3M (MMM) 2017 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 on Tuesday, April 25, 2017.

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 2017 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.

Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3m.com under the heading Quarterly Earnings.

Before we begin, let me remind you of the dates for this year's investor events.

Please turn to Slide 2. First, starting with earnings.

Our Q2 and Q3 conference calls will be held on July 25 and October 24, respectively.

Next, our 2018 outlook meeting will take place on December 12.

Please mark your calendars.

On Slide 3, our details for our upcoming European investor meeting, which will be held on June 6 and 7 at our headquarters in Neuss, Germany.

We will be posting the presentation materials on our Investor Relations website at 3m.com for those that are not able to attend the meeting in person.

Please take a moment to read the forward-looking statement on Slide 4. 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 5, and I'll hand the call off to Inge.

Thank you, Bruce.

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

The 3M team delivered a strong start to 2017.

We posted good growth that was positive across all geographic areas while expanding our profitability.

At the same time, we increased investments across the enterprise to accelerate organic growth and improve productivity.

I will take you through the first quarter highlights.

Companywide, organic local currency sales growth was 5%.

Growth was led by Electronics and Energy, which grew 12% in the quarter.

We have done a lot of work in this business to improve our relevance to customers and the marketplace, and those efforts are paying off.

Industrial, our largest business group, had another good quarter with 6% growth, as did Safety and Graphics, which grew 5%.

Health Care grew 3% organically, and we continue to expect growth in this business to accelerate further into the year.

Our consumer business declined 1% due to ongoing channel adjustments, specifically in the office and retail space.

Companywide, we posted total sales of $7.7 billion, along with earnings of $2.16 per share, up 5% year-over-year.

Operating margins were 23%, which includes $136 million of strategic investments we made in the first quarter.

Excluding those investments, our core operating margins were nearly 25%, so we are executing extremely well.

We also returned $1.4 billion to our shareholders through dividends and share repurchases.

This includes a 6% increase in the dividend, which marks 3M's 59th consecutive year of increases.

And over the last 5 years, we have doubled our per share dividend.

Beyond financial results, we continue to execute our 3 key levers which are big value creators both today and into the future.

The first is portfolio management.

And in March, we announced the acquisition of Scott Safety for $2 billion.

This will further strengthen our position in the fast-growing personal safety market.

The second lever is investing in innovation.

And in Q1, we invested $470 million in research and development or 6.1% of sales.

This includes adding more resources in the field to bring our scientists and application engineers even closer to our customers.

These investments support organic growth along with our ability to constantly deliver premium margins.

We also continue to move forward with the third lever, business transformation, which starts and ends with our customers.

It is making it easier for customers to do business with us while creating an even more agile and efficient 3M.

The backbone of business transformation is our new ERP system, and the rollout in West Europe is nearly complete.

You will hear more about this at our Investor Day in Germany on June 7.

Please turn to Slide 6. In addition to the 3 key levers, we took also other actions to prepare our enterprise for success in both the short and long term.

Earlier, I mentioned the incremental $136 million of strategic investments we made in the first quarter, which include $36 million to accelerate growth in the core platforms.

These growth investments will continue throughout the year, and we expect them to contribute 50 to 100 basis points of growth in 2017, which we began to see in Q1.

We also took actions to strengthen the portfolio and optimize our manufacturing footprint.

These actions will increase productivity and intensify our focus on larger, faster-growing opportunities into the future.

In summary, the first quarter was strong for 3M.

We delivered good financial results while investing for the long term.

I will now 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 7 with a recap of our first quarter sales performance.

As Inge mentioned, we posted strong organic growth in the quarter of 4.6% with volumes up 4.5% and selling prices up 0.1%.

Divestitures of nonstrategic businesses reduced sales by 0.4 percentage points, and foreign currency translation decreased sales by another 50 basis points.

As a result, total first quarter sales in U.S. dollars increased 3.7% versus last year.

As you can see on the right side of the slide, growth was broad-based across all geographic areas.

Let me start with the U.S., where organic growth was 1.4%, led by mid-single-digit increases in both Industrial and Safety and Graphics.

Our Electronics and Energy and Health Care businesses also delivered solid growth in the quarter.

The Consumer business declined mid-single digits organically in Q1, impacted by channel adjustments in the office market, as Inge mentioned.

Asia Pacific led the company with organic growth of 10.1%.

All business groups posted strong growth in the quarter, led by a double-digit increase in Electronics and Energy.

We also had strong growth in Industrial, Health Care and consumer.

Looking at key countries within Asia Pacific.

Organic growth increased 13% in both China/Hong Kong and Japan.

Excluding our electronics businesses, China/Hong Kong grew 12% and Japan was up 2%.

Moving to EMEA.

Organic growth increased 4% in Q1.

West Europe was up 5% organically with sales growth led by Industrial and Safety and Graphics.

Central/East Europe and Middle East/Africa grew nearly 2%.

Finally, organic growth in Latin America/Canada increased 2.3%, led by a high single-digit growth in Health Care along with solid growth in Consumer and Safety and Graphics.

At a country level, Mexico continued to deliver strong growth at 8%.

Canada was up 3% while Brazil declined 3%.

Please turn to Slide 8 for the first quarter P&L highlights.

Companywide, first quarter sales were $7.7 billion and net income increased 3.7% to $1.3 billion.

GAAP operating margins were 23.1%, down 100 basis points versus last year's Q1.

Earlier, you heard Inge mention the additional $136 million of strategic investments we made in Q1 to strengthen 3M for the future in terms of both growth and productivity.

Excluding the impact of these investments, margins were up 80 basis points year-over-year, driven by strong organic growth and solid operational performance.

Let's take a closer look at the various components of our margin performance in the first quarter.

Organic growth, along with improved productivity, contributed 120 basis points to margins.

Lower raw material costs, net of selling price changes, added another 50 basis points.

Raw material prices remained favorable to start the year as our global businesses again delivered savings in excess of market price changes.

We expect raw material benefits to moderate as the year progresses, but still remain positive for the full year.

Turning to headwinds.

Foreign currency, net of hedge gains, brought margins down 40 basis points in the quarter.

As previously discussed, strategic investments impacted margins by 180 basis points, and higher pension and OPEB expense decreased margins by 30 basis points year-on-year.

Finally, lower year-on-year gains from divestitures reduced margins by an additional 20 basis points.

Let's now turn to Slide 9 for a closer look at earnings per share.

First quarter GAAP earnings increased 5.4% to $2.16 per share.

The combination of organic growth and productivity contributed $0.22 per share to Q1 earnings.

Business transformation is having a positive impact on our productivity efforts.

The year-on-year impact from divestitures reduced earnings by $0.03 per share.

Foreign currency, net of hedging, reduced pretax earnings by $0.04 a share while strategic investments were a $0.16 impact.

The first quarter tax rate was 23.7% versus 26.8% in the comparable quarter, which increased earnings by $0.09 per share.

The lower year-on-year tax rate was driven by favorable geographic profit mix, increased tax benefits from employee equity-based compensation and ongoing strategic tax initiatives.

In light of the first quarter performance, we now expect our 2017 full year tax rate to be in the range of 26% to 27.5%.

Finally, average diluted shares outstanding declined nearly 2% year-on-year, which added $0.03 to Q1 earnings per share.

Please turn to Slide 10 for a look at cash flow.

We continue to generate solid operating cash flow as a company, which allows us to consistently invest in the business and also return cash back to shareholders.

First quarter free cash flow was $701 million, down $245 million year-on-year, largely due to the timing of pension contributions.

Full year 2017 pension contributions are expected to remain in the range of $300 million to $500 million, similar to 2016.

Free cash flow conversion was 53%.

And for the full year, we continue to anticipate free cash flow conversion to be in the range of 95% to 105%.

Recall that Q1 is typically our lowest conversion rate of the year.

First quarter capital expenditures were $287 million, in line with our expectations heading into the quarter.

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

As you heard earlier, we increased our first quarter per share dividend by 6%, resulting in $702 million in cash dividends paid to shareholders during the quarter.

We also returned $690 million to shareholders through gross share repurchases.

We continue to expect full year repurchases in the range of $2.5 billion to $4.5 billion.

Let's now review our performance by business group, starting with Industrial on Slide 11.

Industrial continued its strong growth momentum from Q4, delivering first quarter sales of $2.7 billion, up 5.7% organically.

Industrial's growth was broad based across all businesses and geographic areas.

Our automotive OEM business continued to lead sales growth within Industrial, increasing double digits organically.

Growth in this business outpaced the rate of global car and light truck builds by more than 400 basis points.

Advanced materials also had a strong start to the year, up high single digits.

Our Heartland businesses within Industrial: Abrasives, industrial adhesives and tapes and automotive aftermarket, each increased mid-single digits organically.

On a geographic basis, organic growth was led by Asia Pacific, up high single digits, while the U.S. and EMEA increased mid-single digits.

Industrial delivered first quarter operating income of $625 million with operating margins of 23.1%.

Operating margins were down 80 basis points year-on-year or up 40 basis points, adjusting for a Q1 2016 divestiture gain.

As you can see, Industrial is off to a strong start to 2017.

For the full year, we now expect organic growth in the range of 2% to 5% versus our prior estimate of 1% to 3%.

Please turn to Slide 12.

First quarter sales in Safety and Graphics were up 4.8% organically to $1.5 billion.

Personal Safety, another Heartland business, delivered strong organic growth in the high single digits with particular strength in Asia Pacific and the U.S. The roofing granules business continued to perform well in the first quarter, posting double-digit organic growth as demand remains strong in the replacement shingle market.

Geographically, Safety and Graphics grew organically in all areas, led by mid-single-digit increases in EMEA, Asia Pacific and the U.S. Operating income for the business group was $399 million and operating margins increased 180 basis points to 26.1%.

Adjusting for acquisition and divestiture activity in this year and last, operating margins were up 80 basis points.

As with Industrial, Safety and Graphics is off to a strong start and growth is better than we anticipated entering the year.

We now expect organic growth for this business to be between 2% and 5% versus a prior estimate of 1% to 3%.

Please turn to Slide 13.

Our Health Care business generated first quarter sales of $1.4 billion.

Organic growth was 3.1% year-on-year, in line with our full year expectations of 3% to 5%.

Growth was led by a double-digit increase in both drug delivery systems and food safety.

Our medical consumables businesses, which represent the largest segment within Health Care, posted good growth in Q1.

Oral care delivered mid-single-digit organic growth in the first quarter, a marked improvement from the second half of 2016.

Our Health Information Systems business was down low single digits organically.

We expect the business to improve throughout the year.

Geographically, organic growth in Health Care was positive in all areas, led by high single-digit growth in Latin America/Canada and Asia Pacific.

We saw notable strength in China/Hong Kong, which was up double digits in the quarter.

Health Care's operating income was $434 million and margins remained strong at 30.5%.

Importantly, we generated these returns while investing an additional $21 million to enhance growth in core platforms across the business.

Please turn to Slide 14.

Electronics and Energy led our company with organic growth of 11.5% in the first quarter.

Sales were $1.2 billion.

The electronics side of the business grew 18% organically as our team successfully drove increased penetration on a number of OEM platforms.

Demand strengthened across most market segments in consumer electronics, which also boosted our growth rate.

And we benefited from favorable year-on-year comps.

Our energy-related businesses were up 1% organically with low single-digit growth in Electrical Markets, while telecom was flat.

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

First quarter operating income for Electronics and Energy was $225 million with margins of 18.6%, up 70 basis points.

Adjusting for first quarter portfolio actions, margins were nearly 24%, up 600 basis points year-on-year.

As you can see, Q1 organic growth was very robust for Electronics and Energy.

As a result, we are updating our full year growth expectations for this business to a range of up 1% to 6% versus a prior range of down 3% to up 1%.

The first half of the year is expected to be stronger than the second half, largely driven by year-on-year comps.

Please turn to Slide 15.

First quarter sales in Consumer were $1 billion and organic growth declined 1.2% year-on-year.

3 of our 4 businesses within Consumer grew organically, again, led by home improvement, followed by consumer health care and home care.

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

Filtrete filters also delivered strong growth in the quarter.

More than offsetting this growth was a year-on-year decline in our stationery and office supplies business, which was impacted by continued channel inventory reductions primarily in the U.S. office retail and wholesale.

Geographically, organic growth in Consumer was led by Asia Pacific and Latin America/Canada, which was more than offset by a decline in the U.S. Operating income was $222 million with operating margins of 21.3%.

Looking at the full year, we expect organic growth for consumer to be in the range of 1% to 3% versus a prior estimate of 2% to 4%.

We also expect to see growth improve as the year progresses.

Please turn to Slide 16.

Before I turn it back to Inge, let me address a few items that we anticipate will happen over the remainder of 2017.

The net impact of these items is factored into our EPS guidance today.

First, as you may recall, in December, we announced the divestiture of our Identity Management business within Safety and Graphics.

The sale of this business, which has annual sales of approximately $205 million, is expected to close during the second quarter.

Upon completion, we expect to record a gain on sale of approximately $0.55 per share, partially offset by the profit that will go with the business in 2017 after the divestiture is closed.

In addition, recall at our investor meeting in March of 2016, we introduced a plan to better optimize our portfolio and supply chain footprint.

We expect to make significant progress on that plan in 2017 with associated costs in the range of $0.40 to $0.45 per share over the remainder of the year.

We anticipate $0.20 to $0.30 per share will incur in Q2.

In total, the net impact of these items is expected to add between $0.05 and $0.10 to 2017 earnings per share.

Again, this impact is reflected in our full year updated guidance, which Inge will now cover on Slide 17.

Inge?

Thank you, Nick.

As you have seen, our team delivered a very strong start to the year.

As a result, today, we are raising our full year expectations for both organic growth and earnings per share.

We now anticipate organic growth in 2017 of 2% to 5% versus the prior range of 1% to 3%.

With respect to earnings per share, we expect earnings of $8.70 to $9.05, up 7% to 11%, versus a prior range of $8.45 to $8.80.

Finally, we continue to expect strong performance in terms of both return on invested capital and free cash flow conversion in 2017.

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

(Operator Instructions) Our first question comes from the line of Andrew Kaplowitz with Citi.

Can you talk about the uptick in strategic investments that you're making a little more?

You said that you were going to do $0.05 to $0.10 of investments in '17, but you did $0.16 in the quarter.

A lot of that seems to be in E&E and Health Care.

You mentioned the increased growth that you expect, the 50 to 100 basis points.

How much did you see in the first quarter?

And can you classify these moves as a lot more offensive to gain share or maybe more defensive, in E&E especially, given that you've had some share impact from OLED, for instance.

So how do you sort of characterize it all?

Yes, Andy, thanks for the question.

You covered quite a few things there.

Just from an overall theme standpoint, Andy, we're always looking for opportunities to enhance the value of the enterprise, and that's really part of our business model.

What you're see in the first quarter for incremental investments, some of that was investments we were taking to accelerate growth, and that was really lined up with what we had shared last December of the incremental $100 million over the course of 2017 to deliver accelerated growth throughout the year.

The other context I'd share with you in thinking about this step up in strategic investments.

If you think back to last March at our investor meeting when we laid out our 5-year plan, we shared plans for optimizing our portfolio and supply chain footprint with, at that time, what we described a total of between $500 million and $600 million of investments.

And ultimately, that -- we expected that, by 2020, to be creating $125 million to $175 million of annualized benefit, operating income benefit.

What you're seeing in this step up of accelerated strategic investments, both for the quarter and for the year, is us taking more action related to that -- the -- what we laid out last year for the optimized actions on our supply chain footprint.

Got it.

Okay, that's helpful, Nick.

And then shifting gears, you're guiding to 2% to 5% expected growth in Industrial.

You did 5.7% in the first quarter.

Comparisons do get a little harder, especially in 4Q, we know that.

But your Industrial business also seems to have momentum entering the second quarter.

So what do you think could slow down as the year goes on?

How much in the new guide is conservatism versus concerns around things like auto OE?

Or is anything else in the Industrial portfolio slowing?

Or is this just it's early in the year and you've seen a nice uptick in the businesses and you do expect good momentum here in -- as you go into 2Q.

Andy, this is Inge.

What I think you should look -- first of all, we see good momentum globally for the Industrial business.

And you can see that also then going over to our Safety and Graphics business.

So both of them are doing slightly better than we thought when we started the year.

And you can see, we changed the range, not only for the company but for those 2 businesses specifically from 1% to 3% to 2% to 5%.

It is early in the year, so we don't see at this point in time anything specifically that will slow.

But I think a range of 2% to 5% is more realistic at this point in time.

And when you look upon industrial, that was, in the United States, very good growth for us.

And the same in West Europe.

And I just came back from China 2 weeks ago, and you can see a slight momentum upwards there as well.

So we are raising it now to 2% to 5%, and we will maybe, of course, talk more about it as we have maybe 1 more or 2 more quarters under our belts here.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

So maybe staying on the growth point for a second.

So clearly, really strong organic growth quarter.

Just curious, as the quarter progressed, did the things -- did momentum continue to get better?

Was there any particular month that was better than others?

I'm just trying to get -- understand, I guess really in the context of the full year guidance.

Yes, Joe.

As the quarter went on, it was consistent strength across the quarter, all 3 months of the quarter.

And I'd further add, we're seeing April -- the start of April, tracking very much in line with what we've been seeing for the first quarter.

So really, no intra-quarter trend changes to note.

Okay.

And then I guess maybe taking 2 of those businesses and talking for a second about electronics, which was -- which had a great quarter.

You have plus 11% and change.

And the guidance for the rest of the year and the expectation for what you expect will be the shift to OLED over the next couple of quarters.

And then contrasting that maybe with the Consumer business, which has been a really stable business for you guys for quite some time.

And whether -- do you think that there are maybe some structural versus kind of cyclical pressures that you're seeing there?

Well, first of all, if you -- if we start with Electronics and Energy.

And as I said earlier, we have done a lot of work in that business during the last couple of years in order to make sure that we have the right structure in place.

And I think those are the things that you see in terms of action we are making on the portfolio, some rightsizing on manufacturing, et cetera.

But what also have been going on for quite some time is our shifting of commercialization capabilities into faster-growing businesses in Electronics and Energy.

So what we -- and we will continue, of course, to look upon consumer electronics, utilities, construction and semiconductor.

But over time here, for the last couple of years, we have shifted more into data center, to automotive electrification, to energy grid and communication infrastructure.

So that's a move over time and that starts to pay off.

And your comment on OLED, there is no change to what we laid out earlier in the year.

But one thing that you need to understand with our -- we are global.

So what we see in the -- what you call consumer electronics, we are going on big platforms for the Chinese OEMs as we speak.

So I think we have a tendency to over-rely on the United States enterprises in terms of that platform.

And as I said, came back from China 2 weeks ago.

And the progress we are making on platforms out there on consumer electronics is just fantastic.

So I will say on that business, there are things that you see in terms of actions, but there are also things that we have done in terms of shifting our focus into faster-growing businesses.

And I think we showed that at the last investor meeting, where we are type of moving more capabilities into $12 billion market opportunity that is growing 10% to 15%.

So that's the piece you see.

So I'm very, very pleased, I would say, with the hard work that business has done in order to manage the costs and efficiency and then type of shift to faster-growing markets.

Terms of Consumer, Consumer had basically, this quarter, 3 or 4 division was growing.

One division was down and is basically in the United States and it's into the office and -- office channels.

When we look upon that now for the second quarter in a row, our sell-out is 2%, but our sell-in is down.

So I think it would take us a couple of more quarters in order for the inventory levels to come right in that channel.

It's not a 3M issue, it's maybe an issue relative to consolidation in that channel that is pretty robust, I would say, if you follow what is going on into that channel.

So I will say -- and what I looked upon -- or we looked upon the growth for Consumer around the world, we had robust growth everywhere except in Central/East Europe, Middle East/Africa, we were down 2%.

And then as Nick said, in United States, where we were down 5% all into the office supply.

But if you look upon the rest, it was very good growth with China/Hong Kong, 40%; Canada, 5%; Latin America, 2%; and total international was actually 4% growth.

So let's see how long time it will take for the channel to adjust.

I cannot predict that as I sit here, but probably another 2 quarters or so.

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

Just wanted to start with the pricing side.

I think core price in your EBIT margin bridge was flat in the first quarter.

It was down slightly in the fourth quarter.

How are you thinking about price overall for the balance of the year versus that figure in Q1?

I noticed your U.S. pricing, at least in your revenue commentary, is still negative.

Do you think that will turn up in the balance of the year?

Yes, Julian, we're not fundamentally seeing any change in our pricing power.

That remains strong.

We do continue to look for targeted places where we can use price to help drive organic volume growth.

If I look out over total 2017, we're still -- we're expecting U.S. price growth to be approximately flat.

If I expand it to the total globe of -- if I pull out the FX impact, we expect pricing to be up slightly.

Our normal range is 30 to 50 basis points of core price growth.

I think it will be somewhere between there and flat for total 2017.

And then my second question was just around the strategic investments.

I was just trying to sort of square some of the different numbers.

I mean, is the sense that the higher operating leverage you're getting from the better organic growth, you're redeploying most of that into growth-related strategic investments.

And then the majority of the gain you're getting, you're redeploying into cost or COGS-related reduction efforts.

Is that a fair summary?

Or is there something going on in the end markets that's also driving some of this stepped-up spending?

Yes, the $136 million in strategic investments in the first quarter, Julian, a little less than half of that is investments that we see having a fairly short-term return in 2017 and into early 2018.

And those are primarily growth-oriented investments.

And those growth-oriented investments were factored into the guidance we set out for the year.

The remainder of these strategic investments, those relate to our portfolio, supply chain footprint.

And that's really laid out -- aligned closely with the plan that we put forward a year ago in March.

Understood.

So the -- in your initial EPS bridge from December, the $0.05 to $0.10 of strategic investment headwind, that correlates fairly closely with that $0.40 to $0.45 portfolio and footprint actions you call out in today's Slide 16.

Not entirely, but it's a different line, is it?

Yes.

So when we -- in December, when we laid out our guidance, EPS guidance for the year, strategic investments, we had incrementally in a $0.05 to $0.10 range.

That was aligned primarily or almost exclusively with our growth investments.

Now what you're seeing -- we're seeing the growth investments play out exactly as we've guided, still in that $0.05 to $0.10 range for the total year.

What we're layering on top of that is additional footprint actions that we're -- and portfolio actions that we're taking throughout 2017.

So on top of the growth investments, there's roughly an incremental $0.10 of supply chain and portfolio actions that we took in the first quarter of 2017.

And then in terms of the guidance for the balance of this year, for Q2, 3 and 4, there's an extra $0.40 to $0.45 on top of that, that was not part of our initial guidance.

So all in, the growth investments, the incremental $0.10 that we took in the first quarter, plus what we're expecting Q2 through Q4, it's now in the range of $0.55 to $0.65 for the total year.

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

At the morning -- at the risk of sort of flogging a dead horse to death, so the timing of the accelerated investments in 1Q, is it because you saw you had a tax benefit and therefore, you decided to offset that?

Does that explain the timing of the investments?

And should we think of this as more of a pull-forward from the -- you mentioned the $0.05 to $0.10 of growth investments.

It sounds like all that's been made in 1Q.

So this is a pull-forward, Nick?

Yes, it would -- Nigel, we're always -- as I said earlier, we're always looking for opportunities.

The level that we were investing in Q1 in strategic investments around growth, no pull forward there.

That's coming exactly as we had planned.

The increased strategic investments around portfolio actions and supply chain footprint, that's aligned with our longer-term vision.

The exact timing of when we were going to do that, we did not have clarity on until we started pulling the trigger on some of those actions in the first quarter and some that we expect to have happen over the next 3 quarters.

So I'm not sure I'd characterized it as a pull forward as much as it would be.

Now is the time that it looked like the right time for us to pull the trigger on actions that we had laid out last March.

Okay.

And then the revised guide.

Does this bake in anything for Scott Safety?

Or is that still outside of the guidance?

And I'm wondering if maybe the $0.40, $0.45 of actions maybe includes the $0.10 of dilution from Scott.

No, the $0.40 to $0.45 does not include anything for Scott Safety.

At the time that closes, we will update guidance to take into account any impact that will have on our 2017 earnings.

Okay.

And then just one quick one.

Some companies have talked about the benefits from channel restock.

I'm just wondering, what sort of intel do you have on sort of sell-in versus sell-outs?

Did you see any restockings?

It looks like [ our trunks ] might have been, but any color there would be helpful.

Yes, we've -- first of all, you heard Inge talked about some of the channel impacts in our office retail and wholesale channel.

In addition, in our industrial channel, we are seeing increased confidence in the channel, which we are seeing.

While we're seeing good sell-outs of our product, we're seeing even stronger sell-in to the industrial channel, primarily in the U.S. So that is one place where we're attributing it to higher confidence amongst that channel and seeing what appears to be some restocking of depleted channel levels that we've seen in the past.

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

I was hoping to circle back on Consumer and the stationery, office commentary.

And this came up in the fourth quarter, and Inge, you gave us some good color in terms of the sale-in and sale-out as kind of the destocking going on.

We can see and read about all the consolidation in this channel, but I was interested in hearing your commentary about e-commerce because that is a growing factor in these products.

And how is this captured in your channel descriptions and categories?

Are you calling the brick-and-mortar customers a part of your channel overall?

Does that include their e-commerce?

And so how does e-commerce factor into this?

Yes, it does.

So what we -- e-commerce is one channel of many for us, right?

And if you think about the total enterprise, in a quarter like this, our e-channel sales is north of $200 million.

And we are growing 6% in that channel generally as a total company.

International actually grew 25% in e-business for the quarter.

So it is an element.

And so for us, we look upon our customers in terms of one channel.

Then inside of them, they have omni-channel, et cetera, which they are utilizing.

And as you have seen when you -- I cannot talk about them.

We have to look upon their reports.

But as you see, for many of them, the e- part is growing very, very fast and its type of slower growth in the traditional business, if you like.

And that's the same for us then when we look upon our -- as our output in terms of growth.

But as I said, for that channel, generally speaking, it is United States at this point in time, that they're consolidating as a total channel.

The e-channel is growing, I think, for most of our customers, and we are part of that.

That's real helpful.

And then just over on Health Care and Oral Care specifically.

One of your key competitors was seeing destocking in this business on the consumables side.

It looks like you didn't suffer from that.

Is it easier comps?

Have you seen the destocking trend over?

And maybe you can comment on the sell-in versus sell-through.

Yes, we did not see what you're describing here.

We saw maybe a little bit more confidence, actually, into the channel on all products.

So we took market share on the consumable part into the Oral Care.

And I think the momentum there is -- we have 5% growth, right?

And I think the momentum and the confidence for the retailers is very high for our product as you move forward into the year.

So I think it's a combination of us taking market share and also the retailer, as Nick said for Industrial specifically, have a good confidence as they move into the year and maybe build a little bit of inventory.

But it's not the majority of the growth.

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

A couple loose ends here.

First, just on electronics.

You're actually raised the range, but you actually have a wider range with 1 quarter in your pocket already.

I was wondering if you could just elaborate a little bit on kind of what the big swing factors are as you think about how the rest of the year plays out for you specifically.

Yes, yes.

First of all, I think the positive is that we changed the guidance north, we extended the range a little bit.

And that's based on, I would say, very positive outlook that we have as we move in on some of the platforms, specifically out in Asia.

And as I said earlier, we have worked for quite some time relative to our commercialization capabilities into market segments that are growing faster.

And I talked about data center.

I talked about automotive electrification and energy grids and communication infrastructure.

That is starting to pay off.

So I will say that it looked positive, but it's still early.

But as you see, we go rather 1% to 6% than 1% to 5% is maybe indicating the positive signs that we see in that business in terms of growth.

And of course, margins have improved dramatically the last couple of years.

And as you see again this quarter, we took some actions that we could do and still deliver very, very good margins for that business.

Are there some specific OEM wins that really drive how this plays out that you don't have visibility on yet?

Or is it just kind of an end-market demand question?

No, there is also wins.

And that will, of course, is [ speccing ] now and the sales will come later.

But as I said earlier, I think we have a tendency to think about 3M as a U.S. company.

We're a global company.

So we work on platforms all over the world.

And as you know out in Asia, there is very big movements coming from the Chinese OEMs relative to this space, and they are all speccing in our products as they move ahead.

And then just a couple of quick cleanups for Nick, if I could.

Nick, on tax, have you solved your 2017 tax rate down to what you think your ongoing sustainable tax rate is going to be?

Or do we have more downside as we look forward?

And also, just on the $136 million of spend.

Where was it precisely?

I think $21 million in Health Care and maybe it was $70 million to $75 million in E&E, is that right?

And where was the rest of it?

Jeff, to your first question on the tax rate for what we're now seeing for total 2017.

There's a few dynamics going on.

First of all, we are seeing a favorable geographic profit mix for us that is helping us in our tax rate.

It's been a headwind for us the last couple of years, and that's switching over to a tailwind for us this year.

We're also seeing some of the benefits, as you'd expect, from some of our tax planning.

But one of the more significant items just in the first quarter is the benefit we're getting from the accounting standard change and -- that came into effect last year for the excess tax benefits from stock-based compensation.

From a year-on-year basis, that's about a $0.04 benefit versus what we had a year ago.

And Jeff, I'd say that's the wildcard.

Other things are going very much as we had planned to get to the 27% tax rate by 2020.

But with the added variability from what happens with this excess tax benefit from stock-based compensation, there'll be some quarters that, that's a benefit and some quarters we won't see any benefit at all.

All in, we're well on track for the -- hitting the 27% in 2020, possibly even lower than that.

But when we have better clarity on that, we'll give a revised number of can that go even lower than the 27%.

To the second point on the strategic investments, the $136 million.

Of the growth-related investments, you're correct.

Health Care had the majority of that.

There were small amounts, single digits of millions of dollars, low to mid-single digits in millions of dollars in the other 4 business groups.

And then from a portfolio and supply chain footprint optimization, the vast majority of that is impacting the Electronics and Energy business with a little of that hitting the Consumer and office business, the Consumer Business Group.

Our next question comes from the line of Rob McCarthy with Stifel, Nicolaus & Company.

Can you hear me?

Yes.

Yes.

Great.

So this is more of a longer-term question.

Obviously, listen, you're a global company, you've been making investments with the perspective of a multiyear kind of view, which is obviously wise and prudent.

But you are dealing with geopolitical headwinds across the border, volatility.

How do you think about the investments you've made, particularly in global excellence, particularly in the Eurozone?

If we see an increased risk of a breakup there, do you -- is there actions you're going to have to take?

How are you going to react to some of these kind of black swans with respect to perhaps increased nationalism?

Yes.

Well, first of all, as you know, we have done business in international for many, many years, right?

So we are -- we have a good understanding of the ins and outs relative to different parts of the world.

And I will say that the way that 3M emerged and developed itself over years have been country-by-country.

And type of starting with a sales office then becoming a subsidiary, adding in technical capabilities and then manufacturing, et cetera.

And I think the last 10 years or so, we have started more to regionalize and be more efficient specifically around supply chain and manufacturing, where we still have continued to execute commercially in every country.

Because, as you know as in most cases, different languages and, in some cases, different currency.

And I don't think there will be much of a change as we move forward, to be honest, right?

And if so, we'd have to adjusted that.

We have -- I think we have had experiences in the past where we need to change the business model geographically based on what is happening in that specific area from time to time.

And we can go back as early '90s when the European Union was formed and the way we type of changed the structure in that point in time in order to serve the European market with free goods flowing, people able to move in between countries and there will be one currency for all countries in Europe.

Now that didn't really play out the way that, that was laid out.

And that was figured out, not last year, not 2 years ago, that was figured out 10 years ago.

And we adjusted again to that and have been successful ever since in those geographical areas.

So it's difficult to talk about specifics here today because we don't know what will happen.

But I can guarantee you one thing, that we are diverse enough in our management and we have experience enough, both in United States and overseas, in order to adjust our business model at any point in time in order to serve our customers.

Well, just as a follow-up to that.

I mean, I think one thing about the ERP investment, the global excellence investments, is ultimately looking at SKU rationalization around the company.

But if you have this countercyclical trend of increased nationalism and perhaps higher trade barriers and less regionalization, doesn't that cap the upside from SKU rationalization?

Not necessarily.

I think that the business transformation we put in place will serve us very well for the future despite what will happen in terms of things in Asia, in Europe, et cetera.

I think we will see -- people are rational relative to growth, right?

So people will understand and see that fewer distribution centers are better because, by definition, you can serve the customers in a more efficient way to a lower cost.

So reality is when everything is -- all cards is putting down in place, people understand that is the most effective way to do business, and it will enhance growth of the economies around the world, and Europe specifically, as you talk about it.

Just the last follow-up.

Has there been any change in your outlook in terms of CapEx or investment with respect to automation in your facilities in the last 18 to 24 months?

Yes, Rob, we -- as far as the automation portion of our CapEx spending, a year ago at our investor meeting, we laid out that we expected that to be a noticeable part of our CapEx investments.

What we're seeing is that's playing out exactly as we laid out a year ago, that we're seeing continued opportunities for automation investments within our CapEx plans.

And I wouldn't call in an uptick, but I'd say it's planning -- playing out exactly as we laid out.

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

Inge, I can't remember a time where we had 5% core growth in Western Europe.

And I'm trying to figure out whether this is just a weak euro and it's -- and most of that is just export markets or is it really broad-based, both internal consumption plus export?

Given your experience in running Europe for so many years, maybe you can give us a little bit of color around what you see in Europe and what you think the outlook is for the rest of the year more specifically?

Yes.

So first of all, it was broad-based, where we saw -- if you first talk about business groups, all business groups except one had growth of -- we had one that grew 5%, which was Industrial.

So you had 5% in Industrial, which -- for the whole of West Europe.

You have 6% for Safety and Graphics.

So you take those 2 businesses together, which is into the industrial sector very much, I would say, you looked upon 5% to 6% there and it was broad-based.

It was -- electronics was up to 7%.

And then it was slow in Health Care and Consumer.

In fact, Consumer, that is a very small business for us in Europe, was actually flat.

So you look upon that, it was broad-based with growth of, I would say, 4% to 6% in the most important businesses for us.

There was no big change in the country side.

But you can see countries that have been slow in the past, like Spain, and what we now call Iberia, are coming up.

But that's very much due to comparison for them.

But I will say that there is a positive momentum driven very much out from Germany, I will say.

And that's then broad-based.

And it's of course starting in Industrial and Safety and Graphics.

So it was very good and it's not a one-time shot, as I see it.

Okay.

So there's some sustainability to it.

Yes.

Okay.

So -- I know there's been a half dozen questions on this, but I'm not sure I got the answer right or the answer was clear.

If core growth positively surprises, I think you're being reasonably conservative the rest of the year, will your growth investments need to accelerate from these levels?

Or are these new levels of you've stated kind of the new -- the line in the sand for 2017?

Scott, the increase in the strategic investments from what we originally guided is really around supply chain and portfolio optimization and much less around growth.

If we see growth even higher than what we're currently expecting, could our growth investments tick up some?

I think the short answer is, yes, it could tick up some.

But I don't think on a material basis.

I think we're now talking single digits of pennies at that point.

As you remember, Scott, we laid out for the year, actually, I think it was $105 million -- $100 million to $105 million in those investments that we called core search, right, core platforms.

And $36 million was there the first quarter.

And we started already last year to load into those opportunities.

And we see the result coming.

So that's the positive thing, right?

So the growth coming this quarter, I will say that there's been a lot of work here that is, in my view, both the microscope and telescope, right?

The microscope is to make the investment and get growth going, right?

And then you saw some of that investment we did in strategic investment is a type of the telescope.

This will great very good value for 3M and for the shareholders as we go ahead.

So if you think about what we did in this quarter, I think if you look upon it as a play book, this is right what you would like to do in order to build both short-term that most of us are focused on, but also for the mid- to long-term for shareholders for 3M.

So I think it was the right thing to do.

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

Can you just remind us what exactly -- when you talk about supply chain rationalization, what exactly that is?

Is this just kind of a fancy way to talk about restructuring?

Or what -- just remind us in kind of, I guess, the most brief way, since you're coming to the end of the call, what exactly some of those actions are.

Yes, Steve, thanks for the question.

Part of what we talked about a little over a year ago at our outlook meeting -- for the 5-year outlook meeting, is the number of manufacturing sites we have around the world and looking at the productivity in those sites and the opportunity we have through rationalizing the number of those sites, increasing capital into some of the -- our more productive sites, the opportunity to reduce the total footprints of our manufacturing and supply chain sites over the course of the next 4 years.

So that's what we mean when we talk about it when we laid out a $500 million to $600 million investment that we expect to take.

The resulting productivity from that, that by the time we get to 2020, we think that will add another $125 million to $175 million of added operating income through that productivity we can get through rationalizing our supply chain footprint.

Right.

Okay, that makes a ton of sense.

And one last question just on price/cost.

Outside of electronics, was there anywhere where price was negative?

I mean, I know it was kind of like 0.1% or whatever.

So they're probably -- maybe outside of electronics, it wasn't.

I'm not sure.

Just maybe a little bit of color on where, if there is any, there is price pressure outside electronics?

If I look at this globally, Steve, we had a positive, though very small, price in all businesses except for Health Care, where we were flat.

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

Just 2 very quick ones.

First on the restructuring cost in Q2, any segments in particular where margins would be noticeably distorted?

And secondly, as you think about the cadence from 2017 to 2018, do you now think your growth investments and restructuring costs will be flat year-over-year?

Or do you think they will be a bit of a tailwind into 2018?

Laurence, to the first question on business, and I'll go further in geography.

We expect that these actions that we're taking in the second quarter and in the third and fourth quarter will impact all businesses and all geographies, that it will be broad.

As far as the specific details of each business, we're still working through those details.

We're not ready to be sharing that yet, Laurence.

And then as far as the '17 to '18, some of these actions will have a tail into '18, where there will be residual cost impact hitting us in '18, though I expect the -- it will not -- I very much expect it will be a decline from the level that we're projecting now for 2017.

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

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

Well, thank you.

To wrap up, this was a very strong quarter for 3M in terms of healthy, broad-based growth, increased earnings per share and good execution across each of our business groups and functions.

Equally important, we made additional investments to support growth and productivity for the remainder of 2017 and well into the future.

Thank you for joining us this morning and have a good day.

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

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

Have a great day, everyone.