3M Company (MMM) — Q1 2018 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our first quarter 2018 business review. On the call today are Inge Thulin, 3M's Chairman, President and CEO; Mike Roman, our Chief Operating Officer; and Nick Gangestad, our Chief Financial Officer. Inge and Nick 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 upcoming investor events in 2018 found on Slide 2. Please mark your calendars for our upcoming earnings calls on July 24 and October 23. Also, we have established a date for our next Investor Day, which will be held at our headquarters in St. Paul, Minnesota on Thursday, November 15. More details will be available as we get closer to the event. Please take a moment to read the forward-looking statement on Slide 3. During today's conference call, we'll 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 note that throughout today's presentation, we'll be making references to certain non-GAAP financial measures, in particular, measures which exclude the impact of the measurement adjustment for the Tax Cuts and Jobs Act and the previously disclosed legal settlement with the State of Minnesota. Reconciliations of the non-GAAP measures can be found in the appendix of today's presentation and press release. Lastly, we filed a Form 8-K on March 15, updating our business segment reporting for dual credit and reflecting the adoption of the new financial accounting standard relative to pension and post-retirement benefit cost. Both of these updates are reflected in our reported results and on a historical basis starting this quarter. Please turn to Slide 4, and I'll hand off to Inge.

Thank you, Bruce, and good morning, everyone. Coming off a strong 2017, our team opened the new year with broad-based organic growth across all business groups. We expanded margins and posted a double-digit increase in earnings per share while continuing to invest in our business and return cash to our shareholders. Looking at the first quarter numbers, we delivered earnings of $2.50 per share, a 16% increase year-on-year. Total sales rose to $8.3 billion, which is an all-time high for our enterprise. Company-wide, organic growth was 3%. Three of our business groups, Safety and Graphics, Electronics and Energy, and Consumer, all posted good growth that was within or above their expected full year ranges. Safety and Graphics delivered another robust performance with 7% organic growth, coming off 6% growth in 2017. As you know, we have significantly adjusted the Safety and Graphics portfolio over the last several years, and those actions continued to pay off in terms of improved growth and margins. Electronics and Energy posted 2% growth in the quarter with strong growth in data center and semiconductor markets. Within this business group, we have also adjusted the portfolio in recent years, and we now see, in addition to growth, continued and sustained improvements in margins. Consumer also delivered 2% organic growth, its fourth straight quarter of positive growth, with particular strengths in our home improvement business. Our Health Care and Industrial Business Groups, which grew 3% and 2%, respectively, each had many areas of strengths but also a few areas of softness that tempered overall growth. Within Health Care, we delivered good growth in medical consumables, health information systems, and food safety. We saw flat growth in oral care, and sales in drug delivery were down against a tough comparison. Turning to our Industrial Business Group, Industrial opened the year with 2% growth with good performance in abrasives and industrial adhesives and tapes. The Automotive OEM business also grew well and once again outperformed global auto builds despite negative build rates for the total automotive industry. Finally, growth in our automotive aftermarket business was softer than we anticipated going into the year. Looking at our entire company's performance from a geographical perspective, we continue to capitalize on opportunities in developing markets. In Q1, we posted 7% growth in developing markets, including double-digit growth in China, along with strong growth in India, Southeast Asia, and Brazil. Turning to margins, our team expanded margins to a healthy 23% with four of our five business groups at 23% or higher. We also continued to build for the future, including investing 10% of sales into the combination of research and development and capital expenditure while returning significant cash to our shareholders. In the quarter, we returned $1.7 billion to our shareholders through both dividends and share repurchases. And as a reminder, we increased our Q1 dividend by 16%, which marks 60 consecutive years of dividend increases. In summary, we delivered good growth in the quarter throughout much of the portfolio while a few markets were softer than we anticipated going into the year. As a result, today, we're adjusting the top end of our full year guidance for organic growth and earnings per share. We expect organic growth of 3% to 4% versus 3% to 5% previously, along with EPS of $10.20 to $10.55 against the prior range of $10.20 to $10.70. Going forward, we remain confident in our ability to keep generating premium value for our customers and premium returns for our shareholders. We will continue to execute the 3M playbook and strengthen our competitiveness and are well positioned to deliver strong results in 2018 and beyond. With that, I will turn the call over to Nick, who will take you through the details.

Thank you, Inge, and good morning, everyone. Please turn to Slide 5. Let me begin with two topics that impacted GAAP earnings in the first quarter that Bruce touched on at the beginning of the call. Recall that following the passage of the Tax Cuts and Jobs Act, we recorded a provisional tax expense in Q4. As expected, the IRS has issued subsequent guidance resulting in updates to these amounts. As a result, we booked an additional tax expense of $270 million or $0.36 per share in the first quarter. We expect further IRS updates throughout the year. Also, we incurred an $897 million charge for the legal settlement which amounted to a $1.16 impact to earnings per share. This charge is reflected within Corporate and Unallocated. Excluding these impacts, first quarter earnings were $2.50 per share, an increase of 16% year-on-year. Please note that the balance of my prepared remarks today will exclude the impact of both items on 2018 earnings. Please turn to Slide 6 to review first quarter sales. Sales growth in the first quarter was 2.8% organically. Selling prices increased 70 basis points in the first quarter. Excluding our electronics businesses, selling prices were up 90 basis points and were positive across all geographic areas. This marks our strongest underlying price performance in several years. The net impact of acquisitions and divestitures contributed 70 basis points to growth in the quarter. In addition, foreign currency translation increased sales by 4.2 percentage points. All in, first quarter sales in U.S. dollars increased 7.7% versus last year. In the U.S., organic growth was 2.3% with selling prices up 80 basis points. Growth was led by Safety and Graphics and Consumer. EMEA was flat in Q1, with West Europe down 1%. Asia Pacific delivered mid-single-digit organic growth, led by Safety and Graphics and Health Care. Organic growth was 11% in China/Hong Kong. Japan was flat or up 3%, excluding electronics. Finally, Q1 organic growth in Latin America/Canada was 3.5%, led by Health Care and Safety and Graphics. Please turn to Slide 7 for the first quarter P&L highlights. Company-wide, first quarter sales were $8.3 billion with operating income of $1.9 billion, up 9.3%. First quarter operating margins were 23%, up 30 basis points year-over-year. Let's take a closer look at the components of our margin performance in the first quarter. Leverage on organic growth, productivity, and lower year-on-year performance and footprint actions contributed a combined 120 basis points to margins. Acquisitions net of divestitures reduced margins by 40 basis points. Selling price benefits more than offset raw material inflation, adding 10 basis points to operating margins. Foreign currency net of hedging impacts reduced margins by 40 basis points, and higher retirement benefit cost decreased operating margins by 20 basis points. Let's now turn to Slide 8 for a closer look at earnings-per-share. First quarter earnings were $2.50 per share, up 16% year-over-year. The benefits of organic growth, productivity, and lower year-on-year portfolio and footprint actions added a combined $0.17 to per share earnings in the quarter. Foreign currency impacts net of hedging added $0.05 a share. Other expenses decreased earnings by $0.07 per share due to higher year-on-year net interest expense and retirement expense. Our underlying Q1 tax rate was 17.6%, in line with our expectations, which increased earnings by $0.18 per share. The lower tax rate was driven by tax reform and continued benefits from our supply chain centers of expertise. Please turn to Slide 9 for a look at our cash flow performance. First quarter free cash flow was minus $161 million, impacted by the legal settlement that I referred to earlier. The net impact from the legal settlement and tax reform adjustment decreased free cash flow conversion by 72 percentage points. First quarter capital expenditures were $304 million, up $17 million year-on-year. For the full year, we continue to anticipate CapEx investments in the range of $1.5 billion to $1.8 billion. As Inge mentioned earlier, we increased our first quarter per share dividend by 16%, resulting in $810 million in cash dividends paid to shareholders during the quarter. We also returned $937 million to shareholders through growth share repurchases. With this in mind, we are increasing our full year range to $3 billion to $5 billion versus $2 billion to $5 billion previously. Let's now review our business group performance, starting with Industrial on Slide 10. The Industrial Business Group delivered first quarter sales of $3.1 billion, up 2.2% organically. Within Industrial, growth was led by abrasives, up mid-single digits, and industrial adhesives and tapes, up 3%. Our automotive OEM business was up over 3%, outpacing growth in global car and light truck builds by over 400 basis points. In automotive aftermarket, we saw good growth in our products and solutions for retail car care, which was more than offset by softer demand from auto body shops. On a geographic basis, Industrial's organic growth was led by a 5% increase in Asia Pacific, followed by low single-digit growth in both Latin America/Canada and the United States. Industrial delivered first quarter operating income of $719 million, up 7.3%, with an operating margin of 22.9%. Please turn to Slide 11. First quarter Safety and Graphics sales were up 6.9% organically to $1.8 billion with growth across all businesses and geographies. Our Personal Safety business continued to post excellent growth, up double digits in the quarter. This business continues to see strong global demand for our personal protective equipment across all end markets. The commercial solutions and roofing granules businesses were both up mid-single digits. Transportation safety also posted positive growth, driven by our core sheeting and pavement marking segments. In addition, this business recently won contracts with the State of California to upgrade their infrastructure and enable the roadway of the future. Geographically, organic growth was led by high single-digit increases in both Asia Pacific and the U.S. with mid-single-digit growth in both EMEA and Latin America/Canada. Operating income was $483 million and operating margins of 27.1%, up 140 basis points year-on-year. Please turn to Slide 12. Our Health Care business generated first quarter sales of $1.5 billion, up 2.7% organically. Growth was led by a high single-digit increase in both food safety and health information systems. Our medical consumables business, which represents the largest segment within Health Care, posted mid-single-digit growth in Q1. Oral care was flat with continued good growth internationally, particularly in developing economies, offset by softness in the U.S. On a geographic basis, Asia Pacific led the way, up 8%, followed by 5% growth in Latin America/Canada. We saw continued strength in developing markets, which were up 10% in the quarter, led by China/Hong Kong and Brazil. Health Care's first quarter operating income increased 7% to $460 million, and operating margins were nearly 30%. Next, let's cover Electronics and Energy on Slide 13. Electronics and Energy organic sales growth was 1.7% in the first quarter. Sales were $1.4 billion. The electronics side of the business grew 3% organically, including low double-digit growth in electronics materials solutions. Growth continues to be very strong in semiconductor manufacturing and data centers, with robust demand for cooling fluids and interconnect solutions. Partially offsetting this growth was a decline in display materials and systems due to softness in consumer electronics. Our energy-related businesses were down low single digits organically, with electrical markets flat and telecommunications down. Please note, we continue to expect to close on the sale of our telecommunications business later this year. On a geographic basis, organic growth was led by a 4% increase in Asia Pacific. First quarter operating income for Electronics and Energy was $337 million, with operating margins of 24.9%. Please turn to Slide 14. First quarter sales in Consumer were $1.1 billion, and organic growth was 2.1% year-on-year. Our home improvement business grew high single digits organically, building on its track record of strong performance over the past several years. Home care also delivered positive growth in the quarter while consumer health care declined. Looking at Consumer geographically, growth was led by a 4% increase in the U.S., followed by 3% growth in Latin America/Canada. We continue to invest and expand our category-leading brands, such as Filtrete and Post-it. During Q1, we launched the first-ever Bluetooth-enabled Filtrete Smart Air Filter. We also launched Post-it Extreme Notes, which are designed to hold to rough surfaces even in challenging conditions. Finally, operating income was $218 million, with operating margins at 19.3%. Operating margins were impacted by year-over-year portfolio and footprint actions, along with the investments associated with the new product launches I previously mentioned. For the year, we expect margins to be in the low 20s, similar to 2017. That wraps up our review of first quarter results. Please turn to Slide 15, and I'll review our updated 2018 guidance. As Inge summarized in his opening remarks, we are updating our full year organic growth expectation to a range of 3% to 4% versus previous guidance of 3% to 5%. With respect to earnings, we now expect full year adjusted EPS to be in the range of $10.20 to $10.55 versus a prior range of $10.20 to $10.70. Our full-year expectations for return on invested capital and free cash flow conversion remain unchanged. With that, we thank you for your attention and we'll now take your questions.

Is this Inge's last call that he's hosting before he becomes Chairman, the special new job thing?

No, it's not. I would be in July as well, and I own the next quarter as well, so I'm not going away.

Well, good. Well, we're glad to keep you or have you still around. But anyways, I've got 2 questions and one just on the business and one really on succession. But first, on the business, electronics, is price decelerating in electronics? Is there some sort of change in supply dynamic or supply-demand dynamic? Or is it on the same, really, curve that's been on now for several years?

Yes, Scott. What we’re seeing in price in the Electronics and Energy business, I'd say there's no discernible trend of it getting better or worse. It's typically a slight decline in price as we compete on the electronics side of the business. We've been seeing that and we continue to expect that going forward, but not a trend of it accelerating down nor accelerating up. It's pretty constant, Scott.

Right. As a follow-up, Inge, what has Mike Roman been focusing on? Do you have any early insights on the CEO transition and what changes or differences we might expect?

Yes, Mike is here, so he will give some comments around that. But yes, a couple of comments. The transition is going very well. Mike, first of all, we have worked together for many years, as you know. The first time we worked together was back in Europe early 2000, so I think 2003 and so. And then Mike was also working with me on the strategies that were laid out in 2012 and 2013. And currently, we talk every day. I feel like we text every hour and are totally aligned to what needs to be done. But he's here, so he should make some comments relative to his initial thought and so forth. But most importantly, he is very much focused on delivering Q2 together with all of us and, of course, also what we did in Q1. So Mike, if you like to add some comment on...

Yes, Scott, I would start there too. I am focused on delivering for 2018, starting with Q2 now. Over those 15 years, I have really enjoyed working with Inge, especially the last six years. I have been proud to be part of his leadership team, which has helped advance the company. We have accomplished a lot under his leadership. My focus is on the things we have been building, where we share many similarities, and our focus is in our playbook. This includes our commitment to the playbook, the opportunities we have in Portfolio Management, and the innovation in Business Transformation as we move forward. That is where our focus lies right now.

Just wanted to make sure I understood the reduction at the high end of guidance. Is that whole $0.15 just sort of high incrementals on the 1% reduction at the high end?

Yes, Steve. The EPS change in guidance really is a result of what we're doing on the adjustment to our outlook for organic growth and really making that adjustment from 3% to 5% to 3% to 4% and doing that, really focused on those businesses and markets where we saw some of the specific market softness as we came through Q1.

Okay. Regarding the market softness, it seems there may be a bit more clarity about what's happening in Western Europe, particularly in relation to the short cycle side.

Yes, in Western Europe, organic growth has met our expectations. As we've previously mentioned, we are making changes to our portfolio and footprint in this region to enhance our growth and margins. This remains a part of our strategy as we aim to achieve a 20% income margin by 2020. We still anticipate that Western Europe will align with our expectations of low single-digit growth.

Okay. And then in that case, just broadly speaking, the weakest organic growth on the short cycle basis that you saw globally, can you just nail that down for us?

Well, I think we called out several specific markets. So automotive aftermarket, oral care, and I would say, our consumer electronics is tracking as we expected as we come into the year.

Can we discuss the organic growth guidance, specifically the decrease to 3% to 4%? During our discussion in March, it appeared that the upper end of the range was still attainable for the year. I'm curious if, from a near-term standpoint, there have been any changes. Did things begin a bit slower than you initially anticipated in April?

Joe, I would say that back in March, we started noticing a softness in the first quarter as the month progressed, and we communicated that. Even then, it was specifically related to the market segments we mentioned, which unfolded as we anticipated throughout March. Looking at April, it has begun in accordance with our expectations. Therefore, the adjustment to the range was primarily based on those specific markets we identified in the first quarter. We do expect to see some improvement in a couple of those areas, and that is what is driving the adjustment.

Okay, fair enough. If I were to maybe just touch on price costs for just a second. So clearly, pricing is coming through a little bit better than expected. But also, from a cost inflation standpoint, it seems like it's a little bit more difficult this year to try to offset with substitute products. Maybe just an update on the expectations for the year for both pricing and also on the cost inflation side.

Yes, Joe. You're correct in identifying those two points. We believe we are off to a strong start with our selling prices, which have increased by 70 basis points and are positive across all regions. For the year, we anticipate that price growth will continue to be robust and will more than counterbalance raw material inflation. However, we are witnessing some increases in raw material prices, surpassing our initial estimates from December, particularly in crude derivatives and transportation costs. Despite this, we still expect that our stronger price growth will sufficiently offset raw material costs. Initially, we projected raw materials to have a neutral impact, estimating a potential variation of up to $0.05 either way, depending on our offsetting projects. Currently, we assess that this impact is leaning towards a $0.05 to $0.10 headwind, which is influencing our earnings for the year, but it is more than compensated for by the increased pricing we are anticipating.

That's helpful, Nick. Maybe just one clarification there, there's a new like kind of $0.05 to $0.10 range from a headwind perspective. Does that include the increased freight cost as well?

Yes, it does.

Could you provide some insight into how we will trend throughout the year in terms of growth? I understand that the timing of Easter in the first quarter has been mentioned. How does that influence the second quarter? Additionally, can you comment on any potential fluctuations in growth during the second half, particularly in the third and fourth quarters?

Yes. Steve, as I look out over the rest of the year, April, we're seeing off to a strong and expected start for us. So as I look at the three remaining quarters of the year, I don't really see any discernible trend difference amongst those three. All of them are coming in line now with our expected 3% to 4% organic growth for the year. I don't really see any lumpiness there.

Is there anything that you believe unusually affected the seasonality in the first quarter? I don't expect it to be related to price costs since they are still neutral, but was there anything in the quarter that led to a decrease in results from a seasonal standpoint?

Other than the timing of Easter, I don't think we see anything else seasonal.

In Health Care, growth has been modest over the past few quarters, possibly falling short of expectations. Oral care has remained flat and has shown some weakness compared to the previous quarters. Last year, you performed better in oral care, but there has been some improvement this year. What measures could be taken in Health Care to stimulate growth as the year progresses? We are aware that your long-term growth expectations for Health Care exceed the high 2% range reported this quarter.

Thank you, Andy. In Health Care, we experienced good growth in our medical consumables, food safety, and health information systems businesses, and we anticipate that this trend will persist throughout the year. Oral care remained flat. While we saw strong international growth, particularly in developing economies, this was somewhat countered by a slowdown in the U.S. We expect to see improvements in that area. The organic growth in the first quarter was impacted by these factors. Additionally, our drug delivery business, which operates on a project basis, can fluctuate from quarter to quarter, and we observed a year-on-year decline in Q1 compared to a strong performance last year. Thus, the flat performance in oral care was the main concern.

Okay. Shifting to Industrial, there was strong momentum in the second half of the year. You mentioned the auto aftermarket, and you also talked about rebates in Industrial. Additionally, you've seen good pricing growth. Do you think that the slowing in Industrial might be due to being overpriced? How do you view the outlook moving forward?

Yes. As you heard, we had good growth in abrasives and industrial adhesives and tapes and in auto OEM over build rates. And all of those were part of that price performance as well. So I think that's a broad part of our portfolio, and that didn't see any volume fall off because of price. In automotive aftermarket, which was the decline in Q1, we saw strong growth in our products and solutions for retail. Car care was really the declines in auto body, and so it was a very specific market. And we saw no indications of a pull-in ahead of any price increases and really no changes. It was just a soft market for us as we went through that quarter. So it was really that. So I think we continue to see strong growth across the broader industrial portfolio.

Okay. And you don't think it's share loss or anything like that in auto aftermarket?

No, we don't see any indication of that at all, Andy.

I want to follow up on Andy's question. Clearly, you experienced some solid pricing in the U.S. In the first quarter, I believe it was up slightly—'18, plus 80 basis points. However, there was some weakness, and when considering your overall strategy for leveraging global IPI and maintaining strength in the U.S., would you agree that you have underperformed in the U.S.? Doesn't this raise concerns about certain parts of your product portfolio potentially facing commoditization issues in Consumer and some areas of consumer healthcare? How do you plan to address this beyond perhaps a stance of defiance?

So Rob, I want to emphasize that we are observing broad growth in relation to those markets and the overall economic landscape. Therefore, it appears to be specific to certain market segments, which is evident in the U.S. right now. When we examine the portfolio as a whole in the U.S., the focus has been on automotive aftermarkets, oral care, and a few project-based businesses. We do have year-over-year comparisons with some project-based businesses, and these are not related to changes in price value.

Your gross margin has decreased by approximately 60 basis points compared to last year. Can you provide some insight into the factors contributing to this change in terms of product mix and pricing costs? What is driving this trend as seen in Slide 19 regarding your consolidated P&L?

Rob, one of the bigger things in there that you may not be seeing visibility to is what FX is doing to our gross margin. Clearly, we get some benefit to our earnings per share from a weaker U.S. dollar, but that's partially offset by our hedging strategy that offsets some of our risk from FX. All of those hedging losses become part of our cost of goods sold. And that brought down gross margin in the first quarter of 2018 as well as bringing down operating margin by 40 basis points.

Should we think about that currency translation drop through kind of like low teens, like a 10% drop through by definition of the rolling of the hedges and structurally? Or how do we think about the incremental margin coming from FX growth?

The incremental margin, Rob, I haven't quite thought of it in that direction. Generally, what...

Sorry, the drop through from FX to the bottom line.

Yes, it will vary depending where we are in the cycle with FX movements. Right now, we're at a point where we're going against a comp a year ago where we were having hedging gains. Now we're having hedging losses with the weaker U.S. dollar. So I can't put out one metric like that because it will vary quarter-to-quarter.

Just in terms of geographies, the China strength was impressive, up double digits. Maybe give us a context about the end market drivers or the product drivers there. And part of the issue here, maybe this is just an overhang with all the headline news about trade war and protectionism and so forth, is that if things came to a boil, any boycott of American brands would likely put 3M at risk. And have you given any consideration to that potential development?

We observed broad-based growth in China, primarily driven by our domestic-facing businesses. Key areas included health care, personal safety, and segments of our industrial businesses, such as industrial adhesives and tapes, which performed well. We're also noticing ongoing strength in important trends where we are leveraging our innovations, including air quality, water quality, and food safety. At the beginning of the year, the electronics sector has aligned with the overall growth in China. Overall, we experience broad growth supported by our diverse portfolio in domestic markets. Regarding contingency plans for potential market challenges, our diverse portfolio allows us to strategize effectively with various customer segments. At this moment, we believe we are well positioned within the Chinese markets and among Chinese customers, regardless of the economic outlook.

Deane, this is Nick. I would like to add that our strategy in China involves establishing local manufacturing to serve our Chinese customers. We believe this provides an additional layer of protection for our approach as we implement it in China.

That's helpful. As a follow-up, Nick, regarding the increase in buybacks announced today, what are your expectations for the impact on leverage? At the beginning of the year, you anticipated adding between $1.5 billion and $4 billion. Where do you see us falling within that range and what is the expected timing?

Deane, I'm not changing the expected range on leverage. I would say M&A is the biggest factor in determining where we will end up with added leverage, and it's challenging to predict the timing of that. The range we have now is our best estimate, the same one we communicated in December. This change in the level of share buybacks does not affect our total estimated leverage that we expect to add for the year.

Maybe just the first question on the sort of productivity aspect of the earnings or EPS road map that you laid out previously. If I look at that, you had maybe $0.60 or so in aggregate coming from portfolio and footprint, business transformation, and then productivity. So I just wondered, in light of the raw material headwinds and also the shortfall on organic volume growth, if there was any increased urgency around extracting higher savings from productivity this year, whether just pulling some forward or increasing the amount for the year as a whole.

Julian, for the year, we still estimate our productivity level to be in line with what we originally projected in December. In the first quarter, our margins were 23%, and the underlying productivity was positive. However, we expect to see improvement in productivity as the year progresses. We believe that our lower volumes in the first quarter contributed to productivity being slightly lower than our annual estimates. As the year continues, we are confident that our productivity will align with the levels we estimated in December.

Understood. And then my follow-up would just be around the Electronics and Energy segment. Just trying to understand, you had guided obviously sort of a slowdown there back at the end of 2017. We did see that slowdown very clearly manifest itself in Q1. So as you look at the balance of the year, is there a sense that, that may start to accelerate from that Q1 low base as you move through 2018? Or you think that the current growth rate is representative of the year?

Yes, I would say that our outlook, as we established at the beginning of the year, is aligning quite well, particularly in the consumer electronics sector. We experienced significant growth in data centers and semiconductor markets, and there's strong demand for our products, including our fluid solutions and interconnect solutions in those sectors. However, this is being balanced out by the challenges in consumer electronics and the demand within those markets. Overall, we are progressing as anticipated and are on track with our projections for the year.

This is Inge. I want to make one more comment regarding that business group because it's crucial when discussing future volume. We need to remember the work that has been done related to the portfolio. Looking back several years, we faced slower growth and challenges with margins. However, now we can see that over the past few quarters and years, the structure is right, and our market relevance is solid. Our margins are now very positive, particularly for the enterprise, and we believe they are sustainable moving forward. This is a key aspect of that business within 3M. We manage it effectively, even with some fluctuations in volume, because we recognize there are areas of business that can be more volatile. Nevertheless, the work we have done on the portfolio has positioned us well, and we feel very confident in delivering returns to you quarter by quarter.

Maybe just on that point, would you characterize the sell in and the sell-through in electronics just being in good balance right now if there's any inventory?

Yes, it does. Yes, no increase, yes.

I have two quick questions. You mentioned various end markets or product lines related to construction. Is the traction you're experiencing due to better spending or an increase in spending from your customers, or is it driven by an innovation cycle on your part? Additionally, regarding the litigation settlement, could you provide an update on your current status, what remains outstanding, your expected timeline, and whether there are any issues that might delay the resolution?

Yes. On the construction side, we continue to experience strong growth from our home improvement business within our Consumer Business Group, particularly driven by construction. The businesses utilizing that channel have been increasing and are significantly contributing to its success. This growth is supported by both a strong market and the innovative products we are introducing. We have invested heavily in that segment of our portfolio, expanded it, and are well-positioned for future growth in that market. Regarding your second question about the NRD settlement, we are currently implementing the grant to the state and collaborating closely with the State of Minnesota as anticipated. We believe we are focused and well-prepared as we move forward.

But could you clarify if this sets a precedent for other states or if it rules out similar issues in other states? There has been a lot of media speculation about various scenarios, most of which seem highly improbable. I would appreciate your perspective on that.

No, this is a unique situation. This is our home state and something that we've been working on with them for a number of years. So this is a unique situation in both the nature of the case as well as the grant and the process that we're working through with them.

I have two quick questions. Returning to the consumer topic, I find it interesting or perhaps concerning, based on some of the anecdotes shared. Do your results indicate any potential weakening in U.S. consumer strength that might not yet be visible from a macroeconomic perspective? Or do you believe it's simply timing fluctuations and unique issues in a few specific channels?

Yes. Jeff, as you look at the U.S., that was actually one of the strengths of our consumer business as we came through Q1. We saw stronger growth there. And as we talked about, it was led by home improvement, but our home care business was also positive. We continue to see some slight declines in our office channel, but it was broad-based, stronger growth in the U.S. market. So no, very much in line with improvements in low GDP and outlook for retail spending.

And then just very specifically on dental, oral care, it's just kind of been a slog for you and Danaher and others, all these kind of distribution changes and things going on. Do you see any opportunity there that change the business model, perhaps go direct, not go through these various distribution channels? Are you doing anything proactive there to maybe kind of reshape, reposition that business in any way?

It's notable that the oral care channel has become more efficient over time due to changes in management. You can observe this in the balance of our sell-in and sell-out metrics. We continue to adapt to the ongoing changes in our commerce channels. This trend is evident across various sectors of our business, including oral care. Our primary focus remains on developing new models to better serve our customers. We prioritize understanding the needs of the end users and collaborate with our channel partners to navigate their transitions, incorporating new models as they emerge. Our strategies in oral care and beyond are diverse and comprehensive.

Thank you. As I look at our first quarter performance, there are many positives, broad-based growth across all business groups, which included strong pricing, expanded margins, and a double-digit increase in EPS. Equally important, we continue to evolve and build out our enterprise for long-term success. 3M is strong and we have the experience, market position, and capabilities to continue delivering sustained profitable growth in 2018 and well into the future. Thank you for listening, and have a good day.