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3M Company (NYSE:MMM)

Q4 2013 Results Earnings Call

January 30, 2014 9:00 AM ET

Executives

Matt Ginter - Vice President, Investor Relations

Inge Thulin - Chairman, President and CEO

David Meline - Chief Financial Officer

Analysts

Joe Ritchie - Goldman Sachs

Scott Davis - Barclays

Andrew Obin - Bank of America Merrill Lynch

David Begleiter - Deutsche Bank

Steven Winoker - Sanford Bernstein

Deane Dray - Citi Research

Laurence Alexander - Jefferies

Ajay Kejriwal - FBR Capital Markets

Shannon O'Callaghan - Nomura Securities

Drew Pierson - J.P. Morgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Fourth 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, January 29, 2014.

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 everyone. On today’s call, we’ll discuss our fourth quarter and full year 2013 performance along with the 2014 outlook. Inge and David will make some opening comments and we will leave plenty of time for your questions.

Let me mention a few upcoming dates and events. First, our 2014 earnings conference calls are set for April 24th, July 14th and October 23rd. Also, we’ll host an investor meeting on the morning of Tuesday, December 16. I know that calendar is filled quickly, please hold these dates. More details will be available later this year.

Note that today's earnings release and slide presentation accompanying the call are posted on our Investor Relations website at 3m.com under the heading Quarterly Earnings.

Please take a moment to read the forward-looking statement on Slide 2. During today’s conference call, we will make certain predictive statements that reflect our current views about 3M’s future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions.

Please turn to Slide 3 and I’ll turn the call over to Inge Thulin, 3M’s Chairman, President and Chief Executive Officer.

Inge Thulin

Thank you, Matt and good morning everyone. I appreciate you joining us for the call today. For 3M, 2013 was a very successful year. Our team did an excellent job of bringing our vision and strategy to life and increasing 3M’s relevance to customers around the world.

We delivered a strong performance and importantly, we advanced the company through the three key strategic levels, portfolio management, investment in research and development and business transformation. Let me give you a bit more on each of these key levels.

In 2013, portfolio management remained at the front of how we managed 3M. For example, we combined and scaled businesses in electronics and energy to better serve our customers, gain rapid cost synergies and address underperforming businesses. We took similar actions in Safety and Graphics to enhance our product offerings and improved our relevance to customers. And when it made sense, we exited as we did with the fly-fishing business within the consumer business group.

We continued to build strength on strengths by investing in research and development, which is the heartbeat of our plan. Our increased investment is focused on long term disruptive technologies aimed at opportunities with significant growth potential. We made good progress with business transformation enabled by our global ERP implementation. We rolled out in several countries in 2013 as we moved forward into the deployment phase. This effort will help us to create a more efficient and productive 3M.

Our teams are building on the experiences from the initial rollouts in order to improve our capabilities to deploy going forward. Overall very good execution by our team in these strategic levels.

At our investor meeting in December, we announced plans to better optimize our capital structure. These plans will reduce our total cost of capital, allow us to further expand the company and enable even higher returns to our shareholders. Organic growth remains key to our plans, so we will continue to invest in CapEx and research development. And we are planning to invest $5 billion to $10 billion in acquisitions through 2017 with more possible given the right strategic opportunity. We also announced in December a 35% increase of our first quarter 2014 dividend along with a stronger commitment to share repurchases.

Over the 2013 to 2017 planning period, we expect per share repurchases of $17 billion to $22 billion this is a prior expected range of $7.5 billion to $15 billion. This more aggressive deployment of capital reflects the strength of our business model and our confidence in 3M’s future.

Now I will review financial highlights from 2013. Please turn to slide four. For the year sales were nearly $31 billion, up 3.2% in dollar terms. Organic local currency growth was 3.4% led by Health Care and Industrial at 5% and Safety and Graphics at 4%.

Geographically, we posted positive organic growth in all regions. Latin America/Canada led away with organic growth of 7%, Asia-Pacific growth 4%, United States was up 3% and Europe/Middle East/Africa was up 2%.

Currency impacts reduced worldwide sales by 1.6% and acquisitions added 1.4% to sales growth for the year. Operating margins remained strong at 21.6% or 21.9%, excluding acquisitions.

Four of our five business groups delivered margins above 21%, evidence of continued broad based effectiveness and efficiency. Earnings were $6.72 per share, up 6.3% year-over-year. We returned a record $6.9 billion in cash to shareholders through dividends and share repurchases.

Finally, free cash flow conversion was 89% with return on invested capital at 20%. Overall, I'm very pleased with our 2013 results. We delivered good broad based performance while investing and building for long-term success.

Let me now review the outlook, please turn to slide five. We described our 2014 planning estimates in detail at our December Investor Meeting and we are maintaining those estimates today.

We expect 2014 earnings per share in the range of $7.30 to $7.55 and organic local currency growth of plus 3% to plus 6%. Foreign currency translation is expected to be neutral to minus 1% and we anticipate the tax rate of 28% to 29% with free cash flow conversion of 90% to 100%.

I will now turn the call over to David Meline for the detail on the fourth quarter results. David?

David Meline

Thank you, Inge. I will begin by reviewing the fourth quarter sales growth. Please turn to slide #6. Organic local currency growth was 3.4% in the fourth quarter, including organic volume growth of 2% and selling price increases of 1.4%.

Price increases have been positive in 2013 for a couple of reasons. First, investment in research and development continues to support a strong price value equation in many of the markets that we serve. And second, we adjust selling prices to offset currency devaluations in certain developing countries, which has been the case in 2013.

Acquisitions added 0.7 points to sales growth in the quarter, all due to Ceradyne in our Industrial Business group. We acquired Ceradyne in late November of 2012, so we are now passed the one-year mark and beginning with December reporting, we no longer report Ceradyne sales as acquisitions.

Foreign exchange impacts reduced sales by 1.7 percentage points in the fourth 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. On the total U.S. dollar basis, sales rose 2.4% versus the fourth quarter of 2012.

Looking geographically, local currency sales growth was 4.5% in the United States, the highest of any region during the quarter. All business groups grew organically in the U.S., with particular strength in Industrial and in Safety and Graphics.

Organic sales growth in EMEA was 3.4% in the fourth quarter, West Europe in particular grew by 3%, continuing the positive trends we have seen in recent quarters. In Germany the largest of our West Europe subsidiaries grew a solid 8% per organically. All businesses posted positive organic growth in the EMEA lead by Industrial. Asia Pacific grew 3.3% organically in the fourth quarter with consumer, Health Care and Safety and Graphics leading the way.

Industrial also posted positive organic growth in the fourth quarter within APAC and Electronics and Energy grew just slightly. Japan continued to grow nicely with 4% organic growth year on year. China, Hong Kong grew 1% organically versus a tough prior year comp off 16% plus in the fourth quarter of 2012.

Excluding electronics China, Hong Kong grew more than 6% organically in Q4. Organic local currency sales growth was 2.2% in Latin America, Canada during the fourth quarter which was below recent trend levels for a few reasons.

One, we saw some slowing in government tenders for infrastructure projects in certain countries which impacted sales in our Electronics and Energy business. Consumer was also soft in Q4 due to weak retail demand and challenging year-on-year accounts and lastly sales in Venezuela declined year-on-year due to economic and the political situation there.

Venezuela diluted fourth quarter organic growth in Latin America, Canada by 1.5 percentage points and we continue to work towards minimizing our (inaudible) exposure in any associated cost. Organic local currency growth was 4% across all developing markets and 3% in developed markets.

Let’s turn to Slide number 7 for a discussion of the fourth quarter income statement. Sales for the fourth quarter were $7.6 billion, an increase of 2.4% in dollar terms. Gross profit rose 5.8% to $3.6 billion and gross margins rose by a solid 1.5 percentage point to 47.5%.

SG&A spending increased in line with sales growth and R&D as a percent of sales rose by 10 basis points to 5.8%.

Operating income increased nearly 10% versus the fourth quarter of 2012. GAAP operating margins were 20.9%, up 140 basis points year-on-year. Organic volume growth at 20 basis points margins and the combination of lower raw material cost and higher selling prices contribute a positive 160 basis points year-on-year.

Fourth quarter margins improved year-on-year in a recently acquired Ceradyne business which added 30 basis points to total company operating margins in Q4. We expect further margin improvement in 2014 for this business. Strategic investments, reduced margins by 70 basis points year on year, this represents incremental investments in disruption R&D, ERP and various restructuring actions. Lower year-on-year pension and OPEB expenses boosted fourth quarter margins by 30 basis points while foreign exchange impacts reduced margins by 40 basis points.

Fourth quarter earnings increased 15% to $1.62 per share. Average diluted shares outstanding declined 3% year-on-year which added $0.05 to EPS and currency impacts hurt fourth quarter earnings per share by approximately $0.04. The fourth quarter concluded a good year for the company and the 3M team is energized and confident as we begin 2014. Now let’s turn to cash flow.

Please turn to Slide number 8. We generated $2 billion of operating cash flow in the quarter, up $255 million versus last year’s fourth quarter. Higher net income and lower pension contributions were the primary drivers of this improvement.

Capital expenditures were $543 million, an increase of $36 million. Looking ahead to 2014, we continue to expect full year CapEx will be in the range of $1.7 billion to $1.8 billion. Fourth quarter free cash flow was $1.5 billion, up $219 million year-on-year and we converted 131% of net income to cash versus 124% in last year's comparable quarter.

For the full year 2013, free cash flow was $4.2 billion and conversion was 89%. We paid $423 million in cash dividends during the quarter or $1.7 billion year-to-date. And as Inge mentioned, in December we announced a 35% increase in the first quarter 2014 dividend.

Gross share repurchases were $1.7 billion in the fourth quarter and $5.2 billion for the full year. For 2014, we expect full year gross share repurchases will be in the range of $3 billion to $5 billion. In total, we returned $2.1 billion in cash to shareholders in the fourth quarter or $6.9 billion for the full year, both at all-time record levels for 3M.

Net debt at year end 2013 increased $900 million year-on-year and $300 million sequentially. As I mentioned at our December investor meeting, we expect to add leverage of $2 billion to $4 billion in 2014, as we continue to improve the efficiency of our capital structure. During the fourth quarter, 3M issued an 8th-year Eurobond yielding less than 2%. The face amount was €600 million or $815 million.

Let's now review our fourth quarter performance on a business-by-business basis. Please go to Slide #9. Our Industrial business have another strong quarter with sales of $2.6 billion and 6% organic local currency growth.

Our advanced materials and automotive OEM businesses generated double-digit organic growth and we also posted good growth in 3M Purification, aerospace and automotive aftermarket. Organic local currency sales increased in all geographic regions led by the U.S. at 8%, EMEA grew 6% in Q4, including more than 10% in Germany. Organic growth was 3% in both Asia Pacific and in Latin American/Canada.

The Ceradyne acquisition added 2% to Industrial growth in the quarter. Fourth quarter operating income was $553 million, up 14% year-on-year and operating margins increased 150 basis points to 21.5%. Volume leverage, positive selling prices and good productivity contributed to the improvement.

Our Industrial business had an outstanding year in 2013. Organic sales growth accelerated in the second half of the year versus the first and sales exceeded $10 billion for the first time ever. Nice performance by the Industrial team.

Please turn to Slide #10. Our Health Care business generated sales of $1.4 billion in the fourth quarter. Sales rose 4% in organic local currency terms with the strongest growth in health information systems, food safety and critical and chronic care. Drug delivery systems declined in the quarter.

All geographic regions generated positive organic local currency sales growth with Asia Pacific up 6%, Latin America/Canada up 5% and EMEA and the U.S. each up 3% in the quarter. In developing markets, Health Care grew 10% organically in the fourth quarter.

This has been an area of strategic investment priority for some time and we are encouraged to see consistently strong organic growth as a result. Fourth quarter operating income in Health Care was $425 million. Operating margins were 31.2%, which was very much in line with full year. Fourth quarter margins were down a point year-on-year against a strong comp in Q4 2012. The recently enacted U.S. medical device tax was a contributing factor.

Please go to Slide #11, Safety and Graphics had a solid fourth quarter with 5% organic local currency sales growth and 16% growth in operating income. Organic growth was broad based with nearly all businesses posting positive growth.

Personal safety by far, our largest business within Safety and Graphics generated high single-digit organic growth in Q4. We also posted good growth in roofing granules, commercial graphics and architectural markets. Sales in Safety and Graphics grew organically in all major geographic regions with Latin America/Canada up 8%, Asia Pacific and the US up 6% and EMEA up 1%. Operating income increased 16% to $256 million and margins rose 2.2 percentage points to 19.1%. Profits benefited from volume leverage, price performance and solid productivity.

Now let's look at Electronics and Energy found on Slide 12. Fourth quarter sales in this business were $1.3 billion, up 0.4% in organic local currency terms and operating income rose 1% to $221 million. Margins were 16.7% up 40 basis points versus last year’s fourth quarter. I mentioned in our October earnings call that we expected sales and earnings for electronics and energy to be very close to last year’s levels and in fact that is what happened. Electronics related sales declined 2% on an organic local currency basis with positive growth in optical films offset by declines in other businesses. In our energy related businesses, sales increased 2% organically, led by our electrical markets and renewable energy businesses.

On a geographic basis, organic local currency sales increased 2% in EMEA and United States, Asia Pacific grew slightly and Latin America/Canada was down year-on-year. Despite challenging end market conditions, the electronic and energy team executed very well in 2013. Second half organic growth rates were stronger than the first as were operating margins. It was a good result in the tough market.

Finally, let's review the Consumer business found on Slide number 13. Sales on the consumer business group were $1.1 billion with organic local currency growth of 1.3%. Recall that in the fourth quarter of 2012 consumer generated 9% organic local currency growth, so the comp here was quite challenging. Organic sales growth was strongest in our consumer Health Care and home care businesses and we also had a positive organic growth in DIY. Sales declined slightly in stationary and office supplies impacted by continued consolidation trends in the office retail and also market.

On the positive side, we recently launched a new line of command and ease of products for outdoor use which contributed nicely to fourth quarter growth. The US retail shopping season is an important factor for the consumer business and we would characterize this year’s season is okay but not strong. Fewer shopping days due to the late Thanksgiving holiday were a factor for most major US retailers and for their suppliers. On a geographic basis, sales in organic local currencies increased 9% in Asia Pacific and rose slightly in both the US and EMEA, Latin America/Canada declined 6% year-on-year. Operating income was $226 million with operating margins of 20.4%.

That concludes my comments regarding 3M’s fourth quarter business results. I’ll turn now the call back to Inge.

Inge Thulin

Thank you, David. To summarize, Q4 was a strong finish to a very successful year for 3M. In 2013 we received good growth and solid profitability while advancing our strategic initiatives in investments. Perhaps most importantly, we came out of 2013 stronger than we ever at with both sales and earnings growth accelerating in the second half of the year, this was the first. 2013 results provided further proof that our strategies are gaining traction and driving our performance to higher levels. I can think of numerous example that illustrate is but I will highlight just a couple.

Let's start with our $1.4 billion automotive OEM business which in 2013 grew over 7% organically more than twice the rate of global auto production. We see this result through improved customer relevance, leveraging 3M’s vast technology capability to solve problems for this important group of OEM customers. This business grew significantly in Q4 in developing markets like China, Mexico and Indonesia by offering relevant solutions to these rapidly growing markets.

Another example is our safety and graphic business group. We saw margins expand by more than two points in the fourth quarter. This improvement is due to cost through several recent portfolio actions, which have resulted in improved customer relevance, greater scale and reduce costs. We also saw improved profitability on recent acquisitions in this business. These are two powerful examples of many that illustrate how the strategies are pushing 3M’s performance through new level.

In closing, I want to recognize the people of 3M for their many contributions that continued our success as a company. We have great confidence and good momentum as we enter 2014. Our teams are focused on executing our plan and creating even greater value for customers and our shareholders. Thank you for your attention this morning and we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.

Joe Ritchie - Goldman Sachs

Thank you and good morning, everyone.

Inge Thulin

Good morning, Joe.

Joe Ritchie - Goldman Sachs

So my first question is really on the organic growth trajectory. It seems like you are exiting the year pretty strongly in Industrial and in Safety and Graphics, but still some weakness there in electronics and energy. And so I was wondering if you could just provide some context and color, as it relates to the guidance that you have for 2014 because the ranges across your segments tend to be pretty consistent. And so whether you have more or less confidence in any of the segments as you're building into 2014?

Inge Thulin

Well, first of all, we hold our guidance of 3 to 6 for the year and you are right. We are coming out strong of the year, right. So if we look upon our performance in between Q3 and Q4 and add that together for the second part of the year, we had a very good second part of the year. So we feel good about that.

In terms of the businesses, you can see that we have had very good tick up in Industrial as of lately and we feel very confident of that business and that range, which is 3 to 6. The same for Health Care, Health Care is continuing to grow well for us and specifically as you’ve have seen in developing economies. And again, we had in this quarter a 10% growth in that part of the world. And we have a very strong platform in the developed world, right.

So we feel confident around that. I will say the auto businesses are right in the middle of the range. We don’t see any indication at this point in time of going outside the range. Again, as we know electronics and energy is very much based in the electronic space based on the market, right. And as you know that is what we are following. And if there is a little bit slower that will impact us, of course but it can turnaround relatively fast. So from that perspective, the 2 to 6 guidance we have, we feel confident with that, so no change at this point in time.

Joe Ritchie - Goldman Sachs

Okay. Thanks. That’s helpful color. And I guess my follow-up question is really --

Inge Thulin

The 2 to 6 range is for electronics and energy, it is 3 to 6.

Joe Ritchie - Goldman Sachs

That’s all right. That’s right. I guess my follow-up question is really for David. I know that you haven’t made any changes to guidance. Over at the Outlook Meeting, you provided us with a 2014 earnings bridge. I was wondering if there were any changes to any of the sub buckets and specifically perhaps you can provide some color on the pension number, which is a pretty wide range at $0.10 to $0.20?

David Meline

Sure. So if you look at our earnings bridge, the answer would be right now, we don’t see any changes to the bridge of the elements. If you were to think about where we are monitoring at the top or the bottom in those ranges, first, on pension, we come in now with a confirmed year-over-year decrease in expense of $150 million for $0.15 a share. So right in the middle of that range we've provided. And what I would say right now is the other area that we’re monitoring, we said zero to five on foreign exchange. And if there is anything that if I marked that market today, it would be certainly towards the lower end of that price and headwind versus the range right now versus as we saw a couple of months ago. So otherwise we think we’re looking fine in terms of the other elements.

Inge Thulin

And just to clarify that the lower-end of the range do you think the FX headwind is going be close to zero?

David Meline

Closer to $0.05.

Inge Thulin

Closer to five, okay great I'll get back to you thanks guys.

David Meline

Yeah.

Operator

Our next question comes from the line of Scott Davis of Barclays. Please proceed with your question.

Scott Davis - Barclays

Hi good morning guys.

David Meline

Good morning, Davis.

Scott Davis - Barclays

Congrats on a good 2013. Inge, you mentioned M&A in your prepared remarks and if you talk through, you put out a pretty big prefix number as a target of potential deals. I mean can you talk through your confidence and also maybe the timing, the types of things you're looking at, obviously you can’t name names. But I think if I look back the years of 3M it's been hard there, really there hasn't been a lot of consistency to the three -- to the R&D effort. I’m sorry to the M&A effort so it just gives a little sense of what's what you're looking out there.

Inge Thulin

First of all, as you know, we have been working for the last 18 months to clarify the position of our business relative to our portfolio. And I think that’s an important starting point relative to understanding of where we try to go. So the thing about Heartland and push forward of course, places for us that are interesting in order to build up, not only in terms of research and development, but potential acquisitions. So I think if you think about it from that perceptive, we would like to look upon businesses that will either strengthen a very strong position for the Heartland divisions and/or accelerate growth and push forward. So by definition, we’re looking for many elements as you know relative to acquisition candidates but think about it in those categories.

Now that can always be an exception to the rule and if you have businesses where we really need to boost up our performance or build out and be more relevance we will do that as well. And I think if you go back and think about the efforts take that we did, we're seeing through the traffic safety system, but by definition not these either Heartland will push forward, but what's important for us to make that acquisition in order to build out a relevance in that market.

And so that’s the way you think about it in that way versus think about this business group right. We are -- we are interested everywhere, but I think it's from the market perspective in order to move the company forward. Now the pipeline is good for us, we have, as I said, we have laid on a little bit of, we’ve always had a process of bottom-up.

We have type of laid on a top down approach as well in order to make sure that we do not miss out on potentials that go across business groups in terms of potential. And where we talked about size of the potential acquisitions, I think there is a couple of things, we had build up now a very competent group relative to integration because one of the thing that is important for us is to integrate acquisitions as fast as possible and get the benefit for you and for us in terms of return of the investment.

And now we will not go crazy if it doesn’t -- we have done acquisitions in the past has that been on very small or to mid-size and we will really evaluate huge, huge acquisitions in terms of strategic importance. So I think you will see acquisitions in mid-range as well as we go ahead here. In terms of timing as you know it's very difficult to comment on timing this is really in some cases will take some time and we are very careful as we do this as you know.

Scott Davis - Barclays

Okay. That's helpful. And then, just as a follow up, obviously 3M is focused on R&D has been important and goes back a long ways, but something seems to have changed since you’ve taken over Inge. It seems like the R&D focus may have made the yielding more results if you just look across where the growth rates have been higher, it's been generally the more, I would say R&D intensive businesses has been outgrowing in market the most? I mean, what have you specifically changed that yielded that acceleration in new products?

Inge Thulin

Well, first of all, this is not about me. This is about a very dedicated 3M team. So, its not about me, it’s a credit should go to the business groups and the divisions and the subsidiaries. But I think that, what I am doing, I've encouraged them really to make sure that they understand the business model in terms of us be able to create more value for our customers, because that is to help it for us in terms of making sure that we maintain an eventually improved margins and the return on the business.

So, I think it’s, that reduce up with, the whole way up to me relative to how we are doing and also try to encourage to help them if there is some project that is may be more difficult for them to pull off based on the current situation. So there is a little bit piece of running a business with glasses on with one microscope on one side and a telescope on the other side of the glasses, right, and I think that’s important for us to do.

So, we feel good about it, we are very committed to research and development. It is by definition revalue create to 3M and if you think about it, we are in terms of the technologies, we are a creator and builder of technologies and we also user.

But in addition to that, other company can use the technologies. So that’s the difference for us. We create and we develop the technologies and in many cases we are using it. But other companies, we can help them a lot for them to be more competitive by using our technologies and that is the strength of 3M.

Scott Davis - Barclays

Okay. I did a lot of job asking the question. I think what I was meaning to say is, have you made any change it all from focusing the efforts on undisrupted technologies versus extensions?

Inge Thulin

Yes. We have and that additional, when we tried to go from historically 5.5 closer to 6 and you saw we made a small improvement on that, specifically this quarter we moved again, that additional investment is all into disrupted technologies for the future. So that’s an important. Thank you for that question. It’s a very important piece.

Scott Davis - Barclays

Okay. Thank you, guys.

David Meline

Thanks Scott.

Operator

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

Andrew Obin - Bank of America Merrill Lynch

Hi, guys. Good morning, guys.

Inge Thulin

Good morning Andrew.

David Meline

Good morning.

Andrew Obin - Bank of America Merrill Lynch

Hi. Just to dig in a little bit into what's happening in the emerging markets that I guess specifically in South America, it would be -- went from being the fastest growth market to the lowest growth market? How much of a surprise was it what happened in that quarter and how are you sort of monitoring the developments there to make sure that its stays under control?

Inge Thulin

Let me start on the front end of the business. First of all, there was a slight slowdown in the economies down there and we saw that, as David said, in his speech here earlier was specifically around consumer confidence that impacted our consumer business. And that was very much on, I would say, government related businesses, specifically into utility businesses, where we have the strong precision.

So I think that and that was broad base for us, so the economy slowed and as you know there is big business around mining in that part of the world. So that impacted us and I would say, I don’t know, you would be always be a little bit surprised when you are not growing as fast as in the past because you will do that. But, generally speaking, we had a good feeling of what is happening in that part of world. In terms of risk as we talked about in Venezuela, it’s -- David will make some comments here relative how we are all manage and monitoring that.

David Meline

Yeah. Thank you, Andrew. So, I think, picking up on Inge’s comment, if you think about the guidance we provided in December. We indicated we think that this year we will grow 8% to 11% in the region. So little bit off of where we have been in the last of couple of years but still elevated and I would say today as we look at that, probably we are thinking about it more along the lines of the low end of that range of 8% to 11%.

And specifically it relates to what Inge has said, we got some sectors which we saw some slowing, we don’t necessarily think that’s going to remain slow all through ’14, but we have to take that into account. And then, I think, in particular, we saw what's going on now, a very fluid situation is developing, in particular in Venezuela, and at some level in Argentina as well. And so if you look at our business, we’ve got about -- each of those countries, our business is a little less than $200 million of revenue in each of the two countries. We’ve been in them for many decades so we have a very capable local management and we have a good position in those markets. But inevitably, it does create both some risks in terms of our revenue growth in ’14 as well as financial risk. And that’s something that we monitor very carefully and we manage carefully given the volatility that we have in those markets and in others.

So if you look for example, today in Venezuela which is what we’ve called out as the most significant of the risks, we run the business on a local basis, the net monetary asset position of the balance sheet is basically flat. So that gives us a very good position in terms of addressing any risks that might occur. But we also have a $40 million receivable in sitting apparent from the subsidiary on imported goods and that’s something that we’re watching and managing quite carefully because we do recognize that there’s risk there that we’re going to have to manage through. So I would say nothing that’s material for the corporation, but certainly something that we’re very carefully monitoring and reacting to so that we can manage that risk. It’s just really a conversion risk. And of course, you see in our results overall very strong pricing in the emerging markets which is the other component of how we manage the risk of these countries.

So we feel good about our ability to manage risk. But as I say, we’re also very cognizant of the fact that we need to be proactive as well.

Andrew Obin - Bank of America Merrill Lynch

And the other side of the coin, the Health Care you get a high margin, high growth business in emerging markets part of the strategy. If wear well in terms of top line growth. Could you give us a sense of how connected is this business to effect fluctuations or is it fairly shielded just in terms of how the business works in emerging markets? How should we think about it?

Inge Thulin

Yeah, I know it’s a good question. So I would say that you start in terms of FX risk, you have to think first about the overall risk profile that we have as a company and Health Care as part of that. So we hedge on a rolling basis 50% of our exposures which covers all of our business flows and our intercompany exchange fluctuations. So that applies to Health Care as with the other company, other sectors of the business. So that’s an important element that enables us to manage the risk. And then the second piece is obviously through time, the best way to manage foreign exchange risk is to have a balanced footprint of exposure structurally, so that’s one of the reasons why we continue to localize the production of our products into the countries where we sell which gives us a balanced foreign exchange risk profile and I think as you know, we’ve been working hard to both grow Health Care and as part of that strategy to localize production which helps us to have a good profile to have local production, local R&D which is closer to customers, but it also gives us a better risk profile from a foreign exchange perspective. So I would say Health Care, I don’t view as something with, if you will outside risk compared to the other sectors in our business.

Andrew Obin - Bank of America Merrill Lynch

I guess what I was trying to say, just like me -- just saying, is Health Care spending in emerging markets? Do you feel it’s the care versus consumer spending? It was sort of simple question I think.

Inge Thulin

Okay. While, I think it’s -- as I’ve said early in order for you to build out your business in a way, you will be able to move Health Care products going their way than their consumer. And you’re talking about developing economies due to the fact that these many drivers, in terms of key opinion leaders that try to get to a service level and outcome around health, that is very strong. This is, you think about consumer which is very much retail brand equity driven which take you a longer time in a way to change the mindset of people to go from one brand to the other. So again speaking, we say that in the model that I’ve showed you multiple times now in terms of how developing economies are evolving from manufacturing to infrastructure to safety to retail consumer and Health Care. Often Health Care can come earlier due to that element and in Health Care, generally speaking in fact, dental and orthodontist is coming faster than the big Health Care business.

So for us it’s a good model. We have still huge opportunities there. We’re very pleased of the growth we see that this outcome is based on some strategic investment which they started a couple of years ago, actually in order to build up that business.

Andrew Obin - Bank of America Merrill Lynch

Thank you very much.

Operator

Our next question comes from the line of David Begleiter of Deutsche Bank. Please proceed with your question.

David Begleiter - Deutsche Bank

Thank you. Good morning.

Inge Thulin

Good morning David.

David Begleiter - Deutsche Bank

Inge, very good margin performance in Safety and Graphics, is this -- what type of operating leverage would you look for in safety in 2014 over course of the year?

Inge Thulin

Well, I would say first of all, thank you for the compliment relative to the improvements of the margins. And I think one of the reason there is that some consolidated -- consolidation that was done of the businesses. And so as we move ahead into next year, we’re basically looking for the same leverage into 2014 specifically in that business. So I don't see as any new change for us. So I think we’re on the level now that is in the end of it, very competitive for us.

David Begleiter - Deutsche Bank

Understood. And just a follow-up on Asia, line growth is low, was it all due to the tough comp (inaudible) was there some slowing in end market activity as well?

Inge Thulin

Generally the Asia performance was in line with where we’ve seen it growing through the year. And as we called out, I’d say couple areas that slowed, one was in China and that was most particularly related to the underlying electronics business. If you look at the base business excluding electronics grew at 6% in China. And then if you look at our performance in Japan which is the other most significant business we have in Asia. We grew quite strongly 4% overall but we were double-digit in the Industrial area. So I would say David, most specifically we see it linked to the electronics performance in Q4.

Inge Thulin

Very -- continue very strong growth in consumer and Health Care business.

David Meline

Yes.

David Begleiter - Deutsche Bank

Thank you very much.

Operator

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

Steven Winoker - Sanford Bernstein

Thanks. Good morning guys.

Inge Thulin

Morning, Steve.

Steven Winoker - Sanford Bernstein

Could you just start with inventory impact in terms of distribution obviously important. Were you seeing any kind of stocking increases, decreases, how should we think about that?

Inge Thulin

Generally speaking this quarter, no change, right. We didn’t see anything -- we didn’t see anything of it on Industrial, general Industrial or specifically as we know, we could be more concerned around consumer electronics. We didn’t see any change there and the other thing is around retail. I think retail was very stable as well. And as you know, they manage it very, very carefully. So I will say, we don’t see anything there in terms of change and it’s not a concern for us as we’re sitting here now.

Steven Winoker - Sanford Bernstein

Okay. So all that U.S. growth is sort of core customer growth on the manufacture side -- Industrial -- in Industrial?

Inge Thulin

Yeah, correct. We had very -- in U.S., we had a very strong growth in whole Industrial space right, which then had a very good impact for many of our businesses, generally speaking right in the Industrial space. So you’ll have the whole Industrial business grew but you have also Safety and Graphics with all the personal safety business doing very well in environment like that. So that was good for us.

So Industrial in U.S. in the quarter, Industrial basically would have 8% growth and safety and graphic had 6% growth. And then it was a little bit slower in the consumer and the Health Care in United States at the end of this quarter.

Steven Winoker - Sanford Bernstein

Okay. And maybe just one more on pricing, so 1.4% again very strong making up as you mentioned for this combination of currency [devals] elsewhere as well as sort of just core R&D supporting margin. But maybe can you give us an idea again of that 3% to 6% growth in 2014, how much of that are you into, saying this volume versus price? And do you think that your ability to keep up with continued currency moves with price. Any issues on that front as you look forward or we couldn’t just sort of count on those two offsetting each other?

Inge Thulin

Yeah, no it's a good question. So if you look at the -- as we looked at it in the fourth quarter and set out the guidance our thinking has been that is primarily volume that will look for in 2014 on the top end on the revenue line but obviously so in other words we expect price to be declining through the calendar year as we step through the quarters. Now that would change and it goes back to the view to the extent we see weaker foreign exchange occur in certain of the countries where we operate certainly will have to look at the actions that we need to take to preserve our position in the market and our ability to remain competitive but certainly our experience most recently in 13 but you can look over a longer period of time as long as we continue to develop -- to offer a very strong price value equation to the customers we’re able to address that through price as we need to. So I think we feel comfortable that we can do what's necessary to maintain that relationship.

Matt Ginter

Hey Steve, it's Matt, just to clarify one thing. Price issue will be positive in the year but the positive impact should moderate as the quarters go on.

Operator

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

Deane Dray - Citi Research

First question for David on corporate expense, you would highlight that that would come in lower and it just come in lower and you said that there would some ERP expense and that would be shifted to the segments but it still came in lower than what we were looking for. So is there anything else going on in corporate and what should be the run rate of that in the course of 2014?

David Meline

Right, 14 yes, so the corporate expense line that came in a little bit lower in the fourth quarter and frankly there are ups and downs there based on closing out accruals on a quarterly basis or one off of them, so I would say nothing that I would point to that was of a particularly you know headline an unusual nature in Q4. If I look forward into 2014 we expect that the corporate expense line is going to come in for the year somewhere in the range of 200 to 250 versus I think it was 320 in 2013and the majority of that you can largely attribute that to the declining pension expense, so we’ll pick up about two thirds of the $150 million pension expense decline I mentioned will show up I that corporate line hence a reduction year-over-year of that magnitude and again it bounced around quarter-to-quarter but generally speaking I think it can you know pencil that in throughout 2014.

Deane Dray - Citi Research

Good, that’s really helpful and then David I know you guys are not in the quarterly guidance business but for the first quarter would you want to call anything out that would be unique seasonally, (inaudible) for seasonal I mean both calendar and as well as whether that might be a factor that we should be considering anyone primers.

David Meline

Yeah, so if you look at the business through the year what I would say is that we consider most of the factors whether that be at the topline, whether it’d be expense elements, we think that it’ll be pretty steady through the year and follow more typical seasonal patterns. So I’m obviously first and fourth quarter typically at the lowest revenue but you know that’ll be the case as we see. The couple of exceptions I would offer, one is one we already talked about which is we do except through the year to see some declining contribution of price in raw materials as we move through the years, so positive but declining. Secondly, we had called out in December and that continues to be our intent which is build some of the incremental investment we’re making in our European center of expertize on a year-over-year basis as well as some restructuring actions that we have them looking at primarily in Europe and the US that some of those would be about $20 million to $30 million of additional expenses which are comprehended. There is the strategic investment line, but you can see that it will be some what front-loaded for the year into Q1.

And then the final point I would make on, this is the one I talked about already, which is what’s happening in the markets globally right now. We are monitoring carefully developments in some of the emerging markets with the specific focus on Venezuela because I think there is some discernible risk there, some event risk which looks like may materialize as soon as Q1.

Deane Dray - Citi Research

Great. Thank you for the color.

Inge Thulin

Yeah.

Operator

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

Laurence Alexander - Jefferies

Two quick ones. On your comment about the slightly weaker trend in infrastructure market, are you seeing any signs of that bottoming out? And secondly with respect to emerging market volatility or credit risk that maybe developing there, is that an opportunity for you to further gain share because of your relatively low cost of borrowing and excess to trade onto finance, or do you think that that will really have a material impact on your relative share position?

Inge Thulin

Let me -- on the first question, I think that in terms of the infrastructure specifically, for us was related specifically to utilities and government businesses in one part of the world and is also related to the mining industry there. We see that easing up as we go into 2014. So it's not overly concerned for us.

In terms of emerging market and so let me give a perspective on developing and emerging market. We have been in the developing world for many years. So the thing about 3M, we started to do business outside of the United States in the 20s and in fact, we have done business in BRIC. In Brazil, we went 1946.

So we've been for longtime in that part of the world. And the strings for 3M based on the history, is that we have learned a lot, so we know how to monitor situation like this. And in developing economies that will always be some type of bump in the road as you go. Now, we have a very good point to say that when that is happening and we have not only seen it, we have lived it many times over the year and not only to organization but me personally and David Meline as well, as we have lived in some of those countries.

So we have seen it and we have worked in those environments. The strings for 3M, when this is happening is we were never going back. We continue to stay but we are adjusting our organization. And we are in all cases I would say from an historical perspective, we are coming out stronger when it's done. And the reason for that is, we right sized the organization. We stay, continue our local connections and we help the customers that are still there because when it turns again because if will turn up, we are there with them.

So in all cases, what have happened for us is that in the case when you come in the turmoil like this, we are coming out stronger due to the fact that we stayed. And I think that's an important element to know. So we are very local in the countries, but we have very strong centralized team with experiences that can help out in terms of making sure that processes is right even on the financial side and David will make comments relative today.

David Meline

Yeah.

Inge Thulin

But it’s actually -- for us, it's not a good think generally speaking, but we are coming out stronger after a turbulence like that.

David Meline

And you are right, Laurence, we try to maintain a conservative posture from a risk management perspective. And we do enjoy the benefit as do other large well managed multinationals of having good access to credit, having the ability to assess credit risk and so exactly. While it can be bumpy to front end if you basically keep your head down and remain calm and have a playbook as we do, typically we can be advantaged as you see things start to turn around.

Laurence Alexander - Jefferies

Thank you.

Operator

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

Ajay Kejriwal - FBR Capital Markets

Thank you. Good morning, gentlemen.

Inge Thulin

Good Morning, Ajay.

Ajay Kejriwal - FBR Capital Markets

So maybe on Health Care margins you talked about the medical device that impact. Maybe, any comment on what you saw in drug delivery systems and the transfer and the impact on margins from the business and then also I know in the past they really have talked about flexibility in that business in terms of how you manage margins and spending relative to topline. So if you can comment on how we should think about margins in '14 for Health Care?

Inge Thulin

Well, as you ask specifically about DDSD, that is very much a project base business. Right, so we are selling R&D to other companies and we are selling products. So that's a business that can move a little bit in terms of quarter-by-quarter. So there was nothing happened at these unusual meaning that we lost business or something like that. So it's a strong business for us. In fact we have extended some of the bigger contracts have now been extended. So as we look ahead for that business, it's a very solid, very good business for us and we are very pleased with that.

So looking from that as -- there is all ways to stop in the beginning to a quarter and these quarter based on the contracts and project, we're working with, this is how it came out. So that's, I wouldn't like it to be overly concerned that business.

In terms of Health Care, (inaudible) speaking in terms of the margin that David will make some comment relative to that.

David Meline

Yeah. So if you look, Andre, if we look, I think its how it looks for us in 2014. I'd make a couple of comments and maybe just pick up a little bit of comments here on the overall trends. So Health Care we expect to run in the low 30s through 2014. The Industrial Safety and Graphics and consumer we expect to run around as its been the case around the company average. And if you look at electronics and energy this year, we ran in the high teens last year which is what we expected as started the year.

This year we see that trending towards the high teens, towards 20%. So that's how we're looking at the overall view for the businesses and I think the final point I'd offer, I talked about the corporate line, there is about a 30 basis points year-over-year increase in the cost that will be seen in the businesses as it relates to our strategic initiatives around business transformation, the restructuring we've talked about and the innovation funding.

Ajay Kejriwal - FBR Capital Markets

Got it. That's very helpful. And then, maybe, some color around stock repurchase and the range you have 3 to 5 billion, maybe just conceptually, what would be the variables that drive that purchase near the high end versus the low end?

David Meline

Sure. So, yeah, so if you look at that and just kind of frame the commentary. So as we announced in December, we made a decision as a company to adjust our capital structure to one that's more efficient. So by definition that means increasing from a de minimis level, the portion of our funding from borrowing, right, from bond issuances and borrowing. And it means that we also have to, as part of that reduce the portion of the structure that's coming from equity funding. So by definition that means we've reduced the equity funding, we're going to do buyback with set of 17 to 22 billion for the period.

We then looked at the sources and uses to the best we're able to predict them in the year and we concluded that -- it looked us, starting the year three to five billion at the gross level looks like the right number for the company. And as I said in December the way I think about that is that, it's certainly something that's more discretionary than a number -- frankly many other of our variables we manage from a sources and uses perspective.

But it's our best views, we start the year and what we'll do then is, we'll have a portion of that repurchase that we do on a steady basis through the year. We also look and pay attention to intrinsic value to the price in the market of all assets including the one we are repurchasing here. And that impacts how we deploy capital into that area.

So we'll adjust our share repurchase through the year based on the overall view of the business and sources and uses, and we'll also adjust the repurchase activity based on thinking about the core component, as well as how the share prices is looking as well.

Ajay Kejriwal - FBR Capital Markets

Got it. Thank you very much.

Inge Thulin

Thanks, Ajay.

David Meline

Yeah.

Operator

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

Shannon O'Callaghan - Nomura Securities

Good morning, guys.

Inge Thulin

Good morning, Shannon.

David Meline

Good morning.

Shannon O'Callaghan - Nomura Securities

Hey. David, just maybe if we could size this Latin America last year you called out with Venezuela and Argentina, so you said they're both less than $200 million in revenue each?

David Meline

Yeah.

Shannon O'Callaghan - Nomura Securities

So, I mean, at the corporate average margin, you're talking about sort of less than a dime of EPS. I mean, is that the scope of the risk you're talking about or is there more risk than that, I mean, because there'd be -- could things get worse than that in terms of losses or other impacts?

David Meline

Yeah. It's a good question, Shannon. So I don't see right now from what we can see and obviously it's pretty fluid, if I were to size that risk, I think there's event risk that could put the exposure from an earnings perspective into the $0.03 to $0.04 a share range.

Shannon O'Callaghan - Nomura Securities

Okay. Thanks that helps.

David Meline

Yeah.

Shannon O'Callaghan - Nomura Securities

And then the strength in Europe, right, I mean, you talked about Germany being very strong, broadly I think but also in -- particularly in Industrial? I mean do you have a view in terms of how much of the strength you're seeing in Europe is intrinsic to Europe versus related to export?

Inge Thulin

Well, I think, it's a mix and I also think one other thing we have to think about here is, yes, there are comparisons, right. But, first of all, we see very good acceleration, specific on the Industrial side, I would say both in Germany and also even if the reporting issue nothing, we have talked about West Europe, we also see that in Poland actually.

So I think we see both West Europe been driven by manufacturing uptick, which I would say, it's a balance in between domestic production for Germany, but also export for them, of course, as you know it’s big automotive industry in Germany that we're exporting quite a bit.

But, so I think we have still to be cautious about Europe, but it's a very positive trend and if we look upon it for our side, in West Europe, we had Q1 this year was a minus 3%, we're basically flat in Q2. We have the 3% growth in Q3 and another 3% in Q4.

But I will say when I look upon it when you get Germany from flat in the first half of the year to around 6% then it was 8% in the last quarter that's very encouraging for us and again, as I said, there are businesses there for us that had good growth versus -- Industrial had 6% growth in West Europe. So it's encouraging for us but we still have to be cautious as we go into the year and we are type of looking upon West Europe next year for flat to 3% growth, right.

Shannon O'Callaghan - Nomura Securities

Okay. Great. Thanks a lot.

David Meline

Thank you.

Operator

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

Drew Pierson - J.P. Morgan

Hi. Good morning, it's Drew Pierson on for Steve.

David Meline

Good morning.

Inge Thulin

Hi. Good morning.

Drew Pierson - J.P. Morgan

I know we're running long, just quickly, I don't know if you've commented on the linearity of the quarter, if there anything interesting to call out in terms of month-to-month trends?

David Meline

Within the quarter, yeah, I would say nothing, Drew, that we'd want to point to that would be unusual spikes up or down beyond what we've talked about more generally this morning.

Drew Pierson - J.P. Morgan

Yeah. And then on the price cost side, I believed you mentioned, kind of the closing -- gradual closing that gap through the year, just when we think about the components of that, I know you have your sourcing programs, I know the raws have maybe picked up very slightly? But maybe just a little bit more color around kind of how to think about the different factors and how they progress?

Inge Thulin

Yeah. So if you look at the components of price and raw materials, so we talked about prices where we exited 2013 quite strong. We see that then moderating as we walk through the year, towards the de minimis level, right but still slightly positive.

And if you look at raw materials what we indicated our outlook for the year was another favorable $0.05 to $0.15 a share performance in 2014. We exited the year actually pretty stable with raw material performance. So we were down a couple of percentage points in ‘13 through the year including Q4 and we see that moderating somewhat as we move through the year but there will be some carryover impact certainly as we enter the first part of the year.

Drew Pierson - J.P. Morgan

Okay. Thanks for the detail.

Inge Thulin

Sure.

Operator

And our last question comes from the line of Nigel Coe of Morgan Stanley, please proceed with your question. Hello Nigel, your line is open. Please proceed with your question. I do apologize. Nigel Coe, your line is open, please proceed with your question. I will close his line. That concludes the question-and-answer portion of our conference call. I will now turn the call back over to 3M for some closing comments.

Matt Ginter

Well, thank you again for joining us today. I appreciate your attention, your continued interest in 3M and we look forward to speaking to you next quarter. So have a great day.

Operator

Ladies and gentlemen….

[Ends Abruptly]

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