3M Company (MMM) — Q2 2017 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to our second quarter 2017 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 future investor events. Please turn to slide 2. First, starting with earnings, our Q3 earnings conference call will be held on October 24, the Q4 call will be next year on January 25. And lastly, our 2018 outlook meeting will take place on December 12. Please mark your calendars. 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 hand the call off to Inge.

Thank you, Bruce. Good morning, everyone, and thank you for joining us. For 3M the second quarter was marked by strong organic growth of 4% with positive growth across all five business groups. At the same time, we took a number of actions to better position our enterprise for success in both the short and long-term. This includes accelerated strategic investments to support growth and strengthening our portfolio along with M&A. I will now take you through some of the numbers. As I mentioned, organic growth across the company was 4% led by Electronics and Energy at 8%. Industrial, and Safety and Graphics continued to grow well posting organic growth of 4% and 3% respectively. Health Care also grew 3% and it was good to see our Consumer business turn positive with 1% organic growth. Company-wide total sales in U.S. dollars were $7.8 billion, up 2% year-on-year. We delivered earnings of $2.58 per share along with margins of 28%. Note that these results include impacts from both M&A and strategic investments, which Nick will cover in more detail. Excluding those impacts, core operating margins remained strong at more than 24%. Turning to free cash flow, we posted a good conversion rate of 85% in the second quarter. Our healthy cash flow enabled us to invest in the enterprise by also returning significant cash to our shareholders. In the second quarter, we returned $1.2 billion to our shareholders through dividends and share repurchases. That concludes my opening remarks and I will now turn the call over to Nick who will take us through more of the numbers. Nick?

Thanks, Inge, and good morning, everyone. I'll start on slide 5. As Inge mentioned, GAAP earnings for the quarter were $2.58 per share. Since we had several moving parts this quarter, I thought I would take a moment to cover each item to make our underlying second quarter performance as clear as possible. As Inge mentioned, we continue to execute our plans in Q2 to strengthen the company for the future. During the quarter, we made incremental strategic investments of $178 million; $39 million was growth-related and $139 million related to portfolio and footprint actions. For the second half of the year, we anticipate another $0.20 to $0.25 per share impact from incremental strategic investments, largely footprint-related. These actions drive greater productivity from our manufacturing and supply chain base and will improve our service to our customers. Looking ahead, we expect footprint actions to be, at a minimum, an expense of $0.10 per share in 2018. This expectation includes benefits from actions implemented in 2017. In addition, we had divestiture-related activity in the quarter which added $0.57 to GAAP earnings per share, of which $0.54 relates to the identity management business. Taking into account these items, underlying earnings were $2.25 per share, up 8.2% year-on-year. Please turn to slide 6 for a recap of our quarterly sales performance. We posted good organic growth in the quarter of 3.5%, with volumes up a solid 3.8%. Selling prices were down 30 basis points year-on-year due to a couple of factors. Strong volume growth in electronics had a negative impact on price, and we saw less price growth in Latin America as currencies were more stable versus the U.S. dollar. We continued to actively manage the portfolio in Q2 and divested some non-strategic businesses which reduced sales by 100 basis points. Foreign currency translation decreased sales by another 60 basis points. All in, second quarter sales, in U.S. dollars, increased 1.9% versus last year. In the U.S., organic growth was 1.9%, led by a mid-single-digit increase in Industrial. Our Health Care and Safety and Graphics businesses delivered low single-digit growth in the quarter. The Consumer business was down 1% organically in the U.S. in Q2, impacted by continued channel adjustments in the office market. Asia Pacific led the company with organic growth of 10% in Q2. All business groups within APAC posted strong growth in the quarter, including a double-digit increase in Electronics and Energy and high single-digit growth in each of our other four business groups. Organic growth was 17% in China/Hong Kong and 8% in Japan. Excluding our electronics-related businesses, China/Hong Kong grew 12% and Japan was up 4%. Moving to EMEA, organic growth declined 2% in Q2, with a similar result in West Europe. This area experienced fewer billing days versus last year due to the timing of the Easter holiday. Through the first half of the year, EMEA grew 1% organically, led by our Safety and Graphics and Industrial businesses. Finally, Q2 organic growth in Latin America/Canada was 4%, with all businesses posting positive growth. Health Care led the way, up high single-digits and Consumer grew mid-single digits. At a country level, Mexico continued to deliver strong organic growth at 8%. Brazil was up 6% while Canada grew 3%. We continue to generate broad-based growth across the globe, giving us confidence in our full-year expectations, which Inge will discuss later. Please turn to slide 7 for the second quarter P&L highlights. Company-wide second quarter sales were $7.8 billion with net income of $1.6 billion, up 23%. On a GAAP basis, second quarter operating margins were 28%, or 24.3% year-on-year excluding the previously mentioned impact from incremental strategic investments and divestitures. Let's take a closer look at the various components of our margin performance in the second quarter. Gains from organic volume growth and productivity contributed 60 basis points to operating margins. Lower raw material costs net of selling price changes added another 10 basis points. Foreign currency net of hedge gains brought margins down 50 basis points in the quarter, while higher year-on-year pension and OPEB expense decreased margins by 30 basis points. Finally, incremental strategic investments reduced margins by 2.3 percentage points, and divestiture-related activity benefited margins by 6 percentage points. Let's now turn to slide eight for a closer look at earnings per share. Second quarter GAAP earnings were $2.58 per share, including a net earnings benefit of $0.33 per share from the combined impact of gains on divestitures which were partially offset by incremental strategic investments and non-repeating lost operating earnings. Excluding these items, our operating EPS was $2.25, up 8.2% year-on-year. The combination of organic growth and productivity contributed $0.08 per share to Q2 earnings. Business transformation continues to have a positive impact on our productivity efforts. Foreign currency, net of hedging, reduced pre-tax earnings by $0.05 a share. Our Q2 tax rate was 26% versus 29.6% in the prior year, which increased earnings by $0.12 per share. The lower tax rate was driven by favorable geographic profit mix, our supply chain centers of expertise, and ongoing strategic tax initiatives. For the first half of the year, our tax rate was 25%. We now expect the full-year tax rate to be in the range of 26% to 27% versus a prior range of 26% to 27.5%. Finally, lower shares outstanding and higher interest expense together had a net $0.02 positive impact to EPS. Please turn to slide 9 for a look at cash flow. We continue to generate solid operating cash flow as a company, which allows us to consistently invest in the business and return cash to shareholders. Second quarter free cash flow was $1.3 billion, up $378 million year-on-year. Free cash flow conversion was 85% in the quarter. And for the full year, we now anticipate free cash flow conversion to be in the range of 95% to 100%, versus 95% to 105% previously. The adjustment to the high end of the range is primarily due to the gain on sale of identity management. Second quarter capital expenditures were $302 million, and for the full year, we continue to anticipate CapEx investments in the range of $1.3 billion to $1.5 billion. During the quarter, we paid $701 million in cash dividends to shareholders and also returned $494 million to shareholders through gross share repurchases. In the first half of the year, we repurchased $1.2 billion in stock and now expect full-year repurchases to be in the range of $2 billion to $3.5 billion versus $2.5 billion to $4.5 billion previously. Let's now review our performance by business group. Please turn to slide 10. Industrial, our largest business group, continued its strong growth delivering second quarter sales of $2.7 billion, up 3.8% organically. Industrial's growth was once again broad-based across all geographic areas and nearly all businesses. Advanced materials led the way with low double-digit growth in the quarter. The automotive and aerospace solutions business grew mid-single digits in the quarter as we continue to grow the market. Our Heartland businesses within Industrial all posted positive organic growth in the quarter. Industrial adhesives and tapes grew mid-single digits, and abrasives and automotive aftermarket each grew low single digits. On a geographic basis, organic growth was led by Asia Pacific and the U.S. Industrial delivered second quarter operating income of $523 million with an operating margin of 19.2%. Adjusting for incremental strategic investments, operating margins were 21.5%, down nearly 200 basis points year-on-year. Half of the decline was due to foreign currency with the remainder from mix and select pricing actions to drive volume growth. Looking ahead, we expect operating leverage in the business to improve in the second half of the year. Please turn to slide 11. Second quarter sales in Safety and Graphics were $1.5 billion with organic growth of 3.2%. Organic growth was led by our personal safety business which again delivered high single-digit growth in the quarter. We continue to experience strong demand for our personal safety solutions across the world with particular strength in Asia Pacific, up double digits, followed by high single-digit growth in the U.S. In transportation safety, we continue to take actions to improve the portfolio. In Q2 we finalized the sale of the identity management and tolling businesses and announced the exit of electronic monitoring. For almost 80 years, 3M has pioneered industry-leading solutions to improve road safety and mobility. We continue to focus on the rapidly changing trends in transportation safety and mobility including the connected roadways of the future. Finally, Q2 organic growth in our commercial solutions business was flat while the roofing granules business declined, primarily due to tough year-on-year comps. Geographically, Safety and Graphics grew organically in all areas led by a 9% increase in Asia Pacific. Second quarter profits in Safety and Graphics more than doubled year-on-year to $852 million, boosted by the divestiture gain. Adjusting for these items and strategic investments year-on-year, operating margins were 27.1%. Please turn to slide 12. Our Health Care business generated second quarter sales of $1.4 billion. Organic growth was 2.5% year-on-year. Organic growth was led by a double-digit increase in drug delivery systems followed by food safety which was up high single-digits. Our medical consumables businesses, which represent the largest segment within Health Care, posted 3% organic growth in Q2. Health Information Systems was flat year-on-year and delivered sequential improvement. Looking ahead, we expect organic growth to improve in this business throughout the balance of the year as our contract pipeline continues to build. Oral care was flat in Q2 with the first half of the year up 2%. Geographically, Health Care was led by high single-digit organic growth in both Asia Pacific and Latin America/Canada. The U.S. grew 3% and EMEA declined mid-single digits. We saw notable strength in China/Hong Kong and Latin America which were both up double digits in the quarter. Health Care's operating income was $412 million and operating margins were 28.6%. Adjusting for strategic investments year-on-year, operating margins were 30.6%. Please turn to slide 13. Electronics and Energy continued to lead our company with second quarter organic growth of 8.4%, resulting in sales of $1.2 billion. The electronics side of the business grew 15% organically, as our team continued to drive increased penetration on many OEM platforms. For example, our Novec specialty fluid grew high teens as we continue to see strong demand for its many applications. Demand strengthened across most market segments in consumer electronics and we continue to benefit from favorable year-on-year comps. Our energy-related businesses were down 3% organically with electrical flat while telecom declined. On a geographic basis, organic growth was led by a double-digit increase in Asia Pacific which is where our electronics business is concentrated. Latin America/Canada grew slightly, while the U.S. was flat, and EMEA declined. Second quarter operating income for Electronics and Energy was $301 million with operating margins of 24.8%. As you can see, Q2 was another strong quarter for our Electronics and Energy business. Please turn to slide 14. Second quarter sales in Consumer were $1.1 billion with organic growth of 0.7%, which was an improvement versus recent quarters. We continue to see positive organic growth in three of our four consumer businesses namely home improvement, home care, and consumer health care. As expected, our stationery and office supplies business was again impacted by channel inventory reductions in the U.S. office retail and wholesale channels, although these growth headwinds were lower in Q2 versus Q1. We expect to see these channel adjustments continue, but to have less of an impact in the back half of the year. We are seeing a good return on accelerated investments in some of our key category-defining brands. For example, our Command damage-free mounting products posted strong double-digit growth, and we also delivered good growth in Scotch-Brite cleaning products. Geographically, organic growth in Consumer was led by Asia Pacific and Latin America/Canada, both up high single-digits. This growth was partially offset by declines in the U.S. and EMEA. Finally, operating income was $195 million with an operating margin of 17.2%. Adjusting for strategic investments year-on-year, operating margins were 22.2%. Please turn to slide 15 and I will now turn the call back over to Inge. Inge?

Thank you, Nick. As I look upon the first six months of the year, I'm pleased with the performance from our global team. We are successfully executing the 3M playbook while delivering strong growth and premium returns. On the left-hand side of this chart, you see the first half numbers. Robust earnings of $4.74 per share. Organic growth of 4%, margins of more than 25%, up 130 basis points year-on-year or up 40 basis points excluding the impact of M&A and strategic investments, and a free cash flow conversion rate of 70%. Equally important, we were active in taking action to strengthen 3M today and into the future. As you heard Nick discuss, we accelerated strategic investments in the first half which include an incremental $75 million to support growth in core platforms. This growth investment will continue throughout the year and will contribute 50 basis points to 100 basis points of growth in 2017. We also invested another $239 million in the first half to optimize our portfolio and manufacturing footprint. This is part of the five-year plan we laid out in March of 2016 at our investor day in St. Paul, and we are making good progress executing that plan. These investments are important to strengthen the long-term competitiveness of our enterprise. Beyond strategic investment, we also continue to make good progress on our three key levers. The first is portfolio management and in March we announced the acquisition of Scott Safety which should close in the second half of this year. This acquisition will complement organic growth and further improve our position in the fast-growing personal safety market. In the first half, we also finalized three divestitures and announced another one. Ultimately, selling the businesses will allow us to focus on our biggest and best opportunities and create the greatest value for our shareholders. Investing in innovation is the second lever. In the first half, we invested $944 million in research and development or 6% of sales. These investments support organic growth while enabling us to deliver premium margins and return on invested capital. The third lever is business transformation which starts and ends with our customers. At our Investor Day last month in Neuss, Germany, many of you saw the good progress we are making with the rollout of the ERP system in West Europe. Our business transformation plan is on track and I remain confident going forward. In summary, our team delivered a strong first half performance. We're executing our strategies, building for the future, and posting a good financial performance. As a result, today we are raising the bottom end of our full-year guidance for both earnings per share and organic growth which you will see on slide 16. With respect to EPS, we now anticipate earnings of $8.80 to $9.05 per share, up 8% to 11% versus last year, against the prior range of $8.70 to $9.05. Organic growth is estimated to be 3% to 5%, up from the previous range of 2% to 5%. And as you can see, we continue to expect strong results in terms of both return on invested capital and free cash flow conversion for the full year. That concludes our prepared remarks. And with that, I thank you for your attention, and we will now take your questions.

Good morning, guys.

Good morning, Andy.

Good morning, Andrew.

Nick, can you give us more color on what's going on with your ability to price? You mentioned the electronics pricing impact in APAC, the U.S. pricing continues to drift down. You did preview price versus raw as getting less positive as the year went on and it did stay positive during the quarter, but could you talk about your confidence that it will stay positive as the year continues? And then the negative pricing, you're seeing more choice and a market share gain for you or is it simply more competition?

Yeah, Andy, in the case of pricing both for the quarter and for the year, we're not – if I think about 3M's business model, where we take technology, use that to create value for the customers, that ultimately creates our fundamental pricing power. That hasn't changed. That remains strong. For the second quarter, we saw price down 30 basis points and as you mentioned we saw it down approximately 40 basis points in the U.S. On a global basis, what we're seeing, Andy, is two main things that have changed from the first quarter are strong growth in electronics which was much more of a price down that the other businesses that we saw that strong volume growth there contributed to more negative price growth in Asia Pacific. And then in Latin America, where we often see price growth often driven by weakening currencies against the U.S. dollar, we saw much more stable currencies there versus the U.S. dollar, so some of the corresponding price growth we see didn't materialize. The core price growth and this gets into what we saw in the United States. Core price growth, we traditionally see somewhere between 30 basis points and 50 basis points of core price growth. In the U.S., we see ourselves now tracking to the low end of what we've been expecting for price growth. We expect it to be closer to flat for the total year in the U.S. And we are taking in some markets selected price adjustments to gain market share, to accelerate volume growth. Some examples are our Industrial business and our Consumer business.

Okay, Nick. That's helpful. And then, Inge, can you give us a little more color on what's going on in your Health Care business? You've talked about seeing an acceleration in that business? Health Care also seems like the biggest target for your growth investments that are supposed to boost growth in that segment this year, yet you did see some deceleration in the quarter. Obviously, the deceleration looks oral care related, maybe that's shift Easter, but your growth investments, are they having their intended effect and could you still see some acceleration in that business in the second half here?

Yes, we will see acceleration of that business in the second half. And it is a very strong business for us. And you're right, we have made investment now for quite some time and in fact in Q2 we peaked that investment moving forward. So we see a couple of things happening for us. The accelerated investment for growth is now in a way hitting the peak for us, and you will see some of the business is really picking up in the second part of the year. And we have some easier comparisons as well. So you comment on oral care and, as you'll recall, all will recall, we had a very strong first quarter, almost 5% growth, second quarter was flat. And I think when you look upon that there is of course an impact, as we talked about billing days and selling days in West Europe due to Easter specifically. But I also think you saw in the United States end-user demand was down in the second quarter due to the reduction of restorative procedures. So I think, if you take those together, the growth for oral care after the first two quarter is 2%. So clearly, we are continuing to grow and we take market share. So I'm not overly concerned about that shift in between Q1 and Q2 for that business. And Health Care will do very well as we move ahead into the second part of the year. So we're on plan and it looks good for us.

Okay. Thanks, Inge.

Thank you. Good morning, everyone.

Good morning, John.

Good morning, guys. I'd like to pick up on the price theme just for a second. I think you have to go back to 2008 to see net price negative. And I guess I'm curious to know, are you guys – are you cutting price because your products are too expensive? Or because competitors have cut price? Or the underlying markets are changing out from under you? Maybe a little more color as to what's the context and nature of these adjustments? And in theory price cuts just don't happen on a one-time basis, there's a certain degree of perpetualness to it, right? Maybe you could help frame the durational context in your minds.

Yeah, John, you know as well as I do, it's a competitive world. We're constantly working to, how can we gain the market share that we think our products should be having? In this kind of competitive world, we keep looking for – where are there opportunities where price could have been a barrier for us taking market share? And in a couple of businesses I mentioned, Industrial and Consumer as well as Electronics in Asia, we look for where there are those opportunities. Partly how I think about this, John, we're also through our investments to accelerate growth as we're investing more dollars to commercialize many of our existing product lines. In some of those cases we looked at where are there opportunities where price – our current price position could be a barrier to us reaching the maximum market share potential that we felt we could attain. And we're making those selected adjustments. I do think we are at probably the peak of the price declines that we've taken to do that. I don't see much further downward pressure from the momentum we've had. If anything, I see the second half of the year with some uptick in that pricing.

Okay. So if I read between what you're saying, it sounds like you're saying that as you're looking at sort of strategy in the future, you said, hey, certain product lines in these categories are going to face upward limits if we don't actually adjust prices lower. So in other words, competitors weren't putting pressure on you, although maybe that happened thoughtfully, but this is very much 3M driving the strategic pricing, is that fair?

Yeah, John, I think the fair way to characterize it is, these are 3M decisions we're making not responses we're making to the market. These are 3M driven actions.

Okay. Understood. And then next, just the decline in share repurchase for the year kind of at the midpoint, what exactly are you signaling, if anything? And maybe you could remind us what exactly is your dividend policy? Your stock's done incredibly well, but now your yield is kind of – it's bordering on below-average. I mean, is it a payout formula? Or is it a yield function? Or maybe you could just remind us again please.

I'll talk broadly on returning cash to shareholders and then go into specifically what you're asking on the dividend and the share repurchases. So you know for us, John, returning cash to shareholders is a priority and we do it both through dividends and we do it through share repurchases. On the dividend front, we've reached a point where we think our dividend payout ratio is in the zone that we want it to be, and future increases in our dividend over time, we expect to be very similar to what we anticipate for earnings per share growth. So in the coming years, we expect our dividend to grow in line with earnings over time. On the share repurchase front, that's more dynamic for us, and you've probably heard me say this before, we have a two-fold strategy there. We do maintain a consistent presence in the market with a base level of repurchases, and then we augment that with opportunistic buyback based on relative value. We continually assess the market valuation through our own analysis, comparing it to how the stock is trading, and over time, we've found that to be a good risk-adjusted basis to be creating value. Now, in the case of lower purchases, both for the quarter and for the year, we adjusted the full-year range down based on where we stand through the first half of the year. The market has been strong, and we're exercising discipline. And we anticipate that there will continue to be opportunities in the future to effectively deploy capital to maximize those returns. I would also add that our allocation of capital to share buyback is also influenced by other demands on capital such as M&A.

So in other words, Nick, is the money you're going to save from share repo this year, is that sort of earmarked for something else? Or is it kind of a wait and see then?

There's a bit of a wait and see on that, John, that we still plan to be putting significant capital into share repurchases. We have announced our planned acquisition of Scott Safety, which we anticipate to happen in the second half of the year. But as you know, this type of market, there can be dynamics, so we are keeping our options open for the second half of the year.

Yes, we'd like to have flexibility, John, as we move ahead.

Yeah, absolutely, makes sense. Thank you very much.

Thank you.

Yeah. In terms of the strategic investments, you have spoken a lot about it on the call and it's been consistent with kind of your contemplation through the first half of the year. Could you talk about specifically what kind of returns you're looking for on these investments, whether paybacks or ROI? And talk about are the nature of the investments truly growth investments or there's some restructuring involved as well in certain areas where perhaps demand is not what you're thinking it is?

Rob, you can think of our growth investments this year in two big components. One is our investments in growth, and that's the minority part of the investment and it's aligned with what we originally guided back in December about an incremental $100 million that we anticipate to be spending in growth investments. There's a number of core product platforms we have that we're investing in commercialization dollars in some cases that can be advertising, merchandising, in some cases it can be people involved in adding people in the actual selling process of our products. And we anticipate that that will add 50 basis points to 100 basis points to our growth for the total year, and that's factored into our guidance now. And through the first half of the year, Rob, we're seeing our growth and our expenditures on that front tracking very much in line. But that's the minority of our total strategic investments. The more significant thing on strategic investments for us in 2017 is the actions we're taking in optimizing our manufacturing supply chain footprint. And that aligns with what we shared in March of 2016 when we laid out our five-year plan. And in optimizing our footprint and our manufacturing base, we anticipated over a period of the next few years we'd be investing between $500 million and $600 million, in some cases closing manufacturing sites and shifting manufacturing and expanding manufacturing in our more efficient sites, ultimately to reduce our total manufacturing footprint, to improve efficiency and to improve our ability to service our customers. Most of what you're seeing under strategic investments fits under that strategy. We took a number of actions in the second quarter, and in terms of the return, the way we've quantified that there's a couple ways I can quantify that for you, Rob. One is, by 2020 we anticipate that this will increase our operating income annually between $125 million and $175 million. That's one way for you to think of it. Another way is that we anticipate that this will be greater than a 30% return on investment for the investment that we're taking on this footprint optimization.

That's very thorough. Thank you. I mean, I guess the other question in the context of some of these pricing discussions that John and Andy alluded to, you'll find that investors in the space generally have a lot of PTSD when it comes to Amazon with respect to the distribution disruption that's going on across the board, and we see price concessions or a pricing regime of sorts in consumer, industrial businesses. Can you talk about your – are you rethinking distribution and the sensitivity to price or going direct? Or anything along those lines that would kind of orient why you think this is a forward-thinking 3M movement that you're kind of looking at things and saying maybe the business is changing, or maybe the environment is changing, we're going to get ahead of this and have more concessions on price or maybe do value engineering around new products to drive better growth? Could you just comment on that?

This is Inge. Let us first of all talk about what is going on in the marketplace. And as you talked about initially, consumer if you like, what is going on in the retail and consumer space. When you lead a business in totality, it's not price that you initially think about, you think about structure. And if you take our Consumer business, in order to adjust our structure for the future, we started that back in 2012. So 2012 was when we started to look upon our Consumer business in terms of how do we operate, and how do we think the future will look like, and how can we become more relevant to our customers? That was the question. At that time we had nine divisions in consumer, today we have four. So you think about that in terms of evolution of the portfolio. We started back very early to adjust for future that eventually could look different. And as you heard in the result today, there's slight difference in it in terms of consolidation for us as we have three or four business divisions growing. It's basically the office supply that still consolidation is going on. We have not seen any either in Consumer or in Industrial, any differences relative to the power for us to drive growth. We're often a price leader and we're executing those plans. So we don't see differences there. And if you think about 3M generally speaking as a business, 70% of our business is either design or specced in or regulated. So if you think about it from that perspective, it's a smaller portion of 3M that eventually could be impacted. And we will adjust relative to that. But we're not thinking of going on price because that's not our business model. Our business model is to introduce a product that is adding value either through different design or improved productivity, and then we're driving price based on that. But your question is on price, and I would say we are adjusting our business models as we move forward. And often that is for us the structure in commercialization and it's also footprint, right? So you saw the investment we are doing here and the first question relative to return on that $500 million to $600 million with an annual return by 2020 of in between $125 million to $175 million. Those are important things for us to improve our competitiveness as we move forward.

Thanks for your time.

Thank you.

Thanks. Good morning, guys.

Hi, Nigel.

So I hate to return to the same pricing, but I just don't think I've ever heard 3M trying to drive volumes or market share gains through price, so I'm wondering are you taking here a decision to invest some of the raw material goodness, the deflation in raw materials into price and hence market share? And just maybe, Nick, thinks about that $0.10, $0.15 of raw material deflation benefit in the plan, how does that look on a net basis versus price at this point?

Yeah. For the raw materials, the $0.10 to $0.15 that we anticipated of benefits at the beginning of the year, there's been puts and takes as we go along on the raw material side, but so far we're still seeing ourselves in that range of $0.10 to $0.15. I'd say, the potential were, in the last couple of years were we could go past that number, I don't see that as a very high probability. I see this in this range, maybe $0.10 being a little towards the bottom end of that range based on what we're seeing in the raw material markets today. On the pricing front, I don't know what to repeat, but other than there have been these isolated places where we've taken action. In the second half of the year, we expect a more normal price growth for 3M as we've put in place some actions to be bringing price back to a more normal level that we've historically experienced in 3M. So I don't see much changing on that front from our original guidance, Nigel.

Okay. That's fair. And just to clarify, when you say normal, do you mean the 30 bps to 50 bps ex-FX, will that be the second half of the year? Or is that more 2018? And then maybe just clarify as well the comment you made on the investment spending in 2018, you said $0.10. Now, is that $0.10 on top of the $0.05 to $0.10 run rate or $0.10 total?

On the strategic investment around growth, when we started the year we said that we expected that to be an incremental $0.10 expense and we continue to expect it to be that incremental $0.10. We're not increasing that number any further. And then on the price growth, well, I'd say it is a more normal range, I do think it'll still be to the lower end on price growth in the second half of the year, approaching in the positive zone, but not up to the whole 30 basis points to 50 basis points that we normally are getting for core price growth.

Hey, guys. Good morning.

Good morning, Steve.

So when you think about the Industrial business and I guess you can kind of throw Safety and Graphics in there as well, how much of that business currently goes through kind of the proper industrial distributors? And then how has that kind of trended relative to online and the Amazons of the world over the last, call it, two years here, three years, in rough terms?

Yes. This is Inge. If you think about – you combine the two businesses which is a good way to look upon it, I would say that think about it like a 50-50 model, if you think on it globally. Some countries will have more distribution than others. But if you think about the two businesses combined and how we go to market, I think it's 50-50 generally speaking. Again, if you take many businesses in both Industrial and in Safety and Graphics, they are spec in or designed in or also regulated in a way. So the push will maybe happen for some consumables that will go through e-business channels, if you like. But we have not seen a big trend in that space as of yet. Maybe it will come, but I think then you have to think about how will that impact you relative to what you do with your end customers. But we are prepared to move in that direction. And if you look upon our business in the second quarter, if you take the two businesses you're talking about, the increase relative to e-business was 9%, and they estimate it to be 14% for the second half of the way. But you have to think about it also, that piece today for us is 2% to 3% of our total business what we do e-business direct ourselves. Many, many of our customers are of course finding the platforms themselves, but they will not impact us by definition as we see at this point in time on price levels.

So when we think about kind of what's going on in the world going back to Rob's question around the higher level strategic type of stuff, Grainger obviously came out and made some headlines talking about cutting price to drive growth. They have a great franchise historically. I mean, you guys obviously have one of the greatest franchises ever and you're talking about cutting price to drive growth. Is this just coincidence? Is this just kind of the macro environment that we're in? Or are these in some way linked to what's become a much more dynamic competitive environment in the Industrial or even Consumer channels if you want to throw Consumer in there as well. Any relationship there at all? Has Grainger at all called you and said, hey, let's take some of the pain because I know you guys go to them a bit. It's just – this deflationary environment is just something new for all of us, I think, over the last.

I cannot comment on Grainger, but of course in business, generally speaking, that would be more dynamic as you move ahead, right? I think we see that specifically in the retail area at this point in time. And then I think different company will have different impacts, right? If you think about what we're all about relative to our portfolio, as I said, a lot of it is spec in, design in and regulated. So by definition, to drive that in terms of price down, that's where you have to hold back to your technology platforms, to your brand equity, etc. So I don't see a direct correlation as you talk about this quarter to be honest. But I will agree to as we move ahead that in all businesses, in health care or electronics or consumer, industrial, dynamics will happen and we have to adjust to that and that's what we're doing by the way, right? When you see some of our investments in terms of strategic investment for the future is to make sure we are more competitive as we move ahead. And we take action on most things in terms of our infrastructure to make sure we drive out as much cost as we can, flatten the organization and make sure we have a more agile execution model as we move ahead. So you're prepared for whatever is coming at you, right. And as I always have said, when you take those actions, do it when you can not only must. So we are taking some of those – we do it now because we can and prepare ourselves for a much, much better, more competitive and more agile 3M as we move ahead. Will pricing be one part of those and be driven by the market? Well, let's see. But important thing that you have all your fundamentals in place so you can complete.

Great. And, Nick, just very quickly, just in the second half, the comps get just a little bit tougher yet you're kind of into the high end of the range even though the first half growth is more at the midpoint of the new range. So should we just kind of ignore the comps and assume that things accelerate in the second half of the year despite that? Do you see the true economy getting better in the second half? It just would seem that your peak growth rate probably happened in the first quarter. Maybe I'm wrong about that from a timing perspective – or days sales or something.

Yeah, when it comes to the comps, there's a couple of different things going on. One, like for instance our Electronics and Industrial, both of those, I agree with you, we're going to have slightly tougher comps in the second half of the year. In the case of Consumer and in Health Care, both of those will be seeing easier comps. I wouldn't call it a big statement on our fact that we're seeing an improving economy. We're seeing a fairly stable economy outlook for the balance of the year. Our move in the organic growth range to now would be 3% to 5% and take us confidence in our ability to maintain the growth trajectory even with the tougher comp that we'll be facing, primarily in the fourth quarter.

Thank you. As I said earlier, I'm pleased with the performance through the first six months of the year. We are successfully executing the 3M playbook and positioned to deliver a strong 2017. As you saw today in our updated guidance, this includes good progress relative to our four primary financial objectives: earnings per share, organic local currency sales growth, return on invested capital, and free cash flow conversion. At the same time, we are making investments to accelerate growth and strengthen our portfolio, which will build on an even more competitive 3M for 2018 and beyond. Thank you very much for joining us, and have a good day.