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 a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, January 28, 2020. I would now like to turn the call over to Bruce Jermeland, Vice President of Investor Relations at 3M.

Thank you, and good morning, everyone. Welcome to our fourth quarter 2019 business review and 2020 outlook. With me today are Mike Roman, 3M's Chief Executive Officer; and Nick Gangestad, our Chief Financial Officer. Mike and Nick will make some formal comments, and then we'll take your questions. 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. Please turn to Slide 2. Before we begin, let me remind you of the dates for our 2020 quarterly earnings conference calls, which will be held on April 28, July 28 and October 27. Also note, we are planning to host an Investor Meeting in 2020. We will update you once we have finalized the date for the meeting. 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. Finally, please note that throughout today's presentation, we will be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the appendix of today's presentation and press release. Please turn to Slide 4, and I'll hand it off to Mike. Mike?

Thank you, Bruce. Good morning, everyone, and thank you for joining us. Our team executed well in the fourth quarter and delivered results that were in line with our expectations. Although we continue to face growth challenges in certain end markets, our focus on productivity and cost management helped generate solid underlying margins and robust cash flow with a conversion rate of 186%. We also continue to build, invest, and transform for the long-term success of 3M. Earlier today, we issued a press release on the next big phase of our transformation journey, a new global operating model and streamlined organizational structure, which I will discuss in more detail. Today, I will also provide an update on our ongoing commitment to sustainability and environmental stewardship, including PFAS. Later in the call, I will come back to discuss our full year performance, including record cash flow and good progress on our strategic priorities along with our outlook for 2020 where we expect to return to growth. Please turn to Slide 5, where I will begin with a summary of our fourth quarter results. Organic growth company-wide in the fourth quarter was minus 2.6%, in line with our guidance. We continue to face softness in certain end markets, namely China, automotive, and electronics, which impacted overall growth. We delivered adjusted earnings of $1.95 per share, which includes a $0.20 Q4 restructuring charge that I will discuss shortly. Excluding that charge, we delivered EPS of $2.15 at the high end of our guidance. Finally, we generated underlying margins of 20.7%, which includes a 140 basis point impact from the Acelity acquisition, while reducing inventory levels by $115 million. Overall, I'm pleased with our team's execution and our ongoing progress in driving operational improvements. Please turn to Slide 6. I have talked to you…

Thank you, Mike, and good morning, everyone. I'll start on Slide 8 with a recap of our fourth quarter sales performance. Fourth quarter organic sales declined 2.6%. Volumes were down 340 basis points, while selling prices were up 80 basis points. The net impact of acquisitions and divestitures increased sales by 5.1 percentage points, while foreign currency translation was a 40 basis point headwind to sales. All-in fourth quarter sales in U.S. dollars grew 2.1% versus last year. Looking at growth geographically. U.S. organic growth declined 3%, primarily due to declines in the Transportation and Electronics and Safety and Industrial businesses. Asia-Pacific declined 3% in Q4 with Japan down 7%, primarily due to a decline in our Electronics business. Organic growth was up 1% in China. This result is primarily due to last year's easier comparison. EMEA declined 3% while Latin America, Canada was flat. Please turn to Slide 9 for the fourth quarter P&L highlights. Company-wide fourth quarter sales were $8.1 billion with adjusted operating income of $1.5 billion. Adjusted operating margins were 19%, which included a negative 170 basis point impact from restructuring. Considering this impact fourth quarter operating margins were right in line with our expectations. On the right hand side of this slide, you see the components of our margin performance in the fourth quarter. Lower organic volumes and our continued efforts to reduce inventories to improve cash flow were both headwinds to margins year-over-year. Partially offsetting these headwinds were benefits from our Q2 restructuring actions. In total, these factors resulted in 110 basis point reduction to margins versus last year's fourth quarter. Acquisitions and divestitures combined reduced margins by 140 basis points mainly related to our acquisition of Acelity. Higher selling prices along with slightly lower raw material costs contributed 70 basis points to fourth…

Thank you, Nick. As I look at 2019, I'm encouraged how our team responded to the challenges we faced in our end markets: stepping up our execution, improving operations and driving strong cash flow as we move through the year. We finalized the restructuring we announced in April, effectively managed costs and reduced inventory levels by $370 million. With respect to the full year numbers, organic growth company-wide was minus 1.5%. We posted adjusted earnings of $9.10 per share, which included a $0.21 benefit from the divestiture of our gas and flame detection business. We increased cash flow by 10% year-over-year to $5.4 billion, an all-time high for our enterprise, while delivering a strong conversion rate of 118%. Additionally, we posted a good return on invested capital of 18%, including the impact of acquisitions. In 2019, we also returned $4.7 billion to our shareholders through dividends and share repurchases. And last year marked our 61st consecutive year of dividend increases. Please turn to Slide 14. Beyond financial results, I view 2019 as a fundamentally significant year for 3M as we implemented major change to position us well for the future. Earlier, I talked about how we are accelerating the pace of our transformation, and we also made significant progress on our other three priorities for long-term growth and value creation. I'll make a few comments on each, starting with portfolio. The ongoing review and reshaping of our portfolio is critical to maximizing value across our company. Since 2012, we have moved from 40 businesses to 23, while completing more than 10 divestitures and 14 acquisitions. In 2019, we continued portfolio, with particular progress in strengthening our Health Care business. We acquired Acelity, which accelerates 3M as a leader in advanced wound care, along with MModal's technology business, an ideal fit…

[Operator Instructions] Our first question comes from the line of Scott Davis with Melius Research. Please proceed with your questions.

Hey good morning guys.

Good morning, Scott.

As far as the – I mean, there's some noise out there with this virus in China and stuff, and you sell a fair amount of products into – that benefit, but at the same time, there's some offsets and slower growth in China overall. But when you think about, Mike, the cadence of returning growth in 2020, is there a sense of when? Is it 1Q as you start to get into some easier comps or is it more towards the back end of the year?

So Scott, I would start with the model for returning growth in 2020 is based on that broader macro, that outlook for the broader macro. It also is looking at some of those key markets that we talked about that were challenges for us in 2019. China, for example, one of the challenges in 2019. We see that in our model for 2020 returning to low-to-mid single-digit growth for the total year. In both cases, I would say, we see growth strengthening as we move through the year. So Q1, positive growth for the overall enterprise in the middle range – middle of the overall guidance of the range, maybe a little slightly lower end of the guidance of the range. And China, in particular, before we got to the last couple of weeks with the coronavirus really becoming the focus, we were looking at a sluggish start to China in first quarter really based on automotive, and the build rate's expected to be down mid-single digits and maybe even high-single digits. And so it's – that was kind of our pacing. Now coronavirus, it's kind of changing things as we go and we're seeing what you're seeing. We're seeing increased demand for our respiratory protection products, and we're ramping up our production worldwide, in China, around the world to meet that demand. At the same time, we're seeing what everybody else is seeing, that there's – the businesses are shutting down, extending their shutdown beyond Lunar New Year. So, we're really watching day to day what that's going to mean for our outlook for China, but I'll give you kind of the frame we had and then how we're kind of looking at it as we see the updates day by day.

Okay. That's helpful, Mike. And just as a quick follow-up. Will Acelity be accretive to your growth rate in 2020? Will that be above your guidance range in your view?

So Scott, this is Nick. We – Acelity is, of course, incorporated in the guidance that we're giving there. Throughout the year, most of its growth will be coming through what we report for acquisitions versus organic growth, but when we compare it to the underlying growth that was a revenue that was there before we acquired it, we see its growth as accretive to the overall 3M growth rate that we're projecting.

Okay, super helpful. Thanks, good luck guys.

Thanks, Scott.

Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.

Thanks, good morning.

Good morning, Nigel.

Hey, so just wanted to touch on the additional PFAS charge here. I mean I think I understand the Alabama and Illinois plant issues, but what's the trigger for the customer litigation charge? I mean, obviously, there has to be a trigger to get you to recognize that charge. Maybe just touch on – there's obviously a speculation about EPA regulation. Where do you stand on that issue?

Yes. So maybe I'll take the charge first, Nigel. So, we played out in the prepared remarks that there are two aspects to the charge. One is our ongoing commitment to resolve the issues where we manufacture and dispose the PFAS. The other part of the charge is related to really ongoing negotiations with customers. As part of our commitment is to do our part to help customers address the PFAS issues they face, and we've got our negotiations and mediation as far enough along that we can identify what's probable and estimable around a group of customers. It's multiple customers. It does account for the Wolverine cases that we've been – we've talked about in the past, but it's multiple customers, and really the next step of what we can understand is probable and estimable. So then in working with – one of the commitments we did make in last fall is to work in support of the EPA as we move forward with their regulatory plan around PFAS. They've got a – they've laid out a plan to move forward. We are working to support that with our investment in research and understanding – helping the understanding of PFAS, providing our data and really doing things like helping to provide a clearinghouse for all of the information and data around PFAS. And so, we continue to be working in support of the EPA in our work on our resolving, our manufacturing disposal sites, and then also on moving the regulatory standards forward.

Thank you. A quick follow-on on the 2020 guidance. On the cash flow, the $5.3 billion to $6 billion of free cash, are you simply assuming delevering of the balance sheet in the bridge?

Yes. Nigel, we’re not – as we ended 2019, we had debt-to-EBITDA ratio of roughly – just a little over 2.5 times. We see that coming down probably about 50 basis points to be two or just slightly over two times debt to EBITDA, so that's part of our overall capital structure planning in 2020.

Okay. Thanks, Nick. Thanks, Mike.

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

Thanks, good morning everyone.

Good morning, Joe.

Hey, Mike, can you expand a little bit on the commentary on this, the new restructuring initiatives that you have in place and how that differs from business transformation, fully recognizing that it sounds like you're streamlining the organization as well? But any additional color you can provide there would be helpful. (Auidt End)

Yes. And Joe, what I laid out is really the next phase of our transformation journey, and it's taking advantage of everything that we've done, deploying the ERP, the ecosystem around it, the service models that we put in place, the capabilities, the technical capabilities to really manage our business, digitize a lot of what we do to manage our operations and our business processes. And so it became clear that we could take full advantage of that with how we operate our businesses globally. And last spring, we announced moving from five to four businesses. At the time, it was – it looked like a realignment of the company, but where does it go? And this is really the next part of the story. We aligned around our customers and our go-to-market models. And with the launch in the new year of the new model, we are going to operate globally around those go-to-market models. And that includes how we operate our businesses everywhere around the world. It includes taking advantage of the capabilities we put in place with business transformation, and then It also includes this really consolidation of our manufacturing, supply chain and customer operations end-to-end to really optimize for those go-to-market models. So it's a significant change in really how we align the customers, how we bring our innovation to market, how we streamline and simplify 3M around the world. It is taking advantage of business transformation, but it's really transformation, but it's really multiplying that impact as we move ahead.

Okay, thank you. And then maybe just my follow-on, focused on the Transportation and Electronics segment. Clearly, that's a segment that has – had a tough 2019, and I think that there's some optimism in 2020 that we'll potentially start to see a rebound, particularly in the electronics side of things. And so if we were to start to see better growth, what kind of operating leverage would you guys expect to see out of that business? And in your commentary, Mike, earlier around positive organic growth in the first quarter, is this a segment that is also going to be positive in Q1?

Yes. Joe, let me take that one. First of all from – to the second part of your question, Transportation and Electronics, for the year we've guided that negative 2% to positive 2% organic growth. Our view right now, as we see all four quarters in that range. Right now, and just to go a little off track, the Safety and Industrial business is the only one that we see a potential that that one would be below its range in the first quarter and then in the next three quarters within the range that we've guided. As far as leverage that we expect in Transportation and Electronics, this is one of the businesses where as we see us returning to growth in that, that this would be accretive and would be adding to our leverage that we see that. A specific percentage, we typically don't put out, but it would be beneficial and we'd see the margins, the accretive margins there very similar to what we see for the total company, that as we rebuild the revenue there that we would be seeing that maybe an extra 10% going to increasing the margin as that – as the revenue improves there.

Okay. Thank you both.

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

Good morning. This is David Ridley-Lane on for Andrew.

Good morning, David.

Good morning. Can you provide details on how your core gross margin will trend in 2020 given the unusual inventory related effect in 2019?

Yes. The gross margins and our overall margins, but a part of – a big part of it will be our – through our gross margin improvement. We see overall operating margins improving 50 basis points to 100 basis points in 2020. And in the first quarter, we expect them to be roughly flat prior to the impact of Acelity. Acelity, we again – we – because that was not part of our base in the first quarter, we expect that will be a negative impact to our total company margins of about 100 basis points in the first quarter, and will impact Health Care's margins by 400 basis points to 500 basis points in the first quarter. But the underlying margins in first quarter, excluding that we see roughly flat and then some expansion, because our primary inventory reductions that we were executing were occurring in the second, third and fourth quarter. And as we move into that that range then we – that's when we expect to be seen margin expansion, particularly gross margin expansion in 2020.

Got it. And for the follow-up, what are the sort of tailwinds do you see within Health Care? And do you see potential upside to the 2% to 4% organic guidance for the full year as you get to the second half of the year? Thank you.

Yes. If you look at 2020 David, Health Care is going to be a leader for growth for us and that is really on some of the strengths that we saw coming out of 2019. We see continued strength in health information systems and with the M*Modal addition being part of that in our food-safety business. Our medical solutions business, we see that benefiting from the strong market – outlook for market growth in Health Care. And so we see, and I would say, continued strength in developing markets helping to lead that growth forward. So it's some of the areas that we saw strengths in 2019 and then some of the things that we've been able to build upon with our acquisitions and leverage even stronger positions against a good macroeconomic outlook.

Thank you very much.

Thank you. Our next question comes from the line of John Inch with Gordon Haskett. Please proceed with your question.

Thank you. Good morning, everyone.

Hey, John.

Good morning John.

Good morning guys. Nick, can we start on the EPS road map, Slide 27? So you've dialed in minus $0.25 for 2019 headwinds. I think it's interesting. It's not a range. It's an exact precise number. What exactly is in that? For example, like our compensation headwinds, so having to pay people more money, is that in there? And anything you could say on that? Was there flex around it? What is going on there?

Yes, John, there's two precise things in there, which is why it's not a range. About one-third of that is from gains we took in 2019 on disposal of certain properties, certain assets we had, that I talked about during our third quarter earnings call. The other two-thirds of that, John, is coming from variable compensation. With our results that were delivering – delivered in 2019, our variable comp is below our planned variable comp level. And we've built our plan for 2020 that we would be returning to planned variable comp. And that's why we're calling that out as a 2019 headwind.

And can I ask you, Nick why is that fixed? For instance, let's just say the economy got better as 2020 progressed and you did much better than your zero to 2% core growth. Does that variable number also not dial up? Or is it kind of a fixed bonus? Like, why wouldn't the $0.25 possibly dial a little bit higher as a drag?

Yes. So in 2020, if we start to see our compensation being different than that, then our normal practice would be that becomes part of productivity. So if we are paying more than our planned variable comp that would become a headwind to our productivity that we're projecting in 2020.

Got it. And then just as a follow-up, Nick, can you remind us what's going on – or Mike. What's going on in Europe? I had in my notes – I thought that you were sort of on deck to maybe downsize your European footprint, I think pro forma, like about a third of production facilities, with a lot of this happening in the back half of 2019. Where do we stand on that? And I noticed that, for instance, Europe, on the core sequentially got worse. Was that actually – was that self-inflicted because of this associated internal disruption or actions? Or is there something else? Just is it just macro in Europe? Just where do we stand in Europe overall and the runway even to your 20% plus margins that you talked about at the last Analyst Meeting, Nick?

Yes. John thanks for asking that question. And there are several moving parts in there. First, let me talk to the margin, and then I'll talk to the growth. 2019 was a very good year of progress for us with our operating income margins again expanding in Europe to approximately 19%, very much along the trajectory that we were projecting that we would be on to be moving this to a 20% operating income margin by 2020. As part of that, we've been taking a number of action over the last few years. Some of them had been footprint actions, and we are starting to see some of that benefit manifest in our 2019 results going forward into 2020. Also, there's been some portfolio adjustments, where there are certain product lines where we've been going through and prioritizing and deciding either to exit or to de-prioritize and de-resource. And as we look at our organic growth in 2019 as well as, in particular, you're asking about fourth quarter of 2019, that's been impacted, impacted by 50 basis points to 100 basis points of organic growth by some of our – what we have planned and done from a portfolio standpoint as part of our move to shift our portfolio in Europe. Much of the rest has been macro of what we're seeing. Plus, a little bit right now what we're seeing in the fourth quarter is a comparison that we're going against fourth quarter last year in Europe. This was very much in the range we're expecting. But macro, we're continuing to see auto builds down in Europe, and that does impact our overall EMEA results.

But EMEA is up. Do you think it hits your 20% target in 2020 or maybe even a little bit better?

Yes. We see ourselves very much in-line to be hitting that. Could be a little ahead, but I wouldn't get too far ahead on that. We see ourselves right in line to be hitting that.

Got it. Thanks very much.

Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning everyone.

Hi, Deane.

Hey, Mike, I was hoping to circle back on the restructuring announcement today, and I wanted to put it in context with what we're seeing across the multi-industry sector, where a number of companies are pursuing simplification via larger spinouts, bigger, bolder moves versus kind of what I would characterize, 3M has been more surgical. Have you looked – as a result, you look more like an outlier in terms of your simplification approach. Is it – what's your response there? Is it really company-specific? Are there opportunities to do something bigger? Is that – might be another next phase? But if you could give us some color there, that would be helpful.

Yes, Deane. We – what I framed it up is this is part of our transformation journey. And if you look back, even back to the Investor Day in November of 2018, we laid out a plan for margin improvement over the coming years, and a big part of that was from transformation. So there was a plan by us to really keep moving forward in this. This announcement today is the next phase of that plan to move forward with an alignment around those four go-to-market models, our customers, better leverage all the business transformation investments we put in place. And we are optimizing as we go. We're building on the capabilities we've put in place. You saw that in 2019 start to come through our EMEA and Canada results in terms of margins and service and inventory management improving there. We – it was part of getting on top of inventory in North America, too, as we deployed the new capabilities. And so I wouldn't call it a – I wouldn't think of it as a one-step in the middle of this. It's part of our transformation journey. And so we'll continue to optimize off of this. This is – enables – the charge that we took in Q4 enables us to move quickly to the alignment, get the full benefit of it as we go forward. It's really, we think, going to be an important part of what positions us to deliver growth and better efficiency as we go through 2020 and beyond.

That’s helpful. And then just staying on the restructuring, the payback for 2019, did – that's $40 million to $50 million in savings. Just based upon the size of the restructuring that seems a slower payback, does that have more to do with the timing of how you'll do these reductions?

Yes, Deane, that really is a function of this. As we move to streamline the – our operations there, not all of it is happening right away. There's parts of it that phase in over the course of the year, and that's why it's only having a $40 million to $50 million impact. Some of it, a minority position, part of that will come in the first half of the year. The vast majority of that $40 million to $50 million comes in the second half of the year.

Got it. Thanks helpful. Thank you.

Thank you. Our next question comes from the line of John Walsh with Credit Suisse. Please proceed.

Yes, good morning.

Hey John.

Hey John.

Wanted to talk about the price performance in the quarter and specific to the U.S., but happy if you want to broaden it out. As we think about that 1.7% price increase, that's a higher number than we've seen here in the past. Is that priced because of innovation and sustainable? Or did you hold price, and that was kind of impacting why the volume was down in the U.S.?

John, the price growth – first of all, let me expand it to the full year for U.S. price growth. With that 1.7%, that brings our full year price growth to 80 basis points. John, I think that's the more helpful number for you to look at and focus on. Often in a quarter-to-quarter basis, there's going to be what is it comparing to in the quarter in the prior year. So I won't overreact to the 1.7%. Our view is the 80 basis points that we did in the U.S. in total 2019, that's indicative of what we're doing. And to the first premise of your question, what we overall see in price growth is a function of the value we are creating. It's the innovation we have in our products and continuing to update the product lines and the products that we offer there. And that is a big driver of that. But I won't focus on the 1.7%. I'd focus more on the full year, the 80 basis points.

Got you. And then maybe coming at the flat to up 2% organic just a different way. If we think about 2019, particularly on the automotive side, you did have some impact from channel inventory destocking. I don't know if it's possible, but have you thought about what the growth rate would look like just with the absence of those headwinds? And how much of that kind of flat to 2% is just a normalization versus the macro getting any better?

John, the return to growth of zero to 2% that is really reflecting both the macro and then I think a closer look at the markets that we've been challenged within 2019. So electronics, automotive, China. And in 2019, as you noted, there was an impact from channel reactions. As they saw the decline in those markets, they reacted, took out inventory. So part of the year-over-year, in those markets, comparison is going to be a more stable channel. We do see more balanced inventory in those channels. I would say electronics; we're seeing the early signs of maybe some encouraging outlook in areas like semiconductor, fabrication and data centers. In automotive, the outlook for the year is still negative build rates. Slightly negative, I think, is the broader economic view. We're a little more conservative than that in a slower start to the year. But again, I would say our view is – also has that idea of balanced inventory in the face of those outlooks.

Great. Thank you.

Thank you. Our next question comes from the line of Andrew Kaplowitz with Citi. Please proceed with your question.

Good morning, guys.

Good morning, Andy.

Hey Andy.

Mike, can we go back to Health Care for a second? I know that you changed the reporting last year and put separation and purification, and that's continuing the growth a little bit. But you, I'm sure, recall that Health Care was supposed to be a 2% to 4% grower in 2019 and reported a little under 2% and the 4% to 6% through 2023. So I know you're saying 2% to 4% for 2020. Has the impact on Health Care just been, I guess, unexpected cyclicality? Or have you sort of reassessed the long-term growth of the business? And is there any sort of thought about accelerating portfolio optimization in that particular business beyond selling drug delivery?

Well, Andy, I would say, as I highlighted in my speech, we have been focused with our portfolio actions on Health Care. As you mentioned, drug delivery and the plan to divest that, adding Acelity, adding M*Modal into our health information systems. And if you go back to Q4, the growth – organic growth in Q4 was positive across most of the portfolio. It was led by mid-single-digit growth in health information systems and food safety. Medical solutions was up slightly in the quarter. Oral care declined in the low single digits. And so that was maybe the focus of the softer growth in Q4. We did see strong growth geographically in areas like China and other parts of the world. So that's kind of what we carry into 2020. And we see medical solutions improving. The market outlook there is strong, and our position is strong. We see health information, food safety continuing. We see separation and purification getting a little better. And so we – all of that together positions us in a stronger growth for the outlook for the total year.

Mike, that's helpful. And then, Nick, just looking at the walk for 2020 again. Do you still see the potential for additional property sales? So there may be an element of conservatism in that item. And then you talked about a pretty wide range for this year in terms of productivity impacts from zero to $0.25. It seems that's like a little higher than usual. Is productivity more dependent on what organic growth is this year and that's why it's a little hard to pin down in 2020?

Andy, I just want to make sure you asked, where the potential for other property sales and if that's what you said, no, we're not anticipating anything of any material magnitude on gains or losses from property sales in 2020. In terms of the range that we have for productivity between zero and 25% – $0.25, that's might be a little wider than normal. And I think it does reflect as we're coming off a year where our margins were declining as we were having noticeable drops in inventory as well as we're going through the transformation and the restructuring charges we've called out and isolated the restructuring charges, but that's also a driver of our productivity and we're isolating that, and just the interplay of that adds a little more complexity for that. And we see the zero to $0.25 is like our best estimate right now. And of course we're going to be striving to be on the higher end of that, but it's where we are building our plans right now.

Thanks for that Nick.

Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. Please proceed with your question.

Hi. Good morning guys.

Good morning Josh.

Good morning Josh.

Just a follow-up on Andy's question a little bit on productivity, maybe slightly a different way. I guess Nick, how does zero end up in the range? You mentioned kind of the under-absorption and destocking issues, which I think caught you by surprise in the first quarter of last year, in particular on the volume drop. What would be the driver of the lower end of that range? Is it – if demand is better and like you said the incentive comp is a hit to productivity? Just trying to understand what the downside could be or what even drive the pressures to that?

Josh a couple of things. First of all, as would typically be the expectation if our growth is on the lower end of our range, I think that puts a little pressure to us on the lower end of the productivity range that we've laid out here, and included in that productivity range there's positive things that we're doing such as where we're seeing where the utilization of our factories in comparison to 2019. But it's also – we're also facing into as we do every year wage inflation so offsetting wage inflation is part of that. We also have other things that are impacted in there. For example, what we've called out under other and other pension expense that hits the non-offline is being flat year-on-year. Included in our productivity there is a between $0.06 and $0.07 headwind for increased pension expenses, that's part of that productivity number. So there is a negative headwind – there is headwinds we're facing and there as we face a zero to 25%.

Got it. That's helpful. And then just on the demand outlook. I think clearly there is an expectation maybe a few months ago that we were on this kind of linear recovery and maybe a mid-year bigger inflection in demand across the industrial universe. It seems like January has been a little slower for everyone. If you guys had a snap the line today versus some of the potential may be green shoots you could have been seeing 30 days or 60 days ago, as anything seen pushed out or off track or is this just kind of a timing issue and we shouldn't read anything into January?

Josh, I think you laid it out. The way we looked at that low growth macroeconomic especially in industrial, industrial production index kind of view of that it was getting better as we went through the year. That's the way we built our outlook for the year, our plan. I would say the biggest change since that has been what's going on in China. And it's – that will be the – have the biggest impact on how the first quarter plays out and then how we move further into the year. So I think that's the most important thing to be watching out.

Got it. Appreciate the color. Thanks guys.

Thank you. Our last question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.

Hi, good morning. Thanks for squeezing me in.

Hey, Julian.

Hi. Just a quick question following up on inventories. I think Nick or Mike; you'd said that you had a $370 million drawdown in 2019 overall. Maybe just help us understand what the margin impact of that drawdown was for the full year 2019. And also, as you sit here today, do you view your channel inventories that your customers and partners as being fairly normal? Or is there a bit more to go of destock in Q1? And then, switching back to 3M itself on inventory, do you have that old medium-term goal of a $500 million reduction, where do we stand on that?

Julian, several questions all at once. So first of all, on the $370 million of inventory reduction, our estimate that that's negatively impacted our operating margins or our gross margins in 2019 by 50 basis points to 100 basis points. That's true both for the fourth quarter and also true for the full year about 50 basis points to 100 basis points. And we see that flipping to be part – that's part of our guidance of the margin improvement in 2020 is having that headwind behind us. As far as channel inventories, there's always some puts and takes. I'd say we're seeing nothing abnormal right now with channel inventories. We have, of course as we've said throughout the year we've seen some reductions in our inventory – channel held inventories, but right now, I'd characterize it is fairly normal where we stand with inventories. And then we – in 2020 we do anticipate that we will bring down inventories a bit more, nothing on the magnitude of the $370 million that we did in 2019, but we expect we will be – we'll continue our progress of taking down our inventories slightly in 2020. As far as the guidance we had given prior of $500 million. We see the progress that we made in 2019 as most of that reduction getting us back to where we were when we first said that and some of that starting to make progress on that $500 million. We still see opportunities in the coming years for us to operate our supply chain even more efficiently and gather even more of that $500 million inventory reduction through our cash flow in the coming years. We've made some progress in 2019, we'll make more in 2020 and we'll make more in 2021.

That's very helpful. Thank you.

Thank you. That concludes the question-and-answer portion of our conference call. I will now turn the call back over to Mike Roman for some closing comments.

To wrap up. In the fourth quarter, we leveraged the strengths of the 3M business model to navigate market conditions while delivering strong cash flow and solid margins. We also continue to make significant progress on our transformation journey with the rollout of our new operating model. We enter 2020 in a strong strategic and financial position poised to return to growth and deliver value for our customers and shareholders. Thank you for joining us.

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