3M (MMM) 2015 Q1 法說會逐字稿

Welcome to the 3M first quarter earnings conference call.

(Operator Instructions)

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

Welcome to our first quarter 2015 business review.

On the call today are Inge Thulin, 3M's Chairman, President, and CEO; and Nick Gangestad, our Chief Financial Officer.

Each will make some formal comments, and then we'll take your questions.

As a reminder, please mark your calendars for upcoming earnings call dates, July 23, October 22, and January 26.

Also, take note of our next investor meeting which is 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.

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 view about 3M's future performance and financial results.

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

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

Please turn to slide 3 and I will hand off to Inge.

Thank you, Matt.

Good morning, everyone.

I appreciate you joining us today.

3M executed well and delivered another solid quarter of operation of performance.

We once again posted broad-based organic sales growth and continued to improve profitability.

Importantly, we achieved this against a more challenging first quarter economic backdrop.

The rising US dollar negatively impacted revenues and profits, offset in part by hedge in gains.

In addition, global economic growth slowed which we saw a bit in our growth figures.

As 3M always does, we continued to manage all things within our control, execute our plan, and build for the future.

I'll take you through the first quarter highlights.

Earnings were $1.85 per share, up 3% year over year.

Sales were $7.6 billion in the quarter, down 3% versus last year.

Organic local-currency growth was 3.3%.

For the seventh consecutive quarter, 3M posted organic growth in every business group as well as across all geographic areas.

As I mentioned, the US dollar strengthened significantly against a number of currencies reducing sales by 6.5%.

We expanded Company-wide margins to 23%, up nearly a full percentage point from last year.

And all business groups delivered margins greater than 21%.

Rising margins and broad-based organic growth are more evidence that our [patrolling] actions over the last three years are paying off.

This quarter, 3M took a number of additional steps to strengthening our portfolio.

We announced plans to acquire Polypore's Separations Media business for $1 billion, which will enhance our core filtration platform.

Last month, we completed acquisition of Ivera Medical, a good addition to our healthcare business.

And at the same time, we completed the sales of our Static Control business in January.

Also in the quarter, we returned $1.5 billion to shareholders through dividends and share repurchases.

And finally, we increased the first quarter dividend by 20% on top of a 35% increase last year.

Nick will now go through the details of the quarter.

Nick?

Thanks, Inge.

And good morning, everyone.

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

As Inge mentioned, in the quarter we delivered positive organic growth in all business groups in geographic areas.

Worldwide organic local currency growth was 3.3% with volumes up 2.3% and selling prices up 1%.

Two healthcare related acquisitions, namely Treo Solutions and Ivera Medical, added 10 basis points to growth.

This impact was offset by the divestiture of the Static Control business which reduced sales by 10 basis points.

The stronger US dollar reduced sales by 6.5%.

In US dollars, total sales declined 3.2% versus the first quarter of 2014.

The US dollar strengthened significantly versus several foreign currencies during the first quarter, continuing a trend that began in 2014.

In particular, the average Euro rate declined 18% versus the US dollar year on year.

The yen declined 14% and the Brazilian real 19%.

Looking more closely at organic local currency growth, Asia Pacific led the way at 5.6%.

Safety and Graphics again posted the strongest growth in APAC at 9% followed by Health Care at 8% and Electronics and Energy At 7%.

Organic growth was 7% in China/Hong Kong or 8% excluding Electronics similar to recent quarters.

Japan was up against a challenging comp.

Recall that Japan's organic growth was 20% in the first quarter of last year leading up to the April 1, 2014, consumption tax increase.

EMEA organic growth was slightly positive in the first quarter with west Europe flat, central east Europe up mid-single digits, and Middle East/Africa down slightly.

Organic growth in EMEA was led by Electronics and Energy and Safety and Graphics at 4% and 1% respectively.

We posted 4% organic growth in Latin America-Canada where Industrial, Safety and Graphics, and Health Care all grew 5%.

Mexico delivered another outstanding result with 15% organic growth in the quarter, and Brazil was down 2%.

The United States grew 3.1% organically with Industrial, Health Care, and Consumer each growing 4%, Safety and Graphics and Electronics and Energy each grew 3%.

Please turn to slide 5 for the first quarter P&L highlights.

First quarter sales were $7.6 billion, down 3.2%.

Operating income on the other hand increased nearly 1% to $1.7 billion, and earnings rose over 3% to $1.85 per share.

Early in the year, it became apparent that business conditions would be more uncertain, particularly given that the US dollar was moving higher.

As always, we had contingency plans in place and we executed those plans as Q1 played out.

Gross margin improvements and strong SG&A productively allowed us to increase first-quarter operating margins by 90 basis points year on year to 22.8%.

For the full year, we expect operating margins to increase by a minimum of 1 percentage point.

Let's take a closer look at this quarter's margin improvement.

Organic volume leverage added 20 basis points to operating margins and the combination of lower raw material costs and higher selling prices contributed 120 basis points of margin expansion.

We continued to generate positive selling price changes across our businesses, boosted by 3M's world class material science and strong new product flow, both of which are important elements of our business model.

In addition, we have been raising prices in select countries to help mitigate the impact of currency devaluations.

On the raw material front, we are benefiting from both lower commodity prices and from our sourcing team's ongoing negotiation efforts.

We expect raw material benefits to gain momentum as the year progresses.

Productivity added 30 basis points to margins as spending remained under good control in the quarter, and foreign currency impacts net of hedge gains were neutral to margins.

First year acquisitions were 10 basis points dilutive to our operating margin in the quarter.

In addition, we continued to make other strategic investments, including disruptive R&D programs along with business transformation and ERP.

These investments reduced operating margins by 20 basis points year on year.

Finally, higher pension and OPEB expense reduced first-quarter operating margins by 50 basis points.

As a reminder, this year's pension increase is a result of the adoption of new mortality tables along with a lower discount rate.

Summarizing the first quarter P&L, our teams executed well in the face of currency headwinds and a more mixed economic backdrop.

EPS expanded year on year, and margins increased by nearly 1 percentage point.

Now let's take -- turn to slide 6 for a closer look at earnings per share.

Earnings for the first quarter were $1.85 per share, an increase of 3.4%.

Organic growth and margin expansion contributed $0.14 to the EPS increase in the quarter.

This included a $0.04 headwind from higher pension and OPEB expense.

Foreign currency impacts, net of hedging, reduced pre-tax earnings by $90 million or the equivalent of $0.10 a share.

The first-quarter tax rate was 29.5% versus 27.4% in the comparable quarter, which reduced earnings per share by $0.05.

The increase was due to the geographic mixed which was influenced by the strong US dollar.

In addition, Q1 2014 included a one-time benefit that did not repeat.

Average diluted shares outstanding declined by 4% versus last year's first quarter, which added $0.07 to first quarter earnings per share.

Now let's review cash flow performance on slide 7. We generated $1.1 billion of operating cash flow in the quarter, in line with Q1 2014.

Capital expenditures were $291 million, consistent with last year's first quarter.

Our full year expected CapEx range is $1.4 billion to $1.6 billion, down $100 million versus prior estimates, all due to the stronger US dollar.

First-quarter free cash flow was $789 million, and we converted 66% of net income to cash, in line with last year's first quarter.

Note that the first quarter is typically our seasonal low.

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

As Inge mentioned earlier, we increased our first quarter per share dividend by 20%.

We paid out $652 million in cash dividends during the quarter.

Gross share repurchases were $886 million in the first quarter, and we continue to plan $3 billion to $5 billion for the full year.

Now let's review our first-quarter performance on a business-by-business basis.

Please go to slide 8. Industrial, with sales of $2.7 billion, delivered organic local currency growth of 3% in the quarter.

Our aerospace and commercial transportation, automotive OEM, and 3M purification businesses all generated high single-digit growth.

We also posted positive organic growth in advanced materials and in industrial adhesives and tapes.

On a geographic basis, Latin America/Canada set the pace with organic growth of 5%.

The US was up 4%, Asia Pacific increased 3%, and EMEA was flat.

We continue to invest for the future within Industrial.

During the quarter, we announced our intent to acquire Polypore's Separations Media business for $1 billion.

This business is a leading provider of microporous membranes and modules for filtration in the life sciences, industrial, and specialty segments.

The acquisition will enhance 3M's core filtration platform and help generate new growth opportunities across the Company.

Wrapping up on Industrial's first quarter performance, operating income was $598 million and operating margins were 22.5%, up 20 basis points versus last year's Q1.

Now let's turn to Safety and Graphics on slide 9. First quarter sales in Safety and Graphics were $1.4 billion, increasing 4% organically.

Personal safety grew high-single digits in the quarter.

Worker safety remains a high priority for manufacturers globally, and we are gaining share.

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

Commercial solutions and traffic safety and security each posted positive organic growth while roofing granules declined year on year.

Asia Pacific delivered 9% organic growth.

Latin America/Canada increased 5%.

The US was up 3% and EMEA increased 1%.

Operating income was $335 million, and operating margins increased 2.1 percentage points to 24.4%.

Margins in this business continue to be boosted by strong productivity and a keen focus on prioritization and portfolio management.

Let's now turn to Health Care on slide 10.

Health Care delivered sales of $1.3 billion and organic growth of 3%.

Growth was strongest in food safety, critical and chronic care, and health information systems.

Our infection prevention and oral care businesses also posted positive growth in the quarter.

The drug delivery systems business declined year over year.

Geographically, organic growth in Asia Pacific was 8% while Latin America/Canada and the US each grew 4%.

EMEA declined 1%.

In developing markets, Health Care grew 10% organically marking the 13th consecutive quarter of double-digit growth.

This has been a high priority investment area of ours for some time as healthcare markets rapidly evolved in developing countries.

In March, we successfully closed the acquisition of Ivera Medical Corporation.

This business will enhance 3M's vascular access product offerings to the healthcare facilities.

Integration is going smoothly and we look forward to expanding this business globally.

Health Care's operating income was $408 million and margins remain strong at 30.7%.

Note that first-quarter margins absorbed 40 basis points of dilution from the Ivera ad Treo acquisitions, therefore, underlying margins were 31.1%.

Next we will look at Electronics and Energy on slide 11.

Electronics and Energy delivered 6% organic local currency growth in the first quarter with sales of $1.3 billion.

Organic local currency sales grew 12% in our electronics related businesses as we continued to see strong consumer demand enhanced by speccing winds at several OEMs.

In our energy related businesses, organic local currency sales declined 3%.

The electrical markets business was flat while telecom and renewable energy both declined year on year.

On a geographic basis, organic growth in Electronics and Energy increased 7% in Asia Pacific, 4% in EMEA, and 3% in both the US and Latin America/Canada.

The divestiture of the Static Control business, which closed on January 2, 2015, reduced sales by 90 basis points in the first quarter.

As a reminder, sales for this business were $46 million in 2014.

Operating income for Electronics and Energy was $283 million, and margins increased 4.1 percentage points year over year to 21.4%.

Recent portfolio management actions are improving our relevance with customers, enhancing our growth capabilities, and contributing to higher productivity and margins.

Please turn to slide 12.

First quarter sales in Consumer were $1 billion with organic growth of 2%.

All four businesses in Consumer grew organically led by do it yourself and home care, each growing mid-single digits.

Looking by geography, the US grew 4% and Asia Pacific increased 2%.

EMEA and Latin America/Canada declined slightly year on year.

Operating income increased to $240 million and margins were 22.9%.

Margins rose 1.7 percentage points year over year.

The business continues to drive efficiencies through investment prioritization and executing on productivity programs.

Before turning to our 2015 outlook, let me comment on corporate and unallocated.

Net expense was $100 million in the first quarter versus $72 million in Q1 of 2014.

With US and pension post-retirement expenses being the primary reason for the increase.

For the full year, we estimate corporate and unallocated net expense to be approximately $400 million.

That wraps up our first quarter results.

Please turn to slide 13 where I'll address our full-year planning estimates.

On organic growth, we expect 3% to 6% for the year so no change versus prior thinking.

Foreign currency translation is forecasted to reduce 2015 US dollar sales by 6% to 7%, up from a previous range of 4% to 5%.

For the second quarter specifically, we expect FX to reduce sales by 8%.

With respect to earnings, we now anticipate full year EPS of $7.80 to $8.10 per share versus a previous estimate of $8 to $8.30 per share.

In our fourth quarter business review on January 27, recall we estimated our foreign currency impacts would reduce 2015 earnings by approximately $0.20 per share.

Of course, since then the dollar has strengthened further.

Today, we estimate that foreign currency impacts will reduce 2015 full-year earnings by $0.35 to $0.40 per share or an incremental headwind of $0.15 to $0.20 per share versus our January estimates.

These figures are net of hedging.

For Q2 in particular, we anticipate that foreign currency impacts will reduce earnings by $0.13 per share.

For the tax rate, we anticipate a range of 28.5% to 29.5% versus 28% to 29% prior.

The stronger US dollar is impacting our profit mix by country, which is leading to a higher effective tax rate.

Finally, no change as it relates to free cash flow conversion.

We continue to expect a range of 90% to 100% for the year.

I will now turn the call back to Inge for a few final comments.

Thank you, Nick.

I'm pleased with the performance of our team in the first quarter.

We executed our playbook and delivered solid results in a tougher external environment.

Now more than ever our teams remain keenly focused on efficient growth, focused both on organic growth, and of course productivity.

As Nick described, we also took a number of additional steps to carefully manage first-quarter expenses in anticipation of a difficult economic environment, clearly a necessary given external realities.

As we navigate short-term challenges, we also continue to invest for long-term success.

This includes portfolio investments, as I mentioned earlier, as well as our ongoing commitment to building our core strength.

I talked to you before about 3M's four fundamental strings, which are leveraged across our enterprise: technology, manufacturing, global capabilities, and our brand.

In technology, for example, we increased R&D investment in the quarter while at the same time managing our SG&A investment very carefully.

We expanded 3M's global capabilities including breaking ground on a new customer innovation center in Chengdu in west China.

As you heard from Nick, our 3M China team continues to execute well delivering 7% organic growth.

We remain very optimistic about 3M's future in China.

And our new innovation center in west China will allow us to collaborate even more closely, both with local and global customers, and help us take advantage of growing opportunities in that region in China.

In March, we also refreshed our brand platform which includes our new tag line, 3M Science Applied To Life.

Through our brand work, we will enhance awareness of how 3M uses science to solve problems and improve lives.

So in summary, it was a solid first quarter for 3M.

Our team performed well against tough economical head winds.

We continue to make investments for the future.

And by that, we are now open to take your questions.

(Operator Instructions)

Our first question comes from the line of Joe Ritchie of Goldman Sachs.

Please proceed with your question.

Good morning, everyone.

Good morning, Joe.

Inge, perhaps maybe just focusing on organic growth for a second, the 3%-plus that did you for this quarter was towards the lower end of your full-year range and yet as you progress through the year, your comps are going to get a little bit more difficult.

So maybe you can just talk about the portfolio and the confidence and perhaps seeing some organic growth acceleration as the year progresses.

Yes, you know, you're right.

There was a little bit slower than we have seen in the past.

You know, the way I look upon it is specifically as you came off Q4, it was around 6% but I think overall, when you look upon the economy around the world, the fourth quarter was much stronger than what we saw in the first quarter on a global basis.

I think first of all, our performance relative to IPI is in the same level as we have seen in the past.

I think when we look upon our performance, you could see -- as you see there, you see a little bit of lower growth in Health Care, which is related to basically one thing but you can add them together.

One, it's relative to west Europe, and it's relative to our drug delivery system that these, I would say project-based business, where you will have some businesses going in and out of that business based on year and/or quarter.

So when I look upon Health Care, that's basically what you can see.

Our core business in Health Care did very well again.

And as you see, we maintained very high margin, et cetera.

When I look upon Industrial, we had 4% growth in the United States for Industrial in the quarter, which is acceptable, and I think that was related very much to as there became maybe some uncertainty, generally speaking, about what will happen for exports due to the dollar strengthening and also what you saw in oil.

I think people specifically not so much what is designed in and expecting, but maybe on the consumables just became a little bit cautious as you went into the quarter.

So I don't see that as an issue either.

As you know, that's a big business for us and we continue to invest in [IBG].

When I say big, it's our biggest.

It's 33% of our portfolio.

You saw again Electronics and Energy did very well.

After the reorganization and realignment of that business, now over two years ago, we really get good traction based on our relevance to customers and speed to market, et cetera.

And Safety and Graphics had also a good quarter and specifically in personal safety, that is going into the respirator business, we're doing very well on a global base even if it was maybe a little bit slow in west Europe in the quarter, but very well in Asia again and whole of APAC doing very, very well.

And then finally, Consumer, that did show had a 2% growth.

4% was in US which is our bigger business.

I would say there the slowness was in west Europe and Latin America was slow for them.

When I -- as we all know, a quarter stop and end.

There is always something going in and out of a quarter.

I looked very carefully on six months comparisons going back over two years.

And when we look upon that over two years with six months comparisons because you don't know always if Easter is coming in Q1 or Q2, et cetera, we have for the last two years in that comparison been in the range of 4% to 6% always, and 4% to 5% during that period.

So this was on the low end but still in the 3% to 6% that we are said for the year, and when we look upon and talk to the businesses, what we see going out for the year, I would say that maybe Q2 will be very similar to Q1, maybe slight improvement, but we not count too much on that and then you will see for the rest of the year, more growth will come.

That's really helpful color, Inge.

Thank you.

Maybe my one follow-up question for Nick, can you decompose the price costs for the quarter?

You had 120 basis points in benefit.

What portion of it was related to FX and can you elaborate a little bit on the raw material piece gaining momentum as the year progresses.

Sure, Joe.

I'll be happy to break that down.

As I said earlier in total, those components, price and raw materials, added 120 basis points.

You can split that right down the middle.

Half of that is coming from selling price increases and half of that is coming from lower raw material commodity prices that we're paying.

And then of the -- in total, what we reported for 1% price growth for the first quarter, Joe, about two-thirds of that is directly or indirectly driven by FX movements and about one-third of that is driven by 3M innovation and the new product flow we have.

Okay, great.

Thank you.

I'll get back in queue.

Our next question comes from the line of Scott Davis of Barclays.

Please proceed with your question.

Good morning, guys.

Good morning, Scott.

I have a little bit of a strange question for you, Inge.

When you think about China, up 7% is a very, very respectable number.

But Consumer was up kind of 2%-ish.

And you seem to be doing really well in China in auto and industrial, but Consumer always seems to be a little bit of a challenge.

Can you help us understand?

Is it just a function of price points and brand or focus?

When we think about the consumer buildout in China, there seems to be an opportunity for you guys.

I'm not sure your business is really that big in the grand scheme of things over there and it doesn't seem to be growing that fast.

First of all, yes, we do well in China.

We have good traction there.

Again, this quarter we had 7% growth.

In fact, 8% in the core business if you take out Electronics.

As I talked earlier, the way the evolution of businesses are going, starting with Industrial followed by Electronics and Energy, then Safety, then Consumer, finally Health Care.

Consumer for us is a smaller portion in China and so is actually Health Care as well.

I think the answer to your question is that it's very much around brand awareness and brand is in our minds.

It's where we all grew up, what we are used to, et cetera.

So it take a longer time in order for you to build awareness in those businesses.

So we still see growth opportunities in China for Consumer but in that specific market, I would turn Health Care and Consumer around and say Health Care will get faster traction for us than Consumer.

So I would say I agree with you.

I had hoped we would be bigger at this point in time.

I'd hoped we had been able to grow faster but we will over time.

We have some very strong brands.

It's just that it take time for us to get awareness and build out in the category, and we also very careful who we deal with in China relative to the channel partners.

I think it's -- over time, it will be big.

We grow faster and we just need to make sure that we get with that business good profitability for us as well, right.

So we are not, as you know, giving away things, and it's not only about market share.

We need to make sure that we are investing in businesses where we get the good return, and there are some very good businesses for us in China as we speak, as you know, both in Industrial -- specifically, Industrial.

One I can talk about, purification, is just growing fantastically.

We've continued to invest in that.

I hope that gave you a little bit of flavor why it's a small --.

Yes, that's helpful.

And then as a follow-up to that, when you think about price and going on getting 1% price in this type of a lower raw material environment and challenging macro in general, what is the interplay between price and volumes?

Did you give up some volume this quarter to get that price?

It's hard to say with some of your markets, you create the category so it seems like you should be able to get pretty good pricing power, but clearly with the currency moves I would imagine you have some local competitors that might be able to keep price a little bit lower for a while and take some share.

How do you think about that?

Scott, we don't see that we're giving up volumes as -- in exchange for price.

It really comes back to 3M's business model of investing in innovation, having that strong new product flow.

It gives us the ability to reflect the value that we're creating in the markets and for our customers.

So it's something we're conscious of.

We monitor, but right now, Scott, we're not seeing our stance on pricing in light of the current cost of raw materials as impacting our volumes.

Okay.

Very helpful.

Thanks, guys.

I'll pass it on.

Thank you, Scott.

Our next question comes from the line of Deane Dray of RBC Capital Markets.

Thank you.

Good morning, everyone.

Good morning, Deane.

On the topic of FX, Nick, maybe if you could help critique the effectiveness of the new hedging program.

Just you extended the duration from 12 to 24 months but how is that program working versus your expectations?

Deane, thanks for the question.

For those that may not know what Deane's talking about, in the middle of 2014, we extended the tenure in our hedging program to go out from our past policy of going out and hedging 12 months out to now hedge in addition to that 24 and 36 months out.

And to answer your question, it's going quite well, Deane.

The true impact of going out with the tenure to 24 and 36 months, that will manifest in 2016, and if you look at the amount of deferred gains that we have in our hedging program, that's reflective of our -- of that change in our hedging program.

Great.

And then a follow-up would be for Inge on the Polypore acquisition and maybe if you could just take us through.

And maybe this has a little bit of the boost that Ceradyne gave you was where else will you apply ultrafiltration across 3M's businesses, and then within your answer maybe what does ultrafiltration give you that Cuno did not.

First of all, you know, as we not have closed on Polypore, I would not like to talk about that specifically, right, so we have to respect the regulatory approvals that we are waiting for.

So I will not talk about that.

But if you think about it broader relative to our filtration business, that is a huge opportunity for us.

I will look upon that as -- I will combine it, if you like, to think about it in terms of our non-woven technologies combined with what we have in our purification business, and then some additional technologies that will be added later on.

So if you think about global megatrends that are related to both air pollution and clean water, that is what we will play big time with the platform as we go ahead.

So I would say that I'm very encouraged, actually, relative to our current performance, both in purification and in personal safety, that is around respiratory products and we will build out those businesses as we go.

So think about it as a good way of us to extend our technology capabilities in order to create more value in those spaces which is both global megatrend but also local megatrends.

As Scott and I talked about earlier relative to China, China, this is a huge opportunity as we all know, and everyone know that but you need to be able to capitalize on it with technologies because in the end of the day, this is very much a regulatory business.

We need to make sure we have product that meet the standards.

Thank you.

Thank you.

Our next question comes from the line of Steven Winoker of Bernstein.

Please proceed with your question.

Thanks and good morning.

Did you all see any volume destocking across your distribution in any of the business units?

We've been hearing some short-term trends from some other companies on that front.

Destocking or?

Destocking, yes.

I think that when you look upon it, I would not say yes, big time, but I suspect that all of us leading businesses like we do at 3M and our customers, some uncertainty came in Q1, as I said earlier, both relative to exports from US based on the strength of the dollar and oil price.

I think most companies, generally speaking, were very careful of how you build and manage your inventory in Q1.

So I think I will be surprised even if I don't have any facts in front of me to say that people managed the inventory very tightly and as tight as they could in Q1.

And so did we, by the way, right.

So it's -- I think that's the answer.

Steve, this is Matt.

Maybe one comment in the Consumer business, which you'll see on one of the slides.

Our point of sale growth was good.

It was higher than our actual growth, so there may have been some -- a little bit of inventory takeout at the retail channel.

Okay, well and then Matt, on the Consumer side, I think that was still the lowest growth since what, maybe the fourth quarter of 2013.

Was that related in any way, or?

Yes, that was the point.

The out the door sales were actually better than that.

Okay.

So, there's some adjustment there in the channel.

Okay, and then a follow-up question on pricing.

You mentioned earlier that two-thirds of the 1% price increase was FX related and a third was roughly was new product development, and et cetera.

So I'm just trying to get a sense, are you seeing pressure on pricing that you think is currency driven in other markets from an export perspect from your competition?

Is this something where people are trying to take advantage of it?

Steve, we're on -- that's something we're constantly on the lookout for in this time of volatile FX, so is this changing the competitive landscape for us.

And at this point, we are not seeing evidence of it changing our competitive landscape or our ability to price in manner similar to how we priced in the past in multiple geographies, including the United States.

Okay.

Great.

I'll pass it on.

Thanks.

Thank you.

Our next question comes from the line of Shannon O'Callaghan of UBS.

Please proceed with your question.

Good morning, guys.

Good morning.

Maybe just a follow-up on sort of tightly managing business the first quarter.

As you mentioned, you're kind of doing that with inventories and others are as well with FX and oil uncertainty.

Is that uncertainty now viewed as or do you view it as having lessened given some stabilization, I guess, and the prices of oil and the currencies?

Or, you know, such that you would manage those things less tightly in 2Q?

How do you view that where we stand today?

In terms of managing our spending tightly, I don't see that changing as the year goes on, particularly in markets like west Europe and the United States, some of our developed markets where we're managing our spending pretty carefully right now.

I would say that there will not be any change as we move into Q2 relative to operation.

I would say that the team here is on this big time.

So that will be no change short term relative to what we need to do.

We have an aggressive plan for the year, and we will do everything we can in order to make sure we deliver on that one.

And then just in terms of how the first quarter progressed, we're getting sort of different stories from different companies about how the year kind of started and exited 1Q.

Did you see any variation across the months of the quarter, either a slow start that improved or vice versa?

Yes, that's something we're always looking at, is there a change in trend.

As we look -- as our revenue progressed through the quarter, we really did not see a meaningful trend one direction or the other throughout the quarter.

We have one-off things occurring like when Chinese New Year is and when Easter is.

When we adjust for those things, we see really no meaningful trend through the quarter.

Okay.

Thanks, guys.

Our next question comes from the line of Nigel Coe of Morgan Stanley.

Please proceed with your question.

Oh, thanks.

Good morning.

Good morning, guys.

Good morning.

Nick, I just want to go back to the raw material commentary.

I think you got it for $0.15, $0.25 benefit for the full year back in December.

And it looks like you have about $0.05 of benefits this quarter.

Are we now looking at a situation where the raw material benefits now above the $0.25 given your commentary that it's more back end loaded in your plan?

We -- yes, so in December, we laid out a range of $0.15 to $0.25 that we were expecting for raw material commodity price benefits.

On January 27 in our fourth-quarter earnings call, we updated that to say we now see ourselves at the high end at $0.25.

Nigel, what we have been seeing is this is playing out almost exactly as we've expected.

It's from a commodity pricing, we see it fairly balanced throughout the year.

The only nuance on that is that there is some inventory channel work through of using slightly more expensive inventory through our channel, which is what makes it just a little bit less in the first quarter.

That's all progressing right to our $0.25 that I stated back in January.

And my math on the benefits, on the 60 bps of benefits, that's about $0.05.

Is that about right for the quarter?

60 bps would be about approaching --.

I think it's about $0.04, Nigel.

We'll get back to you.

That's fine, Matt.

Thanks for that.

Just secondly, on the margin bridge, I just want to understand the neutral impact of FX because we've just seen that the hedge gains would have been a net benefit to margins.

So I just want to understand why that's flat and if possible, if you could call out how much of the gain came through in 1Q.

Yes, there's a couple different forces there, Nigel, that in this quarter netted out to no change to the margin.

There's the hedging gain, which is an absolute upside benefit to the margin, but that's offset by a differential to the margin where we source things to the extent to which our international company source product from a US dollar currency.

That has a negative impact on margins.

Those two things offset each other in 20 -- in the first quarter of 2015.

As we look out over the remaining three-quarters of the year, that will likely become slightly accretive to our margin.

Very similar to what we saw in second quarter and then a little more accretive in second and third and fourth quarter.

Any way you could quantify that, Nick?

Excuse me, Nigel?

Any way you can quantify that benefit?

When I'm saying -- I'm talking small, like 10, 20, 30 basis points, just to put a range on that.

Okay, thanks.

I apologize for the nitty questions.

I'll pass it on.

Thanks a lot.

Our next question comes from the line of Robert McCarthy of Stifel.

Please proceed with your question.

Good morning, everyone.

Good morning, Robert.

Just one quick question on any update on what you're seeing with ERP and the traction in terms of your investments?

Yes, we -- it's going well.

As you know, we updated you in December and even after that.

We are rolling out, as we speak now, in Europe, in west Europe specifically, and next place to go live is in Nordic and we are rolling that out according to plan.

As you know, we went from go -- when we tested it country by country, now to go regional and we're going west Europe first.

I think it's the first week of -- we go in July, the second week in July is when we will roll out in Nordic next.

So everything is on plan.

Thanks for your time.

Thank you.

Our next question comes from the line of Steve Tusa of JPMorgan.

Please proceed with your question.

Hello, guys.

Good morning.

Good morning, Steve.

On the hedging dynamics, I guess I could kind of do the math on that.

I'm not sure whether it's in the 10-K or not or the 10-Q.

What are you looking at for 2016 if the euro stays where it is today?

Is there an impact there or do you go all the way out through 2016?

Steve, we are hedged out through 2016, in fact, a little into 2017.

Just to put the numbers on it for 2015 versus 2016, we're estimating approximately $175 million of hedge gains to our P&L in 2015, and if everything stayed right where it is, that would be followed by $110 million of hedge gains in 2016.

Got you.

Okay.

Has anything changed with regards to how the ForEx is dropping through exclusive of the hedges?

I think Danaher today talked about a higher margin on their drop through.

No, I'm --.

No, I guess what I'd say, Steve, is back to the couple of questions ago, you know, when we're hedging and the dollar is strong, net-net it should be slightly positive to margins, as Nick just alluded to, and that is our expectation for the year.

So when we calculate the impact, we take our numbers and pull out the sales impact from FX and the bottom-line impact from FX, recalc the margin, and if you're hedging, by definition your margin should go up slightly.

Right.

One last question just on that.

So basically, similar growth in the second quarter to the first quarter.

Should we be -- can growth get to, in this kind of an economy, this kind of outlook, can growth get to like above 6% in the second half?

Should we be thinking about high end of the range type of growth in the second half of the year?

Can it accelerate that much?

Well, you know, we do not change our guidance for the year at this point in time.

So you have 3% to 6%.

So I think you're describing correct, as I said earlier, think about it very similar to Q2 as Q1, and then we would see an acceleration in the last part of the year, second half.

I would not predict at this point in time how high it will go, right, because we are not immune to the economical environment and how that will accelerate.

But our performance or 1.5 times to 1.7 times IPI is steady, as I said, historically when I look upon those six months period as you and I have talked about earlier, so it's -- I'm optimistic of the [3% to 6% for the year.

And then just one last question.

Are you guys seeing any impact from competitors, global competitors given the foreign exchange movements?

I think of your products as pretty defendable with good modes but anybody getting aggressive out there on price?

We have all type of competitors, right.

We have global competitors, we have regional competitors, we have local competitors, so we are working with these the whole time.

And I would say, as Nick said earlier, up to this point in time, we have not seen any change in the behaviors versus what we see the whole time when we do business on a day-to-day basis.

The answer to that is, no.

But of course, we have competitors, right.

They are everywhere and they are very attractive, of course, to come into spaces where we are because there's growth and there is good margins so but we have not seen any change in their behaviors up to this point in time.

Great.

Thanks a lot.

Thank you.

Our next question comes from the line of Jeff Sprague of Vertical Research Partners.

Please proceed with your question.

Thank you.

Good morning.

Good morning, Jeff.

Just a really quick one.

Just back on FX, I would imagine those hedges are in a handful of major currencies.

My question is if you, maybe that's right or wrong, but the larger question is if you think about that $110 million hedge gain that you have for 2016, does that fully cover kind of the top-line driven FX headwind you would expect in 2016 if we just run through at these rates for the rest of this year and into next year?

Okay, Jeff, a couple of questions there to go through.

One is it's largely in developed markets and those currencies that we're able to cost effectively hedge.

So currencies like the euro, the Canadian dollar, the yen, the Australian dollar, those are examples where we do the majority of our hedging.

Other currencies such as the Brazilian real, that's less cost effective for us to hedge and markets and currencies like that, our approach is to rely more on natural hedges, meaning how much do we source locally, our ability to price to offset some of the FX movement, our ability to manage our cost structure in those places.

Those are part of 3M's playbook on managing FX in more developing markets.

To your question on does this fully cover the currency exposure going into 2016, no, it doesn't.

It's never our intent with our hedging strategy, our financial hedging strategy to offset all of the risk.

We offset a portion of it to help minimize reduced volatility, and we also do it do it by time for us to adjust our business models accordingly.

It doesn't negate all of the risk in 2016, but it buys us more time and takes some of that volatility off the table.

Great, thanks.

I was just wondering on strategic investments, is there any change in tempo over the course of the remainder of the year?

No, there is not.

We are working our plan and we are a couple of years into it, as you know.

So there is no change in the tempo relative to our ERP program or investment in research and development in what we call the I3, or any small restructuring as we're doing here and there when we have the opportunity to do it.

So the plan from that perspective is working, and it's working well for us.

Okay, thank you very much.

Thank you.

Our next question comes from the line of Laurence Alexander of Jefferies.

Please proceed with your question.

Two quick ones.

Can you characterize how you see the setup for the year in European auto?

Some companies have talked about that as being the most likely area for [corry and shoots] in terms of domestic activity.

And secondly, are there any regions or end markets where, as you look at the sequential trends into March and April, the deceleration was sharply worse than you expected?

Well, on the European front, first of all, our automotive business globally is doing very well.

I think we have 9% growth in the quarter versus 1% growth in the auto build, so again, we are doing very, very well.

That's a global business.

We do well with all the global players.

Relative to Europe, we have good penetration on design and spec in there, as all other places.

And you could assume, you could assume but who knows that in the later part of the year, that export, generally speaking, for west Europe will improve due to the dollar versus euro and other currency, and by then by definition automotive will capitalize on that as well.

So assuming that that is correct as everyone talk about, then there will be improved export from Europe, generally speaking.

Automotive, by definition, is a big engine for growth in west Europe as we all know.

Now many of the automotive makers, they are designing and speccing in certain places and they produce in the other parts of the world.

But many of them in Europe are exporting quite a bit outside of west Europe in terms of the manufacturing.

To your second quarter, no, I will not say there was any change with more than which is a small piece is Middle East/Africa.

Middle East/Africa, as we all know and understand due to a year of political issues and challenges, so I would say that was not in March.

I think that was for the whole first quarter was a total different environment to do business in.

I think that's the only place that we could see any change in trends, right, but that's understandable in a way.

You have to manage it to the situation.

Okay.

Thank you.

Thank you.

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

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

This is Matt.

It's obviously a very busy earnings day, so we really do appreciate you spending the hour with us.

Thank you very much.

We look forward to speaking to you very soon.

Bye-bye.

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.