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Executives

Matt Ginter - Vice President, Investor Relations

Inge Thulin - Chairman, President and CEO

David Meline - Chief Financial Officer

Analysts

Scott Davis - Barclays

Ajay Kejriwal - FBR

Steven Winoker - Sanford Bernstein

Andrew Obin - Bank of America, Merrill Lynch

Deane Dray – Citi Research

Laurence Alexander - Jefferies

Joe Ritchie - Goldman Sachs

Shannon O'Callaghan - Nomura

Stephen Tusa – JP Morgan

Nigel Coe - Morgan Stanley

3M Co (MMM) Q3 2013 Results Earnings Call October 24, 2013 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. (Operator Instructions)

It is recommended that you use a landline phone if you’re going to register for a question. As a reminder, this conference is being recorded, Thursday, October 24, 2013.

I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Matt Ginter

Thank you and good morning. Here with me today are Inge Thulin, 3M’s Chairman of the Board, President and Chief Executive Officer; and David Meline, our Chief Financial Officer. Welcome to our third quarter business review.

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, I’d like to address a few upcoming events highlighted on slide number two. First, we have set the dates for our 2014 earnings calls. They are January 30th, April 24th, July 24th and October 23rd.

Second, we’ll host an Investor Meeting in the afternoon of Tuesday, December 17th at the Grand Hyatt Hotel, in Midtown, Manhattan. We plan to have several presenters on hand for this event, including many members of our senior leadership team.

Inge will provide the keynote presentation, highlighting 3M’s progress on key strategic initiatives and objectives, and heads of our five business segments in international operations will highlight their respective businesses.

Finally, David will provide the status update to the five-year plan that we introduced in November of 2012 including capital structure and capital allocation, and of course, we will articulate our 2014 earnings outlook. Invitations for this event will be sent this afternoon, so please RSVP as soon as possible and we hope to see you there.

Please turn to slide number three, 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. So let’s begin today’s review, I’ll turn the program over Inge. Please turn to Slide number four.

Inge Thulin

Thank you, Matt, and good morning everyone. As always, I appreciate you joining us for today. I’m pleased to report that Q3 was a strong quarter for 3M. We posted an all-time record for quarterly sales and every business grew sales organically. All five business groups posted margins above 20% while we continued to advance our strategic priorities and investments. Let's take a look at the few third quarter highlights.

Sales rose 5.6% to a record of $7.9 billion. Organic local currency growth was 5.8% in the quarter, led by safety and graphics at 8%, Health Care at 7% and Industrial at 6%. Our consumer business grew 4% organically as did electronics and energy. This quarter’s organic growth of 5.8% was a significant improvement versus the 2% growth in the first half of 2013. Industrial, safety and graphics, as well as electronics and energy showed the most improvements. On geographic basis, developed economies such as United States, West Europe and Japan also showed substantial improvements.

On a year-to-year basis, we posted positive organic growth in all geographical regions. Latin America, Canada led a way with double-digit organic growth of 11%, Asia-Pacific rose 7%, the United States were up 5% and Europe, Middle East, Africa increased 4%. As expected currency was the headwind to sales, reducing worldwide sales by 1.7% and acquisitions added 1.5 points to third quarter growth. So all-in-all, a very strong quarter with organic local currency growth of 4% across all developed markets and 10% in developing markets.

Operating margins were again strong at 22% or 22.4% excluding the first year impact of acquisitions. All five business groups delivered margins above 20% while also growing their top lines through a continued broad based effectiveness and efficiency. Earnings were $1.78 per share up nearly 8% versus third quarter 2012. Finally, we’ve returned $2 billion to shareholders in the quarter through dividends and share repurchases or $4.8 billion through nine months of the year.

In summary, it was an excellent quarter for 3M on many fronts and our business is continued to grow very profitably. I thank the 3M team for their outstanding effort to deliver these very good results. Let me now review the outlook, please turn to Slide number 5. With one quarter remaining in the year and the business performing to all the expectations, we are narrowing our full-year guidance to $6.65 to $6.75, this is a previous range of $6.60 to $6.85 per share. On organic local currency growth, we’re also narrowing the full-year 2013 range to 3% to 4% versus a pervious expectation of 2% to 5%. We continue to expect that currency impact would reduce sales for the year by approximately 2%, and we look for acquisitions to add about 1.5% to sales for the year.

As for the 2013 tax rate, we now anticipate the range of 28.0% to 28.5%, and free cash flow conversion is expected to be approximately 90%. Now Dave will be taking you through the details of the quarter, David.

David Meline

Thank you, Inge. Let’s begin with the review of sales growth, please to Slide 6. Organic local currency growth was 5.8% in the third quarter, which was a significant acceleration versus the 2% we saw in the first half of the year. Volumes contributed 4.8% to third growth and we continued to see good pricing power with selling prices up a 4 percentage point year-on-year.

Acquisitions added 1.5 points to sales growth in the quarter, related to Ceradyne in our industrial business and FSTech in safety and graphics. Foreign exchange impacts reduced sales by 1.7% points in the third quarter. Currency impacts were negative 6% in Latin America, Canada and negative 5% in Asia Pacific, while EMEA had a positive 3% currency impact year-on-year.

Third quarter, sales rose 5.6% in dollar terms. Looking across geographic regions, Latin America, Canada led the way with strong organic local-currency growth of 10.5% in the quarter. All five business groups contributed to growth in the quarter, including double-digit organic growth in Industrial, Healthcare and Safety and Graphics.

Asia Pacific grew nearly 7% organically in the quarter. China, Hong Kong grew by 11% in Q3 with notable strength in Safety and Graphics and in Healthcare, followed by electronics and energy. Organic local-currency growth was 5% in Japan, led by Industrial, Healthcare and Consumer. Organic local-currency growth was 4.5% in the United States, Healthcare, Industrial and Safety and Graphics led U.S. growth in the third quarter.

In EMEA, organic local-currency sales growth was 4.3%. West Europe was up 3%, year-on-year, continuing a positive trend. This was our strongest growth in West Europe since the first quarter of 2011. Middle East, Africa increased double digits and Central and Eastern Europe also posted good growth in the quarter. Organic local-currency growth was 4%, across all developed markets, a positive step up versus recent quarters and 10% in developing markets.

Let’s turn to Slide #7 for a discussion of the third quarter income statement. Sales rose 5.6% to $7.9 billion, which is the highest quarterly sales result in 3M’s history. We generated $3.8 billion in gross profit and gross margins increased 10 basis points year-on-year to 47.6%.

SG&A and R&D investments rose 8% and 6% respectively. Operating income increased 3.6% in Q3 to $1.7 billion. GAAP operating margins were 22%, down 40 basis points year-on-year. Included in these results was a 40 basis point impact from acquisitions, therefore underlying margins were equal to last year’s third quarter result.

Leverage on organic volume growth added 40 basis points to operating margins in the third quarter and the combination of lower raw material costs and higher selling prices added 1.2 percentage points. Strategic investments and one-time actions reduced margins by 80 basis points year-on-year. This represents incremental investments in disruptive R&D, our ERP system and restructuring actions.

Foreign exchange impacts reduced margins by 30 basis points and the combination of the U.S. medical device tax and other factors negatively impacted margins by 50 basis points year-on-year. Third-quarter earnings increased 8% to $1.78 per share. Foreign exchange impacts hurt EPS by $0.04 versus the third quarter of 2012 and a lower tax rate added $0.02. Average diluted shares outstanding declined 2% year-on-year, which added $0.03 to EPS.

Now, let’s turn to cash flow. Turn to Slide #8. We generated $1.2 billion of operating cash flow in the third quarter. Working capital investments were higher year-on-year, largely timing related and we will expect that they will reverse in the fourth quarter.

Capital expenditures were $404 million, an increase of $46 million versus last year's third quarter and we expect full-year CapEx will be in the range of $1.6 billion to $1.7 billion. Free cash flow was $747 million and we converted 61% of net income for the quarter.

For the full year, we anticipate free cash flow conversion will be around 90%. We paid $431 million in cash dividends during the quarter or $1.3 billion year-to-date.

If you look at our balance sheet in today’s press release, you would see that the worldwide cash and marketable securities are $1.6 billion lower today than one year ago. We’re managing the business with lower cash levels, the US in particular for several reasons. First, the business continues to grow and generate significant cash flow. Second rising interest rates are positively impacting our already well-funded pension status and finally our capital structure remains very strong, which is an important component of our business model, but we do not intend to strengthen it further. Gross share repurchases during the quarter were $1.5 billion and for the reason cited above, we’re increasing our expected range to $4.5 billion to $5 billion versus a previous range of $3.5 billion to $4.5 billion for the year. And as Matt mentioned, we’ll provide a full planning update at our upcoming Investor Meeting in December including capital structure and capital allocation.

Now let’s review our third quarter performance on a business-by-business basis. Please go to Slide number nine. Our industrial business had a good third quarter with sales up $2.7 billion and 6.2% organic local currency growth. The growth was broad based as all operating divisions and all geographies posted positive growth. Our aerospace and automotive OEM businesses generated double digit organic local currency growth and we also saw strong growth in advanced materials, liquid filtration, automotive aftermarket and industrial and adhesives and tapes.

On a geographic basis, organic local currency sales rose 13% in Latin America Canada, 8% in EMEA, 6% in the US and 3% in Asia Pacific. The Ceradyne acquisition added 4.1% to growth in the quarter. Integration is going very well and profits continue to exceed our expectations. Nine different 3M divisions have launched development projects that leverage Ceradyne Technology. First year’s sales are a bit short of plan due to US troop draw down efforts, but we’re winning new business with customers. In September for example, we earned an $80 million contract to supply enhanced combat helmets for the U.S. Marine Corps.

Third quarter operating income was $568 million and reported margins were 21.3%. Excluding Ceradyne, industrial operating margins were 22.2%. Margins were also impacted by negative FX and strategic investments in growth programs and our ERP system. Please turn to Slide number ten.

As expected, our electronics and energy business rebounded nicely in the third quarter compared to the first half of the year. Sales were $1.4 billion up 4% in organic local currency terms and operating income rose 3% to $300 million. Margins were 20.7% up a bit versus last year’s third quarter and up 3 percentage points sequentially. Electronics related sales increased 4% on an organic local currency basis. Market demand was stronger year-on-year and we’re expecting to a number of newly introduced electronic devices. Most industry sources are projecting flat demand for electronics this holiday season. As a result we’re planning conservatively through year end.

On the energy side, organic local currency growth was 3%. Electrical markets led the growth, boosted by record sales of our ACCR overhead power conductor. Communications and renewable energy were both slightly positive year-on-year. On a geographic basis organic local currency sales increased 6% in Asia Pacific, 3% in Latin America, Canada and just slightly in EMEA. Organic sales declined 1% in the U.S. Please go to Slide 11.

We saw our growth accelerate in safety and graphics in the third quarter. Sales were $1.4 billion up 8% organically, a significant increase from the 2% in the first half of the year. We generated double-digit organic growth in personal safety products and in roofing granules.

Our Commercial Graphics and Building and Commercial Service businesses also posted good organic growth in the quarter and traffic Safety and Security rose slightly. Sales in Safety and Graphics grew organically in all major geographic regions with strong double-digit growth in both Asia-Pacific and Latin America/Canada.

The FSTech acquisition added 0.9% to growth in the quarter. Safety and Graphics generated an operating income of $315 million, an increase of 7% versus last year’s third quarter. Margins were up slightly year-on-year to 21.8%, excluding FSTech third quarter 2013 operating margins were 22.1%.

Now let’s look at Health Care found on slide 12. Sales in this business were $1.3 billion, up 7% in organic local-currency terms. As was the case in Industrial, we generated positive organic sales growth in every division and in every geographic region within healthcare. Organic sales growth was strongest in food safety, health information systems, oral care, drug delivery and critical and chronic care.

On a geographic basis, organic local-currency sales increased 11% in Latin America/Canada, 9% in Asia-Pacific, 6% in the U.S. and 5% in EMEA. And across all of the developing markets Health Care generated 14% organic sales growth. This is very similar to recent quarters.

Operating income was $426 million, up 7% year-on-year and margins rose 40 basis points to 32.1%. Margins were helped this quarter by a gain on the sale of a small non-strategic asset, offset in part by the U.S. Medical Device Tax, the net of which added 1 percentage point of margin.

Our Health Care business continues to post strong and consistent sales growth and excellent profitability. This helps stabilize the more cyclical elements of our portfolio, the business generates tremendous value for 3M.

Finally, let’s review the Consumer business found on slide #13. Consumer also posted a strong third quarter with sales of $1.2 billion and organic local-currency growth of 4%. Operating income was $247 million, up slightly year-on-year and operating margins were 21.5%. Organic sales growth was strongest in our consumer health care, home care, stationery and office supplies and DIY businesses.

On a geographic basis, organic local-currency sales growth was 9% in Latin America/Canada, 7% in Asia-Pacific, while EMEA increased just slightly. Organic growth was 3% in the U.S. helped by a good back-to-school season. Developing markets within consumer grew 10% organically in the third quarter. Similar to Health Care, the Consumer business is a very steady grower with excellent profitability and is a stabilizing force within the 3M portfolio.

That concludes our discussion of 3M’s detailed third quarter results. I’ll now turn the call back over to Inge.

Inge Thulin

Thank you, David. Before we take your questions, I want to highlight our progress on three important strategic levers, portfolio management, investment in innovation and business transformation. First portfolio management, we continue to strengthen and prioritize our portfolio. The Electronics and Energy business is a good example of where we are making progress.

In the third quarter we consolidated the Infrastructure Protection Division in to the Electrical Markets Division. Given this business a lower cost structure, improved market relevance and greater in financial reach.

Also, earlier this year, we integrated touch systems into the Electronics Solutions Division to align these businesses to better serve our customers. There is more portfolio work to be done here and we've continued to look at other structural opportunities. One of the primary reasons performing the electronic and energy business was to present a single 3M voice to the electronics industry. Now we are easier to work with and more relevant to launch fast moving electronics customers. And I’m happy to report that we are receiving very positive reaction from customers on all these changes.

Second level; investment in innovation. Innovation remains the center of our plan and as I hope you remember last quarter we shared some details about how we are investing in long term disruptive technologies with significant growth potential. We are now finding 20 new product platforms several of which are expected to be introduced to the market in 2014.

We are also investing in a new state-of-the-art laboratory facility at our headquarters in St. Paul Minnesota, which I announced last year. We broke ground in August and construction is well underway. This new laboratory will be an important part for 3M's global research network.

Finally the third level, we continue to make good progress with respect to business transformation and ERP implementation. We successfully went live in Taiwan, Russia, Indonesia and Philippines and in October we went live in Canada. Next up is our European Middle-East Africa supply chain center of excellence in Switzerland in November. Twenty more countries are scheduled for 2014. We expect to achieve benefits in many areas including supply chain, working capital management, customer responsiveness, improved business planning and faster decision making.

In closing, we deliver strong third quarter with good broad based performance across all business. We remain focused on expanding our business driving productivity and executing a plan with strong discipline. I thank you for your attention and we will now take your questions and comments.

Question-and-Answer Session

Operator

[Operator Instructions] One moment please while compile the Q&A roster. Our first question comes from the line of Scott Davis from Barclays. Please proceed with your question.

Scott Davis - Barclays

Hi, good morning guys.

Inge Thulin

Good morning.

David Meline

Good morning, Scott.

Scott Davis - Barclays

Inge, I mean, you, I mean the topline growth is really coming through and I think that support is what you've been trying to accomplish. Can you give us a sense of how you think of this quarter as a bit of an anomaly in that margin -- your incremental margins at least based on some higher cost, ERP things like that, that came through. Would you anticipate that going forward, you’d show us maybe a little bit better incremental margins or is it just something that the cost of the higher growth is going to impact margins for a while until things? Until these investments really normalize?

Inge Thulin

Yeah and first of all on the growth side I’m pleased we are pleased with acceleration we saw through 5.8% in this quarter versus 2% in the first half of the year. And we need and I need to give some credit here to 3M team for doing a very good job in order to work very hard to take market share and had a specific programs in all business relative to competitive conversion. So I think that’s an important element as we see the growth come here.

And yes to describe the growth, in a way, to think about it, we have had steady growth in Health Care and Consumer now for several quarters in a row. They are very savvy, it's working very well. And this quarter you saw electronics and energy turn up and as I mentioned that in my comments and David comment on us as well. And then as we saw growth rate in industrial oriented business is turning up in Q3 versus first half and that was board based so it was very interesting to see it was industrial tape and adhesives, it was abrasives, was automotive OEM and it was in personal care. So it was broad base and we saw it very much also in developed economy, which was very good for us.

So as you know in terms of moving forward, our plan is not margin expansion by definition. So we are committed to the plan we laid out. I think as you think about the balance of the portfolio with more growth in our biggest business, which is industrial that had a slightly tough comparison also versus last year. They had a very good Q3 last year and had a peak performance in Q2 of last year.

I think you have to look upon at one industry also grew as they did in developed economy. I think you will see this type of shift in the mix. But I think as you move ahead, we are committed to our plan and overall, I am very pleased that now able to see topline growth and maintain margins. So if you think about we are delivering 22% bottom-line here, 22.4% excluding first year impact of acquisition. That’s a very strong quarter and I’m pleased with that.

Scott Davis - Barclays

Yeah. Make sense. Just this is a follow on, can you help us understand, you -- we can see the progress on the topline. I just want to ask a question in slightly different way, I mean if you think about 2012, you finished the year with about 6% EPS growth, 2013 seems to be tracking around 6% EPS growth? I mean when you think about the longer term focus of 3M and you turned around the growth side and I understand you don’t want to -- you don’t necessarily need to show higher margin per se? But is there a chance that you’ve -- I mean can you envision the 3M that can be double-digit EPS grower? Or is it really explicit in your model that you are going to be lower risk but higher quality growth company? I guess, I’m trying to figure out, what -- how you think about EPS growth as it relates to topline?

David Meline

Yeah. If I could start, this is David Meline. I would say what you have asked is very much, our thinking is aligned to what we’ve talked about last year in November, which is, we laid out a plan where we had 4% to 6% annual organic growth one and half times IPI. We think that that is certainly something that is reasonable for us to continue to expect to achieve.

You look at that we said 9% to 11% EPS growth, which is a combination of both topline organic growth, as well as the earnings growth that we would expect to get from other activities of the business that would include acquired businesses, which we continue to believe our relevant to our model that includes the impacts of also the non-operating items such as the continuing reduction on share count.

We expect pensions to certainly contribute to our earnings going forward in the future years and we’ll continue to balance. We will look at where the best opportunities are and to the point on this quarter, we think certainly at the present time where we can create the most value right now is to continue to invest towards the long-term health and growth in the business.

So as you point out we are quite significantly investing in places like R&D innovation towards more disruptive technologies, improving our systems, which is a very important initiative for the company and taking the opportunity to also as we see areas where we need to maybe rebalance and restructure somewhat, which is part of the normal course of our business we invest to improve our competitiveness there as well.

Scott Davis - Barclays

Okay. Thanks. Congrats on the topline guys. Thank you.

Inge Thulin

Thank you.

Operator

Our next question comes from the line of Ajay Kejriwal of FBR. Please proceed with your question.

Ajay Kejriwal - FBR

Thank you. Good morning.

Inge Thulin

Good morning, Ajay.

David Meline

Good morning.

Ajay Kejriwal - FBR

So the organic growth rate clearly much better than expectations and much better than what we are seeing from other industrials in the quarter. So and that’s great. So maybe talk about how much of this performance is end demand, I know you have talked about share gains, market penetration, but maybe a little bit color between end demand share gains? And then how much re-stocking might have contributed to the performance?

Inge Thulin

Yes. Well, thank you, Ajay, for the question. When we look at upon it, I assume you are also talking a little bit of channel inventory and so forth. First of all, overall, channel inventory levels appear to be balanced across businesses and geographical areas, but what we have to be -- we have to be watchful relative to the consumer electronic markets, particularly in the mobile and handheld small, small, in segments.

So I think that we had a good lift for that business based on specking on platforms and building for the holiday seasons. So I think you saw little bit of inventory build in order to be prepared for that. Now all external facts that we see, you’re saying that the holiday season for that segment will basically be flat, so that’s one of the reason why we are very cautious as we go into their last quarter. Now we had a very good -- so you are right, we've had a very good optic here, specifically in the industrial based businesses and you have to assume that there is a slight improvement in the segments, but to be honest we don’t see any differences versus any of our competitors. So what is happening here you know the execution from our team relative to competitive conversions is working very well. So overall I would say that the channel inventory levels are appear to be balanced only for us to be watchful which is based on external data relative to the consumer electronic market.

Ajay Kejriwal - FBR

That’s very helpful and you’re getting really nice pricing, especially in the context that some industrials are reporting pressure and I guess that reflects the pricing power of your brands and that my question is how should we think about pricing for you in a benign inflationary environment next several quarter.

David Meline

Yeah. In terms of pricing, I would say, certainly, if you look at the performance in Q3, we are pretty pleased. We saw price performance was good pretty broadly across the portfolio with perhaps the exception in the electronics business where you of course have structural price declines. What I would say in terms what we see, of course, geographically, we do have you know more significant price actions are going on in locations where you either got weakening currency and/or inflationary pressures as the result. So if you think about Latin America, again we saw significant price movements, we’ve also been working in Japan where they’ve had obviously a significant devaluation of their currency, as well, and then of course right now our comps are a little bit easier in the second half on the pricing basis versus the second half of last year. So at the end of the day, the issue for us is to continue to offer good refreshed products which will give us strength in the market to be able to command price that reflects the value we’re offering to the market and as we do that, that tends to provide also a very nice halo effect for the entire portfolio.

Ajay Kejriwal - FBR

Thank you, very helpful, nice quarter.

Operator

Our next question comes from the line from Steven Winoker of Sanford Bernstein, please proceed with your question.

Steven Winoker - Sanford Bernstein

Thanks and good morning.

Inge Thulin

Morning.

David Meline

Good morning.

Steven Winoker - Sanford Bernstein

Could you just -- may be just can drive a little bit more through the cash flow and the effect of that recovers through the end of the year, but still you're going to end up a little bit lower than you expect. I mean to what extent is that still kind of driven by the additional growth?

David Meline

Sure Steve. Yeah, so if you look at cash flow certainly year-to-date we're running about the same level as we did last year, which is I guess 76% year-to-date versus 75% last year. Obviously, it bounces around some quarter-by-quarter and typically for example in Q4, we would expect better conversion, which is why we're expecting 90% for the year and you know what I would say is very much the 90% would be reflective of the fact that we are investing in the business and at some level as you get an inflection in demand as we’re seeing that tends to put some pressure on the working capitals like them.

So nothing unusual, but just the reflection of seasonality really.

Steven Winoker - Sanford Bernstein

And more inventory and receivables based or…

Inge Thulin

Typically, yeah.

Steven Winoker - Sanford Bernstein

Okay.

Inge Thulin

Typically, inventory and receivables are impacted as you are ramping up towards higher level of demand count.

Steven Winoker - Sanford Bernstein

Okay. And then on the strategic investments and actions you talked about the ERP implementation and such. How do you see that progressing? Are there any other, where you think about those or you qualify also kind of feet on the street additional or what are some of the other actions that we can kind of get a better sense of how that money is getting invested?

Inge Thulin

Scott, I think, when we talked about strategic investment theory in this section, it was about investment in disruptive technologies that we talked about earlier. It’s about ERP investment and then some restructuring on some of the couple of places around the world.

And if you think about our model, 3M model is, we are basically working on this the whole time. I think one of the things here that we have stepped up is around disruptive technologies, where we announced in November last year. On November 8, we announced that we are type of-- in the plan moving from 5.5% closer to 6%.

So that was a step up and the ERPs of course, also something that we are investing in, that will very much improve our efficiency and effectiveness and productivity as a company. Restructuring is pieces that we do ask where we go, all right. We type of look into that and we financed that in quarter-by-quarter, as you very well know as part of the business model.

In terms of acceleration of growth and you talked about feet on the street in terms of commercialization. We have, as I took off, it’s now almost 24 months ago. We made a big effort in terms of marketing excellence and sales excellence and I pointed individuals in order to lead that initiative type of more centralized in order to help with tools and so forth that execute locally.

As we go, we make investment. You saw here when David talked in terms of investment, both in research and development and SG&A. We do that but in a careful way. We also have to look upon different models in terms of commercialization as we move ahead. We have to adapt and make sure we do it in the right way.

But you have to look upon at every business group by definition or working towards their objectives in terms of margin expansion and growth. And that is where they ask for additional investment that is in addition to the three, David and I talked about this morning, then I would say layout is type of normal business procedure as you grow your business.

But we feel good now. We start to see the growth. We have made investment as you know in Healthcare specifically, we build out our capabilities in international sometime ago and we continue to see that delivering which is very good for us. We take market share, we improve our penetration and we have good margins in that business, the same with consumers.

So we look upon it and balance it altogether, those two businesses, consumer, Healthcare steady continue to move forward. And then, we had three out of business groups really ticking up this quarter including Safety and Graphic, as we saw had a very good quarter for us.

Operator

Our next question comes from the line of Andrew Obin of Bank of America, Merrill Lynch.

Andrew Obin - Bank of America, Merrill Lynch

Yeah. Good morning.

Inge Thulin

Good morning, Andrew.

Andrew Obin - Bank of America, Merrill Lynch

Just want to follow-up on what Scott was asking you. So, as I sort of think about the quarter, you’re getting fantastic pricing. Emerging markets which is high margin is outgrowing, Healthcare margins are going up and is outgrowing. You seem to be making very good progress on energy and electronics. And your framework is topline growth of 4% to 6% and EPS growth of 9% to 11%.

But it just seems in a quarter where sort of everything has gone right we still can’t get over double-digit EPS growth. And the question I’m asking, what would it take for you to get over double, what set of circumstances would get you to get over double-digit EPS growth if we can get it in a quarter like this?

Inge Thulin

Yeah. So, I would say Andrew, certainly, we think as we look at a quarter-by-quarter and year-by-year, we think is very reasonable from a planning perspective to expect to deliver our 9% to 11% EPS growth on the kind of growth that we are laying out here and at the end of the day and one particular quarter or another you’ll have more or less impact of whatever it is, the medical device tax, the ERP spending on restructuring acquisitions, so I don’t view this as something that causes me to think that we don’t have the ability to deliver on our plan quite honestly.

Andrew Obin - Bank of America, Merrill Lynch

Okay. So just a follow question, what’s -- you sort of addressed the gross buyback, but what is the change in net buy back for the year?

David Meline

We would expect at $4.5 billion to $5 billion that our net would around $3 billion to $3.5 billion for the year.

Andrew Obin - Bank of America, Merrill Lynch

And the previous was, sorry?

David Meline

Previous would have about $1.5 billion less than the gross, so that would have been about $2 billion to $3 billion.

Andrew Obin - Bank of America, Merrill Lynch

So it’s not options, it’s all going to net buyback?

David Meline

The increase that I’m talking about today would largely be reflected also in the net. So the gross increase -- pardon me.

Unidentified Speaker

Yes, our outlook on the redemption side has not changed. So the whole change would go to net.

David Meline

Yes.

Operator

Our next question comes from the line of Deane Dray of Citi Research. Please proceed with your question.

Deane Dray – Citi Research

Hey, on the industrial side, there was one of the few businesses that showed operating margin down year-over-year and yeah, you showed nice organic revenue growth in the quarter. Was the margin hit mostly from Ceradyne or were there any other items that would have created that pressure?

David Meline

Sure Deane. So just to frame the performance in industrial, first of all, we were quite pleased with the way the growth inflected up for us to 6% in the quarter. And if you look at that first of all, it was a combination, it was both developing markets which grew 7% and we saw a quite strong improvement in our developed markets were we grew 6% in the industrial, so point number one. Point number two is, if you look at last year we were under 23% margin, so it was a certainly an exceptionable quarter while comparing to last year. If you look at our core operating margin in the quarter, we were a little over 22% excluding Ceradyne and the other impacts that brought us from that 22% down to the reported 21% were – basically the same ones we talked about elsewhere.

So the impact on industrials margins of the disruptive R&D technology investments results gets spread through the businesses. The impact on the business of the ERP investment, which is about 30 basis points, FX impacted them negatively and then one thing we haven’t talked about today, but it’s impacting across the enterprise this quarter is, we’ve ramped up now. We’re in the process of putting in place -- Well, Inge mentioned that our European -- our new European supply chain activity and so that’s having some impact on us here in the third quarter as we ramp that up and get ready to go ahead and go live.

Deane Dray – Citi Research

Great and then Inge, we’re really interested in hearing that this promise that you made a while ago as --- when you closed on Ceradyne, you were very excited about how many different divisions of across 3M leveraged ceramics and here we are seeing a -- I think you said nine divisions will be marketing products that leveraged Ceradyne in some way. So could you give us a sense of where are those products? It will also be a 2014 events? Are there more to come because there are certainly more divisions that leverage ceramics at 3M and potentially for that technology, would you provide some more color on it?

Inge Thulin

Yeah, well I think from a business group prospective, you’ve -- you will see it mostly in the industrial space, but you will also see it in some businesses in healthcare, in the orthodontic piece. We say now that these nine that have -- that are ready to commercialize, if you recall my -- on our call last time, I talked about 13 division to 15 division that are looking into it and they are continuing to looking and it’s actually expanding. So the answer for your question more to come; yes, more to come, in terms of the nine that we quote you yesterday, they will roll out different type of activities during 2014.

So when we look upon that acquisition in total, we are very pleased crystal wall, the integration is fully complete and also we are pleased to report that fully integrated to 3M. And as you’ve seen now, we have taken couple of sizable orders we had -- we announced last quarter, an order around $40 million. And as David talked we got another one this quarter of $80 million that we’ll start to be delivered next year. We will not deliver that this year.

So we have -- we've got to order. We are now qualifying it and it will be roll out next year. So I think -- on the bottom line, as David said, we are meeting and exceeding our blue book in bottom line. So in terms of both get some thing in front end around $400 million and then you have technology in the back office that we can leverage a fantastic thing for us.

Deane Dray – Citi Research

Yes. Just from an exclamation point on that, I know that there has been a lot of skeptics at the time of Ceradyne closing that some of the military orders were in jeopardy. And since then that looks that was application and that $80 million order came through and there are others like that?

David Meline

Well, you can say it’s actually handed $20 million because we have $40 million last quarter, $80 million this quarter. So that’s under $20 million. So -- and that is one of the -- one of their segments for that business. So I cannot comment on orders that we are negotiating that is not finalized but we are very encouraged with what we see.

Operator

Our next question comes from the line of Laurence Alexander of Jefferies. Please proceed with your question.

Laurence Alexander - Jefferies

Good morning. Could you give us a little bit more detail on two end markets with the electronics growth you are seeing, can you parse how much of what you are seeing is because of your own pivots or share gains as opposed to the health of the underlying markets?

And then on the Safety and Graphics, architectural coatings, can you talk a little bit about sequential trends that you are seeing there?

Inge Thulin

Well, first of all on the electronics and energy, we -- the electronics piece grew 4% for us and the energy piece grew 3%. And in the energy segment, it’s through the ACCR that David talked about. That’s clearly we are taking market shares. So we are now taking quite a number of orders and very much back in West Europe which is encouraging for us.

As you probably recall, when we talked to earlier, that said relatively long -- I will say not relatively long. It’s a long sales cycle for that product. And that’s now start to be qualified specked in et cetera. So we see orders coming in many countries, West Europe specifically as they were interacting.

So I think in that piece you can clearly say that we are taking market share in the energy piece of the segment. On electronics, I will say for us as you know, we will be expecting on platforms and we are -- and that’s one of the optic we see and then I will say generally speaking in that segment, we have a strong position. We have always had a strong position and what is working well for us is that we are both able to provide technologies that will enhance those product for all the customers and able to drive down cost as fast as possible.

In terms of real market share data there, I think that will be more result of how the sales through will come in the end of the day because as I said we are -- take it very easy now as we’re going to Q4 and make sure that we had sales through in the channels.

On safety and graphics, orders, what was your question there relative to…

Laurence Alexander - Jefferies

The weakness you sliced it on architectural construction markets, if you could maybe talk a little bit about what you are seeing sequentially and I guess, then again if you impasse your own performance to (Inaudible) you think you might be losing share or if you think you are gaining share relative to the market?

Inge Thulin

No first of all that is relatively small business for us. We started at couple of years ago. The base for that business was actually Japan from the beginning. Japan have done very well building out that business. And we took the Japanese model and adjusted that and try to build out first and foremost in United States and also in some selected places in West Europe with Italy be in the center of it relative to design.

So I will say that when I look at -- when I look upon that, it’s not losing market share. I think it’s temporarily shift in the market place and so forth. I don’t -- and it’s not considered on yelling [ph] and speaking that business for us in terms of we're losing market share.

David Meline

More project based.

Inge Thulin

Yeah it’s a project based business. You would see a little bit of that going in and out of quarters, but we are doing very well there with some of our film stuff is coming out from our film technology laboratories. And we are doing very well in lighting generally speaking. Look at on it more as project based, can go up and down a little bit the business is relatively small for us.

Operator

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

Shannon O'Callaghan - Nomura

Good morning, guys.

David Meline

Good morning.

Inge Thulin

Good morning, Shannon.

Shannon O'Callaghan - Nomura

Hey, Inge could you maybe just give a little bit more flavor on these 20 new product platforms, your funding in terms of these disruptive technologies. You know kind of general areas you are talking about and maybe the rough size of the opportunities things.

Inge Thulin

Yeah I can. I will not talk about all 20, but I can talk, yes, to give you a flavor of what we are doing there. So you have to go back to the background. This is based on that we step up the investment and research and development from historically 5.2% to 5.5% closer to 6% and that those money should go into the, what we call, classified and more disruptive technologies. And I say couple of the product, then I would type of just talk about them that is maybe closer for us because there is a couple of them that are in the first stage, very close to the first stage development of completion and that will be rolled out in 2014, maybe in the middle of the year to later in the year, but we are type of encouraged around them and there's a couple of them. Various teams for building constructions is one that is based on something where we believe we should be able to capitalize on some growth relatively fast.

There is a protective film for electronics and appliances which is very encouraging that can be used for OEMs, that oriental appliances and electronics. There is a light management constructions that are both into residential and commercial and that’s very -- so all of -- if you think about those, all coming out from our film technology platforms, that smart grid sensor cables that we believe will be something we should be able to commercialize fast and effectively and west Europe is the target for that specifically.

And then we have the [indiscernible] enhancement film that is just on the way to be rolled out. So if we look upon, as you can see its much here around our base in technologies, from platform perspective. It's going in to businesses step off everything from electronic and energy to the safety in graphics and industrial business.

So you will hear more about them as we go, but this all to be real and at least for me and for us to see, as so it's always type of platforms that start to come to life and that we believe that we should be able to roll out during 2014 is very encouraging. So we are very pleased the way the organization took this initiative to heart, moved it forward and we are focused a lot and make sure we give the bigger program and more resources and more resources and some of them that was good initiatives and maybe dreams that we always should have and we maybe reprioritize them.

Shannon O'Callaghan - Nomura

Okay, thanks. And David if I could take one more crack at this kind of EPS thing. Putting the quarter-to-quarter variability and things aside, I mean the high end the organic range now for this year's 4%, which should probably in your framework at least put to 9% EPS growth and it's not this year in the guidance. So is there -- I mean you're getting a little hit from FX is that it or is there anything else this year that’s not converting, you know making the four equal nine that would in the broader framework?

David Meline

Sure. So if you look at over a long period of time, acquisitions we are certainly topline contribution. We are not seeing a significant at the moment bottom line this year. Pension we had a contribution this year, we had about a hundred million dollars, so that’s contributing. Tax I think is pretty much carry over year-over-year and that’s a contributor if you recall in our five year bridge. We've got a couple of points in the tax. So that would be something that’s not present in current calendar year and then the last one would be we’re -- frankly we are investing quite heavily in the front end for example with this R&D innovation initiative which should contribute in the future. So it’s kind of pay now in terms of long term investment with future results, same as true with the ERP system.

Shannon O'Callaghan - Nomura

So ‘13 is sort of a heavier loaded investment years, I mean would that be main difference?

David Meline

Yes. Correct.

Shannon O'Callaghan - Nomura

Okay. Thanks.

Operator

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

Joe Ritchie - Goldman Sachs

Hi. Good morning everyone.

David Meline

Good morning.

Inge Thulin

Good morning, Joe.

Joe Ritchie - Goldman Sachs

So just following up there with on Shannon’s question, moving from 2013 to ‘14, seems like you have had a lot more of a heavier year this year both on ERP spending, the R&D spending. Talk us through may be some offset into next year or is it possible we do get an acceleration and start to see 5% to 6% growth if the incremental margin from the business will get a lot better and so it will be better portfolio in ‘14 versus ‘13?

David Meline

Sure. So if you look at ’14, obviously will come out with that here in December, but if a kind of frame, I was thinking about ‘14. I would start which is, we are certainly a more constructive on the overall macro economy. We think we will see some improvement in both industrial production and GDP. Although we think the improvements are going to be slow but directionally we are encouraged.

We will continue to invest in ‘14, so the investment, if you look at we talked about going to 6% on R&D. We are on that path and incrementally we’ll invest more next year in R&D. Same with the ERP that will be likely our peak year of investment in our -- in the ERP system and so that will be the part of the plan next year.

We do expect in terms of the things that are in view -- we do expect pensions now to be certainly a $100 million or more of expense benefit next year. And then finally, based on what we’ve been doing with reducing the share counts through the year, you can expect that will be additive to EPS again next year as well.

So I would say we feel quite good about the momentum that we have right now going into 2014 and will be able to share more detail here in December.

Joe Ritchie - Goldman Sachs

I think that’s a helpful bridge, David. Just a clarification on the incremental spending on ERP, I think I had a roughly $50 million incremental next year. Am I ballpark…?

David Meline

Yes. That’s still in the right ballpark.

Joe Ritchie - Goldman Sachs

Okay. Great. Then one last question on growth for 4Q, just implicit in your 4Q guidance, just curious on the -- from the year-on-year perspective, you had really nice growth organically this quarter at 5.8%. Your guidance essentially imply that there will be a step down sequentially on a year-on-year growth perspective, just given some of the commentary that you had on the electronics business?

David Meline

Yes. Well, if you look upon the 3% to 4% for the year, that implies roughly 2% to 6% in the last quarter which is aligned what we have done for the year. So I think the way we look upon it, we are very focus now to make sure we end the year strong here. And I think the business that we are -- cautious as you call out yourself is and what I have talked about is that electronic and energy as we move ahead.

But talking about that business, you think about it, generally speaking, you think about the margins for that. We have gone now through the capital quarters. We went 53 in Q1 to 77 in Q2 and 20.7 in Q3. So constant improvement on the margins. And we have said from the beginning of the year that we will deliver high teens for the year for that business and that’s what we believe we will do.

So I think the Q4 will be a little bit more of a challenge for that business but very pleased with the progress both in terms of growth and the way they have been driving productivity in the underlying operation and taking the portfolio management to half and really improving that business.

Operator

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

Stephen Tusa – JP Morgan

Hey, good morning. Thanks for taking me in.

Inge Thulin

Good morning, Steve.

David Meline

Good morning.

Stephen Tusa – JP Morgan

On the healthcare gain, did you guys have -- in the total company bridges where is that -- discounted? Is that under organic volume or the med device tax other line?

David Meline

That would be in med device, other.

Stephen Tusa – JP Morgan

Okay. Thanks for that now. And then on now on Ceradyne, there was a little bit more of a headwind to margin. It looks like we’ve kind of breakeven this quarter relative adding with mid-single digit margins last quarter, is that seasonality or further acquisition charges or investment, what’s going on there?

David Meline

Yeah it’s a combination, Steve. So one that the booking of orders tends not to be -- there are some lumpiness in terms of those project. So we had a pop-up in Q2, which was a little bit less in Q3 now. And then secondly there has been quite some integration activity which is impacted expenses here in the quarter, so that also was part of what contributed that.

Stephen Tusa – JP Morgan

Okay and then there is just one last question for the year the margin, you guys have given sales guidance, I guess it's kind of baseline people on the fourth quarter, what's kind of a good range for the total operating margin for the fourth quarter or just for the full year?

David Meline

For the full year we –

Stephen Tusa – JP Morgan

For the total company?

David Meline

Yeah we expect it to be pretty similar to what the full year was last year.

Stephen Tusa – JP Morgan

Okay, great. Thank you.

David Meline

Thank you.

Inge Thulin

Thank you.

Operator

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

Nigel Coe - Morgan Stanley

Good morning and thanks for going along here.

Inge Thulin

Good morning.

David Meline

Good morning.

Nigel Coe - Morgan Stanley

So Inge, you talked about the pickup in investment for some of the top five initiatives. Yes, R&D has been pretty flat, year-to-date about 5.4%, so I’m wondering if you're getting better base productivity within R&D and do you still see this sense as the two long term targets?

Inge Thulin

You said the 6%?

Nigel Coe - Morgan Stanley

Yes.

Inge Thulin

Yeah. Well, first of all -- it's clear for me that we start to see more productivity out of the laboratories and I’m pleased to see that to get both investment in R&D and productivity on the same short is fantastic when you do that at 3M and we start to see that then we are just ending up our strategic planning cycles here and I can tell you when I looked upon every business group, when I looked upon international and I look on the total company line outs and investments and productivity target for research and development, I was very pleased, right, so I had more effort on that, so the answer for your first question is, yes.

Is 6% right as we go? I’m not changing that at this point in time. I think it's important, re-stating the cost, relative to make investment, relative to research and development because I believe and we believe and its DNA of the [indiscernible] that is the heartbeat of 3M, that is where we really make a difference as we move ahead, but again we are very focused on making sure we get productivity out from every program that we put in place, but we are not changing the target for the plan, productivity is improving and so overall we feel good about it.

Nigel Coe - Morgan Stanley

Okay, now that’s helpful. And then switching to David, obviously that the free cash provision has been decided by CapEx, well ahead of tangible D&A and I’m just wondering given the ambition to raise CapEx to $2.1 billion over the five year plan, when do we started to see tangible depreciation stepping up and you know we’ve had a lot of questions about the 10% plus EPS growth and I’m just wondering sort of extent that step up intangible is a headwind to EPS growth over the next five years.

David Meline

Tangible? You are saying a step in depreciation is that the point?

Nigel Coe - Morgan Stanley

Yeah, as efficient you have dealt with CapEx?

David Meline

We don’t see -- I don’t foresee a significant step-up in depreciation if you measure it as a percent of revenue. So we expect to be pretty steady in terms of CapEx percent of revenue, if you look and assume the profile of the CapEx is not dissimilar to the past that would imply that depreciation would drag with revenue growth. So I don’t have that pegged as a headwind in the business. And if any of anything, we’re expecting with the completion of both the globalization of our capacity. And secondly, as we get in place this year pre-system and get better visibility on data we think will have a chance to run -- run our supply change more efficiently.

Operator

And our last question is a follow-up question from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed.

Andrew Obin - Bank of America, Merrill Lynch

My questions have been answered. Thank you.

Inge Thulin

Thanks. Andrew.

Operator

That concludes the question-and-answer portion of the conference call. I will now like to turn the call back over to 3M for some closing comments.

Inge Thulin

Well, thank you very much for joining us today. Thanks for your time. Appreciate your questions very much -- very much appreciate your interest in 3M and we look forward to speaking to you soon. Thank you.

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