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#Thanks, <UNK>, and good morning, everyone
I'll start on slide 7 with a recap of our first quarter sales performance
As <UNK> mentioned, we posted strong organic growth in the quarter of 4.6%, with volumes up 4.5% and selling prices up 0.1%
Divestitures of non-strategic businesses reduced sales by 0.4 percentage points, and foreign currency translation decreased sales by another 50 basis points
As a result, total first quarter sales in U.S
dollars increased 3.7% versus last year
As you can see on the right side of the slide, growth was broad-based across all geographic areas
Let me start with the U.S
, where organic growth was 1.4%, led by mid-single-digit increases in both Industrial and Safety & Graphics
Our Electronics & Energy and Health Care businesses also delivered solid growth in the quarter
The Consumer business declined mid-single digits organically in Q1, impacted by channel adjustments in the office market, as <UNK> mentioned
Asia-Pacific led the company with organic growth of 10.1%
All business groups posted strong growth in the quarter, led by a double-digit increase in Electronics & Energy
We also had strong growth in Industrial, Health Care, and Consumer
Looking at key countries within Asia-Pacific, organic growth increased 13% in both China/Hong Kong and Japan
Excluding our Electronics businesses, China/Hong Kong grew 12%, and Japan was up 2%
Moving to EMEA, organic growth increased 4% in Q1. West Europe was up 5% organically, with sales growth led by Industrial and Safety & Graphics
Central/East Europe and Middle East/Africa grew nearly 2%
Finally, organic growth in Latin America/Canada increased 2.3%, led by a high single-digit growth in Health Care, along with solid growth in Consumer and Safety & Graphics
At a country level, Mexico continued to deliver strong growth, at 8%
Canada was up 3%, while Brazil declined 3%
Please turn to slide 8 for the first quarter P&L highlights
Company-wide, first quarter sales were $7.7 billion, and net income increased 3.7% to $1.3 billion
GAAP operating margins were 23.1%, down 100 basis points versus last year's Q1. Earlier, you heard <UNK> mention the additional $136 million of strategic investments we made in Q1 to strengthen 3M for the future, in terms of both growth and productivity
Excluding the impact of these investments, margins were up 80 basis points year over year, driven by strong organic growth and solid operational performance
Let's take a closer look at the various components of our margin performance in the first quarter
Organic growth, along with improved productivity, contributed 120 basis points to margins
Lower raw material costs, net of selling price changes, added another 50 basis points
Raw material prices remained favorable to start the year, as our global businesses again delivered savings in excess of market price changes
We expect raw material benefits to moderate as the year progresses, but still remain positive for the full year
Turning to headwinds, foreign currency, net of hedge gains, brought margins down 40 basis points in the quarter
As previously discussed, strategic investments impacted margins by 180 basis points, and higher pension and OPEB expense decreased margins by 30 basis points year on year
Finally, lower year-on-year gains from divestitures reduced margins by an additional 20 basis points
Let's now turn to slide 9 for a closer look at earnings per share
First quarter GAAP earnings increased 5.4%, to $2.16 per share
The combination of organic growth and productivity contributed $0.22 per share to Q1 earnings
Business transformation is having a positive impact on our productivity efforts
The year-on-year impact from divestitures reduced earnings by $0.03 per share
Foreign currency, net of hedging, reduced pre-tax earnings by $0.04 a share, while strategic investments were a $0.16 impact
The first quarter tax rate was 23.7%, versus 26.8% in the comparable quarter, which increased earnings by $0.09 per share
The lower year-on-year tax rate was driven by favorable geographic profit mix, increased tax benefits from employee equity-based compensation, and ongoing strategic tax initiatives
In light of the first quarter performance, we now expect our 2017 full-year tax rate to be in the range of 26% to 27.5%
Finally, average diluted shares outstanding declined nearly 2% year on year, which added $0.03 to Q1 earnings per share
Please turn to slide 10 for a look at cash flow
We continue to generate solid operating cash flow as a company, which allows us to consistently invest in the business and also return cash back to shareholders
First quarter free cash flow was $701 million, down $245 million year on year, largely due to the timing of pension contributions
Full-year 2017 pension contributions are expected to remain in the range of $300 million to $500 million, similar to 2016. Free cash flow conversion was 53%, and for the full year, we continue to anticipate free cash flow conversion to be in the range of 95% to 105%
Recall that Q1 is typically our lowest conversion rate of the year
First quarter capital expenditures were $287 million, in line with our expectations heading into the quarter
For the full year, we continue to anticipate CapEx investments in the range of $1.3 billion to $1.5 billion
As you heard earlier, we increased our first quarter per share dividend by 6%, resulting in $702 million in cash dividends paid to shareholders during the quarter
We also returned $690 million to shareholders through gross share repurchases
We continue to expect full-year repurchases in the range of $2.5 billion to $4.5 billion
Let's now review our performance by business group, staring with Industrial on slide 11. Industrial continued its strong growth momentum from Q4, delivering first quarter sales of $2.7 billion, up 5.7% organically
Industrial's growth was broad-based, across all businesses and geographic areas
Our automotive OEM business continued to lead sales growth within Industrial, increasing double digits organically
Growth in this business outpaced the rate of global car and light truck builds by more than 400 basis points
Advanced materials also had a strong start to the year, up high single digits
Our Heartland businesses within Industrial, abrasives, industrial adhesives and tapes, and automotive aftermarket, each increased mid-single digits organically
On a geographic basis, organic growth was led by Asia-Pacific, up high single digits, while the U.S
and EMEA increased mid-single digits
Industrial delivered first quarter operating income of $625 million, with operating margins of 23.1%
Operating margins were down 80 basis points year on year, or up 40 basis points adjusting for a Q1 2016 divestiture gain
As you can see, Industrial is off to a strong start to 2017. For the full year, we now expect organic growth in the range of 2% to 5% versus our prior estimate of 1% to 3%
Please turn to slide 12. First quarter sales in Safety & Graphics were up 4.8% organically to $1.5 billion
Personal safety, another Heartland business, delivered strong organic growth in the high single digits, with particular strength in Asia-Pacific and the U.S
The roofing granules business continued to perform well in the first quarter, posting double-digit organic growth, as demand remained strong in the replacement shingle market
Geographically, Safety & Graphics grew organically in all areas, led by mid-single-digit increases in EMEA, Asia-Pacific, and the U.S
Operating income for the business group was $399 million, and operating margins increased 180 basis points to 26.1%
Adjusting for acquisition and divestiture activity in this year and last, operating margins were up 80 basis points
As with Industrial, Safety & Graphics is off to a strong start, and growth is better than we anticipated entering the year
We now expect organic growth for this business to be between 2% and 5% versus a prior estimate of 1% to 3%
Please turn to slide 13. Our Health Care business generated first quarter sales of $1.4 billion
Organic growth was 3.1% year on year, in line with our full-year expectations of 3% to 5%
Growth was led by a double-digit increase in both drug delivery systems and food safety
Our medical consumables businesses, which represent the largest segment within Health Care, posted good growth in Q1. Oral care delivered mid-single-digit organic growth in the first quarter, a marked improvement from the second half of 2016. Our health information systems business was down low single digits organically
We expect the business to improve throughout the year
Geographically, organic growth in Health Care was positive in all areas, led by high single-digit growth in Latin America/Canada and Asia-Pacific
We saw notable strength in China/Hong Kong, which was up double digits in the quarter
Health Care's operating income was $434 million, and margins remained strong at 30.5%
Importantly, we generated these returns while investing an additional $21 million to enhance growth in core platforms across the business
Please turn to slide 14. Electronics & Energy led our company with organic growth of 11.5% in the first quarter
Sales were $1.2 billion
The Electronics side of the business grew 18% organically, as our team successfully drove increased penetration on a number of OEM platforms
Demand strengthened across most market segments in consumer electronics, which also boosted our growth rate, and we benefited from favorable year-on-year comps
Our Energy-related businesses were up 1% organically, with low single-digit growth in electrical markets, while telecom was flat
On a geographic basis, organic growth was up double digits in Asia-Pacific, where our Electronics business is concentrated
First quarter operating income for Electronics & Energy was $225 million, with margins of 18.6%, up 70 basis points
Adjusting for first quarter portfolio actions, margins were nearly 24%, up 600 basis points year on year
As you can see, Q1 organic growth was very robust for Electronics & Energy
As a result, we are updating our full-year growth expectations for this business to a range of up 1% to 6% versus a prior range of down 3% to up 1%
The first half of the year is expected to be stronger than the second half, largely driven by year-on-year comps
Please turn to slide 15. First quarter sales in Consumer were $1 billion, and organic growth declined 1.2% year on year
Three of our four businesses within Consumer grew organically, again led by home improvement followed by consumer health care and home care
Within the home improvement business, our Command damage-free mounting products posted strong double-digit growth, as accelerated investments continue to pay off
Filtrete filters also delivered strong growth in the quarter
More than offsetting this growth was a year-on-year decline in our stationery and office supplies business, which was impacted by continued channel inventory reductions, primarily in the U.S
office retail and wholesale
Geographically, organic growth in Consumer was led by Asia-Pacific and Latin America/Canada, which was more than offset by a decline in the U.S
Operating income was $222 million, with operating margins of 21.3%
Looking at the full year, we expect organic growth for Consumer to be in the range of 1% to 3% versus a prior estimate of 2% to 4%
We also expect to see growth improve as the year progresses
Please turn to slide 16. Before I turn it back to <UNK>, let me address a few items that we anticipate will happen over the remainder of 2017. The net impact of these items is factored into our EPS guidance today
First, as you may recall, in December we announced the divestiture of our Identity Management business within Safety & Graphics
The sale of this business, which has annual sales of approximately $205 million, is expected to close during the second quarter
Upon completion, we expect to record a gain on sale of approximately $0.55 per share, partially offset by the profit that will go with the business in 2017 after the divestiture is closed
In addition, recall at our Investor Meeting in March 2016, we introduced a plan to better optimize our portfolio and supply chain footprint
We expect to make significant progress on that plan in 2017, with associated costs in the range of $0.40 to $0.45 per share over the remainder of the year
We anticipate $0.20 to $0.30 per share will incur in Q2. In total, the net impact of these items is expected to add between $0.05 and $0.10 to 2017 earnings per share
Again, this impacted is reflected in our full-year updated guidance, which <UNK> will now cover on slide 17. <UNK>?
Good morning, Andy
Andy, thanks for the question
You covered quite a few things there
Just from an overall theme standpoint, Andy, we're always looking for opportunities to enhance the value of the enterprise, and that's really part of our business model
What you see in the first quarter for incremental investments, some of that was investments we were taking to accelerate growth
And that was really lined up with what we had shared last December of the incremental $100 million over the course of 2017 to deliver accelerated growth throughout the year
The other context I'd share with you in thinking about this step up in strategic investments, if you think back to last March at our investor meeting when we laid out our five-year plan, we shared plans for optimizing our portfolio and supply chain footprint with at that time what we described a total of between $500 million and $600 million of investments, and ultimately that we expected that by 2020 to be creating $125 million to $175 million of annualized benefit, operating income benefit
What you're seeing in this step up of accelerated strategic investments both for the quarter and for the year is us taking more action related to what we laid out last year for the optimized actions on our supply chain footprint
Yeah, Joe, as the quarter went on, it was consistent strength across the quarter, all three months of the quarter
And I'd further add, we're seeing April, the start of April, tracking very much in line with what we've been seeing for the first quarter, so really no intra-quarter trend changes to note
Yes, <UNK>, we're not fundamentally seeing any change in our pricing power
That remains strong
We do continue to look for targeted places where we can use price to help drive organic volume growth
If I look out over total 2017, we're expecting U.S
price growth to be approximately flat
If I expand it to the total globe, if I pull out the FX impact, we expect pricing to be up slightly
Our normal range is 30 to 50 basis points of core price growth
I think it will be somewhere between there and flat for total 2017.
Yes, of the $136 million in strategic investments in the first quarter, <UNK>, a little less than half of that is investments that we see having a fairly short-term return in 2017 and into early 2018. And those are primarily growth-oriented investments, and those growth-oriented investments were factored into the guidance we set out for the year
The remainder of the strategic investments, those relate to our portfolio, supply chain footprint
And that's really laid out aligned closely with the plan that we put forward a year ago in March
No, <UNK>
Yes, so in December when we laid out our guidance, EPS guidance for the year, strategic investments we had incrementally in a $0.05 to $0.10 range
That was aligned primarily – or almost exclusively with our growth investments
Now what you're seeing, we're seeing the growth investments play out exactly as we guided, still in that $0.05 to $0.10 range for the total year
What we're layering on top of that is additional footprint actions and portfolio actions that we're taking throughout 2017. So on top of the growth investments, there's roughly an incremental $0.10 of supply chain and portfolio actions that we took in the first quarter of 2017. And then in terms of the guidance for the balance of this year, for Q2, Q3, and Q4, there's an extra $0.40 to $0.45 on top of that that was not part of our initial guidance
So all in, the growth investments, the incremental $0.10 that we took in the first quarter plus what we're expecting Q2 through Q4, it's now in the range of $0.55 to $0.65 for the total year
<UNK>, we're always, as I said earlier, we're always looking for opportunities
The level that we were investing in Q1 in strategic investments around growth, no pull forward there
That's coming exactly as we had planned
The increased strategic investments around portfolio actions and the supply chain footprint, that's aligned with our longer-term vision
The exact timing of when we were going to do that we did not have clarity on until we started pulling the trigger on some of those actions in the first quarter and some that we expect to have happen over the next three quarters
So I'm not sure I'd characterize it as a pull forward as much as it would be now is the time that it looked like the right time for us to pull the trigger on actions that we had laid out last March
No, the $0.40 to $0.45 does not include anything for <UNK> Safety
At the time that closes, we will update guidance to take into account any impact that will have on our 2017 earnings
Yes, first of all, you heard <UNK> talked about some of the channel impacts in our office retail and wholesale channel
In addition, in our Industrial channel, we are seeing increased confidence in the channel, which we're seeing good sell-out of our product
We're seeing even stronger sell-in to the industrial channel, primarily in the U.S
So that is one place where we're attributing it to higher confidence amongst that channel and seeing what appears to be some restocking of depleted channel levels that we've seen in the past
Jeff, to your first question on the tax rate for what we're now seeing for total 2017, there are a few dynamics going on
First of all, we are seeing a favorable geographic profit mix for us that is helping us in our tax rate
It's been a headwind for us the last couple years, and that's switching over to a tailwind for us this year
We're also seeing some of the benefits, as you'd expect, from some of our tax planning
But one of the more significant items just in the first quarter is the benefit we're getting from the accounting standard change that came into effect last year for the excess tax benefits from stock-based compensation
From a year-on-year basis, that's about a $0.04 benefit versus what we had a year ago
And, Jeff, I'd say that's the wildcard
Other things are going very much as we had planned, to get to the 27% tax rate by 2020. But with the added variability from what happens with this excess tax benefit from stock-based compensation, there will be some quarters that's a benefit, and some quarters we won't see any benefit at all
All in, we're well on track for hitting the 27% in 2020, possibly even lower than that
But when we have better clarity on that, we'll give a revised number of, can that go even lower than the 27%
To the second point on the strategic investments, the $136 million, of the growth-related investments, you're correct
Health Care had the majority of that
There were small amounts, single digits of millions of dollars, low to mid-single digits in millions of dollars, in the other four business groups
And then, from a portfolio and supply chain footprint optimization, the vast majority of that is impacting the Electronics & Energy business, with a little of that hitting the consumer and office business, the Consumer business group
Rob, as far as the automation portion of our CapEx spending, a year ago at our investor meeting, we laid out that we expected that to be a noticeable part of our CapEx investments
What we're seeing is, that's playing out exactly as we laid out a year ago, that we're seeing continued opportunities for automation investments within our CapEx plans
And I wouldn't call it an uptick, but I'd say it's playing out exactly as we laid out
<UNK>, the increase in the strategic investments from what we originally guided is really around supply chain and portfolio optimization and much less around growth
If we see growth even higher than what we're currently expecting, could our growth investments tick up some? I think the short answer is yes
It could tick up some, but I don't think on a material basis
I think we're now talking single digits of pennies at that point
Good morning, Steve
Steve, thanks for the question
Part of what we talked about a little over a year ago at our outlook meeting, for the five-year outlook meeting, is the number of manufacturing sites we have around the world and looking at the productivity in those sites and the opportunity we have through rationalizing the number of those sites, increasing capital into some of our more productive sites, the opportunity to reduce the total footprint of our manufacturing and supply chain sites over the course of the next four years
So that's what we mean when we talk about it when we laid out a $500 million to $600 million investment that we expect to take, the resulting productivity from that, that by the time we get to 2020 we think that will add another $125 million to $175 million of added operating income through that productivity we can get through rationalizing our supply chain footprint
If I look at this globally, Steve, we had positive though very small price in all businesses except for Health Care, where we were flat
<UNK>, to the first question on business, and I'll go further in geography, we expect that this action that we're taking in the second quarter and in the third and fourth quarter will impact all businesses and all geographies, that it will be broad
As far as the specific details of each business, we're still working through those details
We're not ready to be sharing that yet, <UNK>
And then as far as 2017 to 2018, some of these actions will have a tail into 2018, where there will be residual cost impacts hitting us in 2018, though I expect it will not – I very much expect it will be a decline from the level that we're projecting now for 2017.
