3M Company (MMM) — Q3 2018 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to our third quarter 2018 business review. With me today are Mike Roman, 3M's Chief Executive Officer; and Nick Gangestad, our Chief Financial Officer. Mike and Nick will make some formal comments, and then we'll take your questions. Please note that today's earnings release and slide presentations 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 found on Slide 2. First, we will be hosting our Investor Day at your headquarters in St. Paul, Minnesota in a few weeks with a welcome reception in the evening of Wednesday, November 14th where we will be highlighting how 3M Science is advancing our priority markets for growth. Along with the formal presentation program, on Thursday November 15, the presentations will discuss our new five-year plan along with our preview of our 2019 outlook. If you plan to attend the event and have not yet responded, please RSVP right away. Second, our Q4 Earnings Conference call will take place on Tuesday, January 29, 2019. 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 note that throughout today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the appendices of today's presentation and press release. Please turn to Slide 4 and I'll hand out to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. In the third quarter, 3M delivered a double-digit increase in cash flow and earnings per share along with strong margins despite slower growth. We also continue to execute on business transformation by deploying capital to invest in our future and return cash to our shareholders. Looking at the numbers, our team posted total sales of $8.2 billion in the quarter. We delivered organic growth of 1%, which is on top of 7% growth in last year's third quarter. As you recall from the discussion on our July earnings call, our ERP rollout in the US resulted in revenue shifting between Q2 and the second half of the year. Today, we estimate a pull-forward into Q2 of approximately 100 basis points with the vast majority coming out of Q3. Moving on to earnings per share, we posted EPS of $2.58, an increase of 11% year-over-year. Our company continues to deliver a strong return on invested capital along with premium margins. Company-wide we generated margins of 25%, with all business groups above 22%. Our team also increased free cash flow by 24% year-over-year with a conversion rate of 114%. This is a testament to the strength of our portfolio and business model, and our focus on driving productivity every day. We also continue to invest in R&D and capital to support organic growth while returning cash to our shareholders. In the quarter, we returned $1.9 billion to 3M shareholders through both dividends and share repurchases. Please turn to Slide 5 for a look at the performance of our business groups for both the third quarter and year-to-date. In the third quarter, three of our five business groups, Electronics and Energy, Industrial and Safety, and Graphics posted organic growth of 2%. Healthcare and Consumer each had areas of strength but also areas that were softer than expected. Healthcare's growth declined by 1% primarily due to continued weakness in our drug delivery business. Organic growth in Consumer was down 2%. This business group was impacted by channel adjustments between quarters with our major retail customers, though the sellout of our products remains strong. In his comments, Nick will provide more detail on the third quarter performance of each business group. Given the shift of sales between quarters due to business transformation, it is also helpful to look at our performance through nine months. Safety and Graphics posted 6% growth followed by 3% growth from both Industrial and Electronics and Energy. Healthcare posted 2% growth with Consumer at 1%. Company-wide, we have delivered organic growth of more than 3% year-to-date. I will come back to share our updated guidance after Nick takes us through the details of the quarter. Nick?

Thank you, Mike, and good morning everyone. Please turn to Slide 6. Sales grew 1.3% organically in the third quarter and are up 3.3% year-to-date. Increases in selling prices contributed 120 basis points to sales growth in the quarter, with positive price growth across all geographic areas. The net impact of acquisitions and divestitures contributed 20 basis points to sales growth in the quarter. Foreign currency translation decreased sales by 1.7 percentage points; all in, third quarter sales in US dollars were down 20 basis points versus last year. In the US, organic growth was 0.5% with positive growth in Electronics and Energy, Industrial and Safety, and Graphics. Q3 organic growth was impacted by the deployment of our new ERP system in the US during the quarter. Year-to-date organic growth in the US is up 3%. Asia-Pacific delivered 3.2% organic growth led by Healthcare and Safety and Graphics. Organic growth was 10% in China, Hong Kong, while Japan was down 7% or up 1% excluding our electronics-related businesses. Year-to-date, Asia Pacific is up 4.5% organically. EMEA declined 90 basis points in Q3 with West Europe down 25. From a year-to-date standpoint, EMEA is up 2%. Finally, Q3 organic growth in Latin America, Canada was 2.1% led by Healthcare and Consumer. At a country level, organic growth in Brazil was 5%; Mexico was up 3% while Canada was flat. On a year-to-date basis, Latin America, Canada is up 4% organically. Please turn to Slide 7 for the third quarter P&L highlights. Company-wide third quarter sales were $8.2 billion with operating income of $2 billion. Third quarter operating income margins were 24.7%, up slightly versus last year. Let's take a closer look at the components of our margin performance in the third quarter. Organic volume, productivity, and lower year-over-year portfolio and footprint actions added 70 basis points to margins. The selling price benefit more than offset raw material inflation which added a net 30 basis points to the third quarter margin. For 2018, we now expect full-year raw material headwinds inclusive of tariff impacts of minus $0.15 per share versus a prior range of negative $0.05-$0.10 per share. We continue to expect benefits from selling prices to more than offset raw material headwinds. Nearly offsetting these margin benefits during the quarter was a 50 basis point headwind from foreign currency, a 30 basis point impact from acquisitions, and a 10 basis point headwind from the Q2 divestiture of the communications markets business. Let's now turn to Slide 8 for a closer look at earnings per share. Third quarter GAAP earnings were $2.58 per share, up 11% versus last year. The benefits of organic growth, productivity, and lower year-on-year portfolio and footprint actions added a combined $0.12 to per share earnings in the quarter. Acquisitions added $0.01 with divestiture incoming and transition costs from the communications markets divestiture having an earnings headwind of $0.03 per share. Foreign currency net of hedging reduced per share earnings by $0.08 as the US dollar strengthened against many currencies throughout the quarter. For the full year, we now expect an earnings headwind from foreign currency of minus $0.05 per share versus a prior estimated benefit of $0.10 or a reduction of $0.15 per share versus previous expectations. Higher year-on-year net interest expense and retirement benefit expense decreased earnings by $0.05 per share. Our Q3 tax rate was 21.3% which increased earnings by $0.22 per share. This earnings benefit was primarily driven by the US Tax Reform. Lastly, a reduction in shares outstanding added $0.06 to per share earnings. Please turn to Slide 9 for a look at our cash flow performance. As Mike noted, we continue to generate strong operating cash flow allowing us to consistently invest in the business and return cash to shareholders. Third quarter free cash flow was $1.8 billion, up 24% year-on-year with a conversion rate of 114%. Third quarter capital expenditures were $377 million, up $52 million year-on-year, and we expect these investments to be approximately $1.6 billion for the year. In addition to investing in our businesses, we returned significant cash to shareholders in Q3 including $794 million in dividends. We also returned $1.1 billion to shareholders through gross share repurchases. We continue to expect full-year gross share repurchases to be in the range of $4 billion to $5 billion. Let's now review our business group performance starting with Industrial on Slide 10. The Industrial business group delivered third quarter sales of $3 billion, up 2.2% organically with growth across all geographic areas. Our automotive OEM business continues to drive increased penetration across applications such as structural tapes, adhesives, and acoustics lightweighting and electronics solutions. Overall, our business was up 5% in the quarter compared to global car and light truck builds which were down nearly 2%. The automotive aftermarket business declined low single-digit organically due to softness in the collision repair market. Our Industrial adhesives and tapes business and filtration were both up low single digits in the quarter. Finally, the Advanced Materials business led the way with double organic growth in the quarter. On a geographic basis, industrials organic growth was led by a 3% increase in Asia Pacific followed by the US, up 2%. Industrial delivered third quarter operating income of $667 million with an operating margin of 22.1%. Please turn to Slide 11. Safety and Graphic sales were $1.7 billion, up 2.2% organically in Q3. Growth was led by our personal safety business up 5% organically on top of a 14% increase last year. The integration of Scott Safety is on track and the business continues to exceed our expectations. Transportation safety grew mid-single digits while Commercial Solutions was up low-single digits. Finally, our roofing granules business declined mid-teens as shingle manufacturers slowed production in the quarter. Geographically, organic growth was led by 5% growth in Asia-Pacific. Operating income in the third quarter was $412 million while operating margins were 24.8%, which includes a 150 basis point headwind from the Scott Safety acquisition. Please turn to Slide 12. Our Healthcare business generated third quarter sales of $1.4 billion down 1.1% organically versus a 7% comp last year. Holding back both third quarter and full-year organic growth in healthcare has been the continued softness in our drug delivery business, which is dependent on pharmaceutical regulatory timelines and customer R&D budgets. This business saw a 25% year-over-year decline in Q3 organic growth, which negatively impacted overall healthcare organic growth by 250 basis points. While our drug delivery business is experiencing near-term challenges, the pipeline continues to strengthen and we expect the business to stabilize in 2019. Oral care grew 2% organically with improved growth in the US and continued strength in developing markets. Our 3M Clarity Clear Tray Aligners launch is off to a good start as the number of new cases ramps quickly and we expect continued momentum going forward. Our Medical Solutions business declined slightly against a strong comp of 7% from a year ago. Through nine months this business was up 3% with particular strengths in vascular access and advanced wound care solutions. Food safety continues to deliver strong organic growth in the quarter, up high-single digits while Health Information Systems grew mid-single digits. On a geographic basis, Asia-Pacific led the way up 10% with Latin America, Canada up 4%. EMEA was down slightly while the US declined mid-single digits primarily due to last year's strong comp. Healthcare's third quarter operating income was $446 million and operating margins were nearly 31%. Next, let's cover Electronics and Energy on Slide 13. Electronics and Energy organic sales growth was 2.3% in the third quarter. Sales were $1.4 billion. The electronics side of the business grew 1% led by a mid-single digit increase in electronics materials solutions. This business continues to experience strong demand particularly in the semiconductor and data center market. In addition, we continue to see our content per mobile device grow globally as we apply 3M science to the advancement of this market. Our energy-related businesses were up over 6% organically with strong growth in renewable energy and pipe coating solutions. On a geographic basis, the US was up 5% while both Asia Pacific and Latin America, Canada were up low single digits. Third quarter operating income for Electronics and Energy was $457 million with operating margins of 31.7%. Please turn to Slide 14. Third quarter sales in Consumer were $1.2 billion and organic growth declined 2% year-on-year. Our Home Improvement business grew low single digits organically, while the other three businesses each declined in the quarter. Looking at consumer geographically, organic growth was led by a 5% increase in Latin America, Canada. The US was down slightly impacted by our Q3 ERP rollout. We continue to see strong consumer demand for our products with mid-single digit point-of-sale growth. EMEA declined mid-single digits as we've been actively managing our product portfolio. Lastly, Asia Pacific declined 7% as we've seen lower channel demand for our consumer respiratory solutions. Third quarter operating income was $291 million with an operating margin of 23.5%. That wraps up our review of third quarter results. Please turn to Slide 15 and I'll hand it back over to Mike to review our updated 2018 guidance. Mike?

Thank you, Nick. With three quarters behind us, we are updating our guidance for the full year. We now anticipate organic growth of approximately 3% versus a prior range of 3% to 4%. With respect to earnings, we expect adjusted EPS in the range of $9.90 to $10 against the previous range of $10.20 to $10.45. Our change in EPS guidance is largely due to three factors; our updated growth expectations along with our updated guidance for currency and raw materials that Nick mentioned earlier. Looking at the remainder of 2018 and beyond, we know there's a lot more we can and will do to deliver for our customers and shareholders. Going forward, we are focused on driving growth, being relentless in putting our customers first, and continuing to transform 3M to deliver greater productivity. This means we will continue to work to optimize our portfolio prioritizing resources to our most attractive opportunities. We will strengthen our innovation model and continue to invest in research and development, which enables us to create unique solutions that advance, enhance, and improve outcomes for our customers. In addition, we will continue to invest in high-growth, high-value product platforms such as automotive electrification, advanced wound care, and data centers. We will also step up our efforts to fully leverage the progress we've made on business transformation. With our most recent deployment in the United States, we have now successfully deployed 70% of our global revenue on the new ERP system. I am pleased with the success of our rollouts in Europe and the US. This was a significant undertaking and I thank our team for their tireless efforts. Moving ahead, we'll be able to focus even more on leveraging the power of business transformation to improve service levels to our customers, improve productivity, and accelerate value realization, and at our Investor Day next month, we look forward to sharing more details about our plans. With that, we thank you for your attention and will now take your questions.

Thanks. Good morning, guys. I don't recall covering your stock a long time. I just don't recall the type of volatility you had in the Healthcare business; the drug delivery you mentioned was down 25%. Can you give us a little bit more granularity behind what is causing that kind of volatility right now?

Yes. Scott, as we talked about on the opening here, the organic growth was impacted by drug delivery down double digits. And also, we did have a strong year-over-year comp as we came through Q3 of 2017. Broader we see solid growth in oral care, and our food safety business continues to show strong growth, with health information systems having a strong pipeline right where we expected. So most of the rest of the portfolio is in line with expectations. I would say that the drug delivery business continues to be the challenge against what we saw for the growth for the total year.

So, yes, I am not sure that answers my question. Is there an inventory de-stock at the customer level? I'm trying to think about that. I'm assuming the customer, the end consumer still consuming these drugs, so what's going on at the part of the pharmaceutical companies? That's what I am asking.

Yes, so our drug delivery business is, we've talked about it as a project-based business in the past. It really is—we work in partnership with pharmaceutical companies, really dependent on their regulatory cycle also we have significant R&D partnerships and those are project-based businesses as well. So we see a strong pipeline ahead. We are working through a challenging performance in 2018. We see stabilization as we get into 2019 and strong growth. So we have a good view of our pipeline but not impacting positively as we go through the second half of this year.

Okay. That's a good answer. And then Consumer, you talked about the inventory channel de-stock, is this— is this kind of a new normal where it seems like the retailers are just holding less inventory? Do you view it as a new normal adjustment kind of one time or is it something where you anticipate some additional de-stock going forward?

Yes, it's been something that we've seen with the office channel over the last year-and-a-half almost two years now where you see a restructuring of the channel and you see a de-stocking as the traditional office channel restructures around the new normal for them. I think we see it more broadly as well that we are at a point of sales strong, up mid-single digits across the portfolio. Both the retail channel is at least as we come to this second half of the year sees additional restructuring in. And we expect some of that to continue as we move ahead. This is a space that's been disrupted significantly, and it's something that we expect to see in some individual channels as we move ahead, but really it's the broader base in the second half that's impacting us now.

Thanks, good morning, guys. Can we maybe start on just US growth? I recognize that the ERP transition probably impacted growth a little bit this quarter and I think Mike you mentioned a 100 basis points earlier. But I'm just trying to parse out, like how much of the 50 basis points of growth you saw this quarter is related to ERP versus like what you're seeing from an end-market perspective just given that the US has been so strong across industrial for most of the year.

Yes. So if you look at that 100 basis points that we talked about, that's a worldwide view and really a 250 basis points of impact on the quarter in the US. And as I mentioned, we saw most of that, the vast majority given back in Q3. So year-to-date up 3% is more in line with when you look through that what we're seeing. And we see positive growth in Industrial, Safety and Graphics, Electronics and Energy, and really we see the macro more broadly in the US as positive and steady. It was, I would say, we're back talking about our Healthcare organic growth being impacted by our drug delivery business in the US and a strong year-on-year comp in the US especially strong in that area and then I would say consumer organic growth was impacted by that US ERP as strong as any one of the businesses in our portfolio. So, they had their full share of those 250 basis points.

And Mike, is it your assumption going into Q4 that the ERP overhang kind of subsides or is that something that just carries into Q4 as well?

Yes, I think that's the view we saw the vast majority come out in Q3 so that's not the big impact as we go into Q— as we go into Q4.

Okay. And then my one follow-up just on China. Obviously, through the first three quarters of the year things have held up very good; we're seeing signs of things slowing down particularly on the Consumer side. I'm just curious if you can give any color around the trends that you saw through the quarter and what you're seeing specifically with the Chinese consumer?

Yes, we mentioned that the slowing in the consumer respiratory protection space as one of the impacts. We see other signs of slowing in China, automotive build rates are down significantly. And that has a knock-on effect and so you see some broader softness in industrial as we go into Q4. So we are seeing the same thing that's why we see ourselves tracking more to the 8% to 10% range for China for the year.

Hey, good morning guys. Mike can you give us more color on what happened in Europe this quarter? We know you are expecting a slowdown in the US given the ERP. You just talked about China but EMEA seemed to fall off significantly for you versus last quarter. I think Western Europe was up 6 last quarter and down 2 this quarter. So as Western Europe, is the European decline acquiring just more lumpiness or is there something a little more worrisome there?

Yes, so our broader Europe is tracking to the low end of the range that we had for the year and the 1% to 4%. As we came into the quarter, the Industrial and auto build rates softened a bit and we saw softening across West Europe and organic growth declined in the quarter, up slightly year-to-date and we think up slightly for the full year and so at the bottom end of the range. I think it's also being impacted by some of the portfolio actions that we are taking as we talked about as we've gone through the year part of our plan to improve the overall performance of the portfolio and the profitability of West Europe as we move ahead, but tracking low single-digits at the bottom of our range for the year.

Mike, do you have this visibility though into that sort of low single-digit growth as you go forward because it has been a very lumpy region for you?

Yes. I think we have good visibility across the portfolio and the markets and I would say that the softening in the automotive and the build rates have an impact there. We have been talking about this being towards the low end of the range all year really because of the outlook we have across the markets in our portfolio and also some of those actions we've been taking. So I think it's consistent a little softer than expected in Q3, but, again, for the full year we think it's about in the range where we expected it to be.

And then Nick, your price with raw material plus point three, pricing up one point obviously good results there. Can you maintain positive price versus raws even if tariffs continue to ramp? And could you talk about how you are adjusting raw material sourcing under the supply chain to adjust to the inflationary environment, especially if we see more tariffs moving forward?

Yes, Andy, we are continuing to see raw material price increases and so our pricing has more than been offsetting that and Andy it's our expectation that will continue. We are anticipating continued increases in raw material prices and layering on tariffs that we expect our price strength to continue to more than offset that. If I fast forward a little into 2019, we think tariffs will be having a negative impact on our total sourcing cost. There are a number of things we're doing around that: source changes, supply-chain changes, but also pricing changes. And I'll talk more about this in on November 15th, but our view is we have approximately $100 million headwind from tariffs. And that our pricing will more than offset that and raw material price increases into 2019.

Hi, good morning. Just a question around the moving parts in the P&L, particularly I guess your SG&A was down sort of 90 bps a share of sale, R&D down 40 bps a share of sales to offset falling gross margin. Is there any change to the view that R&D to sales of 6% is the right number? And what's the risk I guess that R&D and SG&A expenses have to sort of snap back up over the next 12 months?

Yes. Julian, let me take the R&D part first. On the research and development as you heard of stock, it's the heartbeat of 3M, it's the center of innovation and it's the key for us sustaining our performance, premium margins, our growth, our return on invested capital. So it's still a top priority for us and a top priority for me as CEO. We are going to continue to invest in it, continue to target that approximately 6% to sales and if you look at the quarter majority of the year-over-year decline in the quarter was really due to a couple of factors; FX of course the contract R&D work that I talked about in the drug delivery business was part of it, and also the divestiture of the communication market. So that it's really and there are some quarterly up and downs as we make investments in experiments and a number of projects and so it's still very much the focus there. If you look at SG&A, I think that's another one that. We—our spending is not completely smooth, but we're making improvements as well on productivity. That's one of the things that we're getting as we move forward with business transformation as we take now 70% of our revenue onto business transformation. We have opportunities to leverage our service models and engage in some improvements there.

Thanks and then my follow-up question would be around Healthcare. You had laid out—or the management team had laid out the 4% to 6% top-line growth aspiration two and a half years ago; Healthcare has consistently run at or slightly below the bottom end of that range even prior to the drug delivery issues. So do you think that's the addressable market growth coming in light or do you think there is a need for 3M itself to step up M&A and/or R&D to close the gap with the growing market?

Yes, Julian, I would say that—I talked about the broader portfolio. We have much of the rest of the portfolio beyond drug delivery that's in line with our expectations. And if you step back and look at the 4% to 6% and where we are now in the 2% to 3% range versus that 4% to 6% or even as we kind of reset and said 4% as we came through the year, it's largely drug delivery and slower oral care. We saw a better oral care performance in the quarter as we move through the year; kind of what we expected, but, still when you look against that 4% to 6% those are the two impacts - that our biggest impact. The year-over-year comps are part of it in the quarter, but if you look at the total year now - those are the impacts. We expect Q4 to be a return to our historical growth rates in healthcare so as we lap some of the drug delivery comps and we get those broader performing portfolios to have a bigger impact.

Thanks. Good morning. Hey Mike, I just want to characterize what you're really seeing out there; you've already from a growth perspective, if you take out the ERP impact, if you take out what you would describe as kind of disrupted channel related to distributor and retail de-stocking, I guess you have slowing China and some European challenges. If you take out the Europe—the drug delivery are you seeing kind of any short-cycle slowing globally from a demand perspective or do you think these are all kind of more 3M specific issues that you're going to be getting through and then normalizing?

Yes, see I think you've characterized it well. The areas that we've talked about already, and we have highlighted a number of businesses where there specific to our markets and our businesses in those markets. I would say that we've performed well and automotive as Nick noted we performed well in the automotive OEMs are relative to their bill grades, but their bill rates continue to move down negative actually in the quarter and part of the slowing in China and part of the impact in Europe as well. We highlighted as well, safety and graphics have been at the top of the range that we have guided for the year and really was we expect them to be there at the end of the year but we're impacted by a negative mid-teens growth in our industrial mineral business, that's another one. But again it's kind of a maybe it's our focus on construction markets and some of the challenges we see in some of those end markets, but that was definitely softness in one of our markets. So, broader we see a steady and positive macro and broader our portfolio the majority of our businesses continue to do well against that broader macro.

Okay, and then I of course on that, it doesn't change your sort of normal 1.5x IPI thinking?

Well, yes. It's on the broader portfolio absolutely and as we move ahead that's the model that we look at it, individual business is impacting the way they did here in the quarter and maybe a couple of them as we go through the second half, it's those are - those will take away from some of that near term, but yes, that's absolutely our performance, that's our focus, that's our expectations, that's our capacity and capability that we demonstrated.

And I don't want to misread your portfolio optimization comment towards the end of your prepared remarks. But that is something that 3M certainly had been emphasizing for some time with Inge and with you before, so do you need something different here in this - what do you mean by that?

Well, that you said it; portfolio management has been one of our key levers. It's a driver of value for us, you look at the performance we have in electronics and energy and in safety and graphics as we come through the year those businesses are performing well and they have been an area that we focused a lot of our portfolio that actions around it's what we have done to reposition and reshape those portfolios through acquisition and divestitures and other actions, I think that's an example of where we take that lever and really create value and so we're always looking at that, we are always realigning our businesses around our portfolio priorities it's how we reshape the company for near term and long-term success. So it's, I guess and I said that at the last call as well, we are in active portfolio management, this is what we do to take full advantage of the 3M model as we move ahead.

Okay, and if I can just sneak in one specific thing for Nick. On the inventory days and I suppose receivables, just slight increases that are going out there. I assume that's all ERP related or is there something else going on?

No. Steve, that's exactly—we had built some inventory in advance of going live in the US with our new ERP system. And we wanted to do that in order to ensure we were fully satisfying our customers and their supply chain, and the increase you are seeing there is that not bleeding off quite as fast as we had planned but we see over the next couple of quarters that inventory coming down.

Thanks, good morning everyone. Hi, guys. So, Mike it sounds like you're characterizing Europe and maybe Asia Pac a little bit as relatively stable. I think that's kind of messaging that I am getting maybe at a slightly decelerated basis. I wanted just kind of confirm that's what you're seeing. Brexit or any other issues are not necessarily sequentially affecting your businesses and on that basis, is this causing you this kind of low-level activity stability, because you're a very big company in Europe. Is it causing you to allocate your R&D or your growth initiatives in any kind of a different way to try and stimulate things more quickly to circumvent auto; just curious on those fronts.

Yes, John, I think you characterized West Europe and Europe overall the way we kind of view it right now, and again we see some markets like auto impacting Europe as well, drug delivery of course impacting Europe as well. But more broadly we see it as a steady economic backdrop, we're not looking at other significant changes there. And Asia I guess I would characterize it maybe at the low end of our range that we had looked at for the year so softer overall but again steady across more broadly with sometimes as long as I've said in China. And so if you look back at West Europe, your question there we are—we deployed the business transformation there over the 2015-16-17 and we're now taking advantage of that, and we are I would say doing a couple of things, it's enabling us to prioritize better where we really do invest in our best parts of our portfolio. It's the models that we have in place, the service models that we have in place there up and running be able to leverage area-wide ERP capability. Those are really enabling us to I think bring even sharper focus on prioritizing and that's part of our active portfolio management as prioritizing where we put our resources for growth shifting resources to those higher growth areas. We're also as planned taking some actions to I would say streamline our structure in EMEA and even Latin America as we get ready for the go-live taking advantage of business transformation so that's really also helping us the focus on the markets in areas that are most important and best opportunities for growth as we go ahead.

So on that point you just raised about business transformation ERP maybe this is for Nick, Nick give us a sense of how much BTU may have actually net contributed in the quarter and I know you haven't really updated your $500 to $700 target in Ohio right from business transformation specifically but can you give us at least an elementary advance as this is coming through? Are we looking at the low end or the high end of that range or a new range altogether?

As far as the savings, John, we are—what we've been saying and continue to say is that by 2020 we expect this to generate between $500 million and $700 million of operating income benefit. This year we're on track for approximately $100 million of savings versus last year, that will bring our total savings since we started that on an annual basis up to $250 million and we remained on track on the 500 to 700, not ready to call whether we think more likely low end or high end, but we still see ourselves in that range by 2020. And as Mike mentioned earlier on this call we have a lot of the deployment behind us now and that's allowing us in 2019 to be putting even more energy and resources into realizing the value realization that that we've been projecting so a little bit of a shift of a little less on deployment and more on the value realization and the business process changes that will create that.

And to be clear about $100 million is a net number, right like that goal flowing to the bottom line pretax?

That's exactly right, John.

And then one more just nitpick here. Why haven't you updated the $500 to $700? I mean this goes back a few years ago right. Is there some obvious reason why should base on the nature of the way this stuff is working that you can't—you haven't actually provided some sort of look forward based on progress or realized results; is that just because the U.S. would save for the last and it's the biggest slug or is there some other reason why this thing is not being updated or would have been updated sort of more quickly?

Yes. We last updated that number in 2016 when we laid out a five-year plan and we've continued to progress as we expected towards that. November 15th when we lay out our next five-year plan we'll be updating that if we'll where this goes even beyond 2020. And so partly, John, it lines up with longer-term plans that we lay out and you can expect to see more from us on in November.

Hi good morning guys. Just I know there've been a lot of questions on growth and maybe not quite what we would have expected in terms of some of the bigger global controversial end markets like auto or the consumer in the US and China; it don't seem to be as big of a drag a lot more 3M specific stuff which I think some of the earlier questions have noted. Do you feel like over the next couple of quarters—and I don't want to get into 2019 too specifically—but do you think there is a smooth handoff where some of the 3M specific issues or some of the submarkets start to balance out and we can still kind of swim upstream versus some of the more controversial ones like auto or is there potential for say someone to have to bleed down further into your business?

Yes, Josh, if you look at some of the businesses we've highlighted today that are impacting growth as we come through Q3 and the second half. A couple of things will happen. One, we'll lap some of those comps as we move ahead, and they're going to expect. I mean we're—we expect to improve those businesses. And I mentioned in drug delivery that we stabilized based on what we have in the pipeline as we get into the 2019 and we returned to growth as we come out of that. And so we can look forward and we can see that stepping into it. Automotive is maybe a little more complex in the dynamic. I mean we're outgrowing the build rates and have consistently done that and with what we're doing with automotive electrification, we see our ability to do that to continue and even leverage our innovation further in the future. But we're still dependent on the build rates. And so what happens in those build rates as we move ahead where it goes in key markets like the US, Europe, China, those are going to impact that. The outlook right now is fairly nominal low growth negative growth as we come through the quarter in the third quarter, but slow growth as we move ahead. So I would say we'll continue to outgrow that that will continue to be a growth contributor with what we've been able to do there. Other markets industrial mineral what happens in the end market demand will dictate that more than us as we get into future quarters. So I think it's a little bit market dependent, but the one examples that we've talked about, I think we do see ourselves being able to continue to rise up in our growth relative to those markets. If you go turn to consumer, the thing I would look at is our sale out continued strong. Our brands, we got category-leading brands that are performing well off the shelf, we've got to work through, and I think our team has done a very good job of working through the channel disruption that's going on there and managing through that. We've got very good visibility as we move through that especially in developed markets. And we expect to see that sale out to eventually rise up and carry the day. And so we'll look for that as we go ahead too.

Got it. That's helpful. And maybe I could just follow on with the teaser for what you may talk about here in a few weeks in November. Clearly a lot of questions about growth here on today. I think business transformation phase 1 has been a lot more margin centric and there is always been an aspiration for phase 2 to have a growth component. Is that something we could start to hear a little bit more about in the coming weeks or is that still a few years off in terms of being quantified?

Josh it goes to John's question and Nick's discussion earlier too. Our business transformation was focused on putting the ERP and much broader than the ERP other system capabilities in place new models, transaction efficient models in place in our supply chain and in our back office. And that's we're doing with business transformation. But as we do that as we now get 70% of our revenue on the new systems, we can start to leverage that in other ways as well. And we'll be talking about at the November 15 Investor Day. We'll talk about where we see opportunities to do that on the commercial side and also in supply chain.

Hi good morning. I guess just trying to put a finer point on the new organic growth guidance. A squiggle does imply a range, so I was just curious as we think about Q4 would you expect to see organic growth accelerate from the 13 we saw this quarter or how should we think about that?

Yes, John. We're just a little over a 3% through the first nine months of the year for growth. And when we're estimating 3, that's our best estimate of what the total year growth will be. I don't see a very wide range on that maybe 20 basis points plus or minus but not a very wide range on that. And yes, that included in that as an expectation that we see higher organic growth in Q4 than what we saw in Q3.

Great. Thank you for that. And then, you touched on the savings portion of business transformation, and how to think about that. But how should we think about the spending? Obviously, this year there were some restructuring around getting out of those stranded costs, but how do we think about the actual spending levels that you are absorbing in your earnings construct as we think about that into 2019?

And John, you're specifically talking about our business transformation and what we're spending on that. John, in terms of the business transformation, over a number of years, we've been saying this is going to be an incremental spend of a little over $1 billion. And as I look at our spending over the last few years, in terms of cash outflow that has been declining. In terms of total spending hitting our income statement, it's been remarkably flat year-on-year of the total spend that we're putting into our business transformation initiative. And right now my view is that's going to continue and a pretty stable level for the next couple years.

Good morning. Can you hear me? Just a question on Safety and Graphics, I think you guys highlight a lot of headwinds when you were at Laguna, but that one is a bit of a surprise to me and a couple of things, organic growth, 2% margin declined year-over-year and particularly you guys highlighted roofing granules, declining double-digits, and as I recall, this was one of the businesses that was supposed to drive big growth and big margin expansion post everything you've done to it in terms of repositioning this business. Can you just talk about what happened in the quarter and has something changed here, or is it a one-off?

Andrew, the roofing granules business is the smallest business we have in Safety and Graphics. And it's a business that has been enjoying, in the U.S., some of the construction increases that are going on in construction as well as there's a cyclical or a temporary nature depending on what's happening with storms. So, this business is very closely tied to shingle production. And right now, shingle manufacturers are making less shingles. And it's a very tightly integrated supply chain. So for the last couple of years, this business has been on a path of high growth and we reached a point in the third quarter that that growth has come down. And the growth going forward is going to be tightly correlated to what happens with shingle manufacturers in the amount of production they're doing.

And is broader for Safety and Graphics, margin decline year-over-year and sort of this growth that maybe 2%. Because I always thought, this was the business that was supposed to go tighten; this was the showcase of how you can sort of realign your portfolio and achieve better margins and better growth. I guess maybe a broader question here.

Yes, right now we're estimating this business to be about at the midpoint of the 4% to 6% organic growth that we guided at the beginning of the year. And that midpoint is absorbing what we're seeing as the impact from the roofing granules business. As far as the total growth in the third quarter. See in mid-single-digit growth in our personal safety business against a 14% comp in our personal safety, that is by far our biggest business. Andrew, we continue to have a lot of confidence in our safety and graphic business and its ability to grow and be a leader in growing 3M's total organic growth, a lot of confidence there. As far as the margin, we are absorbing 150 basis points of margin impact from Scott Safety and we'll be starting to look lap ourselves on that as we acquired that fourth quarter last year. And I no longer we'll see that as being dragged to the margin going forward and potentially accretive going after that.

And just a follow-up sort of the counterpoint to Safety and Graphics. Everybody was concerned about Electronics and Energy and you guys actually posted really good growths throughout this expectation margin was north of 30%, is the margins sustainable or were they one-time items or how should we think about that?

Andrew, if you look at the history of Electronics and Energy Q3 tends to be the high point for our revenue and our margin for that business. Year-to-date our margins are 28.4%; that's up 170 basis points in that. That includes the impact of exiting our communication markets business. So, yes, the portfolio management we have been doing and the things we are doing and investing in research, we see as being accretive to our margins in that business, but I would not call the 31 plus that we are at this—in this quarter as a new level—it's more third quarter is typically the high point.

But there's no one-time big items, it's just everything went right for this business in this quarter. Is that fair to describe?

That's exactly right; everything going right in this business this quarter; no one-time issue.

Hi guys, good morning. So, just so I kind of understand the comments on R&D correctly, are you saying that kind of that the—the productivity which you are getting out of business transformation etc. is allowing you to kind of structurally kind of spend a lower level of R&D than the 6% going forward?

Steve, I would—I guess my message here is that we have not backed off of what we've been targeting with our R&D investment. This idea of investing to enable us to drive more of those priority growth platforms, more of the disruptive new technology, that's what we talked about when we move from 5.5% of sales to 6% of sales, and so while in the quarter we are down at 5.3, our strategy and our plan is to invest in line with what we've talked about when we said we are targeting 6%. It's not an efficiency that we are gaining there. There are some one-time kinds of impacts on the quarter just a little bit of ebb and flow—we expected a little overspending just by the layout of our R&D programs as we went through the year, and then we had the drug delivery contract R&D work down. We had an impact of FX and we had the divesture of communications markets. So, no—they usually expect us to continue to drive that—this is not a BT enabled—we do—we certainly do expect to get returns out of these investments and will adjust as we move ahead, but, near-term that's not— that's not what's going on.

Okay. That makes a lot of sense. When we kind of think about how you are positioned and how you are—what your mindset is for the next several years, the last few years you have had a couple that have been pretty good, but not too many in the kind of double-digit EPS growth range, and that's despite some very heavy stock buyback activity, were you kind of providing a new framework for EPS at some point? Do you wonder in your watch at least? Or is the 8% to 11% still kind of a relevant number, and it's been a really steady as she goes on that front? Or are we going to get an update on that?

Well, that's certainly one of the things we will be talking about at the November Investor Day. That's—we will be laying out our five-year plan and the framework for that five-year plan, and so I think that's something will cover in detail there.

Yes. Thanks. Good morning. Just wanted to go back to the ENE margin, you mentioned everything went right but this is I think the second or third quarter where we have seen divergent trends between ENE and the rest of the portfolio. If you can just maybe just expand how you are seeing such strong open leverage in ENE versus the trends elsewhere?

So, Nigel, what we have been seeing—and I mentioned this earlier on this call, we are continued to see good penetration and content that we are putting into electronic devices, we are seeing good growth in places where we are selling into data centers and semiconductors, that growth is helping us and is being accretive to our margin. In addition, the divesture of our communication markets business within that, which had been dilutive to our margin that is now, for all practical purposes, out of that business and we are also seeing some accretive benefits from that. So, that's what I was saying that many things going right this quarter. As we have focused on that portfolio and what we are investing in and we are seeing a lot of that pay off.

Okay but the key message is that we exit this year, obviously recognizing the seasonality from speaking in 4Q, whatever ENE is this year, is a good base for future years. Okay. And then my typical question again, kind of things about November, when we look at the last three to five years, core growth being in the 2% or 3% range on average, 2.7% for the last three years, I know you are not going to be satisfied with that kind of growth range, what in your mind is the biggest kind of restraint on growth here. Is the R&D pipeline, the commercialization; is it some share loss competition? What is the biggest recurring force on core growth here?

Yes, Nigel, growth is a big focus as we drive forward, I mean it's what we expect our innovation model to deliver, and I would say above-market growth and premium margins. That's really a—I think the hallmark of successful innovation and for us that's been really our history. When we deliver on that, that's what we see. And we expect to see that outgrow the macro and to be able to do that consistently as we move ahead, and so that, that is the focus, that's what we will talk about at the Investor Day that's what we will focused on with our team. That's the way we—that's where we start our focus as a team.

In summary, our third quarter included good performances in many respects including double-digit increases in cash flow and EPS along with strong margins. As I look across our portfolio, most of our businesses continue to do well, but there are also areas that we must work to improve. Looking ahead, how we allocate capital and continue to reshape our portfolio are keys to delivering even greater value to both our customers and shareholders. These are strengths of 3M and will continue to be priorities for us moving forward. Thank you again for joining us this morning, and we look forward to seeing you in St. Paul in a few weeks. Have a good day.