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#Thanks, <UNK>, and good morning, everyone
I'll start on slide 5. As <UNK> mentioned, GAAP earnings for the quarter were $2.58 per share
Since we had several moving parts this quarter, I thought I would take a moment to cover each item to make our underlying second quarter performance as clear as possible
As <UNK> mentioned, we continue to execute our plans in Q2 to strengthen the company for the future
During the quarter, we made incremental strategic investments of $178 million; $39 million was growth related and $139 million related to portfolio and footprint actions
For the second half of the year, we anticipate another $0.20 to $0.25 per share impact from incremental strategic investments, largely footprint related
These actions drive greater productivity from our manufacturing and supply chain base and will improve our service to our customers
Looking ahead, we expect footprint actions to be, at a minimum, an expense of $0.10 per share in 2018. This expectation includes benefits from actions implemented in 2017. In addition, we had divestiture related activity in the quarter which added $0.57 to GAAP earnings per share, of which $0.54 relates to the identity management business
Taking into account these items, underlying earnings were $2.25 per share, up 8.2% year-on-year
Please turn to slide 6 for a recap of our quarterly sales performance
We posted good organic growth in the quarter of 3.5%, with volumes up a solid 3.8%
Selling prices were down 30 basis points year-on-year due to a couple of factors
Strong volume growth in electronics had a negative impact on price, and we saw less price growth in Latin America as currencies were more stable versus the U.S
We continued to actively manage the portfolio in Q2 and divested some non-strategic businesses which reduced sales by 100 basis points
Foreign currency translation decreased sales by another 60 basis points
All in, second quarter sales, in U.S
dollars, increased 1.9% versus last year
In the U.S
, organic growth was 1.9%, led by a mid-single digit increase in Industrial
Our Health Care and Safety and Graphics businesses delivered low single-digit growth in the quarter
The Consumer business was down 1% organically in the U.S
in Q2, impacted by continued channel adjustments in the office market
Asia Pacific led the company with organic growth of 10% in Q2. All business groups within APAC posted strong growth in the quarter, including a double-digit increase in Electronics and Energy and high single-digit growth in each of our other four business groups
Organic growth was 17% in China/Hong Kong and 8% in Japan
Excluding our electronics related businesses, China/Hong Kong grew 12% and Japan was up 4%
Moving to EMEA, organic growth declined 2% in Q2, with a similar result in West Europe
This area experienced fewer billing days versus last year due to the timing of the Easter holiday
Through the first half of the year, EMEA grew 1% organically, led by our Safety and Graphics and Industrial businesses
Finally, Q2 organic growth in Latin America/Canada was 4%, with all businesses posting positive growth
Health Care led the way, up high single-digits and Consumer grew mid-single digits
At a country level, Mexico continued to deliver strong organic growth at 8%
Brazil was up 6% while Canada grew 3%
We continue to generate broad-based growth across the globe, giving us confidence in our full-year expectations, which <UNK> will discuss later
Please turn to slide 7 for the second quarter P&L highlights
Company-wide second quarter sales were $7.8 billion with net income of $1.6 billion, up 23%
On a GAAP basis, second quarter operating margins were 28%, or 24.3% year-over-year excluding the previously mentioned impact from incremental strategic investments and divestitures
Let's take a closer look at the various components of our margin performance in the second quarter
Gains from organic volume growth and productivity contributed 60 basis points to operating margins
Lower raw material costs net of selling price changes added another 10 basis points
Foreign currency net of hedge gains brought margins down 50 basis points in the quarter, while higher year-on-year pension and OPEB expense decreased margins by 30 basis points
Finally, incremental strategic investments reduced margins by 2.3 percentage points and divestiture related activity benefited margins by 6 percentage points
Let's now turn to slide eight for a closer look at earnings per share
Second quarter GAAP earnings were $2.58 per share, including a net earnings benefit of $0.33 per share from the combined impact of gains on divestitures which were partially offset by incremental strategic investments and non-repeating lost operating earnings
Excluding these items, our operating EPS was $2.25, up 8.2% year-on-year
The combination of organic growth and productivity contributed $0.08 per share to Q2 earnings
Business transformation continues to have a positive impact on our productivity efforts
Foreign currency, net of hedging, reduced pre-tax earnings by $0.05 a share
Our Q2 tax rate was 26% versus 29.6% in the prior year, which increased earnings by $0.12 per share
The lower tax rate was driven by favorable geographic profit mix, our supply chain centers of expertise, and ongoing strategic tax initiatives
For the first half of the year, our tax rate was 25%
We now expect the full-year tax rate to be in the range of 26% to 27% versus a prior range of 26% to 27.5%
Finally, lower shares outstanding and higher interest expense together had a net $0.02 positive impact to EPS
Please turn to slide 9 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 return cash to shareholders
Second quarter free cash flow was $1.3 billion, up $378 million year-on-year
Free cash flow conversion was 85% in the quarter
And for the full year, we now anticipate free cash flow conversion to be in the range of 95% to 100%, versus 95% to 105% previously
The adjustment to the high end of the range is primarily due to the gain on sale of identity management
Second quarter capital expenditures were $302 million, and for the full year we continue to anticipate CapEx investments in the range of $1.3 billion to $1.5 billion
During the quarter, we paid $701 million in cash dividends to shareholders and also returned $494 million to shareholders through gross share repurchases
In the first half of the year, we repurchased $1.2 billion in stock and now expect full-year repurchases to be in the range of $2 billion to $3.5 billion versus $2.5 billion to $4.5 billion previously
Let's now review our performance by business group
Please turn to slide 10. Industrial, our largest business group, continued its strong growth delivering second quarter sales of $2.7 billion, up 3.8% organically
Industrial's growth was once again broad-based across all geographic areas and nearly all businesses
Advanced materials led the way with low double-digit growth in the quarter
The automotive and aerospace solutions business grew mid-single digits in the quarter as we continue to grow the market
Our Heartland businesses within Industrial, all posted positive organic growth in the quarter
Industrial adhesives and tapes grew mid-single digits, and abrasives and automotive aftermarket, each grew low single digits
On a geographic basis, organic growth was led by Asia Pacific and the U.S
Industrial delivered second quarter operating income of $523 million with an operating margin of 19.2%
Adjusting for incremental strategic investments, operating margins were 21.5%, down nearly 200 basis points year-on-year
Half of the decline was due to foreign currency with the remainder from mix and select pricing actions to drive volume growth
Looking ahead, we expect operating leverage in the business to improve in the second half of the year
Please turn to slide 11. Second quarter sales in Safety and Graphics were $1.5 billion with organic growth of 3.2%
Organic growth was led by our personal safety business which again delivered high single-digit growth in the quarter
We continue to experience strong demand for our personal safety solutions across the world with particular strength in Asia Pacific, up double digits, followed by high single-digit growth in the U.S
In transportation safety, we continue to take actions to improve the portfolio
In Q2 we finalized the sale of the identity management and tolling businesses and announced the exit of electronic monitoring
For almost 80 years, 3M has pioneered industry-leading solutions to improve road safety and mobility
We continue to focus on the rapidly changing trends in transportation safety and mobility including the connected roadways of the future
Finally, Q2 organic growth in our commercial solutions business was flat while the roofing granules business declined, primarily due to tough year-on-year comps
Geographically, Safety and Graphics grew organically in all areas led by a 9% increase in Asia Pacific
Second quarter profits in Safety and Graphics more than doubled year-on-year to $852 million, boosted by divestiture gain
Adjusting for these items and strategic investments year-on-year, operating margins were 27.1%
Please turn to slide 12. Our Health Care business generated second quarter sales of $1.4 billion
Organic growth was 2.5% year-on-year
Organic growth was led by a double-digit increase in drug delivery systems followed by food safety which was up high single-digits
Our medical consumables businesses which represent the largest segment within Health Care, posted 3% organic growth in Q2. Health Information Systems was flat year-on-year and delivered sequential improvement
Looking ahead, we expect organic growth to improve in this business throughout the balance of the year as our contract pipeline continues to build
Oral care was flat in Q2 with the first half of the year up 2%
Geographically, Health Care was led by high single-digit organic growth in both Asia Pacific and Latin America/Canada
grew 3% and EMEA declined mid-single digits
We saw a notable strength in China/Hong Kong and Latin America which were both up double digits in the quarter
Health Care's operating income was $412 million and operating margins were 28.6%
Adjusting for strategic investments year-on-year, operating margins were 30.6%
Please turn to slide 13. Electronics and Energy continued to lead our company with second quarter organic growth of 8.4%, resulting in sales of $1.2 billion
The electronics side of the business grew 15% organically, as our team continued to drive increased penetration on many OEM platforms
For example, our Novec specialty fluid grew high teens as we continue to see strong demand for its many applications
Demand strengthened across most market segments in consumer electronics and we continue to benefit from favorable year-on-year comps
Our energy related businesses were down 3% organically with electrical flat while telecom declined
On a geographic basis, organic growth was led by a double-digit increase in Asia Pacific which is where our electronics business is concentrated
Latin America/Canada grew slightly, U.S
was flat while EMEA declined
Second quarter operating income for Electronics and Energy was $301 million with operating margins of 24.8%
As you can see, Q2 was another strong quarter for our Electronics and Energy business
Please turn to slide 14. Second quarter sales in Consumer were $1.1 billion with organic growth of 0.7% which was an improvement versus recent quarters
We continue to see positive organic growth in three of our four consumer businesses namely home improvement, home care, and consumer health care
As expected, our stationery and office supplies business was again impacted by channel inventory reductions in the U.S
office retail and wholesale channels, although these growth headwinds were lower in Q2 versus Q1. We expect to see these channel adjustments continue, but to have less of an impact in the back half of the year
We are seeing a good return on accelerated investments in some of our key category defining brands
For example, our Command damage-free mounting products posted strong double-digit growth and we also delivered good growth in Scotch-Brite cleaning products
Geographically, organic growth in Consumer was led by Asia Pacific and Latin America/Canada, both up high single-digits
This growth was partially offset by declines in the U.S
Finally, operating income was $195 million with an operating margin of 17.2%
Adjusting for strategic investments year-on-year, operating margins were 22.2%
Please turn to slide 15 and I will now turn the call back over <UNK>
Good morning, <UNK>
Yeah, Andy, in the case of pricing both for the quarter and for the year, we're not – if I think about 3M's business model, where we take technology, use that to create value for the customers, that ultimately creates our fundamental pricing power
That hasn't changed
That remains strong
For the second quarter, we saw price down 30 basis points and as you mentioned we saw it down approximately 40 basis points in the U.S
On a global basis, what we're seeing, Andy, is two main things that have changed from first quarter are strong growth in electronics which was much more of a price down that the other businesses that we saw that strong volume growth there contributed to more negative price growth in Asia Pacific
And then in Latin America, where we often see price growth often driven by a weakening currencies against the U.S
dollar, we saw much more stable currencies there versus the U.S
dollar, so some of the corresponding price growth we see didn't materialize
The core price growth and this gets into what we saw in the United States
Core price growth, we traditionally see somewhere between 30 basis points and 50 basis points of core price growth
, we see ourselves now tracking to the low end of what we've been expecting for price growth
We expect it to be closer to flat for the total year in the U.S
And we are taking in some markets selected price adjustments to gain market share, to accelerate volume growth
Some examples are our Industrial business and our Consumer business
Yeah, <UNK>, you know as well as I do, it's a competitive world
We're constantly working to, how can we gain the market share that we think our products should be having? In this kind of competitive world, we keep looking for – where are there opportunities where price could have been a barrier for us taking market share? And in a couple of businesses I mentioned, Industrial and Consumer as well as Electronics in Asia, we look for where there are those opportunities
Partly how I think about this, <UNK>, we're also through our investments to accelerate growth as we're investing more dollars to commercialize many of our existing product lines
In some of those cases we looked at where are there opportunities where price – our current price position could be a barrier to us reaching the maximum market share potential that we felt we could attain
And we're making those selected adjustments
I do think we are at probably the peak of the price declines that we've taken to do that
I don't see much further downward pressure from the momentum we've had
And if anything, I see the second half of the year with some uptick in that pricing
Yeah, <UNK>, I think the fair way to characterize it is, these are 3M decisions we're making not responses we're making in the market
These are 3M driven actions
I'll talk broadly on returning cash to shareholders and then go into specifically what you're asking on the dividend, and the share repurchases
So you know for us, <UNK>, returning cash to shareholders is a priority and we do it both through dividends and we do it through share repurchases
On the dividend front, we've reached a point where we think our dividend payout ratio is in the zone that we want it to be, and future increases in our dividend over time, we expect to be very similar to what we anticipate for earnings per share growth
So in the coming years, we expect our dividend to grow in line with earnings over time
On the share repurchase front, that's more dynamic for us, and you've probably heard me say this before, we have a two-fold strategy there
We do maintain a consistent presence in the market with a base level of repurchases, and then we augment that with opportunistic buyback based on relative value
We continually assess the market valuation through our own analysis, comparing it to how the stock is trading, and over time, we've found that to be a good risk-adjusted basis to be creating value
Now, in the case of lower purchases, both for the quarter and for the year, we adjusted the full-year range down based on where we stand through the first half of the year
The market has been strong and we're exercising discipline
And we anticipate that there will continue to be opportunities in the future to effectively deploy capital to maximize those returns
I would also add that our allocation of capital to share buyback is also influenced by other demands on capital such as M&A
There's a bit of a wait and see on that, <UNK>, that we still plan to be putting significant capital into share repurchases
We have announced our planned acquisition of Scott Safety, which we anticipate to happen in the second half of the year
But as you know, this type of market, there can be dynamics, so we are keeping our options open for the second half of the year
Rob, you can think of our growth investments this year in two big components
One is our investments in growth, and that's the minority part of the investment and it's aligned with what we originally guided back in December about an incremental $100 million that we anticipate to be spending in growth investments
There's a number of core product platforms we have that we're investing in commercialization dollars in some cases that can be advertising, merchandising, in some cases it can be people involved in adding people in the actual selling process of our products
And we anticipate that that will add 50 basis points to 100 basis points to our growth for the total year, and that's factored into our guidance now
And through the first half of the year, Rob, we're seeing our growth and our expenditures on that front tracking very much in line
But that's the minority of our total strategic investments
The more significant thing on strategic investments for us in 2017 is the actions we're taking in optimizing our manufacturing supply chain footprint
And that aligns with what we shared in March of 2016 when we laid out our five-year plan
And in optimizing our footprint and our manufacturing base, we anticipated over a period of the next few years we'd be investing between $500 million and $600 million, in some cases closing manufacturing sites and shifting manufacturing and expanding manufacturing in our more efficient sites, ultimately to reduce our total manufacturing footprint, to improve efficiency and to improve our ability to service our customers
Most of what you're seeing under strategic investments fits under that strategy
We took a number of actions in the second quarter, and in terms of the return, the way we've quantified that there's a couple ways I can quantify that for you, Rob
One is, by 2020 we anticipate that this will increase our operating income annually between $125 million and $175 million
That's one way for you to think of it
Another way is that we anticipate that this will be greater than a 30% return on investment for the investment that we're taking on this footprint optimization
For the raw materials, the $0.10 to $0.15 that we anticipated of benefits at the beginning of the year, there's been puts and takes as we go along on the raw material side, but so far we're still seeing ourselves in that range of $0.10 to $0.15. I'd say, the potential were, in the last couple of years were we could go past that number, I don't see that is a very high probability
I see this in this range, maybe $0.10 being a little towards the bottom end of that range based on what we're seeing in the raw material markets today
On the pricing front, I don't know what to repeat, but other than there have been these isolated places where we've taken action
In the second half of the year, we expect a more normal price growth for 3M as we've put in plan some actions to be bringing price back to a more normal level that we've historically experienced in 3M
So I don't see much changing on that front from our original guidance, <UNK>
On the strategic investment around growth, when we started the year we said that we expected that to be an incremental $0.10 expense and we continue to expect it to be that incremental $0.10. We're not increasing that number any further
And then on the price growth, Well, I'd say it is a more normal range, I do think it'll still be to the lower end on price growth in the second half of the year, approaching in the positive zone, but not up to the whole 30 basis points to 50 basis points that we normally are getting for core price growth
Yeah, when it comes to the comps, there's a couple of different things going on
One, like for instance our Electronics and Industrial, both of those, I agree with you, we're going to have slightly tougher comps in the second half of the year
In the case of Consumer and in Health Care, both of those will be seeing easier comps
I wouldn't call it a big statement on our fact that we're seeing an improving economy
We're seeing a fairly stable economy outlook for the balance of the year
Our move in the organic growth range to now would be 3% to 5% and take us confidence in our ability to maintain the growth trajectory even with the tougher comp that we'll be facing, primarily in the fourth quarter
Yeah
<UNK>, if I think about the different quarters, as you're talking about Q1, Q2, we did see core underlying margin expansion once we strip out the gains in the strategic investments in Q1. And in Q2, we're more or less flat
So that's mathematically much of what's describing what you're seeing there on that EPS differential between Q1 and Q2. As we dissect that a little deeper, <UNK>, where did we not see some of the margin expansion we had seen in the past, and what does that mean for the second half of the year? Our Industrial business is one of those businesses where we didn't see as much leverage as we have seen in the past
And as we look to the second half of the year, we're expecting for the total year that we're going to be seeing 50 basis points at a minimum, possibly higher, of year-on-year margin expansion, stripping out the gain and strategic investment impact, so if we get to the underlying 50 basis points or slightly higher
Some of the reasons that will drive added leverage in a business such as Industrial, we do see that improved pricing that I talked about earlier
We do see improved results from our productivity programs, and probably some added belt-tightening going on
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Understood
And then just my second and last question would be around the growth outlook in the EMEA region
I think a lot of companies this earnings have talked about a disconnect of the good soft data not necessarily translating into hard orders or sales
Should we think about your first half overall organic growth in the region of 1%? That is a good placeholder of what you expect for the second half? And maybe just any update on how you're seeing business in Europe in recent months?
Joe, thanks for asking that question
There's different types of actions a company like us, like 3M can take
Sometimes an action where we enter into a restructuring where we're reducing the size of our workforce, that can be a much faster payback
And you've seen actions like that that we've done and see very fast payback
When it comes to optimizing our manufacturing and supply chain footprint, those paybacks take time to materialize
We don't start seeing benefits, Joe, until we actually have the manufacturing site closed that we've chosen to action, and have the new manufacturing going on in a new location
That takes time to happen
It takes time to work with work councils, with employee organizations, it takes time to, in some places re-qualify that product if we're moving
It can many times be several quarters before we – from the point we announce it until we've actually physically made the change and start realizing those benefits
So this is different, and this is why this one takes longer to get happen
Still a very important part of our strategy though to be by 2020 getting to those savings that we're projecting
Well, I can't speculate on whether there will be more M&A activity that will happen because those we announce once we have clear line of sight that they'll actually happen
But in terms of the footprint side, we'll still be seeing the negative impact in absolute terms in 2018 on our margin and on our EPS
We expect in 2019 to become positive, and then by 2020 to be the full amount
As far as the M&A and what that might do in 2018, I think it's too early for me to speculate on that piece
No, nothing has changed on that front
Absolutely not
