3M (MMM) 2014 Q1 法說會逐字稿

Welcome to the 3M first 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 April 24, 2014.

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

Thank you.

Good morning, everyone.

Welcome to our first quarter 2014 business review.

Inge and David will each make some opening comments today and then we will take your questions.

Before we begin, I've a few brief announcements.

Our remaining 2014 earnings calls are scheduled for Thursday, July 24; Thursday, October 23; and Thursday, January 29.

Also please hold the morning of Tuesday, December 16 on your calendars for our next investor meeting, the details of which will be available later this year.

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

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

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

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

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

Thank you, Matt; good morning, everyone, and thank you for joining us.

The first quarter was strong for 3M, marked by organic growth in all business groups and across all geographic areas.

We posted record sales and returned record cash to shareholders, while also increasing investments in R&D and commercialization to reinforce our foundation for long-term success.

Let's look here at a few highlights.

Earnings per share rose to $1.79, an 11.2% increase, year-over-year.

Sales were $7.8 billion, the highest first quarter total in 3M history.

Organic growth was 4.6%, paced by our health care business at 6%.

Industrial and safety and graphic each grew 5% organically.

We saw organic growth in each geographic area, led by Asia Pacific and Latin America/Canada at 7% each.

Europe/Middle East/Africa grew 4%, followed by the United States at 3%.

I'm very encouraged by our continued broad-based organic growth, which is more evidence that our strategies are working.

Currency reduced sales by 2% in the quarter, which was about 1 percentage point worse than our expectation entering the year.

Operating margins were again strong at nearly 22%, up 30 basis points from last year.

Four of our five business groups reported margins greater than 21%.

It remains a good time to be a 3M shareholder.

The Company returned $2.3 billion to shareholders through cash dividends and share repurchases.

We increased our first quarter dividend by 35%, which marked our 56th consecutive annual increase.

In summary, the first quarter was a solid start to 2014.

This is only possible because of the hard work of our entire 3M team on a global basis.

Because of their efforts we continue to deliver consistent and strong results today, while at the same time investing and building for the future.

Now please turn to slide number 4. With one quarter behind us we are reaffirming our earnings and organic growth outlook for the full year.

Earnings per share are expected in the range of $7.30 to $7.55, with organic local currency sales growth in the plus 3% to plus 6% range.

We now anticipate foreign currency translation to reduce full year sales by approximately 1%, a slightly bigger headwind than previous expectations.

Our tax rate estimate remains at 28% to 29% with cash flow conversion at 90% to 100%.

David will now take you through the details of the first quarter.

David?

Thank you, Inge.

I'll begin by reviewing first quarter sales growth; please turn to slide number 5. Worldwide organic local currency growth grew -- was 4% -- 4.6% in the first quarter, with volumes up 3.4% and selling prices up 1.2%.

We continued to experience positive selling price changes across our businesses, boosted by world-class innovation and strong new product flow, both of which are important elements of the 3M business model.

In addition, we have been raising prices in certain developing countries to help offset the impact of currency devaluations.

Foreign exchange impacts reduced worldwide sales by 2 percentage points in the first quarter, and as Inge mentioned, this was about 1 percentage point worse than we expected at the beginning of the year.

The most significant currency headwinds were in Latin America/Canada at negative 12%, as several countries in the area experienced devaluations.

Currency impacts were negative 4% in Asia Pacific and a positive 2% in EMEA.

On the total US dollar basis, sales rose 2.6% versus the first quarter of 2013.

Looking by area, demand accelerated in Asia Pacific in the first quarter with organic local currency growth of 7%.

Growth was led by strong double-digit performance in Japan, where demand was elevated leading up to the April consumption tax increase.

China/Hong Kong grew 2% organically in Q1, or 8% excluding electronics.

On a business basis all five groups within Asia Pacific generated positive organic local currency growth in Q1, led by healthcare and safety and graphics.

Latin America/Canada also grew 7% organically, a nice acceleration versus the fourth quarter.

Growth was led by solid double-digit performances in Brazil and Mexico, our two largest Latin American subsidiaries in terms of sales.

All five businesses posted positive organic growth in Latin America/Canada during the quarter, including double-digit growth in healthcare.

Electronics and energy also posted solid organic local currency growth in the area.

In Venezuela we continue to managed through the economic turbulence and position our business for future success.

Sales and profits were down substantially in Venezuela during the quarter.

We continue to manage our exposures carefully, and we will stay on this path until the situation improves.

For some time now we have been actively managing towards a neutral net monetary asset position in Venezuela, and at this point it appears that any major event risk is behind us.

Organic sales growth in EMEA was 4% in the first quarter, continuing the positive trends that we have seen over the past few quarters.

West Europe grew 3%, with strong performances in Nordic, Alpine, and Iberia regions.

Middle East/Africa also posted strong organic growth in the quarter.

On a business basis, growth in EMEA was strongest in industrial and in safety and graphics.

In the United States, organic local currency growth was 3% in the quarter, which was a bit slower than the growth we saw in the second half of 2013.

It does appear that weather negatively impacted certain channels that we serve in the US, particularly in road construction, retail and industrial distribution.

On the positive side, healthcare posted the strongest US growth amongst our five businesses.

Organic local currency growth was nearly 5% across all developing markets and 4.5% in developed markets.

Again, as Inge mentioned, organic growth was positive across all major geographic areas.

Let's turn to slide number 6 for a discussion of the first quarter income statement.

Sales for the quarter were $7.8 billion, up 2.6% in dollar terms.

Gross profit rose 3.7% to $3.8 billion, and gross margins increased 0.5 percentage points to 48.5%.

SG&A spending increased in line with sales growth, and R&D as a percent of sales rose by 20 basis points to 5.8%.

Operating income increased by just over 4% versus the first quarter of 2013.

GAAP operating margins were 21.9%, up 30 basis points year-on-year.

Organic volume growth added 30 basis points to margins, and the combination of lower raw material costs and higher selling prices contributed a positive 110 basis points year-on-year.

An inherent part of 3M's business model is to leverage productivity and other gains to fund strategic investments while continuing to generate premium returns.

This is seen again in our first quarter numbers.

We invested the equivalent of 90 basis points of margin on incremental programs around disruptive R&D, business transformation and ERP, and restructuring.

In particular, we invested $40 million on restructuring and other realignment efforts in Q1 across a number of business units.

Lower year-on-year pension and OPEB expense boosted first quarter margins by 50 basis points, while foreign exchange impacts reduced margins by 50 basis points.

All in, first quarter earnings increased 11% to $1.79 per share.

Foreign currency impacts reduced first quarter earnings per share by $0.04, and the lower tax rate resulted in a $0.04 per share benefit.

As a result of our announced changes in capital structure strategy, average diluted shares outstanding declined by 4% versus last year's first quarter, which added $0.07 to first quarter earnings per share.

In summary, the first quarter was a good start to the year in 2014.

Organic sales growth was broadly positive across businesses and geographies.

Margins were strong overall, and we expect this performance to continue into the future.

Now let's turn to cash flow -- turn to slide number 7. As a reminder for those who are new to 3M, we announced at our December 2013 investor meeting our plans to manage towards a better optimized capital structure going forward and to allocate capital accordingly.

The strength and stability of our business model and strong free cash flow capability enables us to enact these changes while continuing to invest in our businesses.

Organic growth remains our first priority, so we will continue to invest in CapEx, R&D, and commercialization capability.

In addition, we are ready and able to respond to strategic acquisition opportunities that can strengthen our portfolio.

And at the same time our plan affords us the opportunity to return significant cash to shareholders.

We communicated our intent to implement these changes to our capital structure over time.

For the calendar year 2014 in particular, we expect to add leverage of $2 billion to $4 billion on the balance sheet.

Now let's discuss our cash flow performance for the first quarter.

We generated $1.1 billion of operating cash flow in the quarter, up $98 million versus last year's first quarter.

Higher net income drove the lion's share on the increase.

Capital expenditures were $293 million, a decrease of $31 million of versus last year.

We continue to expect full year CapEx will be in the range of $1.7 billion to $1.8 billion.

First quarter free cash flow was $799 million, up $129 million year-on-year.

And we converted 66% of net income to cash versus 59% in last year's comparable quarter.

Note that first quarter is typically our seasonal low with respect to free cash flow conversion.

For the full year 2014 we expect to be in the range of 90% to 100%.

We paid $566 million in cash dividends during the quarter, up substantially over the $440 million paid in 2013.

As Inge mentioned earlier, we increased our first quarter per share dividend by 35%.

Gross share repurchases were $1.7 billion in the first quarter.

For 2014 we expect full year gross share repurchases will be in the range of $4 billion to $5 billion.

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

Please go to slide number 8. Our industrial business posted strong first quarter results, with $2.8 billion in sales and 5% organic local currency growth.

Leading the way this quarter was our 3M purification business, which drove strong double-digit organic growth.

This business has gained significant traction around the globe as we expand our technology capability and product offerings.

We also generated double-digit organic growth in automotive OEM, which was more than twice the rate of growth in global auto production.

Our advanced materials and industrial abrasives businesses also posted nice first quarter organic growth.

Industrial sales grew broadly across all geographic areas during the quarter.

Organic local currency sales growth was 6% in both EMEA and Latin America/Canada, 5% in Asia Pacific and 3% in the US.

First quarter operating income was $618 million, up 7% year-on-year.

Operating margins increased 80 basis points to 22.3%.

Margins were boosted by volume leverage, positive price raws and good productivity, partially offset by restructuring costs.

We also improved margins year-on-year in Ceradyne, a business we acquired in late 2012, which added 30 basis points to industrial margins in Q1.

Please turn to slide 9. Safety and graphic sales $1.4 billion in the quarter, with organic local currency growth of 5%.

Our largest business here is personal safety, which generated double-digit organic local currency growth.

We also grew in our roofing granules and commercial solutions businesses.

Sales in traffic safety and security systems declined slightly on an organic basis, impacted by a slow start to the road construction season.

Safety and graphics grew organically in all major geographic areas, with Asia Pacific up 9%, Latin America/Canada and EMEA each up 5%, and the US up 2%.

Operating income was $318 million in the first quarter and operating margins were a solid 22.3%, although margins were down year-on-year versus a very strong comp.

Major factors impacting this quarter's margins were higher ERP investments, restructuring, and negative currency impacts.

Please go to Slide 10.

Our healthcare business once again delivered outstanding results.

It was our fastest growing and highest margin business group in the first quarter.

Sales were $1.4 billion and increased 6% in organic local currency terms.

All businesses contributed to this growth in the first quarter, led by health information systems, food safety, and drug delivery systems.

All geographic areas generated positive organic local currency sales growth, with Latin America/Canada up 12%, Asia Pacific up 10%, the US up 7%, and EMEA up 2% in the quarter.

In developing markets, healthcare grew 10% organically in the first quarter, yet another in a long string of double-digit performances.

First quarter operating income in healthcare was $427 million, and operating margins increased 30 basis points year-on-year to 31.1%.

Now let's look at electronics and energy, found on Slide 11.

First quarter sales in this business were $1.3 billion, up 4% in organic local currency terms.

Electronics related sales increased 5% on an organic local currency basis, with positive growth in optical films partially offset by declines in other businesses.

In our energy related businesses sales increased 2% organically, led by renewable energy and telecom.

On a geographic basis organic local currency sales increased 9% in Latin America/Canada and 7% in Asia Pacific.

EMEA was down slightly and the United States declined 4% year-on-year.

Operating income rose 16% to $227 million and operating margins were 17.3%.

Margins in this business continued to track higher, rising 2 points year-on-year, and 60 basis points sequentially.

Volume leverage and improving productivity were both positive contributors to first quarter margins.

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

Sales in the consumer business group were $1.1 billion, with organic local currency growth of 3%.

Sales in our stationery and office supply business declined versus last year's first quarter.

Store traffic in the US office retail channel was softer in the quarter, due in part to harsh weather winter -- winter weather conditions, along with continued store consolidations.

Our construction and home improvement business, which serves the DIY retail market space, lead consumers growth this quarter with high single-digit organic local currency sales growth.

Over the years we have built strong market positions in categories such as Filtrete brand home furnace filters, Scotch Brite painters' tape and Command brand mounting and fastening products, which provide a strong foundation for consistent strong growth.

On a geographic basis, organic local currency growth was 6% in Asia Pacific, 5% in Latin America/Canada, and 1% each in the US and EMEA.

Operating income was $228 million, with operating margins of 21.2%.

That concludes my first quarter related comments, and I will turn the call back over to Inge.

Thank you, David.

As you can see, the year is off to a good start.

We continued to execute well against our long-term strategic levers, which I would like to update you on.

Let's first start with portfolio management.

In the first quarter, we realigned and combined certain businesses to increase customer relevance, build scale, and generate cost efficiency.

In the safety and graphic business group we merged commercial graphics and building and commercial services into a newly formed commercial solutions division.

This brings a comprehensive array of branding, design, protection, and maintenance solutions under one division, allowing us to present one strong voice to the commercial market customers.

Earlier this month, we also further realigned our electronics related businesses to more effectively position them for accelerated growth.

We are now organized around two large divisions.

One is display materials and systems, which consolidates all of the 3M's capabilities in electronic displays.

The other is electronics materials solutions, which aligns our offerings in semiconductor, electronic materials, and components.

These changes will better align our capabilities with customers' needs and expand our leadership in this area.

Also in April, 3M acquired Treo Solutions, a leader in the healthcare data analytics.

This will bolster our health information system business by allowing it to supply customers with better solutions at lower costs.

Let's talk about the second level, investing in innovation.

Innovation is the heartbeat of 3M.

It drives what we do every day and allows us to create even greater value for customers.

Innovation generates new growth and is the key to our long track record of generating premium returns throughout the business.

In fact, one-third of our revenue in 2013 came from products created within the last five years, and we are targeting 37% by 2017.

We are expanding our innovation capabilities globally.

We have now built 45 innovation centers around the world where customers gain exposure to the breadth of our technology.

Our international labs are also typically staffed and led by local nationals.

And our commitment to innovation helps 3M recruit some of the best and brightest scientists from all over the globe.

It is notable that 47% of our new products launched in 2013 were led by international labs, up from 37% just a few years ago.

The results are strong, with more opportunities still to come.

Now let's talk about the third lever, business transformation.

We continue to make progress on implementing our global ERP system, which will lead to a more ideal and efficient 3M.

To date, we have gone live in five countries, with more scheduled for 2014.

Most recently we launched this in one of our European distribution centers based in Dabrowa, Poland.

We're learning more with each implementation and using that knowledge to guide and refine our future work.

There is one final point I would like to make before taking your questions.

When we last met in January, I talked a bit about how 3M managed through volatility in developing markets.

Given uncertainties in some areas of the world today, I would like to expand a bit upon that discussion.

We have a deep history in developing nations.

3M entered Brazil in 1946 and a year later, 1947, in Mexico.

With that history comes a wealth of experience and business teams that know how to be successful in those areas.

This is also the model we are using in Central East Europe, Middle East/Africa, and APAC.

This is the 3M international model.

We enter early, develop connections, grow our customer base and steadily build capability.

We staff our management teams with local nationals -- people who know the country, culture and customs, and of course speak the language.

As with any growth opportunity, there are going to be challenges along the way, and developing markets are no exception.

Yet when these challenges arise we do not abandon our customers or the market.

Our leaders know how to manage through them, knowing from experience that 3M will emerge even stronger, with a more established presence and more loyal customer base.

Our approach continues to produce strong results, including this year's first quarter.

In Brazil, as one example, we grew 11% organically, and in Mexico 15%.

And we see developing countries coming back in terms of growth rate.

Developing markets, in total, represent 35% of 3M's sales today, and we expect that number to keep climbing.

Thank you for your attention, and with that we are now ready to take your questions.

(Operator Instructions)

Andrew Obin, Bank of America Merrill Lynch.

Yes.

Hi, how are you?

Good morning, Andrew.

Good morning.

Just a broad question; as I look at 3M, you guys delivered another quarter of some of the best top-line growth in the industry.

If you look at the margin expansion, you're actually starting to get it -- but then if you look at the operating line, the leverage seems to be limited.

And I understand it is a function of some of the discretionary spending that you guys are doing.

Two questions, A -- what is the level -- what is the run rate of discretionary spending that we should be expecting for the rest of the year?

And second, a broader question, sort of 3M is -- seems to be a combo of an industrial company and a consumer company, but your operating leverage now behaves a lot more like a consumer company than an industrial company.

Do we get operating leverage on the industrial side at some point this year?

Thank you.

Yes.

Thanks, Andrew.

In terms of the leverage we get from growth, we saw in the first quarter, I think very typical of what we would expect for the overall business, which is somewhere, 30% to 40% -- 35% to 40% operating leverage on the growth that we got.

And what is true is, as you pointed out, and as we had planned, we do plan to reinvest a significant portion of that in some of these key strategic investments through 2014.

We had said at the beginning of the year that we expect to invest in these investment programs somewhere between $0.10 to $0.20 a share during the year, and we invested $0.07 a share in the first quarter.

We still expect to invest at that $0.10 to $0.20 range, probably towards the high end, the way it looks right now.

But what you can expect through the year is that you will see some moderation of that spending.

Obviously the business transformation and the R&D investment is pretty steady through the year.

We also invested -- we did some restructuring in the first quarter that we will look at each quarter and determine whether or not there are projects that we should undertake.

And also some of the spending was in this European supply chain center of excellence, which -- we'll lap that spending here as we move into the second quarter.

Just on structural, I understand that you need to invest and it is part of the culture.

But as I said, should we see more -- operating more top-line dropping to the bottom-line in the second half of the year?

Is that a reasonable expectation given what you have stated?

Yes, if you look at the plan we laid out for the year, what you could foresee is that we will see some net increase in our margins for the year, which we did see already here in the first quarter.

So I think it is fair to assume that that will continue as we look through the full year.

Thank you.

Yes.

Steven Winoker, Sanford Bernstein.

Thanks and good morning, all.

Good morning, Steve.

The 50 basis point increase in gross margin -- and when I look at the gross margin overall, the highest I think since 2006, or certainly for a long time -- and you peaked in that earlier time period over 50%.

I know we are having the discussion about investments below the gross margin line, but is most of that increase on the pricing versus raw material front?

And how do you think about the sustainability?

Clearly, you have a lot of pricing power, and you're making up for inflationary issues.

But when you look at your material cost position -- costs out and continued pricing efforts, are there other things going on there on the volume, leverage, et cetera, where we could sort of see that number also continue to tick up for some time?

Sure.

Yes, you are right Steve.

We were encouraged this quarter by the improvement in our gross margin, which seasonally for us, the first quarter is usually the lowest of the year.

So that was encouraging.

If we look year-over-year, well, it's true it's a combination of several factors.

Certainly productivity features in that, and you have heard us really focus in the last couple of years around the rejuvenation and taking Lean Six Sigma to the next level.

So we are seeing, I think, some of that coming through.

Certainly we have been working the portfolio to focus resources where the best opportunities are.

And I think that is certainly contributing to the overall gross margin profitability of the Company.

Then finally there -- certainly as you know, and as you pointed out, there is a component of price and raw material that is supporting this.

On the pricing side, we had quite strong pricing in the first quarter, down a little bit from the fourth quarter, but nonetheless quite strong at 1.2%.

If you look at that, about half of that was attributable to the freshness of the product portfolio and really the price/value relationship that our customers ascribe to those products.

And the other half was largely attributable to offsetting the foreign exchange movements, in particular in the emerging markets.

So it was a combination of several factors, but obviously it is something that we continue to focus on and seek to improve.

That's great.

Inge, you have talked about yet another organizational set of changes internally that just sound like a continued large transformation going on.

Are these latest ones that you have talked about today -- how much -- it sounds like it is all channel driven, but are you also going to reap some cost synergy benefits from this?

Are there other elements beside the channel and customer facing front here that will be -- that we can see the benefits from over time?

Yes, first of all, if you go back to when we laid out our six new strategies, when I took office a little more than two years ago, the first strategy there is calling out relevance to customers, and this is the implementation of that.

So when you have the strategy, you need to follow through in order to make sure that you are on the way to obtain your overall objective.

Some of the changes we have done is clearly based on relevance to customers, for us to be able to respond faster based on their needs.

As you know, our technology platforms are very important, and we need to be able to respond fast back to them based solutions we are working with with them.

In my mind, as we had not looked into organizational structure maybe for almost 10 years, there was some disconnect in between our internal organization and the market.

So we are addressing that.

Of course, you drive it first from relevance to customer to market, but there is also cost benefits, of course, in the organization structure as you make those moves, because you reduce specifically in the back office and in the middle management, where you can reduce costs and be more agile and so forth.

If you think about it from a speed perspective, because we would like to accelerate speed in terms of responsiveness to customers, we have in some parts of the world, that we have not talked about now for a long time, also consolidated subsidiaries into region in the part of West Europe.

And we have done the same in Latin America, et cetera.

If you think about that, where you now have connection points where we previously, in some cases, had three sizable but not huge divisions that needed to interact, for instance in Nordic, with four different countries, where we today have one-to-one.

So you have one huge division totally focused on the market space and your one geographical area in Nordic.

That is an incredible move and shift, if you think about speed in order to execute, where you went from three vice presidents back in Saint Paul and four managing directors in Nordic.

Now you go one for one.

I can tell you that has an incredible impact on an organization in terms of speed as we move ahead.

Look upon it like increased relevance in the front end for the customers, and for us also to be able to leverage cost in our structure, both in international and in the center of the organization.

Great.

Thank you.

David Begleiter, Deutsche Bank.

Thank you.

Inge & David, are you able to break out the weather impacts in Q1?

And if so, how much of those are permanent, and how much will be recaptured in future quarters?

First of all, it is difficult in a way to talk about it, because we are a global company.

Some places around the world, the weather was okay.

I think -- and you think about it, there was some impact in the United States, and United States is 35% of our business.

It is difficult for us to quantify it, but of course we had some impact of it in the United States, specifically.

And it was related to, as David said, was -- traffic in the stores was down, which had an impact on our consumer business.

There was also a delay in some of the construction, and specifically relative to traffic safety and road safety.

If you take road safety and traffic safety, I think that will come back.

It is a timing issue, so we will get that back as we go.

If you are going into the combination of lower traffic in the stores in the first quarter, that is maybe gone.

But we will compensate that in a different way.

But we do not talk much about weather, to be honest, right?

We are a global company, and the sun is always shining somewhere, and that is what need to capitalize on.

If I could just add briefly, David.

If you look at the US from a trend growth perspective, we saw -- in the second half of last year we, grew around 4.5% during that period, and we have got guidance in place for the year of 3% to 6% for the US.

And we grew at 3% in the first quarter.

It feels to us the guidance is still right, and that we will see some recovery as we move through the year.

Just lastly, of the two segments that posted year-over-year earnings declines, safety and consumer -- do you think they can return to earnings growth in Q2?

Yes, we think that we have got an outlook for both of those businesses to grow, again, with the average of the Company for the year in the 3% to 6% range.

We think that their margins will operate around the Company average.

So that would imply some improvement in consumer and probably in the safety and graphics that -- if you look seasonally, they run a little bit lower in the first quarter, typically anyway.

Thank you.

Scott Davis, Barclays Bank.

Hello.

Good morning, guys.

Good morning, Scott.

Do you guys -- when you think about price -- and I think 3M has a history of being pretty good on price, particularly the last five years or so -- but is there a trade-off that you see, a clear trade-off, between price and volume?

Do you have a sense that you are giving up volume, or do you have so much pricing power in most of your businesses that it is fairly immaterial -- that it is more of a mix issue; it is just a better product?

We do not feel at this point in time that we are giving up volume.

You have to think about it in terms of our position in the market and all the new products that we are introducing.

Many of them are based on spec-ing, on platforms, et cetera.

I will not say that we at this point in time are giving up anything that we are aware of.

And as you know, our power in terms of pricing is pretty strong.

And it is all based on the value of the solution that we are providing.

So I think that is important.

I don't think that is an issue.

If it had been, we had not continued to execute based on our strategy in that area.

I think it is more in terms of you talking about growth, generally speaking, is maybe in some part of -- in the developing world that we will add different type of products and solutions that are meeting, I would say, the price points and affordability in that part of the world.

But that is a different discussion, because that is more around the product portfolio that we are introducing in developing economies.

I think there we still have huge opportunities.

And as you heard, I talked about now that we have built out our capabilities with 45 customer technical centers around the world, that is exactly what we can capitalize on.

So for us it is important to make sure we develop products that are adding value, but also affordable for that market.

But we still have a very high expectation relative to our margins in the Company.

We are not giving up on that.

So you should earn your right in order to introduce products with lower margin.

You have to find a different way to produce them and make sure that you get the margins that we expect and that we can pass back to you as a shareholder.

Okay.

That is a good answer.

It seemed in this presentation -- at least I'm looking at slide 7 -- that there is a new emphasis -- or not a new, I should say, but at least an increased emphasis on acquisitions.

And you cite -- there's a line here that says multi-billion dollar deals possible.

When I think of 3M and your margin profile and the technology you have -- is there stuff available out there realistically that you could buy without having to pay enormous multiples?

When I think of 3M type of assets -- that things have been bid up so highly, 15 to 20 times EBITDA.

It would be difficult to do those types of deals, I would imagine.

But is it realistic to assume that you can find things that are interesting, that have the margin structures and the growth structure that you are looking for?

Again, it's coming.

But first of all, you are right when you correct yourself.

It's not the new emphasis.

We have done acquisition -- quite a number of acquisitions over the years.

I think the new and very good thing for all of us is that based on the portfolio management we have put in place, we get a very good profile of where we should invest first versus second as we move ahead.

I think the biggest acquisition 3M has done over the years is $1 billion or so.

And in some spaces, in order for us to be more relevant, we maybe need to do slightly bigger than that as we move ahead.

As you saw, we didn't execute on acquisitions last year.

And the reason for that was that we couldn't find any that were added value for all of us.

But I can tell you our pipeline is strong.

We are working it for each business, and let's see what is happening as we move ahead.

In order for us to build out relevance, in some cases we have to look upon interesting spaces for us.

I guess I would also add, Scott, it would be quite unusual, as you observed, that we would find companies that have the type of profitability and performance that 3M does, but that is very typical.

We will look at targets, we will identify how we can create value by bringing them into the portfolio and leverage either technologies or our brands or our global distribution.

And when we do those transactions, the litmus test for us is to become convinced ourselves that we can take a business and turn it into a 3M-like performing business, which we have done very successfully over the years and in a number of different instances.

That is either the challenge or the opportunity, certainly.

Okay.

Thanks, guys.

Thank you.

Shannon O'Callaghan, Nomura.

Morning, guys.

Good morning, Shannon.

Maybe a little bit more on some of the moving parts on managing currency in the quarter.

First of all, to get to the neutral position in Venezuela, did you have to take a hit to get your remaining receivable out of there?

And then the positive price in Asia Pac, which never happens, is that an FX dynamic?

First on Venezuela, yes, we actually -- as I mentioned in the commentary, we did see a slowdown in sales and income that we generated on the ground in that the availability of currency on imports has been pretty nonexistent since already the fourth quarter.

So that caused a slowdown in the business.

What is also true for us is we have been able to maintain, as I mentioned here, a neutral monetary asset position.

Therefore, as it relates to both the local balance sheet as well as the exposure we have got from offshore, we were able to manage through that.

And we do not see that being a risk as we sit here today.

And of course, things can always change, but we feel much better today than we did last time we were on the call three months ago.

And then in Asia Pacific, could you repeat the question?

Price was positive in Asia Pac, which is pretty unusual.

I did not know if that was a price increase related to offsetting some type of FX, or if that is unrelated?

We have had some pricing pressure in some of the countries that have experienced devaluation over the last year.

So that would be a portion.

And what is also true right now is in a number of our product areas, the price value relationship of some of the new products we're launching has been very strong.

So we were encouraged by the performance there this quarter.

Just on your current assessment of the global economy, volumes in every region except the US improved this quarter.

US sounded like it was mainly weather-related.

Are you encouraged by that?

Do you feel like there is an improving momentum?

Or is it more a comp thing?

Just maybe a little color about what you're hearing from the businesses globally, and how encouraged you might be or not be.

I think, first of all, of course encouraged in the way that the growth is -- it looks like steady for us now.

If you look upon our performance here the last couple of quarters, it has improved for us.

And as you said, it is going up and down in some parts of the world.

I will say that APAC came back slightly.

So APAC is, I would say, the same position as we have had before.

They had good growth in the quarter for us, slightly better in Q1 than how they ended the year.

West Europe grew 3%, which is equal to how they ended the 2013.

So that is a 3% growth.

And it looked like the combination in Europe -- what we have talked before about North and South -- is now very much equalized.

So it looks like 3% is the steady growth there.

Central East Europe and Middle East -- I would say Middle East/Africa had good growth for us.

Central East Europe slightly lower in the quarter, where you could see that some business -- or countries did well there.

Like Turkey had a higher growth rate than you saw in Russia and Poland.

And United States, personally I'm not overly concerned.

It was 3% growth for the quarter.

We started slower and came back stronger in the quarter.

And that is related to, that David talked about, relative to traffic in stores and delay in construction, specifically in the roadside for us.

I think it looks like we are going sideways; slightly up, but not much.

So I think we need another one or two quarters here to see if it is moving on a higher-end.

But as we have said, we are affirming our growth rate for the year.

So we feel -- yes, there you have the answer -- encouraged, and I look upon it rather better than worse.

Okay.

Thanks a lot, guys.

Ajay Kejriwal, FBR Capital Markets.

Thank you.

Good morning.

Good morning.

On healthcare you continue to see very nice growth here in developing markets.

And I know in the past you have talked about new products and penetration and all that.

Maybe just help us with where are you in terms of penetration?

How much a run rate do you still have there?

And the sense of sustainability of this double-digit growth rate that you are seeing here?

As you saw, healthcare grew 6%; and if you separate out, developed was 5%; and developing, 10%.

And you think about the mix for us, it is like developed is almost 80%, and we have 20% in developing.

So already there you have the answer relative to big opportunity in the developing world as we move ahead.

We have very sophisticated solutions in our Business in healthcare, which is one of the reasons why we are able to continue to grow in developed world, and to attractive margins.

And the pipeline of new products is very strong for us in healthcare.

That is in hospital consumables with fastening systems related to our dressing business.

Or if it is in infection prevention, where we are coming with new measurement tools that will increase the time for measuring what they're doing in their infection area by 50%.

We have a very strong pipeline of product going on there.

I would say that -- think about it like developed world, we are able to continue our growth and margins due to very good added value products, which is needed in an environment where there is pressure on cost.

And then in the developing world, for us is to start to implement the penetration plans that we now have been working on for quite some time.

In addition, develop products that will meet the needs from a price perspective in some of the countries there.

They never have a problem with the quality of products, as you assume.

When you look upon our Tegaderm products, or Micropore tapes, or Ioban products, the problem is never quality.

The problem is affordability, and there are different ways for us to go around that.

We are very -- we see very positive on our healthcare business.

And as you see again this quarter, very good result.

And it is not by accident.

This is a business we have built out for many, many years, and there's a lot to come relative to our future in healthcare.

I would just add on, Ajay, I think another piece of evidence that supports that is not only the consistent high level of growth, but again, for example, this quarter, double-digit growth in a number of different countries -- Brazil, Mexico.

If you look in Southeast Asia, if you look in China.

If you saw it in one place concentrated, you might be less confident.

But as we see it individually across all of these markets, it is very encouraging as to the opportunity and sustainability of the growth.

That is good.

Maybe a couple of clarifications -- on the restructuring you mentioned $40 million investment in the quarter.

Is that included in the $0.07 growth related investments you mentioned?

And then if you can, help us with a full-year number -- what you will be modeling in for restructuring?

Yes.

The answer first of all is, yes.

Inside of the $0.07 a share we had $40 million of -- it was a combination of restructuring, primarily in some of our operations in Europe, as well as the cost -- year-over-year increase of this European supply chain -- which, as I mentioned, we'll lap that increase now as we get into the second quarter.

That is piece one.

Piece two is -- if you look at the total of the combination of the longer term investments in R&D and business transformation, plus these items of restructuring and repositioning, we expect that -- we had said $0.10 to $0.20 per share for the year.

And as I mentioned earlier, it looks now like we will be towards the high end of that $0.20 range with some frontloading in the first quarter.

You can think about it declining somewhat as we move through the year.

Got it.

Thank you very much.

Jeff Sprague, Vertical Research Partners.

Thank you.

Good morning, everyone.

Good morning, Jeff.

Just two quick cleanups for me.

Just, first on electronics you noted China/Hong Kong was kind of strong ex-electronics, but your electronics performance overall actually looked okay -- pretty decent.

Can you just kind of reconcile those dynamics, and a little more color on what is going on in the electronics part of the business?

Yes.

Look upon electronics specifically relative to APAC in total.

We had 5% growth there.

That business is moving in between countries from time to time.

For China and Japan specifically, it was type of opposite perspective.

They have comps that in one case was easy and the other case was tough.

So easier for Japan, tougher for China.

So that is the answer.

And then this quarter specifically, much more business went into Japan in terms of our sales that later are converting around Asia.

That is the answer to that question.

If you take China for us, base business there was 8% growth, which is slightly better than Q4 for us and slightly better year-on-year.

China was okay.

When you look upon the total electronic markets, when we look upon semiconductor, data storage, smart phone, notebook, tablet, TV, et cetera.

The market, generally speaking, went sideways, I think, in terms of volume.

But of course tablets going up and capitalize on notebooks in terms of the volume, generally speaking.

For us, we are in all those devices with different type of levels of penetration, but that business is improving, generally speaking.

And I would say, if you take the whole business group of electronic and energy, you saw on -- they have growth and they have the margin expansion of 200 basis points year-on-year.

We are coming around and addressing a lot of issues in that business.

I am personally very encouraged, and I think that management team there is doing a super good job for us addressing some of the issues we have had in the past.

I think it is good -- we are addressing it and taking care of our own destiny I'm very pleased to see that happening.

Right.

Just a quick one for David also, you initially guided your tax rate, assuming the R&D tax extenders and everything came through -- it looks like they won't, but you have found a way to maintain the tax rate guidance.

What is going on there?

Is a some of the restructure in Europe?

Or maybe just the comfort level?

Also on that tax guide at this point.

Yes, if you look at the guidance, we maintain the 28% to 29% for the year and that does continue to presume that we see a renewal some time before year-end of the R&D tax credit, which is worth about 40 basis points to us.

Both of those we continue to foresee.

Then we saw some -- first quarter was a little bit better than the overall full-year which was related -- we completed some prior year audits and we ended up releasing some reserves that we had established.

That is the answer to the question.

All right.

Thank you.

Nigel Coe, Morgan Stanley.

Thanks.

Good morning.

Good morning, Nigel.

Good morning.

Again, couple cleanups again, I guess.

David you mentioned roughly half of the price increase is a function of the currency weakness, particularly Latin America.

So when I think about the 110 BPS benefit from price rolled into your margin build and 50 BPS from FX pinch.

Is it fair to say that the impact currency net-nets is neutral to margins?

No, actually.

We try to call it out there.

We had a net impact -- excuse me of FX in the quarter of 50 basis points.

Nigel, if you look on the income statement slide with the margin walk, you will see a right on there.

0.5 point.

Right, but then the 110 BPS on price is in some ways a function of currency in that you get pricing power.

Sorry, Nigel.

The 110 is both price and raws.

So raw material cost for us were down around 2% year-over-year.

So that contributed to the 110.

And then as you correctly pointed out, as I said, the portion of price that remains of that 110, it is more or less 50/50 this quarter.

So there is certainly some offset, to be honest I do not have the top of mind is it precisely a full offset -- I think it is a little less than that.

That is really helpful.

The second part of my question was, you talk about raw materials are down 2%.

You got to say, [upside] mix of raw materials in most of the companies we look at.

I guess, maybe talk to, generally speaking, about how that raw material index is tracking.

Particularly as we go into 2Q.

And are we still on track for the roughly $0.10 of benefits from raw mats this year?

Yes.

That is right.

Starting we had guided $0.05 to $0.15 of raw material cost benefit for the year, versus last year.

Certainly in the first quarter we were encouraged by the performance in that area.

And that is a combination of, not only the trend on raw material cost themselves, but also to the extent that our efforts to identify alternative formulations to lower raw material cost and change the composition to the extent that we have efforts that would actually lower the amount of raw materials in a product.

These types of things are included in that performance.

And the good news is, is our sourcing organization continues to do a really good job in that area.

We feel good about the guidance on raw materials for the year.

If anything -- if I were to pick a trend, it appears to be trending towards the high end of that range for the year.

Okay.

That's very helpful.

Thank you.

Deane Dray, Citi Research.

Thank you.

Good morning, everyone.

Good morning, Deane.

I was hoping to get a little bit more color on the look forward into the second quarter.

Maybe some commentary on how April has played out so far.

And David, are there any dynamics we should know about -- especially following up on Jeff's question on tax -- a bit of a benefit this year with those releases.

Anything unique about the tax or corporate expense for the second quarter?

In terms of --

Intra-quarter trends and [tax increase].

(Multiple speakers)

In terms of the trends on volume and revenue -- if you look at the first quarter, first of all.

Typically March is our strongest month in that quarter, which turned out to be the case for us again this year.

And maybe a little bit stronger, slightly stronger than a typical intra-quarter pattern.

If we look at Q2, we feel good about the overall view that will continue to operate.

We said 3% to 6% for the year.

Which is a midpoint of 4.5% -- which is exactly where we operated.

If you look at the second half of last year, we ran at 4.5%.

First quarter were now ran at 4.5%.

And we feel good about the second quarter continuing at that rate.

Pluses and minuses, we have kind of inferred that we have some level of optimism about the US.

There are also areas of uncertainty.

And certainly places like Japan, which is a very significant business for 3M we did see a pull forward.

It was quite clear -- a pull forward of sales into the first quarter as a result of the tax increase.

I would say pluses and minuses.

April started out fine, so we feel good about a stable performance for the Company.

In terms of taxes, we had a little over 27% rate in the first quarter, which was closing out of some prior year audits.

Included in that, there was a particular case that we benefited from, where we were able to treat as deductible assets, some assets that had been previously disallowed.

That was a one time occurrence for us in the first quarter.

Which, given that rate in the first quarter, solidifies the view that for the year we can operate at 28% to 29%.

I do not see any unusual patterns that we would foresee quarter by quarter through the balance of the year.

Great.

That's helpful.

Thank you.

Sure.

Joe Ritchie, Goldman Sachs.

Hello.

Good morning, everyone.

Good morning, Joe.

Two quick questions.

First on pricing.

The currency fluctuations notwithstanding -- it still seems like you're getting 50 to 60 basis points in price.

And David, if I am correct, with your raw mat guidance, you are now -- you think it is probably going to be trending towards another 50 to 60 basis points in a raw mat benefit for the remainder of the year.

So, is there any reason to believe that you are not going to get at least a price cost benefit of 1 point for the remaining three quarters?

What we expect price cost for the balance of the year -- what we had guided originally was on pricing -- that we thought would be very modest for the year.

Obviously, with the stronger first quarter performance, significantly supported by the fact that we were having to offset foreign exchange, we expect that pricing performance to decline through the year but nonetheless be positive.

Then on the raw materials side, as I have already indicated, I am expecting -- if we look at that $0.05 to $0.15 range that we set out for year -- I am expecting that right now as we see it, will trend toward the high end of that range.

I think from that you can probably get to the specifics that you were just asking about.

Just to follow up on that a little bit, if you got 50 to 60 basis points potentially ex the currency this quarter.

You are continuing to invest at a higher rate on R&D.

So is there any reason to believe that pricing should step down for the rest of the year?

[Something] I'm just not thinking about?

It is a good question.

We have a number of actions that are calendar year based.

So what we do expect is that we will see some decline through the year.

Which is why we had originally guided that it would be modest price impact on the core base.

Just one question on the buyback.

It looks like the gross buyback this quarter was around $1.7 billion -- think your guidance for the year are is $3 billion to $5 billion.

So perhaps, one, if you can comment on what the net buyback was for the quarter.

And then also, what would get you to maybe flex the $3 billion to $5 billion higher in the coming quarters?

Sure.

So first of all, the net buyback in the first quarter was $1.4 billion against the $1.7 billion gross.

And if you paid attention to the trends over the last couple of years, what has happened is, we have substantially seen a reduction of the outstanding unexercised options.

So that has cut about in half over the last several years.

That will cause our net to be much closer to gross than it has been in the past.

That is one of the reasons why we see it much more closer this quarter.

Secondly, in terms of the overall gross for the year, basically, the way I think about this is -- if we go back to the fact that what we said we would do now is we will move our capital structure to be better optimized going forward.

So we are starting to allocate the capital to put that in place and that started last year as we drew down cash.

This year we said we would increase our leverage by $2 billion to $4 billion.

And if you look in the first quarter with the actions that we took, our net -- our leverage went up by about $1 billion against the to $2 billion to $4 billion guidance for the year.

It is right in line with what we had indicated we would be doing.

And we also did modify the outlook for the year on gross buyback to $4 billion to $5 billion from $3 billion to $5 billion based on the fact that we add up all the pluses and minuses we concluded that, that would the right level for us here in 2014.

Okay.

Great.

Thank you.

John Roberts, UBS.

Morning.

Morning.

Since you're open to looking at multi-billion dollar acquisitions, I don't think you have ever done a hostile, but we have had this [do] development of using activists to facilitate big acquisitions.

Is that something that would be too aggressive for someone like 3M to consider?

I -- first of all thank you for the question.

I do not think that is the way you should move forward and when you look upon those type of things.

We would like to do strategically important acquisitions that would add value for everyone involved, including 3M and our shareholders and the customers that was part of that.

I think that should be done in a very careful way as we move ahead.

If I could add, John.

Our experience -- a couple of comments there.

One is, we did indicate at year-end, that as we look at our own capital deployment and looked at our capability, both in terms of our performance on businesses we been acquiring in recent years, as well as the integration capability that we put in place to ensure that we will continue to have good performance going forward.

Given the size of the Company and how we are deploying capital our conclusion was it would be appropriate for us to not limit the scope of acquisitions to say $1 billion or less.

Which has been the history of the Company.

Hence, we indicated that we would be open to doing things larger than $1 billion, because likewise, we do not like to surprise people as we take action.

That is one piece of our thinking.

In terms of the subject of hostile versus non-hostile.

What I would tell you is that one of the advantages we have as a Company is typically when we do approach companies with the possibility of acquiring, the reaction is typically very good because 3M is known to be the kind of company that invests to build businesses.

Therefore we found that, generally speaking, the reaction is good and that is our preference to take that type of approach frankly.

If you think about the culture of the Company that makes sense to us.

We are about building businesses here and that is what we continue to plan to do.

As I look across the portfolio, it seems to me the electronics and energy area might be the one that could benefit most from a major acquisition.

Maybe the scale might help with the margin improvement you are trying to achieve there and valuations I would suspect are more reasonable in that space -- a lot of other competitors have had struggles in that area over the past couple of years as well.

I think all five business groups can benefit from actions in this area.

It is an ongoing portfolio management activity that we are working on.

I will not call out one business group over another one, relative to how we can build strengths [on strengths] into business groups.

Because when you look upon our strength in each of the five business groups, it is very strong.

So I think in each individual business group, that will add value by us working on the portfolio management as we are doing at the time.

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.

I would like to thank everybody for joining us today.

Thanks for listening.

Thanks for your attention to 3M.

Have a great day.

Goodbye.

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

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