3M Company (MMM) — Q4 2017 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our fourth 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 2018 investor events. Please turn to Slide 2. This year's earnings conference calls will be held on April 24, July 24 and October 23. Please take a moment to read our 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. Finally, please note that throughout today's presentation we'll be making references to non-GAAP financial measures, including measures which exclude the impact of the tax cuts and Jobs Act. Reconciliations of the non-GAAP measures can be found in the appendix of today's presentation and press release. Please turn to Slide 4 and I'll hand it off to Inge.

Thank you, Bruce, and good morning, everyone. I will open with some comments on the fourth quarter and later in the call, I will recap our full year performance. 3M had a strong finish to 2017 delivering robust organic growth across all business groups and all geographic areas. We posted record sales and expanded our profitability while continuing to invest in the business. Looking at the numbers, we increased to $2.10 per share, up 12% year-on-year. Note, that this excludes the impact of tax reform recently enacted in the United States, which Nick will discuss in detail. Our team delivered total sales of $8 billion, an all-time high for the fourth quarter. Organic growth company-wide was a strong 6% as our fundamental strengths are enabling us to capitalize on an improving global economy. This includes very good performance from Electronics & Energy and Safety & Graphics, both of which grew 11% organically. Organic growth in our consumer business accelerated to 5%, its third consecutive quarter of positive growth. Industrial grew 4% organically and healthcare grew 3%. Organic growth was also broad-based across geographic areas led by Asia-Pacific at 12% and Europe, Middle East, Africa at 7%. The United States and Latin America, Canada each grew 3% organically. Turning to margins; our team executed well and expanded margins to a healthy 23% with four of our five business groups above 22%. We also continue to invest in the business including research and development in CapEx while returning significant cash to our shareholders. In the quarter, we returned $1.2 billion to shareholders through both dividends and share repurchases. That concludes my opening remarks, and I will now turn the call over to Nick.

Thank you, Inge. Let me begin with a topic that is top of mind this earning season; the tax cuts and Jobs Act, and its impact on our fourth quarter results and beyond. Please turn to Slide 5; following the passage of the new tax legislation, we recorded a net tax expense in Q4 of $762 million or $1.25 per share resulting in fourth quarter GAAP earnings of $0.85 per share. This net tax expense includes the onetime transition tax on unremitted foreign earnings, as well as true-ups of tax deferred assets and liabilities. Excluding this impact, fourth quarter earnings were $2.10 per share, an increase of 12% year-on-year. In addition, as a result of tax reform we now expect our 2018 tax rate to be between 20% and 22% versus the prior range of 26% to 27%. Inge will provide more details on our updated 2018 guidance later in the call. Please note, that the balance of my prepared remarks today will exclude the impact of U.S. tax reform on 2017 earnings. Please turn to Slide 6 to review fourth quarter sales. Sales growth remained strong in Q4, up 6% organically as we continue to outperform the markets we serve. Selling prices continue to improve throughout the year with fourth quarter up 20 basis points. Excluding our electronics businesses, selling prices were up 40 basis points; our strongest quarterly pricing performance in 2017. The combination of acquisitions and divestitures contributed 30 basis points to sales growth in the quarter. This impact relates to the fourth quarter acquisition of Scott Safety, net of the divestiture of non-strategic businesses over the last 12 months. In addition, foreign currency translation increased sales by 2.7 percentage points. All in, fourth quarter sales in U.S. dollars increased 9% versus last year. In the U.S., organic growth increased 3% with all business groups delivering positive growth. Growth was led by high single-digit increases in both, Safety & Graphics and Electronics & Energy followed by consumer of mid-single digits. Asia-Pacific led the company with organic growth of 12% in Q4. All business groups within Asia-Pacific posted strong growth in the quarter led by double-digit increases in Safety & Graphics, Electronics & Energy, and healthcare. Organic growth was 18% in China/Hong Kong and 7% in Japan. Excluding Electronics, China/Hong Kong grew 19% and Japan was up 5%. Moving to EMEA; organic growth was 7% in Q4 with West Europe up 5%. All business groups grew in the quarter with Safety & Graphics and Consumer leading growth in the area. Finally, Q4 organic growth in Latin America/Canada was 3% led by a mid-single digit growth in consumer, industrial, and healthcare. At a country level, Canada delivered strong organic growth of 8% while Mexico and Brazil were both up 3%. Please turn to Slide 7 for the fourth quarter P&L highlights. Companywide fourth quarter sales were $8 billion with operating income of $1.8 billion, up 9.4%. On a GAAP basis, fourth quarter operating margins were 22.8% or 23.8% adjusting for year-on-year impacts from M&A, strategic investments, and divestiture gains. Let's take a closer look at the various components of our margin performance in the fourth quarter. Leverage on organic volume growth and productivity contributed 150 basis points to operating margins. Acquisitions and divestitures combined brought down margins by a net 60 basis points, this result includes a 90 basis point impact related to the Scott Safety acquisition which closed in early Q4. The combination of lower raw material costs and higher selling prices added 40 basis points to operating margins. Foreign currency, net of hedging impacts reduced margins by 60 basis points and higher year-on-year pension and OPEB expense decreased margins by 20 basis points. Let's now turn to Slide 8 for a closer look at earnings per share. Fourth quarter earnings were $2.10 per share, up 12% year-over-year. The benefits from organic growth and productivity were the predominant driver of earnings growth, contributing $0.33 to per share earnings in the quarter. On our October earnings call, we described four items that would impact the fourth quarter; each of them came in as expected with per share earnings headwind of $0.07 from the acquisition of Scott Safety, $0.06 from incremental strategic investments and $0.11 from our high coupon debt tender while we recorded a benefit of $0.12 from the divestiture of the electronic monitoring business. In addition, there are two other items that I would like to comment on that impacted fourth quarter earnings. First, we updated our reserves for future potential respirator mask claims that we estimate could occur over the next several decades which resulted in a $0.07 year-on-year earnings headwind. Secondly, our Q4 tax rate was 23% versus 28.2% in the prior year which increased earnings by $0.13 per share. The lower tax rate was driven by increasing benefits from our supply chain centers of expertise, geographic profit mix, and equity-based compensation. Please turn to Slide 9 for a look at our cash flow performance. Fourth quarter free cash flow was $1.4 billion with free cash flow conversion of 268%. Included in these results is the impact of the tax cuts and Jobs Act along with a U.S. pension contribution of $600 million that we made following the signing of tax reform. The net impact of these two items benefited Q4 free cash flow conversion by 112 percentage points. For the full year, free cash flow conversion was 100% with a 3 percentage point benefit from tax reform, net of our $600 million pension contribution. Turning to CapEx; fourth quarter capital expenditures were $459 million with the full year totaling $1.4 billion. Also in the fourth quarter, we returned $1.2 billion to shareholders via dividends and gross share repurchases. For the full year 2017, we returned $4.9 billion to shareholders including cash dividends of $2.8 billion and gross share repurchases of $2.1 billion. Looking ahead to 2018, we remain encouraged by the numerous opportunities to invest in the business to improve both, growth and productivity while continuing to return significant cash to our shareholders. Thus in light of these opportunities coupled with tax reform, we are increasing the top end of our 2018 CapEx expectation by $100 million to a range of $1.5 billion to $1.8 billion. In addition, we now expect gross share repurchases in the range of $2 billion to $5 billion versus $2 billion to $4 billion previously. Let's now review our business group performance starting with industrial on Slide 10. The industrial business group posted organic growth of 3.9% in Q4 and 4.9% for the year. Our heartland businesses within industrial had a good finish to the year with abrasives up high single digits. Industrial adhesives and tapes and automotive aftermarket both grew mid-single digits in the quarter. Our automotive OEM business was up 5% continuing its consistent track record of outpacing growth in global car and light truck builds. Finally, the separation and purification business grew low single digits while advanced materials declined year-on-year against last year's strong comp. On a geographic basis, industrial's organic growth was led by a high single-digit increase in Asia-Pacific followed by mid-single digit growth in both, EMEA and Latin America/Canada. Industrial delivered fourth quarter operating income of $527 million with an operating margin of 19.4%. Underlying margins were up 50 basis points year-over-year adjusting for incremental strategic investments and a Q4 2016 gain on divestiture. Please turn to Slide 11; fourth quarter Safety & Graphic sales grew 10.7% organically with double-digit increases across both developed and developing markets. Our personal safety business posted double-digit organic growth in Q4 with broad-based growth across all geographies. The roofing granules business had a strong finish to the year as a result of the rebuilding efforts following last fall's hurricanes. Transportation Safety was up mid-single digits with particular strength in reflective sheeting for roadway infrastructure. This business continues to transform its portfolio to focus on the connected roadways of the future. Geographically, Safety & Graphics grew organically across all areas led by an 18% increase in Asia-Pacific, a 12% increase in EMEA, and a 9% increase in the U.S. Operating income was $406 million and underlying operating margins were up 370 basis points year-on-year adjusting for the Scott Safety acquisition, divestiture impacts, and incremental strategic investments. Please turn to Slide 12; healthcare increased 3.1% organically in the fourth quarter. For the full year healthcare grew nearly 4% with second half organic growth of 5%. In Q4, our medical consumables business, which includes advanced wound management and infection prevention solutions, posted mid-single digit organic growth. Oral care delivered 3% organic growth in the quarter as we continue to post strong international growth, particularly in developing markets. Fourth quarter organic growth was led by high single-digit increases in both Food Safety and Health Information Systems which posted its strongest growth quarter of the year. On a geographic basis, healthcare grew across all geographies with continued strength in developing markets which were up 15% in the quarter. Healthcare's fourth quarter operating income was $464 million and operating margins were 31.5%. Next let's cover Electronics & Energy on Slide 13. Electronics & Energy organic sales growth was 11% for the fourth quarter and the full year. The electronic side of the business grew 14% organically as our team continued to increase penetration on many OEM platforms globally including semiconductor manufacturing, electronic assembly, displays, data centers, and automotive electrification. Our energy related businesses were up 4% organically with electrical markets up high single digits, partially offset by a decline in telecom. We continue to actively manage our Electronics & Energy portfolio in the quarter with the announced divestiture of the communications markets business. On a geographic basis, organic growth was led by a 15% increase in Asia-Pacific, although the U.S. was up high single digits and EMEA up mid-single digits. Fourth quarter operating income for Electronics & Energy was $334 million with an operating margin of 25.2%. Underlying margins were up 80 basis points year-on-year adjusting for incremental strategic investments and the gain on sale of non-core intellectual property in Q4 2016. Please turn to Slide 14; consumer continued to deliver improved organic growth in the fourth quarter, up 5.4%, its strongest quarterly organic growth since Q4 2014. Consumer posted organic growth across all businesses and geographic areas in the fourth quarter. Our home improvement business grew double digits organically continuing its track record of strong performance throughout 2017. This business continues to win in the marketplace with leading brands such as Command and ScotchBlue. We also saw good growth in consumer healthcare with notable strength in our next care branded bandages. Looking at consumer geographically, growth was led by high single-digit increases in both EMEA and Asia-Pacific, although the U.S. and Latin America/Canada increased mid-single digits. Finally, operating income increased 18% to $269 million with an operating margin of 22.9%. That wraps up our review of fourth quarter results. Please turn to Slide 15 and I'll hand it back over to Inge.

Thank you, Nick. The fourth quarter was a strong ending to an equally strong year. In 2017 we executed a 3M playbook and delivered on each of our four long-term financial metrics which we laid out at our Investor Day in March 2016. We posted earnings of $9.17 per share, a 12% increase year-on-year. Organic growth was a robust 5% with positive growth across all business groups and geographic areas. We posted free cash flow conversion of 100% along with a return on invested capital of 21%, and for the fourth consecutive year we expanded margins companywide coming in at 25% in 2017. Beyond these financial results we continued to make good progress on our three key levers which are significant value creators. The first lever is portfolio management. In October, we finalized the acquisition of Scott Safety as we continue to build strength in our personal safety portfolio. At the same time, we divested four businesses that no longer align with our strategic objectives. Portfolio management is strengthening our competitiveness and making us even more relevant to our customers and the marketplace. I will move onto investing and innovation which is the second lever. 3M's primary growth metric is organic local currency sales growth as we invent unique solutions that advance, enhance, and improve outcomes for our customers. That is why research and development is the heartbeat of 3M; and in 2017 we invested $1.9 billion in R&D or 6% of sales. And as you can see in our results, these investments are paying off in terms of organic growth and also our premium margins and return on invested capital. Business transformation is the third lever which starts and ends with our customers. The rollout of the ERP system in Western Europe is nearly complete and we have started initial deployments in the United States. I'm pleased with how our teams around the world are executing business transformation which is already benefiting our customers and 3M. In summary, 2017 was a strong year for our enterprise and we are positioned to build on our momentum and deliver another successful performance in 2018. Please turn to Slide 16; here you see our updated planning estimates for 2018. We now anticipate earnings of $10.20 to $10.70 per share, up from the previous range of $9.60 to $10. Our tax rate is expected to be 20% to 22% versus the prior range of 26% to 27%. The remainder of our guidance is unchanged. Organic growth is expected in the range of 3% to 5% and we continue to anticipate strong performance in terms of both return on invested capital and free cash flow conversion. Please turn to Slide 17; for more than a century the strings of 3M's business model has enabled us to invest in the business while also returning cash to our shareholders; this has included a strong, steady, and rising dividend which is a hallmark of our enterprise. Over the last five years we have doubled 3M's special dividend and today we are announcing a 16% increase in our first quarter dividend for 2018 to $1.36 per share. This marks 60 consecutive years of dividend increases and reflects confidence in our ability to continue generating premium returns in 2018 and beyond. With that I thank you for your attention and we will now take your questions.

My first question is on Electronics & Energy; clearly you guys are exiting especially in the electronics segment, exiting the year very strongly yet a couple of companies in the supply chain reported yesterday very good results, yet the organic growth profile is still expected at 1% to 4% for 2018. Is that just conservatism or are there other puts and takes that we need to be aware of for this year?

First of all, we are very pleased with the momentum we see in that business and you see those multiple factors that are moving us forward and it's all coming back to the way we have repositioned the portfolio in the past. We are coming off stronger at the end of the year than we went into the year for 2017. As Nick said in his remarks, we continue to be expecting on multiple platforms and that should of course reflect more growth as we go. It's too early for us, however, as we are just into the third week of January to change the guidance that we have for the total enterprise and all that business. But I would say that the momentum is there, and we see this as a very positive business for us as we move ahead but it's too early for me and for us to change the guidance, but I wouldn't be overly concerned at all about that business.

Maybe shifting gears a little bit; Nick, just focused on capital allocation for a second. I saw that growth repurchase number went up. It seems like you've got a little bit around $4 billion or so on your balance sheet. Should we be thinking about the pace of capital deployment being a little bit faster now that you have access to your international cash as well?

The big longer-term picture of our capital allocation plan that's not really changing, the way we're investing first in the business, supplementing that with acquisitions that we think make sense and fit well with our business and then also returning cash to shareholders, that whole capital allocation strategy is unchanged. Tax reform and the ability to access international cash a little easier does give us added flexibility. In the short-term, you're seeing a few things change, slightly raising the high-end of our CapEx range, also on our share buybacks and our 16% dividend increase. Those are the things in the short-term that are immediately changing. I will also point out that late in the year we did add an extra $600 million to our U.S. pension immediately following the U.S. signing of this into law. So in the short-term, those are the things we're doing but the long-term, our overall strategy isn't changing.

And if you don't mind me just sneaking in one more; I just wanted to ask you about FX. I saw that you guys didn't change your guidance for FX but the dollar has weakened since you originally gave guidance. So two-part question; shouldn't you have a benefit from FX or is your hedging policy not going to allow you to have an increased benefit? And then, secondly, typically you're able to pass-through greater price when the dollar weakens and so if you can comment on that that would be helpful.

To the first point, even as recent as last week when we look at our exchange rates and the impact on our earnings, $0.10 that we guided in December, that's a very good estimate for the total year. If that changes, we'll start to modify that but I think that's still a very solid number to go with. To the second part of your question, I think you may have it reversed; when the dollar strengthens against developing markets in developing market economies, that's where we see some upward price actions that we take; it's usually not in the reverse.

Inge, can you talk about the 11% growth that you saw in Safety & Graphics in Q4? We obviously remember you saying that Safety & Graphics is the next potential big breakout candidate; do you think that the big difference now in Safety & Graphics is commodity-based growth within personal safety and really starting to come back, and this uplift actually looks sustainable in '18 given the higher commodity prices and maybe it's all the work you've done in portfolio management? But how does that make the 4% to 6% organic growth guidance for '18 look? Could it actually end up being conservative?

Well, first of all your memory is good. I said that that is our next breakout business, and it is the breakout business as we speak. If you think about the portfolio there, we also in that business, as we did in EEBG, took some very heavy lifting relative to the portfolio. It took us more than three years, one was four years to complete. If you think about that portfolio, how we have let some businesses get new ownership where we didn't see that we could accelerate and develop those businesses to a level that we in 3M expect us to deliver, then we build out specifically in personal safety to today be a world-class leader in the whole personal safety area. That is continuing, that's a fantastic business for us. Generally speaking, when you look upon the portfolio, that is in some cases regulated businesses and in some cases is more consumables that we capitalize on. So in my view, the other thing that is working as a positive for us is, we have now figured out our portfolio in traffic safety. Traffic safety today is back to the core, it's back to what we know how to do and where the strengths are. As you know, we are also linking that business now together with automotive electrification where we now have automotive, we have EEBG, and we have Safety & Graphics working on initiatives around that whole space. So I would say that again, it's a little bit early but the momentum is very good in that business and it's not only personal safety. We saw now for the first time a shift in traffic safety that will actually be positive for us as we move ahead. Again, it's too early. I would like to make changes if you can or you're very confident to the growth rate for the year but as you know, I'm also a little bit conservative so I will wait with that, do we have at least one or two quarters behind us so we can with confidence give you a different figure. But again, this is a fantastic business and I'm as proud of what they have done as some in EEBG in terms of really directing those businesses to a much more relevant place for us where we can grow in a very profitable way.

It looks like you're stationary in office business with consumer goods; this is the first time in several quarters and you mentioned in the presentation itself the e-commerce. Do you think the channel environment issues that you've been facing in that segment are behind you or is it that you're just getting penetration into those fields, even with three things in math fragmenting out behind you, or is it that you're just getting better penetration into the market three commissariat off the channel inventory issues?

I think it's both. We have talked about that business for some quarter in terms of the inventory position for them. We have, I think in every quarter, had better sales out than sales in. So they have adjusted their position in that space. So I think it's both; you're coming to a point where your comparison is easier, but also inventory levels are on a better level. So we don't see at this point in time an issue with inventories in that space for the consumer business. This is, in fact, the third consecutive quarter that our consumer business group is growing, this time by 5% and in fact also to a price which is very good. On a company-wide basis as you touch on online sales, for us in the quarter, our online sales as an enterprise was up 21% and for the year was 13%. So it's moving in the right direction for the consumer business so we're very pleased with that.

The Scott Safety assets you acquired present an intriguing opportunity. Historically, there's been a challenge with generating significant growth, maintaining around 1% for a long time. What strategies do you have in mind to change this? Could expanding the brand globally be a factor? Are there other initiatives you can implement to drive growth to match the average growth rates seen at 3M?

I think first of all for us that brings synergy, it brings scale and efficiency into the SCBA priority categories. So I think from that perspective we can add it in and become much more relevant to the customers on the market. The presence in gas detection is becoming much more relevant for us and it enhances our ability to deliver on customer solutions. So if you think about that whole personal safety space, we have now built that out from initially starting to be world leader in respiratory products and then we purchased some years back, maybe 5 to 8 years back, we purchased the welding business and then here in the later years we purchased Capital Safety which is full protection and now Scott Safety that is building us out in that whole space. By definition, we will be able to drive the synergy and scale in that business and be more relevant to big customers around the world. They are looking for as few suppliers as possible but this is a regulated business; they also would like to work with companies that have a high reputation around quality and safety and that's what we stand for. So there is a lot of leverage there for us and that business is doing very well for us. We met the expectation in the quarter, the team is very energized, both our core team and the Scott Safety group that came into us. You'll be able to now to manufacture and innovate safe products based on our technology. So we can add more on the technology side and I think we will be very effective in the commercialization part of that business.

It's clear that Scott is a strong brand. I'm asking a somewhat different question that I've not posed to other companies. The Tax Act is intriguing, and I haven't heard anyone mention whether it can help reduce your corporate G&A tax costs and supply chain expenses. Some companies have had less than optimized supply chains, where movements were made primarily to avoid taxes. I'm not implying you're tax evaders, but some structures have become inefficient over time. Can this Tax Act actually result in lower costs for you, or is it merely about paying less in taxes?

Scott, I'd like to touch on a few points regarding our supply chain optimization journey, which has been ongoing for several years. We've established centers of expertise around the globe to enhance operational efficiency, which also provides us with some tax advantages. The strategies we've implemented to improve our supply chain remain relevant and continue to yield benefits as we move forward. We're committed to expanding these efforts. Regarding the impact of tax reform, it varies for different companies. The reduction of the tax rate to 21% in the U.S. is beneficial for a company like 3M. Additionally, the new U.S. tax law offers favorable conditions for companies that are net exporters, which applies to us as we export approximately $3.5 billion worth of our manufactured goods out of the U.S. This export activity contributes to the benefits we're experiencing.

Nick, can you explain why U.S. pricing seems to have worsened sequentially? I apologize if you already addressed this, especially since last year provided very easy comparisons. I'm surprised to see the U.S. move from minus 2 to minus 7, while your pricing shifts from minus 2 to minus 3. What’s happening?

John, in 2017, our primary focus was on ensuring growth in our U.S. operations, which has been evident with a 3% organic growth in the third and fourth quarters. Throughout the year, we've experienced a price decline of around 20 to 30 basis points in the U.S. The main factor driving this has remained consistent: as we move towards growth, we have rebate incentive plans in place for our most loyal and high-performing customers, which is a key part of our business model. These rebates provide price breaks, and this has been the primary factor affecting the prices we've reported in the U.S. throughout 2017.

U.S. industrial core growth increased only 1% this quarter compared to a 5% increase last quarter, which is why I'm assuming we're not seeing this in your segments. Is this rebate program more focused on the consumer side, and could that be why the consumer segment performed a bit better?

John, there are some aspects of that in all of our businesses but the U.S. and Safety & Graphics I would say are more heavily weighted to having those types of pricing plans.

So was there something about U.S. industrial as to why it seemed like its core growth slowed considering we're sort of living in what appears to be an accelerating industrial economy, certainly in the fourth quarter? Was there timing issues or mix issues or what was going on there?

Yes, regarding our growth in the U.S. industrial sector, I would like to highlight that in the fourth quarter of 2016, we secured a defense contract worth approximately $40 million. This was a significant factor; if we exclude it, our industrial business has experienced strong and accelerating growth.

Kind of at what level though? So if you were to apple-to-apples, that defense business where is the U.S.? I'm just trying to get a sense of how your U.S. business is cadencing; is that kind of a low single digit, mid-single digit, what's the trend?

Pulling that out we would have been in the mid-single digit range, John.

Okay, that makes sense. Regarding pricing, it's clear that inflation is present in the economy, though it's uncertain how long it will persist in the U.S. Inge, what are your thoughts on this? Nick, have you been able to address your input cost pressures, like healthcare and rising wages, and pass those costs through? How does that compare with your price reduction program aimed at boosting U.S. volumes? It seems that rising inflation in the U.S. could be an incremental headwind for margins. How do you plan to manage it?

John, over a period of time we've been able to get 30 to 50 basis points of price growth. Now in 2017, we were approximately flat on price growth. We're highly confident in 2018 that we'll be back into the range of 30 to 50 basis points of price growth over – throughout 2018.

John, I want to clarify something. You mentioned the price down initiative, but that’s not what it is. What Nick pointed out is that we are increasing the incentive program rebates for our loyal customers and channel partners. It does not begin with a price down initiative, and I want to correct that misunderstanding. What Nick clearly communicated is that this is focused on our incentive programs, which we have successfully implemented for two consecutive quarters.

Yes, I'm sorry; the volume rebates, the more you buy…

Exactly.

So my last question is whether the 30 to 50 is sufficient given the pressures in the economy, Nick. I don't have visibility into how much the rising inflation in the United States might impact your operations. Historically, you've had very strong margins, so I don't anticipate significant margin pressure. I just want to understand how you're thinking about managing this.

Yes, in terms of how we're managing the 30 to 50, I feel very confident about it. I believe there is more potential for upside than downside, especially considering the inflationary environment and rising raw material prices. If there's going to be any bias, it's likely towards the high end rather than the low end.

I have a couple of questions regarding the GAAP adjustments on page 8 of the slide deck. For Nick, starting with the tax rate, you noted a benefit this quarter attributed to supply chains, but it appears to lack excellence and there's a geographic profit mix. At $0.13, that's not linked to tax reform, correct? Additionally, would you say this is a sustainable benefit, or how would you describe it?

Deane, you are right that this is unrelated to tax reform, which we have addressed separately. Let me provide more detail on what is influencing this. Year-over-year, we are observing improvements in our centers of expertise in terms of efficiency and profitability, which is an integral part of our strategy and sustainability that we expect to see reflected in our guidance of 20% to 22% for 2018. The geographic profit mix is the smallest factor and pertains to where we generate that profit, specifically in our highest tax jurisdictions compared to the lowest, which can fluctuate annually. Lastly, stock-based compensation results in a tax benefit as more employees exercise stock options; this aspect tends to be the most variable. With our stock price having increased and more employees exercising their options, we are experiencing a greater benefit than we did a year ago.

As a follow-up, we're discussing the segments, and auto has come up several times, particularly in electronic auto electrification and in the industrial sector. I would like to hear from Inge about how you manage coordination when a business or end market overlaps across segments, regarding the go-to-market strategy and if there are any additional coordination efforts needed to ensure smooth operations.

Yes, we have appointed a Vice President to oversee a segment of our automotive division focused on automotive electrification. This individual is responsible for coordinating our company's activities related to this part of the automotive business. We track and manage the results from this area, which we refer to as automotive business, OEM business, and we assess the performance of automotive electrification. We're seeing improvements in that segment, with a reported 15% growth in Q4 and overall strong performance in automotive. The automotive electrification segment represents a significant growth opportunity, estimated at a $6 billion market that is expected to grow by 6% to 8%. This combined growth is promising for us. Additionally, we are actively engaging with both automotive OEM customers and highway transportation authorities worldwide, aiming to develop something impactful in this area as we move forward.

I just wanted to clarify on John's question regarding rebates in North America. Am I correct in thinking that you sort of have a growth rate in view and then you said rebates relative to this growth rate; so if people exceed them they get better rebates. So if you set the growth rate higher next year, rebates would kick in at a higher growth rate; is that a fair way of looking at it?

Andrew, I'd say that's a very fair way of looking at it. We started with a growth expectation and 2017 is a year where many of our customers exceeded that growth expectation, getting higher rebates; that becomes part of the base as we reset those targets for the coming year. And in comparison in '15 and '16, we had below average rebate payments; so we're seeing it from '16 to '17 swing from below to above in '17. I think '18 will be a more normalized year.

I want to revisit the topic of automotive electrification. Inge mentioned in The Wall Street Journal before the New Year that there could be billions of opportunities in the EV sector. I can't help but ask for your insights on this. At Analyst Day, you indicated it was a significant opportunity, and Inge stated it could amount to billions. Can you discuss the underlying assumptions about the market and what it might look like by the time those billions in EV opportunities materialize, whether it’s $2 billion, $10 billion, or something else? Thank you.

The addressable market is $6 billion. If we consider the entire area where we can make an impact in the industry, along with the electrification aspect, we have several components such as management, lightweighting, sensors, vertical signs, and payment markings. Currently, automotive electrification represents approximately $200 million and is growing rapidly. The first billion should be attainable relatively soon, although it will take a couple of years. This presents a unique opportunity for 3M to leverage our technologies and connections in the industry. The potential is not limited to just automotive and automotive electrification; it extends into the broader highway transportation sector. With our 80 years of experience in Traffic Safety and our daily interactions in the industry, we are well-positioned to advance. We are very encouraged by the momentum we are seeing and the early specifications for automotive platforms that are expected to enter production in about 18 to 24 months.

And when you say $6 billion of market opportunity, should we expect 3M to capture a 3M-like market share within that market?

We don't make commitments to undertake anything less than our best efforts. That is what you should anticipate from us, and it is what we expect from ourselves. When we make a commitment, we will execute it correctly and maintain our focus. As we progress, we will gain market share, and I believe that in three to five years, we will look back and recognize it as a significant achievement.

Regarding next year, now that you have a clearer view heading into December, how do you anticipate seasonality affecting performance? Are there any particular trends in electronics or other areas that we should consider when evaluating quarterly growth as the year progresses, or do you expect a consistent range of 3% to 5%?

Steve, our view is it's a pretty steady throughout the year. We're not seeing any big outliers one direction or the other; it's is as pretty as close to down the middle of the road as we could be.

Okay. Regarding the CapEx, is this a minor increase, and can it be sustained in the long term, or is it just a temporary investment spurred by the new tax regime that will eventually decrease over time?

Our longer-term guidance of 4.5% to 5% remains the appropriate perspective. However, considering the current economic environment, tax reform, and investment opportunities in disruptive technologies that could enhance our efficiency, we are slightly increasing our planned spending this year. Nevertheless, the 4.5% to 5% range is still valid for the long term.

And then one more; just when you look at the earnings bridge that you guys gave in December, any tweak to that? I guess strategic investments this year came in a little bit lower but there were some other moving parts like the legal settlement etcetera; so anything in that bridge that moves around that you wanted to highlight, the earnings bridge?

No, it is January; so other than the update in tax, we're not changing anything. As things start to play out after a quarter or two, there might be some tweaks, like we're clearly watching FX and what that's doing; raw materials that continues to be a moving target for us. And then share repurchase is another one that I say we continue to watch of what its impact going to be on EPS.

The gain in the safety business; did that run just to profit not the revenue, correct? Just to be clear.

Correct, that was all through operating income, no revenue.

Now that we're seeing Scott Safety being integrated capital; the last big one, before that I guess it was Polly, so something like $5.5 billion been on the transactions and your result so far, even if there were criticism about the initial price paid on the street, resulting to be pretty impressive as far as growth etcetera and I assume you're heading towards your return on capital targets. Are you thinking again in terms of the profile for 3M, the ability to kind of find and digest M&A becoming an even more accelerated part of the growth story at a nearer term or is it still just steady as she goes?

Well, as you know, primary objective and strategy is organic local currency growth, right, and that's also why we invest in research and development with around 6%. Last year, that's like $1.9 billion. And that is the heartbeat of 3M; that is what is providing us with premium solutions for customers and premium returns for shareholders. I think that's an important element. Now we have shifted activities in the portfolio in order to build out relevance with our customers and markets, and we will continue to do that in order to complement as we move ahead in areas that we are interested in doing. Our pipeline is good, we have many alternatives to look upon and I think as we go you will see probably the same steady path as we had in the past. So I don't think that has changed on that as we move ahead; as long as we get growth on the investment we do in research and development and we do as we speak, and we have also, as you see, stepped up to growth where we had complemented with good solid acquisitions that we've integrated to the company. We don't buy something that we need to fix and try to move in; and the reason for that is there should be good processes in place from the company we buy, there should be world-class management that can come into 3M and with these four fundamental strengths we have, we can create value as fast as possible for our shareholders.

Nick, could you provide an update on the commodity side? I know that many factories have certain challenges, and you seem to have a more integrated approach than many other companies in the multi-industrial sector. Can you give us an overview of your current commodity exposure and how you're addressing that aspect?

Steven, in total we've spent between $7.5 billion and $8 billion a year on raw materials, commodities and some purchase finished goods to go into our cost of goods sold. It's approaching half of our total cost of goods sold. And it is spread out over a lot of different commodity bases but to put a bit of a finer point and this may or may not be what you're asking; we are seeing underlying commodity prices that we are paying, we're seeing them go up and yet we are still reporting all in that we're getting some of the benefit. So in the fourth quarter it's a bit of a transition quarter for us that we are seeing slightly higher market prices we're paying for our commodities which currently are being more than offset by our own sourcing initiatives to bring down the cost of the materials and that can be revamping our products to use a lower raw material, changing the source of supply, or some negotiations that we go through; that's still resulting in a net benefit for us year-on-year but the underlying commodity prices we are now seeing a year-on-year increase in those prices.

And can you size that all; that the increase itself?

1% or slightly less than 1%; it's still a pretty muted number for us.

And if you were advising investors to look at a few specific commodities for that 1% which one should we look at?

There is about one-eighth of our entire commodity base that is petroleum based and when we first set our guidance we had an expectation of oil prices in the $50 to $60 a barrel, that's gone up. So there is some sensitivity there for oil derivative products that go into some of our tapes and adhesives and films.

Regarding Steve's question about commodities, specifically oil, in the past you have provided more detailed sensitivity information, especially during the downturn from 2014 to mid-2016. Can you outline expectations for potential upsides now that oil prices have increased significantly and we might face an oil shock due to geopolitical issues? Additionally, could you discuss the overall energy exposure of the portfolio? We have learned a lot from the downturn about how businesses tied to energy impacted interim organic growth. How do you view that sensitivity if we start to see a rise in the entire petrochemical complex?

Rob, there are a couple of different aspects to consider. First, regarding raw materials, I've mentioned before that a $10 change in oil prices generally equates to a $0.02 to $0.03 increase in our annual raw material costs, affecting us regardless of whether oil prices rise or fall. This is primarily due to products like some resins that have crude oil derivatives. As for the market aspect, when oil prices dropped in late 2014 through 2015, we found that about 3% of our total revenue was linked to the oil and gas sector. With stabilization in oil prices, we've seen some benefits, and any rise in prices would be advantageous for our revenue.

How should we consider incremental margins throughout the year if wage and input cost pressures rise in the second half?

In the second half of 2018?

Yes.

No. As far as wages what we're expecting for wage costs increases in 2018; it remains very similar to what we've seen in the last couple of years, really no change on our ability to generate incremental leverage. So we are not seeing a shift up or down in the pace of wage increases that we've seen historically.

And the second question; how long can you sustain the current pace of growth in Asia before you need to accelerate investment in new capacity?

So we have been consistently investing in our capacity in Asia, working to increase our regional self-sufficiency of more and more that we are selling in Asia Pacific is being manufactured in Asia Pacific. Right now we still have capacity and we will continue to sustain it; I don't see it a dramatic change in direction of the amount of CapEx going in, it's been at about the right pace and we think it's a pretty sustainable pace we're at; so I don't see a big direction change on that.

Thank you. To wrap up, the fourth quarter capped a strong year for us here at 3M; and I would like to take this opportunity to thank our 3M team for their contributions to a successful 2017 and for moving us closer to our vision of advancing every company, enhancing every home and improving every life. We are positioned well going into 2018 and we will deliver another successful year. Thank you for joining us this morning and have a great day.