3M Company (MMM) — Q2 2015 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to our second 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 will take your questions. As a reminder, please mark your calendars for upcoming earnings call dates, October 22 and January 26. Also take note of our next investor meeting scheduled for December 15. More details will be available as we get closer to that date. Today's earnings release and the slide presentation accompanying this call are posted on our investor relations website at 3M.com. Please take a moment to read the forward-looking statement on slide two. 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 three and I will hand off to Inge.

Thank you, Matt, and good morning, everyone, and thank you for joining us today. Overall this was a good quarter for 3M, marked by broad-based organic growth and margin expansion. We continue to operate in an uncertain global economic environment which softened growth. At the same time, we grew organically in all geographic areas, expanded margins a full percentage point and increased net income. Most importantly, we maintained our commitment to managing 3M for the long term with strong investments in our portfolio. Let's go through a few of the second quarter's numbers. Earning per share rose to $2.02, a 5.8% increase year-over-year. Our team posted local currency sales growth of 2% company-wide. On an ex-electronic basis growth was 2.2%, the same as Q1, and I will talk more about our electronics business shortly. Organic growth was positive in all geographic areas paced by the United States at 4%. Four of our five business groups grew organically, led by safety and graphics at 5%, followed by consumer and healthcare businesses at 3%. Growth in industrial slowed a bit to 1% as we experienced channel inventory adjustments in general in the industrial markets. Electronics and energy declined 3% organically in the quarter. This business group faced a tough year-on-year comparison and we also saw somewhat softer consumer demand in the electronics markets. However, even in softer market conditions, we increased margins in electronics and energy to more than 21% for the second straight quarter. As you recall, last year we consolidated a number of businesses within electronics and energy to better align to customers and generate efficiencies, and that portfolio work is paying off. I am pleased with the progress of this business and going forward, the team is focused on driving spec-in wins, increasing productivity and advancing our technology's capabilities. In the second quarter we saw continued strength of the US dollar, which reduced company-wide sales by 7.3%. As a result, total sales declined 5.5% to $7.7 billion. We increased 3M's operating margins to 23.9%, up 1.1 percentage points. This marks the seventh consecutive quarter of year-on-year margin expansion company-wide. Our margins remain strong and broad-based as all business groups posted margins greater than 21%. This is a testament to the strength of our portfolio and business model, and our business teams around the world driving productivity each and every day. In the second quarter we also continued to actively deploy capital in order to improve the business and return cash to shareholders. We returned $2.3 billion to shareholders through dividends and share repurchases. And just last month we announced the acquisition of Capital Safety. Capital Safety is a leading global provider of fall protection equipment and will bolster 3M's personal safety business, which is a strategic priority in our portfolio. This acquisition builds upon a number of other portfolio actions we have taken to strengthen our portfolio. Please turn to slide number four. Portfolio management is one of our three strategic levers and is vital to our success. To succeed in the long term we must constantly evolve to meet the changing demand of our customers and the global economy. Back in 2012 we began a comprehensive review of 3M's portfolio and started to make changes to better align our portfolio with our long-term strategic objectives. This includes reallocation of resources to our best opportunities. It also means taking action to create greater value, such as combining businesses within our company to increase customer relevance, scale and productivity, acquiring businesses that align with 3M's fundamental strengths and strategic objectives, and divesting businesses that no longer align with those strengths or objectives. In the first half of 2015 we took action on all fronts. Earlier this month, for example, we combined two of our healthcare businesses. Our dental and orthodontic business, which are both recognized for their strong technology and brands, were merged to form a single Oral Care Solutions business. Now, through a seamless and single partnership, we can offer customers an entire suite of oral care innovations, thus increasing our relevance and generating efficiency. In fact, since 2012, we have consolidated businesses with each of our business groups. As a result, we have moved from six business groups to five and from 40 businesses to 26. Next, our acquisitions. Earlier I talked about last month's announcement of Capital Safety. In February, we also announced a $1 billion acquisition of Polypore's separations media business, which will enhance 3M's core filtration platform. And in March we acquired Ivera Medical, a strategic addition to our healthcare business group. At the same time in January, we sold our static control business after thorough strategic review. Because of our team's work, 3M is now leaner, more focused and better positioned to win big opportunities and create greater value for customers and ultimately for our shareholders today, and even more so in the future. Thank you, and now I will turn the call over to Nick for more details on the quarter.

Thank you, Inge, and good morning, everyone. Let's begin on slide five where I will describe the elements of second quarter sales growth. We generated organic local currency growth of 1.8%, with volumes contributing 0.8% to our growth and selling prices adding 1%. The sales impact from acquisitions, net of divestitures, was neutral in the quarter. Positive growth related to the Ivera Medical acquisition was offset by our divestiture of the static control business. Foreign exchange impacts reduced sales by 7.3 percentage points in the second quarter. The most notable currencies impacting sales were the euro, yen and Brazilian real, which devalued versus the US dollar by 20%, 17%, and 28%, respectively. In dollar terms, worldwide sales declined 5.5% versus the second quarter of 2014. On a geographic basis, the United States led the way with organic local currency growth of 4.1%. US growth was broad based, led by safety and graphics and consumer at 6%, healthcare at 4% and industrial at 3%. Latin America/Canada posted organic growth of 0.8% in the quarter. Growth was positive in our healthcare and industrial businesses, while safety and graphics and electronics and energy both declined organically. Mexico delivered another outstanding result with 17% organic growth in the quarter, and Brazil turned positive with 1% growth. The impact of year-on-year sales declines in Venezuela reduced organic growth in Latin America/Canada by 4 percentage points in the quarter. This headwind is behind us starting in Q3. Organic local currency growth in Asia Pacific was 0.5% in the quarter, with healthcare and safety and graphics each growing 9% and consumer growing 3%. Electronics and energy declined 4% organically in Asia Pacific. Organic growth was down 2% in China/Hong Kong in the second quarter. Healthcare delivered strong growth which was offset by declines in safety and graphics, electronics and energy, and consumer. We continue to see the Chinese economy adjusting to new growth levels and we saw channel adjustments in some key end markets, which impacted our growth. For the full year 2015, we now expect organic growth in China/Hong Kong to be in the mid single-digit range versus mid-to-high single-digits previously. Japan delivered another good quarter with second quarter organic growth of 2%, or up 7% excluding electronics. Health care and safety and graphics posted strong organic growth followed by steady growth in our consumer and industrial businesses. Turning to EMEA, organic growth was 0.4% in Q2, with West Europe declining 1%. Organic growth in Central East Europe increased high single-digits while Middle East/Africa was down mid single-digits. Organic growth in EMEA was led by safety and graphics at 4%, health care was flat and industrial, consumer and electronics and energy each declined 1%. Please turn to slide six for the second quarter P&L highlights. Second quarter sales were $7.7 billion. Operating margins improved by 1.1 percentage points year-on-year to 23.9%. Strong gross margin improvements, along with productivity, drove the second quarter operating margin performance. Let me cover the primary components of the change in margin. On the positive side, the combination of lower raw material costs and higher selling prices contributed 150 basis points of margin expansion. Pricing performance in the second quarter remained steady, driven by continued new product flow across our businesses and price increases in select countries to help mitigate the impact of currency devaluations. We continue to benefit from lower raw material costs and expect this trend to continue throughout the year. Commodity prices remain favorable and our global sourcing teams continue to generate additional cost reductions. Productivity remains strong in the second quarter, adding 50 basis points to margins, driven by Lean Six Sigma efforts, returns on past portfolio actions and continuing to prioritize investments. Strategic investments reduced margins by 30 basis points. This includes our ERP and business transformation effort, increased R&D investments aimed at disruptive innovation, along with portfolio management actions. These investments will strengthen 3M for the future. Finally, higher pension and OPEB expense reduced second quarter operating margins by 60 basis points. As a reminder, this year's pension expense increase is due to the adoption of new mortality tables along with a lower discount rate. For the full year we continue to expect operating margins to increase by approximately 1 percentage point.

Thank you, Nick. Overall, 3M delivered a good second quarter performance. Organic growth remained broad-based, and we continued to generate premium margins across the portfolio. Looking across 3M’s entire team, I am very pleased with our execution and discipline in an uncertain economic environment, which is evident in our strong productivity. Going forward, we expect that economic uncertainty to remain through the year. In fact, external growth forecasts have continued to moderate over the last several months. As a result, today we are updating our guidance for the full year. We now expect organic growth of 2.5% to 4%, versus a prior expectation of 3% to 6%. With respect to earnings, we now anticipate EPS in the range of $7.80 to $8.00, versus a prior range of $7.80 to $8.10. The rest of the guidance remains in place. As you can see, we still expect currency to reduce sales by 6% to 7%. Our tax rate guidance is unchanged to 28.5% to 29.5%. And we continue to expect a free cash flow conversion rate of 90% to 100%. Like always, our 3M teams are focused on executing our plan, making investments for the future and managing those things within our control, in other words, controlling the controllable. As I described earlier, our portfolio is strong, and getting stronger as a result of our recent investments. Going forward, each of our businesses will continue to be bolstered by 3M’s four fundamental strengths: technology, manufacturing, global capabilities and our brand. Those strengths are leveraged across our Company, and will allow us to gain market share, maintain world-class margins and generate efficient growth into the future. Thank you for your attention, and we will now take your questions.

Thank you and good morning, everyone.

Good morning, Joe.

Inge, maybe just touching on organic growth for a second, you're tracking towards the lower end of the full-year guide so far year-to-date, and there still seems to be a lot of uncertainty in the environment. And so I'm just wondering, how are you thinking about your base case for the rest of the year just given what you are seeing geographically and across your product portfolio?

As we anticipated, the economic environment began to slow down early in the year. After the first quarter, we believed it was premature to adjust our guidance for the year. However, as we moved into the second quarter, it became clear that we needed to revise that guidance. Recently, the Industrial Production Index dropped from 2.6 to 2.1. Given this information and our portfolio analysis, we believe it’s appropriate to set our guidance at 2.5% to 4%, which aligns with our previous outlook. Regarding organic growth for the quarter, the main change came from the electronics segment. We faced a challenging comparison to last year where we experienced 10% organic local currency growth, and there has been some softness in that area. Overall, I consider the growth in the second quarter to be quite similar to the first quarter, excluding the electronics piece. Therefore, I find the 2.5% to 4% range to be a reasonable estimate, and we should aim to land in the middle of that range.

That's helpful. As a follow-up on the electronics business, there is usually some seasonal increase in the second quarter, especially regarding margins. It’s rare to see a sequential decline in margins for electronics. I'm trying to understand the reasons behind the current weakness. What are the utilization rates? How do you assess the inventory levels in the channel? Also, how should we anticipate the margin trends moving forward?

Joe, this is Nick. We expanded our margin by 60 basis points year-on-year compared to a strong second quarter last year. The improvement in our margin has been supported by our portfolio management actions in that business, which have increased our cost competitiveness. This has been the driving factor in the last few quarters, and we expect it to continue to influence our margins in the upcoming quarters, Joe.

Okay. And then I guess just a commentary on the end market from a utilization standpoint and from an inventory standpoint, what’s your sense for what's happening in the channel today?

I think we are experiencing some delays in new product introductions, which can immediately affect us. However, our progress regarding spec-ins remains consistent with previous periods. We've observed no significant changes in inventory levels, which can also be reflected in purchasing patterns. If there are delays in new product launches without corresponding inventory buildup, it inevitably impacts us. It's important to note that when we started this business, the margins were around 15.7% to 15.8%, and we have now increased them to 21%. The underlying question has always been whether this improvement is volume-driven, to which my consistent response has been no. The enhancements we've implemented in our portfolio have led to a more efficient organization, improved customer connections, and better asset utilization. Even if we experience slower growth in the coming quarter, we expect to maintain margins at a high level, demonstrating it is not solely dependent on volume. This quarter confirmed that our model holds true, as we achieved margin expansion despite a slight decline in volume. I am very pleased with the efforts the team has made in managing the portfolio.

That's a fair point. Thanks for that. Thanks, Inge and Nick. I’ll get back in queue.

Thank you.

Thanks and good morning, guys.

Hi, good morning Nigel.

Good morning.

I think if we back out electronics and energy, which is a bit more – a little bit choppier around the quarters, I think the growth is the lowest we've seen since the recovery. So I'm just wondering, maybe just Inge, maybe just some commentary on the macro environment. Do you view this as a speed bump and can we get beyond this back into that 4% or 5% zone or do you think there's something a bit more awry here?

Well, first of all, I think let's hold it to the year, where we start talking to 2.5% to 4%, so we don't go ahead of on this ourselves relative to the future. But I think when I look upon it is to say first of all, United States is very solid. We had a 4% organic local currency growth. We grew in all businesses. It is very solid. And as you recall, hopefully recall, a quarter ago that growth was slightly lower and the question was then, are you concerned about the US? Our answer was no, not necessarily. And I think we had 4% growth here. That's good. In Asia, or APAC, Japan did well. Japan had 2% growth, excluding electronics, which is the base business, 7% growth. China was slow. It slowed down. They're type of adjusting to a new growth level there and we are now talking about mid-to-single – mid-single digit for the year. And I think we have to wait a little bit to see what will happen there. It's a big economy as you know. We have a strong position, but I think that the growth need to pick up more, specifically in the domestic markets, and health care did well for us there. The other businesses went basically sideways. West Europe, we all predicted that there will be a growth pick-up based on the euro situation. So far we have not seen that, and probably will come later in the year, but I think it will be very late in the year. Latin America is doing fine. And as you see again, Mexico had 17% growth. Now is the first quarter in many quarters that we saw a slight improvement in Brazil. And as Nick said, Venezuela is now behind us in terms of comparison where we will go into Q3. And so I think that's my view on it. So I will say, I will not talk about higher figures than the 2.5% to 4%, at least as we go in for this year. Then we will have to see how Q3 and Q4 will work out here.

Thank you, Inge, for your insights. You mentioned we should wait to see how the third quarter unfolds. You provided valuable updates during the last call regarding the second quarter trends, which turned out to be quite accurate.

Can you repeat that, which one?

I'm just wondering how is 3Q tracking?

Nigel, we're not really seeing any change in trends from what we saw in Q2. We saw things pretty stable within Q2 and we're not seeing, so far in the third quarter, any change in that pattern.

Okay, that's very helpful. And just a quick one on health care. You mentioned drug delivery as being part of base and being weak, and that was a factor last quarter. If we back out the impacts of drug delivery, how does that look? How does health care look ex that?

That business in total, Nigel, brought down the growth for health care by approximately 1 percentage point.

Okay, that's very helpful. Thanks, guys.

Thank you.

Thank you, good morning.

Hi, David.

Good morning.

This is actually Jermaine Brown filling in for David. Two questions. Good morning. Your gross margins in Q2 expanded only slightly more than Q1. For H2, should we expect a greater raw material benefit? Or is Q1 and Q2 a good guide for what we should expect for margins within the second half?

We see the raw material benefits being pretty evenly spread between first half and second half. I would say the first half is a very good guide for the second half.

Understood. And my second question is, your demand within Asia-Pacific, particularly China, decelerated. I'd imagine that some of that was due to lower electronics demand. But were there any other businesses or end markets that also contributed to that decline?

Our declines there, we were up in our health care business. Electronics and energy was, yes of course, one of the declines. The others in China/Hong Kong were a deceleration from the growth we saw in the first quarter.

Okay. And then one month into Q3, what are you seeing demand-wise within Asia-Pacific?

As I said earlier, what we're seeing in Q3, so far no change in trajectory from what we saw in the second quarter or for the first half.

Understood. I will hop back in queue. That's all that I have. Thank you.

Thank you.

Thanks and good morning, guys.

Good morning, Steven.

Good morning.

Could you discuss Capital Safety a bit more, as I haven’t had much chance to do so? You mentioned a 14 times EBITDA multiple in the release, which I assume includes synergies. I find the company and the segment quite appealing. Could you explain what that multiple was without considering those synergies over the past year? Additionally, how do you view pricing in general, especially since you're planning to allocate more funds to larger M&A? I'm trying to understand your thoughts on the return profile for this investment and more broadly.

First of all, Capital Safety is in our view, a perfect fit for 3M. Fall protection, which is the segment, is among the fastest-growing and most profitable segments in the PP industry. And Capital Safety is recognized as a leader in fall protection. So you take those things together, there is high complementary synergy to 3M's global business in personal safety, which is a heartland division. So Capital Safety, if you think about it, it provides accretive growth to us and also margins, both for safety and graphics and for overall 3M. And you saw the start again for safety and graphics which is very, very good, and have as I said earlier, is the business group that I thought will have the real break-out as we go. So I think it is a very valued and good acquisition to us. The component annual sales growth had been over 10% for the last four years and EBITDA margins are approaching 40%. You have all those types of things that you lay them back to the portfolio work we did where you say, well you know – well, how can we build out our businesses and make sure that we get more relevance with our customers as we move ahead and drive synergies? So what I think about in totality, and the figures you are quoting there is correct, is actually 12x based on five-year run-rate synergies. But I think this is for us a terrific acquisition that is building out our position.

Okay. And so do you think about it in terms of return on capital over that timeframe as well?

Certainly, Steve. We're focusing on our return on capital and the time it takes to achieve that return. For us, we anticipate this occurring in the fifth or sixth year, evaluated on a cash basis in relation to our cost of capital.

Okay, all right. And then just on the pricing versus raws, you already talked about the raws comment. Pricing was another 1% again this quarter, very strong, obviously dealing with FX and issues. Can we talk about the sustainability of pricing within that equation going forward?

On the margin front, to clarify, out of the 150 basis points, about 60 are attributed to our price growth and 90 to reductions in raw materials. Regarding the sustainability of pricing, we have an average price increase of 1% through the first half of the year, and we expect this trend to continue in the second half.

Okay, and is that mostly just again, that's independent of new products. It's just pure price increases on the existing portfolio?

On our existing portfolio. I would add the color that if you look at all of our price growth, the fact that we keep refreshing our product line with our investments that we're making in research and development, that does enable us through the value we are creating for our customers, to be able to sustain pricing growth. But the other part of our price growth in the second quarter and for the year is also driven by movements related to FX. If I look at second-quarter standalone, of our total price growth, we estimate 25% of that total price growth is coming from pricing based on the value we are creating for our customers, and 75% based on movements we're taking directly or indirectly related to FX movements.

Okay, that's very helpful, thanks.

Good morning, everyone. I was somewhat surprised to hear that in Capital Safety, you mentioned reaching your cost of capital in year five or six. I assume your cost of capital is around 9%. Given your familiarity with this business and the ease of integration in the industry, I would expect a higher return on your investment. This raises the concern that perhaps you overpaid. I don't mean to be skeptical, but could you provide some insight on this?

Part of our portfolio prioritization is we know the assets we want to buy. We know where we can drive the most value. As we look at this business integrated with our personal safety business, we do see cost synergies that we'll be deriving. We see sales synergies, both of those contributing to get that result. What you're seeing here, Scott, is a result of us having a clear vision of what we wanted to add to our portfolio, and also an asset that we could see bringing a good financial return to 3M.

I think that partially answers it. Partially what I'm saying is, if you look at future acquisitions, is this going to be the type of hurdle rate you're looking for going forward? Because from my perspective, you would probably, is all you can do is earn 8% or 9% return five years out and there's risk, you could probably get that just buying your own stock.

The answer to that is not necessarily, Scott. You need to consider this acquisition as clearly strategic in terms of the outcome of the portfolio work. That’s an important element. Some parts of the business can be integrated where we can drive synergy, while others cannot due to the high level of regulation and education in fall protection. We need to continue investing in that to ensure we do everything correctly. There are two aspects to consider. There are parts from the commercialization perspective where we can achieve significant synergy, and we will. However, we still need to determine how to accelerate the return further. It's a highly regulated industry, and because of that, the barrier to entry is quite high. You have to think about integration, and as you proceed, you need to ensure you can create more synergy. But to answer your question, not necessarily. This was a specific case. This is a strategic move for us to strengthen our position, and it's a high-quality asset. It is comparable to 3M regarding margins, returns, and growth.

I agree. I think more specifically, just trying to get a sense of the future.

The other thing here, Scott, if you look upon the other acquisitions we have done from Sumitomo to Ceradyne, et cetera, we are not even close to this, right. I will say that, we can always argue day out and day in of the valuation. Did you pay too much or whatever? This is a strategic fantastic move for us with a world-class asset. So I'm pleased with that piece and now it is up to us to drive the return even faster back to us.

That's a good response. To delve a bit deeper into that, you mentioned a 40% EBITDA margin for Capital Safety. Is it possible for that to reach a 50% EBITDA margin, or is it more about integrating Capital Safety with your other safety product businesses for synergy? Or can Capital Safety itself experience a margin increase?

Scott, we see modest gross margin expansion opportunities there. We probably see more of our cost synergy benefits coming from the back office SG&A front than on the gross margin front.

Thank you, good morning, everyone, and let me say congrats to Matt and Bruce on their new responsibilities. Sorry to pile on the Capital Safety deal, but this was the largest deal you have ever done. And if I'm not mistaken, this was not the first time you had the opportunity to buy this asset. Why did you pass on it before? And then you are already in fall protection because I've been to trade shows where we've had demonstrations of fall protection. So how does Capital Safety expand your product line and where might there be overlaps?

You're right, Deane, that we had a small presence in that segment. We were very, very small. And one thing that I've learned over the years I've done business, if you do not have a reasonable good market share position, you will over time lose out. I've been in businesses over time where you think that a couple of percentage market share will take you to a better position. It is a very, very tough, so you need to come into a leading position. So that was one. So yes, we were there. We were, in my view, not relevant enough for the industry. So very opportunistic. Now let's go back to your comment relative to why now. I talked about it in my speech before, but I have to go back to it because I think this is an important element. If you don't have a clear picture of where you would like to go in the future with your portfolio, you could have a tendency to try to be part of auctions on most things that are becoming available. If you are part of bidding on more things that are becoming available, you maybe don't really know if this is a real important strategic imperative for you, and you should go for it. I would say, I was not part of 2008 and 2010, whatever, when there was bid on that asset. But maybe at that point in time it was not clear enough relative to the portfolio where we should invest for the future. This time, it was very, very clear for me where we should go. That's the answer from me.

Inge, thanks for that context. Just one follow-up on the Mexico organic revenue growth, 17% really jumps out. What was driving that and expectations for the balance of the year?

Mexico has been experiencing growth for nearly two years and is performing very well. This success results from a thriving domestic market and the overall Mexican economy, particularly in exports to the United States. Our portfolio in Mexico is well-balanced, and given our long-standing presence there, we can leverage that advantage. Currently, our growth rate in Mexico is around 15%, and I do not anticipate a slowdown for the remainder of the year. All sectors are performing well, with the industrial sector growing exceptionally fast.

Good morning guys. On this China expectation for the year up mid-single digits, China/Hong Kong, it was up 7% in the first, down 2% in the second. What gets better from here to even get you to the mid-single digits? I mean, you talked about some inventory channel adjustments, maybe just any other color on what you expect to improve from the current rate?

I think that, first of all, I believe that health care will continue. He had a good quarter in health care. Health care will continue and consumer will improve specifically. I also think that the industrial business, that is a sizable business for us there will improve slightly as we go for the year. So when you think about our portfolio, we get industrial slightly better. We get consumer up a little bit, which we will. And then health care continuing. That will take us there. I don't comment on electronics because, as you know, electronics is that kind of business that is on a regional base. Sometimes Japan is doing better than China and so forth, right. So, let's see how much that will be executed in China. But I think there's still a time here that we have to see the adjustment in the Chinese market. But those three businesses specifically will improve for us slightly as we go for the rest of the year.

Hey, guys, good morning. Just to clarify on the Safety acquisition, you said it's going to be dilutive in the first 12 months. When are we expecting to close it? In the third quarter, right? Is that dilution incorporated in the updated guidance?

Andrew, yeah, we've said that for the first 12 months, we expect this to be dilutive to GAAP EPS by $0.04. We expect this to close in the third quarter, in the middle of the third quarter, and our guidance is not yet including the impact of either the Capital Safety or the completion of the Polypore acquisition.

And just to clarify, oil prices have been declining significantly since the end of the quarter. I know you've revised your expectations regarding the impact on your inputs, but when did you adjust your outlook for oil prices? Is it aligned with the drop we've observed over the past few weeks?

Yeah, it is updated. And similar to what I said in April where we see ourselves now at the high end of the range of $0.25 benefit on raw materials, benefits as well as the margin impact I talked about earlier, that's reflecting where we are the most recently with commodity prices. So yes, it is reflecting that, Andrew.

And just a broader question. All of a sudden North America, US is the fastest growing market, right, it has lower margins, emerging markets are slowing. Are you guys thinking about adjusting your longer-term plan, given where the macro is playing out? Or do you think the existing game plan is adaptable to what you're seeing?

The current strategy is flexible and aligns with what we're observing. There's been no change in our thought process. As you know, we are three years into our five-year plan, which naturally sees some adjustments over time regarding various metrics. However, from an execution standpoint, decisions about investments in manufacturing or international opportunities have evolved compared to three years ago. Ultimately, these decisions are made on a daily basis. Nonetheless, there is no alteration to the overall plan at this time, and our strategy continues to be effective.

Hey, good morning.

Hey, good morning, Steve.

So I guess just back to Shannon's question, but at a little more of a broad sense. Can you give us a little color on what you would expect on a core basis for kind of how the third and the fourth quarter play out? I know that you have a little bit of an easier comp in the third, and then a tougher comp in the fourth. I'm just kind of curious to see, to his question, just more broadly, what gets better here from the 1.8% that you put up this quarter?

Okay, Steve, just to clarify, you're talking total company?

Total-co or core. So the 1.8%, what does the 1.8%, kind of how does that trend in the third and the fourth quarter? Is it steady or is it a little bit better in the third? Worse in the fourth?

In our 2.5% to 4%, I can't say we're seeing a noticeable difference between the third and fourth quarter, if you're looking for some color on that, Steve. On the low end of the range, it would be a continuation of the growth rate that we've seen in the first half, that continues into both the third and fourth quarter. If we're a shade towards the middle or the high end of the range, we would expect to start to see that occurring in the third quarter and not all in the fourth quarter.

Okay. How did things trend as you moved through the quarter? What were the dynamics in April, May, and June?

When we look on this on a sales per billing day, we saw virtually no change in our trends between the three months of the second quarter.

Okay. I have one final question regarding the pricing dynamics. You mentioned that 70% or 75% of that is related to foreign exchange. As we compare these foreign exchange numbers next year, will there be a first-quarter comparison? Given that your second half is likely to be slightly below 7% year-over-year for foreign exchange, does that imply that the 1% influence will diminish as we progress?

To the extent that there's a portion of that 1% related to FX, over time, I see that fading, but not in the second half of the year. If it does fade, it will be minimal. The logical extension is we see some fading of that in '16, not a material amount of fading in the second half of 2015.

And on the 0.2% in US, so is that a good kind of reflection on, I guess, the US is probably your most stable market. Is that a good reflection of kind of what you're seeing on the price inflation side? Presumably customers will come back seeing what you guys are doing on the raws side. I mean, is it a little bit tougher to get price these days because of what's going on with raw materials? This is more of a kind of macro question, I guess, as well.

Well, you would assume it would be, but I think one of the advantages for us is that often our product is adding some additional profitability and productivity to our customers. So I would say, yes, a little bit tougher. But as long as you are focused on new product that's adding value into the end market, you are able to demand a slightly higher price.

Thanks.

Good morning, Julian.

I just want to follow up on the industrial business. You talked about some inventory issues there in the second quarter. I just wondered how severe those were and if you thought that that inventory had largely been cleared out, so in the third quarter we should see a better industrial organic growth rate.

Yeah. I would say that I think it will be cleared out, early Q3 is my view. Right. And I think when you listen to the results for the industrial and many businesses did well. There's a capital business that I will describe more as they're not spec-in, right or designing, they're more in the consumable side like abrasives and tape and so forth. That's where we had a little bit of temper and I think that then holding to the channels. But I'm more optimistic as we move forward relative to that front for industrial. The other businesses there, if you think about aerospace and commercial and transportation at another 10% growth, purification another 10%, automotive OEM, as Nick said, has 6%. So many businesses there are doing very well. There were two divisions that had an impact for the quarter and it was very much what I would describe as consumables into industrial tapes and adhesives and abrasives.

Good morning, two quick ones.

Hi, Laurence.

As you look across your portfolio in terms of where you either have a stronger new product pipeline or a high degree of confidence about pent-up demand, do you see any line of sight for acceleration in 2016, 2017 in any of your larger product categories? And secondly, if this choppy, soft demand environment continues for a few more years, how does that effect, if at all, your balance sheet targets?

Nick will share some insights on the balance sheet. In terms of our business groups, there is a strong pipeline of new products across all areas, showing no significant differences among them. The industrial sector represents 33% of our portfolio and remains robust. We are also planning to add an acquisition in this area, which reinforces our position. I believe this sector will continue to thrive. As I mentioned earlier, I see safety and graphics emerging as the next breakout segment for us, similar to how electronics and energy have performed previously. Margins in safety and graphics have improved significantly, and I expect it to perform even better due to the strength of the portfolio. Our health care business typically sees the fastest growth and highest margins, with 80% of this portfolio situated in developed markets, presenting substantial growth opportunities. Additionally, I observe strong performance from our consumer business, marked by impressive growth and expanding margins, backed by solid brand equity. Looking ahead, I am optimistic about our direction. We've been focusing on improving our portfolio’s efficiency and organization, aiming to eliminate unnecessary barriers. At 3M, we emphasize the importance of productivity and recognize that complexity hampers it. Our team is heavily engaged in addressing this. Overall, I see us in a strong position across the board.

Laurence, to follow up on your earlier question about the balance sheet, our approach to our capital structure and capital allocation is designed to support multiple business models, even in a lower growth environment. While changes could occur due to market volatility, it’s reasonable to expect that less of our capital would be directed towards capital expenditure for capacity building. Regarding mergers and acquisitions, that would depend on how we evaluate the valuation of available opportunities. If certain opportunities appear more attractive, it could influence our decisions, but that heavily relies on what we identify at that time.

Laurence, this is Matt. We wouldn't see anything changing in terms of organic growth being the primary way in which we grow. We obviously dial CapEx to whatever levels of growth we're seeing, but it doesn't fundamentally change the way we think about growth, acquisition versus M&A.

Well, thank you very much for participating this morning. We look forward to seeing you very soon. Good-bye.