3M (MMM) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 3M second quarter earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded, Tuesday, July 24, 2018.

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 second quarter 2018 business review.

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

Inge, Mike and Nick 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 our upcoming investor events in 2018 found on Slide 2. Please mark your calendars for our Q3 earnings call on October 23.

Also, our next Investor Day, which will be held at our headquarters in St.

Paul, Minnesota, with a welcome reception the evening of Wednesday, November 14, and a formal presentation program on Thursday, November 15.

More details will be available as we get closer to the event.

Please take a moment to read the forward-looking statement on Slide 3. 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 note that throughout today's presentation, we'll be making references to certain non-GAAP financial measures.

Reconciliations of the non-GAAP measures can be found in the appendices of today's presentation and press release.

Please turn to Slide 4, and I'll hand off to Inge.

Inge?

Thank you, Bruce, and good morning, everyone.

As you all are aware, Q2 was my last quarter as the CEO, and I have now moved on to my new role as Executive Chairman of the 3M Board.

Mike Roman is our new CEO, and I'm pleased with the orderly transition between me and Mike, which we have worked on for the last year.

In a moment, I would turn the call over to Mike and our CFO, Nick Gangestad, and you will see that once again, we had a very strong quarter with robust organic growth, margin expansion, EPS growth and good cash flow.

But before doing that, I would like to make a few comments.

First, I would like to recognize all of you who have covered, analyzed and invested in 3M.

I have enjoyed our many interaction, and I have always appreciated your input along with your integrity and professionalism.

I would also like to thank all of our 91,000 3Mers around the world for your contributions and support.

Working together, I'm pleased at what we have accomplished over the last 6 years.

We have enhanced and focused our portfolio, and as a result, today, we are far more relevant to our customers and the marketplace.

We have strengthened our innovation engine and improved our cost structure and began to transform 3M for the future.

We have reached for our vision of advancing every company, enhancing every home and improving every life.

All of this is reflected in our financial results and in the premium value we have created for our customers and premium returns for our shareholders.

At the same time, I'm equally confident in our future.

The Board of Directors and I have no doubt that Mike is the right person to lead our company as CEO and continue building strengths on strengths.

As I look across our enterprise, it's clear that we have the leadership, market position and capabilities to continue to build on the fundamental strengths of 3M.

With that, I would turn the call over to Mike for a summary of our second quarter.

Mike?

Thanks, Inge, and good morning, everyone.

Let me begin by saying that I am honored to serve as the Chief Executive Officer of this incredible enterprise and lead our team into the future.

I would like to express my gratitude to Inge for his vision, leadership and ongoing partnership in his new role as Executive Chairman.

Over the last 6 years, we've made great progress in building out the 3M Playbook, which has created a tremendous foundation for us.

Moving ahead, we are focused on continuing our momentum, generating extraordinary value for our customers and premium returns for our shareholders.

Now let's review our second quarter results, starting on Slide 5. We had a strong quarter, highlighted by broad-based organic growth and a double-digit increase in earnings per share, along with record sales and rising margins.

Looking at the numbers, total sales were $8.4 billion, an all-time high for 3M.

We delivered strong organic growth of 6%, with positive growth across all business groups and all geographic areas.

Please note that we have an upcoming ERP rollout in the United States.

And in anticipation of that deployment, some of our customers decided to accelerate their purchases.

We estimate that this added approximately 50 to 100 basis points of growth in the second quarter, all of it in the U.S. results.

Moving on to earnings.

We posted GAAP earnings of $3.07 per share, up 19% year-on-year.

Adjusted earnings were $2.59 per share compared to $2.25 a year ago.

This demonstrates that our teams around the world continue to execute well.

Underlying margins were strong at 24%, with all business groups above 21%.

Beyond financial results, we are committed to building 3M for the long run while returning cash to our shareholders.

In the second quarter, we invested $468 million in research and development and another $365 million in CapEx.

We also returned $2.4 billion to shareholders, including both dividends and share repurchases.

Please turn to Slide 6. There's a lot to like this quarter across our entire portfolio.

Our Industrial team posted good organic growth of 6%, a nice pickup from the first quarter.

Growth was broad-based, with particular strength in our filtration platform where we are leveraging our Membrana acquisition to accelerate penetration in biopharma and life sciences.

Safety and Graphics delivered another outstanding quarter of 9% organic growth, along with robust margins.

For the fourth consecutive quarter, our personal safety business grew double digits as we continue to build and extend our industry-leading portfolio in this market.

In Health Care, we continued to expand worldwide with organic growth of 4%, led by our medical solutions business with mid-single-digit growth.

Health Care also posted double-digit growth in developing markets as investments in those areas are paying off.

This is a great business for 3M, and we will continue to invest to strengthen it for the future.

Organic growth in Electronics and Energy was 5% on top of 10% growth in last year's second quarter.

Within this business group, we have done a lot of portfolio work over the last several years to improve our relevance to customers and the marketplace.

This has led to improved growth and a sustained improvement in margins.

Last month, we continued to build on this portfolio work with the sale of our communication markets business.

After a thorough review, we decided that selling this business will result in the greatest value creation for 3M and our shareholders.

This is a good example of how we are actively managing our portfolio to best utilize the 3M model.

Going forward, we will continue to prioritize high growth opportunities in Electronics and Energy, such as automotive electrification, data centers and semiconductor fabrication.

Finally, organic growth in Consumer was 4%, which included good performances across our leading brands.

We saw continued strength in home improvement along with a strong start to the back-to-school season.

In summary, I'm pleased with our performance in the second quarter, and I thank our teams for their many contributions.

Our playbook is working, and we are just getting started.

We are well positioned to grow into an even stronger and more successful company.

Looking ahead, we'll continue to optimize our portfolio, strengthen our innovation and accelerate our transformation while developing our people.

Nick will now take you through the details of the quarter.

Nick?

Thank you, Mike, and good morning, everyone.

Please turn to Slide 7. Sales grew 5.6% organically in the second quarter.

Increases in selling prices contributed 110 basis points to sales growth in the quarter and were positive across all geographic areas.

The net impact of acquisitions and divestitures contributed 80 basis points to sales growth in the quarter.

Foreign currency translation increased sales by 1 percentage point.

All in, second quarter sales in U.S. dollars increased 7.4% versus last year.

In the U.S., organic growth was 5.6%, led by Electronics and Energy, Safety and Graphics and Consumer.

EMEA increased 5.8% in Q2, driven by strong growth in West Europe that was led by Electronics and Energy, industrial and Safety and Graphics.

Asia Pacific delivered 5.5% organic growth, led by Health Care and Safety and Graphics.

Organic growth was 12% in both China/Hong Kong and India, while Japan was down 2%.

Finally, Q2 organic growth in Latin America/Canada was 6%, led by Health Care and Safety and Graphics.

At a country level, Canada was up high single digits while Mexico and Brazil both delivered mid-single-digit organic growth.

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

Company-wide, second quarter sales were $8.4 billion.

Operating income in the second quarter was $2.4 billion, which included a $400 million benefit from the communication markets divestiture gain, net of related actions.

Second quarter underlying operating margins were 24%, excluding the net benefit from the communication markets divestiture.

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

Leverage on organic growth, improved productivity and lower year-on-year portfolio and footprint actions contributed a combined 290 basis points to margins.

Selling price benefits more than offset raw material inflation, adding 30 basis points to operating margins.

Foreign currency, net of hedging impacts, reduced margins by 20 basis points.

Lastly, during the second quarter, we settled several respiratory and oral care-related lawsuits, which decreased margins by 70 basis points.

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

Second quarter GAAP earnings were $3.07 per share, up 19% year-over-year.

Underlying earnings were $2.59 per share when adjusting for the communication markets divestiture gain, net of related actions.

Let me now discuss the primary drivers of the year-on-year increase in Q2 earnings per share.

The benefits of organic growth, productivity and lower year-on-year portfolio and footprint actions added a combined $0.47 to per share earnings in the quarter.

The previously mentioned legal settlements reduced Q2 earnings by $0.07 per share.

Higher year-on-year net interest expense and retirement benefit expense decreased earnings by $0.06 per share.

Our underlying Q2 tax rate was 19.8%, which increased earnings by $0.16 per share.

The lower tax rate was driven primarily by U.S. tax reform and the continued benefits from our Supply Chain Centers of Expertise.

Lastly, lower shares outstanding added $0.04 to per share earnings.

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

Second quarter free cash flow was $1.5 billion, up 14.5% year-on-year.

Free cash flow conversion was 83% in the quarter.

This includes a 16 percentage point headwind from the divestiture gain of the communication markets business and related actions.

Second quarter capital expenditures were $365 million, up $63 million year-on-year.

For the full year, we continue to anticipate CapEx investments in the range of $1.5 billion to $1.8 billion.

During the quarter, we paid $802 million in cash dividends to shareholders and returned $1.6 billion to shareholders through gross share repurchases.

Through the first half of the year, we repurchased $2.5 billion of stock and now expect full year repurchases to be in the range of $4 billion to $5 billion versus $3 billion to $5 billion previously.

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

The Industrial Business Group delivered second quarter sales of $3.1 billion, up 5.7% organically.

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

Our advanced materials, abrasives and separation and purification businesses led the way with high single-digit growth in the quarter.

Looking at the rest of the Industrial portfolio, our industrial adhesives and tapes, auto and aerospace and automotive aftermarket businesses all delivered mid-single-digit growth in the quarter.

On a geographic basis, Industrial's organic growth was led by a 7% increase in EMEA, followed by mid-single-digit growth in each of the other areas.

Industrial delivered second quarter operating income of $724 million.

Operating margins were 23%, with underlying margins up 180 basis points, excluding the impact of last year's second quarter portfolio and footprint actions.

Please turn to Slide 12.

Second quarter Safety and Graphics sales were $1.8 billion, up 8.5% organically, with strong growth across all businesses and geographies.

As Mike mentioned, our personal safety business continued to post excellent growth, up double digits in the quarter.

The integration of our Scott Safety business is performing well, and we are pleased with the performance of the business.

Commercial solutions was up high single digits while the transportation safety and roofing granules businesses were both up mid-single digits.

Geographically, organic growth was led by 10% growth in EMEA, with high single-digit increases in both the U.S. and Asia Pacific.

Latin America/Canada grew 6% organically in the quarter.

Operating income was $480 million, with operating margins of 26.4%.

Please turn to Slide 13.

Our Health Care business generated second quarter sales of $1.5 billion, up 3.8% organically.

Our medical solutions business, which is our largest segment in Health Care, grew mid-single digits in Q2.

Oral care was up 3%, with continued good growth internationally, particularly in developing markets.

Food safety grew high single digits while health information systems grew mid-single digits.

Finally, our project-based drug delivery business declined low single digits year-over-year.

On a geographic basis, Asia Pacific and Latin America/Canada led the way, both up high single digits.

EMEA grew 5%, followed by 1% in the U.S. We saw continued strength in developing markets, up double digits, led by China/Hong Kong growing in the high teens.

Health Care's second quarter operating income increased 7% to $435 million, and underlying operating margins were just over 30%, adjusting for the impacts of a legal settlement and the commercialization investments for our new Clarity aligners.

Next, let's cover Electronics and Energy on Slide 14.

Electronics and Energy organic sales growth was 5.2% in the second quarter.

Sales were $1.3 billion.

The electronics side of the business grew 4% organically, led by mid-single-digit growth in electronics materials solutions.

Our energy-related businesses were up 9% organically, led by electrical markets up double digits.

As mentioned, we closed on the sale of substantially all of the communication markets business in the quarter and expect to close the remaining portion by the end of the year.

On a geographic basis, the U.S. led with high single-digit organic growth, followed by mid-single-digit growth in both EMEA and Asia Pacific.

Latin America/Canada was up low single digits.

Second quarter operating income for Electronics and Energy was $865 million, with underlying operating margins of nearly 28%.

Please turn to Slide 15.

Second quarter sales in Consumer were $1.2 billion, and organic growth was 4.3% year-on-year.

Our home improvement business grew double digits organically, continuing its track record of strong performance.

Our leading brands continue to win in the marketplace, particularly Command and Filtrete, both up double digits.

The home care business and stationery and office supply business each delivered low single-digit growth in the quarter, while consumer health care declined.

Looking at Consumer geographically, growth was led by a 7% increase in the U.S., followed by mid-single-digit growth in Latin America/Canada.

In the second quarter, we continued to see strong consumer demand for our products in the U.S., particularly in the e-commerce channel.

Finally, operating income was $261 million, with operating margins of 21.4%.

That wraps up our review of the second quarter results.

Please turn to Slide 16, and I'll cover our updated 2018 guidance.

Our full year organic growth expectations remain unchanged in the range of 3% to 4%.

With respect to earnings, we now expect full year adjusted EPS to be in the range of $10.20 to $10.45 versus a prior range of $10.20 to $10.55.

The update to the range reflects the impact of the divested income associated with the communication markets business.

Finally, please note that we now expect that foreign currency translation will add approximately 1% to full year sales growth versus a prior expectation of 2%.

With that, we thank you for your attention, and we'll now take your questions.

(Operator Instructions) And our first question comes from the line of Scott Davis of Melius Research.

Inge, you will be missed.

You did a fantastic job, as you know.

And Mike, big shoes to fill, but I'm sure you'll do great as well.

Anyway...

Well, thank you, Scott.

You're quite welcome.

Guys, one thing that caught my eye just in the prepared remarks was your ERP rollout comments.

Can you tell us, is that in every segment?

Is that -- how big of a deal is this?

And what's your confidence level that the pull-forward was just 50 to 100 and not something greater than that?

Is it possible to have that kind of precision?

Yes.

Scott, we've been working on deploying our Business Transformation, our ERP rollout globally for a number of years.

And we have largely completed our deployment in Europe, West Europe in particular, and now we -- as we came into 2018, we are focused on the U.S. And so it's a very well-laid-out plan of deployments by region, by business, by supply chain operations.

And so we are, over the next 18 months now, deploying in the U.S. So very specific deployment by business.

We did deploy our Health Care business at the end of last year, and so we have experience with that business in the deployment already complete.

And now we're deploying the rest of the businesses in the U.S. as we go through the next 18 months.

So we have pretty clear view on which customers are impacted with the deployment at which periods of time.

And so we have very good -- I think, a pretty clear view of how much of the accelerated sales are in line with the deployment now that's taking place in the U.S.

Okay, fair enough.

And then as a follow-up, I mean, we've seen some pretty big moves in EM currency over the last quarter.

And what can you guys -- I mean, what's the playbook?

Do you have to go in there and raise prices?

I mean, do you realign some supply chains?

I mean, what's the playbook when -- to manage that volatility?

Yes, Scott.

In the playbook on there, it really isn't changing.

We seek to have natural hedges against currency risk in how we set up the supply chain, and then we layer on top of that some financial hedges.

And those financial hedges don't ultimately change the underlying financials over a longer period of time, but we have hedges that we enter into going out 1, 2, 3 years to buy time for us to adjust our cost structure, our supply chain in order to end up with a competitive supply chain in a revised FX environment.

So in the short term, what we often do especially in emerging markets, we will adjust prices to partially offset the FX impact, and then we will adjust our supply chain, adjusting where we're manufacturing based on FX movements.

That tends to take a little longer time, though, Scott, and not in the short term, but we often have to change and requalify sources of supply to make that happen.

For the year, Scott, I will say we started the year guiding that FX, with rates as they stood at the end of the year, we thought that they would positively impact our earnings by about $0.10.

Through the first few months of the year, the dollar weakened more, and that pushed our EPS benefit that we were expecting slightly above that $0.10.

In the last few months, we've seen the dollar strengthen, and we now see ourselves slightly below that $0.10.

And through the first half of the year, we have seen a $0.06 EPS benefit from FX.

And if we see meaningful changes to that $0.10 we originally guided, we'll provide updates on that accordingly.

Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch.

Inge, congratulations.

Thanks, Mike.

We look forward to working with you and the team.

Thank you, Andrew.

Same here, Andrew.

Just a question on guidance.

If I look at income before taxes that you guys have on Slide 22, basically, I think prior outlook was $7.7 billion to $8.2 billion and now it's $7.8 billion to $7.9 billion.

And I think the press release indicates that most of it is just adjusting for missing revenue and earnings from the divestiture, but the composition sort of doesn't make sense.

Can you tell us what the moving -- what the big moving pieces are as we move from $7.7 billion, $8.2 billion range to $7.8 billion to $7.9 billion?

Yes.

Andrew, there's a few moving pieces there.

First of all, as you noted, now that we have divested of our communications markets division, there's some income that, that would have been generating in the last 7 months of the year that, that will no longer be generating.

And that's what's encompassed in our adjustment to our EPS guidance for the year.

In particular, what you're talking about there, there's also an impact from net interest expense.

So in terms of our earnings bridge that we laid out at the beginning of the year, there's a couple moving parts in addition to the -- this communication markets adjustment that we announced today.

First is we are buying back more shares.

And we originally guided that, that would be $0.10 to $0.15 of benefit.

We now see ourselves at the high end of that range.

So that's on the positive.

We also are borrowing more money, so our net interest expense is going up.

So we started the year guiding that net interest expense would be a benefit to our EPS of $0.05 to $0.10.

We now think that'll be approximately flat for the year.

Okay, got you.

So these are the 3 moving pieces.

And just a question, going back to the ERP question.

A, I assume your guidance sort of incorporated -- did you guys anticipate this prebuy in the second quarter?

And the second, just how do you guys think about sort of managing disruptions from ERP implementations in North America?

Because Western Europe -- and I do appreciate that Western Europe was a much more significant undertaking in terms of shutting down facilities, moving stuff around, but you did have negative top line comps there for a while.

So going to the second half, as you have to manage ERP disruptions in North America, what gives you confidence that there will not be hits to organic growth?

How are you guys going to manage it?

Sorry for the lengthy question.

Yes.

I would maybe start with, as we've talked a lot about with our Business Transformation, it really starts and ends with the customer for us.

So we are -- in our deployments, that's where we start.

We focus on how to do the best for our customers, minimize impact and provide benefits with where we're going with Business Transformation.

And I would say, as we deployed in Europe, that was true.

I mean, you are asking the customers to significantly change how they interact with us, but on the other side of that, change process is a lot of benefit for how we work together.

And so I think we saw that in Europe.

And I -- we had the deployment, and some of the same things we're seeing now in the U.S. where we had some accelerated purchases, I don't think we would characterize it the way you did, that we saw growth impacted by that Business Transformation.

That was other dynamics in the marketplace and even some of the things that we're doing around portfolio, so I -- and maybe to a degree, some of the things we're doing about some of the strategic investments there.

But the layout with a focus on customers and how we manage that, that's part of what we're doing in the U.S. now.

We're engaging them day in and day out, communicating with them early about how this is progressing, working with them very closely about managing through any disruption as we scale down the legacy systems and scale up the new ERP and surrounding capabilities.

And so that process, we are managing supply all the way through the calendar of those steps.

And this accelerated buy, we expected some accelerated buy.

We were working with our customers as we got closer, how much interruption would they see, how much accelerated buy made sense, if -- and it's really up to them ultimately.

They are making the decision on what they buy based on the information we're communicating with them.

It's -- I would say it's in line with what we've seen as we've deployed through West Europe.

And I think it's projecting that we're doing a good job with deployments.

They're on track and progressing well.

So from your perspective, there is high degree of visibility on organic growth in second half?

Yes.

Related to the ERP deployment?

Absolutely.

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

Inge, congrats and good luck again.

Thank you.

So there's obviously been a little more noise here with the ERP rollout.

But can you give us a little more color on how should we think about your organic sales growth guidance by segment?

If we look at your annual guidance, you guys talked about Health Care at 4% to 6%, maybe you're trending a little below there, but Safety and Graphics is trending way above.

So is there a bit of a trade-off there?

And then are the other segments generally in line for the year?

Is that how we should think about it?

Yes.

Andy, thanks for the question.

Just a few things.

As far as the impact of this ERP go-live impact and the way it's impacting different segments in the U.S., we see these impacts primarily in our Industrial, Safety and Graphics and Electronics and Energy Business Groups.

It's not really having a material impact on Consumer and really no impact on our Health Care business.

So in terms of how you think about that impact in the second quarter and the third quarter and fourth quarter, it's really those 3 businesses that were impacted.

Now in terms of our guidance for the year, we continue to see Industrial -- globally, we had originally guided 3% to 5%.

We see that most likely in the bottom half of that range, and that aligns with the updated total company guidance that we provided in April.

We do see Health Care probably closer to the 4% growth for the total year.

And Safety and Graphics, which we had originally guided at 4% to 6%, we see that at the high end or possibly higher than the high end of our original guidance.

The others are Consumer and Electronics and Energy.

We see those solidly in the ranges that we first put out.

Nick, that's helpful.

And maybe I could ask you about pricing.

Obviously, very strong pricing in the quarter.

When you look at price versus raws, it actually accelerated or was better in Q2 than Q1.

We know you said it was going to be an elevated year for pricing, but are there any particular end markets where pricing is particularly strong?

And then do you think the headwind on price versus raw material costs could be less than the $0.05 to $0.10 for the year that you updated us on last quarter?

Yes.

The $0.05 to $0.10, Andy, just to be clear, that's just the raw material headwind that we updated that.

And as far as price growth, it's actually, Andy, quite broad.

It's -- I won't point out one business or one geography as really driving these results.

It's really quite broad and deep where the price growth is.

In terms of impact on margin, I think I said earlier that I -- we continue to see that as being positive for the year.

And halfway through the year, we continue to see that -- highly confident that our price increases will more than offset whatever we see for raw material headwinds for the year.

Our next question comes from the line of Julian Mitchell of Barclays.

I'll echo the comments on thanks to Inge and welcome to Mike.

In terms of, I guess, maybe a first question on a couple of the end markets.

Any updated thoughts on the automotive outlook particularly in your Industrial business?

And also, within Electronics and Energy, there had been this bifurcation earlier in the year where device sell-through was soft, but the sort of CapEx or electronics materials business was very strong.

Just wondered how you've seen that playing out more recently.

And are you worried about the CapEx portion or EMS decelerating given what's happening with device sell-through?

Yes.

Thank you, Julian.

So starting with the automotive, we continued -- at year-to-date through the first half, we continue to see strong growth relative to the build rates globally.

So remember, we're managing a global automotive business focused around key account relationships with the OEMs globally.

And we're seeing continued good performance on our spec-ins and penetration into the marketplace.

And so good growth year-to-date relative to the build rates.

Some improvement in the build rates in second quarter, still looking at IHS projections, up over 4%, slightly over 4% second quarter.

Again, total year, still in line with that 2.2% kind of number and always watching quarter-to-quarter kind of the ups and downs there, but performing well.

And when you bring together our automotive electrification capabilities and what we're doing in our technology and applications around that, we continue to see a very robust outlook for outgrowing the build rates.

If you turn to Electronics and Energy, we continue to see, I would say, strong growth in what we'd been talking about as high-growth electronic segments, around automotive electrification, around data centers, semiconductor fabrication.

That continues to move forward.

And semiconductor fabrication behind, maybe a part of your question there, where CapEx is being spent, still seeing significant growth opportunities for us.

We -- the rest of the electronics -- I would say electronics in general is playing out in line with the way we laid it out at the beginning of the year.

And that was more, I would say, modest growth in the consumer electronics part of our portfolio and stronger growth in that -- those higher-growth segments.

There are some -- I would say, some shifts here or there in the quarter, but pretty much playing out as we expected in our Electronics and Energy business, pretty much right down the middle of the range that we had laid out at the beginning of the year as well.

And then my second question would just be around, if you look back to your sort of EPS road map from Slide 8, way back at the December Outlook Meeting from Nick's presentation, I think you've given a very thorough update on sort of 2 of the main chunks in that.

But maybe any color on the productivity piece, how that's trending in terms of footprint optimization, Business Transformation and the manufacturing productivity in terms of, I guess, what are the saving -- how are the savings from those various programs tracking in the first half versus what you'd expected?

And were there any gyrations in the sales line causing you to accelerate some of the productivity plans?

Yes.

Julian, the -- in terms of the 2018 road map that I provided last December and then we updated it in January after tax reform, the other components are staying where we expected.

But let me give a little color on it.

Even organic growth, with the roll-down that we had in our growth -- total year organic growth expectation for the year, we see more of our growth coming from price, which is accretive to EPS.

So our organic growth impact on earnings remain unchanged.

Footprint optimization, much of that, Julian, was just not repeating the charges that we took in 2017.

There were some incremental and some charges and some benefit.

Those largely washed in 2018.

We are expecting the majority of that true benefit to be coming in 2019 and 2020.

So that is progressing exactly as we expected.

Raw materials, as I noted, we adjusted that down from that original guidance.

Business Transformation and productivity, both of those are tracking to the ranges that we put in, that they are performing exactly as we expected.

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

Inge, wish you all the best, and congrats again to Mike.

Thanks, Deane.

Hey, I'd like to follow up on some of the business line-specific questions that Julian started there.

And Mike, can you address how auto aftermarket did in the quarter versus some of the fall-off we saw in the first quarter?

And then in oral care, we saw the total growth.

How did the U.S. market do specifically?

Has the distribution channel calmed down?

And maybe talk a bit more about this launch.

It looks like that Clarity will compete directly with Invisalign?

And is that -- and what are the competitive dynamics there?

Yes, sounds good.

So starting with the Industrial, automotive aftermarket kind of question.

Industrial, we saw broad-based growth across all geographic areas, all businesses.

And we highlighted some of the leading growth there.

We saw mid-single-digit growth in our automotive aftermarket business in Q2.

We -- coming out of Q1, we were really looking hard at the market.

We saw end demand soften as we came out of Q1, but the total year was projecting nominal growth for that marketplace, and we expected to improve as we went through the year.

And we saw that start in Q2.

We saw the demand pick up.

We saw our opportunity in the marketplace pick up across developed economies in particular and the U.S. leading that.

So we saw the kind of improvement we expected with automotive aftermarket.

And we're projecting the total year in line with where we started at the beginning.

Turning to oral care, oral care is an important business for us.

We're recognized as the leader in a number of positions, leveraging our material science.

And we continue to innovate and look to invest and grow this business as we move ahead.

It really does leverage our strengths.

If you look at the overall growth in second quarter, 3% for worldwide growth, down slightly in the U.S., improving over Q1.

And again, what we're expecting is to see some improvement globally and led again by developing markets, but improving as we go through the year, still some room to go in improvement in the U.S. as we move ahead.

We did announce and introduce our Clarity aligners at the American Association of Orthodontists show in May.

And we believe that this now positions us to have the broadest set of solutions across orthodontic platforms.

And we're actively onboarding orthodontists right now.

So it's really a play for us to help have a broad-based suite of solutions for the orthodontists in the global market.

We're getting -- so far getting very good and positive feedback.

Got it.

And just as a follow-up on tariffs, and maybe Nick can clarify the point that you expect to be positive in price costs.

Does that include the tariffs that have been announced, enacted?

And what's the look forward on potential risk as it -- as this may get escalated?

Yes, Deane.

The guidance that I said is inclusive of tariffs that have been enacted.

So when we're talking tariffs, there's a number of tariffs.

First, the steel and aluminum under the National Security Act.

And that impact as well as the Section 301 List 1. Those 2 that have already been enacted, we see having a fairly immaterial impact on us.

We estimate that to be approximately $10 million or $0.01 a share on an annualized basis, the direct and indirect impact of those tariffs.

We are actively monitoring and assessing the potential impact from Section 301 List 2 and 3, if those were implemented, and any potential retaliation that could occur with those.

And we're prepared to act with sourcing changes, supply changes and pricing changes if enacted.

So my initial statement stands that we think pricing will offset raw material impacts there.

And if tariffs expand, we continue to see that happening.

We're not quantifying the impact of those latter 2 since they haven't been enacted yet, but we are prepared with actions to minimize the impact of that.

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

Two quick ones.

First on the price-versus-raws dynamic, if raw material pressures peak out, do you think you can maintain the same pace of price or is a certain amount of the price mix, just the raw material offset?

And secondly, on Asia, specifically in China, can you parse out a little bit the trends driving the pickup in Chinese growth, the acceleration from Q1 to Q2?

Is that just consumer and health?

Or is there something else going on there?

Yes.

Laurence, on the price/raw materials, we are likely seeing that our commodity prices and the increases we're seeing there are likely at a peak level.

And our pricing projections, our selling price projections are consistent with that.

And that's part of our anticipation that, in a more stable world going forward with commodities, we'll continue to have our prices -- our selling price increases more than offset what we're estimating now for commodity price increases.

And we really don't see that changing.

And if the commodity prices start to change again, we will be prepared to act.

Yes.

And Laurence, just taking a look at China, we had strong growth in second quarter.

Electronics performed very well as we continued to, I would say, win business with the companies based there, including the China OEMs.

We also saw strong growth in our domestic-facing businesses, kind of the domestic economy-facing businesses.

We've had a strategy to prioritize growth here in line with what China is doing to develop their economy.

And so as you noted, Health Care is a strong leader of that growth in the first half of the year.

A big part of our Consumer businesses, performing very well.

Safety and Graphics also, really with the domestic-facing portfolio, doing well.

And even when you look at our Industrial business, we have platform businesses in our Industrial Business Group that are performing well as -- performing well, too.

And that would be -- a good example, our industrial adhesives and tapes business doing very well in China.

So it's broader than just Health Care and Consumer, really centered around where the growth is occurring in the broader China market.

Our next question comes from the line of Nigel Coe of Wolfe Research.

Sorry.

Am I live?

Yes, you're live, Nigel.

Sorry about that.

Some technical issues here.

So apologies if this has been addressed already.

I was a little late joining the call.

But the $0.15 probably, Nick, of restructuring that's associated with the gain on the comms business, is that just related to the E&E comms segments?

Or is this broader?

And maybe just some color in terms of what actions you are taking with the $0.15.

Yes, Nigel.

That -- the actions that we're taking are to address stranded costs that are left after the divestiture of our CMD business.

So they're addressing structural costs that this divestiture is leaving.

We started those actions in Q2, and we expect to take more in the second half of the year to offset the -- what could have been a negative impact if we had left those stranded costs in the company going forward.

Okay.

And would that be a payback, relatively quick payback, a 12-month payback or a little bit longer?

We expect that, that will be paying back for us next year.

Some of those actions will trail into next year in terms of when the cost savings start to happen, but we'll be starting to see that benefit in 2019.

And Nigel, one other thing, I'm not sure if you were asking this earlier.

This charge is almost entirely being taken at a corporate level and not in our Electronics and Energy business.

Got it, okay.

And then just a follow-on question on the guidance.

The way the guidance is set up first half versus second half, we're getting questions in terms of it's still somewhat back-end loaded, particularly when we think about the way that FX is coming through the P&L, and of course, comms comes out first half versus second half.

What's better in the second half versus the first half to get us to the midpoint of the guidance range?

For the second half of the year, we do expect that we'll be seeing more benefit from share repurchases than we saw in the first half.

We do think productivity will be better in the second half than what we saw in the first half.

And then in terms of commodity prices from a year-on-year basis, we expect that, that'll be fairly neutral between the first half and the second half.

Pricing will likely be better in the second half than in the first half.

Pricing, for sure.

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

Hey, just a quick cleanup for me on Health Care and then maybe a bigger-picture question for Mike.

Health Care U.S. growth has been a little on the soft side year-to-date and in the quarter.

Perhaps it's dental.

But are we observing some hangover from pull-forward on sales there from ERP last year in the Health Care business?

Jeff, Health Care in the U.S., what -- where you're seeing the impact, broadly, we had strong growth, and our medical solutions business is leading the way there.

And maybe just a note about that, too.

We've been talking about this as our medical consumables business in the past, but it really is focused on value-based care and health economics, and it's a much more integrated portfolio around that.

So I'm going to be talking about it as medical solutions.

So leading the way, we saw good growth in the U.S. also in food safety and health information.

Oral care was down slightly.

The bigger drag in second quarter was our drug delivery business.

Again, we talked about project-based business.

We saw a decline in Q2 from that business, and that was the bigger impact.

So broader-based, stronger growth, that'll position us well in the U.S. as we move ahead.

And then you had...

Yes.

And then just on the -- Mike, on the portfolio, obviously, you've been working closely with Inge all along, and I guess things will always be kind of under review.

But with CMD out of the way here now, do you view the portfolio as relatively stable or there's more that you're working on internally and want to reevaluate?

Yes.

If you look at where we are focused as we move ahead, the playbook is working.

Our playbook is working.

But there are opportunities in each of those 3 levers, including Portfolio Management.

We are now an active portfolio manager.

And we do have a robust pipeline of how we look at our portfolio.

And we'll be working to best utilize the 3M model and optimize the portfolio around our model for value creation.

So we're going to continue to be an active portfolio manager as we move ahead.

It's about prioritizing resources.

It's about targeting where we go with M&A, and it's also about reviewing our businesses as we go.

So I see that as very much a part of our future of a value creation opportunity, and it's a priority for me as I step into the role.

Best wishes to Inge.

Take care.

Thanks, Jeff.

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

I'll echo everybody's comments here.

So a lot of ground.

I just want to dig a little bit more into that important price point, the 1.1% in the quarter.

You mentioned it was quite broad.

But you usually also talk about sort of splitting out currency impacts and other impacts versus underlying business year-on-year relative to taking pricing on existing items and new products sometimes driving a big part of it.

Just trying to get a sense for the kind of operating robustness of that number and the repeatability of it as we're looking through -- not only imply the rest of the year but later into next year too.

Yes, Steven.

Yes, as I said, it's broad-based.

100 basis points up in the U.S.; EMEA was up 180 basis points; Latin America/Canada, 210 basis points; and APAC, up 40 basis points.

And that 110 basis points is inclusive of our electronics business, which is normally a price-down model.

If we pull electronics out, our underlying price growth was up 130 basis points.

And as far as geographies and what we see as potential there, we continue to see -- we don't see that going down.

Part of your question, Steve, was also on FX impact.

Right now, we estimate there is only about 20 of that 110 or 130, depending on how you look at it, of price growth that was coming from FX.

The vast majority of it is coming from core underlying price growth.

And it's really a reflection of the value we create for our customers.

And this is a new point I'm making here.

It's based -- it's partially being driven by improvements in our global price management that our Business Transformation initiative is enabling.

The ability to have better governance and better control over that pricing, we're starting to see that benefit.

And that's part of what you're seeing change here.

Okay, that's helpful.

And Mike, Jeff just referred to it on the divestiture side of the portfolio, [change] side.

But as I'm looking at acquisitions, Scott Safety was a great strategic play for you guys.

Are you -- what do you see in terms of the pipeline right now?

Should we be expecting anything in the bigger size range soon?

Or are things on hold at all as you're kind of going through the transition?

What should the expectations be on the acquisition?

Yes.

Thanks, Steven.

For me coming in, as always, organic growth remains our first priority.

And so we're going to continue to prioritize investments in R&D, in CapEx and in product commercialization.

With that in mind, though, in managing our portfolio, we're looking at M&A as an opportunity to create value.

We're going to maintain the flexibility to pursue additional strategic acquisition opportunities like Scott Safety.

And we have been, I think, very clearly focused on strategies that leverage our fundamental strengths, unique value creators to 3M, our ability to integrate successfully these acquisitions and to create market leadership positions like we've been doing in personal safety.

So we are active.

Our top priorities, as I look ahead, are Health Care and Industrial.

Safety and Graphics continues to be a priority, though they're very much focused on integrating Scott Safety at this time.

With that said, all 5 businesses are active, and we have strong overall pipelines for us to work with.

And so for me, it's about really moving ahead and identifying those opportunities that are clearly linked to those strategies where we can create differentiated value.

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

So just better understanding some of the moving parts here, back to Nigel's question on the kind of seasonality, you pulled forward a bit of sales here in the second quarter.

You've got a pretty tough comp in the third quarter.

Anything on that kind of comp that we should be aware of?

I mean, does -- is it kind of like second half looks like first half, whereas first quarter was lower than second quarter, kind of a 3% range?

Is that kind of how we're thinking about the second half split between 3Q and 4Q on organic?

And then also, just on EPS.

You had a low tax rate.

The tax rate at kind of the lower end of the range this quarter.

Maybe that steps up a little bit in the third quarter.

Will you grow earnings here sequentially in the third quarter?

Yes, Steve.

In terms of growth, let me give some guidance on how we're seeing growth between the third and fourth quarter.

Mike talked earlier about the impact of our U.S. go-live with our ERP system and the amount of the revenue.

So that impact, as we expect that to be -- us to be giving back some of those sales in the second half of the year, we expect that to disproportionately impact the third quarter.

And as you noted, between the 2 quarters, Q3 is the tougher of the 2 comps between the third and the fourth quarter.

That all in, we are looking at the third quarter being lower growth than the fourth quarter, both of them aligned with our expectation of 3% to 4% for the total year.

But I'm not going to be surprised if we have a lower number in third quarter given what we're seeing, right, so far for the year, and it's in line with our 3% to 4% guidance.

And then in terms of EPS for each quarter, try to avoid giving EPS guidance on a quarter-by-quarter basis.

But we continue to see ourselves very firmly delivering in that -- on an adjusted basis, the $10.20 to the $10.45 for the total year.

Our next question comes from the line of Joshua Aguilar of Morningstar.

So drug delivery, kind of down low single digits year-over-year.

And I think last quarter kind of was the same case off of tough comps.

Obviously, this is a more project-based business, as you guys said.

And I remember, in your Investor Day in 2016, you were talking about some of the advantages from drug delivery like analytics and patient compliance.

More long term, are you guys still optimistic about the future trends there generally with drug delivery?

And can you give us an update about what you're excited about?

Yes.

Joshua, what you're referring to, some of the opportunities that we see for growth in that business, and we still -- we see opportunities to take that business to a positive-growth business as we move ahead.

It will continue to be a project-based business.

So quarter-to-quarter, it can be lumpy and up and down, but we do see opportunities.

We have some unique capabilities and technology there that we can apply as we move ahead.

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

I will now turn the call back over to Mike Roman for some closing comments.

To wrap up, we had a strong performance in the second quarter, led by broad-based organic growth, expanded margins and a double-digit increase in earnings per share.

We are executing our playbook and are positioned to deliver a successful 2018.

Thank you again 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.