3M Company (MMM) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Fourth Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, January 24, 2017. I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3M.

Thank you and good morning, everyone. Welcome to our fourth quarter 2016 business review. On the call today are Inge Thulin, 3M's Chairman, President and CEO and Nick Gangestad, our Chief Financial Officer. Each will make some formal comments and then we'll take your questions. Please note that 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 investor events in 2017, as highlighted on Slide 2. First, starting with earnings, this year’s conference calls will be held on April 25, July 25, and October 24. Second, we will be hosting a European Investor meeting on June 6 and 7 at our Headquarters in Neuss, Germany. Please hold the dates, additional information will be provided closer to the event. Please take a moment to read the forward-looking statement on Slide 3. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to Slide 4 and I'll handoff to Inge. Inge?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. I will begin my remarks with a recap of the fourth quarter and later in the call, I will provide some comments on our full-year performance. Our team had a good finish to 2016 as we delivered double-digits growth in earnings per share along with strong margins and a robust cash flow. We also continued to position 3M for the future through our three key levers while returning significant cash to our shareholders. With respect to EPS, we posted earnings of $1.88 per share, an increase of more than 13% year-over-year. Total sales across our enterprise was $7.3 billion, up slightly versus last year's Q4. Organic growth companywide was 2% with three of our five business groups delivering positive organic growth. As I indicated in our October earnings call, organic growth in Industrial turned positive in the fourth quarter. This business had a strong finish to the year with 5% organic growth, which was broad-based across the portfolio. Safety and Graphics posted 2% organic growth with a good performance from personal safety, one of our Heartland businesses, as well as from roofing granules. As we expected, organic growth in Health Care was similar to the third quarter at 1.3%. We expect Health Care to regain its momentum as we move further into 2017 and as our additional growth investments begin to pay off. Organic growth in Consumer was down 1%, while this business experienced positive point of sales across its retail customers, it was negatively impacted by inventory reductions throughout the retail industry. Electronics and Energy closed out the year with another quarter of sequential improvement posting organic growth that was down just slightly, while once again expanding its operating margins. Looking at margins across our entire Company, we delivered another strong broad-based performance. Margins were up more than 200 basis points to nearly 23% ranging from 30% in Health Care to 21% in Safety and Graphics. At the same time, we generated healthy cash flow with the free cash flow conversion rate of 154%. Our strong and consistent cash flow enables us to invest in the business, while also return significant cash to our shareholders. And in the fourth quarter, we returned $1.6 billion to shareholders through dividends and share repurchases. In summary, we had a good finish to 2016 and I would now turn the call over to Nick, who will take you through the details. Nick?

Thank you, Inge. Let's begin with Slide 5, where I will breakdown the fourth quarter change in sales. Organic local currency sales grew 1.6% in the quarter with organic volume up 1.5% and selling prices up 0.1%. Divestitures reduced sales by 0.4 percentage points. This impact relates to the divestitures of non-strategic businesses further evidence of our ongoing portfolio prioritization and focus on our best opportunities. Finally, foreign currency translation reduced sales by 0.8 percentage points. Considering all factors, fourth quarter sales in U.S. dollars increased 0.4% versus last year. On a geographic basis, U.S. organic growth increased 1.2% led by a mid single-digit performance in Industrial. Health Care and Safety and Graphics businesses also grew organically in Q4. Turning to Asia-Pacific, organic growth was up 2.4% with Health Care and Consumer leading the way. This growth was partially offset by a decline in Electronics and Energy during the quarter. Within Asia-Pacific, organic growth increased 6% in China/Hong Kong and 3% in Japan. Excluding our Electronics businesses, China/Hong Kong was up 11%, and Japan grew 2% organically. EMEA organic growth declined 2.4%. West Europe was down 1% as growth in Safety and Graphics and Industrial was more than offset by declines in our other business groups. Central East Europe and Middle East Africa declined mid-single digits year-on-year, impacted by ongoing challenges in Saudi Arabia and Turkey, which we expect to persist in the near-term. Finally, Latin America/Canada was our fastest growing area with organic local currency growth of 4.1%. We saw solid growth in four of our five businesses led by high single-digit growth in Health Care. At a country level, Mexico delivered strong double-digit growth, while Canada was up 3%, and Brazil increased 1%. Please turn to Slide 6 for the fourth quarter P&L highlights. Companywide fourth quarter sales were $7.3 billion and we generated earnings of $1.88 per share, a Q4 record. GAAP operating margins were 22.7%, up 220 basis points year-on-year, which we delivered while making incremental strategic investments of $50 million to drive future sales and profit growth. On the right hand side of this slide, you’ll see the components of our margin performance. Starting with the benefits, price in raw materials combined increased margins 50 basis points versus Q4 of 2015. Market prices for many raw materials were once again favorable year-on-year and our global sourcing team continues to deliver savings above market. Core price growth was down slightly in the quarter as we took targeted actions to drive organic volume growth. Moving to restructuring, you may recall that in the fourth quarter of 2015, we announced a restructuring plan to enhance our competitiveness and productivity. The associated benefit from this action boosted fourth quarter 2016 operating margins by 40 basis points year-on-year in addition to the positive comp related to the Q4 2015 charge itself. Pension and OPEB expense declined year-on-year, as has been the case throughout 2016. This increased Q4 margins by 90 basis points. Organic volume and utilization was neutral to margins in the quarter, a marked improvement versus the headwinds we experienced through the first three quarters of 2016. Improved organic volume growth was a factor in this improvement, particularly in our Industrial and Electronics and Energy businesses. Turning now to headwinds, foreign currency impacts net of hedge gains decreased margins by 20 basis points in Q4. Legal and other reduced margins by 30 basis points in the quarter primarily due to higher year-on-year costs from legal settlement. Incremental strategic investments lowered margins by 70 basis points in the quarter. As we indicated during our December outlook meeting, we are increasing investments in a number of core platforms to accelerate growth in 2017 and beyond. At the same time, we continue to take actions in Q4 to better optimize our global manufacturing footprint, improve service to our customers and drive ongoing productivity. Finally, well, you don't see it on this chart. Q4 corporate and unallocated costs were higher than anticipated, largely due to the aforementioned legal costs. For the full-year 2017, we anticipate corporate and unallocated costs will be in the range of $225 million to $275 million. Let's now turn to Slide 7 for a look at earnings per share. Fourth quarter GAAP earnings increased 13.3% to $1.88 per share. As you see a number of factors impacted our earnings, growth and margin expansion added $0.16 to per share earnings in the quarter. Acquisitions and divestitures increased earnings by $0.04 per share, driven by gains on the divestiture of the Polymask business within Industrial, along with the sale of non-core intellectual property in Electronics and Energy. Foreign currency impacts, net of hedging reduced pretax earnings by $18 million or the equivalent of $0.02 per share. Higher balance sheet leverage led to an increase in net interest expense year-on-year reducing per share earnings by $0.02. Our fourth quarter and full-year tax rate came in lower than we had projected due to a combination of increased benefits from our supply chain centers of expertise, along with improved geographic profit mix. The Fourth quarter tax rate was 28.2% versus 29% in last year's fourth quarter, which increased earnings by$0.02 per share. Finally, average diluted shares outstanding declined 2% year-over-year, which added $0.04 to fourth quarter EPS. Please turn to Slide 8 for a look at our cash flow performance. Fourth quarter operating cash flow was $2.2 billion. Free cash flow conversion was 154% in Q4 and 104% for the full-year. For the third consecutive year, free cash flow conversion exceeded 100%. In the fourth quarter, we invested $436 million in CapEx, bringing our full-year investment to $1.4 billion. For 2017, we expect capital expenditures to be in the range of $1.3 billion to $1.5 billion. Also in the fourth quarter, we returned $1.6 billion to shareholders via dividends and gross share repurchases. For the full-year 2016, we returned $6.4 billion to shareholders, including cash dividends of $2.7 billion and gross share repurchases of $3.7 billion. For 2017, we expect gross share repurchases in the range of $2.5 billion to $4.5 billion. Let's now review our Business Group performance starting with Industrial on Slide 9. Industrial posted Q4 sales of $2.5 billion leading the Company with organic growth of 4.6%. Our automotive OEM business led Industrial delivering strong double-digit growth continuing its consistent track record of outpacing growth in global car and light truck builds. Advanced Materials, Automotive Aftermarket and our Separation and Purification business all posted solid mid single-digit growth year-on-year. On a geographic basis, Industrial's organic growth was broad-based across all regions with mid single-digit growth in Latin America/Canada, the U.S. and Asia Pacific while EMEA was up low single-digits. The Industrial business delivered strong operating income of $553 million in the quarter with margins up 260 basis points to 21.9%. The margin improvement was driven by the gain on sale of Polymask, past restructuring actions and ongoing productivity improvements. Please turn to Slide 10. Safety and Graphics delivered another good quarter with fourth quarter sales up 2.2% organically to $1.3 billion. Our Personal Safety business posted solid mid single-digit organic growth in Q4. This included double-digit growth in China/Hong Kong, where we continue to experience strong end market demand for our personal safety solutions. The Roofing Granules business delivered another solid quarter of high single-digit growth which capped off a consistently strong year. On a geographic basis Safety and Graphics growth was led by Asia-Pacific and Latin America/Canada, which were up mid single-digits. You may recall in December, we announced the sale of our Identity Management business. We continue to expect the divestiture will be completed sometime during the first half of 2017. Safety and Graphics operating income was $270 million in the quarter and operating margins decreased 100 basis points to 20.8%. Adjusting for the divestiture gains and restructuring charges that occurred in Q4 of 2015, operating margins increased 120 basis points year-on-year. Please turn to Slide 11. Our Health Care business generated fourth quarter sales of $1.4 billion. Organic growth was up 1.3% in line with our expectations. Health Care growth was led by a double-digit increase in food safety, followed by solid growth in both drug delivery systems and medical consumables. Organic growth in oral care was down slightly as the business continued to be impacted by soft and market conditions and channel inventory adjustments. Health information systems also declined organically year-on-year due to a slower rate of software installations in a tougher market over the past year, along with the challenging comp against last year's record Q4. Looking ahead, our customer pipeline is strong. Therefore, we expect growth in health information systems to accelerate throughout 2017. On a geographic basis, Health Care delivered high single-digit growth in Asia-Pacific with particular strength in China/Hong Kong, which was up double-digits. Latin America/Canada and the U.S. also posted positive organic growth in the quarter. Health Care’s operating income was $410 million and margins remained strong at 29.8%. Importantly, we generated these returns while investing an additional $30 million to enhance growth in core platforms across the business. Next, let's cover Electronics and Energy on Slide 12. Fourth quarter sales for Electronics and Energy were $1.2 billion, down 0.6% organically. Organic sales growth was flat in our electronics related businesses an improvement over recent quarters as end market conditions and channel inventories became more stable. As we explained at our outlook meeting in December, we are gaining penetration with leading electronics OEMs in China and also investing to capitalize on the rapid growth in automotive electronics. Our Energy related businesses declined 2% organically with growth in our telecom business more than offset by declines in electrical markets and renewable energy. As a reminder, at the end of 2015, we exited our backsheet business in renewable energy, which reduced energy related organic sales by 3.5% in Q4 of 2016. On a geographic basis, sales in Latin America/Canada grew organically in the low single-digits, while Asia-Pacific and EMEA declined. Electronics and Energy delivered a strong operational quarter with operating income of $326 million and margins of 26.9%, up 10.3 percentage points year-on-year. The year-on-year improvement was driven by a few factors that impacted Q4 margins in both 2015 and 2016. First in Q4 of 2015, we incurred charges related to portfolio and restructuring actions, which reduced fourth quarter 2015 margins by 340 basis points. Second, in the fourth quarter of 2016, the business realized a gain from divesting non-core intellectual property, which added 270 basis points to Q4 2016 margins. Adjusting for these items, Q4 margins increased year-on-year by approximately 400 basis points. Looking at the full-year operating margins were 22.3%, up 120 basis points year-on-year. I'll finish with our Consumer business on Slide 13. Fourth quarter sales in Consumer were $1.1 billion. And as Inge mentioned, growth was impacted by channel inventory reductions in the U.S. and to a lesser extent West Europe. So from a pure selling perspective, our fourth quarter organic growth was down 0.7%. On the other hand from a point of sale or sellout perspective, our Q4 growth was positive in the in line with our historical trends. So we expect consumers organic growth will be back to more normal historical levels during the first quarter. Despite these channel adjustments, we posted positive worldwide organic growth in three of our four businesses, namely Home Improvement, Consumer, Health Care and Home Care. The Stationery and Office Supply business, which was most impacted by channel adjustments declined year-on-year. Looking at Consumer geographically, growth was led by a mid single-digit increase in Asia-Pacific, while the U.S. was flat, and EMEA declined year-on-year. Consumers operating income was $228 million with operating margins of 20.9%. Margins were down year-on-year for two primary reasons. One, we rationalized one of our manufacturing sites during the quarter, and two, the business accelerated growth investments in the quarter. We continue to see good opportunities to invest and drive growth within the portfolio. In fact, we increased investments in Q4 in our category-leading Command and Filtrete product lines. Both posted double-digit organic growth in the U.S. this past holiday season. That wraps up our review of fourth quarter results. Please turn to Slide 14 and I'll hand it back over to Inge for some final comments before Q&A. Inge?

Thank you, Nick. The fourth quarter kept a successful year for our enterprise, as we executed a playbook and delivered a strong operational performance. We increased our earnings per share by 8%. Margins were up more than 100 basis points to 24% with four of our five business groups posting margin expansion. In addition, we delivered free cash flow conversion of 104%, which is our third consecutive year above 100%. And for the fourth straight year, our return on invested capital was above 20% coming in at 23% this year and we achieved all of this in a year of flat growth. As you can see, we are executing well and controlling what we can control. 2016 was also a notable year with respect to our dividend, as we marked 3M’s 100 consecutive year or paying dividends to our shareholders. For the full-year, when we combine dividends and share repurchases, we returned a total of $6.4 billion to our shareholders. During financial results, we continue to build for the future through our three key levers, which are significant value creators for us. Let me start with portfolio management and ongoing process that is all about strengthening and focusing our portfolio, which improves our competitiveness and make us more relevant to all customers. This includes consolidations within 3M, along with divestiture of non-core businesses, and we were active in both fronts in 2016. Portfolio management is benefiting our customers and 3M as we now have greater scale and are able to better prioritize our resources. This includes growth investments and at our December outlook meeting, we highlighted incremental $100 million we are investing to accelerate growth in our core platforms. We will now move on to the second lever, investing in innovation. In 2016, we invested $1.7 billion or nearly 6% of sales in Research and Development, which is the heartbeat of our Company. This supports both our short and long-term growth objectives and along with our premium margins a return on invested capital. Last year, we also celebrated opening of a new laboratory in St. Paul, while earning more than 3,000 patents around the world. Business transformation is the third lever, which starts and ends with our customers. Last year, we will continue to make good progress with the rollout of our ERP system in West Europe, which is nearly complete. Within West Europe, we have now deployed in 11 countries our four largest distribution centers and our supply chain center of expertise. Globally, we now have a total of 16 countries live and a new ERP system and our three global service centers are also up and running. We are already beginning to realize productivity gains from business transformation, which will increase in 2017 and beyond. By 2020, it will result in $500 million to $700 million in annual operational savings and another $0.5 billion reduction in working capital. Looking upon our performance in 2016, the 3M playbook is working. From an operational perspective, we are executing well and delivering premium returns. At the same time, we continue to make investment that would enable us to capitalize as growth conditions improve. As a result, we are positioned to build on our momentum and deliver another strong performance in 2017. Please turn to Slide 15. Here you see our planning estimates for the year, which are unchanged from December outlook meeting. We estimate earnings per share in the range of $8.45 to $8.80 and increase of 4% to 8%. Organic growth is expected to be 1% to 3% and we anticipate another good cash flow performance with a conversion rate of 95% to 105%. With that, I thank you for your attention and we will now take your questions.

[Operator Instructions] And our first question comes from the line of Scott Davis of Barclays. Please proceed with your question.

Hi. Good morning, guys.

Good morning, Scott.

Good morning, Scott.

When I look at my list of companies at least, you guys tend to be, obviously, about as global as anybody gets and have a pretty broad supply chain. And my question is how do you plan spending on even 2017? I mean how do you plan spending when you don't have a real great sense of tariffs and trade and how all that could be disrupted in the next couple of years? Does that play into the planning at all or do you just continue on?

Hi, good morning by the way.

Good morning.

As you know, we are laying out very much localization strategy in terms of our business well all subsidiaries around the world. So at this point in time, we continue to lay out the plan as we have talked about. We are making investment in what we see the most important businesses for us to grow both in the United States and overseas based on that strategy, right. So by definition, even if we have both the global customers and local customers, we need to make the investment based on what they are and what they are going. And I would say that when I look upon this quarter specifically, there is some very interesting movements, I think coming back a little bit to historic performance relative to growth, which we had that 1% growth in developed markets, but we are 3% in developing markets. So there is type of a movement going also coming back in the developing economies, which is interesting. And as you heard Nick said, if you take China, China was 6% organic local currency growth all in excluding electronics was 11 and when look upon our five businesses in China specifically it was fantastic growth all of them. We have Safety and Graphics grew almost 20%, Consumer 17%, Health Care 15% and Industrial 12%. So we need to continue to invest based on the growth in those segments. So we don't make a change at this point in time relative to the planning for the year and as we said in December, we are adding another $100 million this year in order to accelerate commercialization of products. But I would say generally speaking, it's early in the year as we know, but I saw some trends here that our positive relative to growth coming. You saw Industrial business group almost 5% growth and it was broad-based all over the world. They grew in every geographical area around the world. So very encouraging as I look upon it. For Germany, they have positive growth for the third consecutive quarter for us. So I feel more positive as we move into 2017 even if it's early.

Just a quick follow-up when you guys think about - I’ve never asked this question before, I don't know why I haven't, but is there such a thing is book-to-bill in Electronics and Energy or is it too short cycle for that?

Once again, can you repeat the question?

Sure, is there such a thing is like a book-to-bill or something like that Electronics and Energy where you can get a sense of which quarter of this year coming up, you turn into positive territory? I don’t know again why I’ve never asked that question before, but I don’t think you’ve ever referenced it. Just trying to get a sense of which quarter you might see positive growth and that would…?

Scott, let me take that one. We don't have a formal metric that we're measuring on a book-to-bill ratio in our Electronics business. It is a fairly short cycle, we're working with all of our customers there to be projecting, what the demands are in the future, but unlike some other industries, this is not one where we have a book-to-bill ratio.

Okay. That's what I thought, but I have to ask. Thank you guys, and good luck to you.

Thank you.

Thanks Scott.

Our next question comes from the line of Julian Mitchell of Credit Suisse. Please proceed with your question.

Hi, good morning.

Good morning, Julian.

Good morning. Just a question firstly on the Consumer business, I don't recall you talking about the slowdown much at the mid-December meeting. So I wondered if it was something, the inventory reduction was something that became apparent sort of very late on? Is there any color you could give around days or weeks of excess inventory in those channels today?

Julian as far as the consumer business in the trends we saw throughout the fourth quarter much of this differential we saw between sell in and sell out occurred in December and in particular in the last half of December. In regards to inventory, we don't really see the channel is having excess inventory now. We considered a fairly normal inventory channel level in our consumer channels.

Thanks. And then if we look at the margin bridge, it was curious a little bit that the utilization piece and organic volume was not a contributor. It was flat even though the sales growth performance was actually pretty good. Was there anything unusual in Q4 that weighed on that specific line in margins that meant the operating leverage was not as high as it could or should have been?

Yes, Julian that's and I'll just put it in perspective, we've had that particular item being noticeably negative on our margin for the first three quarters of this year and getting that to be neutral for us for the fourth quarter with our 1.5% volume that's the main thing that happened for us in the fourth quarter. There isn't some particular headwind buried in there, but it was for us a notable trend change from where we've been the first three quarters.

And do you still feel good about $0.10 to $0.20 of EPS accretion in 2017 from utilization.

Yes, we do Julian. That component of our EPS lock as well as every other line, we're still feeling very confident in right now Julian.

Great, thank you.

Our next question comes from the line of Andrew Kaplowitz of Citigroup. Please proceed with your question.

Hey, good morning guys.

Good morning, Andrew.

Good morning, Andy.

So just a follow-up on Industrial, we know you have significant short-cycle exposure within Industrial and you did have easier comparisons in the quarter. But I think that growth jumped pretty meaningfully. Maybe you could give us some more color on how much of the improvement was maybe the energy component within advanced materials looking less bad or we know you had the big defense contract ramping up within advanced materials versus the rest of the Industrial business improving. And then how do you feel about your 1% to 3% growth forecast now for 2017, given you put up over 4% in 4Q?

Well, first of all it was broad-based growth in Industrial, both in terms of the businesses and in terms of the geographical area. So that was not one specific business that type stood out of in terms of growth, even if you saw a Nick comment on - again the fantastic performance for the automotive OEM business, but it was broad-based and it's coming back, I would say a little bit as we have talked about earlier in terms of evolution of economies. And I think you've seen now as becoming more output from manufacturing around the world, we are very early in that process. And if you look upon PMI, the United States had a PMI of 54.7% in the quarter, China 51.4%, and Germany 55.6%. If you think about that in terms of big economies that will help us as we move forward, and as I said, it was broad-based. Now to your second question, how we feel about 1% to 3% for the year as we came out of 5%? Feel good, feel good. Too early to change that as we sit here today, but generally speaking, I would say, feel good about Industrial businesses. And if you think about in terms of size, this is one-third of 3M and when we start to get good momentum in that business, that's helping us, a lot, right. You saw they had good growth and we talked about that on the last earnings call that they will grow in Q4 and they did and it's very good. But yes, I said that’s too early to change anything as we move into the year, right, so let's see after first quarter how we position it.

Hey, Andy just one more detail on that I'll share. We've been talking about this for a quarter or two that we have some defense contracts we were awarded and those shipments were going on in the fourth quarter. Our body armor shipments added about 150 basis points to the total Industrial organic growth in Q4, so stripping that out the core underline is right around 300 basis points of growth.

Okay, Nick, that's helpful. And then, Nick, you've talked about 3M's ability to achieve 30 to 50 basis points [of pressures] across in 2017. You obviously did 50 basis points in 4Q. But pricing in the U.S. continues to look competitive. It was a bit worse in 4Q than it was in 3Q. You mentioned sort of going after some additional organic growth. Can you talk about 3M's ability to offset a pretty competitive U.S. pricing environment? With the better sourcing and with the help of business transformation that you talked about are you still confident in positive price versus cost contributing to that $0.20 to $0.50 of organic global currency growth that you have?

Yes. Andy there is a lot of subjects you hit there in one question. As far as the underlying price growth in the U.S., what we see in our view is our fundamental pricing power is not changing. It's still very strong. We did in the case of the U.S. take some targeted actions to help drive organic volume growth for us. Also for the total Company and this isn't going outside the U.S. This is a quarter where we saw less pricing actions related to FX movements and you see that with our - and that's down noticeably from where we've been in the first three quarters of this year. So all in for 2017, we're still expecting the positive core price growth in the U.S. and globally. Now to the other parts of it, our ability to use sourcing to continue to add to our earnings into our margin. I laid out a month ago that we expect between $0.10 and $0.15 of EPS accretion through our sourcing effort and everything we're seeing now, we see that on track, much of that is being driven not by just pure market prices, but it's now being driven by our own efforts to be substituting raw materials and taking advantage of our negotiation power.

Thanks, Nick.

Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.

Hey. Good morning, guys.

Good morning, Joe.

Congrats on the 100 years of paying a consecutive dividend; not a lot of companies can claim that. The first question I have is on Health Care. You talked a little bit about regaining momentum, and I recognize that you had some product introductions in the quarter, but you also still have some headwinds on Oral Care. And I'm just curious, given the headwinds also potentially from the ACA, I'm just wondering like what gives you kind of the confidence that you could really see the momentum pick up as we progress through 2017?

Well, first of all most of our businesses are doing very well, right. So food safety is still growing very well, drug delivery system did well as well and then consumables in medical space did well. So if you take that together, right, there is underlying momentum in the business. We have invested quite a bit in this business for some time and we stepped that up and they have had a big investment starting already second half of 2016 and that now we'll start to generate growth coming into Q2 and Q3 for the year. And the pipeline as Nick comment on, the pipeline for health information system is very strong, so yes, it’ll slow down a little bit in terms of execution and deployment of that software into the hospitals, but the pipeline is very, very strong. So I would say that when you think about it generally speaking, we know that with investment in the areas we invest in Health Care, which around coverage, is around health economics and that's about some research and development, specifically the coverage will pay off rather sooner or than later. And again we see that the developing economies are starting to pick up for us. So the confidence is high that we will see the growth coming as we move into 2017.

Okay. And then maybe my follow-up question and getting back to price cost for a second. Nick, maybe talk a little bit about the fact - it looks like you got about 10 basis points or so on pricing this quarter. We're moving into more of a kind of a commodity reflating environment. So how is that dynamic going to work as we progress through 2017 on your ability to continue to get price?

Joe the total posted 10 basis points if we strip out the FX portion of that and then we're looking at flat to down very slightly of core underlying there. As I look at how this progresses throughout the year, we actually have a pretty steady view throughout the year Joe, if it changing much of just much of just having our core underlying price growth often in that 30 basis points to 50 basis points. I think the wild card on there is FX, the dollar been moving a lot and that as far as what we post for price growth in the quarters will be volatile in the coming quarters with some volatility based on what happens with the U.S. dollar primarily in developing markets.

Okay. Got you. Thank you very much.

Our next question comes from the line of Steven Winoker of Bernstein. Please proceed with your question.

Thanks and good morning all.

Good morning, Steve.

Good morning, Steve.

Just back to the pricing questions, specifically, you mentioned targeted actions that you took in the U.S. to drive some volume? Can you give us a little more color on what segments you were talking about, what areas?

Yes, Steve, it’s in particularly isolated places, there is some places in our consumer business, where we took actions like that also in our Industrial business. Those are the most common places where we took those types of targeted actions Steve.

Okay. And with the trigger for that kind of thing, competitive actions was it particular projects I'm just trying to get a sense for kind of the implications for the broader pricing power in those businesses?

Steve, we take those actions when we see an opportunity either in the competitive landscape to take share that we otherwise want to have or in some cases it's a reaction to where we see pricing pressure from competitors and we price accordingly to maintain some other shares, so it's some of those Steve.

Okay. And then just a more specific question on E&E. Can you just give a little more sense in display materials systems, how much was OLED impact to this quarter and what the other kind of impact besides OLED was?

The OLED impact or just to put it in perspective, last December when Jim Bauman was laying out the OLED impact that we felt that would have on 2017 sales, we put a range between $50 million and $150 million of impact. We saw a number impact for total year 2016 right in the middle of that range and for the fourth quarter I would call it very similar to that of $20 million to $30 million range of impact on our total revenue. Steve that's the OLED impact on what we're seeing in the Electronics and Energy business.

Okay. And any major offsets to that?

Yes. As I mentioned, we are targeting to be increasing our penetration in some of the OEMs in China, electronics OEMs in China and we're seeing some success there. We're also targeting growth in automotive electronics and we're also seeing some successes there as well.

Okay. Thanks.

Our next question comes from the line of John Inch of Deutsche Bank. Please proceed with your question.

Thanks everyone. Good morning.

Hey, John.

Hey Nick, hi Inge. How did the Dental business do sequentially? I don't remember you talking about that when you were describing the puts and takes in the Health Care performance. And it was under pressure, right in the third quarter? Did you see a similar trend in the fourth quarter?

Yes. John, we saw our Oral Care down slightly, partly from softening end user demand and also what we see is continue channel contractions in the Oral Care business.

Do you have any sense of the underlying - it's one thing if it's one quarter, because sometimes dental, it seems is a little bit of a canary in the coal mine, right, for the economy. But now the economy, based on your own commentary and what other companies are saying, seem to be picking up. So what do you attribute then, I suppose the continuation of the soft dental? Is there a way you could frame what you've seen and maybe provide some historical context?

Yes. I think what you saw in the last quarter of the year, basically the two things is inventory reduction in the channel, because it's very much distribution-oriented and that's based on lower demand in the end market. And I think that was based-based relative to United States and West Europe. Now, if you think about both in consumer and you think about the business like Oral Care, the supply chain there is very sophisticated. So what we have to look upon is sell-in and sell-out, and I think in those cases, what you will see as demand will by definition should go up and I think the facts are telling us that in that industry in Oral Care then they would build up inventory, again, as you go into the year. But for us, we look upon those businesses, they are very good partners of ours and they are very professional very, very professional in the supply chain, so they do the right thing in terms of adjusting their level of inventory if they see a softness. What they are telling us now is they see demand coming back as you roll into 2017. If you move from Oral Care and go back and I was not sure that came across. If you take our consumer business that was down 1% in terms of sell-in from us, sell-out on our top customers in U.S. was 3%. So in 3% that's the historical base for consumer for the last couple of years. So from that perspective, I think the retail channel stay, so maybe some softness for them, generally speaking in the end of the holiday season they did the right, they just managed through their inventory and for me that's a very professional way of doing business. Our sell-out was the same indicating for me as we move into 2017 that inventories will be filled back because the demand will steady in the end market, but I think they did the right thing in terms of the retail channels.

Well, I certainly give away your products as Christmas gifts, so don’t let me…

We can do more.

Yes, bigger gift bags. Just as a follow-up, you mentioned divesting non-core IP in the Electronics and Energy business. Nick or Inge, could you expand on this? What exactly is this and do you have like this reserve of IP that in theory, you could keep divesting to take gains? Or was this a one-off event or just a little more context on what ultimately happened in that segment please?

John, I think this is much more of a one-off. There was a particular set of IP that we had developed and we're using years ago, we reached a point where we felt we no longer needed it for our own business and we were licensing that IP, we chose in the fourth quarter to sell that IP and our relationship with that that particular IP we had in Electronics and Energy. To your question, is it a broad thing that we have a stable of these we’re ready to go with? The short answer is no.

Okay. And then when you say it wasn't core, is there anything you'd say about the IP you sold? What was it for or is it pertaining to anything you downsized or something?

No, it's something related to our electronic materials solutions division and that's about as deep as I'll go with that, but it really is not related to anything we divested.

Got it. Thanks very much. I appreciate it.

Thank you.

Our next question comes from the line of Robert McCarthy of Stifel. Please proceed with your question.

Good morning, everyone.

Good morning.

I guess the first question is in terms of just thinking about your overall explicit exposure to energy and kind of the wider implications and [knock down] effects of your portfolio to energy, given what we've seen in the downturn, have you seen any encouraging trends across your businesses that you would cite to say with the stabilization in energy prices, you could start to see incremental growth in the back half of this year? Could you just comment about what you're seeing across your portfolio with respect to that?

Yes. I think first of all the answer is yes, we should see an uptick in the end of 2017 in the energy space and we have a very strong solid business in two utilities, right. That's a core 3M business and in fact this is a Heartland division. That division will do well. What they have is they have an element of some project-based businesses and we had talked earlier about ACCR and there is some pipe coating as well that had a type of a negative effect in terms of comparison for 2016 and should benefit that business as you move into 2017. The other business that we had a good quarter here is actually communication, what you will call telecommunication, but communication had a good quarter for us with 10% growth. It’s a smaller business for us, but we did well. So I think the energy space for us should improve as we move into 2017.

How do we think about the offsets in association with just kind of price cost and raws in the context of that though?

Rob, as we contemplate where we see our raw material pricing going in 2017, we took a view of oil in the range of somewhere between $50 and $60 a barrel and that's why we're seeing diminished impact from market prices on our commodities benefiting us in 2017 versus what we've seen in 2015 and 2016. So we’re anticipating that in taking that into account. Most of our raw material or commodity benefits we’re seeing are going to be the result of 3M efforts we're doing to take cost or substituting lower commodities. So there is an offset there and we think we’ve pretty accurately taken the offset on both the revenue side and the cost side into account.

One final one, obviously, I don't think you provide or disclose where your CapEx is spent explicitly, although, obviously, anecdotally you do. But just looking at kind of the typical Note 17 in your 10-Ks, you can kind of see a flavor of where your PP&E is. It's disproportionate in the U.S. unsurprisingly, and obviously, the PP&E has been growing reasonably well in the U.S. while it's been relatively flat, I would say, across the balance of the portfolio. But could you comment on explicitly your CapEx kind of strategy for the U.S., any kind of metrics you could use? And really the spirit of the question is obviously with the prospect of a change in the tax law in association with the deduction of capital expenditures in the U.S. potentially, that's the nature of what I'm asking about.

Rob, as you look at our total CapEx, we spent $1.4 billion on CapEx in 2016, a little more than half of that was spent in the United States, and it goes into a number of things, Rob. It goes into some of our business transformation investments; it goes into maintaining our capital base. Of all the areas of the world, the U.S. we have a very well developed capital base of manufacturing sites and investing in CapEx to maintain that, also some expansion in the United States that we've been investing in, so a little over half of it. It's around the world though Rob, we are investing in capital as Inge as started out this morning and talking about we're investing in capital to align with where our customers are and aligning demand. So where we've been in the last few years, we've seen a little less international demand and a little higher U.S. demand and that has impacted our capital allocation. And going forward, we still anticipate a significant amount of our capital, for the next year or two; I won’t be surprised that it's going to maintain being over 50% in the U.S.

Thanks for your time.

Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question.

Thanks. Good morning.

Good morning, Nigel.

Yes. Just of the investment spending picked up this quarter relative to 3Q, so just wondering if you can be a bit more granular in terms of where you're spending. And in particular, you referred to some price actions to drive volumes particularly in the U.S. Would that fall under investment spending?

I'll take the last part of that first Nigel that the changes in pricing that I talked about that would not be part of investment spending. What is included in our strategic investment spending that we called out that's impacting our margin by 70 basis points this quarter, theirs is two components. One is us taking actions on addressing our manufacturing supply chain footprint that we laid out last March at our five-year outlook meeting. We’ve been taking actions and that is part of what occurred in the fourth quarter, but also what's in that is investments we're making in growth in core platforms within 3M and that was part of what we’ll also laid out in December. In 2017, we are accelerating our investments of approximately $100 million in these core growth platforms. We started that investment in the fourth quarter of 2016 and that makes up a little over half of the total of that strategic investment that we laid out for fourth quarter in our margin.

Okay, that's helpful. Thanks Nick. And then a follow-on question on FX. We have seen a fair amount of divergence in the [indiscernible], RMB weaker, the real stronger. How is that impacting the translation impact? How is that impacting your margins? And the spirit of the question is, my understanding is that your EMs are generally higher margin than DMs. Is that still the case and is there any significant margin impact from translation of the currency movements?

Yes. Nigel, what I've seen over time and what I'm seeing this quarter and into the futures it's less impacted by that particular mix, how it impacts our margin more dramatically is actually our hedging and sometimes it becomes counter intuitive Nigel that when the dollar - when we start to have the dollar stronger and negative impacts on our earnings per share from a stronger dollar. We can add for a period of time to see higher margins as our hedging gains step in and boost that margin. We have lower sales dollars from the translation, but higher margins. That's been a more impactful factor on overall margins we post and the mix of where the currencies are strengthening or weakening against the U.S. dollar.

Right. Okay, I'll follow up offline. Thank you very much.

Our next question comes from the line of Shannon O'Callaghan of UBS. Please proceed with your question.

Good morning, guys.

Good morning, Shannon.

Hey. So at 1.6% I mean you're already kind of getting close to the mid-point of the organic guide for the year and you've got Health Care clearly way below what you would normally expect to be at and Consumer is negative. It seems like you feel pretty good about Industrial continuing to be strong. So are there any other offsets here? Because it would seem that you'd be tracking closer to the higher end of that organic guide, all else equal, unless there's something you expect to slow.

Yes. For 2017 Shannon, the 1% to 3% we’re still right there. Yes, we like the fact where we ended in Q4 from an organic growth. But it's also in line with what we were anticipating in total, and it's in line with where we felt we needed to be for the 1% to 3% that we guided for 2017.

We would like to go ahead of our self right. So I think it's important just to make important as we roll into the year and see more evidence of the positive movement, we saw here in the end. But as you said, investment we are doing the initiative we have around growth right because you look upon 3M as you see it now the efficiency in this organization is incredible and you see what we do in terms of EPS growth, free cash flow conversion, return on invested capital. We can get growth up even more that will get very good return for all of us. So that’s why we focus in and make sure that we will execute on that, but we will not over promise anything to you at this point in time.

Thanks. And then just on Mexico, I mean you talked about - I think you said double-digit growth there again this quarter. 3M has always been good at monitoring and managing through different global risk areas. I mean what's your current view there? Are you seeing any change in activity and do you do any kind of scenario planning around your position there in particular?

No, we don't, we have had very have strong growth in Mexico for quite sometime and it is an important local market for us, right. We have been there for many, many years. In Latin America, we have a very good growth rate for this quarter and we have been in that part of the world with our domestic business since 1946, right that we start operation in Brazil 1946. We have huge operations and it's very much locally driven and that is our strategy. So 10% growth in Mexico growth in the quarter is a good result, Brazil had 1%, so look like they're coming back a little bit, but we are not changing anything as I said - as I start the call here. Our strategies around localization and if you go back to what we have talk about, we never left United States. We expanded international based on the local market opportunity, right. So I think that's how you should view 3M in the business model that we are using?

Okay. Thanks.

Thank you.

Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning, Jeff.

Just a couple things, a lot of ground covered here. First, Nick, I was just wondering, back on the December guide, although the broad strokes have not changed, are you within the range of all those individual kind of bucket items that you gave us, [down through] pension, tax, et cetera, et cetera?

Jeff, yes. The short answer is, yes. A couple I’ll just put on the - I'll explain. Pension I'd originally guided $0.00 to $0.10 headwind now that we have that all locked in that will be an 8% headwind for the year. And then tax rate since it ended a little lower, we’re still seeing at a 28% to 29% tax rate in 2017. Back in December, I was saying I expected to be a little bit of a tailwind probably would be more neutral on for us for 2017 right now.

Okay, and also this is for Nick, could you just update us on your stranded cash, probably all your cash is outside the U.S. or some 90%. But do you cap the break near-term on share repurchase? Waiting to see if we get some kind of repatriation or something, or do you kind of proceed as normal on the borrowing and repurchase tempo you've been on??

Yes, our total cash Jeff is we have just a little over $2 billion of cash outside the United States. It's not a large number. I'm sure you're aware of this Jeff. We've been going to a number of efforts to be optimizing our global optimizing our global cash position and we've been managing that global cash balance down especially our international cash balance down. So our current capital allocation plan, we can execute that without any kind of tax reform or any kind of action. And it's really too early for me to comment on if something were to happen of what we do. We're obviously prepping and preparing and will act accordingly to take advantage of whatever kind of legislation occurs, but I think it's too early for me to comment on how that would change our capital allocation right now.

Thanks, and just finally, if you wouldn't mind, any color that you could share on January? Has there been any kind of change in behavior as we slip into the New Year, particularly in shorter cycle Industrial markets in particular would be of interest?

Yes, just as far as the year is starting, we're not seen any kind of change in the trajectory that we were anticipating. It's consistent with what we were expecting when we guided 1% to 3% and nothing really changing out of the norm for us, Jeff.

Thank you very much.

Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.

Yes, good morning.

Good morning, Andrew.

I will ask Jeff's question in a slightly different way about what you're seeing. Inge, I think you said that there are reasons to get excited, and I was wondering if you could share any anecdotes, obviously, without changing the guidance, that makes you more excited.

Yes. As I said earlier, when you look upon it in terms of our performance for this quarter and the momentum you have seen after some time where there has been slower growth right, but if you start to look upon elements that look positive for you. For me that will be like we had a good quarter in United States, right. United States grew 5% in the quarter. Japan grew 2% and China grew 11% excluding electronic. Electronic was 6% and we have had three consecutive quarters in Germany with growth. If I look upon that and I think about big economies in the world United States, Germany, Japan and China on a positive movement forward I feel better about it. I don’t know if I’m overly excited because overall you also have some tempering in Central East Europe and Middle East/Africa and that will hold for some time. But I would say that that's what I see. I saw our Industrial business have a good growth and then I take those geographical pieces together. Safety and Graphics continue to have a solid performance. Health Care, I'm convinced it will come back for us. And then as I said earlier Consumer when you look upon sale in and sail out, it's not the concern. But I think if you take for all of us, the bigger picture of growth coming in the two biggest economies in the world and then you add Germany and Japan to that, if you are 3M, which is about technology conversion and demographic shift. They look slightly better today than it is six to nine months ago.

Let me just ask a follow-up question. One of your competitors highlighted that they're seeing a meaningful, positive impact from the change in one child policy in China. What are you guys seeing in Health Care and Consumer in China? Can you identify it and does it provide any potential upside to your thinking for the second half of the year?

It should by definition and if you look upon those two businesses for us in China specifically, we had 17% growth for Consumer in the quarter; we have 15% growth in Health Care for the quarter and that's a positive outcome and those business even if they are small for us, if you look upon our portfolio in China, the two biggest in size for us is Electronics and Energy, and Industrial right because of the evolution of that economy. But what will come is Consumer and Health Care. So when you’re running them at 15% to 17% that's a good signal for us. We have a huge penetration opportunity there and they are both local domestic markets right, so no export by definition.

And you have the capacity to meet this demand?

Absolutely.

Thank you very much.

Thank you.

Our next question comes from the line of Steve Tusa of JPMorgan. Please proceed with your question.

Hi guys, thanks for going over the hour to fit some of us in. I appreciate it.

Hi, good morning, Steve.

Lots of questions asked just on the forward look here into the early part of the year. The Street has you guys APS kind of flat year-over-year, but normal seasonality from the fourth quarter, if we adjust some of these gains et cetera out, gets you to something that's a little bit higher than that in the 210-ish range. Is there anything unusual about the year-over-year comp that we should be keeping in mind for the first quarter? Maybe just a little bit of color, I know that the Street basically has you guys flat, but they have you growing for the year. So do the trends out of the fourth quarter change that view to make you feel a little bit better about being able to grow earnings here in the first quarter?

Steve for the quarters of 2017, I would call this remarkably stable year of nothing particular to call out quarter-by-quarter to be thinking about the only thing on the margin - on the hedge that I'd say is strategic investments that I talked about earlier that we started in Q4. Those will be more heavily weighted in the first part of the year. In fact I expect strategic investments in first quarter to be very similar to what we saw in the fourth quarter.

Okay, so you expect to grow earnings in every quarter essentially?

I think Steve you're trying to turn me into a quarterly guided here, for the year we’re…

It’s pretty vague question.

Yes, I'll just leave it. We don't see a lot differentiation of the core underline business quarter-to-quarter.

Okay. So when you guys talk about strategic investment that's I would assume outside of R&D because R&D as a percentage of sales was I think down a little bit in the quarter that stuff that is not considered just R&D I would assume?

A very little of our strategic investments if any is R&D. This is really about commercialized for the growth side of it. It's really about investments we're making and commercializing what we already have.

Okay, super. Thanks a lot.

And Steve, just one more point, I’m going to repeat a point from December. Growth we expect to be largely aligned for the year across most of our business the one exception is Health Care. I just want to remind you, we expect Health Care growth to accelerate growth to accelerate as the year goes on.

Great, thank you.

Okay. Thanks Steve,

That concludes the question-and-answer portion of our conference call. I will now turn the call back over Inge Thulin for some closing comments.

Thank you. To wrap up, the fourth quarter completed a successful year for our enterprise. In 2016 we executed our playbook and post strong financial results in terms of EPS and margins along with free cash flow and return on invested capital. At the same, we continue to simplify organization and improve our cost structure while making investments for the future. As a result, we are positioned for a strong 2017 and we'll capitalize as growth conditions improve. Thank you for joining us this morning and have a good day.

Ladies and gentleman that does conclude the conference call for today, we thank you for your participation and ask that you please disconnect your line.