3M Company (MMM) — Q1 2016 Earnings Call Transcript

Thank you and good morning everyone. Welcome to our first quarter 2016 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, July 26, and October 25. Also, take note of our next investor meeting scheduled for December 13. 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 off to Inge.

Thank you, Bruce. Good morning, everyone, and thank you for joining us again. We had the opportunity to see many of you last month at our Investor Day, where we laid out 3M’s new 5-year plan. We also updated you on the 3M playbook and how it is being executed across our enterprise to deliver efficient growth both today and into the future. In the first quarter, the 3M team continued to execute our playbook and delivered another strong operational performance. We increased margins more than a full percentage point and improved our cash flow generation by 20% year-over-year. At the same time, we continue to invest in the business, including opening a new world-class laboratory in the United States while also returning cash to our shareholders. Looking at the numbers, we posted first quarter earnings of $2.05 per share, which is an increase of 11% year-over-year. Please note that this includes a $0.10 earnings benefit related to a new accounting standard that 3M adopted in the first quarter and Nick will provide more details during his comments. Adjusting for this impact, we delivered Q1 earnings of $1.95 per share. Company-wide, organic growth was down slightly at minus 1%. Three of our business groups grew organically in the quarter led by health care at 6%, with strong organic growth across all its businesses. Our Consumer business, which is home to some of 3M’s most iconic brands, also delivered a good quarter of organic growth. I am very pleased that our two domestic-driven businesses, Health Care and Consumer, continue to do well and are off to a very good start in 2016. Safety and Graphics also posted solid organic growth with particular strengths in commercial solutions and personal safety. Organic growth in our industrial business was down low single digits, which was similar to last quarter. And as expected, Electronics and Energy declined low double digits. Electronics and Energy continued to be impacted by softness in the consumer electronics markets, which we expect to persist through the first half of the year. Acquisitions net of divestitures added 2 percentage points to first quarter sales, while foreign exchange reduced sales by 3%. As a result, our company total sales were $7.4 billion, down 2% year-on-year. Our ability to consistently deliver premium margins remains a hallmark of 3M and is an important element of our focus on driving efficient growth. In the first quarter, we posted margins of 24%, up more than a full percentage point versus last year. Without the impact from last year’s fourth-quarter restructuring, we have expanded margins year-over-year for 10 consecutive quarters. Also in the quarter, we have returned nearly $2 billion to our shareholders through dividends and share repurchases. This includes an 8% increase in our first quarter dividend, which marks 3M’s 58th consecutive year of dividend increases. All in all, we had a good start to the year with results that were in line with our expectations. Please turn to Slide 4. In addition to strong financial performance in the quarter, we also made good progress on our three key levers starting with portfolio management. After a strategic review of our Health Information Systems business, we decided that we could create the greatest value by retaining and further investing in that business. In fact, we plan to accelerate investment across our entire global Health Care business, in research and development, health economics, and commercialization capabilities to build strength on strength in both developed and developing markets. In February, we sold the Polyfoam business, which was a small non-core segment, within our industrial business group. Earlier, I mentioned the ongoing softness in the electronics markets. As you know, over the last few years, we have consolidated a number of businesses within Electronics and Energy, which has made us more relevant to our customers and more agile and efficient. Today, we are announcing further actions to build upon that work. This action will reduce 250 positions worldwide, with the majority of reductions on the electronics side of the business and result in an estimated Q2 charge of $20 million. This will further position Electronics and Energy for long-term success. And going forward, this business will continue to stay close to customers, advance its technology capabilities, and increase productivity. Investing in innovation is the second lever, and in the first quarter, we invested nearly $0.5 billion in research and development. Research and development supports organic growth and premium returns. And as you recall, we continued to step up investments in R&D from 5.5% of sales closer to 6%. In March, we also opened our new laboratory in the United States, which many of you had the opportunity to see at our Investor Day. It will house 750 scientists who will leverage our 46 technology platforms to create unique cutting-edge solutions for our customers. Finally, in the first quarter, we continued to march forward with business transformation, which is our third lever. We had a successful ERP deployment in Germany and remain focused on executing the rollout plan across Western Europe. Business transformation, which starts and ends with our customers, is important for our future especially as it relates to efficient growth. We expect these efforts to result in $500 million to $700 million in annual operational savings by 2020 and another $0.5 billion in working capital improvement. Overall, as I look at the quarter, we continue to execute the 3M playbook and deliver strong performance in terms of both financial results and building our enterprise for the future. With that, I will turn the call over to Nick who will take you through the details.

Thanks, Inge and good morning everyone. I will start on Slide 5 with a recap of our first quarter sales change. Organic local currency sales declined 0.8% in the first quarter, with volumes down 1.7%, partially offset by a 0.9% increase in selling prices. Acquisitions net of divestitures added 1.6 percentage points to sales. This impact includes the acquisitions of Capital Safety, Membrana, and Ivera Medical, along with the divestitures of Library Systems, Polyfoam, and the license plate converting business in France. Finally, foreign currency translation reduced sales by 3%. In U.S. dollars, total sales declined 2.2% versus the first quarter of 2015. In the United States, organic growth was up 0.3% with strong performances in our domestic-oriented businesses, namely Health Care and Consumer. Industrial production in the U.S. declined 1.3% in Q1, which impacted growth in parts of our Industrial business. Organic growth in Asia-Pacific was down 5.6%. Three of five business groups posted positive growth in the region again led by Health Care and Consumer. Soft end market demand and excess channel inventories in Consumer Electronics resulted in a double-digit organic growth decline in Electronics and Energy. Within Asia-Pacific, organic growth was down 4% in China/Hong Kong and declined 8% in Japan. Excluding our Electronics business, Japan and China/Hong Kong were both flat. Moving to EMEA, organic growth increased 1.7%, West Europe was up slightly, and the combination of Central/East Europe and Middle East/Africa was up high single digits. Finally, organic growth in Latin America/Canada increased 4.2%. Mexico again had a strong quarter, with 10% organic growth and Brazil also posted positive organic growth of 2%. Please turn to Slide 6 for the first quarter P&L highlights. First quarter sales were $7.4 billion. Operating income increased more than 3% to $1.8 billion and earnings rose 10.8% to $2.05 per share. As Inge mentioned, we had another strong margin performance in the first quarter, up 130 basis points to 24.1%. Let’s take a closer look at the first quarter margin improvement. The combination of lower raw materials and higher selling prices added 110 basis points to first quarter margins. We continue to benefit from both lower commodity prices and from our global sourcing team’s ongoing efforts to reduce costs. Lower pension and OPEB expense increased margins by 100 basis points. Productivity gains related to last year’s fourth quarter restructuring contributed 40 basis points to margins. Strategic investments reduced margins by 10 basis points as we began to take actions on our manufacturing footprint and increased growth investments. Foreign currency net of hedge gains brought margins down another 10 basis points and first-year acquisitions reduced margins by 20 basis points. The year-on-year decline in organic volume reduced margins by 30 basis points. And finally, utilization and other was a net 50 basis point headwind to margins. This included the impact of lower asset utilization, particularly in our Electronics and Industrial businesses, which was partially offset by divestiture gains in the quarter. Also, we continue to increase investments across the business to drive growth and strengthen our competitiveness going forward. All in all, we have started the year on a positive note with respect to margins and continue to expect approximately 150 basis points of margin improvement for the full year, which reflects our focus on delivering efficient growth. Let’s now turn to Slide 7 for a closer look at earnings per share. As stated earlier, earnings for the first quarter were $2.05 per share, an increase of 10.8%. Margin expansion net of organic sales declines contributed $0.04 to earnings in the quarter. First-year acquisitions and divestitures added $0.07 to earnings per share. This result was driven by solid performances from Membrana, Capital Safety, and Ivera along with divestiture gains in the quarter. Foreign currency impacts net of hedging reduced pretax earnings by $48 million or the equivalent of $0.05 a share. Higher balance sheet leverage led to an increase in net interest expense year-on-year, reducing per share earnings by $0.02. The first quarter tax rate was 26.8% versus 29.5% in the comparable quarter, which increased Q1 earnings by $0.07 per share. The lower Q1 tax rate includes the adoption of a new FASB accounting standard, which I will walk through in a moment. Finally, average diluted shares outstanding declined by 4% year-on-year, which added $0.09 to first quarter earnings per share. Please turn to Slide 8. On March 30 of this year, the Financial Accounting Standards Board issued an accounting standards update related to employee share-based payments. This new standard changes the recording of additional tax savings or charges when employees realize benefits from stock-based compensation. The additional tax impact is a result of the change in the value of stock-based compensation, from the time it is granted to an employee to the time it is realized by the employee. Previously these additional tax impacts were recognized in the equity section on the balance sheet. Going forward, it will be recognized on the income statement. All U.S. public companies are required to adopt the new accounting standard no later than the 2017 fiscal year. We chose to adopt this new standard in the first quarter of 2016, which created a first-quarter tax benefit of $0.10 per share, net of tax costs related to global cash optimization actions. For the full year, we expect no impact to our tax rate and earnings per share guidance as additional actions we chose to implement to further optimize our global cash position will increase our tax expense in the last three quarters of the year. Let’s now turn to our first-quarter cash flow performance on Slide 9. Overall, we posted another solid cash flow performance in Q1. Free cash flow conversion was 74%, up 8 percentage points versus the same period last year. As a reminder, Q1 is typically our lowest conversion rate of the year. We generated $1.3 billion of operating cash flow in the quarter, a $180 million increase versus Q1 in 2015. The primary drivers of the increase were improved inventories and accounts receivable, along with lower cash taxes. Capital expenditures were $314 million as we continued to invest in the business to drive efficient growth. For the full year, we expect CapEx investments in the range of $1.3 billion to $1.5 billion. The strength of our business model allows us to invest in growth and also return cash to shareholders. As you heard earlier, we increased our first-quarter per share dividend by 8%, which increased our payout to $672 million in the quarter. In addition to dividends, we returned $1.2 billion to shareholders through gross share repurchases. Let’s now review our first-quarter performance on a business-by-business basis. Please go to Slide 10. Our Industrial business group posted quarterly sales of $2.6 billion. First-quarter organic growth in our Industrial business was down 1.9%, with mid single-digit declines in the U.S. and Asia Pacific. As mentioned earlier, the U.S. Industrial production index was down 1.3% in the first quarter, which impacted parts of our Industrial business. Our advanced materials business declined low double digits, impacted by ongoing weakness in the oil and gas end market. Conversely, our automotive OEM business grew high single digits, continuing its strong track record of outpacing global car and light truck builds. We also posted positive organic growth in our automotive aftermarket business in the quarter. The acquisition of Membrana net of the Polyfoam divestiture added 1.9% to Industrial sales growth. We are pleased with the smooth integration of Membrana into 3M and the business continues to exceed its financial performance objectives. Industrial increased its margins 150 basis points to 23.9%, posting operating income of $617 million. Please turn to Slide 11. First-quarter sales in Safety and Graphics were up 2.4% organically to $1.4 billion. Commercial solutions delivered solid organic growth with particular strength in Latin America and the U.S. Personal safety, one of our heartland businesses also had a good quarter of organic growth led by EMEA and Asia Pacific. Our roofing granules business also posted strong growth in the quarter. Acquisitions net of divestitures added 4.5 percentage points to sales growth in the quarter. This result includes Capital Safety, along with the impact from the divestitures of library systems and the license plate converting business in France. Geographically, organic growth in Safety and Graphics was broad-based, paced by a mid single-digit increase in Asia Pacific. Operating income for the business was $345 million and operating margins were a solid 24.5%. Please turn to Slide 12. Our Health Care business delivered an outstanding quarter from top to bottom. The business generated sales of $1.4 billion and led our company’s organic growth at 6.2%. Growth was broad-based, with all businesses and geographic areas up mid single digits or greater year-on-year. Health Information Systems and Food Safety both posted strong double-digit growth in the quarter, and our medical consumables and oral care businesses each delivered solid mid single-digit growth in Q1. The Ivera Medical acquisition added 90 basis points to first-quarter sales growth year-on-year. This business is performing very well and exceeding its financial performance objectives. Our Health Care business delivered 13% organic growth in developing markets in the quarter, with particular strength in China-Hong Kong, Mexico, and Russia. Operating income was $455 million, up 12% versus last year’s first quarter and margins were strong at 32.9%. As you can see from this quarter’s results, our Health Care business continued its track record of strong performance. And as Inge mentioned we are increasing investments across the business to drive efficient growth into the future. Next, let’s cover Electronics and Energy on Slide 13. First-quarter sales in Electronics and Energy were $1.1 billion, down 11.7% organically and in line with what we communicated at our March Investor Day. On the electronics side of the business, organic sales were down 18%. The decline was due to a combination of factors including soft end market demand, elevated channel inventory, and a challenging year-on-year comparison. Our team remains focused on increasing relevance with customers and driving spec-in wins to deliver organic growth as the industry improves. Our energy-related businesses were down 1% organically, with growth in electrical markets being offset by declines in Telecom as well as Renewable Energy. As a reminder, in last year’s Q4, we took portfolio actions within the Renewable Energy business. These actions negatively impacted Q1 organic growth but have improved profitability in this business. Within Electrical Markets, our ACCR overhead conductor business posted strong double-digit growth. On a geographic basis, organic growth was down double digits in Asia-Pacific, where our Electronics business is concentrated. First-quarter operating income for Electronics and Energy was $208 million, with margins of 18.2%, down 330 basis points largely volume-related. Looking towards the full year, we now expect Electronics and Energy to decline organically in the low to mid single-digit range. As Inge mentioned, we are taking actions in the second quarter to further position the business for long-term success. I will finish with our consumer business on Slide 14. Consumer had another solid quarter, with sales of $1 billion and organic growth increasing 2.8% year-on-year. Sales grew organically in three of our four businesses led by Home Improvement and Consumer Health Care. Across the bottom of this slide, you see just a few of the market-leading brands that are powering our consumer portfolio. Within the Home Improvement business, our Command Damage Free mounting products posted strong double-digit growth as accelerated investments continue to pay off. ScotchBlue Painter’s Tape and Filtrete filters also delivered strong growth in the quarter. Our Consumer Health Care business posted solid first quarter organic growth as the growing trend of active lifestyles continues to drive strong demand for our ACE and FUTURO braces and support products. Geographically, organic growth was paced by Asia-Pacific, driven by double-digit growth in China/Hong Kong, along with solid mid single-digit growth in the U.S. Operating income was $238 million, with operating margins of 22.7%, both similar to last year’s first quarter. On Slide 15, we are reaffirming our 2016 planning estimates. We estimate earnings in the range of $8.10 to $8.45 per share, an increase of 7% to 11% year-over-year. Organic growth is expected to be up 1% to 3%, with acquisitions net of divestitures adding 1% of sales. We estimate that foreign currency translation will reduce sales by 1% to 3%. Finally, our tax rate is still expected to be 29.5% to 30.5%, with free cash flow conversion in the range of 95% to 105%. With that, I thank you for your attention and we will now take your questions.

Thank you. Good morning, everyone.

Good morning, Joe.

Good morning, Joe.

Maybe let’s start off on Electronics since that seemed to be the biggest, I guess, surprise in the quarter at least from our perspective. Can you talk a little bit about your expectations and the cadence for the remainder of the year just particularly in light of some of the commentary regarding slower smartphone shipments? So, that’s kind of the near-term question. And the longer term question is maybe we can talk about this in the context of your portfolio, Inge, you have done a lot to restructure your portfolio since you took over. I am just curious like whether this is a business that you are going to continue to reevaluate as we move forward?

Well, good morning, Joe. Well, first of all, it was a little bit – the slowest business for us in the quarter, but not much of a surprise if you go back and think about our Investor Day when we talked about it in terms of what we expected for the first quarter. Now the electronic part was down 18%, which was I would say is all based on a weaker near-term demand in terms of consumer electronics. So, from that perspective not a surprise for us, but I think as we look out for the next quarter, we have to expect in the second quarter mid to high single growth down. And I think for the year, low to mid single. So, I think that’s how you have to think about the business group. And I will say that in terms of the portfolio, this is a very, very good business for us because we have all the components in order for us to be competitive in this marketplace and we have worked on that business in order to be more relevant now for four years. And as you can see, here in this quarter, we take some more actions in order to line up our business model versus what is required in that business. So, I will say, first of all, all businesses, portfolio management is an ongoing process. We look upon that the whole time. But the fundamentals for us to be in this business are very, very good and very, very strong; it's just that we have to adjust as we go and on the fly and I think that’s what we are doing here again, right. But for me and for us, it’s more a near-term weaker demand in consumer electronics as we speak.

Okay, fair enough. And maybe my second question and turning it to the Health Care group where you saw accelerating organic growth, the margin is now approaching 33%. Maybe talk a little bit about the expectations for that business now. Have they been ratcheted up at all as we progress through the year and should we start thinking about this business as being a 32% to 33% type margin business moving forward?

Well, first of all, you are correct relative to the performance of Health Care over many, many years, right. This is a very good business for us and very solid fundamentals. And I think it’s very much based on the value creation for both the providers and the patient in that market. We will – you saw this quarter again very solid organic local currency growth, margin expansion, and it's broad-based. It’s both in developed and developing markets and you have seen all businesses. And we will now continue to accelerate that investment as we move ahead. So, it’s not only health information systems that we decided to keep in our portfolio; investing is something we will do in all the businesses. And as I laid out, it is around research and development, it’s about health economics, and it’s about commercialization capabilities. Those three things in combination are very, very powerful for us. And think about it as well in terms of developed versus developing. Our position is very strong in the developed world and we continue to take market share and penetrate even deeper there. In developing, the field starts to open up for us because key opinion leaders are recommending our protocols, including our products around the world. So, we have a very strong position there. And you can think about this in terms of our fastest growing business with the highest margin and we are pleased with the margins, but we are not – we will accelerate the investment there to get growth up even further.

Okay, great. Thanks, Inge.

Thank you.

Hi, good morning.

Good morning, Julian.

Just a question firstly on Industrial and Safety and Graphics, if you have seen any change in demand trends as you went through the quarter in China and in developed markets?

Julian, good morning. For both China and in the U.S. and in Europe, as the quarter went on, we saw no discernible change in the trends. It was a pretty consistent performance throughout the quarter.

Got it. Thank you very much.

Yes, the comment on China, we saw again both Consumer and Health Care with very solid growth in China in this quarter. So that’s again a good indication relative to what is happening in those markets as they are type of expanding their businesses specifically in China. They are not shifting, but they are expanding into more domestic-driven businesses. And we saw terrific growth, both in Consumer and Health Care in China.

Thanks. And then just my second moment beyond Electronics and Energy, if you are seeing any price pressure there or it’s all just volume declines. And also you talked about some portfolio changes recently, should we expect therefore that the energy related business could grow this year, actually within that segment?

Julian, first on the price front, we haven’t seen any change in the trajectory on pricing. It’s been pretty flat as it was last year and into this year. No real changes on the pricing, selling price environment that we are seeing on the electronics side. In regards to portfolio movement actions, as I said on the energy side, we took a portfolio action within our renewable energy business in the fourth quarter, which is having a negative impact on our first quarter organic growth. That negative impact will continue throughout all four quarters of 2016, and it’s incorporated into our guidance for the total business and the company.

Thank you.

Thanks and good morning all.

Thanks, Steven.

Could you maybe just talk a little bit about the pricing raw material dynamic in terms of how that’s – it’s still huge even though it’s diminishing, what are your expectations for that going forward and as part of that, how much of that pricing was currency related this quarter?

Good morning, Steve. For the first quarter, the combination of price raw material, that benefited our margin by 110 basis points. The vast majority of that came from lower raw material prices. And on the raw materials side, we are continuing to expect our tailwinds, driven by lower commodity prices and with a heavier weighting to the first half of the year than the second half. Regarding selling prices, we have traditionally been able to achieve about 30 basis points of underlying price growth when we strip out FX. We continue to see that as our capability, and we project that we will be at that type of core price growth in our company for the year. If I look at the price growth that we had in the first quarter of 90 basis points, all of that came in our international operations, and the majority of that 90 basis points was in response to our pricing actions in response to FX movements, the majority of that 90 basis points coming from FX reaction.

Okay, that’s helpful. And then in terms of the M&A that you have done Capital Safety, etc., what was the organic growth of those businesses, what were they achieving from an organic basis?

On an organic basis, well first of all, I will just level set the facts here that what they are adding to 3M’s total growth, our total acquisitions before divestitures added 2.1% to 3M’s growth, and our divestitures reduced 3M’s revenue by 50 basis points. So we had a net 160 basis points growth. Underlying that within our Capital Safety business organically, we continued to see strong revenue performance across the board for that business, with the exception of the oil and gas market that the Capital Safety market serves. In our Membrana business, that business continues to perform well. But from an organic basis, we typically start measuring the organic once we lapped ourselves 12 months after we acquired it, Steve.

No, I know. I am just looking for what the actual – what they are running at organically so that when they do lap 12 months, which should be in the third quarter, how much it’s going to add, that’s what we are trying to get to?

Low single-digits would be our best estimate right now.

Okay, fantastic. And if I could just one last, you guys holding the 1% to 3%, what are you actually taking up since Electronics and Energy are down?

We are not changing our guidance at this point in time.

Hi, good morning guys.

Good morning Scott.

Can you give us a sense, I mean Inge you talked about China a little bit, but can you walk around the world and just talk about what’s getting better or what’s getting worse out there and geographically?

I don’t think since we met at Investor Day that there have been any big changes in the marketplaces. With maybe one slight exception which is Europe, the Middle East, and Africa. I think that’s honestly was a little bit of surprise that we saw slightly better growth there than we had expected. I think that’s the change that from a material perspective, if you like, that have changed. That on the positive side, because I think we have to look for positive sides within Latin America, we had – we continue very good growth in Mexico, but we were positive in Brazil as well. So, I think Brazil then by definition is one country. I think that’s something that we could see changing. But more than that, I don’t see any change. Central Europe, East Europe is doing well. West Europe was actually, as I have said, a slight surprise. Nothing changed in Asia, nothing changed for us in the United States either. So, I think it was very solid and no absolute downs in terms of, I think specifically that was negative that came after as I see it; there were some slight positives, if you like.

Okay. I know this is hard to dial down to this kind of detail, but when you think about the 150 basis points full-year guide on margins, how much of that are you guys thinking as price cost?

Price for raw materials, Scott, we for the year have been expecting that to be 50 basis points and we still see ourselves lining up closely with that.

Okay. And just a quick one, is your price now fully caught up to currency dislocations in 3M?

Yes. Going forward, where the dollar is right now, I think the majority of our price increases due to FX are behind us especially as the dollar stays where it is.

Thank you. Good morning everyone.

Good morning, John.

Good morning, John.

Hi Inge, your history of being able to raise pricing 30 basis points a year may not help you much if these raw costs, metals, gas, oil keep climbing the way they do, you put up very impressive margins, I am just – what’s your playbook for offsetting a potential margin squeeze if you could draw on history and your own thoughts towards being able to raise pricing more than you have in your history to offset some of these cost increases that seem to be about to hit us all?

Yes. John, I will take that one. The 30 basis points is when we look over a long period of time of what our capability has been. And it’s been fairly sustainable. In times of commodity price increases that tends to go up slightly, in times of commodity price declines that tends to go down. But it’s fairly constant within 3M. To answer your question John, I would like to take you back to our Investor Day. As we look to the next few years of where we will be driving our efficient growth and potential for margin expansion, we are really driving many of our initiatives to be able to do that. Our initiatives around business transformation, one of our key levers, actions we are taking with our footprint to better optimize our efficiency and effectiveness of our manufacturing supply chain. That I see as the heart of what we will be doing in the coming years to continue our ability to grow efficiently and part of that involves margin expansion.

Okay. So you basically, Nick, are saying that it’s highly probable you are going to get behind on raw costs versus price increases, but there is just ample productivity within 3M and you are taking more restructuring obviously in E&E that you feel good about just being able to offset it. Is that kind of it?

Yes, I am not – I think I am not ready to say and I don’t think it would be accurate to say that we see ourselves flipping over to the negative on the price raw materials, but it has been a noticeable benefit to us for the last two plus years. We are not planning for it to be as positive for us as it has been, and we are relying more on other productivity initiatives to fuel our efficiency and our growth.

Yes, we do. I think that we look upon our total portfolio. Right. As I said earlier, this change we see is the weaker near-term demand in consumer electronics and maybe that it will persist a little bit longer than we thought. So, if you take that as a given that is the change, I would say, but we see in Industrial that that model is still working for us and we are sticking to the plan as we go for the year. And three of our businesses will compensate for what I will say a delay of the growth rate coming in the second part for the electronics part of our business. So, there is no change down. I don’t see that change coming either to be honest. I have not seen that as of yet. I see there is a slight strength, actually, coming both for Safety and Graphics, Consumer and Health Care and Industrial stays very much as we laid out as we met the last time and it looked like that there will be a little bit longer persistent in the consumer electronics part as we thought just two months ago also.

That’s right. So, in other words, Industrial is flat and other businesses are doing a little bit better. One last thing, Nick, this accounting change, you say you are basically going to offset it with I am assuming cash repatriation on which you pay taxes. How does that – does that like you give a sense of how that’s going to break out over the next three quarters? And if you don’t do that, have you actually given yourselves somewhat favorably a $0.10 tailwind? Well, I guess it’s the accounting change, but does this accounting change create a $0.10 tailwind heading into ‘17 because you may not repatriate for whatever next year, so that’s just how the math works?

John, a couple of points on that. As far as the actions we are taking to optimize our global cash position, I don’t want you to think of it as a one-time event. This is a continuation of ongoing efforts we do in our company to efficiently and effectively manage our cash positions. And as you look at our balance sheet, the amount of our global cash has been declining. And we are always looking for how we can move cash to improve our efficiency and effectiveness as well as reduce the risk in holding that cash. It’s been an ongoing effort. We are going to continue to do it. It did give us an opportunity to take some actions and repatriation, John, as part of that. In terms of setting up another $0.10 tailwind into 2017, I think that would be going too far. I think it continues to position us well for ‘17, but I wouldn’t think of it all as a tailwind going into ‘17.

But is the $0.10 equally spread I know for the next three quarters in your tax line, Nick?

Yes, John, it is. Over the next three quarters, we expect to average approximately a 31% tax rate. But as you know and as you look at our results, there are fluctuations. Some quarters will be higher and some lower, but over the next three quarters, averaging around 31%.

Good morning guys.

Good morning, Andrew.

Good morning.

So, if you look at your breakdown of price you look at the U.S. pricing, you didn’t get any price in the U.S. this quarter. You got 0.6 last quarter and really you have averaged that usual 30 to 50 basis points over the last year in the U.S. Are you seeing any more competition in the U.S.? Is there any more of an issue in any particular segment in the U.S.? Did something change that it might get tougher to get your usual 30 to 50 basis points in the U.S.?

Yes, Andy, I will take that one. We are not seeing a big change. There are certain parts of our business in the U.S. where we continue to face good competition and we react with price, but I would call those pockets, not widespread. Sometimes with pricing, in particular in the U.S., we saw actions to capture more market share and adjust pricing. And that’s part of what’s leading to that 0% that we posted in price in the U.S. for the first quarter.

Nick, do you think you could still average that 30 to 50 as you go over the next year or?

Of underlying price capability... we still see that 30 basis points as a good reflection of our underlying capability there.

Yes. I think both are strengthening their positions. And the way we should think about this is in terms of the acceleration of growth, by definition will go faster in Health Care than in consumer. And the reason for that is everything you have to do around brand equity in consumer takes a little bit longer time. So when you compare the two of them, we will see a faster acceleration for Health Care versus consumer. But both of them are growing very, very well. And I would not say that in terms of outcome, yes, we see both of them coming stronger now than versus a year ago. But we have been on this for quite some time. And it’s often realization of change of brand equity position for consumer. And then it’s a question about money availability for Health Care. So our solutions are very advanced and are very much driven based on health economics. And as countries get bigger budgets and can spend more into Health Care, they are shifting from less advanced solutions to solutions like 3M can provide. So that’s what we believe, that both Health Care and consumer have great futures for us in that part of the world. And as you look upon our mix, those are also two of our businesses that mix in the portfolio, that we have less penetration and less sales in developing versus developed markets for those two businesses. So the future looks good, it’s up to us now to execute and do that as fast as possible.

Good morning guys.

Good morning.

Hey, Inge, Health Care and consumer, two businesses you have been trying to grow more in developing markets from their historic position, you highlighted both the growth in developing markets for both in this quarter, I am just wondering if you feel like you are reaching some kind of a tipping point there or maybe just a little bit of what you are seeing going on there?

Yes. I think both are strengthening their positions. And the way we should think about this is in terms of the acceleration of growth, by definition will go faster in Health Care than in consumer. And the reason for that is everything you have to do around brand equity in consumer takes a little bit longer time. So when you compare the two of them, we will see a faster acceleration for Health Care versus consumer. But both of them are growing very, very well. And I would not say that in terms of outcome, yes, we see both of them coming stronger now than versus a year ago. But we have been on this for quite some time. And it’s often realization of change of brand equity position for consumer. And then it’s a question about money availability for Health Care. So our solutions are very advanced and are very much driven based on health economics. And as countries get bigger budgets and can spend more into Health Care, they are shifting from less advanced solutions to solutions like 3M can provide. So that’s what we believe, that both Health Care and consumer have great futures for us in that part of the world. And as you look upon our mix, those are also two of our businesses that mix in the portfolio, that we have less penetration and less sales in developing versus developed markets for those two businesses. So the future look good, it’s up to us now to execute and do that as fast as possible.

Okay, great. And just maybe some comments on what the M&A pipeline looks like until we lacking any size this year?

It looks good. All business groups have a good pipeline. We are constantly looking into that. I would say that when you think about what we have done the last year that you saw we did fewer, but more sizable versus the past and very strategically relative to our portfolio, that is what you should expect from 3M going forward.

Hey guys. Good morning.

Good morning, Steve.

So thanks for the revenue color on the second quarter there. I guess the moving parts kind of sequentially with tax going up obviously and then you have the charge I guess which is going to flow through Electronics and Energy, so a normal seasonality would get you to something in kind of a 2.10 to 2.15 range, I would assume that these items bring you perhaps a little bit lower than that given what you pulled into the first quarter, is that kind of the right way to think about it. And then just the margin, year-over-year margin, I guess another way to ask the question would be what are the major differences in the year-over-year margin bridge given that the utilization and other should probably still be with you, you have the extra restructuring. Just maybe a little bit of color on the bottom line dynamics to help size us for the second quarter?

Okay. So, for the second quarter, Steve, I have shared much about the second quarter already. I would say about what we are expecting for total growth in Electronics and Energy, you noted the charge we are taking in our Electronics and Energy business. I think the only other thing on the margin I will point out is corporate and unallocated, I have guided that we expect that to be between $150 million and $200 million for the year first quarter right in line with that. As we look at the seasonality, we expect a corporate and unallocated for the year. We think that will stay right in that range. I do see Q2 as the highest quarter for our expense we will be incurring in corporate and unallocated and then moderating going into Q3 and Q4. In regards to margin for Q2, as it look Q2 and for the total year, Steve, FX and raw materials are a couple of things that are a little better than how we started the year thinking. And though I see those partially offsetting what we are seeing from lower utilization of our electronics and industrial assets in the first half of the year.

Okay. So year-over-year, a little bit of a better lift on margins in the second quarter is what you are saying?

As I look at our total guidance for the year, we expect margins up about 150 basis points. We were at $130 million in the first quarter. As I look across the whole year, fourth quarter is, Steve, where we expect the most margin expansion where we had the restructuring charge in the fourth quarter of last year. The second and third quarter I would put below the mean for the year for margin expansion.

Below the mean for the year. Okay, got it. So, can you get this, I mean, I think I am kind of walking these moving parts down. I mean, it seems like there is something roughly around $2. Is that kind of the right area for you guys?

Yes. Steve, we give guidance for the year, $8.10 to $8.45 is the right guidance for the year. I am not going to try to guide the EPS for the quarter.

Good morning. I guess two longer-term questions on the Electronics and Energy segment. Are you happy with the prospects for accelerating growth through better R&D the same way as you expressed on Health Care? And then related to that as you look at the longer-term strategic options for those businesses, are your options constrained by the degree to which our R&D backbone across the business is integrated, so that you don’t want to source an IP to exit the company that might affect the other segments?

Well, let’s start with the first question. In a way, they are maybe related, right. So, you are talking about research and development, investment into that business and so forth. The advantage in that business is if you think about the Electronics, very much of that is spec-ins right. So, we work direct with our customers in order to make sure we find solutions for them. That’s actually a very powerful model if you think about it. So, we have two processes in the company, one called Idea 2 Innovation, i2i, which is more for consumables, and then you have customer-inspired innovation, which is a model where you work direct with one specific customer. So, if that is in aerospace, that is in automotive, if that’s consumer electronics or wherever that it is right into one specific customer. The strengths of that model is that you know exactly the outcome of that model. You don’t work on something that is broad-based from a market perspective that eventually will take place. You know it will take place in this customer-inspired innovation. And if you don’t come to a solution, you kill it very early. So, I am very confident in that model and that is why that is a very good business from 3M because we can provide through our technology platforms multiple solutions that will generate better and more competitive products for our customers. So, the answer to that is I’m very confident in the research and development into that model. And we can adjust of course based on what they are requiring. So, that’s an important element on the Electronic side. On the Energy side, it’s a model that we are using in the normal industrial production or in consumer, etc. where you have a bigger market space that you need to serve and when you get the input from customer panels, etc. So, the business is always built on research and development, and that is the heartbeat of 3M. That is also why we are able to generate very good returns to our investors, because we are not commoditized. We don’t work with those customers in order to replace something that is already in their devices today. We try to move it to the next level together with them. That is the power of it.

To wrap up, we had a strong start to the year highlighted by good earnings, margins, and cash flow. Going forward, we will continue to execute the 3M playbook to drive efficient growth and create even greater value for customers and shareholders. Thank you for joining us, and we look forward to talking to you very soon. Have a great day.