3M (MMM) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded, Thursday, July 25, 2013.

I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Thank you, and good morning.

With me here today are Inge Thulin, 3M's Chairman of the Board, President, and Chief Executive Officer; and David Meline, our Chief Financial Officer.

Welcome to our second-quarter business review.

Note that today's earnings release and slide presentation accompanying this call are posted on our investor relations website at www.3M.com under the heading quarterly earnings.

Before we begin, I would like to mention a few calendar items.

We will announce our third-quarter earnings on Thursday, October 24, and our fourth-quarter earnings on Thursday, January 30.

In addition, we will host an investor meeting on the afternoon of Tuesday, December 17, at the Grand Hyatt hotel in Midtown Manhattan.

And, for calendar purposes, please plan on 1.00 pm to 5.00 pm on that day.

If you turn to slide number 2 please, 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 projections.

So, let begin today's review, and I will turn the program over to Inge.

Please turn to slide number 3.

Good morning, everyone.

I appreciate you joining us for today's call.

The second quarter was another good one for 3M.

We continued to grow our sales, profits, and free cash flow in the face of a continued slow growth economy and a strong US dollar.

Sales grew 3% year-on-year to $7.8 billion, an all-time record for any quarter in 3M's history.

Organic local currency growth was 2.3% in the quarter with healthcare leading the way at 6%.

Industrial and consumer each grew 3%, and safety and graphics grew 2%.

In electronics and energy, sales declined 2% on an organic local currency basis.

As I told you in each of the last two quarters, we expected a challenging consumer electronics market in the first half of 2013, and our prediction was correct.

We continue to anticipate some recovery in the second half of 2013 in this business.

Geographically, Latin America/Canada led the way with organic growth of 9%.

Asia-Pacific and Europe, Middle East, Africa each grew by 2%, and the United States was up 1%.

Currency impacts reduced worldwide sales by 1.3%, impacted by the weak Japanese yen.

Acquisitions added nearly 2 points to second-quarter growth.

Second-quarter operating margins were strong at 22% on a GAAP basis, or 22.4% adjusted for recent acquisitions.

Earnings was $1.71 per share, up 3% versus second quarter of 2012.

Free cash flow in the quarter was $1.3 billion, a second-quarter record for 3M, and we converted 107% of net income to cash.

Finally, in the quarter, we returned $1.6 billion of cash to shareholders via dividends and share repurchases, a step-up versus recent quarters.

David will have more to say on this in a moment.

Entering 2013, we anticipated slow market growth in the first half of the year, and that is how it played out.

I am pleased with our performance especially given this backdrop.

We also expected a second-half recovery based on improving macroeconomic trends and a recovery in the consumer electronics.

This remains our view today.

Please turn to slide number 4.

Looking at full-year guidance, we are maintaining our previous expected earnings range of $6.60 to $6.85 per share and organic local currency growth of 2% to 5%.

We now expect that currency impacts will reduce sales for the year by 2% versus the prior expected reduction of 1.5%.

Acquisitions should add about 1.5% to sales for the year.

As for the 2013 tax rate, we now anticipate the range of 29% to 29.5% versus the previous range of 29.5% to 30%.

And, we continue to expand free cash flow conversion of 90% to 100% for 2013.

Now, I turn the call over to David for details on the quarter.

Thank you, Inge.

Let's begin with slide number 5 where I will break down the second-quarter change in sales.

We generated organic local currency growth of 2.3% amidst a continuing challenging economy.

Volumes contributed 1.7% to our growth, and selling prices increased 0.6%.

Acquisitions added 1.9 points to sales growth in the quarter, the majority of which come from Ceradyne which was acquired by our industrial business in last year's fourth quarter.

Foreign exchange impacts reduced sales by 1.3 percentage points in the second quarter, largely due to a 20% year-on-year decline in the Japanese yen versus the US dollar.

In dollar terms, worldwide sales grew 3% versus the second quarter of 2012.

On a geographic basis, Latin America/Canada led the way again this quarter with organic local currency growth of 8.5%.

All five of our businesses posted positive growth in this region led by a double-digit result in Health Care.

Organic local currency growth in Asia-Pacific was 2.2% in the second quarter with health care again up double digits.

Safety and graphics also had a nice growth in the quarter.

China/Hong Kong grew 3.4% organically in Q2, and Japan declined 2.3% year-on- year.

In EMEA, or the combined Europe, Middle East, and Africa, second-quarter sales increased 1.9% on an organic local currency basis.

Four of five businesses posted positive growth led by health care and industrial.

On a sub-EMEA level, we achieved double-digit organic growth in Middle East Africa and single-digit growth in central East Europe.

And, organic growth turned positive in West Europe in the second quarter which was encouraging to see after several down quarters.

In the United States, organic local currency growth was 0.8%.

Growth was positive in our Health Care, industrial, and consumer businesses and declined in electronics and energy and in safety and graphics.

Let's move to the income statement.

Please turn to slide number 6. Second-quarter sales were $7.8 billion, up 3% in dollar terms.

Our gross profit percentage was 48.3%, down 30 basis points versus the second quarter of 2012.

Investments in SG&A and R&D both increased 5% year-on-year.

Operating income was $1.7 billion, down 1.5%.

Operating margins were 22%, down 90 basis points versus last year's strong Q2 result.

Included in this quarter's results was a 40-basis-point headwind from acquisition, therefore, underlying Q2 margins were 22.4%.

Profit leverage on organic volume growth added 20 basis points to second-quarter operating margins, and the combination of lower raw material costs and higher selling prices added 80 basis points.

In addition, lower year-on-year pension and [OPEV] expense added 10 basis points to second-quarter margins.

Factory utilization reduced margins by 50 basis points, an improvement versus the first quarter and largely in line with our expectations.

Strategic investments impacted margins by 40 basis points.

This represents our ERP and business transformation effort along with more R&D aimed at disruptive innovation.

Both will strengthen 3M for the future.

Finally, the combination of foreign exchange impacts, the recently enacted medical device tax in the US, and other factors reduced margins by 70 basis points year-on-year.

Second-quarter earnings were $1.71 per share, up 3% versus the second quarter 2012.

The second-quarter tax rate improved to 27.4% versus 30.1% last year, which added $0.06 to earnings, and foreign exchange impacts reduced second-quarter earnings by $0.02 per share.

Now, let us turn to cash flow.

Turn to slide number 7. Second-quarter operating cash flow rose by $290 million year-on-year, or 21%, to $1.7 billion.

The increase was due primarily to lower pension and OPEV contributions along with improved working capital.

We invested $394 million in capital expenditures during the second quarter, up $36 million versus the second quarter of last year.

For the full year, we continue to expect capital expenditures in the range of $1.6 billion to $1.8 billion.

Free cash flow rose by $254 million, or 25% to $1.3 billion.

Free cash flow conversion was 107% in Q2, a 19 point improvement versus the second quarter of 2012, and we continue to expect conversion of 90% to 100% for the full year.

Cash dividends paid were $436 million in the second quarter, up $26 million year-on-year.

As a reminder, we increased the per share dividend by 8% this past February.

This marks 55 consecutive years of dividend increases, and the Company has now paid a cash dividend for 96 consecutive years.

Gross share repurchases were $1.2 billion in the quarter, up $551 million compared to Q2 of 2012, and as Inge mentioned, a step-up versus recent quarters.

We now anticipate a range of $3.5 billion to $4.5 billion of gross repurchases for the full-year 2013 versus a prior expectation of $2 billion to $3 billion.

We are increasing this range for a few reasons.

One, our business is operating well and generating substantial free cash flow which we expect will continue.

Two, rising interest rates are positively impacting our already well-funded pension status.

Three, we did not close any new acquisitions in the first half of 2013.

And, finally, our capital structure is already strong today, and we do not intend to strengthen it further.

Let us review in more depth our second-quarter performance on a business-by-business basis starting with industrial.

Please go to slide number 8. Second-quarter sales were $2.7 billion in industrial, up 3.3% on an organic local currency basis.

Growth was strongest in the aerospace and automotive after-market businesses, followed by liquid filtration, industrial adhesives and tapes, and automotive OEM.

Sales in industrial grew organically in all major geographic regions with Latin America/Canada up 9%, the US and EMEA up 3%, and APAC up 2%.

In November of 2012, we acquired Ceradyne Inc., one of the leading ceramics Companies in the world.

Ceradyne sales were $116 million in the second quarter, which added 4.6% to industrial's growth, and the business was profitable on a GAAP basis.

We are pleased thus far with the integration effort and look forward to continued success in this business.

Second-quarter operating income was $599 million, and reported margins were 22.5%.

Ex-acquisitions, industrial operating margins were 23.2%.

Now let's move to safety and graphics.

Turn to slide 9. Second-quarter sales were $1.5 billion, up 2% on an organic local currency basis.

We generated positive organic growth in commercial graphics, personal safety products, architectural markets, and building and commercial services.

Sales declined organically in the roofing granules business and in traffic safety and security systems.

On a geographic basis, organic local currency sales rose 9% in Latin America/Canada, 7% in Asia-Pacific, and 1% in EMEA.

The US declined 3% in the quarter.

The FSTech acquisition added 1.9% to growth in the quarter, and the business is on track to meet its top and bottom line targets in 2013.

We are aggressively integrating this business to capture significant cost in sales synergies.

FSTech increases our relevance in the large highway infrastructure market and is a natural growth adjacency for our reflective sheeting and pavement marking business.

Operating income in safety and graphics was $333 million, and operating margins were a strong 22.9% against a very tough comp of 25.9% in the prior year.

Excluding acquisitions, second-quarter 2000(sic) operating margins were 23.8%, and we are investing to accelerate growth in this business, particularly in personal safety in our recently formed mining, oil, and gas business.

Next up is electronics and energy found on slide 10.

In electronics and energy, sales were $1.3 billion for the quarter, down 2% in organic local currency terms.

Operating income was $237 million, and margins were 17.7%.

As we anticipated, margins were down year-on-year, but importantly, showed nice improvement versus the 15.3% margin that we posted in the first quarter.

Organic local currency sales declined slightly on the electronics side.

Consumer electronics end market demand has been fairly tepid throughout the first half of the year, but by and large, the market seems to have stabilized and third-quarter sales should show recovery.

End market inventories were heavy at year-end and have improved as the first half has progressed with some modest overhang still remaining in the handheld space.

In energy, sales declined 4% in the second quarter.

Our Heartland electrical markets business had positive organic growth and continued to perform very well in Q2.

This growth was more than offset by declines in other energy-related businesses.

Renewable energy, in particular, posted a double-digit sales decline in the quarter.

This market continues to seek a bottom which is impacting our growth.

But, we do see sales stabilizing in the second half, and the comps begin to ease.

We have been actively working to repurpose these assets to other 3M businesses where we anticipate growth.

On a geographic basis, organic local currency sales increased slightly in Latin America/Canada and declined in other regions.

Please go to slide 11.

Health Care had another excellent quarter, posting the highest organic growth and the highest operating margins amongst our five business segments.

Sales totaled $1.3 billion, up 6% on an organic local currency basis.

We continued to see broad-based growth across much of the Health Care portfolio, including health information systems, food safety, critical and chronic care, oral care, and infection prevention.

Sales in Health Care grew organically in all geographic regions led by double-digit performances in both Latin America/Canada and Asia-Pacific.

Health Care's second-quarter organic sales growth was 15% in developing markets on top of 13% in the first quarter.

These are highly promising growth sectors for 3M, and we continue to funnel investment dollars toward them and we are encouraged to see the positive results.

In developed markets, health care grew 8% organically in Japan and 3% in both the US and Western Europe.

Operating income rose 1% to $417 million, and margins were again strong at 31.2%.

The recently enacted US medical device tax was a 40-basis-point drag on Q2 operating margins.

Finally, let's review the consumer business found on slide number 12.

Consumer also delivered a good second quarter.

Sales were $1.1 billion, up 3% on am organic local currency basis.

Profits rose 4% to $235 million, and operating margins rose 40 basis points year-on-year to 21.4%.

We grew organically across the consumer portfolio, most notably in consumer health care where our Ace and Futuro brands showed particularly good growth in the second quarter.

We also posted positive organic local currency growth in our home care, stationery and office, and do-it-yourself businesses.

Q2 is when we begin to see the impact of the back-to-school season, and growth thus far four has been encouraging.

We have good placement and promotional programs in place, and we are seeing some sales lift from our newly introduced family of Scotch expressions tapes.

From a geographic perspective, organic sales growth was 7% in Latin America/Canada, 4% in Asia-Pacific, and 2% in the US.

Growth was slightly positive in EMEA.

In developing markets, the consumer business grew 7% in organic local currency in Q2.

Like health care, consumer is one of our most significant growth opportunities in developing markets as retail sectors expand along with the growing middle class.

Developed markets grew 2% organically.

That wraps up the detailed Outlook at the second quarter.

Now, I will turn the call back over to Inge.

Thank you, David.

Before we take your questions, I want to highlight our progress on several strategic fronts.

Let's start first with a brief update on the integration of Ceradyne which we acquired in October 2012.

Sales and profit exceeded expectations for the quarter.

Very good results and strong evidence of our progress.

You will recall that earlier this year, Ceradyne was awarded a $40 million-plus order for protective armor plates.

We saw some positive sales impact from this win in the second quarter.

Let me also give some comments on our portfolio management efforts and our R&D investments.

We are continuing to strengthen our portfolio through better prioritization and by addressing underperforming businesses.

For example, recently we announced a consolidation of our infrastructure protection division which has been under strategic review into the electronic market division.

We expect to gain rapid cost synergies as we increase the sale and efficiency on the newly combined entity.

In addition, these divisions share common end markets such as construction, electrical utilities, and electrical equipment Manufacturing.

Back in May, we announced the sale of our fly-fishing equipment business to Orvis.

This is a good business and a market leader in its space, but it has no relevance to become important in the broader 3M portfolio.

We also are making good progress in identifying new and promising technology programs.

As you may recall, we are planning to increase investments in longer-term, disruptive technologies aimed at opportunities with significant growth potential.

We formed a review team called the 3M innovation board comprised by myself, David, our Chief Technology Officer, and our head of corporate strategy.

The team meets quarterly to review milestone [progresses] and previously approved programs and to screen new investment ideas.

I am very encouraged on what I have seen so far.

Finally, we continue to move resources to our businesses with the most promising growth opportunities.

A great example is Health Care where the end markets continue to grow nicely and our technology and market positions give us strong relevance with our customers.

Consumer is another example where retail markets in developing economies are now beginning to develop.

And, we are actively prioritizing our Heartland divisions to ensure that they have the resources they need to improve their already strong market positions.

In summary, first-half conditions were challenging, and 3M executed very well under the circumstances.

We anticipate demand recovery in the second half of the year with some help from both the macroeconomic and the consumer electronics markets.

And, we remain focused on driving productivity and executing our plan with strong discipline.

Thank you for your attention.

We will now take your questions and comments.

(Operator Instructions)

Deane Dray, Citi Research.

Please proceed with your question.

Good morning, everyone.

I would like to start off on geographies and maybe you can comment on the significance, and we haven't seen this in a while.

But, central Europe showing stronger growth than the US.

Is this just easier comps?

But, maybe just give us a sense of what you're seeing in Europe now?

Good morning, Deane.

You asked specifically about central East Europe where we have had a good base for quite some time as you know as we have built out our businesses there, and we see continued good growth driven by specifically Russia, Turkey, and Poland.

But also, a lot of the other smaller countries there are doing well.

So, I think it is broad-based for us.

I am personally not surprised.

I was over visiting here actually this last quarter a couple of countries including Russia.

It is very encouraging what we see in the marketplace there.

Again, our portfolio has been wheeled out with very much industrial as the base in that part of the world, and now we see an increase in our businesses that going into safety-related businesses, but also Health Care is taking off very well for us.

So, I will say that it is not a surprise to us.

In fact, encouraging as we have moved out our portfolio.

We have also made some investments.

Actually the last 10 years or so, relative to local capabilities both in terms of converting and manufacturing and now research and development.

So, we have a big place over there in Poland in Wroclaw where we utilize a lot of capacity in order to serve that part of the world.

And recently, as you maybe recall in the last quarter, we talked about we are now opening also a center of excellence for logistics in Turkey that over time will serve as a bridge in between central East Europe and Middle East Africa.

It is very encouraging to us, and we would like to be bigger there.

And, as you are -- as I talk about central East Europe and Middle East Africa also Middle East Africa had very good growth for us in the quarter.

That is from a lower base, but basically all countries there grew except -- we have a little bit slower growth in South Africa due to some instability in that country.

So overall, very good.

The commentary -- same commentary for Western Europe?

Western Europe, first of all, we saw very, very slight growth for the first time in eight quarters which was encouraging for us.

And, the way we look upon it, we try to separate in between North and South.

And, in North, we are growing slightly better than in South.

I will say in terms of you look upon the countries -- I will say, Germany was basically going sideways on a lower level.

And, we had a little bit better growth in UK, up to 5% to 6% in that country.

And North part would be identified as Nordic UK, Germany, Benelux, and also [Alpine], as the Alpine countries are very dependent on Germany.

So, it's on a lower level, going sideways, but at least was encouraging to see that we, for the first time in eight quarters saw slight, slight growth from that part of the world.

And, as we had talked about earlier, we have really worked on the back end of the organization there in order to streamline that combined regions and try to manage the cost in the back end of the operation.

Thanks, and last one for me on safety and graphics.

You all called out roofing granules and traffic safety, and the slide also said security.

But, how would you split out the margin decline year-over-year across those three businesses?

Yes.

I think there are three components there.

You have, 1/3 is related to the FSTech acquisition.

1/3 is related to the decline in government-related project businesses.

Specifically, into road safety.

And then, finally, we are making some strategic investment in that business into mining, oil, and gas and to personal safety.

Personal safety is the Heartland division for us and had in the quarter 6% growth, and we are continuing to invest there.

So, those are the three elements of that business.

And, if you take out FSTech, that business had an operating income of almost 24% in the quarter, 23.8%.

Very good in our view even if it was a decline versus last year but not any major concern.

Great, thank you.

Thank you.

Steven Winoker, Sanford Bernstein.

Thanks, and good morning all.

I just want to follow-up.

Deane's question geographically on the US specifically.

It was 2.3% last quarter, 0.8% this quarter, 0.7% volume.

just give us a sense for that slowdown specifically if you could?

Yes, I think when we look upon where we had solid growth was in Health Care, industrial, and consumer.

I think it was more a relative base comparison and very much into some specific businesses that was related to government businesses as I talked earlier about from safety and graphic business.

Very much related to road safety.

And then, we also had the granule business that I would say was an inventory correction for the whole industry that happened for that business specifically.

We had relatively good consumer business and a good back-to-school [sale in] which I think was -- just that segment was up almost 10% as we rolled into the quarter.

Now, we have to look upon the sellout as we know as we move into the rest of the year.

Okay, and then second question.

When we look at pricing across the different geographies, and you see Latin America up 6.1% versus the volume of 2.4%.

And, I presume much of that is inflation-driven.

Can you give us a sense for how much you think is inflation versus just other kinds of price -- pricing power.

Obviously, you're exhibiting of pricing power there.

It would be helpful to understand that.

Sure, Steve, if I could comment.

If you look at -- and correctly a significant part of our reported price in the quarter was driven by Latin America which is, it was already up in the first quarter.

And, we saw it a little bit higher this quarter.

That is largely being driven by the fact that we have some of the currencies in several countries as well as inflation has been picking up.

So, what you see is the businesses are reacting to that to make sure we are preserving our profitability, and it is in an environment where we are able to, with the good brand positioning we have, we are able to put through those prices and still deliver growth in the region.

Okay, and sorry, just one more.

The 40 basis points of strategic investment margin headwind, how long should we think about building that into our forecast?

Yes, I would say that the strategic investments we are doing -- those as I mentioned earlier specifically related to our ERP business transformation which will go on for several years.

Now, on a year-over-year basis, we expect that the phenomena you see this year will continue certainly through the end of this year.

And, in the case of the innovation spend, we are starting to see that picking up somewhat as we get into these approved programs.

So, I think from a planning perspective at least through this year, you should expect that kind of investment level on a year-over-year basis.

And then, as we get into next year's planning, we will give you an update as to what to think about that.

Okay, thank you.

Yes.

Shannon O'Callaghan, Nomura.

David, could you just gage sort of an update on EPS contributions now going forward from shares, tax, pension because you are now buying back more shares.

You've got lower share count.

I don't know if that still goes lower.

And, I imagine pensions moved a bit with interest rates.

Maybe just gauge what we should expect in terms of EPS tailwinds from those?

Yes, so if you look at pensions, what you would observe as we had called out here the impact on margin in the first half.

If you look at first quarter, second quarter.

That has added about 0.3 points to the margins in the first-half, and you should expect that to continue through the balance of the year.

Obviously, as you start then looking forward into the future, if we stay in this kind of an interest rate environment, we will start to see our expense further decline as we talked about last November.

If you look at share count correctly, we have upped the amount that we would intend to buy back this year.

And so, I think you can calculate the figures, but we will see some reduction in share count impacting the second half.

But, as you do the averaging, the increase that we see in the actual buyback in the second half will have a bigger impact next year than this.

So, we will see some pickup in the second half.

The one thing I would add to that Shannon is foreign exchange.

There was a headwind in the first half to the tune of about $0.03 per share, and that will get a little bit stiffer in the second half of the year.

It will be closer to about $0.05 in the second half.

How should we interpret the share repurchase in terms of what drove your decision to increase it?

And, is this a reset to a higher range, or is this just a one-off?

Yes, that is a good question.

So, as I tried to call out here, in deciding how to proceed on that, we first and foremost looked at how the business is running, and certainly we are pleased with the performance of the business now.

And, we think that will continue in the context of both the health of our business and the economy.

Secondly, the pension plans, we have been -- obviously, with the tick-up in interest rates, if you look at our funding position -- funded position -- at midyear, we were at about 94% funded globally in all of our plans versus 87% at year-end.

Were that to continue that will be some easing on the demand for capital in that area which factors into our decision-making.

And then, as I also mentioned acquisitions, we did not deploy in the first half.

We continue to expect to and would guide to $1 billion to $2 billion this year, but inevitably, timing is very difficult to call.

And, certainly in this lower interest rate environment, we are seeing that finding transactions where we can create value from 3M has been more difficult for us recently.

So, that will factor into our thinking on sources and uses of cash.

And then, finally, as I mentioned, the capital structure of the Company, we think is certainly very strong and is adequate, and we wouldn't foresee strengthening it further.

So, add those pieces up.

Look at how those evolve.

That will inform us as to what kind of planning we will do in terms of our buyback activity going forward.

And, just to clarify on the tax and pension.

Do you still -- taxes coming in lower this year.

Do you still expect it to go lower in 2014?

And, do you have a read on what pension tailwind would be at this point?

Sure.

That's right.

So, we guided tax to 29% to 29.5% which is more in line with the tax rates that we had last year.

Everything we see, and again, we are just now in the update of our long-term plan.

We've just started that.

But, we would foresee -- we had indicated last year that by the end of the five-year period we would expect our rate to be in the neighborhood of 27%.

I do not have any reason right now to think that would change.

As to the year-by-year precise amounts, that is something we will have to refine here as we go through the balance of the year.

In terms of pensions -- yes, as you know it is a very significant consideration for 3M.

We have very significant obligations, and we have absorbed over the last five years an increase in our annual pension expense cumulatively of $550 million.

This year, our pension expense versus last year has declined by $100 million, and given the very strong funded position we have, which is improving.

Given the fact that we now have transitioned our work force globally such that we are moving increasingly into defined contribution-type profiles.

Considering very good return on assets we have been generating over recent years.

And then, finally rising interest rates would cause us to expect expenses to decline.

So, if you were to close the year today, what we would think is that we would have $100 million or more decline in expense next year.

Great, thanks a lot.

Stephen Tusa, JPMorgan.

Can you maybe just talk about any update to the price cost forecast for the year?

It was kind of in line with the first quarter.

There is some -- obviously some inflation-driven price you're getting.

In Latin America, pricing was better.

So, just maybe talk about that for the second half?

Sure.

So, in terms of price cost, we had indicated that we expected some price improvement initially which would then decline as we walked through the year.

And, that continues to be our view on an overall basis.

We had some price performance in the first half here which was primarily driven by increases we took during the year last year.

So naturally, that would be declining as we move into the second half.

In terms of the other piece of price which is inflation and foreign exchange-driven, that we will have to see how things develop, but I would say that you could expect that we would continue to have a positive contribution there which would then be enabling us to offset the negative impacts of exchange.

Okay.

So, the price cost spread, which I think you said was going to kind of plus or minus this year for the year, is now better than -- it's now more favorable?

Because moving through the year, you have a [plus-80] so far?

Price cost, we expect will continue to decline quarter by quarter, but it would be more favorable than what we had initially indicated at the beginning of the year.

Got you.

Are you in position to put through this year with raw materials in the economy -- are you in position to get more price this year like you had in previous years?

Like another unusual step-up like you had maybe a year ago?

Or, is it just more normal this year?

Yes.

From a planning perspective, we don't -- other than specific situations where you've got exchange or inflation-driven price movements, we do not right now have particular plans to be driving price.

Certainly to the extent which is normally what we drive to, where we have significant and fresh products and good brand positioning, we have the ability to price.

But, in the current benign cost environment, our thinking is that steady as she goes is the right posture for the Company.

Got you.

One last quick one.

Can you comment on what you're seeing in Latin America?

A lot of crosscurrents in the economy there.

Maybe if you just talk about how you see the second half playing out?

Well, we are optimistic relative to the second half.

And, as David has commented relative to the relation of organic growth and price for the first and second quarter, we are on plan.

Relative to execution, we see a slight uptick coming in Brazil for us which is good.

It is the biggest subsidiary for us down there.

And, as you know as we have talked about before, we have a very broad-based -- both portfolio.

And, probably the best balanced portfolio in any part of the world in Latin America.

We have execution capabilities across all countries.

So, we see it very positive for the rest of the year as well.

And as I said, as we have been in that part of the world since 1946, and it is, I would say it is the role model relative to us how to build out businesses in developing economies and have done very well.

We feel good not only for the rest of this year but for many years to come.

As you know, that business for us is as sizable as China and it's growing faster and it's very, very profitable.

So, we are very optimistic about Latin America as we go ahead.

In fact, I think there is some acceleration for us for the rest of the year and beyond.

Great, thanks.

Thank you.

Andrew Obin, Bank of America Merrill Lynch.

Just a question on your share buyback.

Can you just tell us on a net basis, how much did you increase the buyback versus the previous expectation?

Because the stocks [has done well], I'm just wondering where did options go.

Right.

So, if you look at the reissuances that we expect to occur during the year, I think we originally guided $1 billion to $1.5 billion.

And, right now, it looks to us like we will be at or slightly above the high end of that range.

So, think about maybe $1.5 billion, maybe slightly about that depending upon what happens through the balance of the year.

If you then think about net, the $3.5 billion to $4.5 billion would imply somewhere approaching $2 billion to $3 billion net versus the original guidance of $1 billion to $1.5 billion.

Thank you.

And, the second question on electronics and energy.

If we look at sequential improvement, how sustainable it is going to the second half?

And, what leverage do you still have left to push sort of to get this business improving in the absence of a recovery on the electronic side?

First of all, it is as you comment yourself, it's stabilized relative to first quarter.

So, we have [minus-2 and minus-2].

So basically, you can say stabilized in terms of the growth on a lower level for us.

You can see that we improve margins, and that's result -- we went from 15.3% to 17.7% sequentially, and that is based on mix improvement and better utilization.

You can also see we're taking action here relative to our portfolio management.

We have recently announced some combination of the catalog divisions where we then would drive costs and synergy in the back office while still capitalize on the front end.

Now, it is clear as we had said earlier that we are counting on a tick-up in consumer electronic in the second part of the year.

And, we see small evidence of that as we move into Q3 here.

We base that, of course, on what we see on our spec ends on platforms.

So, I would say that we are on plan, relative to that business.

We need to see a big pickup in consumer electronics.

But, the way we look upon that, we see what we [expect] in.

We see that that is coming in our order flow for Q3.

And then, what will drive that the rest of the year is, of course, end market demand, right?

Which is, where we are sitting still a little bit difficult or us to see, but we -- that is how we plan it for now.

Can you continue to improve margin on the electronic side in the absence of growth?

Yes, we can.

Thank you.

Scott Davis, Barclays.

I know it may be hard to answer this specifically, but when you think about, Inge, the investments that you have made in R&D and also in the core businesses and the changes you've made.

At what point do you see that inflection do you think where you start to outgrow global GDP?

I think in the last couple of years you have been growing pretty much in line with pretty sluggish global GDP, but I would imagine there has to be a point where you start to show some real progress.

Can you give us a sense of is this a 2014 -- can we see at this year?

Is it more like 2015?

Just give us a sense of what you think.

Well, first of all, I will say that we have outperformed IPI lately.

You look upon last quarter -- you see this quarter, we have outperformed IPI.

You have to make that clear because I think you said that we had not, right?

We are in line with.

I think we outperformed.

So, we are pleased with that.

And, you have to keep it in perspective -- at least where I am sitting, I am pleased that we have showed three quarters in a row organic local currency growth.

So, we had Q4 last year, Q1, and now Q2.

So, that is first the baseline that I am looking upon.

So that is very encouraging.

Now, when you make those shifts as we are doing, right, there is a capital strategic shift in the Company.

Portfolio management is a lever for us.

And, it is an important one.

And, as I talked about earlier, we have put that in place.

We are very serious about it.

We are on that the whole time.

That is an important lever.

The second one is, our investment in research and development which is very much at this point in time relative to disruptive technologies that would have a longer term outcome.

However, in that pipeline, there is some project that I believe that we will be able to commercialize in the middle of next year.

So, I think the way that this is moving for us, it is difficult to say exactly a time.

But, I think that we should -- 12 to 18 months from now, we should start to see the traction of the moves that we are doing.

[Nice] elements here that are very important that all in order for us to strengthen the Company as we go ahead.

And I think as I said, and David talked earlier about our ERP initiative.

You think about the level for us is portfolio management.

It is research and development, and then, it is investment in ERP.

Those three together will strengthen the Company as we move forward.

But, we start to see -- I start to see good progress on the growth side, but I am still not happy.

Let me say that I am still not happy.

But, I can see that we start to take market share.

We are doing very well specifically in the heartland divisions.

Start to really get some good traction.

And, automotive after-market this quarter was very good.

And again, it is related to us be able to take market share and penetrate better around the world.

The same -- I'll talk about personal safety.

We had 6% growth in a big, very profitable division for us that has brand equity and a position around the world.

So, I think that you see the focus we have got around the heartland divisions has helped us in order to grow, and it is based on both taking market share and to improve penetration.

And then, as we look upon the businesses that have underperformed, that will over time help us to accelerate growth -- [endorse] those what we call push forward other businesses that are very good, very strong for us, using multiple technologies, but have a relatively smaller size based on the market.

But, those markets are growing faster.

I do not know if this is helping you, but at least it [extends] the direction where we are going.

I think the answer is actually very comprehensive in what you said about the big lever in M&A is fairly relevant, too.

As a follow-up, you talk about M&A because it is so important for a Company that generates as much cash as you do to either have an outsized buyback program or an outsized M&A program.

But, what is your bias as it relates to the type of things you want to buy?

In your tenure, we have seen you -- obviously, you bought Ceradyne.

The Avery deal fell through.

These are fairly low growth assets.

Are there emerging technologies that you are looking at?

Or, is it more mature companies?

Just give us a sense of what we could expect out of M&A and the type of assets going forward?

Yes.

I think I will go back and repeat what I have said earlier relative to you should expect slightly bigger than you have seen in the past -- for the last five, six years.

We did 60 to 70 acquisitions the last six years or so.

Many of them were very small and in geographical areas that was way out and was maybe in some cases difficult for us to lever from an execution perspective on the global base.

I think you should see acquisitions that are slightly bigger than in the past.

You should see acquisitions that we should be able to lever and scale on a global base, ideally, and for sure on a regional base.

If there is a technology as part of it, that will be very, very interesting.

I think that was exactly what Ceradyne gave us.

Ceradyne had a good solid front then in terms of business, but in addition, there was a technology play that was very important for us that we can lever over many divisions in the Company.

So, I think that is what you should think about.

And, that is also why the portfolio work that we are doing is so important.

Because this is, as we go, also be able for us to capitalize the businesses and look upon opportunities as we go ahead.

So, we have a very active pipeline, and as you know, we are looking upon them from different perspectives.

But, I think you should think about it in the way of slightly bigger in the past.

Should be faster growing than the average of the Company will be ideally.

And then, a technology piece of it will really be good because that's what we are all about.

So, we can leverage around many, many divisions in the Company due to the fantastic vertical integrated model we have in both research and development and manufacturing and the subsidiary structure.

Fantastic.

Good luck.

Thank you.

Thank you.

Joe Ritchie, Goldman Sachs.

So, as it relates to organic growth.

You did maintain your organic growth guidance for the year.

Yet outside of industrial and safety and graphics, comps do get harder across your segments in the second half.

And, the midpoint of your guidance essentially implies an acceleration beyond easing comps.

So, my first question is, were there any changes to the segment level growth expectations based on what you reported today?

And, maybe you can talk little bit about your confidence on hitting that second half organic growth guidance?

Sure.

So, if you look at the guidance that we have offered which is maintaining the 2% to 5% for the year which is what we have had in place all year.

We had expected, and that continues to be our view that we would see a second half that improves from the first.

So, no different there.

If you then look at the sector level, we gave guidance on the sectors at the beginning of the year for the whole year, and generally, we expect to be operating within those levels and those ranges.

If there is any area where we have the biggest question, that specifically has been and is on electronics and energy.

So, if you think of our range for the year, operating to the low end of that range would be in an environment where we wouldn't see any pickup in the economy.

We wouldn't see any pickup in the electronics and energy space which is not the environment that we are presently expecting.

To operate toward the high end of that range for the year, it would -- as Inge was talking about, it would require not only that improvements that we are for foreseeing in the third quarter in the electronics -- consumer electronic space, but it would also foresee some additional economic pickup generally which is certainly not out of line with economic forecasts that are out there.

And secondly, it would require pretty robust end market demand in areas like general consumer.

So, think about a good sellout for the holiday season.

And then, specifically, in the consumer electronics business.

Okay, great.

That's really helpful color, David.

Maybe another question for Inge.

On Ceradyne, specifically, it seems like things went well in the second quarter.

Still behind plan for the first half of the year on the sales side but doing better on EBITDA.

My question is really around the technology platform and the uses of that platform across your other divisions.

Can you talk a little bit about the opportunity there?

And, whether you're starting to deploy it across some of the other 3M divisions?

Yes, we do.

And, I think it is very much aligned relative to the synergies we see with different divisions.

I think at this point in time, there is 13 -- I think it's 13 to 15 divisions that see that they can utilize the technologies that came in from Ceradyne.

So, we purchased the Company, moved into one division, in industrial.

I think beyond that now there is a team in place that are looking upon opportunities across businesses.

I think it is from the business groups, basically three of the five are very much involved.

I think it's -- let's say it's 13 divisions.

13 to 15 that see the opportunities in their different spaces.

So, it is very, very encouraged actually what we see there.

Fred Palensky, our CTO, is very encouraged what he has seen, and he was very pleased before we did the acquisition.

I think we will be able to talk about it more later when we see some specific programs coming out of the [heartland].

We are very pleased.

As we said, that acquisitions were maybe different in the way that there is not only for us to purchase a position in the marketplace, but also to get -- build out the technology platform that we had already in ceramics.

Make it broader and deeper and then be able to capitalize on it which is what 3M is very good at.

Okay.

Thank you very much.

Thank you.

Ajay Kejriwal, FBR.

Maybe just on Health Care.

It is very nice to see your highest margin business, also your fastest-growing.

We have seen over the last couple of quarters now.

Maybe talk about what you are seeing there?

What is driving that growth?

I know you're seeing very high growth rates in the developing markets.

So, talk a little bit about sustainability, especially given what we are seeing on the macro side on the developing countries.

One, what your Outlook is, and then all the implications for margins?

Yes.

First of all, when you think about that portfolio, 78% of that portfolio is today in developed economies.

So, you have 20% to 22% in the developing if you look upon that portfolio from our perspective in Health Care.

That is indicating that we have a very strong position in the developed world based on that value proposition coming out from those businesses broad-based.

So, that is a very strong position to be in, and we are growing in the developed world as well.

We had 3% growth in the developed world.

So, think about that.

That is indicating that the value proposition that we are providing to our customers are very strong.

In the developing world, the growth was 15% in the quarter.

And, as we have talked about earlier, as we build out our businesses in the developing world, there is now the opportunity also for developed solutions in that part of the world.

I think hopefully, remember the way that we described build out the business, starting with infrastructure, manufacturing, safety, retail, and then finally, Health Care.

In many countries, we are now coming to that point in the end relative to Health Care.

In fact, Health Care is growing ahead of retail in many ways relative to the execution of our plan because there is a different type of network from key opinion leaders for Health Care versus in consumer what is brand equity that is a key element for you to be successful.

So, I think that is the reason for us that we have growth.

We have growth both in developed and developing world.

The value proposition is strong in both places.

We have made investments for many years into the developing world in order to be ready for execution as the programs are coming.

So, and as we are able to show here that it is sustainable relative to margins.

And, as you maybe recall we have said earlier, we should run that business over time in the high [20s] that we are running it above [30], and we're still running it at about [30].

That despite that we are building out our capabilities very much relative to the execution of the programs which means coverage in the marketplace.

We are very efficient manufacturing in model as well.

We are able to utilize two huge centers around the world for manufacturing but also many smaller converting facilities.

It is a very good business for us.

Doing very well, and we are very pleased.

It is not by accident.

It has been planned for a long time by the team here in order to come up to this position.

Of course, a very nice business.

Helps that it is also your highest margin business so good work there.

Maybe one question David on utilization.

It's still a headwind.

How should we think about that for the rest of the year?

Does that headwind come down as you allocate those assets to other businesses?

Or, is that more related to volume coming back in electronics?

Yes.

Ajay, I would say generally the trend we are working towards, obviously, is to fully utilize all of our assets.

We are driving to get better utilization, obviously, as we always are.

We see some good progress here.

As I talked about last quarter, a couple of sources of that underutilization related to some businesses and renewable energy and one of our automotive areas where we had some inventory overhangs.

So, that has largely been addressed.

What is true for us is that the renewables space will continue to be an area that we are looking through to identify exactly what are the prospects for the business going forward.

How do we best participate there to offer technology solutions and also generate a return to the Company?

And, that is probably going to take us into 2014 to come to some final solutions.

So, we will have some issues that we will continue to deal with for the foreseeable future, but I think as you've already seen, we are starting to get our arms around it and certainly the trend should continue to be down.

Thank you.

Thank you.

Laurence Alexander, Jefferies.

Just a very quick one as I know we have gone over.

As you look at the ramp in your R&D investment and these new areas that you're looking at investing in, is there an implication that in a few years out there could be a step-up in the CapEx cycle for the Company for some reason?

Or, is it all going to be roughly the same capital intensity as the businesses you are already in.

Sure.

Yes, I would say Laurence, in terms of our Outlook for capital.

As you would know, we do deploy capital at a level which is typically higher than the average peer which is an outgrowth of the very significant level of vertical integration that the Company has because a lot of our technology is proprietary and know-how that we want to preserve.

And therefore, to do that when it is in the manufacturing process area, we feel the best strategy is to do it ourselves.

So, we are quite vertically integrated, and that will continue.

In terms of does the step-up in investment in R&D imply an increase in our CapEx?

Right now, we do not foresee that to be the case, but quite honestly, we have to monitor how that progresses.

Because there's a bunch of things we are working on that we have not fully developed yet.

But, I would say if I look over a longer period of time, I wouldn't expect that there is some implied step-up in our CapEx.

Thank you.

Yes.

Nigel Coe, Morgan Stanley.

Yes, thanks.

Good morning.

Thanks for squeezing me in here.

Again, a couple of quick ones from me.

Just turning to the margin bridge.

This is probably for David.

The impact of FX?

Just want to confirm, that's the transactional impact of US exports?

That is -- yes, it is.

Okay, great.

And then, a quick update on where we are on the $2.5 billion of restructuring portfolio.

You've made a couple of actions in terms of one business within E&E and the security business back in areas here.

I am just wondering where we are in terms of progress on that $2.5 billion?

Yes, we have made some progress.

And as I said, we have not put a timeline on it.

That is difficult to do when you do business as you know in terms of what needs to be done.

But, we are focusing in on them.

And, you have seen now that probably three actions that have been taken relative to make sure that we improved in position.

We sold off one business, and we have combined two.

And, in fact, we are re-harvesting a fourth one.

So, that is an ongoing process, and we take it very seriously.

So, there is not a timeline on it by definition.

What I have said to you and I have said internally, you cannot stay in that category for long.

We are working on it, but we are also doing the right thing in order for us to evaluate the right position for those businesses as we move ahead.

And ballpark, we are at about $1 billion of actions taken in those small businesses so far?

In terms of the portion of the businesses and the revenue impact, that is in the ballpark, yes.

Great, thanks.

Thank you.

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

I will now turn the call back over to 3M for some closing comments.

This is Matt.

I'd just say thanks to everybody for joining us, for your questions.

Appreciate your continued interest in 3M.

Bruce and I will be around for any follow-ups.

Thank you.

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.