3M (MMM) 2013 Q4 法說會逐字稿

Welcome to the 3M's fourth-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, January 30, 2014.

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

Thank you and good morning, everyone.

On today's call we'll discuss our fourth-quarter and full-year 2013 performance along with the 2014 outlook.

Inge and David will each make some opening comments and will leave plenty of time for your questions.

Let me mention a few upcoming dates and events.

First, our 2014 earnings conference calls are set for April 24, July 24 and October 23.

Also we'll host an investor meeting on the morning of Tuesday, December 16.

I know that calendars fill quickly, so please hold this date.

More details will be available later this year.

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

Please take a moment to read the forward-looking statement on slide 2.

During today's conference call we will make certain predictive statements that reflect our current views about 3M's future performance and financial results.

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

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

Please turn to slide 3 and I'll turn the call over to Inge Thulin, 3M's Chairman, President and Chief Executive Officer.

Thank you, Matt, and good morning, everyone.

I appreciate you joining us for the call today.

For 3M 2013 was a very successful year.

Our team did an excellent job of bringing our vision and strategy to life and increasing 3M's relevance to customers around the world.

We delivered a strong performance and, importantly, we had advanced the Company through the three key strategic levels -- portfolio management; investment and research and development; and business transformation.

Let me give you a bit more on each of these key levers.

In 2013 a portfolio management remained at the front of our how we manage 3M.

For example, we combine and scale businesses in Electronics & Energy to better serve our customers, gain rapid cost synergies and address underperforming businesses.

We took similar actions in Safety & Graphics to enhance our product offerings and improve our relevance to customers.

And when it makes sense we exit it as we did with the fly fishing business within the Consumer Business group.

We continue to build strength on strength by investing in research and development, which is the heartbeat of our plan.

Our increased investment is focused on long-term disruptive technologies aimed at opportunities with significant growth potential.

We made good progress with business transformation enabled by our global ERP implementation.

We rolled out in several countries in 2013 as we moved forward into the deployment phase.

This effort will help us to create a more efficient and productive 3M.

Our teams are building on the experiences from the initial rollouts in order to improve our capabilities to deploy going forward.

Overall very good execution by our team in these strategic levels.

At our investor meeting in December we announced plans to better optimize our capital structure.

These plans will reduce our total cost of capital, allow us to further expand the Company and enable even higher returns to our shareholders.

Organic growth remains key to our plan so we would continue to invest in CapEx and research and development.

And we are planning to invest $5 billion to $10 billion in acquisitions through 2017 with more possible given the right strategic opportunity.

We also announced in December a 35% increase to our first quarter 2014 dividend along with a stronger commitment to share repurchases.

Over the 2013 to 2017 planning period we expect cross share repurchases of $17 billion to $22 billion versus the prior expected range of $7.5 billion to $15 billion.

This more aggressive deployment of capital reflects the strength of our business model and our confidence in 3M's future.

Now I will review financial highlights from 2013.

Please turn to slide 4. For the year sales were nearly $31 billion, up 3.2% in dollar terms.

Organic local currency growth was 3.4% led by Health Care and Industrial at 5% and Safety & Graphics at 4%.

Geographically we posted positive organic growth in all regions.

Latin America/Canada led the way with organic growth of 7%; Asia-Pacific rose 4%; the United States was up 3%; and Europe/Middle East/Africa was up 2%.

Currency impacts reduced worldwide sales by 1.6% and acquisitions added 1.4% to sales growth for the year.

Operating margins remain strong at 21.6% or 21.9% excluding acquisitions.

Four of our five business groups delivered margins above 21%, evidence of continued broad-based effectiveness and efficiency.

Earnings were $6.72 per share, up 6.3% year over year.

We returned a record $6.9 billion in cash to shareholders through dividends and share repurchases.

Finally, free cash flow conversion was 89% with return on invested capital at 20%.

Overall I am very pleased with our 2013 results; we delivered good broad-based performance while investing and building for long-term success.

Let me now review the outlook, please turn to slide 5. We described our 2014 planning estimates in detail at our December investor meeting, and we are maintaining those estimates today.

We expect 2014 earnings per share in the range of $7.30 to $7.55 and organic local currency growth of plus 3% to plus 6%.

Foreign currency translation is expected to be neutral to minus 1%.

And we anticipate a tax rate of 28% to 29% with free cash flow conversion of 90% to 100%.

I now turn the call over to David Meline for the detail on the fourth-quarter results.

David.

Thank you, Inge.

I'll begin by reviewing the fourth-quarter sales growth; please turn to slide number 6. Organic local currency growth was 3.4% in the fourth quarter including organic volume growth of 2% and selling price increases of 1.4%.

Price increases have been positive in 2013 for a couple of reasons.

First, investment in research and development continues to support a strong price/value equation in many of the markets that we serve.

And second, we adjust selling prices to offset currency devaluations in certain developing countries which has been the case in 2013.

Acquisitions added 0.7 points to sales growth in the quarter all due to Ceradyne in our Industrial business group.

We acquired Ceradyne in late November of 2012, so we are now past the one year mark and beginning with December reporting we no longer report Ceradyne sales as acquisitions.

Foreign-exchange impacts reduced sales by 1.7 percentage points in the fourth quarter.

Currency impacts were negative 6% in Latin America/Canada and negative 5% in Asia-Pacific while EMEA had a positive 3% currency impact year on year.

On a total US dollar basis sales rose 2.4% versus the fourth quarter of 2012.

Looking geographically, local currency sales growth was 4.5% in the United States, the highest of any region during the quarter.

All business groups grew organically in the US with particular strength in Industrial and in Safety & Graphics.

Organic sales growth in EMEA was 3.4% in the fourth quarter, West Europe in particular grew by 3%, continuing the positive trends we have seen in recent quarters.

In Germany, the largest of our West Europe subsidiaries, grew a solid 8% organically.

All businesses posted positive organic growth in EMEA led by Industrial.

Asia-Pacific grew 3.3% organically in the fourth quarter with Consumer, Health Care and Safety & Graphics leading the way.

Industrial also posted positive organic growth in the fourth quarter within APAC and Electronics & Energy grew just slightly.

Japan continued to grow nicely with 4% organic growth year on year.

China/Hong Kong grew 1% organically versus a tough prior year comp of 16% plus in the fourth quarter of 2012.

Excluding Electronics, China/Hong Kong more than 6% organically in Q4.

Organic local currency sales growth was 2.2% in Latin America/Canada during the fourth quarter, which was below recent trend levels for a few reasons.

One, we saw some slowing in government tenders for infrastructure projects in certain countries, which impacted sales in our Electronics & Energy business.

Consumer was also soft in Q4 due to weak retail demand and challenging year-on-year comps.

And lastly, sales in Venezuela declined year on year due to economic and the political situation there.

Venezuela diluted fourth-quarter organic growth in Latin America/Canada by 1.5 percentage points and we continue to work towards minimizing our Bolivar exposure and any associated costs.

Organic local currency growth was 4% across all developing markets and 3% in developed markets.

Let's turn to slide number 7 for a discussion of the fourth-quarter income statement.

Sales for the fourth quarter were $7.6 billion, an increase of 2.4% in dollar terms.

Gross profit rose 5.8% to $3.6 billion and gross margins rose by a solid 1.5 percentage points to 47.5%.

SG&A spending increased in line with sales growth and R&D as a percent of sales rose by 10 basis points to 5.8%.

Operating income increased nearly 10% versus the fourth quarter of 2012.

GAAP operating margins were 20.9%, up 140 basis points year on year.

Organic volume growth added 20 basis points to margins and the combination of lower raw material costs and higher selling prices contributed a positive 160 basis points year on year.

Fourth-quarter margins improved year on year in our recently acquired Ceradyne business, which added 30 basis points to total Company operating margins in Q4.

We expect further margin improvement in 2014 for this business.

Strategic investments reduced margins by 70 basis points year on year, this represents incremental investments in disruptive R&D, ERP and various restructuring actions.

Lower year-on-year pension and OPEB expense boosted fourth-quarter margins by 30 basis points while foreign exchange impacts reduced margins by 40 basis points.

Fourth-quarter earnings increased 15% to $1.62 per share.

Average diluted shares outstanding declined 3% year on year which added $0.05 to EPS and currency impacts hurt fourth-quarter earnings per share by approximately $0.04.

The fourth quarter concluded a good year for the Company and the 3M team is energized and confident as we begin 2014.

Now let's turn to cash flow.

Please turn to slide number 8. We generated $2 billion of operating cash flow in the quarter, up $255 million versus last year's fourth quarter.

Higher net income and lower pension contributions were the primary drivers of this improvement.

Capital expenditures were $543 million, an increase of $36 million.

Looking ahead to 2014, we continue to expect full-year CapEx will be in the range of $1.7 billion to $1.8 billion.

Fourth-quarter free cash flow was $1.5 billion up $219 million year on year.

And we converted 131% of net income to cash versus 124% in last year's comparable quarter.

For the full year 2013 free cash flow was $4.2 billion and conversion was 89%.

We paid $423 million in cash dividends during the quarter or $1.7 billion year to date.

And as Inge mentioned, in December we announced a 35% increase in our first-quarter 2014 dividend.

Gross share repurchases were $1.7 billion in the fourth quarter and $5.2 billion for the full year.

For 2014 we expect full-year gross share repurchases will be in the range of $3 billion to $5 billion.

In total we returned $2.1 billion in cash to shareholders in the fourth quarter or $6.9 billion for the full year, both are all-time record levels for 3M.

Net debt at year end 2013 increased $900 million year on year and $300 million sequentially.

As I mentioned at our December investor meeting, we expect to add leverage of $2 billion to $4 billion in 2014 as we continue to improve the efficiency of our capital structure.

During the fourth quarter 3M issued an eight year euro bond yielding less than 2%, the face amount was EUR600 million or $815 million.

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

Please go to slide number 9. Our Industrial business had another strong quarter with sales of $2.6 billion and 6% organic local currency growth.

Our advanced materials and automotive OEM businesses generated double-digit organic growth and we also posted good growth in 3M Purification, aerospace and automotive aftermarket.

Organic local currency sales increased in all geographic regions led by the US at 8%, EMEA grew 6% in Q4, including more than 10% in Germany.

Organic growth was 3% in both Asia Pacific and in Latin America/Canada.

The Ceradyne acquisition added 2% to Industrials growth and the quarter.

Fourth-quarter operating income was $553 million, up 14% year on year, and operating margins increased 150 basis points to 21.5%.

Volume leverage, positive selling prices and good productivity contributed to the improvement.

Our Industrial business had an outstanding year in 2013.

Organic sales growth accelerated in the second half of the year versus the first and sales exceeded $10 billion for the first time ever.

Nice performance by the Industrial team.

Please turn to slide number 10.

Our Health Care business generated sales of $1.4 billion in the fourth quarter.

Sales rose 4% in organic local currency terms with the strongest growth in health information systems, food safety and critical and chronic care.

Drug delivery systems declined in the quarter.

All geographic regions generated positive organic local currency sales growth with Asia-Pacific up 6%; Latin America/Canada up 5%; and EMEA and the US each up 3% in the quarter.

In developing markets Health Care grew 10% organically in the fourth quarter.

This has been an area of strategic investment priority for some time and we are encouraged to see consistently strong organic growth as a result.

Fourth-quarter operating income in Health Care was $425 million.

Operating margins were 31.2% which was very much in line with full year.

Fourth-quarter margins were down a point year on year against a strong comp in Q4 of 2012.

The recently enacted US medical device tax was a contributing factor.

Please go to slide number 11.

Safety & Graphics had a solid fourth quarter with 5% organic local currency sales growth and 16% growth in operating income.

Organic growth was broad-based with nearly all businesses posting positive growth.

Personal safety, by far our largest business within Safety & Graphics, generated high single-digit organic growth and Q4.

We also posted good growth in roofing granules, commercial graphics and architectural markets.

Sales in Safety & Graphics grew organically in all major geographic regions with Latin America/Canada up 8%, Asia-Pacific and the US up 6% and EMEA up 1%.

Operating income increased 16% to $256 million and margins rose 2.2 percentage points to 19.1%.

Profits benefited from volume leverage, price-performance and solid productivity.

Now let's look at Electronics & Energy found on slide 12.

Fourth-quarter sales in this business were $1.3 billion, up 0.4% in organic local currency terms and operating income rose 1% to $221 million.

Margins were 16.7%, up 40 basis points versus last year's fourth quarter.

I mentioned in our October earnings call that we expected sales and earnings for Electronics & Energy to be very close to last year's levels and in fact that is what happened.

Electronics-related sales declined 2% on an organic local currency basis with positive growth in optical films offset by declines in other businesses.

In our Energy-related businesses sales increased 2% organically led by our electrical markets and renewable energy businesses.

On a geographic basis organic local currency sales increased 2% in EMEA and the United States, Asia Pacific rose slightly and Latin America/Canada was down year on year.

Despite challenging and market conditions the Electronics & Energy team executed very well in 2013.

Second-half organic growth rates were stronger than the first as were operating margins.

It was a good result in a tough market.

Finally, let's review the Consumer business found on slide number 13.

Sales in the Consumer business group were $1.1 billion with organic local currency growth of 1.3%.

Recall that in the fourth quarter of 2012 Consumer generated 9% organic local currency growth, so the comp here was quite challenging.

Organic sales growth was strongest in our Consumer Health Care and Home Care businesses and we also had a positive organic growth in DIY.

sales declined slightly in Stationery & Office Supplies impacted by continued consolidation trends in the office retail and wholesale market.

On the positive side we recently launched a new line of Command adhesive products for outdoor use which contributed nicely to fourth-quarter growth.

The US retail shopping season is an important factor for the Consumer business and we would characterize this year's season as okay but not strong.

Fewer shopping days due to the late Thanksgiving holiday were a factor for most major US retailers and for their suppliers.

On a geographic basis sales in organic local currencies increased 9% in Asia-Pacific and rose slightly in both the US and EMEA.

Latin America Canada declined 6% year on year.

Operating income was $226 million with operating margins of 20.4%.

That concludes my comments regarding 3M's fourth-quarter business results.

I'll turn now the call back to Inge.

Thank you, David.

To summarize Q4 was a strong finish to a very successful year for 3M.

In 2013 we issued good growth and solid profitability while advancing our strategic initiatives and investments.

Perhaps most importantly we came out of 2013 stronger than we entered it with both sales and earnings growth accelerating in the second half of the year versus the first.

2013 results provided further proof that our strategies are gaining traction and driving our performance to higher levels.

I can think of numerous examples that illustrate this, but I will highlight just a couple.

Let's start with our $1.4 billion automotive OEM business which in 2013 grew over 7% organically, more than twice the rate of global auto production.

We achieved this result through improved customer relevance, leveraging 3M's vast technology capability to solve problems for this important group of OEM customers.

This business grew significantly in Q4 in developing markets like China, Mexico and Indonesia by offering relevant solutions to these rapidly growing markets.

Another example is our Safety & Graphic business group which saw margins expand by more than 2 points in the fourth quarter.

This improvement is due in part to several recent portfolio actions which have resulted in improved customer relevance, greater scale and reduced costs.

We also saw improved profitability on recent acquisitions in this business.

These are just too powerful examples of many that illustrate how the strategies are pushing 3M's performance to new level.

In closing, I want to recognize the people of 3M for their many contributions that continued our success as a Company.

We have great confidence and good momentum as we enter 2014.

Our team are focused on executing our plan and creating even greater value for our customers and our shareholders.

Thank you for your attention this morning and we will now take your questions.

(Operator Instructions).

Joe Ritchie, Goldman Sachs.

So my first question is really on the organic growth trajectory.

It seems like you are exiting the year pretty strongly in Industrial and in Safety & Graphics, but still some weakness there in Electronics & Energy.

And so I was wondering if you could just provide some context and color as it relates to the guidance that you have for 2014 because the ranges across your segments tend to be pretty consistent.

And so whether you have more or less confidence in any of the segments as you are building into 2014?

Well, first of all, we hold to our guidance of 3% to 6% for the year.

And you are right, we are coming out strong of the year.

So if we look upon our performance in between Q3 and Q4 and add that together for the second part of the year, we had a very good second part of the year.

So we feel good about that.

In terms of businesses, you can see that we have had very good tick up in Industrial as of lately and we feel very confident of that business and that range, which is 3% to 6%.

The same for Health Care.

Health Care is continuing to grow well for us and specifically, as you have seen, in developing economies.

And again we had in this quarter a 10% growth in that part of the world and we have a very strong platform in the developed world.

So we feel confident around that.

I would say the other businesses are right in the middle of the range.

We don't see any indication at this point in time of going outside the range.

Again, as we know, Electronics & Energy is very much based in the Electronics space based on the market, right.

And as you know, that is what we are following.

And if there is a little bit slower that will impact us of course, but it can turn around relatively fast.

So from that perspective the 2% to 6% guidance we have there, we feel confident with that.

So no change at this point in time.

Okay, thanks, that is helpful color.

And I guess my one follow-up question is really (multiple speakers).

The 2% to 6% range is for Electronics & Energy, it is 3% to 6% for the Company.

That is right.

And I guess my one follow-up question is really for David.

I know that you haven't made any changes to guidance.

Over at the outlook meeting you provided us with a 2014 earnings bridge.

I was wondering if there were any changes to any of the sub buckets.

And specifically perhaps you can provide some color on the pension number which is a pretty wide range at $0.10 to $0.20?

Sure.

So if you look at that earnings bridge the answer would be right now.

We don't see any changes to the bridge, the elements.

If you were to think about where we are monitoring at the top or the bottom of those ranges, first on pension, we come in now with a confirmed year over year decrease and expense of $150 million or $0.15 a share.

So right in the middle of that range we provided.

And what I would say right now is the other area that we are monitoring we said zero to $0.05 on foreign exchange and if there is anything that -- if I mark that to market today it would be certainly towards the lower end of that $0.05 headwind versus the range right now versus as we saw it a couple months ago.

So otherwise we think we are looking fine in terms of the other elements.

Just to clarify.

The lower end of that range, so you think the FX headwind is going to be closer to zero?

Closer to $0.05.

Closer to $0.05, okay, great.

I will get back in queue.

Thanks, guys.

Scott Davis, Barclays.

Congrats on a good 2013.

Inge, you mentioned M&A in your prepared remarks and can you talk through -- you put out a pretty big number as a target of potential deals.

Can you talk through your confidence in deals, maybe the timing, the types of things you are looking at, obviously can't name names.

But I think if I look back at the years of 3M it's been hard to really -- there hasn't been a lot of consistency to the R&D effort -- or I'm sorry, to the M&A effort.

So could you just give us a little sense of what you are looking at there?

Yes.

Well, first of all, as you know, we have been working for the last 18 months to clarify the position of our businesses relative to our portfolio.

And I think that is an important starting point relative to understanding of where we tried to go.

So we think about heartland and push forward of course places is for us that are interesting in order to build out, not only in terms of research and development but potential acquisitions.

So I think if you think about it from that perspective we would like to look upon businesses that really either strengthen our very strong position for the heartland divisions and/or accelerate growth and push forward.

So by definition we are looking for many elements, as you know, relative to acquisition candidates.

But think about it in those categories.

Now that can always be an exception to the rule, and if you have businesses where we really need to boost up the outperformance or build out and build more relevance we will do that as well, right.

And I think if you go back and think about the FSTech that we did, it was into the traffic safety system that by definition not is either heartland or push forward, but was important for us to make that acquisition in order to build out our relevance in that market.

So that is the way -- think about it in that way versus think about this business group.

We are interesting everywhere but I think it's from a market perspective in order to move the Company forward.

Now the pipeline is good for us, we have, as I said, we have laid on a little bit of -- we have always had a process of bottom up, we have type of laid on -- top-down approach as well in order to make sure that we do not miss out on potentials that go across business groups in terms of potential.

We have talked about size of potential acquisitions, I think that is a couple of things.

We have built out now a very competent group relative to integration because one of the things that is important for us is to integrate the acquisitions as fast as possible and get the benefit for you and for us in terms of return of the investment.

Now, we will not go crazy if it doesn't -- we have done acquisitions in the past that have been on very small to midsize and we will really evaluate huge, huge acquisitions in terms of strategic importance.

So I think you will see acquisitions in mid range as well as we go ahead here.

In terms of timing, as you know, it's very difficult to comment on timing, we will in some cases we will take some time and we are very careful as we do this as you know.

Okay, that is helpful.

And then just as a follow-up.

Obviously 3M is -- focus on R&D has been important and goes back a long ways, but something seems to have changed since you have taken over, Inge.

It seems like the R&D focus may be yielding more results if you just look across where the growth rates have been higher it has been generally the more I would say R&D intensive businesses have been outgrowing the markets the most.

I mean what have you specifically changed that has yielded that acceleration in new products?

Well, first of all, this is not about me; this is about the very dedicated 3M team.

So it is not about me, it is -- the credit should go to the business groups in the divisions and the subsidiaries.

But I think what I am doing, I am encouraged really to make sure that they understand the business model in terms of us be able to create more value for our customers.

Because that is the heartbeat or us in terms of making sure that we maintain and eventually improve margins and the return on the business.

So I think there is reviews up with -- the whole way up to me relative to how we are doing and also try to encourage to help them if there is some project that is maybe more difficult for them to pull off based on the current situation.

So it is a little bit this of running a business with glasses on with one microscope on one side and a telescope on the other side of the glasses, right.

And I think that is important for us to do.

So we feel good about it.

We are very committed to research and development.

It is by definition a real value creator for 3M.

And if you think about it, we are -- in terms of technologies we are a creator and builder of technologies and we're also a user.

But in addition to that, other companies can use the technologies.

So that is the difference for us -- we create and we develop the technologies and in many cases we're using it.

But other companies -- we can help them a lot for them to be more competitive by using our technologies.

And that is the strength of 3M.

Okay.

I think I did a lousy job asking the question.

I think what I was meaning to say is have you made any change at all from focusing the efforts on disruptive technologies versus extensions (multiple speakers)?

Yes, we have -- yes, we have.

And that additional -- as you know, when we tried to go from historically [5.5] closer to [6] and so we made a small improvement on that specifically this quarter, we moved again, that additional investment is all into disruptive technologies for the future.

So that is an important -- thank you for that question, it is a very important piece.

Okay, thank you, guys.

Andrew Obin, Bank of America-Merrill Lynch.

Just to dig in a little bit into what is happening in the emerging markets, and I guess specifically in South America, it went from being the fastest growth market to the slowest growth market.

How much of a surprise was it what happened in the quarter?

And how are you sort of monitoring the developments there to make sure that it stays under control?

Let me start on the front end of the business.

First of all there was a slight slowdown in the economies down there.

And we saw that, as David said in his speech here earlier, was specifically around consumer confidence that impacted our Consumer Business.

And then it was very much on I would say government-related businesses specifically into utility businesses where we have a strong position.

So I think that -- and that was broad-based for us.

So the economy slowed and, as you know, there is a big business around mining in that part of the world.

So that impacted us and I would say -- I don't know, you will only be a little bit surprised when you're not going as fast as in the past because you will do that.

But generally speaking, we had a good feeling of what is happening in that part of the world.

In terms of risks, as we talked about in Venezuela, it's -- David will make some comment here relative to how we are managing and monitoring that.

Yes, thank you, Andrew.

So I think picking up on Inge's comments, if you think about the guidance we provided in December, we indicated we think that this year will grow 8% to 11% in the region.

So a little bit off of where we have been in the last couple of years, but still elevated.

And I would say today as we look at that, probably we are thinking about it more along the lines of the low end of that range of 8% to 11%.

And specifically it relates to what Inge said, we have got some sectors which we saw some slowing.

We don't necessarily think that is going to remain slow all through 2014, but we have to take that into account.

And then I think in particular, we saw what is going on now a very fluid situation is developing in particular in Venezuela, and at some level in Argentina as well.

So if you look at our business we have got about -- each of those countries our business is a little less than $200 million of revenue in each of the two countries.

We have been in them for many decades, so we have very capable local management and we have a good position in those markets.

But inevitably, it does create both some risk in terms of our revenue growth in 2014, as well as financial risk.

And that is something that we monitor very carefully and we manage carefully given the volatility that we have in those markets and others.

So if you look, for example, today in Venezuela, which is what we have called out as the most significant of our risks, we run the business on a local basis.

The net monetary asset position of the balance sheet is basically flat.

So that gives us a very good position in terms of addressing any risks that might occur.

But we also have a $40 million receivable sitting at parent from the subsidiary on imported goods, and that is something that we are watching and managing quite carefully because we do recognize that there is risk there that we are going to have to manage through.

So I would say nothing that is material for the Corporation, but it is certainly something that we are very carefully monitoring and reacting to so that we can manage that risk.

It is just really a conversion risk.

And of course, you see in our results overall very strong pricing in the emerging markets, which is the other component of how we manage the risk of these countries.

So we feel good about our ability to manage risk, but as I say, we are also very cognizant of the fact that we need to be proactive as well.

And the other side of the coin, the healthcare, you have very high margin, high growth business in emerging market as part of the strategy.

You did very well in terms of top-line growth.

Could you just give us a sense how connected is this business to FX fluctuations, or is it fairly shielded?

Just in terms of how the business works in emerging markets, how should we think about it?

Yes.

No, it is a good question.

So I would say that you start -- in terms of FX risk you have to think first about the overall risk profile that we have as a Company, and healthcare is part of that.

So we hedge on a rolling basis 50% of our exposures, which covers all of our business flows and our intercompany exchange fluctuation.

So that applies to healthcare as with the other companies, other sectors of the business, so that is an important element that enables us to manage the risk.

And then the second piece is obviously through time the best way to manage foreign-exchange risk is to have a balanced footprint of exposure structurally.

So that is one of the reasons why we continue to localize the production of our products into the countries where we sell which gives us a balanced foreign-exchange risk profile.

And I think as you know, we have been working hard to both grow Health Care and as part of that strategy to localize production, which helps us to have a good profile to have local production, local R&D, which is closer to customers but it also gives us a better risk profile from a foreign-exchange perspective.

So I would say Health Care I don't view as something with, if you will, outsized risk compared to the other sectors in our business.

I guess what I was trying to say -- just let me just explain, is Health Care spending in emerging markets -- do you feel it is stickier versus consumer spending?

It was sort of a simpler question, I think.

Oh, okay.

Well, I think, as I said earlier, in order for you to build out your business in a way you will be able to move Health Care faster in a way than the consumer.

And we are talking about developing economies due to the fact that these many drivers there in terms of key opinion leaders that try to get to a service level and outcome around Health Care that is very strong.

Versus you think about consumer, which is very much a retail brand equity driven, which take you a longer time in a way to change the mindset of people to go from one brand to the other.

So again, we're speaking I would say that in the model that I've showed you multiple times now in terms of how developing economies are evolving from manufacturing to infrastructure towards safety to retail consumer, in the end Health Care, often Health Care can come earlier due to that element.

And in Health Care generally speaking in fact dental and orthodontic is coming faster than the big Health Care business.

So for us it is a good model.

We have still huge opportunities and we are very pleased with the growth we see that is now coming based on some strategic investment we did -- started a couple of years ago actually in order to build out that business.

Thank you very much.

David Begleiter, Deutsche Bank.

Inge, very good margin performance in Safety & Graphics.

Is this -- what type of operating leverage would you look for in Safety in 2014 over the course of the year?

Well, I would say first of all thank you for the compliment relative to the improvements of the margin.

And I think one of the reasons there is that some consolidation that was done of the businesses.

So as we move ahead into next year, we are basically looking for the same leverage into 2014 specifically in that business.

So I don't see us as any huge change for us; I think we are on the level now that is in the end of it very competitive for us.

Understood.

And just a follow up on Asia, volume growth did slow.

Was that all due to the tough comp in Electronics or was there some slowing in end market activity as well?

Generally the Asia performance was in line with where we have seen it growing through the year.

And as we called out I would say a couple areas that slowed, one was in China and that was most particularly related to the underlying Electronics business.

If you look at the base business excluding Electronics grew at 6% in China.

And then if you look at our performance in Japan, which is the other most significant business we have in Asia, we grew quite strongly 4% overall, but we were double-digit in the Industrial area.

So I would say, David, most specifically we see it linked to the Electronics performance in Q4.

Very -- continued very strong growth in Consumer and Health Care business.

Yes, yes.

Thank you very much.

Steven Winoker, Sanford Bernstein.

Could you just start with inventory impacts in terms of -- distribution obviously is important?

Were you seeing any kind of stocking increases, decreases?

How should we think about that?

Generally speaking this quarter no change, right?

We didn't see anything.

We didn't see anything either on the Industrial, general Industrial or specifically, as you know, we could be more concerned around Consumer Electronics, we didn't see any change there.

And that whole thing is around retail.

I think retail we are very stable as well.

And as you know, they manage it very, very carefully.

So I would say we don't see anything there in terms of change and it is not a concern for us as we're sitting here now.

Okay, so all that US growth is sort of core customer growth then on the manufacturer side -- Industrial, in Industrial?

Yes, correct.

We had very -- in US we had a very strong growth in the whole Industrial space, which then had a very good impact for many of our businesses generally speaking in the Industrial space.

We have the whole Industrial business group, but you have also Safety & Graphics with all the personal safety business are doing very well in an environment like that.

So that was good for us.

So Industrial in US in the quarter -- Industrial business you have 8% growth, in Safety & Graphic you had 6% growth.

And then it was a little bit slower in Consumer and Health Care in United States at the end of this quarter.

Okay, and maybe just one more on pricing.

So 1.4%, again, very strong, making up, as you mentioned, for this combination of currency devals elsewhere as well as sort of just core R&D supporting margin.

But maybe -- can you give us an idea again?

Of that 3% to 6% growth in 2014, how much of that are you anticipating to be volume versus price?

And do you think that your ability to keep up with continued currency moves with price -- any issues on that front as you look forward?

Or we shouldn't just sort of count on those two offsetting each other?

Yes.

No, it is a good question.

So if you look at the -- as we looked at it in the fourth quarter and set out the guidance, our thinking has been that that is primarily volume that we look for in 2014 on the top end on the revenue line.

But obviously -- so in other words we expect price to be declining through the calendar year as we step through the quarters.

Now that would change and it goes back to the view to the extent we see weaker foreign-exchange occur in certain of the countries where we operate, certainly we will have to look at the actions that we need to take to preserve our position in the market and our ability to remain competitive.

But certainly our experience most recently in 2013, but you can look over a longer period of time, is as long as we continue to offer a very strong price/value equation to the customers we are able to address that through price as we need to.

So I think we feel comfortable that we can do what is necessary to maintain that relationship.

Hey, Steve, it is Matt.

Just to clarify one thing -- prices will be positive in the year, but the positive impact should moderate as the quarters go on.

Yes, yes, sorry, yes.

Got it, thank you.

Deane Dray, Citi Research.

First question for David on corporate expense.

You had highlighted that that would come in lower and it did come in lower and you said that there would be some ERP expenses that would be shifted to the segments, but it still came in lower than what we were looking for.

Is there anything else going on in corporate than what should be the run rate for that over the course of 2014?

Right.

14, yes.

So the corporate expense line it came in a little bit lower in the fourth quarter and frankly there are ups and downs there based on the closing out accruals on a quarterly basis or one-off events.

So I would say nothing that I would point to that was of a particularly -- headline an unusual nature in Q4.

If I look forward into 2014, we expect that the corporate expense line is going to come in for the year somewhere in the range of $200 million to $250 million versus I think it was $320 million in 2013.

And the majority of that -- you can largely attribute that to the declining pension expense.

So we will pick up about two-thirds of the $150 million pension expense decline I mentioned will show up in that corporate line, hence a reduction year over year of that magnitude.

And again, it bounces around quarter to quarter, but generally speaking I think you can pencil that in throughout 2014.

Good, that is real helpful.

And then, David, I know you guys are not in the quarterly guidance business, but for the first quarter would you want to call anything out that would be unique seasonally?

Sure.

And (multiple speakers) for seasonal I mean both calendar and as well as weather that might be a factor that we should be considering any one timers?

Yes.

So yes, if you look at the business through the year, what I would say is that we consider most of the factors, whether that be at the top line, whether it be expense elements, we think that it will be pretty steady through the year and follow a more typical seasonal pattern.

So obviously first and fourth quarter typically have the lowest revenue but that will be the case as we see.

The couple of exceptions I would offer, one is one we already talked about which is we do expect through the year to see some declining contribution of the price in raw materials as we move through the year.

So positive but declining.

Secondly, we had called out in December, and that continues to be our intent, which is both the incremental investment we are making in our European center of expertise on a year-over-year basis, as well as some restructuring actions that we have been looking at primarily in Europe and the US.

The sum of those would be about $20 million to $30 million of additional expenses, which are comprehended, there is the strategic investment line.

But you can see that it will be somewhat frontloaded for the year into Q1.

And then the final point I would make on this is the one I talked about already, which is with what is happening in the markets globally right now we are monitoring carefully developments in some of the emerging markets with a specific focus on Venezuela, because I think there is some discernible risk there, some event risk which looks like may materialize as soon as Q1.

Great, thank you for the color.

Laurence Alexander, Jeffries.

Two quick ones.

On your comment about the slightly weaker, the trend in infrastructure markets.

Are you seeing any signs of that bottoming out?

And secondly, with respect to the emerging market volatility, your credit risk that may be developing there, is that an opportunity for you to further gain share because of your relatively low cost of borrowing in excess to finance?

Or do you think that that won't really have a material impact on your relative share position?

Let me -- on the first question I think that in terms of infrastructure specifically, for us it was related specifically to utilities and government businesses in one part of the world and it's also related to the mining industry there.

We see that easing up as we go into 2014.

So it is not overly concerned for us.

In terms of emerging market, so let me give a perspective on developing and emerging market.

We have been in the developing world for many years.

So think about 3M, we started to do business outside of United States in the 1920s and in fact we have done business in BRIC, in Brazil we went 1946.

So we have been for long time in that part of the world.

And the strength or 3M based on the history is that we have learned a lot.

So we know how to monitor a situation like this.

And in developing economies there will always be some type of bump in the brood as you go.

Now we have a very good point to say that when that is happening, and we have not only seen it, we have lived it many times over the year, and not only in the organization but me personally and David Meline as well as we have lived in some of those countries.

So we have seen it and we have worked in those environments.

The strength for 3M when this is happening is we are never going back, we continue to stay but we are adjusting our organization.

And we are in all cases I would say from a historical perspective, we are coming out stronger when it is done.

And the reason for that is we right sized the organization, we stay, continue our local connections and we help the customers that are still there.

Because when it turns again, because it will turn up, we are there with them.

So in all cases what has happened for us is that in a case when you come into turmoil like this we are coming out stronger due to the fact that we stayed.

And I think that is an important element to know.

So we are very local in the countries, but we have a very strong centralized team with experiences that can help out in terms of making sure that processes is right even on the financial side.

And David will make some comments relative to that.

But it is actually -- for us it's a good -- not a good thing generally speaking, but we coming out stronger after a turbulence like that.

You are right, Laurence, we try to maintain a conservative posture from a risk management perspective and we do enjoy the benefit, as do other large well-managed multinationals, of having good access to credit, having the ability to assess credit risk.

And so exactly.

While it can be bumpy at the front end, if you basically keep your head down and remain calm and have a playbook, as we do, typically we can be advantaged as you see things start to turn around.

Thank you.

Ajay Kejriwal, FBR Capital Markets.

So maybe on Health Care margins, you talked about the medical device tax impact.

Maybe in a comment on what you saw in drug delivery systems and the trends there and any impact on margins from the business?

And then also, I know in the past, David, you have talked about flexibility in that business in terms of how you manage margins and spending relative to top-line.

So if you can comment on how we should think about margins in 2014 for Health Care.

Well, as you asked specifically about DDS D, that is very much a project based business, right, so we are selling R&D to other companies and we are also selling products.

So that is a business that can move a little bit in terms of quarter by quarter.

So there was nothing happened there that is unusual meaning that we lost business or something like that.

So it is a strong business for us.

In fact we have extended some of the bigger contracts have now been extended.

So as we look ahead for that business it is a very solid, very good business for us and we are very pleased with that.

So look up on that as that is always a start and a beginning to a quarter and this quarter, based on the contracts and projects we are working with, this is how it came out.

So that is -- I wouldn't like you to be overly concerned about that business.

In terms of Health Care, [generally] speaking in terms of the margins, David will make some comment relative to that.

Yes.

So if you look, Ajay, if we look I think it how it looks for us in 2014, I would make a couple of comments and maybe just pick up a little bit of commentary on the overall trends.

So Health Care we expect to run in the low 30s through 2014, the Industrial, Safety & Graphics and Consumer we expect to run around, as has been the case around the Company average.

And if you look at Electronics & Energy this year, we ran in the high teens last year, which is what we expected as we started the year this year we see that trending towards the high teens towards 20%.

So that is how we are looking at the overall view for the businesses.

And I think the final point I would offer, I talked about the corporate line.

There is about a 30 basis points year-over-year increase in the cost that we'll be seeing in the businesses as it relates to our strategic initiatives around business transformation, the restructuring we have talked about and the innovation funding.

Got it, that is very helpful.

And then maybe some color around stock repurchase, the range you have $3 billion to $5 billion.

Maybe just conceptually what would be the variables that drive that purchase near the high end versus the low end?

Sure.

So, yes, if you look at that and just kind of frame the commentary.

So as we announced in December, we made a decision as a company to adjust our capital structure to one that is more efficient.

So by definition that means increasing from a de minimis level the portion of our funding from borrowing, right, from bond issuances and borrowing.

And it means that we also have to as part of that reduce the portion of the structure that is coming from equity funding.

So by definition that means we reduce the equity funding, we are going to do buy back we said of $17 billion to $22 billion for the period.

We then looked at the sources and uses to the best we are able to predict them in the year.

And we concluded that it looked to us starting the year $3 billion to $5 billion at the gross level looks like the right number for the company.

And as I said in December, the way I think about that is that it's certainly something that is more discretionary than a number -- frankly many other of our the variables we managed from a sources and uses perspective.

But it is our best view as we start the year.

And what we will do then is we will have a portion of that repurchase that we do on a steady basis through the year, we also look and pay attention to intrinsic value to the price in the market of all assets including the one we are repurchasing here.

And that impacts how we deploy capital into that area.

So we will adjust our share repurchase through the year based on the overall view of the business and sources and uses.

And we will also adjust the repurchase activity based on thinking about a core component as well as how the share price is looking as well.

Got it.

Thank you very much.

Shannon O'Callaghan, Nomura Securities.

David, just maybe if we could size this Latin America risk that you called out with Venezuela and Argentina.

So you said they are both less than $200 million in revenue each.

Yes.

So I mean at the corporate average margin you are talking about sort of less than $0.10 of EPS.

I mean, is that the scope of the risk you are talking about or is there more risk than that?

I mean could things get worse than that in terms of losses or other impacts?

Yes, it is a good question, Shannon.

So I don't see right now from what we can see, and obviously it is pretty fluid -- if I were to size that risk I think there is event risk that could put the exposure from an earnings perspective into the $0.03 to $0.04 a share range.

Okay.

Thanks, that helps.

And then the strength in Europe, you talked about Germany being very strong broadly I think but also particularly in Industrial.

Do you have a view in terms of how much of the strength you are seeing in Europe is intrinsic to Europe versus related to export?

Well, I think it is a mix and I also think one of the things we have to think about too is just a comparison.

But first of all we see very good acceleration specifically on the Industrial side I would say both in Germany and also, even if a reporting issue, nothing we talk about West Europe, we also see that in Poland actually.

So I think we see both West Europe being driven by manufacturing uptick which I will say it is a balancing between domestic production for Germany, but also export for them is -- of course, as you know, is a big automotive industry in Germany that are exporting quite a bit.

So I think we have still to be cautious about Europe.

But it is a very positive trend.

And if we look upon it for our side, in West Europe we had Q1 this year was a minus 3%, we are basically flat in Q2, we have a 3% growth in Q3 and another 3% in Q4.

But I will say when I look upon it, when you get Germany from flat in the first half of the year to around 6%, and it was 8% in the last quarter, that is very encouraging for us.

And again, as I said, there are businesses there for is that had good growth was Industrial had 6% growth in West Europe.

So it is encouraging for us.

But we still have to be cautious as we go into the year.

And we are type of looking upon West Europe next year for flat to 3% growth, right.

Okay, great.

Thanks a lot.

Steve Tusa, JPMorgan.

Good morning, it is Drew Pierson on for Steve.

I know we are running long, just quickly -- I don't know if you commented on the linearity of the quarter.

Is there anything interesting to call out in terms of month-to-month trends?

Within the quarter.

Yes, I would say nothing, Drew, that we would want to point to that would be unusual spikes up or down beyond what we have talked about more generally this morning.

And then on the price/cost side, I believe you mentioned the gradual closing of that gap through the year.

Just when we think about the components of that, I know you have your sourcing programs, I know the raws have maybe picked up very slightly, but maybe just a little bit more color around kind of how to think about the different factors and how they progress.

Yes.

So if you look at the components of price and raw materials, so we talked about price where we exited 2013 quite strong, we see that then moderating as we walk through the year towards a de minimis level, but still slightly positive.

And if you look at raw materials, what we indicated our outlook for the year was another favorable $0.05 to $0.15 a share performance in 2014.

We exited the year actually pretty stable with raw material performance.

So we were down a couple percentage points in 2013 through the year including Q4.

And we see that moderating somewhat as we moved through the year, but there will be some carryover impacts certainly as we enter the first part of the year here.

Okay, thanks for the detail.

Nigel Coe, Morgan Stanley.

Hello, Nigel, your line is open, please proceed with your question.

I will close his line.

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.

Well, thank you again for joining us today, appreciate your attention, your continued interest in 3M and we look forward to speaking to you next quarter.

So have a great day.

Ladies and gentlemen (technical difficulty).