3M (MMM) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, October 23, 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.

Welcome to our third-quarter 2014 business review.

You'll see a list of upcoming events and dates on slide 2.

We will hold our next investor meeting on Tuesday, December 16, at the Grand Hyatt Hotel in New York City.

The meeting will begin at 8:00 AM and conclude around noon.

Invitations will be sent today, so please RSVP as soon as possible.

Also make note of our earnings call dates for 2015 scheduled for January 27, April 23, July 23, and October 22.

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

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

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

If you'd please turn to slide 4 and I'll hand off to Inge Thulin, 3M's Chairman, President, and Chief Executive Officer.

Thank you, Matt, and good morning, everyone.

I appreciate you joining us today.

The third quarter for 3M was marked by steady execution and strong growth, delivered in a mixed global economic environment.

For the fifth consecutive quarter, we posted organic growth in all business groups and all geographic areas.

Our team's execution also produced [racing] margins and the highest quarterly sales in 3M history.

At the same time, we made investments in research and development and our commercialization capabilities to ensure long-term success.

Let me take you through a few highlights of the quarter.

Earnings rose to $1.98 per share, up 11.2% year over year.

Sales were $8.1 billion, a 3M record.

Organic growth was 4% company-wide on top of 6% growth in last year's third quarter.

Leading the way with 5% growth was Health Care, a business that is pioneering medical advancements in emergency rooms, hospitals, and dental clinics around the world.

Electronics and Energy grew a solid 4% with particular strength in our Electronics business.

Industrial also grew 4% with a special encouraging growth in the United States.

Consumer delivered 3% growth including significant gains in our do-it-yourself business.

Safety and Graphics also grew 3% led by our personal safety division.

Organic growth was positive across all geographic areas paced by the United States at 6% and Asia Pacific at 5%.

I'm pleased that operating margins are very robust.

Margins rose to 23%, up 1.4 percentage points year on year.

All business groups delivered margins greater than 22%, another Company first.

Margin expansion, combined with 4% organic growth, is further evidence of portfolio management actions are delivering hard results.

Free cash flow was strong in the third quarter, allowing us to deploy more resources to enhance the values of our businesses, and we returned $1.8 billion to shareholders through dividends and share repurchases.

On September 1, 3M also completed acquisition of the remaining 25% of our Sumitomo subsidiary at the price of $865 million.

Three weeks ago, I was in Japan to visit our team along with our biggest customers.

We discussed the growth opportunities in the market around infrastructure, healthcare, consumer, and other areas.

Our 3M Japan team is excited to grow into an even bigger and more profitable enterprise.

Overall, I am pleased with our third-quarter performance.

We executed well, and delivered strong growth across the Company.

Nick will now take you through the details.

Nick?

Thank you, Inge, and good morning, everyone.

Please turn to slide 5 where I'll review the third-quarter income statement.

Q3 was a strong quarter, and we are on track to deliver the sales and income targets that we communicated entering the year.

The Company continues to operate well, with a good balance of growth, margins, and cash generation.

Third-quarter sales were an all-time record $8.1 billion, an increase of 3% year on year, with 4% organic growth more than offsetting the stronger US dollar.

Operating income rose 9% to $1.9 billion and earnings per share rose 11% year on year.

We generated good productivity in Q3 and increased operating margins by 1.4 percentage points while investing in important programs for the future.

I'll dig a bit deeper into the components of the third-quarter margin improvement.

Organic volume leverage added 20 basis points to third-quarter operating margins, and the combination of lower raw material costs and higher selling prices contributed 80 basis points year on year.

Underlying selling prices remained firm across many of our businesses, supported by technology innovation and strong new product flow.

Raw materials were again lower versus last year's comparable quarter.

Commodity prices remained steady, and our sourcing teams continue to create new opportunities to reduce costs across the globe.

Lower pension and OPEB expense added 50 basis points to third-quarter margins.

Strategic investments reduced third-quarter margins by 40 basis points.

This includes increases in new disruptive R&D programs, business transformation and ERP costs and restructuring.

Foreign-exchange impacts reduced margins by 10 basis points, and the Treo acquisition was just slightly dilutive to third-quarter margins as we integrate that business.

Inge also mentioned that we acquired the remaining 25% minority equity position in Sumitomo 3M on September 1. But because that subsidiary was already being fully consolidated in our results, it had no impact on operating margins.

It was, however, $0.01 accretive to earnings per share in the third quarter.

Finally, productivity and other items added an additional 50 basis points to margin year on year.

Earnings were $1.98 per share, an increase of 11%.

Foreign currency impacts reduced earnings by $0.02 a share in Q3, given the broad-based strength of the US dollar, and a higher tax rate reduced earnings by $0.08 per share.

Average diluted shares outstanding declined by 5% versus last year's third quarter which added $0.10 to third-quarter earnings per share.

Slide 6 outlines the details of our third quarter sales change.

Worldwide organic local-currency growth was 3.9%, with volumes up 3.2% and selling prices up 0.7%.

We've now achieved 20 consecutive quarters of positive organic sales growth.

The Treo acquisition added 10 basis points to sales growth, and the stronger US dollar reduced third-quarter sales by 1.2%.

On an all-in basis, sales rose 2.8% versus the third quarter of 2013.

Organic local currency sales growth was positive across all major geographic areas, making this the sixth consecutive quarter that we have done so.

The United States outpaced all geographic regions in the third quarter with organic local currency growth of 6%.

US growth was led by Industrial at 8%, Safety and Graphics at 7%, and Health Care at 6%.

Asia Pacific organic growth was 4.9% in Q3.

Health Care and Electronics and Energy led the way with growth of 9% and 7% respectively.

Organic local currency growth was 7% in Japan or 3% excluding Electronics.

China, Hong Kong, grew 4% organically in Q3 or 3% excluding electronics against a challenging double-digit comp growth in last year's third quarter.

EMEA posted organic local-currency growth of 0.8% in the third quarter.

Central East Europe and Middle East Africa each grew in the mid single-digits while West Europe declined 0.5%.

While we have seen pockets of slowing in some West European countries, our teams there are executing well in the face of some economic headwinds.

Organic growth within EMEA was positive in Health Care, Safety and Graphics, and Industrial, but declined in both Electronics and Energy and Consumer.

Finally, Latin America/Canada grew 0.4% organically with Health Care leading the growth.

Mexico generated double-digit organic growth and Brazil was up mid-single digits.

Venezuela remains challenging but our team is managing through the situation well and the currency risks are under good control.

Revenue was down in the third quarter in Venezuela which reduced organic growth across Latin America/Canada by 6 percentage points.

Now let's turn to cash flow.

Turn to slide number 7. Free cash flow was strong in Q3 with 103% conversion versus 61% in last year's comparable quarter.

Operating cash flow increased $560 million, driven by multiple factors including higher net income, lower working capital, lower pension contributions, and lower cash taxes.

Year to date is a similar story with 91% free cash flow conversion versus 76% in 2013.

We expect full-year conversion will be in the range of 95% to 100%, up from 90% to 100% previously.

Full-year capital expenditures are expected to be in the range of $1.5 billion to $1.6 billion, which is consistent with our prior view.

We continue to manage the Company towards a better optimized capital structure.

Our plan calls for additional balance sheet leverage, which we will use for two purposes.

One, to expand our businesses and, two, to increase cash returns to shareholders.

We are executing on that plan in 2014 and beyond.

For example, as Inge mentioned, on September 1, we closed on the acquisition of the remaining 25% non-controlling interest in Sumitomo 3M for approximately $865 million.

We have also paid $1.7 billion to shareholders in the form of cash dividends during the first three quarters of 2014, up $365 million versus 2013.

And in terms of buybacks, year-to-date gross repurchases were $4.4 billion, up $835 million year on year.

We now expect full-year 2014 repurchases will be in the range of $5.5 billion to $6 billion, versus a previous expected range of $4.5 billion to $5 billion.

Net debt at September month end was $3.5 billion, up $2.3 billion versus year end 2013, due to both higher debt levels and lower cash balances.

Next, I'll go through the results for each of our business groups starting with the largest business, Industrial.

Please go to slide number 8. We had a good third quarter in Industrial with sales of $2.8 billion and 4.2% organic local-currency growth.

This strength was broad-based as nearly all businesses posted positive organic growth.

Our aerospace and commercial transportation business generated double-digit organic local currency growth and we also saw a strong growth in 3M purification, automotive OEM, advanced materials, and industrial adhesives and tapes.

The United States was by far the fastest growing region of the world for Industrial with 8% organic growth in the quarter.

Again, US growth was broad-based with notable performances in three of our heartland businesses; namely, automotive aftermarket, abrasives, and industrial adhesives and tapes, along with aerospace and commercial transportation and automotive OEM.

Elsewhere around the world, organic local currency growth was 4% in Asia Pacific, 1% in EMEA, while Latin America/Canada declined 1%.

Industrial's organic growth continues to outpace that of worldwide industrial production and it's clear we are taking share in some key industries.

Automotive OEM is a good example where 3M's 7% organic growth in the third quarter was three times the rate of global automotive builds.

Third quarter operating income Industrial was $616 million and operating margins were 22.2%, up 1 full point versus the third quarter of 2013 and in line with recent quarterly trends.

Let's now look at Safety and Graphics found on slide 9. Third-quarter sales in this business were $1.4 billion, up 3% on an organic local-currency basis.

Organic growth was led by our personal safety business along with traffic safety and security systems.

Sales declined organically in roofing granules.

As with Industrial, the United States led all the geographic regions with 7% organic local-currency sales growth in the quarter.

Personal safety products and traffic safety and security systems again led the way.

Organic growth was 3% in EMEA, flat in Latin America/Canada, and declined 1% in Asia Pacific.

Operating income in Safety and Graphics was $340 million and operating margins increased 1.6 percentage points to 23.5%.

Strong operating leverage, along with the benefits from recent portfolio actions, helped drive the increase.

Please go to slide 10.

Our Electronics and Energy business continued to post solid results in the third quarter.

Sales were $1.5 billion, and organic local-currency growth was 4%.

Operating income was $338 million and margins rose 1.8 percentage points to 22.5%.

Organic local-currency sales grew 8% on the Electronics side of the business due to solid end customer demand combined with successful spec-in wins at several OEMs.

In Energy, organic local-currency sales declined 2% in the third quarter.

The electrical markets business was flat in the quarter while telcom and renewable energy both declined year on year.

On a geographic basis, organic local-currency sales increased 7% in Asia Pacific, 3% in the United States, and were up slightly in Latin America/Canada.

EMEA declined by 6% in the quarter.

We have a strong group of businesses in Electronics and Energy, strengthened further in the past couple years via multiple actions to better align to our customers and improve the portfolio.

The team continues to execute well as evidenced by the growth and margin improvements seen throughout the first nine months of this year.

Please turn to slide 11.

Health Care had another very good quarter with sales of $1.4 billion and organic sales growth of 5.4%.

Every Health Care business posted positive organic local-currency sales growth, led by double-digit performances in both drug delivery and health information systems.

We also grew organically in all major geographies, with Asia Pacific up 9%, the US and Latin America/Canada up 6%, and EMEA up 3%.

Health Care's third quarter organic sales growth was 11% in developing markets, marking the 11th consecutive quarter that we've grown at 10% or higher.

Developing markets represent substantial opportunities for 3M, and we continue to build our capability to capitalize on future opportunities.

Third-quarter operating income in Health Care was $432 million and margins were strong at 31%, including some modest dilution from Treo which was acquired on April 1 of this year.

Integration efforts are tracking to our expectations and the business is exceeding its sales and profit objectives.

Last year's third-quarter margin of 32.1% included a 1.4 percentage point benefit from a gain on the sale of a non-strategic asset.

If I adjust for this year's acquisition and last year's one-time gain, margins increased 70 basis points year on year.

Health Care is a strong set of businesses and one of our highest investment priorities.

Over the past several years we've made substantial investments to bolster our Health Care businesses in China, Germany, Poland, Thailand, India, the United Kingdom, and the United States.

Last week, we announced a $58 million capacity expansion in the United States to support growing demand for 3M medical tapes, dressings, surgical drapes, and other wound-care products.

I'll wrap up with the Consumer business group found on slide number 12.

Third-quarter sales in the Consumer business group were $1.2 billion, with organic local-currency growth of 3%.

Consumer is home to several of 3M's best known power brands such as Post-it, Scotch, and Scotch-Brite.

For the retail consumer, these are household names but, in fact, many other 3M brands are also enjoying success in the marketplace.

Take, for example, our Filtrete brand filters, which significantly improve air quality in the home.

This business grew double digits organically in the third quarter as we gained share in the US and expanded the category globally.

Our Command brand adhesives also generated double-digit organic growth in the quarter boosted by a strong back-to-college season.

College dormitories are a growing market for 3M Command Solutions because our products eliminate the need to pound nails into walls when hanging pictures, decorations, or other items.

Filtrete and Command helped propel our do-it-yourself business to 10% organic growth in the third quarter.

Sales in the Consumer Health Care and Home Care businesses also grew organically in Q3 while stationery and office supply was down slightly.

Looking at the Consumer business geographically, organic local-currency growth was 5% in Asia Pacific and 4% in the United States.

Back-to-school sales were strong in the US mass retail channel.

Consumers' organic sales were down slightly in both EMEA and Latin America/Canada.

Operating income was $272 million with operating margins of 23.2%.

That wraps up my review of the quarter.

Please turn to slide 13 where I will address our forward outlook.

Three quarters in, we are updating our guidance for the full year.

We are expecting earnings to be in the range of $7.40 to $7.50 per share versus a prior expected range of $7.30 to $7.55 per share.

With respect to organic local currency sales growth, we are narrowing the range to 4% to 5% versus a previous expected range of 3% to 6%.

Given recent strength in the US dollar, we are now estimating that foreign currency impacts will reduce sales by approximately 1.5%.

Previously, we anticipated a 1% FX headwind.

From an earnings perspective, FX for the full year is now expected to be an approximate $0.15 per share headwind, $0.10 of which has occurred in the first three quarters of the year.

We anticipate $0.05 of FX headwind in Q4.

Our tax rate estimate is narrowed to 28.5% to 29%, and finally, as I mentioned previously, free cash flow conversion is expected to be between 95% and 100% for the year, up from a prior range of 90% to 100%.

Now I'll turn the call back to Inge for some additional comments.

Thank you, Nick.

As I look across our enterprise, one eye is always on the microscope, driving results day to day, month to month, quarter to quarter, and I remain very pleased with those results.

The other eye is on the telescope ensuring we are investing for the long-term prosperity.

Three strategic levers are strengthening our foundation for the future.

The first is portfolio management.

I mentioned our Japanese acquisition along with portfolio actions in Electronics and Energy.

Earlier this year, we also realigned divisions in our Safety and Graphics business group.

And on Tuesday, we took action within our Industrial business group.

Our personal care division was merged into industrial adhesives and tape division.

This will increase customer relevance, create broader research and development and manufacturing capabilities, boost efficiency, and position the business for greater success.

The second lever is investing in innovation.

Innovation is the heartbeat of 3M.

It generates unique solutions for customers and rising value for shareholders.

That is why research and development is in the center of our plan.

We are increasing research and development investment to about 6% of sales by 2017.

We are also funding 26 product platforms specifically aimed to creating the new sustainable growth through disruptive technologies.

I'm very encouraged that we are beginning to see initial product commercialization from some of those programs in healthcare, infrastructure, consumer, and other markets.

In September, we opened our 46th global customer technical center in the United Kingdom, which showcases the breadth of our technology.

Those facilities provide an ideal setting for our scientists to meet directly with customers and explore solutions to their unique challenges.

This is a very important element, as 3M is in the business of inventing things that are both new and useful.

These investments are critical to bolstering our competitive edge into the future.

The third lever is business transformation.

This will allow us to deliver quicker and greater value to customers by creating a more ideal 3M.

The backbone is a global ERP system.

We are currently live in five countries.

Most recently, we also successfully deployed our largest European distribution center in Juchen, Germany.

With each deployment, we are learning more and using those lessons to refine our plans going forward.

I remain encouraged by our progress and I will give you a further update when our December 16's investor meeting in New York.

To support our ERP system, we're also in the process of creating a standardized global business process.

Ultimately, this will leverage 3M's size and scale to drive productivity and improve service to customers.

Those are the three strategic levers propelling our forward fuel.

Yet underpinning each strategy we adapt is the 3M team.

Our Company has many core strings; chief among them is our people.

Their creativity, their skill, and their ability to execute no matter the force of external headwinds.,,

I thank our entire 3M team for delivering a strong third quarter, even in a mixed global economic environment.

Because of them, we are delivering consistent results today while remaining on track to meet our long-term targets.

Thank you for your attention.

With that, we now welcome all your questions.

(Operator Instructions)

Scott Davis of Barclays.

Thanks, operator.

Good morning, guys.

Good morning.

Inge, the numbers are great obviously, and you did mention some macro concerns, particularly in Europe.

Is there any sense that you see particularly in -- now that you at least have half the month of October through and your customers are starting to get concerned about macros and inventory destocking, any real slow down or is this volatility that we are seeing in the marketplace maybe a little bit ahead of itself?

No, we see what you see, and as you are calling out, you're talking about Europe a little bit, right?

So I think for [asking] the quarter, as you see on our results for West Europe, we slide down slightly versus Q1 and Q2.

There was, I would say, a small temper in Germany relative to the industrial sector.

But the consumer and retail piece in that market, meaning the domestic business, was still doing okay if you talk about Germany as a country.

An interesting thing in Europe was that many countries there that have dragged their performance in West Europe as of the last couple of years, like Iberia, Italy, Benelux, in some cases Alpine, and they show slight growth and we saw growth in UK as well.

So I would say that we saw a slight decline in the industrial piece but it's not alarming by definition for us.

And when we look at raw data, when we look upon IPI growth, GDP growth, PMI growth, et cetera, you can see a temper specifically PMI that is related to the manufacturing space, but it's not a concern at all.

I would say also when we look upon West Europe in total, with a slight decline in growth, if you pull all pieces together, we can in fact pace that down to some utility businesses that are project based that we had a comparison that was a little bit tougher for us and that business is coming back next year.

So I would say that we got sidelined in terms of West Europe if you combine it with total international.

Inge, how about China?

We see good and bad over there.

The last time I was there, it seemed like half the businesses were fine, half not fine.

Your business in China, if my notes are right, has been slowing a bit the last several quarters if I back into it.

Are you seeing any thing there that causes concern?

Well, we look upon the same metrics as I talked about for Germany, so IPI, GDP, PMI, et cetera.

And when I look upon that for China, it looks actually slightly better than the figures I talked about for Germany.

So for us, we had a 4% growth in total.

If you exclude Electronics, it was 7%.

So we are mid to high single digit in our base business and that is where we have been for the last, I would say, one to one and a half years.

So for me when I look upon China, looking forward, even if they are building out as we all know, they are building out the domestic business that is good for 3M with our Consumer and Health Care business, and even if that's a little bit pressure on the export business I would say for us, we see now us to be in mid to high single digits.

It's very consistent for the last couple of quarters.

From that perspective looking forward, it's not an alarming figure for me.

Okay, very helpful.

I will pass it on.

Congrats, guys, and good luck.

Thank you very much.

David Begleiter of Deutsche Bank.

Hi.

Good morning.

This is Ram Sivalingam sitting in for David.

Good morning, Inge.

Very, very strong margin quarter obviously.

The best I think since 2010.

As we go through Q4 and into 2015 segment wise, where you see up side or down side to margins?

You know, we would talk more in December -- December 16 relative to 2015.

As you can see, we have improved this year very much in Electronics and Energy.

That was based on the plan, right?

You recall that business and we go back now a couple of years.

We are down a lot in that business in order to improve our performance, both in terms of growth and margins.

So you have seen that we constantly have moved them upwards and we have said for this year that they should come closer to 20.

Maybe not the whole way to 20 full year, but that is what they will be.

And you also know that three of the businesses are basically a corporate average in terms of margin and then you have Health Care that is slightly higher, I would say.

So you will see us be able to continue the work we're doing in our portfolio and so forth, but I don't know that I can at this point in time call out someone.

I think if you look upon it, it's very robust, and broad-based now, which is good for us.

Sure.

That's very helpful and maybe one quick follow-up.

This move we've seen in the energy space, does it have any impact that you can see on your energy business?

Or on your raw materials side?

You're specifically talking about oil prices?

Exactly.

Yes, Ram, we are -- there is a portion of our raw materials, not a significant portion, that are based on oil prices.

Right now, we don't expect a significant impact from that.

If we do look forward into the coming year, we've had a year -- a couple years where raw materials have been a tailwind to us, and we do expect that to continue into 2015.

Understood, thank you very much.

Thank you.

Andrew Obin of Bank of America Merrill Lynch.

Good mowing, guys.

Good morning.

Just a question/observation.

If we net out productivity and investment, it seems that we have turned positive for the first time since, I think Inge, you have become this Company's CEO.

And I'm just wondering -- .

Positive in terms of what?

If I net out the margin impact and productivity, it turned quite negative in 2012 and then it's been negative and for its first time it's now a contributor.

I am just wondering is that sustainable or do we revert back to being negative as you continue to invest for repositioning?

Andrew, there are several things driving that productivity that you are noting.

With the growth we're seeing, we are seeing improve factory utilization but also what we're seeing in our productivity improvement is the result of our prioritization and portfolio management that you are seeing a difference there.

Our business model is to drive those productivity improvements and as we've talked about with our strategic investments, to invest that to improve our capability going forward.

Right, but do we think we are going to go back to where it's a driver margin or do you think it can actually turn positive?

Will it sustainable positive or neutral?

Andrew, I don't see us going back into negative productivity.

With the current economics situation we are facing, I see it continuing neutral to slightly positive, but some of that is consumed by our continued strategic investments.

Sure.

The second question just, can you give us more color on Brazil?

It's an area where we get a lot of questions from investors.

Seems to be a concern but you keep posting positive numbers.

Can you just give more color on industrial versus consumer businesses?

And if you're seeing any sort of yellow flags?

You keep telling us you guys are going to do okay, and I believe you and you keep doing okay, but any color will help.

We were positive in Brazil this quarter.

And as you probably recall, last quarter was more of a concern.

So we actually turned more positive in this quarter.

We had the 4% organic local-currency growth.

And by the way, we had 15% organic local-currency growth in Mexico.

I would say when you look upon it, we have a big industrial business down there, and they grew at the average of the Company.

I see Brazil was a type of average in terms of the growth, type of mid single digit for this quarter, and my own prediction is it will be slightly better as we move ahead.

Now when you talk about some others and their performance and so forth, I cannot comment for that.

But I can tell, we have been in Brazil since 1946 since we have talked about before.

So we have a very solid organization there that where we have all functions in place.

We have a strong manufacturing footprint in order to deliver in that local market.

We have a very comfortable research and development organization, and we have the commercialization on that we, as you know, always going in with first.

I think one of the success factors for us is we have all functions in place in Brazil and been there for a long time.

We know the market, we know the culture, we are able to develop solutions for their market and produce it there in their home country.

I think that's maybe one differentiator for us to some other people.

But we saw a slight uptick in this quarter versus last quarter, and very happy with that business, and I am more optimistic moving forward than opposite.

Fantastic.

Thank you very much.

Thank you.

Steve Winoker of Bernstein Research.

Thanks, and good morning.

An impressive margin performance, that 1.4 percentage points would be even higher if we excluded that Health Care gain as well.

But I'm trying to maybe understand what's implied on the margin side, I know you don't want to talk about 2015, but at least the fourth quarter, in terms of what you are expecting for those dynamics on that breakout chart that you gave us on page 5. How should we be thinking about somehow those -- any major changes in any of those pieces might look over the next quarter, anyway?

As I look out in the next quarter, we expect still some continued benefit on price raw materials, pension of course will continue as a benefit, and productivity probably still continuing as a benefit.

FX right now, which was fairly neutral in the third quarter, I think it's more likely to think of that as a negative in fourth quarter.

Okay, all right.

And the other question is, I guess over a long period of time, various management at 3M have talked about the sustainability of Health Care margins, and we've often heard about whether that's in the mid 20%s, high 20%s, low 30%s.

Inge, maybe just provide a little bit of your perspective there.

Should we really be thinking at this point that there is no reason to believe that you can't sustain R&D investment, sales investment, and still deliver those kinds of margins?

Or is there pricing pressure in some of the various developed countries that is bound to make that more challenging?

High 20%s or 30%s or low 30%s, they are very good.

And we have a very effective model, and we are very confident that the solutions that we are providing, both in the developed world and the developing world, will let us continue to be competitive.

Not only the marketplace in terms of market share, but also due to our capabilities in manufacturing, which is a very strong side for us to have manufacturing capabilities that is holding our cost on very low and competitive position.

So if you think about the health care space generally, for many, many decades, there has always been pressure in those markets.

I can recall myself when I lived back in Europe, early 1990s, and so forth, there was this German health care reform act.

It was exactly what is going on from time to time in countries.

So we are used to be able to scale and leverage our businesses as we go ahead.

So I'm not overly concerned about us being able to maintain margins at the very high level.

Now we are continuing to invest and you've seen and when you look upon our mix, 75% of our business in health care is in developed economy, and only 25% in developing.

And the growth will come there over time and we are able to win new product and technical solutions, able to put new price points based on the evidence of improved customer satisfaction in that segment.

So it's a good space for us.

We continue to invest and we are very, very local and all those markets, and domestic market, local market is good for us.

We know how to do that.

Fantastic.

Just one point of clarification, also.

Based on your Venezuela comment, just to be explicit, Latin America/Canada would have been 6.4% ex-Venezuela.

Did I understand that correctly?

You understand the correctly.

Okay great, thank you.

Okay, thank you.

Joseph Ritchie of Goldman Sachs.

Hi.

Good morning, everyone.

First question is on free cash flow and the balance sheet.

Nick, maybe could you provide a little bit more detail on the strong free cash flow conversion this quarter?

Was there anything one-time like an inventory flush that helped it?

And then on the balance sheet, specifically, you guys called out an increase of $1 billion in buyback.

Is it net buyback also increasing by $1 billion?

Yes, a couple questions are.

First of all on the free cash flow, know that there is not one particular thing that swung that up.

It's a combination of several things.

Good inventory management, continuation of low needs to be funding a strong pension, good CapEx spending in line with our expectations.

It's really the combination of several things that are resulting in that 103% free cash flow conversion we saw this quarter.

To your second question, the $1 billion raise on top and bottom of the range on gross share repurchases, that $1 billion would also apply to the net share repurchases range, too.

Okay great.

That's helpful.

And then maybe staying on the balance sheet for a second, Inge, perhaps you can provide a little color on the M&A environment.

Clearly, you got the Sumitomo deal done so maybe talk a little bit about the pipeline and what you are seeing out there today.

You know the pipeline is good for us as we look upon it.

We have done a couple of acquisitions during the last 12 months, as we talked about.

Sumitomo was one that maybe you guys were not thinking so much about before we did it.

But it was a very good one if you look on the financials there.

And we did Treo which was a smaller one, and as Nick said, we are executing that very, very well, actually and ahead of both top and bottom line relative to expectation.

So every business group has a good robust pipeline, and we're looking upon them.

I think the important thing for us when we look upon them, we need to make sure that first of all, they fit into our portfolio now that is categorized in terms of where we would like to go.

And then also the four fundamental strings of 3M, which is around technology, manufacturing capabilities, brand, and the global capabilities.

So we need to make sure that those four fundamentals are direct linked in so we can drive additional value as fast as possible when we do them.

So I would say the pipeline is okay.

The multiples are maybe too high based on how we think about it today, and as you know, the primary strategy for us is organic local-currency growth.

And that is why we are beefing up the investment in research and development.

And when I look upon what we are delivering from an organic local-currency perspective, and done now for quite some time, in the range of, as you know, we have 4% to 6%.

I am happy with that and I think that's one of the things we have to remain focused on that the acquisitions will be complementary and they should be strategically important and we should be able to drive value immediately.

Okay.

Great.

Thanks.

And maybe if I could sneak one more in on the Electronic and Energy margins, that the margins the last few quarters have been incredibly good.

So maybe talk about the sustainability of what you are seeing in that specific business?

First of all, we have to go back and think about what we did in that business.

We started by realigning those businesses and reduced a number touch points out to the customers.

And we did that -- it's two years ago now since we realigned that organization and formed an organization that did a couple of things.

First of all, to be able to touch the end markets, to be able to connect back to our technology platforms, and respond much faster with solutions to a very fast moving market.

I think that was a key element, and we also made sure we could get better asset utilization as we aligned the businesses.

And as you know, that will also then drive productivity into organization structure, et cetera.

The business has gone since it was formed over two years ago, I think from 15, 17 and now we are at 15, 17.

I think we start 17 this year.

We are touching closer to 20 as we have said for the year.

That business, by definition, is a little bit more volatile than the other businesses for us.

But our expectation here at 3M and on that business is that they should be part of almost close to the average of the Company as we move ahead.

I think we're on a much better place today, based on the streamlined work we have done around the organization structure, which all have been in the benefit for the customer in terms of responsiveness and for us relative to asset utilization.

Okay.

Great.

Thank you for taking my questions.

Thank you.

Ajay Kejriwal of FBR Capital Markets.

Thank you.

Good morning.

So US really strong here.

You actually seeing acceleration.

Looks like you had 2.6% in first quarter, 4.5% second, and now 6%, and I guess it's not easier comps because you had a really good quarter last year as well.

So Inge, maybe share thoughts on what's driving this, what are you seeing broadly, how much of this growth here is end market versus all the work you are doing, and might this be some restocking that could be contributing.

First of all, the business -- if you look upon our businesses, we had good growth in all of them, the five business groups in the United States, led by Industrial.

Industrial had 8% growth in the United States, but you had also Health Care of 6% and you have the Safety and Graphics of 7%.

So very strong robust growth in our view, it's not build of inventory in the channels, as we can see it.

The economy has improved, and we are able to capitalize on that.

If you think about what we have done at 3M, I don't know if you recall that but let me take you back two and a half years, more than two and a half years when we start to refocus our US organization.

We had at that point in time, very much an organization that the [manufacturing] were global versus total accountability and responsibility relative to execution on the United States subsidiary, if you remind that discussion.

That work started actually in May of 2011, and have continued since in terms of making sure that there is a specific execution arms for every vision in the United States, as well as we have had in Germany and Japan and Chile and Russia, et cetera.

I think there are two elements into it as I reflect on it.

One is that we are capitalized on the economic situation in the United States, and number two, I believe that we also have moved our organization to a much more focused execution, much more focused execution model in the United States.

It's both and its broad-based, as I said.

Our business is growing 6%, 7%, 8% in the United States in the quarter.

That's very, very good.

And we have seen a tick up here, shortly as you said from Q1 to Q3 -- Q1 to Q2 to Q3, we seen an uptick in the growth in the United States.

Excellent.

That's very helpful, and then Nick, maybe on the tax rate.

It has gone up a little bit here, I guess, part of it's mix.

But how should we think about the trajectory as you implement some of the planning initiatives into next year?

Every quarter, as you can imagine, there's puts and takes that cause the rate to fluctuate some up and down.

We had some benefits, third quarter last year not repeating.

We also had a one-time expense this quarter, actually related to your more long-term question, a one-time charge related to the establishment of our distribution center that we set up in the EMEA region.

So as you think about this long term, we've guided to expecting a 27% tax rate by 2017, and we see ourselves on track to that.

Thanks, Ajay.

Jeff Sprague of Vertical Research Partners.

Thank you, good morning gentlemen.

Good morning, Jeff.

Good morning, morning.

Just a couple of things.

I know you don't want to get into a big discussion about next year, but with all the global gyrations I thought maybe some of the non-operational things you could at least give us a little insight on.

The state of the globe maybe is anybody's guess.

Pension has kind of come back to the fore as possibly an issue for companies and we've got this mortality table dynamic out there.

I was wondering if you could give us a little bit of color there if there is anything to think about.

Just on FX, too, we can all try to work through our own guesstimate, but is there anything to be aware of for 3M on how you're hedging or translation versus transaction to just kind of be mindful of as we try to think about what next year looks like?

Yes, Jeff.

A couple things.

Of course, you know we'll share full details in December on many things, but for a couple that you are asking about, I think they're both worthy of mention right now.

First of all, on the second part of your question on FX, with the movement we've seen in the US dollar in recent weeks, our estimate if we were to take FX rates as they exist right now, is that year on year in 2015, we expect about a $0.10 headwind on earnings per share.

And that's after hedging impact.

And in comparison, that's to a $0.15 headwind that we're expecting in 2014.

On the first part of your question on the pension, multiple factors going into that.

The asset returns we are experiencing this year, the discount rate expectation, and the mortality table.

If I take all three of those in combination, we are looking -- we are estimating at least $100 million headwind going into 2015 on earnings per share -- on our earnings next year.

I think that covers what you are asking, Jeff.

Yes, it does and maybe just one more and I'll move on.

I think your tax rate has crept up this year in your guide because you were anticipating the extenders and everything and it looks like that's not happening.

But should we expect any tax rate headwinds?

I kind of asked the question in the spirit of this US strength.

Is there any kind of move in the mix of your earnings that are actually tax rate negative that we should be thinking about or anything else that's idiosyncratic to 3M that may affect the tax rate?

Yes Jeff, the tax rate is impacted by our mix of profits we earn around the world.

Our current guidance of 28.5% to 29% takes into account that current mix we're expecting for 2014.

And on the extenders, we currently are still building that into our estimate for 2014.

And if it doesn't pass, that would likely put us at the high end of the range that I've talked about.

Okay.

All right.

Thank you.

Thank you, Jeff.

Steve Tusa of JPMorgan.

Hello.

Good morning.

Good morning, Steve.

Clearly some very good execution against the tougher 4X and global environment out there.

The margin was definitely stronger than we were expecting, I guess.

In the context of what I see here as kind of a 75% incremental margin year over year and the thing that kind of stands out the most obviously is this productivity line.

Utilization, I kind of understand.

What do you mean by portfolio management exactly?

What is that?

Portfolio management, Steve, is some of the actions we've been taking as part of our strategic investments to, in some cases, combine businesses for efficiency and better relevance to our customers, as well as some restructuring expenses that we've taken.

When we say portfolio management in that regard, that's what I'm talking about.

So it's not like a year over year.

This is like blocking and tackling on cost takeout from business combinations.

Exactly.

Okay, and just in the fourth quarter here, I guess, it seems like pretty steady state organic growth you are guiding to.

Any kind of movement around the various pieces of the business geographically in the fourth quarter?

Not where we can see at this point in time.

We have guidance there.

4% to 5% for the year and we feel confident around that.

Okay, great, thanks a lot.

Thank you, Steve.

Nigel Coe of Morgan Stanley.

Good morning, thanks for that.

Good morning.

Nick, you mentioned $100 million for the pension at current discount rate.

Does that include mortality tables because I get $100 million just with discount rates but you mentioned mortality table as well.

Nigel, that's taking three things into account: us adopting the new mortality table, a roughly 50 basis point drop in our discount rate, and the asset returns that we have experienced in our -- expecting to experience for 2014.

Okay.

That's really helpful.

Thanks.

And then obviously be margin expense has been discussed ad nauseam so far.

If I just dig into the next layer looking at the SG&A as a portion of sales down about 70 basis points year over year and R&D flat, and I'm wondering given that global IPI has come in a little bit weaker than we all expected, is there any element of going back a little bit on growth investments, a bit more action on cost control at this point, just given the movements we are seeing in SG&A and R&D?

Nigel, what we're seeing on the movement there is a function of our normal drive on productivity.

It's not really a change in our trajectory on our growth investments that we're making.

Those are continuing.

We are, year on year, seeing a pension benefit that is impacting SG&A.

And then to the later point I made, the portfolio management where we've been taking some restructuring actions, we are starting to see some of the benefits of those manifest in our SG&A expenses.

Okay.

That's great.

And just finally microchip, you know [born], if you like, on the electronics end markets earlier this month.

Are you seeing any weakening at all in those end markets for 3M?

No, we did not see that at all.

Our Electronics business did very well, as you saw, I think we call it out 8% organic local-currency growth.

So we didn't see anything on that.

The external data, at least going back to Q2, was indicating then that that market went sideways overall, right?

So now it's -- if you are in that segment and depending where you are in that segment, then it's coming down to execution to make sure that you capitalize on the market overall.

Based on our portfolio, we didn't see that.

Okay, thanks very much guys.

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, real quickly, thanks for participating this morning.

It was a good call.

We look forward to seeing you in December if not before.

Have a great day.

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

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