3M Company (MMM) — Q1 2015 Earnings Call Transcript

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 Chief Executive Officer; 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 views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to Slide 3, and I will hand it over to Inge.

Thank you, Matt, and good morning, everyone. I appreciate you joining us today. 3M executed well and delivered another solid quarter of operational performance. We once again posted broad-based organic sales growth and continued to improve profitability. Importantly, we achieved these against a more challenging first quarter economic backdrop. The rising U.S. dollar negatively impacted revenues and profits, offset in part by hedging gains. In addition, global economic growth slowed, which we saw a bit in our growth figures. As 3M always does, we continue to manage two 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 U.S. 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 portfolio actions over the last three years are paying off. This quarter 3M took a number of additional steps to strengthen 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 the acquisition of Ivera Medical, a good addition to our Health Care 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.

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 and geographic areas. Worldwide organic local currency growth was 3.3% with volumes up 2.3% and selling prices up 1%. Two Health Care 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 U.S. dollar reduced sales by 6.5%. In U.S. dollars total sales declined 3.2% versus the first quarter of 2014. The U.S. dollar strengthened significantly versus several foreign currencies during the first quarter, continuing the trend that began in 2014. In particular, the average euro rate declined 18% versus the U.S. 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 U.S. 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 productivity 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 remains 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 continue 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 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 geographic mix, which was influenced by the strong U.S. 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 number 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 U.S. 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 number 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 industrial adhesives and tapes. On a geographic basis, Latin America/Canada set the pace, with organic growth of 5%. The U.S. 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. Workers safety remains a high priority for manufacturers globally, and we're 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 U.S. 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 in 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 U.S. 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 evolve in developing countries. In March, we successfully closed the acquisition of Ivera Medical Corporation. This business will enhance 3M's vascular access products offerings to 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 and 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 continue to see strong consumer demand enhanced by spec-in wins 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 U.S. 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 U.S. 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 U.S. and pension postretirement 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 will 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 U.S. 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 that 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 U.S. 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 am 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, focusing 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 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 strengths. I have talked to you before about 3M's four fundamental strengths, which are leveraged across our enterprise: technology, manufacturing, global capabilities, and our brand. On technology, for example, we increased R&D investment in the quarter while at the same time managing our SG&A investments very carefully. We expanded 3M's global capabilities including breaking ground on the 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 with both 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 tagline: 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 economic headwinds, and we continue to make investments for the future. And by that we are now open to take your questions.

Inge, perhaps maybe just focusing on organic growth for a second, the 3% plus that you did this quarter was towards the lower end of your full year range, and yet as you progressed 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 in perhaps seeing some organic growth acceleration as the year progresses.

Yes, you're right. It was a little bit slower than we have seen in the past. The way I looked 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. So I think first of all, our performance relative to IPI is in the level as we have seen in the past. I think when you look upon our performance, you see a little bit 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 Systems, that is I would say, a project-based business. So you will have some businesses going in and out of that business based on year-end or quarter. So when I look at Health Care, that's basically where you can see. And our core business in Health Care did very well again, and as you see we maintained very high margin, et cetera. And 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 due to some uncertainty generally speaking around what will happen to export due to the dollar strengthening and also what you saw in oil. I think people, specifically not so much what is designed in and spec-in, 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. And 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. So again Electronic 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. Safety and Graphics had also a good quarter, and specifically in personal safety that is going into the respiratory business, we are doing very well on a global basis, even it was maybe a little bit slow in West Europe in the quarter, but very well in Asia again and throughout APAC doing very, very well. And then finally, Consumer, that you saw had a 2% growth; 4% was in the U.S., which is our bigger business. And I will say that the slowness was in West Europe and Latin America was slow for them. So as we all know, a quarter stops and ends there is always something going in and out of the quarter. I look very carefully at 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 new story is coming in Q1 or Q2, et cetera. We have for the last two years on that comparison been in the range of 4% to 6%, always in 4% to 5% during that period. So this was on the low end, but still in the 3% to 6% that we have set for the year and when we look upon and talk to the businesses what we see going out for the year, we say that maybe Q2 would be very similar to Q1, maybe slight improvement, but we do not count too much on that. And then you will see for the rest of the year that more growth will come.

And maybe my one follow-up question for Nick. Can you decompose the price cost 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, happy to break that down. As I said earlier in total those components price in raw materials added a 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 in total what we recorded 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.

It's an interesting question, Inge. Considering China, a 7% growth is very respectable, while the Consumer segment is only up around 2%. It looks like you're performing well in Auto and Industrial sectors, but the Consumer segment appears to present some challenges. Could you clarify if this is related to brand pricing or focus? When we look at Consumer growth in China, there seems to be potential for you, yet it feels like your overall business presence there isn't substantial and doesn't seem to be growing rapidly.

First of all, yes, we perform well in China. We have strong growth. This quarter, we experienced 7% overall growth, and 8% in our core business if we exclude electronics. As I mentioned earlier, the progression of our business areas is led by Industrial, followed by Electronics and Energy, then Safety, followed by Consumer, and finally Health Care. The Consumer segment constitutes a smaller part of our business in China, and Health Care is also comparatively small. The key to your question lies in brand awareness. Our brand is something we are familiar with, and it takes time to establish that awareness in these categories. We do see growth potential in China for Consumer, but I believe Health Care will gain traction more quickly than Consumer. I agree with your observation; I hope we will see more growth at this point. While I would like to see our growth pace increase over time, we have strong brands. Building awareness and expanding in these categories takes time, and we are cautious about our channel partners in China. Over time, we expect our business to grow significantly. We must ensure that our growth is accompanied by good profitability, as it’s not solely about market share. We want to invest in sectors that yield strong returns, and there are excellent opportunities for us in China, especially in Industrial. For instance, our purification business is growing impressively, and we are continuing to invest in that area. I hope this provides some insight into why our Consumer segment is smaller.

And then as a follow-up to that, I mean when you think about pricing 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? I mean, 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 categories, so it seems like you should be able to get pretty good pricing power. But clearly, with the currency moves, I would imagine if you have some local competitors that might be able to keep the price a little bit lower for a while and take some share, what do you think about that?

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

On the topic of FX, Nick, maybe if you could help critique the effectiveness of the new hedging program, you extended the duration from 12 to 24 months, but how is that program working versus your expectations?

For those that may not know what Deane is talking about, in the middle of 2014 we extended the tenure in our hedging programs 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 impacts of going out with the tenure in 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 that change in our hedging program.

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, as we have not 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. And I will look upon that and 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 a global mega trend that is related to both air pollution and clean water, that is where we will play big time with the platform as we go ahead. So I will say that I am very encouraged 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 a global mega trend, but also local mega trends. And as Scott and I talked about it earlier, relative to China, this is a huge opportunity, as we all know and everyone knows that. But we need to be able to capitalize on it with technologies because at the end of the day, this is very much a regulatory business, and we need to make sure we have products that meet the standards.

Did you all see any volume de-stocking across your distribution in any of the business units? We've been hearing some short-term trends in some other companies on that front.

De-stocking or?

De-stocking, yes?

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

Maybe one comment in the Consumer business, which you'll see in one of the slides, our point of sale growth was good and it was higher than our actual growth. So there may have been a little bit of inventory takeout at the retail channel.

And then, Matt, on the Consumer side, I think that was still the lowest growth since, like what, maybe the fourth quarter of '13. Was that related in any way?

Yes. That was the point. The outdoor sales were actually better than that. So there is some adjustment there in the channel.

And then just a follow-up question on pricing. You mentioned earlier that two-thirds of the 1% pricing increase was FX related and a third roughly it was new product development, etc. So I'm just trying to get a sense, are you seeing pressure on pricing in that you think is currency driven in other markets from an export prospect from your competition? Is this something where people are trying to take advantage of it?

Steve, that's something we're constantly on the lookout for as in the time volatile FX. So this is 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 a manner similar to how we priced in the past in multiple geographies, including the United States.

Maybe just a follow-up on the tightly managing business in 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 in the prices of oil and the currencies or such that you would manage those things less tightly in Q2, or 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.

Yes, I would say that there will not be any change, as we move into Q2 relative to operation. The team here is on this big time. So there would be no change short-term relative to what we need to do. And we had 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 as if there is a change in trend. And 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. They have one-off things occurring like when Chinese New Year is and when Easter is, but when we adjust for those things, we really see no meaningful trend through the quarter.

So, Nick, just wanted to go back to the raw material commentary. I think you guided for $0.15, $0.25 benefit for the full year, back in December. And it looks like you have a $0.05 of benefit this quarter. So are we now looking at a situation where the raw material benefits are now above the $0.25, given your commentary that it’s more backend loaded in your plan?

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, saying we now see ourselves at the high-end at $0.25. And Nigel, what we have been seeing is this is playing out almost exactly as we've expected. 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 to our channel, which is what makes it just a little bit less in the first quarter. But that's all progressing right to our $0.25 that I stated back in January.

And my math on benefits, on the 50 bps of benefits above $0.05, is that about right for the quarter?

50 basis points would be about approaching.

I think it's about $0.04, Nigel. We'll get back to you.

And then secondly on the margin bridge, I just want to understand the mutual impact of FX, because we've 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?

There are a couple of different forces there, Nigel, that in this quarter netted out to no change to the margin. There was 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 companies source product from a U.S. dollar currency. That has a negative impact on margins. Those two things offset each other 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 the second quarter and then a little more accretive in the third and fourth quarter.

Any ways you could quantify that mix?

Excuse me, Nigel.

Any way you can quantify that benefit?

When I mention small, I mean around 10 to 30 basis points. Just to provide a rough estimate.

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

It's going well. As you know, we updated you in December and even afterwards. We are currently rolling out in Europe, specifically in Western Europe, and the next location to go live is Nordic. We are implementing this according to plan. We have transitioned from testing country-by-country to a regional rollout, starting with Western Europe. We anticipate launching in Nordic during the second week of July. Everything is proceeding as planned.

On the hedging dynamics, I guess you can kind of do the math on that, I'm not sure whether it's in the 10-K or not or the 10-Q. But are you looking at for '16, if you know the euro stays where it is today. Is there an impact there or do you go all the way out through '16?

Yes, Steve, we are hedged out through '16 and in fact a little into '17. And just to put the numbers on it for 2015 versus 2016, we're estimating approximately $175 million of hedged 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.

Has anything changed with regards to how the FX drops through, exclusive of the hedges? I think Danaher today talked about a higher margin on their drop through.

I guess what I'd say, Steve, is back to the couple of questions ago, the one 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 that, when we calculate the impact, we pull out the sales impact from FX and the bottomline impact from FX, recount the margin; and if you're hedging, by definition, your margin should go up slightly.

So one last question about the growth in the second quarter being similar to the first quarter. Should we expect that growth could exceed 6% in the second half of the year? Should we consider that there could be high-end growth for the latter half of the year, and is it possible for it to accelerate to that extent?

Well, 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 will see an acceleration in the last part of the year, second half. And then I would not predict at this point in time how high it will go, all right, because we are not immune to the economical environment and how that will accelerate. But our performance of 1.5 times to 1.7 times IPI is steady, as I said historically, when I look at those six-month periods, as you and I have talked about earlier, so I'm optimistic 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?

Well, we have all types of competitors, right. We have global competitors. We have regional competitors. We have local competitors. So we are working with this 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, so the answer to that is no. But of course, we have competitors, right. And they are everywhere and they are very attractive, of course, to come into spaces where we are, because nice growth and nice profit margins, but we have not seen any change in their behaviors up to this point in time.

I have a quick question about foreign exchange. I assume that the hedges involve a few major currencies. My question is regarding the $110 million hedge gain for 2016. Does that amount fully offset the expected foreign exchange headwind for this year and next year if we continue at these rates?

Jeff, 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 in and in 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, and 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 reduce volatility and we also do it to buy time for us to adjust our business models accordingly. So it doesn't negate all of the risk in 2016, but it buys us more time and takes some of the volatility off the table.

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

No, there's not. I mean, we are working our plan and we're a couple of years into it, as you know. So there's no change in the tempo relative to our ERP program or investment in research development and what we call I3 or any small restructure as we do in here or there when we have the opportunity to do it. So the plan from that perspective is working and it's working well for us.

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 most likely area for Korean chute 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 mean we have 9% growth in the quarter versus 1% growth in the auto build. So again, we are doing very, very well. And that's a global business, so 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 that, who knows, that in the later part of the year, the 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 from that as well. So assuming that is correct, as everyone talks about, then there will be an 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 here are designing and spec-in on certain places and they could use it to other parts of the world. But many of them in Europe are exporting quite a bit outside of West Europe in terms of manufacturing. To your second question, 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 geopolitical issues face challenges, so I would say that was not in March. I think that was for the whole first quarter was a totally different environment to do business. And so I think that's the only place that we could see any change in trends, right. So that's understandable in a way and we have to manage it through the situation.

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.