MMM
#First of all, the Capital Safety is, in our view, a perfect fit for 3M.
Fall protection, which is the segment, is among the fastest-growing and most profitable segments in the PP industry.
Capital Safety is recognized as a leader in fall protection.
So you take those things together, there is high complementary synergy to 3M's global business in personal safety, which is a heartland division.
So Capital Safety, if think about it, it provides accretive growth to us and also margins, both for safety and graphics and for overall 3M.
You saw the slide again for safety and graphics which is very, very good, and have as I said earlier, is the business group that I thought will have the real break-out as we go.
I think it is a very valued and good acquisition to us.
The component annual sales growth had been over 10% for the four last years and EBITDA margins is approaching 40%.
You have all those types of things that you lay them back to the portfolio work we did where you say, how can we build out our businesses and make sure that we get more relevance with our customers as we move ahead and drive synergies.
What I think about it in totality, and the figures you are quoting there is correct, is actually 12x based on five-year run rate synergies.
I think this is for us a terrific acquisition that is building out our position.
Certainly, <UNK>.
We're looking at return on capital and looking at the time it takes us to bring this back to a return on capital.
For us that's in the fifth or sixth year that we see this meeting, on a cash basis, our cost of capital.
On the margin front, just to clarify, of that 150 basis points about 60 of those basis points are coming from our price growth, and 90 basis points from our raw material reductions.
As far as the sustainability of price, we're at a 1% price increase on average through the first half of the year.
We see that trend sustaining through the second half of the year.
On our existing portfolio.
I would add the color that if you look at all of our price growth, the fact that we keep refreshing our product line with our investments that we're making in research and development, that does enable us, through the value we are creating for our customers, to be able to sustain pricing growth.
But the other part of our price growth in the second quarter and for the year is also driven by movements related to FX.
If I look at second-quarter standalone, of our total price growth, we estimate 25% of that total price growth is coming from pricing based on the value we are creating for our customers, and 75% based on movements we're taking directly or indirectly related to FX movements.
Part of our portfolio prioritization is we know the assets we want to buy.
We know where we can drive the most value.
As we look at this business integrated with our personal safety business, we do see cost synergies that we'll be deriving.
We see sales synergies, both of those contributing to get that result.
What you're seeing here, <UNK>, is a result of us having a clear vision of what we wanted to add to our portfolio, and also an asset that we could see bringing a good financial return to 3M.
Also to that it is not necessary, <UNK>.
I think you have to look upon this ---+ first look upon this acquisition first of all, clearly strategic in terms of the outcome of the portfolio work, right.
I think that's an important element.
There are certain pieces of the business that can be integrated and where we can drive synergy, others cannot.
The reason for that is that there's a high element of regulation and education in that fall protection.
We need to continue to invest in that and make sure that we do everything that is right.
There's two elements into it.
Some pieces from the commercialization perspective where we can drive a lot of synergy, and we will.
And the other piece, I think we still need to figure out how we can accelerate that to get the return even faster.
It's a highly regulated business, as you know.
And then by that, the advantage of that, the barrier to enter is very high.
You have to think about it, you get it integrated and as you move on it, you have to make sure that you can drive more synergy.
The answer to your question, necessarily not.
This was a specific case.
This is a very important strategic move for us in order to build out our position here, and it is a high-class asset.
It is a high-class asset that is very similar to 3M in terms of margins, returns and growth and so forth.
So we can always ---+
The other thing here, <UNK>, if you look upon the other acquisitions we have done from Sumitomo to Ceradyne, et cetera, we are not even close to this.
I will say that, we can always argue day out and day in, of the valuation.
Did you pay too much or whatever.
This is a strategic fantastic move for us.
We have a world-class asset.
I'm pleased with that piece and now it is up to us to drive the return even faster back to us.
<UNK>, we see modest gross margin expansion opportunities there.
We probably see more of our cost synergy benefits coming from the back office SG&A front than on the gross margin front.
You're right, <UNK>, that we had a small presence in that segment.
We were very, very small.
And one thing that I have learned over the years I've done business, if you do not have a reasonable good market share position, you will over time lose out.
I've been in businesses over time where you think that a couple of percentage market share will take you to a better position.
Is a very, very tough, so you need to come into a leading position.
That was one.
Yes, we were there.
We were, in my view, not relevant enough for the industry.
So very opportunistic.
Now let's go back to your comment relative to why now.
I talked about it in my speech before, but I have to go back to it because I think this is an important element.
If you don't have a clear picture of where you would like to go in the future with your portfolio, you could have a tendency to try to be part of auctions of most things that are becoming available.
If you are part of bidding on more things that are becoming available, you maybe do not really know if this is a real important strategic imperative for you, and you should go for it.
I would say, I was not part of 2008 and 2010, whatever, when there was bids on that asset.
But maybe at that point in time it was not clear enough relative to the portfolio where we should invest for the future.
This time, it was very, very clear for me where we should go.
That's the answer for me.
Mexico has now been growing for almost two years, doing very, very well.
It's, I would say, a combination of both domestic market growing well there, but also the overall Mexican economy in terms of exports, specifically into the United States.
We have a very good portfolio balance in Mexico.
As you know, we've been there for a long time and we're able to capitalize on that.
I don't know exactly if I can give you the ---+ No, no, his question is about the outlook for the year in Mexico.
I think our growth rate here today is around 15% and I don't expect for the rest of the year that would slow down.
All businesses doing well there and specifically industrial is growing very, very fast.
I think that, first of all, I believe that health care will continue.
What a good quarter in health care.
Health care will continue and consumer will improve specifically.
I also think that the industrial business, that is a sizable business for us there, will improve slightly as we go for the year.
When you think about our portfolio, we get industrial slightly better.
We get consumer up a little bit, which we will.
And then health care continuing.
That will take us there.
I don't comment on electronics because, as you know, electronics is that kind of business that is on a regional base.
Sometimes Japan is doing better than China and so forth.
Let's see how much that will be executed in China.
I think there's still a time here that we have to see the adjustment in the Chinese market.
But those three businesses specifically will improve for us slightly as we go for the rest of the year.
Yes, that is what we are counting on.
We cannot count on anything else.
That is what we are counting on.
Yes.
Yes, our industrial adhesives and tape business within industrial, that's one of the businesses that was flat.
That contributed to bringing the total organic growth down.
Abrasives is another business that was down.
Exactly.
Including, in the case of abrasives, there's some oil and gas exposure there.
<UNK>, yes, we've said that for the first 12 months we expect this to be dilutive to GAAP EPS by $0.04.
We expect this to close in the third quarter, in the middle of the third quarter, and our guidance is not yet including the impact of either the Capital Safety or the completion of the Polypore acquisition.
Yes, it is updated.
And similar to what I said in April where we see ourselves now at the high end of the range of $0.25 benefit on raw materials benefits as well as the margin impact I talked about earlier, that's reflecting where we are most recently with commodity prices.
So yes, it is reflecting that, <UNK>.
Yes, the existing game plan is adapting to what we are seeing.
There's no change from that thinking at that point in time.
As you know, if you think about the five-year plan, we are three years into it.
There's always some changes going in and out in the plan, in terms of all metrics.
At this point in time ---+ of course from an execution perspective on where you invest for manufacturing and so forth, there are some differences now versus what they were three years ago, or where will you invest in international, or will you do it in the United States.
I think that's a business call on a day-to-day business.
At this point time there's no change from the overall plan, and our play-book is working.
Our play-book is working.
Okay, <UNK>, just to clarify, you're talking about total Company.
And our 2.5% to 4% I can't say we're seeing a noticeable difference between third and fourth quarter, if you're looking for some color on that, <UNK>.
On the low end of the range it would be a continuation of the growth rate that we've seen in the first half, that continues into both the third and fourth quarter.
If we're a shade towards the middle or the high end of the range, we would expect to start to see that occurring in the third quarter and not all in the fourth quarter.
When we look on this on a sales per billing day, we saw virtually no change in our trends between the three months of the second quarter.
To the extent that there's a portion of that 1% related to FX over time, I see that fading, but not in the second half of the year.
If it does fade, it will be minimal.
The logical extension is we see some fading of that in 2016, not a material amount of fading in the second half of 2015.
You would assume it would be, but I think one of the advantage for us is that often our product is adding some additional profitability and productivity to our customers.
So I would say, yes, a little tougher.
But as long as you are focused on new product that's adding value into the end market, you are able to demand a slightly higher price.
I would say that I think it will be cleared out, early Q3 is my view.
I think when you listen to the results for the industrial and many businesses did well.
There's a capital business that I will describe more as they're not spec-in, or designing, they're more in the consumable side like abrasives and tape and so forth.
That's where we had a little bit of temper and I think that then holding to the channels.
I'm more optimistic as we move forward relative to that front for industrial.
The other businesses there, if you think about aerospace and commercial and transportation at another 10% growth, purification another 10%, automotive OEM, as <UNK> said, has 6%.
So many businesses there are doing very well.
There were two divisions that had an impact for the quarter and it was very much what I would describe as consumables into industrial tapes and adhesives and abrasives.
<UNK>, there's a few things at play here.
First of all, when we pay our cash taxes there is some timing, and second quarter happened to be heavier weighted.
That will moderate for the total year.
Second quarter was also a quarter of higher than normal amount of our total pension contribution occurring in the second quarter.
And then the last piece is we did see some increases in our working capital and we expect that also to moderate in the second half of the year, all of the three of those contributing to improvement in our working capital into the second half.
Those are what I'd adjust for.
We have normal adjustments where, for instance for compensation, that always has a noticeable improvement in our free cash flow conversion in the second half of the year versus the first half of the year.
<UNK> will give you some comment on the balance sheet.
Let me address the comment relative to the, let's say, business groups.
First of all, there is a very robust pipeline of new products in each an individual business groups.
I don't see, from that perspective, a difference in between them.
But when I look upon it, we have some businesses here that is ---+ industrial is 33% of our portfolio, and very strong.
And we are now adding, even, an acquisition into that moving forward.
And I think that what I call a design or spec-in there is a very strong credible business.
I think it will be strong.
I think, as I said earlier, safety and graphics, I talked about that for over a year now, that I believe that safety and graphics is the next breakout business group for us, as electronics and energy came earlier.
The margin has expanded quite a bit there and I predict that safety and graphics will follow, and maybe do even better due to the fact of the portfolio there.
I'm confident that will happen.
And you see our health care business.
Health care business is usually the fastest growing, highest margin for us.
And 80% of that portfolio is in the developed world, meaning only 20% in the developing, and that way a lot of growth for us is coming.
Again, I would say, yes, when I look upon it and try to be objective, you see the performance of our consumer business.
Again, with a very good growth I would say, and margin expansion and a very strong brand equity.
So I would say for the future for what we're doing here, I'm optimistic.
And it's been a lot of work on the portfolio side, get more efficiency and organization, try to reduce unnecessary variables internally.
And as we say here at 3M, that the productivity is important and complexity is the biggest enemy of productivity.
And the whole team is working on that big time.
I would not make a distinction in between there.
We are in a good position everywhere.
<UNK>, just a follow-up close on the last piece, you were asking about the balance sheet.
Our strategy with our balance sheet, as far as our capital structure and our allocation of capital, we see our strategy there robust enough to encompass a number of business models, including a lower growth scenario.
On the margin, what would change, and again, this would the volatile of exactly why we're seeing a lower growth world.
But for example, CapEx, our capital allocation strategy, I think it would be natural to assume there would be less of our capital going into our CapEx capacity building.
In terms of M&A, that would depend on our view of the valuation of the opportunities.
It could have an impact where things become more attractive to us, but that's highly driven by the opportunities that we see presenting at that time.
<UNK>, this is <UNK>.
We wouldn't see anything changing in terms of organic growth being the primary way in which we grow.
We obviously dial CapEx to whatever levels of growth we're seeing, but it doesn't fundamentally change the way we think about growth, acquisition versus M&A.
Thank you very much for participating this morning.
We look forward to seeing you very soon.
Goodbye.
