3M (MMM) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, January 27, 2015.

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

Thank you.

Good morning, everyone.

And welcome to our fourth-quarter 2014 business review.

Let me kickoff with a reminder of our upcoming 2015 earnings call dates: April 23, July 23, and October 22.

Also, mark your calendars for our next investor meeting scheduled for December 15.

More details will be available as we get closer to that date.

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 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.

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

Thank you, Matt, and good morning, everyone.

3M finished the year strong, delivered both record sales and record earnings in the fourth quarter.

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

We did that while expanding margins, increasing profits, and investing in our future.

I'll take you through a few numbers.

Earnings per share rose to $1.81, up 11.7% year over year; sales were at $7.7 billion, a fourth-quarter record; organic growth company-wide was 6%, paced by Safety and Graphics at 9%.

Our other four business groups: Health Care, Electronics and Energy, Industrial, and Consumer each grew a solid 6%.

We saw organic growth in every geographic area.

Both APAC and United States grew 7%.

For United States, that marked its strongest growth of the year.

Latin America/Canada grew 9%, while Europe/Middle East/Africa grew 3%.

Our team is clearly capable of executing in tough environments and fighting through tough headwinds.

That includes a stronger US dollar, which reduced fourth-quarter sales by more than 4%.

Yet, we still delivered good top- and bottom-line growth.

Operating margins remained healthy at 21.5%, an increase of 60 basis points from last year.

We again generated strong cash flow with a conversion rate of 144%.

This allowed us to invest in the business and continue rewarding shareholders.

We returned $1.8 billion to shareholders through dividends and share repurchases.

And in December, we announced a 20% per share increase in our Q1 dividend for 2015, on top of a 35% increase in 2014.

Overall, we finished the year strong, and I thank the entire 3M team for their hard work and execution.

Nick will now go through the details.

Nick?

Thank you, Inge, and good morning, everyone.

Please turn to slide 4 where I'll review the components of our fourth-quarter sales change.

Worldwide organic local currency growth was 6.3%, with volumes up 5.6%, and selling prices up 0.7%.

This was our strongest quarterly organic growth since Q1 2011.

The Treo acquisition added 10 basis points to growth, and the stronger dollar reduced sales by 4.4%.

All in, sales rose 2% versus fourth quarter of 2013.

Leading the way with 9% organic growth was Latin America/Canada, where Electronics and Energy, Health Care, and Safety and Graphics all grew double digits.

Mexico delivered strong double-digit growth in the quarter, and Brazil was up slightly.

Asia-Pacific grew 6.9%; Safety and Graphics and Health Care led the way with growth of 12% and 9%, respectively.

Organic growth was 9% in Japan, or 4% excluding electronics.

China/Hong Kong grew 4%, or 6% excluding electronics.

The United States grew 6.6%, led by Industrial at 10%; Health Care, Consumer, and Safety and Graphics all grew 7%.

EMEA posted organic growth of 3.3% in the quarter.

Central East Europe and Middle East/Africa each grew double digits, while West Europe grew 1%.

EMEA economies remain soft, but our teams are managing the situation well by growing our market positions and driving continuous productivity across the region.

Organic growth within EMEA was positive in four of our five businesses, led by Safety and Graphics, and Electronics and Energy.

Consumer was down slightly in the quarter.

Turn to slide 5 for the fourth-quarter P&L highlights.

Fourth-quarter sales were $7.7 billion, up 2% year on year, with 6% organic growth more than offsetting the stronger dollar.

Operating income rose 5%, to $1.7 billion, and earnings-per-share rose 12% year on year.

We increased operating margins by 60 basis points year on year, while continuing to invest for the future.

I'll now go into more details on our margin improvement.

Organic volume leverage added 40 basis points to operating margins, and the combination of lower raw material costs and higher selling prices contributed 60 basis points.

Selling prices increased year on year across many of our businesses, supported by technology innovation, brand, and strong new product flow.

Raw materials were again lower versus last year's comparable quarter, commodity prices declined as we closed out Q4, and we expect these tailwinds to accelerate in 2015.

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

Strategic investments reduced margins by 80 basis points.

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

During Q4, we took portfolio actions totaling $30 million, spread across the United States, Western Europe, and Asia Pacific.

Foreign currency exchange reduced margins by 10 basis points, and the Treo acquisition was just slightly diluted.

Finally, productivity resulted in a benefit of 10 basis points to margin, year on year.

Earnings were $1.81 per share, an increase of 12%.

Foreign currency impacts, net of hedging, reduced earnings by $0.05 a share, given the broad-based strength of the dollar.

A lower year-on-year tax rate added $0.01 to per-share earnings and average diluted shares outstanding declined by 5% versus last year's fourth quarter, which added $0.08 to fourth-quarter earnings per share.

Now, I'll review cash flow performance on slide number 6. Free cash flow was strong in Q4, with 144% conversion versus 131% in last year's fourth quarter.

Operating cash flow increased $190 million, driven by multiple factors including higher net income and improved fixed and working capital efficiencies.

For the year, we delivered 104% free cash flow conversion.

We continue to manage toward a better optimized capital structure by adding balance sheet leverage, which we are using for two purposes.

First, to invest in our businesses; and second, to increase cash returns to shareholders.

Full-year capital expenditures were $1.5 billion; an important element as we continue to expand the business organically.

We paid $2.2 billion to shareholders in cash dividends during 2014, up $486 million versus 2013.

As a reminder, on December 16 we communicated a Q1 2015 dividend increase of 20% per share.

And in terms of buybacks, growth share repurchases in 2014 were $5.7 billion, up $440 million year on year.

Net debt at the end of December was $3.5 billion, up $2.3 billion from year-end 2013.

Next, I'll go through the results of our business groups, starting with Industrial on slide 7. Industrial, with sales of $2.6 billion, delivered strong organic local currency growth of nearly 6% in the quarter.

Advanced materials led the way with double-digit growth.

Our aerospace and commercial transportation business generated high single-digit growth.

And we also saw strong growth in industrial adhesives and tapes, automotive aftermarket, and auto OEM.

All regions delivered growth for Industrial, paced again by the US, at 10%.

The US growth was broad based, with notable performances in the three industrial heartland businesses; industrial adhesives and tapes, automotive aftermarket, and abrasives.

Latin America/Canada grew 6%, followed by Asia Pacific at 5%, and EMEA at 1%.

Operating income was $538 million, and operating margins were at 20.5%, down 90 basis points versus last year's all-time Q4 record margin, which was driven by very strong productivity.

Investments were higher year on year, including efforts to better optimize elements of our US supply chain.

Fourth-quarter 2014 operating margins were in line with normal seasonal trends, and for the full year, margins were a solid 21.7%, up 10 basis points versus 2013.

Let's now look at Health Care on slide 8. Health Care delivered another very good quarter, with sales of $1.4 billion in organic growth of over 6%.

Every Health Care business posted positive organic growth.

Our large core medical businesses, namely infection prevention, and critical and chronic care, posted strong growth in the quarter.

Health information systems and food safety each grew double digits.

Health Care grew organically, in all geographic areas, led by Latin American/Canada at 12%, and Asia Pacific at 9%.

The US grew 7% and EMEA grew 3%.

In developing markets, Health Care grew 15% organically, marking the 12th consecutive quarter of double-digit growth.

This has been a high-priority investment area of ours for some time, and these investments are paying off.

We continue to build our capability to expand even further into the future.

Operating income was $431 million, and margins remain strong at 31%, which includes 30 basis points of dilution from the Treo acquisition.

Integration efforts are tracking to our expectations, and the business continues to exceed sales and profit objectives.

Please turn to slide 9. Electronics and Energy continue to build momentum, with strong fourth-quarter results.

Sales were $1.4 billion, with organic growth over 6%.

Operating income was $257 million, and margins increased 2 percentage points year over year, to 18.7%.

Recent portfolio management actions are enhancing our relevance with customers and generating operational efficiencies, which contributed to the growth and margin improvement in the quarter and for the year.

Organic local-currency sales grew 9% in our electronics-related businesses, as we continue to see strong end-customer demand, enhanced by spec-in wins at several OEMs.

In our energy-related businesses, organic local-currency sales increased 2%.

The electrical markets business was up high-single digits, while renewable energy and telecom both declined year on year.

On a geographic basis, organic growth in Electronics and Energy increased 13% in Latin America/Canada, 7% in Asia Pacific, and 5% in EMEA.

The United States was flat year on year.

Please turn to slide 10.

Fourth-quarter sales in Safety and Graphics were $1.4 billion, up a robust 9% organically.

Personal safety grew double digits, as we continued to see strong demand for 3M safety solutions in the manufacturing sector.

In addition, our respiratory products are selling well in China, where air quality is an ongoing concern.

We also saw a pickup in sales related to Ebola in the quarter.

We estimate this added approximately $30 million to Q4 sales.

Elsewhere in Safety and Graphics, commercial solutions grew mid-single digits, and organic sales declined slightly in roofing granules and traffic safety and security.

Asia Pacific delivered 12% growth for Safety and Graphics, led by personal safety.

Growth was 10% in Latin America/Canada, 9% in EMEA, and 7% in the United States.

Operating income was $285 million, and operating margins increased 1.6 percentage points, to 20.8%.

This result was driven by strong organic growth and productivity.

I'll finish with the consumer business group found on slide 11.

Fourth-quarter sales in Consumer were $1.1 billion, with organic growth of nearly 6%.

All four businesses in Consumer grew organically, led by a double-digit increase in do-it-yourself.

This business continues to win in the marketplace, with leading brands such as Filtrete filters and Command adhesives.

We also saw good growth in consumer healthcare, with notable strength in our Futuro-branded health supports.

Looking by geography, US organic growth was 7%, boosted by a strong holiday selling of Scotch and other 3M-branded products.

Elsewhere, organic growth was 8% in Latin America/Canada and 5% in Asia Pacific.

EMEA declined 1% year on year.

Operating income increased 12%, to $254 million, and margins were 22.5%.

Margins rose 2.1 percentage points year over year.

The combination of strong organic growth, productivity, and portfolio prioritization continue to drive efficiencies across the business.

That wraps up my review of the quarter.

I'll hand it back to Inge.

Thank you, Nick.

The fourth quarter was a strong ending to an equally strong year.

In 2014, we delivered a record $32 billion in sales.

We grew organically in each business group and geographic area, with a good balance between developed and developing markets.

We expanded margins and returned a record $7.9 billion to shareholders.

We also made good progress on each of our long-term financial objectives, which I laid out at our investor meeting here in St.

Paul on November 8, 2012.

On earnings per share, our target is 9% to 11% average score.

In 2014, we grew EPS 11.5%.

On organic growth, our target is 4% to 6%.

We grew 4.9% organically for the year.

For return on invested capital our target is 20%.

In 2014, we achieved 22%.

Finally, on free cash flow conversion our target is 100% -- for the year, we hit 104%.

Driving our success is the skill of our people and the strength of our business model, which includes three key levers.

The first is portfolio management.

Since 2012, we have realigned our portfolio from 6 sectors to 5 business groups, and from 40 businesses to 27.

In 2014, we combined businesses within three of our business groups: Electronics and Energy, Safety and Graphics, and Industrial.

All in, we invested $90 million in 2014 in portfolio actions to position us for greater future success.

We also looked to enhance our portfolio and complement organic growth through M&A.

In 2014, we invested $1 billion in acquisitions, including the remaining 25% of our Sumitomo subsidiary, one of 3M's most successful businesses.

We also just recently divested our Static Control business.

Active portfolio management is delivering significant benefit for 3M, including greater customer relevance, scale, and productivity.

Investing in innovation is our second lever.

3M's primary growth strategy is organic, and we strive to develop unique solutions that advance, enhance, and improve outcomes for our customers.

This is why research and development is the heartbeat of our Company.

In 2014, we invested $1.8 billion in research and development.

The strengths of our innovation engine helped drive organic growth of nearly 5% in the year.

3M also earned more than 3,000 patents in 2014.

In our history, we have now earned more than 100,000 patents globally.

The third lever is business transformation.

At our investor meeting in December, I laid out our path forward, which includes implementation of global ERP system.

This will create a more agile and efficient 3M and allow us to better serve customers around the world.

Looking at our 2014 performance, I see clear evidence that our playbook includes these three levers, is continuing to drive strong results and value creation.

We expect to continue that momentum in 2015.

Please turn to slide 13 and I will review our outlook for the year.

EPS guidance remains unchanged at $8 to $8.30.

Organic growth is still expected to be 3% to 6% in the range.

Given the strength in US dollar, we are seeing stronger currency headwinds than expected in December.

We now estimate FX to reduce sales by 4% to 5%, versus previous guidance of minus 2% to minus 3%.

However, as evidenced in our fourth-quarter and full-year results, we know how to operate in this environment.

In addition, we see input costs lower versus one month ago, and our sourcing teams are focused on maximizing those benefits.

Our tax rate estimates remains to 28% to 29%, with free cash flow conversion of 90% to 100%.

As you can see, we look forward to another strong and successful year.

And with that, I thank you for your attention and we now welcome your questions.

(Operator Instructions)

Ajay Kejriwal, FBR.

Thank you, good morning and congratulations on a nice result.

So just looking at the organic growth.

To me it seems like to define all of the negative macro headlines out there, imagine a lot of what you're seeing, what you're doing here, looks like share gains.

But Inge, maybe just a couple on that.

I'd be curious, one just on your take on what the macro is, what you're seeing by geography.

And then second, if you're able to kind of identify or talk to some of the markets that you seeing share gains.

Because I'd imagine some of this is share gains in terms of the growth of this market.

Thank you.

First of all, we are pleased to see the momentum that has built over many quarters now relative to organic local currency growth.

For me specifically why that is very encouraging is that we have made a lot of efforts relative to our organizational structure, both in the United States, but also outside of the United States to make sure we becoming more efficient and effective and more relevant to our customers.

And I think that is what we see paying off.

And it's broad-based and I think that is also related to -- we have a very diversified portfolio as a Company.

If you think about the five business groups, we're very diversified from a business group perspective and we are very diversified geographically as well.

With the United States, as the biggest geographical area for us and a type of a homeland.

So it's very nice to see it all coming together for us.

When we looked upon the result for the quarter and then look out to the range for 2015, there is no change in the range for us.

We still believe -- we had the United States we have a 7% organic growth for the quarter.

We have said for 2015 at 3% to 6% in the range, so we believe that will be on the high end of that range in my mind as we sit here today.

We are doing very well.

APAC, we had another 7% in the quarter and we have seen that business is coming back a little bit both in China for us and in Southeast Asia.

And Japan had a very good year as well for us.

But when you look at the map in terms of a range for the year, we believe Asia is 3% to 7%, China is probably 4% to 10% and Japan a little bit lower.

So there is a good market condition for us in order to be able to grow.

Latin America as you saw came back and Latin America, Canada came back this quarter and we talked about that at the last call where we said see 5% to 8% for them as we roll into the year.

And we're still sticking with that.

You know Brazil was slightly positive and Mexico did very, very well.

So I think that when you look at North America, US, Canada, Mexico, has a very good growth momentum for us.

And then Western Europe, we would say as we said before, that it is a bit of a question mark.

We've had that the range of minus 2% to plus 2% for the year.

We had growth of 1 percentage point in West Europe and Europe, Middle East, Africa 3% for the quarter.

And then, as we produce quite a bit in those countries, in terms of export, that should not be too negative for us as we move ahead.

As you know, it's not only that the research and development which is driving organic local currency growth by the way, but also the strategy that we've had around domestic business models it should play for us here.

And you ask about market share and so forth, we have many businesses so it's difficult to go through all of them.

But when I look upon it is clear that we take market share in many of our businesses.

Excellent.

That's for very helpful.

And then a quick one for Nick.

Maybe on the currency exposures, any color on how you position in terms of hedging both natural and through contract.

And then, maybe any comments on your Swiss franc exposure please?

Thank you.

Yes, if we go back to the December 16 earnings outlook meeting, at that time we shared that we expected FX to impact our earnings per share negatively in 2015 by $0.10 to $0.20.

With the movement of the foreign exchange rates that we've seen in the last month, we now put ourselves right at the high end of that range, as hurting 3M's earnings per share by $0.20 year on year.

Our approach in managing that is really unchanged and it's on several fronts.

First of all we have a strong management team that knows how to manage through foreign currency exchanges.

And that's been demonstrated time after time.

We also have a hedging strategy where we hedge approximately 50% of our economic or P&L exposure.

And we hedged that out in the past for 12 months.

As we noted in the middle of 2014, we extended that tenor out to 24 months for some of the currencies in developed, some of the developed countries we're in such as euro and yen.

And then operationally, some of the things we do to manage that exposure is looking for opportunities in sources of supply.

And in some cases raising prices to offset that currency or pegging our selling prices to a hard currency such as the US dollar.

And that's much of the story we've had in the past and it remains the same in 2015.

Thank you.

As far as you question on Switzerland, we have minimal cost exposure there and that will have an immaterial impact on our results in 2015.

All right, thank you.

Scott Davis, Barclays.

Thanks, good morning, guys.

I wanted to follow up on the question on currency a bit.

Just how do you guys think about adjusting production or changing how you think about your -- how you supply the marketplace?

Just given the fairly violent swings we've had in currency.

And for example, the Canadian dollar has fallen as dramatically as it has, does it make sense to produce in that country and export into the US?

Or are there other things that you can do that could help mitigate the impact?

Scott, that's a good and interesting question.

I'll just put it in a short-term and a long-term perspective.

From a short-term perspective, this isn't the type of thing that week to week, month to month that we fluctuate our production from one part of the world to the next.

Our number one focus is how are we going to serve our customers locally.

And then from there, we then focus on are there opportunities?

So, I'll use the eurozone right now, where we have a European center of excellence, that's looking at what kinds of opportunities do we have with the current FX rates on the euro.

Looking at our material costs, are there potentials to renegotiate purchase prices?

Material localization, does it create new opportunities for us to source something from a new supplier at a different FX exchange rate to our advantage?

In times like this, it also causes us to manage our spending, probably more tightly in some parts of the world.

And then, to what you are talking that is a little longer term, looking at regional self-sufficiency.

We do have manufacturing capability to manufacture products that is spread around the world.

And then we use movements like this to look for those opportunities.

That's going on constantly and it's a heightened case for us right now, Scott.

Okay.

That's helpful.

And then, when you look at your CapEx budget for 2015, I'm just trying to get a sense for where the priorities?

Where are you investing and once, this question asked a couple of years ago would have been all China or other emerging markets, and has that shifted it all back to more developing nations?

Or just give us a sense of when you think about the priorities for the $1.5 billion.

Where are you going to spend money?

Scott, I'd characterize our priorities as fairly balanced and not changing in 2015.

There's a couple of dimensions to talk about that.

First of all, we try to have a nice balance of where we're investing in growth.

Expanding our capabilities and our capacity to meet local customer requirements.

Second, we're also investing in increasing our competitiveness.

Often that's in renewal or enhancements to existing manufacturing sites we have.

And then third, there are some strategic investments we're making where it might be expanding in a new geography, or one of our significant strategic investments is our investment in business transformation and ERP.

Geographically, we continue to see a nice balance of where that's going.

It's not skewing more to developing markets right now.

In 2015 we see a balance very close to what we've had in the last two years.

Okay.

That's helpful.

Great job guys.

Thanks, I'll pass it on.

Thank you.

Andrew Obin, Bank of America Merrill Lynch.

Yes, good morning.

Just a question, in terms of restructuring in the quarter, it seems like strategic investments reaccelerated versus the third quarter.

So the first thing, can you just -- you mentioned $30 million for restructuring in Q4, what was the 3Q number if you could remind us?

And then, if you could just talk about the balance of strategic investments and restructuring, versus the benefit.

Because last quarter they turned positive and we're back to being negative.

Just how should I think about the benefits of restructuring going forward?

Andrew, a couple of points on that.

Our $30 million, that was restructuring portfolio actions that we took in a few of our businesses; in electronics and energy, safety and graphics and healthcare.

And as I said earlier, spread geographically but most heavily concentrated in Western Europe for a total of $30 million.

And that was very close to zero in Q3 of 2014.

So an uptick from the level we saw one quarter before.

Returns that we see on this will vary by geography.

The restructuring actions we're taking in the United States, we see paybacks occurring within the next calendar year, or less than 12 months.

The paybacks that we see on our Western European portfolio actions typically take longer and we see paybacks that can take two or three years on those investments.

But just as we're thinking about the paybacks, because obviously you've been reinvesting for a couple of years now.

And as I said, just going back last quarter you had a pretty positive tailwind from the benefits.

And this quarter, I think it was relatively flat.

How should I think about that going forward?

Thinking about that going forward Andrew, part of what I laid out for 2015 is that we're expecting $0.10 to $0.20 of productivity benefit, and part of our margin expansion in 2015 versus 2014.

A portion of that productivity benefit, and I'll roughly attribute one-third of that productivity benefit, is coming from past restructuring activities that 3M has invested in.

Got you.

That's great.

Just a small follow-up.

What's your assumption for oil price that's baked into your forecast for the year?

Andrew, for the year, we are estimating that oil prices are going to average $50 a barrel.

And while you're on the subject, in the December 16 earnings call, part of my outlook at that time was that raw materials we expected to benefit our earnings per share in 2015 by $0.15 to $0.25.

With our latest assumption on oil prices, we're now right at the high-end of that estimate.

We're still in the estimate but now at the very high end of it.

Thank you very much.

You're welcome.

Joe Ritchie, Goldman Sachs.

Thanks, good morning everyone.

And a nice quarter.

Just my first question is on price cost.

Nick, you've been talking for a while that we're going to start to see a lower benefit from price cost.

And historically, over the past year, you've done closer to about 100 basis points; you have 60 basis points this quarter.

Could you just talk to us a little bit about the dynamic this quarter, was it because you lapped some pricing increases, and how should we think about pricing in 2015?

Yes Joe, it did come through almost exactly like as we were describing.

The components of what we're seeing there, we did have significant price growth in 2013, and there is a bit of lapping occurring there.

We do continue to still see strength of the 3M products innovation flow, the strength of the 3M brand and the impact that has on pricing.

FX in the first part of 2014 had a more pronounced impact on our pricing growth.

And that abated some in the fourth quarter.

Partly of the mix of where the FX movements had been occurring, it's much more in developed markets and in currency such as the euro.

And then going forward, we continue to expect low price growth of all of our organic growth, the 3% to 6% that we're projecting for 2015, we're expecting the vast majority of that to be in volume growth and not price growth.

Okay great.

That's helpful.

And maybe one follow-up for Inge.

You mentioned earlier on M&A, you mentioned Sumitomo, was just wondering whether the environment recently with the evaluations coming down in certain end markets, whether things have gotten any more attractive in terms of the pipeline from an M&A standpoint.

We're talking overall M&A pipeline?

You're don't talk specifically Japan, but overall?

Overall.

Our pipeline is robust and we are working on it constantly.

As I had said earlier, I feel that we're in a much better position to really identify the most attractive pieces for us, as we have a much better understanding today versus two or three years ago of the positions in our portfolio in between the different businesses.

And also we now have identified the real fundamental strengths of 3M which is for us which is around technology, manufacturing, global capability and brand equity.

So I would say that we are in a much better position today in order to be able to look upon them and identify them et cetera.

So that's good.

And we have, as I said earlier, from a move -- from more of a bottom-up approach, we have complement that with that top-down approach as well in order to make sure that we can identify and find something that can be used more broad based in the organization.

Ceradyne was probably the first one around those acquisitions, and it's working out very well.

And again, had a very good quarter for us this quarter.

And so, we think about it in that respect, we find that, that's very attractive, it's both the sustainable end market that is interesting but also some technology for us that we can expand into a lot of platforms, which is an important thing for us.

And technology innovation for us is important for us in order to create more value for our customers and for our shareholders.

So it's an important element.

Thanks for the color and nice quarter.

Thank you.

Steve Winoker, Sanford C. Bernstein.

Thanks, and good morning all.

I wondered if we could dig in a little more in that pricing point.

Specifically around your ability to price versus translation and other currency effects competitively in Europe and Latin America.

So to what extent is there a lag here and those pricing actions being taken?

So when I looked at that 1.4% on price in EMEA and 3% Latin America, Canada versus minus 9.7% to 9%, should we count on that catching up a bit in the next quarter or two?

And then Inge, just strategically as you think about this going forward, any competitive dynamics that change as a result of that currency fluctuation?

Yes, Steve, in the past what you have witnessed for price growth when it's driven by FX reductions in the last couple of years, primarily in developing markets, you've seen a pretty significant amount of that recaptured in price.

If I were you modeling, I would not be modeling that same ratio of pricing actions to offset that.

The businesses are out there engaged, working on where the opportunities are for offsetting some of that FX in price.

But the ratios that we've experienced in the past are not going to be the same as what we're going to see in Western Europe.

There are some parts of EMEA though where we are changing our pricing to the US dollar price, which will bolster our price growth there.

But the guidance I give, Steve, is temper that ratio that you've historically seen.

And, Steve, if I may on your question.

I think one important thing is to just recognize the investments that we have done over years under the umbrella of domestic demand and domestic manufacturing, which is helping you a lot relative to issues like this.

I think the other thing is the technology innovation will, by definition in most businesses, help you.

And the way we look upon our business, we have one that I will describe as a design and spec-in business, and then you have one on consumables.

On design and spec-in businesses where you provide technology and innovation that is coming on platforms.

That's a big advantage for us, because the technology is there, and in most cases we are able to produce locally.

And the other thing is, over one-third of our business is in the United States.

And as I've said before, 3M never left United States.

We stayed here.

In fact, we also invested this year on more capacity.

Specifically in our healthcare business.

So, I see, in terms of some competitive moves, yes, from time to time that can be in my view in smaller countries around the world, maybe some push in the low end of the portfolio from some local competitors.

But I think that's not what 3M is all about, based on our business model generally speaking.

So we should be able to pull in then and as I said, probably gain market share as we move ahead.

I am generally speaking very, very pleased with the execution relative to our commercialization capabilities in the Company.

And I'm very pleased to see how that momentum has built now for five or six quarter, slightly stronger every quarter, so that's good.

3M used to quote a percentage of regional production for regional consumption or supply, which you referred to several times now in this call.

Do you have a sense for how high that is these days?

It depends on the region by definition.

It's slightly higher in West Europe and United States versus in APAC and Central East Europe and Middle East Africa.

We are pushing that, I would say, as we move ahead.

But also, being thoughtful relative, so we do not build too much capacity and duplicate efforts.

I think it will be a big effort then as you remember that we talked in the past about slightly complicated supply chain operation.

And so maybe I said to many of you is that that's a big thing now that we go after as we move into 2015 and beyond is to make sure we get a much more streamlined supply chain, and better cost of goods sold, and better inventory and management and so forth.

And was wage inflation anything unusual in the quarter at all?

When you did a productivity 10 basis point number, I assume that's net of wage inflation?

Yes, that is net of wage.

And no, we're not seeing anything unusual in wage inflation or wage pressures.

Very normal trends for us.

Okay thanks, I'll will pass it on.

Thank you, Steve.

Shannon O'Callaghan, UBS.

Good morning, guys.

Can you just dig a little bit more into this US industrial strength?

I think you said it was up 10% in the quarter and I think you mentioned the safety business was also strong in manufacturing.

What's the strongest thing you're seeing there, and your confidence level, what you see changing?

Yes, so first of all, the two businesses as you talked about in industrial, by definition co-industrial and personal safety, they often go hand-by-hand.

So we saw good growth there.

So for us, we saw aerospace and transportation in high-single digit growth.

And if you take the core business, which I will categorize as adhesives and tape and abrasives, we saw very good growth.

We saw adhesives and tape that is our biggest division, we saw that at 8% growth in the quarter.

And we also saw automotive at 5%.

So I would say it was broad-based in United States, in those businesses.

And as I said earlier, you think about that for us, as a design and spec-in, where you have coming in on products and platforms of then you have your consumables where you're using our product in Europe manufacturing operations and so forth.

So I would say it was broad based.

And, when I looked upon the growth for the businesses in industrial, we were around 5% plus for every business in the United States, so very strong.

And as you said, personal safety was even higher than that.

So it looks good for us.

And the team is executing well, so it's good.

Okay.

And then, 3M is a pretty interesting view into how the impact of lower oil prices is actually going to impact the demand in the economy and sort of the positives and the negatives of that.

Do you have any kind of early read on that or anything that you sense in your businesses, or seen talking to your business leaders?

Or a view of how this might play out?

Yes Shannon, the impact on the business and our ability to organic growth, I really don't have any insight to share there of anything changing in the market as a result.

The primary impact we are seeing is what's coming at us with commodity prices.

And what we've been seeing in what we're paying for commodities so far this year, and why I'm saying that we're now on the high end of our $0.15 to $0.25 benefit from raw material prices.

Okay, you haven't sensed an early pick up and better consumer spending in your businesses because consumers have more discretionary (multiple speakers)?

We haven't seen that yet, Shannon.

Okay, thanks a lot.

Thank you.

Deane Dray, RBC Capital Markets.

Thank you and good morning everyone.

My first question as on R&D.

And Inge, I know that there's a plan to ramp up R&D to a 6% level.

But it didn't look like it started to happen this quarter.

It actually declined year-over-year.

I know it probably shouldn't not be a linear process, but maybe if you could comment on the R&D spending over the next couple of quarters?

Yes, well first of all, we see improved productivity coming out of the laboratories, which we're very pleased about.

If I give you some facts relative to that additional 5%, from 5.5% to 6% increase in spending, is around disruptive technologies, and this is now going into the third year.

So overall, we have 30 programs that are funded.

19 of them came on in 2013, 7 in 2014, and we're looking for another 4 here in 2015.

So the investment over the years has been 82 in 2014, it was 40 and 2013 and we plan for another 70 plus this year.

Seven of the programs are now in early stage of commercialization and that's in healthcare, infrastructure and transportation, electronics and consumer markets.

So we had sales from those investments in 2014 for around $150 million and we are looking, as I said in New York, for around $250 million as we go ahead.

So we'll continue to invest and as we have talked about in the past, our new product vitality index is robust, 32%, 33% that's a good place for us to be and we are continuing to invest in.

Now, the investment going into it is important but equally important for me is to see the outcome.

And I'm pleased by that because, as you see, we are running in the middle of a range of 4 to 6 now, running around 5. In fact, this quarter on the high-end of that range.

That is clear evidence that new programs are being introduced as we grow.

And we have quite a number of new products introduced in 2014 that hit the market.

So $10.4 billion of new products hitting the market from 3M in 2014.

So I'm not -- we to continue to invest, but they are not excluded from productivity improvements.

That's great color.

My second question is -- I wanted to go back to the hedging practices to Nick for moment.

It was interesting to hear that your response has been to extend the duration of your hedges from 12 months to 24 months and we are seeing companies in both new hedging practices, we saw GE doing that, Honeywell has done that, so you've extended the duration.

But I was curious why would you not increase the percent of your current hedges from 50% to let's say 75%?

Did you look at that and what the costs are there?

Yes, Deane, thanks for asking a clarifying question on that.

One of the constraints or governors on our ability to hedge is qualifying for hedge accounting treatment.

And, if we go over 50% in most cases, we would then be subject to mark-to-market accounting and, therefore, defeat the purpose of what we're trying to do with our hedging process.

In fact, we'd probably add more volatility if we did that.

So that's the upper-limit constraint on what we can.

And part of our approach, if I go back over a decade, is not to eliminate all the risks there.

Our approach is to give the business some time to react and adjust to the changing business conditions.

And that's consistent with our 50% strategy.

Great, Nick, that clarification was real helpful.

We would rather not see you go through that -- the currency mark-to-market gyrations.

So we'll live with the 50% then.

Thanks.

Steve Tusa, JPMorgan.

Good morning.

What are you guys seeing in Europe, specifically, maybe in some of your industrial verticals?

Well, first of all it's I would say, as you saw relative to the growth, for the quarter for us in Europe, it was okay, I would say.

And I would say that specifically, we had good growth in some of the businesses that -- specific around automotive and so forth, which is a big portion in Europe.

We also saw very good growth in personal safety, which is very much related into the industrial space.

So it's still a slow growth generally speaking over there but, I think personally with the trend relative to the currency that we would see more exports coming out of Europe.

And our position in Europe is very strong, I would say in our industrial position and in healthcare.

We are weaker in the consumable space in Europe, based on historical position.

So I think, as export will increase as we go, I think that will help 3M as we go ahead.

I think the other thing relative to Europe is to say that we have been on West Europe specifically now for many years, I think four years relative to the structure over there.

So I think one of the things that is sometimes is difficult to predict exactly the outcome of the growth.

But I think one thing that you do need to do as an enterprise is to address the structure constantly.

And as we had talked about earlier, we have addressed that big-time in terms of going from a subsidiary structure to a regional structure and taking out quite a bit of layers and management in the organization, while we kept the front end of the organization in terms of execution.

So let's say, I think that we are in a good place in Europe.

But it's not an easy environment as we all know.

But there is no disadvantage for us by definition.

As a said, the portfolio for us is strong in industrial healthcare and safety and graphics.

Those businesses are the strongest for us, electronic and energy and consumer businesses as a smaller mix in Europe.

And I would say specifically consumer electronics is very small in Europe.

We are strong in energy.

Consumer retail is by definition a small portion for us.

I think in that segment also where you would see a lot of pressure maybe as we go ahead.

Okay thanks.

Just one last question, I know that this is a dumb question for you guys.

But, is there any quantification of what you guys sell in and around the oil and gas markets?

Is there any quantification of whether it's 2% to 3% or do you guys have visibility on what you may sell in and around those markets?

Whether it's adhesives or anything like that that go into those economies?

Yes, Steve, we do look at this and approximately 3% of our revenue is into the oil and gas industry.

Okay great.

Thank you, very helpful.

Jermaine Brown, Deutsche Bank.

Hi, good morning gentlemen.

Most of my questions have already been answered already.

So really quick, over the course of the year, how do you expect the raw material tailwinds to flow through your income statement, given the movement in crude oil prices?

With the move, we expect it to be mostly balanced through the year.

If there's going to be a slight bias it's going to be slightly backend loaded but not markedly so.

Okay.

Thank you very much.

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.

Thanks for joining us on what I know is a very busy earnings day.

Appreciate your participation.

We look forward to seeing you during the year.

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.