3M Company (MMM) — Q4 2016 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to our fourth 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'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3M.com under the heading, quarterly earnings. Before we begin, let me remind you of the dates for our investor events in 2017, as highlighted on Slide 2. First, starting with earnings, this year’s conference calls will be held on April 25, July 25, and October 24. Second, we will be hosting a European Investor meeting on June 6 and 7 at our Headquarters in Neuss, Germany. Please hold the dates, additional information will be provided closer to the event. Please take a moment to read the forward-looking statement on Slide 3. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to Slide 4 and I'll handoff to Inge. Inge?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. I will begin my remarks with a recap of the fourth quarter and later in the call, I will provide some comments on our full-year performance. Our team had a good finish to 2016 as we delivered double-digit growth in earnings per share along with strong margins and robust cash flow. We also continued to position 3M for the future through our three key levers while returning significant cash to our shareholders. With respect to EPS, we posted earnings of $1.88 per share, an increase of more than 13% year-over-year. Total sales across our enterprise was $7.3 billion, up slightly versus last year's Q4. Organic growth companywide was 2% with three of our five business groups delivering positive organic growth. As I indicated in our October earnings call, organic growth in Industrial turned positive in the fourth quarter. This business had a strong finish to the year with 5% organic growth, which was broad-based across the portfolio. Safety and Graphics posted 2% organic growth with a good performance from personal safety, one of our Heartland businesses, as well as from roofing granules. As we expected, organic growth in Health Care was similar to the third quarter at 1.3%. We expect Health Care to regain its momentum as we move further into 2017 and as our additional growth investments begin to pay off. Organic growth in Consumer was down 1%, while this business experienced positive points of sales across its retail customers, it was negatively impacted by inventory reductions throughout the retail industry. Electronics and Energy closed out the year with another quarter of sequential improvement posting organic growth that was down just slightly, while once again expanding its operating margins. Looking at margins across our entire Company, we delivered another strong broad-based performance. Margins were up more than 200 basis points to nearly 23% ranging from 30% in Health Care to 21% in Safety and Graphics. At the same time, we generated healthy cash flow with the free cash flow conversion rate of 154%. Our strong and consistent cash flow enables us to invest in the business, while also return significant cash to our shareholders. And in the fourth quarter, we returned $1.6 billion to shareholders through dividends and share repurchases. In summary, we had a good finish to 2016 and I would now turn the call over to Nick, who will take you through the details. Nick?

Thank you, Inge. Let's begin with Slide 5, where I will breakdown the fourth quarter change in sales. Organic local currency sales grew 1.6% in the quarter with organic volume up 1.5% and selling prices up 0.1%. Divestitures reduced sales by 0.4 percentage points. This impact relates to the divestitures of non-strategic businesses further evidence of our ongoing portfolio prioritization and focus on our best opportunities. Finally, foreign currency translation reduced sales by 0.8 percentage points. Considering all factors, fourth quarter sales in U.S. dollars increased 0.4% versus last year. On a geographic basis, U.S. organic growth increased 1.2% led by a mid single-digit performance in Industrial. Health Care and Safety and Graphics businesses also grew organically in Q4. Turning to Asia-Pacific, organic growth was up 2.4% with Health Care and Consumer leading the way. This growth was partially offset by a decline in Electronics and Energy during the quarter. Within Asia-Pacific, organic growth increased 6% in China/Hong Kong and 3% in Japan. Excluding our Electronics businesses, China/Hong Kong was up 11%, and Japan grew 2% organically. EMEA organic growth declined 2.4%. West Europe was down 1% as growth in Safety and Graphics and Industrial was more than offset by declines in our other business groups. Central East Europe and Middle East Africa declined mid-single digits year-on-year, impacted by ongoing challenges in Saudi Arabia and Turkey, which we expect to persist in the near-term. Finally, Latin America/Canada was our fastest growing area with organic local currency growth of 4.1%. We saw solid growth in four of our five businesses led by high single-digit growth in Health Care. At a country level, Mexico delivered strong double-digit growth, while Canada was up 3%, and Brazil increased 1%. Please turn to Slide 6 for the fourth quarter P&L highlights. Companywide fourth quarter sales were $7.3 billion and we generated earnings of $1.88 per share, a Q4 record. GAAP operating margins were 22.7%, up 220 basis points year-on-year, which we delivered while making incremental strategic investments of $50 million to drive future sales and profit growth. On the right-hand side of this slide, you’ll see the components of our margin performance. Starting with the benefits, price in raw materials combined increased margins 50 basis points versus Q4 of 2015. Market prices for many raw materials were once again favorable year-on-year and our global sourcing team continues to deliver savings above market. Core price growth was down slightly in the quarter as we took targeted actions to drive organic volume growth. Moving to restructuring, you may recall that in the fourth quarter of 2015, we announced a restructuring plan to enhance our competitiveness and productivity. The associated benefits from this action boosted fourth quarter 2016 operating margins by 40 basis points year-on-year in addition to the positive comp related to the Q4 2015 charge itself. Pension and OPEB expense declined year-on-year, as has been the case throughout 2016. This increased Q4 margins by 90 basis points. Organic volume and utilization was neutral to margins in the quarter, a marked improvement versus the headwinds we experienced through the first three quarters of 2016. Improved organic volume growth was a factor in this improvement, particularly in our Industrial and Electronics and Energy businesses. Turning now to headwinds, foreign currency impacts net of hedge gains decreased margins by 20 basis points in Q4. Legal and other reduced margins by 30 basis points in the quarter primarily due to higher year-on-year costs from legal settlements. Incremental strategic investments lowered margins by 70 basis points in the quarter. As we indicated during our December outlook meeting, we are increasing investments in a number of core platforms to accelerate growth in 2017 and beyond. At the same time, we continue to take actions in Q4 to better optimize our global manufacturing footprint, improve service to our customers and drive ongoing productivity. Finally, well, you don't see it on this chart. Q4 corporate and unallocated costs were higher than anticipated, largely due to the aforementioned legal costs. For the full-year 2017, we anticipate corporate and unallocated costs will be in the range of $225 million to $275 million. Let's now turn to Slide 7 for a look at earnings per share. Fourth quarter GAAP earnings increased 13.3% to $1.88 per share.

As you see a number of factors impacted our earnings, growth and margin expansion added $0.16 to per share earnings in the quarter. Acquisitions and divestitures increased earnings by $0.04 per share, driven by gains on the divestiture of the Polymask business within Industrial, along with the sale of non-core intellectual property in Electronics and Energy. Foreign currency impacts, net of hedging reduced pretax earnings by $18 million or the equivalent of $0.02 per share. Higher balance sheet leverage led to an increase in net interest expense year-on-year reducing per share earnings by $0.02. Our fourth quarter and full-year tax rate came in lower than we had projected due to a combination of increased benefits from our supply chain centers of expertise, along with improved geographic profit mix. The Fourth quarter tax rate was 28.2% versus 29% in last year's fourth quarter, which increased earnings by $0.02 per share. Finally, average diluted shares outstanding declined 2% year-over-year, which added $0.04 to fourth quarter EPS. Please turn to Slide 8 for a look at our cash flow performance. Fourth quarter operating cash flow was $2.2 billion. Free cash flow conversion was 154% in Q4 and 104% for the full-year. For the third consecutive year, free cash flow conversion exceeded 100%. In the fourth quarter, we invested $436 million in CapEx, bringing our full-year investment to $1.4 billion. For 2017, we expect capital expenditures to be in the range of $1.3 billion to $1.5 billion. Also in the fourth quarter, we returned $1.6 billion to shareholders via dividends and gross share repurchases. For the full-year 2016, we returned $6.4 billion to shareholders, including cash dividends of $2.7 billion and gross share repurchases of $3.7 billion. For 2017, we expect gross share repurchases in the range of $2.5 billion to $4.5 billion. Let's now review our Business Group performance starting with Industrial on Slide 9.

Industrial posted Q4 sales of $2.5 billion leading the Company with organic growth of 4.6%. Our automotive OEM business led Industrial delivering strong double-digit growth continuing its consistent track record of outpacing growth in global car and light truck builds. Advanced Materials, Automotive Aftermarket and our Separation and Purification business all posted solid mid-single-digit growth year-on-year. On a geographic basis, Industrial's organic growth was broad-based across all regions with mid-single-digit growth in Latin America/Canada, the U.S. and Asia Pacific while EMEA was up low single-digits. The Industrial business delivered strong operating income of $553 million in the quarter with margins up 260 basis points to 21.9%. The margin improvement was driven by the gain on sale of Polymask, past restructuring actions and ongoing productivity improvements. Please turn to Slide 10. Safety and Graphics delivered another good quarter with fourth-quarter sales up 2.2% organically to $1.3 billion. Our Personal Safety business posted solid mid-single-digit organic growth in Q4. This included double-digit growth in China/Hong Kong, where we continue to experience strong end market demand for our personal safety solutions. The Roofing Granules business delivered another solid quarter of high single-digit growth which capped off a consistently strong year. On a geographic basis, Safety and Graphics growth was led by Asia-Pacific and Latin America/Canada, which were up mid-single-digits. You may recall in December, we announced the sale of our Identity Management business. We continue to expect the divestiture will be completed sometime during the first half of 2017. Safety and Graphics operating income was $270 million in the quarter and operating margins decreased 100 basis points to 20.8%. Adjusting for the divestiture gains and restructuring charges that occurred in Q4 of 2015, operating margins increased 120 basis points year-on-year. Please turn to Slide 11. Our Health Care business generated fourth-quarter sales of $1.4 billion. Organic growth was up 1.3% in line with our expectations. Health Care growth was led by a double-digit increase in food safety, followed by solid growth in both drug delivery systems and medical consumables. Organic growth in oral care was down slightly as the business continued to be impacted by soft market conditions and channel inventory adjustments. Health information systems also declined organically year-on-year due to a slower rate of software installations in a tougher market over the past year, along with the challenging comp against last year's record Q4. Looking ahead, our customer pipeline is strong. Therefore, we expect growth in health information systems to accelerate throughout 2017. On a geographic basis, Health Care delivered high single-digit growth in Asia-Pacific with particular strength in China/Hong Kong, which was up double digits. Latin America/Canada and the U.S. also posted positive organic growth in the quarter. Health Care’s operating income was $410 million and margins remained strong at 29.8%. Importantly, we generated these returns while investing an additional $30 million to enhance growth in core platforms across the business. Next, let's cover Electronics and Energy on Slide 12. Fourth-quarter sales for Electronics and Energy were $1.2 billion, down 0.6% organically. Organic sales growth was flat in our electronics-related businesses an improvement over recent quarters as end market conditions and channel inventories became more stable. As we explained at our outlook meeting in December, we are gaining penetration with leading electronics OEMs in China and also investing to capitalize on the rapid growth in automotive electronics. Our Energy-related businesses declined 2% organically with growth in our telecom business more than offset by declines in electrical markets and renewable energy. As a reminder, at the end of 2015, we exited our backsheet business in renewable energy, which reduced energy-related organic sales by 3.5% in Q4 of 2016. On a geographic basis, sales in Latin America/Canada grew organically in the low single digits, while Asia-Pacific and EMEA declined. Electronics and Energy delivered a strong operational quarter with operating income of $326 million and margins of 26.9%, up 10.3 percentage points year-on-year. The year-on-year improvement was driven by a few factors that impacted Q4 margins in both 2015 and 2016. First in Q4 of 2015, we incurred charges related to portfolio and restructuring actions, which reduced fourth-quarter 2015 margins by 340 basis points. Second, in the fourth quarter of 2016, the business realized a gain from divesting non-core intellectual property, which added 270 basis points to Q4 2016 margins. Adjusting for these items, Q4 margins increased year-on-year by approximately 400 basis points. Looking at the full-year operating margins were 22.3%, up 120 basis points year-on-year. I'll finish with our Consumer business on Slide 13. Fourth-quarter sales in Consumer were $1.1 billion. And as Inge mentioned, growth was impacted by channel inventory reductions in the U.S. and to a lesser extent West Europe. So from a pure selling perspective, our fourth-quarter organic growth was down 0.7%. On the other hand, from a point of sale or sellout perspective, our Q4 growth was positive in line with our historical trends. So we expect consumers' organic growth will be back to more normal historical levels during the first quarter. Despite these channel adjustments, we posted positive worldwide organic growth in three of our four businesses, namely Home Improvement, Consumer, Health Care, and Home Care. The Stationery and Office Supply business, which was most impacted by channel adjustments, declined year-on-year. Looking at Consumer geographically, growth was led by a mid-single-digit increase in Asia-Pacific, while the U.S. was flat, and EMEA declined year-on-year. Consumers' operating income was $228 million with operating margins of 20.9%. Margins were down year-on-year for two primary reasons. One, we rationalized one of our manufacturing sites during the quarter, and two, the business accelerated growth investments in the quarter. We continue to see good opportunities to invest and drive growth within the portfolio. In fact, we increased investments in Q4 in our category-leading Command and Filtrete product lines. Both posted double-digit organic growth in the U.S. this past holiday season. That wraps up our review of fourth-quarter results. Please turn to Slide 14 and I'll hand it back over to Inge for some final comments before Q&A. Inge?

Thank you, Nick. The fourth quarter capped a successful year for our enterprise, as we executed our playbook and delivered a strong operational performance. We increased our earnings per share by 8%. Margins were up more than 100 basis points to 24% with four of our five business groups posting margin expansion. In addition, we delivered free cash flow conversion of 104%, which is our third consecutive year above 100%. And for the fourth straight year, our return on invested capital was above 20%, coming in at 23% this year, and we achieved all of this in a year of flat growth. As you can see, we are executing well and controlling what we can control. 2016 was also a notable year with respect to our dividend, as we marked 3M’s 100 consecutive year of paying dividends to our shareholders. For the full year, when we combine dividends and share repurchases, we returned a total of $6.4 billion to our shareholders. During financial results, we continue to build for the future through our three key levers, which are significant value creators for us. Let me start with portfolio management, an ongoing process that is all about strengthening and focusing our portfolio, which improves our competitiveness and makes us more relevant to all customers. This includes consolidations within 3M, along with the divestiture of non-core businesses, and we were active on both fronts in 2016. Portfolio management is benefiting our customers and 3M as we now have greater scale and can better prioritize our resources. This includes growth investments and at our December outlook meeting, we highlighted the incremental $100 million we are investing to accelerate growth in our core platforms. We will now move on to the second lever, investing in innovation. In 2016, we invested $1.7 billion or nearly 6% of sales in Research and Development, which is the heartbeat of our Company. This supports both our short and long-term growth objectives along with our premium margins and return on invested capital. Last year, we also celebrated the opening of a new laboratory in St. Paul, while earning more than 3,000 patents around the world. Business transformation is the third lever, which starts and ends with our customers. Last year, we continued to make good progress with the rollout of our ERP system in West Europe, which is nearly complete. Within West Europe, we have now deployed in 11 countries our four largest distribution centers and our supply chain center of expertise. Globally, we now have a total of 16 countries live and a new ERP system and our three global service centers are also up and running. We are already beginning to realize productivity gains from business transformation, which will increase in 2017 and beyond. By 2020, it will result in $500 million to $700 million in annual operational savings and another $0.5 billion reduction in working capital. Looking at our performance in 2016, the 3M playbook is working. From an operational perspective, we are executing well and delivering premium returns. At the same time, we continue to make investments that will enable us to capitalize as growth conditions improve. As a result, we are positioned to build on our momentum and deliver another strong performance in 2017. Please turn to Slide 15. Here you see our planning estimates for the year, which are unchanged from our December outlook meeting. We estimate earnings per share in the range of $8.45 to $8.80, an increase of 4% to 8%. Organic growth is expected to be 1% to 3% and we anticipate another good cash flow performance with a conversion rate of 95% to 105%. With that, I thank you for your attention and we will now take your questions.

Hi. Good morning, guys.

Good morning, Scott.

Good morning, Scott.

When I look at my list of companies, you guys tend to be, obviously, about as global as anybody gets and have a pretty broad supply chain. And my question is how do you plan spending on even 2017? I mean how do you plan spending when you don't have a real great sense of tariffs and trade and how all that could be disrupted in the next couple of years? Does that play into the planning at all or do you just continue on?

Hi, good morning, by the way.

Good morning.

As you know, we are laying out very much localization strategy in terms of our business across all subsidiaries around the world. So at this point in time, we continue to lay out the plan as we have talked about. We are making investments in what we see as the most important businesses for us to grow both in the United States and overseas based on that strategy, right? So by definition, even if we have both global customers and local customers, we need to make the investment based on what they are and what they are doing. And I would say that when I look upon this quarter specifically, there are some very interesting movements, I think coming back a little bit to historic performance relative to growth, which we had that 1% growth in developed markets, but we are 3% in developing markets. So there is a type of a movement also coming back in the developing economies, which is interesting. And as you heard Nick said, if you take China, China was 6% organic local currency growth all in excluding electronics was 11 and when we look upon our five businesses in China specifically it was fantastic growth in all of them. We have Safety and Graphics grew almost 20%, Consumer 17%, Health Care 15% and Industrial 12%. So we need to continue to invest based on the growth in those segments. So we don't make a change at this point in time relative to the planning for the year and as we said in December, we are adding another $100 million this year in order to accelerate the commercialization of products. But I would say generally speaking, it's early in the year as we know, but I saw some trends here that are positive relative to growth coming. You saw the Industrial business group almost 5% growth and it was broad-based all over the world. They grew in every geographical area around the world. So very encouraging as I look upon it. For Germany, they have positive growth for the third consecutive quarter for us. So I feel more positive as we move into 2017 even if it's early.

Just a quick follow-up. When you guys think about - I’ve never asked this question before, I don't know why I haven't, but is there such a thing as book-to-bill in Electronics and Energy or is it too short cycle for that?

Once again, can you repeat the question?

Sure, is there such a thing as book-to-bill or something like that Electronics and Energy where you can get a sense of which quarter of this year coming up, you turn into positive territory? I don’t know again why I’ve never asked that question before, but I don’t think you’ve ever referenced it. Just trying to get a sense of which quarter you might see positive growth and that would…?

Scott, let me take that one. We don't have a formal metric that we're measuring on a book-to-bill ratio in our Electronics business. It is a fairly short cycle, we're working with all of our customers there to be projecting, what the demands are in the future, but unlike some other industries, this is not one where we have a book-to-bill ratio.

Okay. That's what I thought, but I have to ask. Thank you guys, and good luck to you.

Thank you.

Thanks Scott.

Hi, good morning.

Good morning, Julian.

Good morning. Just a question firstly on the Consumer business, I don't recall you talking about the slowdown much at the mid-December meeting. So I wondered if it was something the inventory reduction was something that became apparent sort of very late on? Is there any color you could give around days or weeks of excess inventory in those channels today?

Julian, as far as the consumer business in the trends we saw throughout the fourth quarter, much of this differential we saw between sell in and sell out occurred in December and in particular in the last half of December. In regards to inventory, we don't really see the channel having excess inventory now. We considered a fairly normal inventory channel level in our consumer channels.

Thanks. And then if we look at the margin bridge, it was curious a little bit that the utilization piece and organic volume was not a contributor. It was flat even though the sales growth performance was actually pretty good. Was there anything unusual in Q4 that weighed on that specific line in margins that meant the operating leverage was not as high as it could or should have been?

Yes, Julian. That's, and I'll just put it in perspective, we've had that particular item being noticeably negative on our margin for the first three quarters of this year and getting that to be neutral for us for the fourth quarter with our 1.5% volume was the main thing that happened for us in the fourth quarter. There isn't some particular headwind buried in there, but it was for us a notable trend change from where we've been the first three quarters.

And do you still feel good about $0.10 to $0.20 of EPS accretion in 2017 from utilization?

Yes, we do, Julian. That component of our EPS lock as well as every other line, we're still feeling very confident in right now, Julian.

Hey, good morning, guys.

Good morning, Andrew.

Good morning, Andy.

So just a follow-up on Industrial, we know you have significant short-cycle exposure within Industrial and you did have easier comparisons in the quarter. But I think that growth jumped pretty meaningfully. Maybe you could give us some more color on how much of the improvement was maybe the energy component within advanced materials looking less bad or we know you had the big defense contract ramping up within advanced materials versus the rest of the Industrial business improving. And then how do you feel about your 1% to 3% growth forecast now for 2017, given you put up over 4% in 4Q?

Well, first of all, it was broad-based growth in Industrial, both in terms of the businesses and in terms of the geographical area. So that was not one specific business that type stood out in terms of growth, even if you saw Nick comment on - again the fantastic performance for the automotive OEM business, but it was broad-based and it's coming back, I would say, a little bit as we have talked about earlier in terms of evolution of economies. And I think you've seen now as becoming more output from manufacturing around the world; we are very early in that process. And if you look upon PMI, the United States had a PMI of 54.7% in the quarter, China 51.4%, and Germany 55.6%. If you think about that in terms of big economies that will help us as we move forward, and as I said, it was broad-based. Now to your second question, how we feel about 1% to 3% for the year as we came out of 5%, feel good, feel good. Too early to change that as we sit here today, but generally speaking, I would say, feel good about industrial businesses. And if you think about in terms of size, this is one-third of 3M and when we start to get good momentum in that business, that helps us a lot. Right? You saw they had good growth and we talked about that on the last earnings call that they will grow in Q4, and they did and it's very good. But yes, I said that’s too early to change anything as we move into the year, right, so let's see after the first quarter how we position it.

Hey, Andy, just one more detail on that I'll share. We've been talking about this for a quarter or two that we have some defense contracts we were awarded and those shipments were going on in the fourth quarter. Our body armor shipments added about 150 basis points to the total Industrial organic growth in Q4, so stripping that out the core underline is right around 300 basis points of growth.

Okay, Nick, that's helpful. And then, Nick, you've talked about 3M's ability to achieve 30 to 50 basis points across in 2017. You obviously did 50 basis points in 4Q. But pricing in the U.S. continues to look competitive. It was a bit worse in 4Q than it was in 3Q. You mentioned sort of going after some additional organic growth. Can you talk about 3M's ability to offset a pretty competitive U.S. pricing environment? With the better sourcing and with the help of business transformation that you talked about, are you still confident in positive price versus cost contributing to that $0.20 to $0.50 of organic global currency growth that you have?

Yes. Andy, there are a lot of subjects you hit there in one question. As far as the underlying price growth in the U.S., what we see in our view is our fundamental pricing power is not changing. It's still very strong. We did in the case of the U.S. take some targeted actions to help drive organic volume growth for us. Also for the total Company and this isn't going outside the U.S. This is a quarter where we saw less pricing actions related to FX movements and you see that with our - and that's down noticeably from where we've been in the first three quarters of this year. So all in for 2017, we're still expecting positive core price growth in the U.S. and globally. Now to the other parts of it, our ability to use sourcing to continue to add to our earnings and our margin. I laid out a month ago that we expect between $0.10 and $0.15 of EPS accretion through our sourcing effort and everything we're seeing now, we see that on track, much of that is being driven not by just pure market prices, but it's now being driven by our own efforts to be substituting raw materials and taking advantage of our negotiation power.

Hey. Good morning, guys.

Good morning, Joe.

Congrats on the 100 years of paying a consecutive dividend; not a lot of companies can claim that. The first question I have is on Health Care. You talked a little bit about regaining momentum, and I recognize that you had some product introductions in the quarter, but you also still have some headwinds on Oral Care. And I'm just curious, given the headwinds also potentially from the ACA, I'm just wondering like what gives you kind of the confidence that you could really see the momentum pick up as we progress through 2017?

Well, first of all, most of our businesses are doing very well, right. So food safety is still growing very well, drug delivery system did well as well and then consumables in the medical space did well. So if you take that together, right, there is underlying momentum in the business. We have invested quite a bit in this business for some time and we stepped that up and they have had a big investment starting already in the second half of 2016 and that now we'll start to generate growth coming into Q2 and Q3 for the year. And the pipeline as Nick commented on, the pipeline for health information system is very strong, so yes, it’ll slow down a little bit in terms of execution and deployment of that software into the hospitals, but the pipeline is very, very strong. So I would say that when you think about it generally speaking, we know that with investment in the areas we invest in Health Care, which is around coverage and health economics and some research and development, specifically the coverage will pay off sooner rather than later. And again, we see that the developing economies are starting to pick up for us. So the confidence is high that we will see the growth coming as we move into 2017.

Okay. And then maybe my follow-up question and getting back to price cost for a second. Nick, maybe talk a little bit about the fact - it looks like you got about 10 basis points or so on pricing this quarter. We're moving into more of a kind of a commodity reflating environment. So how is that dynamic going to work as we progress through 2017 on your ability to continue to get price?

Joe, the total posted 10 basis points if we strip out the FX portion of that and then we're looking at flat to down very slightly of core underlying there. As I look at how this progresses throughout the year, we actually have a pretty steady view throughout the year, Joe, it's changing much of just having our core underlying price growth often in that 30 basis points to 50 basis points. I think the wildcard on there is FX, the dollar been moving a lot and that as far as what we post for price growth in the quarters will be volatile in the coming quarters with some volatility based on what happens with the U.S. dollar primarily in developing markets.

Thanks and good morning all.

Good morning, Steve.

Good morning, Steve.

Just back to the pricing questions, specifically, you mentioned targeted actions that you took in the U.S. to drive some volume? Can you give us a little more color on what segments you were talking about, what areas?

Yes, Steve, in particularly isolated places, there are some places in our consumer business, where we took actions like that also in our Industrial business. Those are the most common places where we took those types of targeted actions Steve.

Okay. And with the trigger for that kind of thing, competitive actions was it particular projects I'm just trying to get a sense for kind of the implications for the broader pricing power in those businesses?

Steve, we take those actions when we see an opportunity either in the competitive landscape to take share that we otherwise want to have or in some cases it's a reaction to where we see pricing pressure from competitors and we price accordingly to maintain some of our shares, so it's some of those Steve.

Thanks everyone. Good morning.

Hey, John.

Yes, hi, Inge.

Hey Nick, hi Inge. How did the Dental business do sequentially? I don't remember you talking about that when you were describing the puts and takes in the Health Care performance. And it was under pressure, right, in the third quarter? Did you see a similar trend in the fourth quarter?

Yes. John, we saw our Oral Care down slightly, partly from softening end-user demand and also what we see is continuing channel contractions in the Oral Care business.

Do you have any sense of the underlying - it's one thing if it's one quarter, because sometimes dental, it seems is a little bit of a canary in the coal mine, right, for the economy. But now the economy, based on your own commentary and what other companies are saying, seem to be picking up. So what do you attribute then, I suppose the continuation of the soft dental? Is there a way you could frame what you've seen and maybe provide some historical context?

Yes. I think what you saw in the last quarter of the year, basically the two things is inventory reduction in the channel, because it's very much distribution-oriented and that's based on lower demand in the end market. And I think that was based relative to the United States and West Europe. Now, if you think about both in consumer and you think about businesses like Oral Care, the supply chain there is very sophisticated. So what we have to look upon is sell-in and sell-out, and I think in those cases, what you will see as demand will by definition should go up and I think the facts are telling us that in that industry in Oral Care then they would build up inventory again as you go into the year. But for us, we look upon those businesses, they are very good partners of ours and they are very professional, very, very professional in the supply chain, so they do the right thing in terms of adjusting their level of inventory if they see softness. What they are telling us now is they see demand coming back as we roll into 2017. If you move from Oral Care and go back and I was not sure that came across, if you take our consumer business that was down 1% in terms of sell-in from us, sell-out on our top customers in the U.S. was 3%. So in 3%, that's the historical base for consumer for the last couple of years. So from that perspective, I think the retail channel stay, so maybe some softness for them, generally speaking in the end of the holiday season they did the right, they just managed through their inventory and for me that's a very professional way of doing business. Our sell-out was the same indicating for me as we move into 2017 that inventories will be filled back because the demand will steady in the end market, but I think they did the right thing in terms of the retail channels.

Well, I certainly give away your products as Christmas gifts, so don’t let me…

We can do more.

Good morning, everyone.

Good morning.

I guess the first question is in terms of just thinking about your overall explicit exposure to energy and kind of the wider implications and effects of your portfolio to energy, given what we've seen in the downturn. Have you seen any encouraging trends across your businesses that you would cite to say with the stabilization in energy prices, you could start to see incremental growth in the back half of this year? Could you just comment about what you're seeing across your portfolio with respect to that?

Yes. I think first of all, the answer is yes, we should see an uptick in the end of 2017 in the energy space and we have a very strong solid business in two utilities, right. That's a core 3M business and in fact this is a Heartland division. That division will do well. What they have is they have an element of some project-based businesses and we had talked earlier about ACCR and there are some pipe coating as well that had a type of a negative effect in terms of comparison for 2016 and should benefit that business as you move into 2017. The other business that we had a good quarter here is actually communication, what you will call telecommunications, but communication had a good quarter for us with 10% growth. It’s a smaller business for us, but we did well. So I think the energy space for us should improve as we move into 2017.

How do we think about the offsets in association with just kind of price cost and raws in the context of that though?

Rob, as we contemplate where we see our raw material pricing going in 2017, we took a view of oil in the range of somewhere between $50 and $60 a barrel and that's why we're seeing diminished impact from market prices on our commodities benefiting us in 2017 versus what we've seen in 2015 and 2016. So we’re anticipating that in taking that into account. Most of our raw material or commodity benefits we’re seeing are going to be the result of 3M efforts we're doing to take cost or substituting lower commodities. So there is an offset there and we think we’ve pretty accurately taken the offset on both the revenue side and the cost side into account.

Thanks. Good morning.

Good morning, Nigel.

Yes. Just of the investment spending picked up this quarter relative to 3Q, so just wondering if you can be a bit more granular in terms of where you're spending. And in particular, you referred to some price actions to drive volumes particularly in the U.S. Would that fall under investment spending?

I'll take the last part of that first, Nigel. The changes in pricing that I talked about that would not be part of investment spending. What is included in our strategic investment spending that we called out that's impacting our margin by 70 basis points this quarter, is two components. One is us taking actions on addressing our manufacturing supply chain footprint that we laid out last March at our five-year outlook meeting. We’ve been taking actions and that is part of what occurred in the fourth quarter, but also what's in that is investments we're making in growth in core platforms within 3M and that was part of what we'll also laid out in December. In 2017, we are accelerating our investments of approximately $100 million in these core growth platforms. We started that investment in the fourth quarter of 2016 and that makes up a little over half of the total of that strategic investment that we laid out for fourth quarter in our margin.

Good morning, guys.

Good morning, Shannon.

Hey. So at 1.6%, I mean you're already kind of getting close to the midpoint of the organic guide for the year and you've got Health Care clearly way below what you would normally expect to be at and Consumer is negative. It seems like you feel pretty good about Industrial continuing to be strong. So are there any other offsets here? Because it would seem that you'd be tracking closer to the higher end of that organic guide, all else equal, unless there's something you expect to slow.

Yes. For 2017 Shannon, the 1% to 3% we’re still right there. Yes, we like the fact where we ended in Q4 from an organic growth. But it's also in line with what we were anticipating in total, and it's in line with where we felt we needed to be for the 1% to 3% that we guided for 2017.

We would like to get ahead of ourselves, right. So I think it's important just to make important as we roll into the year and see more evidence of the positive movement, we saw here in the end. But as you said, investment we are doing the initiative we have around growth right because you look upon 3M as you see it now the efficiency in this organization is incredible and you see what we do in terms of EPS growth, free cash flow conversion, return on invested capital. We can get growth up even more that will get very good return for all of us. So that’s why we focus in and make sure that we will execute on that, but we will not overpromise anything to you at this point in time.

Just a final one. Obviously, I don't think you provide or disclose where your CapEx is spent explicitly, although, obviously, anecdotally you do. But looking at kind of the typical Note 17 in your 10-Ks, you can kind of see a flavor of where your PP&E is. It's disproportionate in the U.S. unsurprisingly, and obviously, the PP&E has been growing reasonably well in the U.S. while it's been relatively flat, I would say, across the balance of the portfolio. But could you comment on explicitly your CapEx strategy for the U.S., any kind of metrics you could use? And really the spirit of the question is obviously with the prospect of a change in the tax law in association with the deduction of capital expenditures in the U.S. potentially, that's the nature of what I'm asking about.

Rob, as you look at our total CapEx, we spent $1.4 billion on CapEx in 2016, a little more than half of that was spent in the United States, and it goes into a number of things, Rob. It goes into some of our business transformation investments; it goes into maintaining our capital base. Of all the areas of the world, the U.S. we have a very well developed capital base of manufacturing sites and investing in CapEx to maintain that, also some expansion in the United States that we've been investing in, so a little over half of it. It's around the world though Rob, we are investing in capital as Inge started out this morning and talking about we're investing in capital to align with where our customers are and align demand. So where we've been in the last few years, we've seen a little less international demand and a little higher U.S. demand and that has impacted our capital allocation. And going forward, we still anticipate a significant amount of our capital for the next year or two; I won’t be surprised that it's going to maintain being over 50% in the U.S.

Thanks. Good morning.

Good morning, Nigel.

Yes. Just a follow-up on the commentary related to Mexico, I know you expressed how well Mexico is doing, but can you elaborate on your longer-term thoughts on the region and any risk factors you think are present moving through 2017?

No, we don't, we have had very strong growth in Mexico for quite some time and it is an important local market for us, right. We have been there for many, many years. In Latin America, we have a very good growth rate for this quarter and we have been in that part of the world with our domestic business since 1946, right; that we started operations in Brazil in 1946. We have huge operations and it's very much locally driven and that is our strategy. So 10% growth in Mexico growth in the quarter is a good result, Brazil had 1%, so look like they're coming back a little bit, but we are not changing anything as I said - as I start the call here. Our strategy is around localization and if you go back to what we have talked about, we never left the United States. We expanded internationally based on the local market opportunity, right. So I think that's how you should view 3M in the business model that we are using.

Yes, good morning.

Good morning, Andrew.

Just on the pipeline, you are seeing strong trends in some of your businesses, can you lay out how much you anticipate selling off some of your inventory throughout the year?

As we move into 2017, we are quite positive about our sales pipeline. We will continue to accelerate the growth in key areas where we have been investing for the past few years. We expect our inventory levels to normalize as the demand becomes more consistent over the year. Thus, while specific figures may fluctuate, we're more focused on driving the underlying organic growth trajectory for the year.

Thanks, guys. I'm curious about the incoming trends in the first half of the year. Specifically, do you feel like the current momentum in Industrial translates into sustained strength throughout the first half, or is it leaner towards a cyclicality as we go deeper into Q2 and Q3?

We feel good about the current momentum in Industrial and believe it can translate into sustained strength through at least the first half of the year. However, we’re cognizant of potential cyclical trends as we move deeper into the year, especially with the external economic conditions fluctuating. It's important to remain agile and responsive to market conditions.

Thank you. To wrap up, the fourth quarter completed a successful year for our enterprise. In 2016, we executed our playbook and posted strong financial results in terms of EPS and margins along with free cash flow and return on invested capital. At the same time, we continue to simplify the organization and improve our cost structure while making investments for the future. As a result, we are positioned for a strong 2017 and we'll capitalize as growth conditions improve. Thank you for joining us this morning and have a good day.