3M (MMM) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, October 22, 2015.

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

Thank you, and good morning, everyone.

Welcome to our third-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 today and then we'll take your questions.

Today's earnings release and slide presentation are posted on our investor relations website at 3M.com.

Please turn to slide 2 for a list of upcoming 3M investor events.

On Tuesday, December 15, we will discuss our 2016 business outlook on a conference call beginning at 8:00 AM Central time.

Please note we will not be hosting this year's outlook meeting in New York as has been our practice in recent years.

The conference call should last approximately 90 minutes so please plan accordingly.

Also, on March 29 of next year, we will be hosting an investor day at our headquarters in St.

Paul.

Lastly, note the dates for next year's earnings calls which are scheduled for January 26, April 26, July 26, and October 25.

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.

Please turn to slide 4, and I will hand it off to Inge.

Thank you, Matt, and good morning everyone.

As always, thank you for joining us.

3M delivered a solid operational performance in the third quarter.

In an external environment that will remain soft, our team posted strong earnings, organic growth in all geographic areas, and expanded margins.

Equally important, we continue to make investments and take actions to build strengths on strings and precision 3M for long-term success.

Let me first take you through the quarterly numbers.

Earnings per share rose to $2.05, which is a 3.5% increase year over year.

Company-wide, we delivered organic local currency sales growth of 1% with positive growth across all geographic areas.

Four of our five business groups grew organically paced by consumer at 5% and health care at 4%.

Acquisitions added 1% to sales in the quarter as we deployed capital to drive growth and strengthen the business.

The strong US dollar continued to impact our top line and reducing quarterly sales by more than 7%.

Total sales in the quarter declined 5% to $7.7 billion.

At the same time, we continued to generate strong product activity in the quarter by controlling those things within our control.

As a result, operating margins were 24.3%, up nearly a full percentage point year on year.

All five business groups deliver margins greater than 22%.

In the quarter, 3M also returned $2.2 billion to shareholders through dividends and share repurchases.

Now please turn to slide number 5. At 3M, we always have one eye on the microscope and one eye on the telescope.

The microscope view is about driving growth, productivity, and efficiency day to day, quarter to quarter, and year to year.

The telescope view is about the long term and making sure we are investing in the future.

The global economy continues to evolve as do the needs for us and for our customers.

3M is evolving as well, building for a future that will be more competitive, more dynamic, and more challenging.

We're doing that in large part to our three strategic levels, portfolio management, investing in innovation, and business transformation.

Let me start by describing our efforts to strengthen and focus our portfolio and ongoing processes -- an ongoing process we began in 2012.

In the third quarter, we closed two important acquisitions to both complement organic growth and enhance two of 3M's core platforms, personal safety and filtration.

The integration of those businesses is off to a good start.

At the same time, earlier this month, we announced a divestitures of our Library System business and our French license plate converting business, both within our safety and graphics business group.

After extensive review, we concluded that these businesses were worth more to an outside owner versus remaining part of the 3M portfolio.

Selling the businesses resulted in greatest value creating for the Company and for the shareholders.

Last month, we also announced that we are exploring strategic alternatives for Health Information Systems business, which is an industrial leader in health care coding software.

Options include spinning off, selling, or keeping the business.

Ultimately, we will choose the best path to benefit 3M, our stakeholders, and the business itself.

The selection of a strategic direction is anticipated by the end of Q1 in 2016.

In addition to portfolio investments in the quarter, we continue to invest in organic growth to research and development, in close proximity with our customers and the market.

Technology conversion will remain a key driver for the global economy into the future, and our investments will strengthen 3M's scientific edge.

And at our investor day in St.

Paul next March, we look forward to taking you through our new state-of-the-art research laboratory.

Finally, to make 3M more competitive, more productive, and more efficient, we are transforming our business processes.

The backbone is a new global ERP system.

As you recall, we are implementing this system on a regional basis starting in Europe.

3M made good progress in the third quarter including a successful deployment across the Nordic countries.

Our team is focused on continuing to execute a roll-out plan in West Europe with the United States to follow.

By 2020, our business transformation efforts will result in an estimated operational savings of $500 million to $700 million annually and a reduction in working capital of $0.5 billion.

Beyond our three strategic levels, we are taking other steps to increase our competitiveness and strengthen 3M for the future.

Today, we announced a restructuring plan that will result in the reduction of 1,500 positions.

Reduction will be preliminary focus on structural overhead, largely in the United States along with slower growing markets with particular emphasis on Europe, Middle East, Africa, and Latin American.

On a pretax basis, we would take a charge of approximately $100 million in the fourth quarter, related to this plan with savings of approximately $130 million in 2016.

Each and every day as I look across our enterprise, I grow more confident in our future.

We are taking action to build a stronger, more agile, and more focused Company that will compete and win, not just today but well into the future.

Thank you, and now Nick will go through more details on the quarter.

Nick?

Thank you, Inge, and good morning, everyone.

Please turn to slide 6 where I will cover the elements of third-quarter sales growth.

Q3 organic growth was 1.2%, largely driven by higher selling prices.

Volumes were up slightly in the quarter.

All geographic areas posted positive organic growth in the quarter.

In August, we completed the acquisitions of Capital Safety and Polypore's Separations Media business.

The net impact from acquisitions and divestitures added 1 percentage point to sales growth in Q3.

Foreign-exchange impacts reduced sales by 7.4 percentage points, with notable year-on-year declines in the euro, yen, and Brazilian real.

These currencies devalued versus the US dollar by 15%, 14%, and 37% respectively.

In dollar terms, worldwide sales declined 5.2% versus the third quarter of 2014.

The United States delivered organic growth of 1.5% led by consumer, health care, and safety and graphics.

Our US industrial business, which experienced softer end market conditions in a challenging year-on-year comparison, declined organically.

Asia-Pacific organic sales increased 0.4% in the quarter where four of our five business groups posted positive growth.

Organic growth was led by health care and safety and graphics, while electronics and energy declined year on year.

Within Asia-Pacific, Japan increased 1% organically or 5% excluding electronics.

As you may recall, last fall we acquired the remaining 25% interest in our Sumitomo Japan subsidiary.

The 3M Japan team continues to execute well and is delivering strong results in 2015.

China/Hong Kong's organic growth was down 2% or up 3% excluding electronics.

Moving to EMEA, we saw organic growth of 1.5% with West Europe flat, Central East Europe up double digits, and Middle East Africa down slightly.

Finally, Latin America/Canada delivered organic growth of 2.3% versus last year's third quarter.

Mexico continued its trend of strong double-digit organic growth increasing 13%, while Brazil declined 2%.

Please turn to slide 7 for the third-quarter P&L highlights.

Company-wide, third-quarter sales were $7.7 billion with operating income of $1.9 billion.

Operating margins were 24.3%, an increase of 90 basis points year on year.

As you see on the right-hand side of the slide, the combination of lower raw material costs and higher selling prices contributed 170 basis points of margin expansion.

Productivity added another 20 basis points to margins as we continue to prioritize investments, benefit from past portfolio actions, and drive operational efficiencies through Lean Six Sigma.

Foreign currency impacts, net of hedge gains, increased margins by 20 basis points.

The impact from recent acquisitions reduced Q3 operating margins by 60 basis points as we began to absorb purchase accounting adjustments and work through integration plans for Capital Safety and Polypore's Separations Media business.

Strategic investments reduced margins by 10 basis points.

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

Through nine months, we have increased total Company operating margins by 1 percentage point to 23.7%.

Let's now turn to slide 8 for a closer look at earnings per share.

Third-quarter earnings were $2.05 per share, an increase of 3.5% year on year.

The combination of organic growth and margin expansion contributed $0.11 to our earnings growth this quarter.

This results include a negative $0.04 impact from higher year-on-year pension and OPEB expense.

Our third-quarter tax rate was 29.6% versus 30.3% in last year's comparable quarter, which increased earnings by $0.02 per share.

And average diluted shares outstanding declined by 4% year over year, which added $0.08 to third-quarter earnings per share.

The acquisitions of Polypore's Separations Media business and Capital Safety reduced earnings by $0.04 per share in the quarter due to purchase accounting adjustments and one-time expenses and integration costs.

In the fourth quarter, we expect $0.02 per share of additional dilution from these transactions.

Foreign currency impacts net of hedging reduced pretax earnings by approximately $95 million, or the equivalent of $0.10 per share.

For the full year, we expect foreign currency impacts to reduce earnings by approximately $0.40 per share.

Let's now review cash flow performance on slide 9. We generated $1.7 billion of operating cash flow in the quarter, down slightly from last year.

Third-quarter capital expenditures were $354 million, in line year on year.

For the full year, capital expenditures are expected to be in the range of $1.4 billion to $1.5 billion versus a prior expectation of $1.4 billion to $1.6 billion.

We generated $1.3 billion of free cash flow and converted 101% of net income to cash.

Free cash flow conversion for 2015 is now expected to be in the range of 95% to 100% versus 90% to 100% previously.

As a reminder, our fourth-quarter free cash flow conversion is typically the strongest of the year.

We returned $2.2 billion of cash to shareholders in the third quarter, an increase of $369 million year on year.

Cash dividends were $635 million, and gross share repurchases were $1.5 billion.

For the full year, gross repurchases are now forecasted to be in the range of $5 billion to $5.5 billion versus a prior expectation of $4 billion to $5 billion.

Now let's review our business group performance starting on slide 10.

Industrial posted sales at $2.6 billion in the quarter, up slightly organically.

Our automotive OEM business grew mid-single digits as we continue to gain share by increasing 3M's content per vehicle.

This business consistently grows faster than the rate of global car and light truck production levels.

3M purification, abrasives, and industrial adhesives and tapes also posted positive organic growth in the quarter.

Our advanced materials business declined primarily due to weakness in the oil and gas market.

The acquisition of Polypore's Separations Media business added 70 basis points to industrial sales growth in the third quarter.

On a geographic basis, industrials growth was positive in Latin America/Canada, Asia Pacific, and EMEA, while declining in the US.

The industrial business delivered operating income of $580 million in the quarter.

And operating margins were 22.5%, up 30 basis points year over year, or up 90 basis points excluding the Polypore's Separations Media acquisition.

Let's now turn to safety and graphics on slide 11.

Sales in safety and graphics increased 2.9% organically to $1.4 billion.

Organic sales growth was strong across much of the portfolio including commercial solutions and our Heartland personal safety business.

The roofing granules business posted double-digit organic growth in Q3 while traffic, safety and security systems declined year on year.

Complementing safety and graphics organic growth was the acquisition of Capital Safety, which added 4.2% to sales in the third quarter.

On a geographic basis, organic growth was led by Asia Pacific, EMEA, and the US while Latin America/Canada declined.

Operating income was $324 million, and operating margins declined 0.6 percentage points to 22.9%.

Excluding the Capital Safety acquisition, margins rose 1.3 percentage points to 24.8%.

Please turn to slide 12.

The health care business generated third-quarter sales of $1.3 billion with organic growth of 3.7%.

Our medical consumables businesses, namely infection prevention and critical and chronic care, along with our oral care business, were up mid-single digits year on year.

Together, these businesses represent three-quarters of our health care business.

Health information systems and food safety enjoyed double-digit growth in Q3.

Drug delivery declined organically as its challenging year-on-year comparisons continued into the third quarter.

The Ivera Medical acquisition added 90 basis points to quarterly growth.

Integration of this business is going well, and it is exceeding sales and profit objectives.

Our health care business grew organically in all geographic areas led by Latin America/Canada, Asia Pacific, and the US.

The business continues to drive penetration in developing markets with 10% organic growth in the quarter.

Countries with notable strength included Taiwan, China/Hong Kong, India, and Mexico, all up double digits.

Health care's operating income was $432 million with margins of 32.1%, up 110 basis points year over year.

Next, let's cover the third-quarter performance of electronics and energy.

Please turn to slide 13.

Sales for this business were $1.4 billion in the quarter, down 2.8% organically, while operating income increased slightly to $342 million.

Portfolio management actions, raw material benefits, and the team's relentless focus on operational excellence drove a 240 basis point improvement in operating margins to 24.9%.

Organic sales declined 3% on the electronic side of the business with electronics material solutions up slightly, and display materials and systems declining.

In our energy-related businesses, organic sales were down 2% similar to pass quarters, with growth in telecom more than offset by declines and electrical markets and renewable energy.

On a geographic basis, organic growth increased in EMEA, while the US, Latin America/Canada, and Asia Pacific all declined.

Please turn to slide 14.

Third-quarter sales in consumer were $1.2 billion with organic growth of 5%.

Organic growth was led by our stationery and office supplies business, with strong back-to-school sales in Scotch home and office tapes, Post-it, and Command products.

In the home improvement business, our Filtrete brand filters, which significantly improve air quality in the home, also helped propel growth in the quarter.

Our home care business also delivered positive organic growth while consumer health care declined slightly.

Looking at the business -- consumer business geographically, organic growth was led by the US, Asia Pacific, and EMEA, while Latin America/Canada declined.

Operating income increased to $293 million.

Margins were 25.2%, up 2 percentage points year over year.

That wraps up our review of the third-quarter business results.

Please turn to slide 15 where Inge will provide an update on our 2015 planning estimates.

Inge?

Thank you, Nick.

As we all know, the current economic growth environment remains challenging.

Against that backdrop, today we are updating our full-year outlook for 2015.

We now expect organic growth of 1.5% to 2%; this is prior guidance of 2.5% to 4%.

Foreign currency translation will reduce sales by approximately 7% compared with a prior range of 6% to 7%.

Excluding the impact of restructuring, we expect full-year earnings per share in the range of $7.73 to $7.78.

We previously expected EPS in the range of $7.73 to $7.93.

On a GAAP basis, we expect EPS in the range of $7.60 to $7.65, which reflects the expected $0.13 restructuring charge in Q4.

We also now anticipate the free cash flow conversion rate of 95% to 100%, up from the prior range of 90% to 100%.

So thank you for your attention.

We will now take your questions.

(Operator Instructions)

Scott Davis, Barclays Capital.

Good morning, Inge and Nick.

Good morning, Scott.

I think a lot of us are trying to figure out what -- more macro than 3M specific but this is the second quarter in a row where you have taken down your top-line core guidance.

Trying to get a sense of how much of the decline you guys think might be related to inventory de-stock versus actual sell-through and just the state of where you think inventories are right now.

Clearly, folks are little bit more cautious so you can see -- it would be logical that folks be decreasing inventories right now, I suppose.

Right?

I think it's a combination, Scott.

First of all, when you look upon the decline in terms of IPI growth, we have all seen that going down quarter by quarter during the year.

And that is related both to United States and to China and Germany.

You can say basically on a global base.

I think that has one impact.

And then of course, enterprises around the world look upon the balance sheet and the cash flow and type of work down there, the inventory as well.

I would say when we look upon our performance in terms of growth, yes, it's slower during the year.

But we don't believe and we know that we are not losing out in terms of penetration or market share.

But I think it's a combination of both of them.

So we clearly see -- we're ending out the year I would say at the lower global-growth rate in the economy versus what all of us anticipated as we went into the year.

And when I look upon that, I feel personally very good of how we as a team.

And I'm talking now about all the 90,000 at 3M and be able to manage that through and improve most other metrics when it became more of a challenge for us to grow.

But we are growing and we have margins expansion and very good cash flow.

But also your question, I think it's a combination of both.

And I think people would like to look out a couple of years.

Now what will this mean.

And I think everything you see that we have been doing this year in terms of our portfolio work and our investment in R&D and the business transformation, in addition to the announcement today of a restructuring is for us to be prepared as we move ahead in order for us to get good return, despite maybe something that has been difficult for us to control, which is the growth in IPI and GDP.

I hope that helps.

It does.

Help us understand, how do you plan for this type of an emerging market slowdown that we're seeing?

Really, the last time we had a major EM dislocation was in the 1990's.

It was a long time ago and it's impossible to hedge for the local currencies.

It's tough to raise prices when you have -- when you're trying to raise prices in an economy in a recession.

And then at the same time, some of these countries like Brazil are kind of hard to restructure.

It's not easy to fire people there either.

How do you plan for it?

How do you change?

Do you just keep moving forward like you always have?

Or do you start to think in terms of taking real fixed assets out and dis-investing in some of these areas?

No, you just not continue as you have done in the past, of course, because the landscape changed and then you have to -- that's always say regarding the forest and you go out with your map and the map and the forest doesn't connect any longer.

The forest is always right.

So you cannot continue with your map.

If you think about that as a business plan.

So we are doing that.

When I look back over the years here, it's not something that we react to just today based on a quarter that is soft doing one way or the other.

You will go back to China, for instance.

We have not added people there for 12 to 18 months.

We didn't reduce by definition but we adjusted and slowed down the way we added people.

Brazil today, you are correct, Brazil today will still in my view and I think in most of our views, be a challenge maybe for the next two years.

And you can see also in the restructuring announcement today, we are talking about Latin America as a primary focus and inside of that is, of course, Brazil.

So what you have to do is to surgically go in and address it.

I think that's serving us well with the model we have that is very much around localization meaning we have a managing director in each country that is leading the operation.

And there is an empowerment around that.

But to get a lot of help from us, I can tell you that's got in order to make sure that we take action.

So just careful in terms of building out assets in terms of manufacturing and so forth that you maybe did differently five, six years ago.

And just see how you can serve those markets differently.

Now you heard, as Nick said, if you take our healthcare business that is growing very well and is very profitable, they had 10% organic local currency growth in developing economies in the quarter.

Consumers doing well, et cetera.

When I look upon it, there is a shift in between developed and developing.

We adjust accordingly.

There are still big penetration opportunities in those countries.

But you are more cautious.

You are looking upon it slightly different and make sure you position yourself for the long term.

Completely understand.

Thank you, guys.

I'll pass it on.

Thank you, Scott.

Hope you're doing well.

Andrew Obin, Bank of America Merrill Lynch.

Good morning.

Good morning, Andrew.

Instead of asking a question on margins, I just want to zero in on electronics and energy.

If we go back to 2013, you know, the margins bottomed out at 15%.

And you reported a margin almost 25%.

Could you just focus on that business and explain to us what is it you are able to do there?

And how does it sort of translate into changes that have taken place at 3M at large?

Andrew, good morning.

Yes.

You are right.

I think it started it out at like 15.7% or something and now it's an incredible improvement relative to margins.

What has happened is first of all, we realigned the businesses, as you maybe recall.

We did that in late 2012.

And one of the reasons for that was we reduced the number of business groups, right.

So we tried to build out relevance for our customers.

We reduced a number of divisions, meaning tried to get out more efficiency, more productivity, and get more alignment with the market and the customers.

So we were able to respond faster with technology platforms.

If you take this specific business, electronic and energy, we went from eight or nine divisions to four divisions.

We relentlessly looked upon the structure of it.

And we reallocate assets in a better way that we had for that specific business that they have to utilize maybe in between three different business groups.

Now we add it together so they could manage it which helped them to drive efficiency in the manufacturing and be able to respond much faster to customer demands.

And also they addressed a lot of -- I would say issues in the portfolio.

So you remember, we had this analysis where we had Heartland divisions strategic or push forward and then under strategic review.

They addressed all of that.

As I have said earlier and I think this is now showing again.

I have said the last two quarters that the margins for that business is now at the point that it's not dependent on big growth on top line only to drive margins.

So we have now proven that for the third quarter that the model is now streamlined, efficient with very good combination of manufacturing, commercialization, and R&D capabilities in a very streamlined organization.

And I would say, you referred to rest of 3M.

It's the same everywhere.

But this business group could get a big lift because where they started.

One business that you see have a very good result this quarter is consumer.

Consumer 2012 also started with eight divisions, have now four divisions.

We worked to streamline organization.

We took out unnecessary layers in the organization.

We have addressed span of control and levels in the organization.

And that is happening everywhere in 3M.

You see bigger benefit from some short term because they had a lower starting point.

But EEBG had the lowest, right.

If you are running 15.7% operating margin and are part of 3M, that is not us.

I will complement that business group for taking that on and working through.

Today we see the result.

It's nice to see.

And a follow-up question on China.

Do you think you will see any the benefit from RMB devaluation offsetting just weaker macro there?

It's an export business, as I understand.

Andrew, we are watching for that.

And the change -- the movement in the renminbi has been fairly modest.

And we are not seeing a movement on that.

And if it is, we expect it to be minor.

Although we do see it as a positive development for that portion of the business, but minor at this point.

Thank you.

Thank you, Andrew.

Nigel Coe, Morgan Stanley.

Good morning, Nigel.

I just wanted to pick up on the inventory question.

You call out the inventory you had within Q2.

Clearly, it's impacting the Q3 as well.

Do you have any sense on how deep we are into this correction and when we might get into a situation where a sell-through is somewhat equal to selling?

It depends on which business group, right.

Which market you are in.

But I would say that my own observation, when I look upon it for the last three to five years, generally speaking, it's a much better correlation in between selling and sell out for most companies in most markets.

And I would say, you think about retailing and consumer much, much better.

So you can see a slight change from the ending of a quarter to a new quarter based on maybe the season and so forth.

But I would say it's generally speaking very well balanced today, which is also then giving us an opportunity to be more efficient, in fact, relative to all manufacturing and production and so forth.

To give a timing on it is difficult.

I cannot do that, Nigel, to be honest with you.

It is very difficult to do.

I think overall, management of inventory is handled much, much more effectively, generally speaking, which is good for all of us.

Okay.

That's very fair.

And then just honing in on Q4.

It looks like you're forecasting 1% midpoint core growth for Q4 based on what you did in Q3.

I'm just wondering though given the developments through the quarter, in particular, the little step down in the EM currencies, have you seen any change in behavior in places like Brazil or Southeast Asia, maybe even Canada or Australia, on the back of these movements?

Maybe in particular, just hone in on pricing power because you successfully continue to pass through a lot of currency weakness in price.

I'm wondering has there been any change in behavior over the past few months.

Nigel, in the last few months, what we have seen in FX movements more recently has been more focused on developing market currencies whereas early in the year, it was more in developed market currencies.

How you are seeing that manifest is, developing market currencies is where 3M has a little more pricing power ability to raise price to offset that FX movement.

That's why we are seeing the 110 basis points of price growth in Q3.

About 75% of that 110 basis points we attribute to FX movements.

We've seen some shift though very, very subtle in that as the year has gone on.

But no change in your ability to pass on that weakness in price?

Yes, that part -- parsing it out between developed and developing has remained remarkably stable.

Okay.

Thanks a lot.

Steven Winoker, Bernstein.

Thanks, and good morning, guys.

Good morning, Steven.

I just want to follow-up Nigel's question quickly on the pricing point.

You mentioned, Nick, that 75% was FX related.

As you look at unit volumes versus non-currency related pricing going into Q4, are you therefore implying a pickup on unit volumes at this point?

Our range for the year of 1.5% to 2% does not anticipate a very significant movement in price growth in Q4 from where we have been running in the first nine months of the year.

I think we're expecting it to be very close to where we have been running so far this year.

Okay, including unit volumes?

And then unit volumes will -- depending on the implied range for Q4 that a 1.5% to 2% says for the year, unit volumes could range to slightly negative to slightly positive in Q4.

Okay, great.

On the restructuring and ERP pacing, one of my questions here is you have called out that ERP -- the savings from ERP over time, I think you mentioned again in this call $500 million to $700 million annually, was it?

And the restructuring, you've got another $130 million in 2016.

First of all, is that incremental to the ERP, the trending for the ERP pacing?

I assume there is an enablement.

Are they completely separate?

Is one enabled by the other?

Is there any financial overlap between the two?

There is some overlap between the two that the progress we're making with business transformation and the actions we're taking have enabled some of the restructuring actions that we announced this morning.

We still see ourselves on that path from the $500 million to $700 million.

This restructuring announcement enables us to accelerate the path to that $500 million to $700 million a little faster.

That's a portion of that $130 million of savings.

It's by no means the dominant portion of that savings we're talking about.

Okay.

And given the short payback period there, are you -- it just makes me think that there is still a lot of opportunity within 3M for additional restructuring.

Is that an unfair comment?

I don't know if it's an unfair comment.

We are living in a competitive world and we adjust as we go.

When you look upon this is, we are addressing here areas where we believe we will get very good return on the investment we are doing here in Q4.

And it's very targeted.

It's very, very targeted relative to where those opportunities lay.

And if you think about what we have done here over the last 3, 3 1/2 years, we have addressed many things in terms of combining divisions and reduced a number of business groups, et cetera.

And now the efficiency is now at the point where we can take the next swing of it.

I would say that when you look upon the organization like ours, we have to make sure that we really have the commercialization capabilities in place, that we have continued focus on research and development.

And also I will say around the Lean Six Sigma, making sure in times like this that we maybe even add more to Lean Six Sigma.

What you have to ask yourself is structure, management layers, and so forth, which is necessary sometimes but then you come into other times where you just prepare yourself for the future.

To answer your question, it's very difficult to say if you need to do something more.

You play it by ear or by -- and see how the competitive landscape look like and you adjust to that.

Our commitment is to grow our business and have a good return back to our shareholders.

Thanks for the color.

Thank you.

Deane Dray, RBC Capital Markets.

Thank you.

Good morning, everyone.

Good morning, Dean.

I'd like to come back to a question I had asked when you first made the Polypore announcement and so we tabled the question until it closed.

And I'd be interested in hearing the ways you are envisioning leveraging this ultra-filtration technology across 3M.

It reminds me a bit of Ceradyne and the way all those different product areas that would benefit from ceramic technology.

So how do you expect to leverage Polypore?

I know it's in industrial but I would imagine there is some interesting applications on the healthcare side.

You are correct.

It's housed now, if you like, in the industrial business group with very close linkage to our purification business because that -- well, you maybe from a commercialization perspective see the fastest opportunity for us to leverage both of those businesses.

When you look upon the technology, the way it can move out, I would say it's maybe in life sciences.

We don't call it life sciences.

But it's a combination of healthcare and biotech where there is big opportunities for us.

We do business in the biotech area, not necessarily with our healthcare business group but very much with the purification business.

And there is big opportunities for us that we can build out.

At this point in time, the total focus is short term to integrate the business, make sure we get full leverage based on what we are paid, and can give back to the shareholders based on what we paid for that business.

But you are right.

I think you have more opportunities in businesses going versus healthcare, life sciences, biotech, than you have for instance, in consumer and safety and graphics.

But we take it seriously now in terms of integrating the business and execute the plan, as the first step.

So we don't migrate the resources in R&D and start to -- they need to present very specific programs and opportunities in order to get the resources to expand the business as we move ahead.

So more to come, Deane.

We are now focused to integrate the model and execute.

Second question.

I was hoping you could share with us some of the decision-making and the timing on the move of healthcare IT into strategic review.

So what prompted it?

What changed?

So we have the vernacular correctly within how you frame your businesses.

I would assume this had been in Heartland, not pushed forward.

So what bumped it into strategic review and when?

First of all, it was in Push Forward, was not in Heartland.

It was in Push Forward.

I think the important thing there was for sure not in the first category under strategic review.

It is a business that is doing very well.

I think it's our responsibility to look upon all businesses to say, can we get better benefit in a different business model?

Is there more value that can be created in a different way for some of our businesses?

This business could be one of them where we would like to evaluate.

And as you know, it could be a spin, it could be a sell, or we keep it.

We are making that evaluation now.

And we will know because I would like to move forward and ahead of our own processes.

At the end of Q1, we should know how the outcome of that will be.

If you go back and look upon -- in my view at least today, we have a very good process in order to measure our businesses and try to understand where we can leverage even more.

And in some cases, we have to ask the question, can we lever more and can there be more return to shareholders in a different business model?

I think that's my responsibility to do.

And I think it's our team's responsibility to do, and then we do it.

So it's not always a business that is under performing that you need to evaluate.

Sometimes, in a case like this, you have to look upon it.

And it has been on my mind for some time I would say.

But I'm very careful to not overload organization initiatives relative to the portfolio.

My first objective was to make sure that we got all businesses to a respectable position.

And I think we are there now as you have seen with the result in EEBG as well.

There is a time for everything.

Now we are here.

We have announced it.

We are transparent about it.

And then we have to see at the end of Q1 what the next step will be.

Any case, it's a fantastic business.

If it's with us, if it's a spin, or it's sold.

It's just [a fantastic].

So there is nothing wrong with this business.

It take courage to take a step like this when you have a business doing as well as this is doing.

Thank you.

Jeff Sprague, Vertical Research Partners.

Thank you, good morning, everyone.

Good morning, Jeff.

Could we just come back to restructuring?

Inge, as you had pointed out, you have done a lot of internal blocking and tackling in this consolidation of these segment divisions underneath the segments.

How would you size what you are announcing here in Q4 relative to kind of the normal ongoing restructuring that 3M must do kind of every day?

Yes.

This is of course bigger.

If you are talking about where you normally type of challenge every step on the way.

Right?

That's what you are talking about.

Yes.

So those so called -- I would say that is more an adjustment of the organization that you do.

And you ask yourself the question every time you get an opening, do we need to replace it and so forth.

This is more sizable at this point in time.

And why now is very much that I feel now that we have a very good handle on our model in terms of operation.

So it's like when you go through everything as you describe it, there are pieces that are moving the whole time in your portfolio, et cetera.

Then you are coming to more of a stabilization.

Now you look upon it to say, okay, is there more that can be done and should we do it now.

And so it's 1,500 people.

It's sizable in my view for each individual person that is impacted by it.

So I'm very sensitive to the whole situation.

But it's something that we need to do in order to build strength on strength.

So people can view it saying 1,500 is that a lot or is that not enough?

For us, it's perfect at this point in time.

And I don't underestimate that because I understand the impact for each individual of those 1,500 that need to go away and do something different.

As you have restructured these other segments though then there's ostensibly, there is excess overhead in facilities.

Those have just kind of attritted down through this process?

Or would we expect that at some future date not too distant in the future, there could be other moves like this?

As I said earlier, in my view and our view, is as we move ahead here, we have an opportunity in our supply chain area.

That will be maybe something we will talk about as we move ahead.

But that's different, in a way.

That's about the whole model of us improving our balance sheet or turns and reduced inventory and so forth.

If you do that as you go down the line, you cannot think about that less distribution centers, maybe a few manufacturing sites, et cetera.

So the beauty with all that despite we are doing very well.

There are still opportunities in 3M in order to create value.

Just one really quick one.

Was there any change in kind of the monthly trends in your business, Inge?

We have heard from some that July and August was okay, and then September was much more challenging.

Did you see anything like that across your business?

Jeff, this is Nick.

No, we didn't.

As we look at the three months, they were all very similar.

Thank you.

Thank you, Jeff.

Steve Tusa, JPMorgan.

Good morning, thanks for fitting me in.

Hello, Steve.

The electronics margins were pretty strong despite the continued revenue pressure there.

What's going on there in electronics?

And I guess where do you go from kind of this higher base?

Well, Steve, Inge talked a little bit about this earlier about the margins going on there.

There are a number of things.

Some of the consolidations that have occurred, the push on productivity, and relevance with our customers.

And building a business there that is not dependent on growth as a way to generate a margin in this range.

That going forward, this is still a business that we see opportunities for growth in the future.

So we continue to invest in this business and as far as margins going further, I'm not ready to make a statement like that yet.

But we continue to see this business growing.

And the margins that are at or slightly higher than the total Company margins.

Stepping back to the macro a bit.

I guess from your commentary, I just want to make sure that I'm reading what you're saying the right way.

You're basically saying that there is not a lot of, you know, inventory dynamics going on here.

So I guess as we look at the second half of the year with volume flat, is there any real impetus for a pickup as you move into next year?

Or is this kind of the -- look, this is the environment we're in.

That's why you guys are taking restructuring.

You are holding the line on price a little bit better than expected.

I just want to kind of make sure I parse out the macro comments and understand where your head is at on the degree of potential acceleration or good news that could come moving beyond Q4.

Steve, as we look forward, we remain constructive on our view of the global economy for 2016.

Albeit we are expecting a similar slow growth environment to what we are seeing in 2015.

You're talking -- when you ask about impetus of other things changing, as we look at 2016 for us, in addition to that slower growth organic world, we are expecting raw material benefits to continue into 2016 but at a lower level than what we have seen in 2015.

This restructuring that we discussed this morning, that will be accretive to our views for 2016.

Pension OPEB, right now we see that as a benefit to us in 2016 of approximately $100 million.

And we'll, of course, we'll continue to drive productivity in our Company as well as getting benefits from our capital allocation strategy that we have been following and will continue to follow.

Headwinds that I see right now going forward into 2016, FX has been a headwind throughout 2015.

We see it being a headwind for us in 2016, just not on the same level.

We see it at a lower level than what we have seen in 2015.

And then just to round it out as I look at 2016, I also see interest expense as we are following our capital structure, capital allocation strategy, we see interest expense going up in 2016.

So I guess does year, I guess next year, can you still kind of get to that longer-term model that you guys have talked about, that kind of close to double digit even with current volume levels?

Yes, Steve.

We are still in the stages of putting together our entire 2016 plan.

We'll share more details on that on our December 15 conference call.

All right.

I had to try.

Thanks.

(laughter)

Thank you, Steve.

Always a pleasure.

(Operator Instructions)

Julian Mitchell, Credit Suisse.

Hello.

Thank you.

Just following up on the comments around capital allocation and what that means for interest expense and so on.

More broadly, when you are thinking about the buyback target for the medium term that you laid out a few years ago.

Maybe talk about what's the scope for that to move up and how you view the credit rating in the context of the propensity to increase capital allocation.

Thanks for the question, Julian.

We are continuing to follow our capital allocation and capital structure strategy that we've laid out.

We do see that we are continuing to make progress on that capital allocation strategy.

You saw in 2015 us deploying $3.5 billion into mergers and acquisitions.

Our plan does call for us leveraging our balance sheet to grow the business, investing first in the business, but maintaining some flexibility for opportunistic deployment.

We're continuing on the path we have laid out, Julian.

In regards to your question about debt rating, as we have indicated in the past, we would consider a downgrade for the right value creating strategic opportunity.

Those include acquisitions, as well as times when we see 3M as a good value to buy ourselves.

Thanks.

And then just a very quick follow-up on emerging market demand.

Obviously, a lot of people have expected that to tail off for 3M in recent months.

It didn't happen in Q3.

Just to confirm, as you entered this quarter, how were the emerging market organic trends in aggregate?

Were they fairly similar to a few months ago?

Yes, I think so.

Maybe even -- yes.

If you take in totality, yes.

China shifted a little bit positive for us actually in this quarter.

Not much but a little bit.

So you go minus 3% to plus 3%.

So you're not overly happy with core business China 3% but it's much better than minus 3%.

I would say I think we went sideways with almost 2% growth in what I call developing economies.

My view there is you adjust your organization as you speak.

But I still, specifically in domestic businesses which is for us is healthcare and consumer, huge penetration opportunities.

For the rest, it would be very much based on the global economy and export businesses, et cetera.

I would say in between Q2 and Q3, we went sideways with some small growth.

As you know, Brazil is a tough time.

We're minus 2% in Brazil but that was slightly better than in Q2 anyhow.

So it's a tough situation but it's absolutely not hopeless and we have penetration opportunities that we try to go after that.

Great.

Thank you.

Laurence Alexander, Jefferies & Company.

Good morning.

One quick one.

With the productivity relation to the ERP and supply-chain improvements, do you see the benefits flowing through in a fairly even cadence from here?

Or will there be extra costs in 2016 and 2017 that will dilute the impact initially and then make it stronger later in the decade?

Laurence, two parts to the question that I will go through here.

First of all, from the cost standpoint of our investment in business transformation, we're at a point where we are at the peak of what we are investing in this.

And any incremental investments would be small or nonexistent of what we're spending on that initiative.

In the coming years, we expect to see ourselves growing to build to that $500 million to $700 million of operating income benefit that we have shared.

I'm quite confident, as we talk in December 15 about our outlook for 2016.

You'll start to see some of those benefits being shared at that time and how they'll impact 2016.

Starting small but then growing as we progress to 2020.

Thank you.

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

I will now turn the call back over to Inge Thulin for some closing comments.

Thank you.

To wrap up, we continue to deliver a solid operational performance in 2015.

And I thank our whole 3M team for an outstanding effort.

This quarter, we expanded margins and posted strong earnings while taking many actions to strengthen our long-term competitiveness.

We are executing our plan and controlling what we can control in building for the future.

Thank you again for joining us this morning and have a good 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.