3M Company (MMM) — Q3 2019 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our third quarter 2019 business review. With me today are Mike Roman, 3M’s Chairman and 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. Today’s earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3m.com under the heading, Quarterly Earnings. Before we begin, let me remind you of the dates for our future investor events. Our Q4 earnings conference call will be held on January 28th, 2020. Please note we will be providing our 2020 guidance during our January call. As a result, we will not be having a 2020 outlook meeting later this year. Please take a moment to read the forward-looking statement. 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 will be making references to certain non-GAAP financial measures. 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 Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. The 3M team executed well and delivered a strong operational performance in the third quarter, building on our progress in the second quarter. While the macroeconomic environment remains challenging, we continue to effectively manage costs, improve productivity, and invest for the future. We exceeded the cost savings plan that we laid out in April, at the same time reducing inventory by $180 million. This is on top of the $250 million reduction in Q2. Our underlying margins were strong, and we generated robust free cash flow with a conversion rate of 106%. At the same time, we are making good progress on our four strategic priorities for value creation: portfolio, transformation, innovation, and people and culture. For example, two weeks ago, we finalized our acquisition of Acelity, which is an exciting addition to 3M's healthcare portfolio. In Q3, we also divested our gas and flame detection business and announced the sale of our ballistic protection business, all part of our ongoing effort to optimize our portfolio. Later in today's call, I will also discuss our guidance for the full year and provide an update on PFAS. Please turn to Slide 5 for a summary of our third quarter results. Organic growth company-wide was minus 1%. We continue to face softness in certain end markets, namely China, automotive, and electronics, which represent 30% of our company. Growth in the rest of our business was positive, and we saw strength in end-markets such as residential construction, medical, and consumer retail, which Nick will discuss. We also continue to see good returns from our investments in innovation, including the priority growth platforms we have shared with you in the past. Year-to-date, these platforms are up 9% as we create differentiated solutions for customers in areas such as auto electrification, connected safety, and structural adhesives. Turning to EPS, we delivered GAAP earnings of $2.72 per share, a 5% increase year-over-year. Please note that this includes a $0.14 benefit from the Q3 divestiture that I talked about earlier. We generated underlying margins of 23.8% with all business groups above 23%. For the second consecutive quarter, we improved our margins on a sequential basis while reducing inventory, which shows that our productivity actions are working. We also saw notable improvements in both EMEA and Canada, two areas where we have deployed our new business processes end-to-end. In these areas, we are seeing improved margins, better use of data analytics, lower inventories, and enhanced customer service, which gives us continued confidence in our ability to realize the benefits from our transformation journey. In summary, I'm pleased with our team's progress in the third quarter. I thank them for their efforts and continued focus as we move forward. That wraps up my opening remarks. I will come back with some additional comments after Nick takes you through the details of the quarter, Nick?

Thank you, Mike, and good morning, everyone. I'll start on Slide 6 with a recap of our third quarter sales performance. Third quarter organic sales declined 1.3%. Volumes were down 160 basis points, while selling prices were up 30 basis points. The net impact of acquisitions and divestitures increased sales by 60 basis points. While foreign currency translation was a 130 basis point headwind to sales. All-in third quarter sales in U.S. dollars declined 2% versus last year. Looking at growth geographically, the U.S. declined 1% organically. Consumer and healthcare each delivered solid growth in the quarter. This was more than offset by declines in safety and industrial and transportation and electronics. These two businesses were impacted by weakness in end markets and channel inventory adjustments which further softened as we moved through the quarter. Asia-Pacific declined 4% in Q3, Japan's organic growth was up 3% with broad-based strength across most of our businesses. Organic growth was down 9% in China driven by continued weakness in automotive, electronics, and export-related markets. For the year, we expect organic growth in China to be down mid-single digits. EMEA grew 2% with positive growth across all businesses. Latin America and Canada grew 3% led by strong growth in Canada and Mexico. Please turn to Slide 7 for the third quarter P&L highlights. Company-wide third quarter sales were $8 billion, with operating income of $2 billion. Operating margins were 25.2%, which included a 140 basis point benefit from the Q3 divestiture. Overall, I'm pleased that our actions to drive productivity continue to gain traction with strong underlying third quarter margins of nearly 24%. On the right-hand side of the slide, you can see the breakdown of our third quarter margin performance. First, the biggest impact to Q3 margins was the year-on-year decline in organic volume, along with our actions to lower production volumes and reduced inventories to improve cash flow in the quarter. Partially offsetting these headwinds were benefits from the restructuring actions taken in Q2, as well as net gains related to property sales. In total, these factors resulted in a 160 basis point reduction to margins versus last year's third quarter. Acquisitions and divestitures contributed a net 100 basis points to margins, primarily due to the gain from this quarter’s divestiture which was partially offset by the M*Modal acquisition. Higher selling prices continue to more than offset raw material inflation, contributing 30 basis points to third quarter margins. While selling prices came in a bit lower than expected, our sourcing efforts reduced raw material costs resulting in a net benefit which we expect to continue as we move forward. And finally, foreign currency net of hedging impacts increased margins by 80 basis points. Let's now turn to Slide 8 for a closer look at earnings per share. Third quarter earnings were $2.72 per share, which included a $0.14 benefit from this quarter’s divestiture. Excluding this benefit, overall earnings were solid as the 3M team delivered a strong operational performance. Looking at the components of our year-on-year earnings performance, the net impact of organic growth, inventory reductions, and the other items that I covered on the prior slide reduced third quarter per share earnings by $0.16. Acquisitions and divestitures combined increased third quarter earnings by $0.10 per share versus last year. Foreign currency net of hedging was an additional $0.05 per share tailwind in the quarter. Our third quarter underlying tax rate contributed $0.08 to per share earnings year-on-year. The lower rate is primarily a function of last year's tax reform and the benefits it created for U.S.-based companies with a significant portion of their manufacturing in the U.S. And finally, we reduced average diluted shares outstanding by 2.6% versus Q3 last year, which added $0.07 to per share earnings. Please turn to Slide 9 for a look at our cash flow performance. As Mike noted, we delivered very strong cash flow in the third quarter. Free cash flow was $1.7 billion with a conversion rate of 106% which included a negative 27 percentage point combined impact from the Q3 divestiture, and cash payouts of previously accrued respiratory-related legal settlements. For the full year, as a result of increasing cash flow, we are raising our expectations for conversion to a range of 105% to 110% versus 95% to 105% previously. Third quarter capital expenditures were $349 million and remain on track to be in the range of $1.6 billion to $1.7 billion for the year. During the quarter, we paid $828 million in cash dividends to shareholders and returned $142 million to shareholders through gross share repurchases. Please turn to Slide 10, where I'll summarize the business group performance for Q3. Our safety and industrial business declined 3.3% organically in the quarter. Similar to the first half of the year, we saw continued end market softness and channel inventory reductions, which impacted most of our portfolio. Safety and industrial’s organic growth was led by a 2% increase in EMEA and a 1% increase in Latin America and Canada. While the U.S. and Asia-Pacific each declined. Safety and industrial's third quarter operating margins were 26.8%, which included a 3.9 percentage point benefit from the gas and flames detection divestiture. Overall underlying margins in this business were solid in the quarter when considering negative organic growth and inventory reductions. Moving to transportation and electronics, third quarter sales were down 3.4% organically compared to last year. The electronics-related businesses declined high single digits organically, as demand remains soft in consumer electronics, semiconductor, and factory automation end-markets. Our automotive OEM business was down 3%, in line with third quarter global car and light truck builds. Advanced materials grew mid-single digits organically while both transportation safety and commercial solutions each grew low single digits. Geographically, Latin America and Canada grew 7%, EMEA was up 1% organically. While the U.S. and Asia-Pacific each declined mid-single digits. Transportation and electronics' third quarter operating margins were 25.2%, down 250 basis points. Similar to safety and industrial, margins were impacted by lower sales and inventory reductions. Turning to health care, the business delivered 2% organic growth in Q3, led by strong growth across most of our health care business. The biggest growth driver was Health Information Systems, which increased by high single digits. We continue to invest in this business, including this year's acquisition of M*Modal, which recently launched new AI clinical documentation software that provides real-time insights to clinicians. Medical solutions, our largest business in health care, was up low single digits in the quarter. We are excited to have Acelity join this team, which Mike will cover shortly. Food safety grew organically mid-single digits with oral care up slightly. Separation and purification was down mid-single digits, primarily due to softness in China. Looking geographically, health care grew across each area. Health care's third quarter operating margins were 26.7% impacted by 1.5 percentage points from the M*Modal acquisition. Also impacting margins were inventory reductions, Acelity acquisition-related costs, and investments in priority growth platforms. Lastly, third quarter organic growth for our consumer business was nearly 3%. Sales were led by mid-single digit growth in home improvement and low single digit growth in consumer healthcare. While stationery and office and home care declined. We saw continued strength in many of our leading brands, in particular Filtrete, Command, and Nexcare. Looking at Consumer geographically, EMEA, Latin America, Canada, and the U.S. each grew low single digits, while Asia-Pacific declined. Consumers' operating margins were 23.2% in the third quarter, up slightly year-over-year. That wraps up our review of third quarter results. Please turn to Slide 11, and I'll hand it back over to Mike.

Thank you, Nick. I would like to make a few comments about our acquisition of Acelity, which was finalized earlier this month. We are excited as we bring together two innovative companies focused on improving healthcare outcomes for patients. Acelity offers an impressive range of medical solutions, including their groundbreaking negative pressure wound therapy. They are an ideal fit within our healthcare portfolio, complementing our existing business and further accelerating 3M as a leader in advanced wound care, which is a significant and growing market. Acelity has annual revenues of $1.5 billion and year-to-date, they have delivered organic growth of 5% and EBITDA growth of more than 10%. We look forward to leveraging the fundamental strengths of 3M, especially our global reach and technologies to build upon these results and drive even greater value. We expect the acquisition to be $0.25 dilutive to GAAP EPS in the first 12 months, or $0.35 accretive excluding purchase accounting and anticipated one-time expenses related to the transaction. We are pleased to welcome the talented people of Acelity to our 3M team and are confident in the value this acquisition will deliver to our customers and our shareholders. Please turn to Slide 12 where I will discuss our guidance. Today we are updating our guidance to incorporate the Acelity acquisition along with our expectation of continued softness in China, automotive, and electronics. With one quarter remaining in the year, we are providing our guidance for Q4. We anticipate earnings in the range of $2.05 to $2.15 and an organic sales decline of 1% to 3%. On this slide, you will also see our updated full-year guidance for EPS and organic growth. Before turning to Q&A, I would like to make a few comments related to PFAS. We continue to proactively manage this issue. And I would like to provide some specific updates of what we have done since our last earnings call. As you may know, in early September, we testified before a Congressional Subcommittee in Washington D.C. We reminded the committee that the weight of scientific evidence does not show that PFAS causes adverse human health effects at current or historical levels. Opposition shared by public health agencies and independent science review panels. In our testimony, we also announced a number of commitments that build upon our existing efforts related to PFAS, including supporting new coordinated research into PFAS, establishing a clearinghouse to share best practices on detection, measurement, and remediation, supporting nationwide science-based regulation, and continuing to work with former customers to help ensure that unused AFFF containing PFOS is properly handled. We also reaffirmed our commitment to ongoing remediation of our manufacturing facilities and historical disposal sites. With respect to litigation, the AFFF multi-district litigation is still in the early phases, and at this time no trials have been scheduled. Outside of AFFF, the earliest we expect other product-related trials to begin would be in the Spring of 2020. Moving forward, we will continue to keep you updated as developments unfold. In summary, as I look across our company, I see the strength of the 3M model. We have deep competitive advantages in our unique technology platforms, advanced manufacturing, global capabilities, and leading brands. We also have experienced teams that know how to manage through macroeconomic slowdowns, which our businesses tend to see early. In these situations, we put an even greater emphasis on improving our operational performance and reducing costs, enabling us to generate strong cash flow as we did again in the third quarter. Throughout the business cycle, we remain focused on winning with our customers and keeping them at the core of everything we do, a great strength at the heart of the 3M culture. As a result, we are well-positioned to lead out of this slowdown and deliver strong growth and premium returns as our markets recover. Thank you for your attention, and we will now take your questions.

Hey, good morning, guys.

Good morning, Andrew.

Mike or Nick, can you give us more color into your revenue guidance for Q4? If you look at sales comps, they're reasonably close to Q3 and Q4, you are forecasting continued deceleration at the mid-point of your guide. So you are expecting some of your markets just still get worse in Q4, and could you give us some color by segments? Are the biggest changes there in safety and industrial, and then in healthcare, are you going to reach the high end of your range? And how much of that is the China slowing that you mentioned?

Andy, I would say when you look at Q3 versus Q4, Q4 has a very similar dynamic to Q3. You start with industrial production GDP; they're pretty much in line quarter-to-quarter. We, as I said in my remarks, are still anticipating some of that slowing in China, automotive, and electronics could continue through Q4. So that outlook continues to remain the same. I would say our view of Q4 is on the top line, much like Q3 and with a range around it. And then we are, and our focus continues, as you expect, to focus on execution. There are growth opportunities, the 70% that had positive growth in Q3; there are growth opportunities there, so we're going to be pursuing those aggressively, and much of healthcare is part of that.

Okay, Mike. And maybe shifting gears, Nick, can you give us more color on how you're thinking about all the moving pieces around margin? Obviously, good performance in the quarter, you got to around 23% in Q3, and you came in closer to 24% ex-divestiture. So you talked about second half restructuring, currency tailwind, lessening impact from inventory destock. And then you've got the transformation optimization ramping up. So can you talk about which of these variables were better than expected? And if it's possible, could you give us some early color on how you're thinking about these variables into 2020?

Okay, Andy, quite a bit you asked there. First of all, we are very pleased with our margin performance in Q3. When we strip out the gain on our divestiture, nearly 24%, and we're seeing productivity actions that we’re taking gaining traction. At the same time, we're continuing to lower our production volumes and inventories with our focus on improving cash flow. So very pleased with that. Now when we look at what's going on in the margin performance itself in the quarter, there's about 150 basis points that we laid out that's negatively impacting from organic growth, inventory reductions, and other items. About a third of that headwind is just directly related to the lower organic growth. The remaining two-thirds is tied in with our lower production on lowering our inventory levels. It is partially being offset and benefited by our restructuring actions, which are coming in exactly as we expected. We also had a gain on a sale of some property that I will go into a little more depth on. We continue to have a portfolio process where we're reviewing our assets for optimization to more cost-effective operations. In the third quarter, we consummated a transaction disposing of an office building that resulted in a net benefit of about 50 basis points to our margin, or about $0.06 to $0.07 per share. Those are the main things going on in the quarter from a margin perspective. If I as far as next year, Andy, I think it's really too early. We're so focused on delivering 2019. We'll give guidance on that in January.

All right, thanks, Nick.

Hi, good morning.

Good morning, John.

I guess, maybe going back to electronics and automotive markets, maybe even China as well. In the Q, you have the reported numbers; you kind of give us some direction on the local currency growth on the call, but are you actually seeing the second derivative start to improve in those end markets? So if you look at some of the external data, electronic market declines have kind of stabilized, at least where they are in terms of negatives and gotten a little bit better sequentially. Auto could potentially flip next year as the second derivative gets better, but can you talk specifically to your businesses and those that touch those markets, what you saw in the quarter?

Sure, John. Yes, just maybe kind of look across all those starting with automotive, so automotive the build rates are still negative and actually, I would say the projections, they were worse than the projections maybe a bit better than what we saw in the first half but still negative and so that was something that is an update to how we look at the second half of the year. I think we had a more conservative view of the overall projections. And so we are planning for this. We did see additional channel reactions to those negative build rates. We had talked about in the Q2 call that we thought a majority of the channel response to the decline in automotive and electronics more broadly took place in the first half of the year, but we did see some additional adjustments, a big part of that in, I would say in China, but more broadly than that as well. Electronics continued to be a drag in terms of end markets; they were negative growth as well. There's some signs out there that people are optimistic it’s going to improve. We have some early indications that semiconductors is looking like it might start to improve. Certainly, there have been some good consumer electronics OEMs and brands that have talked about increasing sales. We've yet to see that necessarily play through the supply chain for us, but it's, I think the Q3, Q4, what I said earlier to Andy's comment, we see auto, electronics, and China kind of in line between Q3 and Q4.

Okay, thank you for that. And then I guess as we think about at least the acquisitions, I know you don't want to get into next year, but maybe we can talk about the underlying you're seeing in the back half this year, obviously, M*Modal will flip from being a headwind to a tailwind based on your prior guidance for that business. We have Acelity coming in, but can you talk about the underlying health care business either in terms of incremental growth or maybe just help us understand what's going on there in an underlying basis?

Hey, John, just to clarify, you’re talking about growth or margin when you're saying that?

Sorry, on the margin side, on the margin side, because there's going to be a lot of noise in that margin number, particularly on Q4 through the acquisition dilution.

Yes, thanks for clarifying that, John. So what we're seeing in health care, from year-on-year margin performance, the biggest thing, as I said earlier, is coming from our M*Modal acquisition, and yes, that will start to flip next year. Other things going on there, we're continuing to invest in a number of priority growth platforms. If those are a number of growth platforms that you've seen us lay out, health care has a disproportionate amount of those, and we continue to invest in that. We also in the current quarter have some investments we are making as we get ready for the Acelity acquisition, that that's part of that. Just from a historical standpoint, we reorganized this business earlier this year, and added our separation purification business to be part of this. I think, John, we restated and shared with those who were on a restated basis for last year and the year before that, the health care business was operating on about a 28% operating income margin.

Great, thank you for that.

Hi, good morning.

Hey, good morning.

Good morning, Julian.

Good morning, maybe just starting with the health care division, not so much on the margin side, which I think you've clarified that maybe organic growth. So I think the organic growth year-to-date in health care is running at about 2%. Also, just wondered when you're looking at that, maybe over the next 12 months, what are you expecting to accelerate that number? And related to it, separation purification rolled over, it sounded like having been flattish in Q2. How long do you expect that downturn to last? And maybe tied to health care? The Acelity GAAP dilution has shrunk a bit versus what you said at the time of the deal. What drove that?

So, Julian, I would start with just this remains a very attractive business. The end markets are very attractive with some strong growth trends, the demographics play well here. So, as we look forward, we see that as a strong growth driver for us. If you look in the quarter that the 2% growth, it was positive across nearly all of health care and it was led by good growth again in Health Information Systems and food safety, strong growers. Medical solutions were up low single digits. The headwind that we faced with separation and purification was primarily due to elevated channel inventories in a few areas of the world. One of those is China, where we have a significant separation purification business, so that was the headwind. We did have both drug delivery and oral care. We're up slightly in the quarter, and we expect drug delivery to continue to improve sequentially as we go forward. Oral care continues to grow strongly globally; we saw some softness in the U.S. We think the strength globally will carry us to better growth as we move ahead. The overall markets have a strong portfolio, and the medical solutions business is getting stronger with the integration of Acelity. By the way, the results in health information are reflecting some of the early synergies that we're getting from our M*Modal acquisition, bringing those teams together that's really starting to play out in the market for us as well. We do see it improving as we go into next year.

In regards to the improved guidance that we're giving concerning Acelity, we had previously said that in the first 12 months, we expected it to be $0.35 dilutive to GAAP earnings, and we now expect it to be $0.25 dilutive in the first 12 months to GAAP earnings. That $0.10 better EPS impact is primarily related to lower than expected financing costs. We saw interest rates from the time we announced that financing improve. That’s one piece, and the most significant piece. We also are seeing better than expected EBITDA projections for that business than we were assuming back in May when we announced this deal.

That's good to hear. Thank you, Nick. Maybe one quick follow-up switching tack, just looking at the firm-wide P&L for Q3. Very good performance on SG&A to sales coming in at 18%. Just wondered how much you thought that was sort of variable costs, or something temporary like currency affecting that number, or that ratio, and how much is related to fixed cost reduction efforts that Mike you've been putting in place the last 12 months, and whether that lower SG&A to sales run rate may be sustainable?

If I look at this year-on-year, third quarter last year to third quarter this year, we're down about 80 basis points year-on-year. That's the combination of a couple of things. First of all, FX is not having a very material impact on that as a percent of revenue because it affects both the numerator and the denominator, not a big change there. The two biggest things are impacting that. One is the restructuring actions that we took in second quarter, we're seeing that benefit; the second is the gain we had on the sale of the building that I mentioned earlier that will not be a repeated action. It's about half and half.

As Nick said, we're executing well against our plan for the restructuring actions. Our teams are also responding to the dynamics that we see in the market, and I think you see good operational and cost discipline as part of every business. So those are both playing through.

Great, thank you.

Yes, good morning.

Good morning, Andrew.

Good morning, Andrew.

And just a question, sort of another broad question on growth, as we think auto probably will remain a headwind, specifically in North America and even if China bottoms into 2020. Just wondering, what kind of set of macro assumptions do we need for 3M to grow top line organically in 2020? Overall, I'm not asking for your forecast, but if you could just outline what's the baseline macro scenario that gets 3M growing in 2020? Thank you.

Andrew, I’m probably not ready to give a forecast. But I would say what you talk through, just automotive, electronics, and you think about broader across what we've been talking about in our businesses, absent a recession and or some other major downturn in the markets in 2020, we expect to have positive growth across the company. You'll see, know, at least in a year-over-year comparable improvements, less headwinds in automotive and electronics. As I talked about earlier, we're seeing some early signs that we might have some upside in electronics going forward, though that has to play out. Right, we are focused on Q4, and Q4 will tell us a lot about what to expect certainly in early 2020. But absent a recession, we expect to have positive growth.

And just a follow-up on electronics, historically, you guys have been very good at calling out electronics a lot better than other suppliers in the industry. It seems it was one area of the shortfall in the quarter. Can you give us more specifics as to what sub-segments within electronics end market? And I'm, looking at one of the slides where you give the full-blown disclosure, what specific end markets or products drove deceleration of this quarter versus previous quarter? Thank you.

Maybe I will talk about…

In 18, I’m referring to Slide 18.

Yes, I will talk about the four end markets in electronics broadly that are – that we talked about when we talked about driving our growth. Consumer electronics, we saw softness in that, continue to come through in Q3. Factory automation, there's no sign that that's turning around at this point and that also remains soft. Auto electrification, we saw lower build rates in Q3 in electric, in automotive electrification-related platforms and make some models, and so that was impacted by the overall auto build rate. We still had some growth in the auto electrification portfolio but not as strong as we had seen earlier in the year. As for semiconductors, I would say it declined into the quarter, but as I said, there may be some early signs that we’ll see that pick up as we go forward. So that's kind of the view of the four. Literally three of them were soft in the quarter and our frame is to, that's the outlook for Q4 as well.

Terrific. Thank you very much.

Hi guys.

Good morning, Steve.

Good morning, Steve.

So given you aren't going to do the kind of a year-end meeting, will there be a point where you guys kind of it just seems to me like a lot has changed since we last kind of sat down and walked through the strategy like a little less than a year ago? Will there be a time here in the next six months or so and certainly in the context of like maybe what you might learn on the PFAS front, where we'll kind of all get together and reset kind of the long-term view or are you still of the view that, steady as she goes, there's really no change to kind of the longer-term framework and algorithm you provided last fall or winter, whatever that was in Minnesota?

Yes, Steve certainly the first year of our five-year plan hasn't turned out as we anticipated, and given the slowdown in those key end markets, we've been talking about. We do have parts of our five-year plan that are just as a reminder doing well. We're on track for strong performance in free cash flow conversion and return on invested capital, but you're talking about growth when we look at growth in the outlook. Our Q4 earnings calls where we'll give an outlook for next year is really the next indicator of where we are to get back on track with the longer five-year plan. It's I think we are taking the right actions; I think it's early to today to give an update on the five-year plan, but we'll be looking for the right time to do that as we come out of our guide for next year.

Okay, so there's no like you're still kind of a, hey we'll see what happens here. And we may or may not reset that. I mean, is there a chance that you'd look at that? Or is there basically no chance that this is basically just a cyclical element in your first year and you will assume everything kind of bounces back?

We’re always looking at the long-term plan versus what we see in the markets, and I think as we get a better view of 2020, we will incorporate that and then we'll come back to.

Okay, and just one final point regarding the core underlying leverage. I understand that you faced some significant inventory challenges. However, it appears to me that, particularly with the property sale, there is a more pronounced impact on volume, even after excluding the inventory effects. Is there anything expected to change in the next couple of years? Are you planning to spend more than you typically would in a more challenging environment? How should we view the growth required to achieve that 40% incremental margin or to gain real leverage on margins as conditions improve, especially since it seems like the leverage remains difficult when focusing solely on volumes?

Yes, Steve when part of our year-on-year comparison is as you noted, aggressively pulling out inventory out of our own supply chain, we're estimating year-on-year that's having a 150 to 200 basis point negative impact on our margins. Reaching a point of more stability on our amount of inventory in the production that we have in our supply chain, that in itself is in the future going to start to create some of a tailwind to us when we’ve depleted that inventory out. And by the way, in our guidance here, we're estimating that we're going to take about another $50 million of inventory out of our supply chain in the fourth quarter.

Okay, and then one last quick one on price cost? Is that material benefit, that’s kind of like detached from volume, right? So like volume goes down, obviously, your materials are going to go down, or is that how does that kind of reflect that dynamic? Just remind me about, just remind us of that?

Yes, that's detached from volume. That's looking at what we're getting from prices versus what we're paying for our raw materials. We really don't factor in a volume component into that.

Yes, okay. Great, thanks for all the details. You guys were very helpful.

Thanks.

Thanks. Good morning, everybody.

Good morning, John.

I just want to pick up on the point of the year-end meeting; is this just a suspension for this year based on the economy or an influx, or this permanently you're not going to hold these anymore? And so I'm actually curious, how do we get our gift bag of stocking stuffers?

Well, John, it’s definitely we think it's the right thing to do this year. So we have a really clear view of what we saw in the quarter as we start the year. We think we can give a better outlook at the earnings call. We did it last year, too. The dynamic was similar; we saw changes in the end markets coming and we thought it was a better place to give, I think just better quality outlook for the year. So we're going to do it again this year.

Yes, I don't disagree. Honestly, November last year was a little early. Just based on the way things were fluctuating, that is not really that much of a surprise. I do want to ask you though, the U.S. did seem to step down in the quarter kind of versus that trajectory and not sure that we're hearing that really from other companies. So I'm curious, kind of what's your read, Mike and Nick, on the U.S., what kind of got worse? Was there some inventory? Is this transitory, or what's kind of going on in the underlying and Asia also seem to get a little worse too, but I think you sort of explained that with the additional inventory step down that kind of occurred in some of those end markets, but what's going on in the U.S.?

Sure, John. IPI, as I said earlier, IPI is kind of similar Q3 to Q4 worldwide, but the U.S. we saw significant decline in IPI and a revision down into third quarter, and Q4 actually is projected to go negative. So you're seeing a broader impact on industrial production, broader manufacturing; we're certainly seeing that, and that's impacting our safety and industrial business, our auto business is certainly caught up in that. We have good growth areas in much of health care. There's some segments; consumer and retail spending continues to be strong in the U.S. And there are some other segments like construction where we've seen significant growth opportunities, but that broader industrial manufacturing set of markets is weighing on U.S. results. With that slowdown, we saw additional channel actions in the quarter. That was part of what you saw coming through our numbers, especially our safety and industrial business.

And I'm assuming, I mean, obviously, we all saw the September I assume print; I'm assuming everything you've seen thus far in October doesn't is the trend since September kind of more or less the same with respect to the United States or is there any other, is there any difference thus far realize that you still got another week to go but?

Well, I would say as we've talked in the past, channels tend to react pretty quickly. We it's early days in October; we'll see if there's additional reaction there, but I think I would say what I said earlier that Q4 and Q3 kind of in line, and October is starting out as expected.

And then just lastly, Nick on the $0.35 of Acelity accretion, how much like how should we spread that? There's obviously going to be some in the fourth quarter through the next four quarters. How would you spread that? And then what about the restructuring savings that we took in the second quarter from those actions? How much hit the third quarter? And how would you expect, again, sequentially the restructuring savings from your second quarter actions to play out?

The restructuring savings, just as a reminder, we expected an annualized benefit of $225 million to $250 million, where we expect $110 million of that to impact the second half of this year, and it's playing out as we expected. It's almost evenly split between Q3 and Q4. The balance of that we expect to benefit the first half of 2020. In regard to Acelity, and now you're on to, you're not talking about the GAAP impact, but from a $0.35 once we exclude the purchase accounting and the transaction and the integration costs. We expect a large chunk of that will be hitting in Q4 right now; all we’ve guided is that we expect about $0.15 on a GAAP basis, but on a non-GAAP basis, we're not providing guidance yet. That $0.35 will be seeing more evenly spread over the next four quarters.

Maybe the point is the fourth quarter, what how much of the fourth quarter has been Acelity, is that $0.15 of your fourth quarter guidance?

Yes, from a GAAP perspective, it's a $0.15 headwind to us in the fourth quarter, and then another $0.10 headwind in the first three quarters of 2020.

Yes, John, that is included in our guidance.

Yes, okay. All right, we will work details offline. Thanks, guys. Appreciate it.

Thanks.

To wrap up, I am pleased with our team's progress in the third quarter, which demonstrates the strength of the 3M model and our ability to perform across the business cycle. Moving forward, we are focused on delivering greater value for our customers and shareholders building on the momentum from our execution and results in Q3, driving strong cash flow and improving growth. Thank you for joining us.