thanks for the revenue color on the second quarter there.

I guess, some moving parts sequentially, with the tax going up, obviously.

And then you have the charge, I guess, which is going to flow through Electronics and Energy.

So you know, normal seasonality would get to you something in the 210 to 215 range.

I would assume that these items bring you perhaps a little bit lower than that, given what you pulled into the first quarter.

Is that kind of the right way to think about it?

And then just the year-over-year margin, I guess another way to ask the question would be, what are the major differences in the year-over-year margin bridge, given that this utilization and others should probably still be with you?

You know, you have the extra restructuring.

Just maybe a little bit of color on the bottom-line dynamics to help size this for the second quarter?

Okay, so for the second quarter -- Steve, I've shared much about the second quarter already.

I'd say about what we're expecting for total growth in Electronics and Energy, you noted the charge we're taking in our Electronics and Energy business.

I think the only other thing on the margin I'll point out is, corporate and unallocated, I've guided that we expect that to be between $150 million and $200 million for the year.

First quarter, right in line with that.

As we look at the seasonality we expect of corporate and unallocated for the year, we think that will stay right in that range.

I do see Q2 as the highest quarter for our expense we'll be incurring in corporate and unallocated, and then moderating going into Q3 and Q4.

In regards to margin for Q2, as I look Q2 and for the total year, Steve, FX and raw materials are a couple things that are a little better than how we started the year thinking.

And I see those partially offsetting what we're seeing from lower utilization of our Electronics and Industrial assets in the first half of the year.

Okay.

So year over year, a little bit of a better lift on margins in the second quarter, is what you're saying?

As I look at our total guidance for the year, we expect margins up about 150 basis points.

We were at 130 in the first quarter.

As I look across the whole year, fourth quarter is, Steve, where we expect the most margin expansion, where we had the restructuring charge in fourth quarter of last year.

The second and third quarter I would put below the mean for the year, for margin expansion.

Below the mean for the year, okay, I got it.

So can you get this -- I mean, I think I'm kind of walking these moving parts down.

I mean, it seems like there's something, you know, roughly around $2?

Is that kind of the right area for you guys?

Yes, Steve, we give guidance for the year.

$8.10 to $8.45 is the right guidance for the year.

I'm not going to try to guide the EPS for the quarter.

Okay.

I had to try.

Thanks a lot.

(laughter)

Thank you, Steve.

Our next question comes from the line of Laurence Alexander of Jefferies.

Please proceed with your question.

Good morning.

Good morning, Lawrence.

I guess two longer-term questions on the Electronics and Energy segment.

Are you happy with the prospects for accelerating growth through better R&D, the same way as you expressed on Health Care?

And then related to that, as you look at the longer-term strategic options for those businesses, are your options constrained by the degree to which your R&D backbone across the businesses integrated?

So that you don't want certain IP to exit the Company that might affect the other segments?

Well, let's start with the first question.

In a way, they are maybe related, right?

So you're talking about research and development, investment into that business, and so forth.

The advantage in that business, if you think about the electronics, very much of that is spec gains, right?

So we work direct with our customers in order to make sure we find solutions for them.

That's actually a very powerful model, if you think about it.

So we have two processes in the Company, one called Idea 2 Innovation, i2i, which is more for consumables.

And then you have customer-inspired innovation, which is a model where you direct work with one specific customer.

So if that is in aerospace, that is in automotive, if that's consumer electronics, or wherever that is, it's right into one specific customers.

The strength of that model is that you know exactly the outcome of that model.

You don't work on something that is broad-based from a market perspective that eventually will take place.

You know it will take place in this customer-inspired innovation.

And if you don't come to a solution, you kill it very early.

So I'm very confident in that model.

And that is why that is a very good business for 3M.

Because we can provide true all-technology platforms, multiple solutions that will generate better and more competitive products for our customers.

So also to that is very confident in the research and development into that model.

And we can adjust, of course, based on what they are requiring.

So that's an important element on the electronics side.

On the energy side, it's a model that we are using in normal industrial production, or in consumer, et cetera, where you have a bigger market space that you need to serve, and where you get the input from customer panels, et cetera.

So the business is always built on research and development; and that is the heartbeat of 3M.

That is also why we're able to generate very good returns to our investors.

Because we are not commoditized.

We don't work with those customers in order to replace something that is already in their devices today.

We try to move it to the next level together with them.

That is the power [width].

Thank you.

Thank you.

That concludes the question-and-answer portion of our conference call.

I will now like to turn the call back over to Inge Thulin for some closing comments.

To wrap up, we had a strong start to the year, highlighted by good earnings, margins, and cash flow.

Going forward, we will continue to execute the 3M play book to drive efficient growth and create even greater value for customers and shareholders.

Thank you for joining us, and we look forward to talking to you very soon.

Have a great day.

Ladies and gentlemen, that did conclude the conference call for today.

We thank you for your participation, and ask that you please disconnect your line.