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3M Company (NYSE:MMM)

Q1 2014 Earnings Conference Call

April 23, 2014 09:00 AM ET

Executives

Matt Ginter – VP, IR

Inge Thulin – Chairman, President and CEO

David Meline – CFO

Analysts

Andrew Obin – Bank of America Merrill Lynch

Steven Winoker – Sanford Bernstein

David Begleiter – Deutsche Bank

Scott Davis – Barclays Bank

Shannon O'Callaghan – Nomura Securities

Ajay Kejriwal – FBR Capital Markets

Jeff Sprague – Vertical Research Partners LLC

Nigel Coe – Morgan Stanley

Deane Dray – Citi Research

Joe Ritchie – Goldman Sachs

John Roberts – UBS Securities

Operator

Welcome to 3M First 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, April 24, 2014.

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

Matt Ginter

Thank you, good morning everyone. Welcome to our first quarter 2014 business review. Inge and David will make some opening comments today and then we will take your questions.

Before we begin I've a few brief announcements. Our remaining 2014 earnings calls are scheduled for Thursday, July 24, Thursday, October 23 and Thursday, January 29. Also, please hold the morning of Tuesday, December 16 on your calendars for our next investor meeting, the details of which will be available later this year.

Note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3m.com under the heading Quarterly Earnings. Please 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. Good morning everyone and thank you for joining us. The first quarter was strong for 3M; marked by organic growth in all business groups and across all geographic areas. We posted record sales in return record cash to shareholders, by also increasing investments in R&D and commercialization to reinforce our foundation for long-term success.

Let's look at the few highlights earnings per share rose to $1.79, an 11.2% increase year-over-year. Sales were $7.8 billion the highest first quarter total in 3M history. Organic growth was 4.6% paced by our health care business at 6%.

Industrial, Safety and Graphics each grew 5% organically. We saw organic growth in each geographic area led by Asia Pacific and Latin America/Canada at 7% each. Europe, Middle East, Africa grew 4% followed by the United States at 3%. I'm very encouraged by our continued broad based organic growth, which is more evident that is our strategies are working.

Currency reduced sales by 2% in the quarter, which was about 1% points worse than our expectation entering the year. Operating margins were again strong at nearly 22% up 30 basis point from last year. Four of our five business groups reported margins greater than 21%.

It remains a good time to be a 3M shareholder. The company returned $2.3 billion to its shareholders to cash dividends and share repurchases. We increased our first quarter dividend by 35%, which marked 56 consecutive annual increase.

In summary, the first quarter was a solid start to 2014. This is only possible because of the hard work of our entire 3M team on a global basis because of the efforts, we continue to deliver consistent and strong results today, while at the same time investing and building for the future. Now please turn to Slide number 4.

With one quarter behind us, we are reaffirming our earnings and organic growth outlook for the full year. Earnings per share are expected in the range to $7.30 to $7.55 with organic local-currency sales growth in the 3% to 6% range. We now anticipate foreign currency translation to reduce full year sales by approximately 1%, a slightly bigger headwind than previous expectations.

Our tax rate estimate remains at 28% to 29% with cash flow conversion at 90% to 100%. David will now take you through the details of the first quarter. David?

David Meline

Thank you, Inge. I'll begin by reviewing first quarter sales growth. Please turn to Slide number 5. Worldwide organic local-currency grew was 4.6% in the first quarter with volumes up 3.4% and selling prices up 1.2%. We continue to experience positive selling price changes across our businesses. Boosted by world-class innovation and strong new production flow both of which are important elements of the 3M business model.

In addition, we've been raising prices in certain developing countries to help offset the impact of currency devaluations. Foreign exchange impacts reduced worldwide sales by 2% points in the first quarter and as Inge mentioned this was about 1% point worse than we expected at the beginning of the year.

The most significant currency headwinds were in Latin America/Canada had negative 12% as several countries in the area experienced devaluations. Currency impacts were negative 4% in Asia Pacific and a positive 2% in EMEA. On the total US Dollar basis sales rose 2.6% versus the first quarter of 2013.

Looking by area, demand accelerated in Asia Pacific in the first quarter with organic local currency growth of 7%. Growth was led by strong double-digit performance in Japan where demand was elevated leading up to the April consumption tax increase.

China, Hong Kong grew 2% organically in Q1 or 8% excluding electronics. On a business basis, all five groups within Asia Pacific generated positive organic local currency growth in Q1 led by health care and safety and graphics. Latin America/Canada also grew 7% organically, a nice acceleration versus the fourth quarter.

Growth was led by solid double-digit performances in Brazil and Mexico; our two largest Latin American subsidiaries in terms of sales. All five businesses posted positive organic growth in Latin America/Canada during the quarter including double-digit growth in health care. Electronics and energy also posted solid organic, local-currency growth in the area.

In Venezuela, we continue to manage through the economic turbulence and position our business for future success. Sales and profits were down substantially in Venezuela during the quarter. We continue to manage our exposures carefully and we will stay on this path until the situation improves.

For some time now, we have been actively managing towards a neutral net monitory asset position in Venezuela and at this point, it appears that any major event risk is behind us. Organic sales growth in EMEA was 4% in the first quarter continuing the positive trends that we have seen over the past few quarters.

West Europe grew 3% with strong performances in Nordic, Alpine and Iberia regions. Middle East Africa also posted strong organic growth in the quarter. On a business basis, growth in EMEA was strongest in industrial and in safety and graphics.

In the United States organic local-currency growth was 3% in the quarter, which was a bit slower than the growth we saw in the second half of 2013. It does appear that weather negatively impacted certain channels that we serve in the US, particularly in road construction, retail and industrial distribution.

On the positive side, health care posted the strongest US growth amongst our five businesses. Organic local-currency growth was nearly 5% across all developing markets and 4.5% in developed markets and again as Inge mentioned organic growth was positive across all major geographic areas.

Let's turn to Slide number 6, for discussion of the first quarter income statement. Sales for the quarter were $7.8 billion up 2.6% in dollar terms. Gross profit rose 3.7% to $3.8 billion and gross margins increased 0.5% points to 48.5%. SG&A spending increased in line with sales growth and R&D as a percent of sales rose by 20 basis points to 5.8%.

Operating income increased by just over 4% versus the first quarter of 2013. GAAP operating margins were 21.9% up 30 basis points year-on-year. Organic volume growth added 30 basis points to margins and the combination of lower raw material cost and higher selling prices contributed a positive 110 basis points year-on-year.

And inherent part of 3M's business model is to leverage productivity and other gains to fund strategic investments, while continuing to generate premium returns. This is seen again in our first quarter numbers. We invested the equivalent of 90 basis points of margin on incremental programs around disruptive R&D, business transformation, and ERP, and restructuring.

In particular, we invested $40 million on restructuring and other realignment efforts in Q1 across a number of business units. Lower year-on-year pension and OPEB expense boosted first quarter margins by 50 basis points, while foreign exchange impacts reduce margins by 50 basis points.

All in first quarter earnings increased 11% to $1.79 per share. Foreign currency impacts reduced first quarter earnings per share by $0.04 and the lower tax rate resulted in a $0.04 per share benefit.

As a result of our announced changes in capital structure strategy, average diluted shares outstanding declined by 4% versus last year's first quarter, which added $0.07 to first quarter earnings per share.

In summary, the first quarter was a good start to the year in 2014. Organic sales growth was broadly positive across businesses and geographies. Margins were strong overall and we expect this performance to continue into the future.

Now let's turn to cash flow, turning to Slide number 7. As a reminder for those, who are new to 3M; we announced at our December 2013 Investor Meeting, our plans to manage towards a better optimized capital structure going forward, and to allocate capital accordingly.

The strength and stability of our business model and strong free cash flow capability, enables us to enact this changes while continuing to invest in our businesses. Organic growth remains our first priority, so we will continue to invest in CapEx, R&D and commercialization capability.

In addition, we're already enabled to respond to strategic acquisition opportunities that can strengthen our portfolio, and at the same time our plan affords us the opportunity to return significant cash to shareholders. We communicated our intent to implement these changes to our capital structure overtime.

For the calendar year 2014 in particular, we expect to add leverage of $2 billion to $4 billion on the balance sheet. So now let's discuss our cash flow performance for the first quarter. We generated $1.1 billion of operating cash flow in the quarter up $98 million versus last year's first quarter.

Higher net income drove the line share of the increase. Capital expenditures were $293 million, a decrease of $31 million versus last year. We continue to expect full year CapEx will be in the range to $1.7 billion to $1.8 billion. First quarter free cash flow was $799 million, up $129 million year-on-year and we converted 66% of net income to cash versus 59% in last year's comparable quarter.

Note that, first quarter is typically our seasonal low with respect to free cash flow conversion. For the full year 2014, we expect to be in the range 90% to 100%.

We paid $566 million in cash dividends during the quarter up substantially over the $440 million paid in 2013. As Inge mentioned earlier, we increased our first quarter per share dividend by 35%.

Gross share repurchases were $1.7 billion in the first quarter for 2014 we expect full year gross share repurchases will be in the range $4 billion to $5 billion. Let's now review our first quarter performance on a business-by-business basis. Please go the Slide number 8.

Our industrial business posted strong first quarter results with $2.8 billion in sales and 5% organic local currency growth. Leading the way this quarter was our 3M Purification business which drove strong double-digit organic growth. This business has gained significant traction around the globe, as we expand our technology capability and product offerings.

We also generated double-digit organic growth in automotive OEM, which was more than twice the rate of growth in global auto production. Our advanced materials and industrial abrasive businesses also posted nice first quarter organic growth.

Industrial sales grew broadly across all geographic areas during the quarter. Organic local currency sales growth was 6% in both EMEA and Latin America/Canada. 5% in Asia Pacific and 3% in the US.

First quarter operating income was $618 million up 7% year-on-year. Operating margins increased 80 basis points to 22.3%. Margins were boosted by volume leverage, positive price raw's and good productivity, partially offset by restructuring cost.

We also improved margins year-on-year in Ceradyne, a business we acquired in late 2012 which added 30 basis points to industrial margins in Q1. Please turn to Slide 9. Safety and Graphic sales were $1.4 billion in the quarter with organic local currency sales growth of 5%.

Our largest business here is personal safety, which generated double-digit organic local-currency growth. We also grew in a roofing granules and commercial solutions businesses. Sales in traffic safety and security systems declined slightly on organic basis, impacted by slow start to the road construction season.

Safety and graphics grew organically in all major geographic areas with Asia Pacific up 9%, Latin America/Canada and EMEA each up 5% and the US up 2%. Operating income was $318 million in the first quarter and operating margin were a solid 22.3%, although margins were down year-on-year versus a very strong comp.

Major factors impacting, this quarter's margins were higher ERP investment, restructuring and negative currency impacts. Please go to Slide 10. Our health care business once again delivered outstanding results. It was our fastest growing and highest margin business group in the first quarter. Sales were $1.4 billion and increased 6% in organic local currency terms.

All businesses contributed this growth in the first quarter led by health information systems, food safety and drug delivery systems. All geographic areas generated positive organic local-currency sales growth with Latin America/Canada up 12%. Asia Pacific up 10%, the US up 7% and EMEA up 2% in the quarter.

In developing markets health care grew 10% organically in the first quarter, yet another in a long string of double-digit performances. First quarter operating income in health care was $427 million and operating margins increased 30 basis year-on-year to 31.1%. Now let's look at electronics and energy found on Slide 11.

First quarter sales in this business were $1.3 billion up 4% in organic local-currency terms. Electronics related sales increased 5% on an organic local-currency basis with positive growth in optical films partially offset by declines in other businesses. In our energy related business, sales increased 2% organically led by renewable energy in telecom.

On a geographic basis organic local-currency sales increased 9% in Latin America/Canada and 7% in Asia Pacific. EMEA was down slightly and the United States declined 4% year-on-year. Operating income rose 16% to $227 million and operating margins were 17.3%. Margins in this business continue to track higher rising 2 points year-on-year and 60 basis points sequentially.

Volume leverage and improving productivity were both positive contributors to first quarter margins. Finally, let's review the consumer business found on Slide number 12. Sales in the consumer business grew $1.1 billion with organic local-currency growth of 3%.

Sales in our stationary and office supply business declined versus last year's first quarter. Store traffic in the US office retail channel was softer in the quarter, due in part to harsh winter weather conditions along with continued store consolidations.

Our construction and home improvement business which serves the DIY retail market space led consumer's growth this quarter with high single-digit organic local currency sales growth. Over the years, we have built strong market positions in categories such as Filtrete brand, home furnace filters, Scotch-Brite, painters tape and Command brand mounting and fastening products, which provide a strong foundation for consistent strong growth.

On a geographic basis, organic local-currency growth was 6% in Asia Pacific, 5% Latin America/Canada and 1% each in the US and EMEA. Operating income was $228 million with operating margins of 21.2%, that concludes my first quarter related comments and I'll turn the call back over to Inge.

Inge Thulin

Thank you David. As you can see, the year is off to a good start. We continue to execute well against our long-term strategic levels, which I would like to update you on. Let's first start with portfolio management. In the first quarter, we realigned and combined certain businesses to increase customer relevance, build scale and generate cost efficiency.

In the Safety and Graphic business group, we merged commercial graphics and building and commercial services into newly formed commercial solutions division. This brings a comprehensive array of branding, design, protection and maintenance solutions under one division allowing us to present one strong voice to the commercial markets customers.

Earlier this month, we also further realigned our electronics related businesses to more effectively position them to accelerate growth. We are now organizer on two large divisions. One is display materials and systems, which consolidates all of 3M's capabilities in electronic displays.

[Batteries] electronics material solutions which aligns our offerings in semi-conductor electronic materials and components. This changes will better align our capabilities with customers needs and expand our leadership in this area.

Also in April, 3M acquired Treo Solutions, a leader in the health care, data analytics. This will bolster our health information system business by allowing it to supply customers with better solutions at lower cost.

Let's talk about the second lever, investing in innovation. Innovation is the heartbeat of 3M. It drives what we do every day and allow us to create even greater value for customers. Innovation generates new growth and is the key to our long track record of generating premium returns throughout the business.

In fact, one-third of our revenue in 2013 came from products created in the last five years and we are targeting 37% by 2017. And we expanding our innovation capabilities globally, we have now built 45 innovation centers around the world, where customer gain exposure to the breadth of our technology.

Our international labs are also typically staffed and led by local nationals and our commitment to innovation helps 3M recruit some of the best and brightest scientists from all over the globe. It's notable that 47% of our new products launched in 2013, were led by international labs up from 37% just a few years ago.

The results were strong with more opportunities still to come. Now let's talk about the third lever; business transformation. We continue to make progress on implementing our global ERP system, which will lead to more a ideal and efficient 3M.

To-date, we have gone live in five countries with more schedule for 2014. Most recently, we launched is it, that is in one of our European distribution center based in Dabrowa, Poland. We are learning more with each implementation on using that knowledge to guide and refined our future work.

There is one final point I'd like to make before taking your questions. When we last met in January, I talked a bit about our 3M manage to a volatility in developing markets. Given down certainties in some areas of the world today. I like to expand a bit upon that discussion.

We have a deep history in developing nations. 3M entered Brazil in 1946 and a year later, 1947 in Mexico. With that history comes wealth of experience and business teams that know how to be successful in those areas.

This is also the model; we are using in Central East Europe, Middle East, Africa and APAC. This is the 3M international model. We enter early, develop connections grow our customer base and steadily build capability.

We staff our management teams with local nationals, people who know the country, culture and customers and of course speak the language. As with any growth opportunity, there are going to be challenges along the way and developing markets are no exception, yet when these challenges arise we do not abandon our customers or the market.

Our leaders know how to manage through them, knowing from experience that 3M will emerge even stronger with a more established presence and more loyal customer base. Our approach continue to produce strong results including this year's first quarter. In Brazil, as one example we grew 11% organically and in Mexico 15% and we see developing countries coming back in terms of growth rate.

Developing markets in total represents 35% of 3M's sales today and we expect that number to keep climbing. Thank you for your attention and with that, we are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line Andrew Obin, Bank of America Merrill Lynch. Please proceed with your question.

Andrew Obin – Bank of America Merrill Lynch

Good morning, just a broad question. As I look at 3M, you guys delivered another quarter of some of the best top line growth in the industry and if you look at the margin expansion. You're actually starting to get it, but then if you look at the operating line the leverage seems to be limited and I understand it's a functional some of it discretionary spending that you guys are doing.

So two questions; A, what is the level, what is run rate of discretionary spending that we should be expecting for the rest of the year? And second a broader question, sort of 3M seems to be a combo and industrial company and a consumer company, but your operating leverage now behaves a lot more like consumer company than an industrial company. Do we get sort of operating leverage on the industrial side by some point this year? Thank you.

David Meline

Yes, thanks Andrew. So in terms of the leverage we get from growth. We saw in the first quarter, I think very typical of what we've expect from the overall business which is somewhere 35% to 40% operating leverage on the growth that we got and what's true as you pointed out and as we had planned, we do plan to reinvest a significant portion of that in some of these key strategic investments through 2014.

So we have said in the beginning of the year that we expect to invest in these investments program somewhere between $0.10 to $0.20 during the year and we invested $0.07 a share in the first quarter. So we still expect to invest at that $0.10 to $0.20 range probably towards the high end, the way it looks right now, but what you can expect through the year is that you'll see some moderation of that spending.

So obviously, the business transformation and the R&D investment is pretty steady through the year. We also invested, we did some restructuring in the first quarter that we'll look at each quarter and determine, whether or not there are projects that we should undertake and also some of the spending was in this European supply chain center of excellence, which will lap that spending here as we move into the second quarter.

Andrew Obin – Bank of America Merrill Lynch

Just on structural, I understand that you need to invest and it's part of the culture, but as I said should we see more operating more top line dropping to the bottom line in the second half of the year, is that a reasonable expectation given what you've stated?

David Meline

Yes, I mean if you look at the plan we laid out for the year. What you could foresee, is that we will some inept increase in our margins for the year, which we did see already here in the first quarter. So I think it's fair to assume that will continue as we look through the full year.

Andrew Obin – Bank of America Merrill Lynch

Thank you.

Operator

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

Steven Winoker – Sanford Bernstein

The 50 basis point increase in gross margin and when I look at the gross margin overall. The highest, I think since that was 6 certainly for a long time and you peaked in that earlier time period over 50%. I know we are having sort of the discussion about investments below the gross margin line, but is most of that increase on the pricing versus raw material front and how do you think about this sustainability.

I mean clearly you have a lot of pricing power and you're making up for some inflationary issues, but when you sort of look at your material cost position, cost out and continue pricing efforts, are there other things going on there in the volume leverage etcetera and we can sort of see that number also continue to tick up for some time.

David Meline

You're right, Steve. We were encouraged this quarter by the improvement in our gross margin which seasonally for us, the first quarter is usually the lowest of the year. So that was encouraging, if we look year-over-year. What's true, it's a combination of several factors. Certainly productivity features in that and you've heard us really focus in these last couple of years around the rejuvenation and taking segment to the next level and, so we are seeing I think some of that coming through.

Certainly, we've been working the portfolio to focus resources where the best opportunities are and I think that's certainly contributing to the overall gross margin profitability of the company and then finally, there certainly as you know and as you pointed out. There is component of price in raw material that's supporting this.

On the pricing side, we had quite strong pricing in the first quarter down a little bit from the fourth quarter but nonetheless quite strong at 1.2% and if you'll look at about half of was that attributable to the freshness of the product portfolio and really the price value relationship that our customers described to those products and the other half, was largely attributable to offsetting the foreign exchange movements in particular in the emerging market.

So as a combination of several factors, but obviously it's something we continue to focus on and seek to improve.

Steven Winoker – Sanford Bernstein

That's great and Inge. You've talked less about it, yet another organizational set of changes internally that just sound like a continued large transformation going on. Are these latest ones that you talked about today? I mean, how much – it sounds like it’s all channel driven but you're also going reap some cost synergy benefits from it? So there are other elements besides the channel and customer facing front here that will be, we can see the benefits from overtime?

Inge Thulin

First of all, if you go back when we lay out our six new strategies when I took office. A little bit more than two years ago, the first strategy is to calling out relevance to customers and this is the implementation of that. So when you have the strategy, you need to follow through in order to make sure that you on the way to obtain your overall or be active.

So some of this changes that we've done is clearly based on relevance to customers for us to be able to respond faster based on their needs, where you know as you know that our technology platforms are very important and we need to be able to respond fast back to them based on solutions, we are working with them.

In my mind, as we not have looked into the organization structure maybe for almost 10 years, there was some disconnect in between our internal organization in the market, so we are addressing that. And of course, so drive it first from relevance to customer, to market, but there is also cost benefits of course into organization structure, as you make those moves because you reduced specifically in the back office and in the middle management, where you can reduce cost and be more ideal and so forth.

So if you think about it from a speed perspective because we would like to accelerate speed in terms of responsiveness to customers. We have in some parts of the world, that we have not talked about now for long time also consolidate subsidiaries into region in the part of West Europe and we have done in Latin America, etc.

So if you think about that, well you now have connection points where we previously in some cases said three sizeable but not huge divisions that needed to interact. For instance, in Nordic with four different countries where we today have one-to-one. So you have one huge division totally focused in market space and you have one geographical area in Nordic that's incredible move and shift if you think about speed in order to execute, when you went from three Vice President's back in St. Paul and four Managing Director, Nordic.

Now you go one-for-one, I can tell you that has an incredible impact on the organization in terms of speed as we move ahead. So look upon it like increased relevance in the front end for the customers and for us also to be able to leverage cost in our structure both in international and in the center of the organization.

Steven Winoker – Sanford Bernstein

Great. Thank you.

Operator

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

David Begleiter – Deutsche Bank

Inge and David, are you able to break out the weather impacts in Q1 and if so, how much of those are permanent and how much will be recaptured in future quarters?

Inge Thulin

Well first of all, it's difficult in a way to talk about it because we are global company. So some places around the world, the weather was okay. So I think and you think about it that was some impact in United States and United States is 35% of our business.

So it's difficult for us to quantify it, but of course we had some impact of it in United States specifically and it was related to as David said, was traffic in the stores was down which had an impact on our consumer business and that was also delayed in some of the construction and specific relative to traffic, safety and road safety.

If you take road safety and traffic safety. I think that will come back. It's a timing issue, so we will get that back as we go. If you go into the combination of the lower traffic in the stores the first quarter that's maybe gone but we will compensate that in a different way, but you know we don't talk much about weather to be honest, right it's -- we are global company and the sun is always shining somewhere and that is what we need to capitalize on.

David Meline

If I can, just add briefly David. So if you will look at the US from a trend growth perspective. We saw in the second half of last year, we grew around 4.5% during that period and we've got guidance in place for the year of 3% to 6% for the US and we grew 3% in the first quarter. So it feels to us, the guidance is still right and that we will some recovery, as we move through the year.

David Begleiter – Deutsche Bank

And just lastly, of the two segments posted year-over-year or any declines in safety and consumer. Do you think they can return to earnings growth in second quarter?

David Meline

Yes, we think that we've got and outlook for both of those businesses to grow again with the average of the company for the year in the 3% to 6% and we think that their margins will operate around the company average, so that would imply some improvement in consumer and probably in the safety and graphics.

If you look seasonally, they run a little bit lower in the first quarter typically anyway.

David Begleiter – Deutsche Bank

Thank you.

Operator

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

Scott Davis – Barclays Bank

Do you guys, when you think about pricing. I think 3M has a history of being pretty good on price particularly the last five years or so, but is there a trade-off that you see, a clear trade-off between price and volume. Do you have a sense, that you're giving up volume and do you have so much pricing power in most of your businesses that it's fairly immaterial that, it's more of a next issues, it's just a better product.

Inge Thulin

Yes, we don't feel at this point in time that we are giving up volume. You have to think about it in terms of our position in the market and all the new products that we are introducing, as many of them are based [specking] on platforms etc. So I will not say that, we're at this point in time or giving up anything that we are aware of and as you know, our power in terms of pricing is pretty strong.

And it's all based on, of the value of the solution that we are providing. So I think that's important, so I don't think that's a issue. If we had been, we had not continued to execute based on our strategy in that area. I think it's more in terms of you talking about growth generally speaking, is maybe in some part of in the developing world that we will add different type of products and solutions that on meeting.

I will say that, their price points and affordability in that part of the world, but that's a different discussion because that's more around the product portfolio that you're introducing in developing economies and I think that, we still have huge opportunities and as you heard, I talked about now that we have build out our capabilities with 45 customer technical centers around the world, that's exactly what we can capitalize on.

So for us, it's important to make sure that we develop product that are adding value but also affordable for that market but we still have a very high expectation relative to our margins in the company and we are not giving up on that. So you should earn your right in order to introduce products with lower margin. You have to find a different way to produce them and make sure that you get the margins that we expect and that we can prospect you as a shareholder.

Scott Davis – Barclays Bank

Okay, that's a good answer. It seemed in this presentation as I'm looking at Slide 7. There's new emphasis not a new I should say, but at least an increased emphasis on acquisitions. You cite that, there's a line here says, multibillion dollar deals possible. When I think of 3M and your margin profile and the technology you're having.

The stuff available out there realistically that you could buy without having to pay enormous multiples and I think 3M type of assets. The things have been bid up so highly 15 to 20 times EBITDA. I mean, it would be difficult to do this types of deals. I would image but, is it realistic to it to assume that you can find things that are interesting that have the margin structure and the growth structure that you're looking for?

Inge Thulin

Well again, it's coming but first of all you're right when you correct yourself. It's not the new emphasis. We've done acquisition, quite a number of acquisitions over the years, right? I think the new one and very good thing for all of us is that based on the portfolio management, we are putting place. We get a very good profile of where we should invest first, there's a second as we move ahead.

I think the biggest acquisition 3M had done over is a $1 billion or so and in some spaces in order for us to be more relevant. We maybe need to do slightly bigger than that, as we move ahead. As you saw, we didn't execute on acquisitions last year and the reason for that was that, we couldn't find any added value for all of us, but I can tell you our pipeline is strong.

We are working it for each business and let's see what is happening as we move ahead, but in order for us to build out relevance in some cases. We have to look up interesting spaces first.

David Meline

I guess, I would also add Scott that. I mean, it would be quite unusual as you observe that we would find companies that have the type of profitability in performance that 3M, but that's very typical. We'll look at targets will identify, how we can create value by bringing them into the portfolio and leverage either technologies or brands our global distribution and when we do those transactions litmus test for us, is to become convinced ourselves that we can take a business and turn it into a 3M like performing business, which we've done very successfully over the years in a number of different instances.

So that's either the challenge or the opportunity certainly.

Scott Davis – Barclays Bank

Okay. Great. Thanks, guys.

Operator

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

Shannon O'Callaghan – Nomura Securities

Just maybe a little bit more on some of the moving parts on managing currency in the quarter. I mean, first of all, to get to this neutral position in Venezuela, did you have to take a head to get your remaining receivable out of there and then the positive price in Asia Pac, which never happens, is that an FX dynamic?

David Meline

First on Venezuela, yes we actually as I mention in the commentary. We did see a slowdown in sales and income that we generated on the ground, in that the availability of currency of imports is been pretty non-existent since already the fourth quarter. So that caused to slowdown in the business, what's also true for us as we've been able to maintain as I mentioned here neutral monetary asset position and therefore as it relates to both the local balance sheet as well as the exposure we've got from offshore.

We were able to manage through that and we don't see that being risk as we sit here today and of course things can always change, but we feel much better today than we did last time we were on the call, there months ago.

And then in Asia Pacific, could you repeat the question?

Shannon O'Callaghan – Nomura Securities

Well, I mean price was positive in Asia Pac, which is pretty unusual, I didn't know if that was in price increase related to offsetting some type of FX or that's unrelated.

David Meline

We have had some pricing pressure in some of the countries out of experienced evaluation over the last year. So that would be a portion and what's also true right now is in a number of our product areas. The price value relationship of some of the new product, we are launching is been very strong.

So we were encouraged by the performance there this quarter.

Shannon O'Callaghan – Nomura Securities

Just on kind of your current assessment of the global economy. Volumes in every region except the US improved this quarter. US sounded like it was mainly weather related, are you encouraged by that? I mean do you feel like improving momentum or is it more of a comp thing. Maybe just a little more color about what you're hearing from the businesses globally and how encouraged you might be or not be?

Inge Thulin

Well I think, first of all of course encouraged in the way that the growth is, it looked like steady for us. Now if you look upon our performance here the last couple of quarters, it have improved for us right and as you say, it's going up and down in some parts of the world. I will say that, APAC it came back slightly. So APAC is, I would say the same position as we've had before.

They had a good growth in the quarter for us slightly better than Q1 and how they ended a year. West Europe grew 3%, which is equal to how they ended back 2013, so that's a 3% and it looked like the combination in Europe, what we've talked about before about North and South is not very much equalized, right.

So looked like 3% is steady growth there. Central East Europe, Middle East. I was certain Middle East, Africa had a good growth for Central East Europe slightly lower in the quarter where you could see that some business or countries did well like Turkey had higher growth rate than you saw in Russia and Poland.

United States personally, I'm not overly concerned was 3% growth for the quarter. We start at slower and came back stronger in the quarter and that's related to what David talked about relative to traffics and stores and delay in construction. Specifically in the road side for us.

So I think its look like we are going sideways slightly, up but not much, right? So I think we need, neither one but two quarters here to see, if it's moving on a high run, but as we said we are firming our growth rate for the year. So we feel, yes there you have the answer. Encouraged and I look upon it, rather better than was.

Shannon O'Callaghan – Nomura Securities

Okay, thanks a lot guys.

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

So on health care, you're continuing to see very nice growth here in developing markets and I know in the past, you've talked about new products and penetration and all that. So maybe just, help us with, where are you in terms of penetration. How much runway do still have there and the sense of sustainability of this double-digit growth rate that you're seeing here?

Inge Thulin

Well, as you saw health care grew 6%, right? And if you separate out developed was 5% and developing 10%. And you think about the mix for us, it's like developed is almost 80% and we are 20% in developing. So already there, you have the answer relative to big opportunity in the developing world, as we move ahead.

Now we have very sophisticated solutions in our business in health care, which is one of the reason why we are able to continue to grow in developed word and to very attractive margins and the pipeline of new products is very strong for us in health care, if that's in hospital consumables with fastening systems related to our dressing business or if it's in infection prevention, we're becoming new measurements tools start that will increase the time for measuring what they're doing in the infection area by 50%.

We have a very strong pipeline of product going on there. So I will say that, think about it like developed word, we are able to continue our growth and margins due to very good added value products, which is needed in an environment where there is pressure on cost and then in the developing word for us it to, start to implement the penetration plans that we now have been working on for quite some time and in addition developed products that will meet the needs from a price perspective in some of the countries there.

They never have a problem with a quality of products, as you assume. When you look upon our Tegaderm products, or Micropore tapes or [indiscernible] products. The problem is never quality, the problem is affordability and there is different ways for us to go around that.

So we are very, we see very positive on our health care business and as you see again this quarter very good result and it's not by accident. You know, as you said business we are build out for many, many years and there is lot to come relative to our future in health care.

David Meline

I'd just add, Ajay. I think another piece of evidence that supports that is not only the consistent high level of growth, but again for example this quarter double-digit growth in a number of different countries Brazil, Mexico. If you're looking Southeast Asia, if you're looking China.

So if you saw it in one place concentrated you might be less confident but as we see it individually across all of these markets. It's very encouraging as to the opportunity and sustainability of the growth.

Ajay Kejriwal – FBR Capital Markets

That's good. Maybe couple clarifications on restructuring you mentioned $40 million investment in the quarter. Is that included in the $0.07 growth related investment you mentioned and then if you can help us with a full year number, what should be modeling in for restructuring?

David Meline

Yes, so the answer first of all is yes inside of the $0.07 the share, we have $40 million. It was a combination of restructuring primarily in some of our operations in Europe as well as the cost year-over-year increase of this European supply chain which as I mentioned will lap that increase, now as we get into the second quarter.

So that's piece one. Piece two is; if you look at the total of the combination of the longer term investments in R&D and business transformation plus these items of restructuring and repositioning. We expect that, we had said $0.10 to $0.20 a share for the year and as I mentioned earlier, it looks now like will be towards the high end of that $0.20 range, with some front loading in the first quarter.

So you can think about it declining somewhat, as we move through the year.

Ajay Kejriwal – FBR Capital Markets

Got it. Thank you very much.

Operator

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

Jeff Sprague – Vertical Research Partners LLC

Just two quick cleanups for me. First on electronics, you noted China, Hong Kong was kind of strong ex-electronics but your electronics performance overall actually looked okay, pretty decent. Can you just kind of reconcile those dynamics and a little more color on what's going on in the electronics part of the business?

Inge Thulin

Look upon electronics specifically relative to APAC in total. So we had 5% growth there and that business is type of moving in between countries from time-to-time. So for China and Japan specifically was type of opposite perspective. They have [coms], that in one case was easy and the other case was tough.

So easier for Japan, tougher for China so that's the answer and then this quarter specifically much more business went into Japan in terms of our sales but later converting around Asia. So that's the answer to that question. So if you take China for us, best business there was 8% growth which is slightly better than fourth quarter for us and slightly better year-on-year.

So China was okay, when you look up the total electronic markets. When we look upon semi-conductor, data storage, smartphone, notebook, tablets, T.V., etc. The market generally speaking went sideways I think in terms of volume. That, you had of course tables going up and capitalize on notebooks in terms of the volume generally speaking.

So for us, we are in all those devices with different type of levels of penetration, but that business is improving generally speaking and I would say, if you take the whole business group of the electronic and energy. You saw they had growth and they have margin expansion of 200 basis points year-on-year.

So it's we are coming around and addressing a lot of issues in that business and I'm personally very encouraged and I think that management team guys doing a super job for us addressing some of issues we've had in the past. So I think, it's good we are addressing it and they're taking care of their own destiny and I'm very pleased to see that happening.

Jeff Sprague – Vertical Research Partners LLC

Right and just a quick one for David then also. You've initially guided your tax rate, assuming the R&D tax extenders and everything came through, it looks like they won't but you've found a way to maintain the tax rate guidance. What is going on there, is it some of the restructuring Europe maybe just a comfort level also on that tax guidance at this point?

David Meline

Yes, so if you look at the guidance we maintained the 28% to 29% for the year and that does continue to presume that we see a renewal sometime before year end of the R&D tax credit, which is worth about 40 basis points to us. So both of those we continue to foresee and then we saw some, first quarter was a little bit better than the overall full year, which was related to, we completed some prior year audits and we ended up releasing some reserves that we'd established, so that's the answer to the question.

Jeff Sprague – Vertical Research Partners LLC

All right. 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

Just again cleanups I guess, so David you mentioned roughly half of the price increases is a function of the currency weakness particularly in Latin America. So one thing about the, 110 bips benefit from price roll seeing your margin build and 50 bips from FX pinch. Is it that a phase, the impact currency net-net is neutral to margins?

Inge Thulin

No actually. And then we try to call it out, we had a net impact of FX in the quarter of 50 basis points in that.

David Meline

Nigel, if you look on the income statement Slide with the margin block, you'll see it right on there.

Nigel Coe – Morgan Stanley

Right, but then 110 bips from price, in some ways a function of currency and then you got pricing.

Inge Thulin

Sorry, Nigel. So the 110 is both price and raw's. Right?

David Meline

Yes.

Inge Thulin

So raw material cost for us were down around 2% year-over-year, so that contributed to the 110 and then as you correctly pointed out, as I said the portion of price that remains of that 110. It's more or less 50/50 this quarter. So there is certainly some offset, to be honest I don't have top of mind, is it precisely a full offset. I think it's a little less than that.

Nigel Coe – Morgan Stanley

No, that's really helpful and then the second part of my question was, you talked about raw materials were down 2%. You've got to say, opposite side different mix of raw material input and most of the things as we look at so, do you expect [indiscernible] generally speaking how that raw material in nexus tracking, particularly as we go into second quarter?

And as we set on track for the roughly $0.10 of benefits from roadmaps this year?

David Meline

Yes, so that's right. So starting out. We have guided $0.05 to $0.15 of raw material cost benefit for the year versus last year. Certainly in the first quarter, we were encouraged by the performance in that area and that's a combination of not only the trends on raw materials cost themselves, but also to the extent that are efforts to identify alternative formulations to lower our raw material cost and change the composition to the extent that.

We have efforts that would actually lower the amount of raw materials in a products. These types of things are included in that performance and the good news, as our sourcing organization continues to do a really job in that area. So we feel good about the guidance on raw materials for the year.

If anything, if I were to pick it the trend. It appears to be trending towards the high end of that range for the year.

Nigel Coe – Morgan Stanley

Okay, that's very helpful. Thanks guys.

Operator

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

Deane Dray – Citi Research

I was hoping to get a little bit more color on the look forward into the second quarter. Maybe some commentary on how April has played out so far and David, are there any dynamics we should know about specially following up on Jeff's question on tax, a bit of a benefit this year with those releases. Anything unique about the tax or corporate expense for the second quarter?

David Meline

Okay, in terms of, first one was what again? So in terms of the trends on volume in revenue. If you look, if you look at the first quarter first of all, typically March is our strongest month in that quarter, which turned out to be the case for us again this year and maybe a little bit stronger, slightly stronger than typical intra-quarter pattern.

If we look at second quarter, we feel good about the overall view that will continue to operate. We said 3% to 6% for the year, which is a mid-point of 4.5%, which is exactly where we operated if you look at the second half of last year, we ran at 4.5% first quarter. We now ran at 4.5% and we feel good about second quarter continuing at that rate.

Pluses and minuses, we've kind of inferred that we some level of optimism about the US. They're also areas of uncertainty and certainly places like Japan which is a very significant business for 3M. We did see a pull forward, it was quite clear pull forward of sales into the first quarter result of the tax increase.

So I would say pluses and minuses. April started out fine so, we feel good about stable performance for the company. In terms of taxes, we had little over 27% rate in the first quarter, which was closing out some prior year audits and included in that there was a particular case, that we benefited from where, we were able to treat as deductible assets, some assets that had been previously disallowed.

So that was a one-time occurrence for us in the first quarter which given that rate in the first quarter solidifies the view that for the year, we can operate at 28% to 29% and I don't see any unusual patterns that we would foresee quarter-by-quarter through the balance of the year.

Deane Dray – Citi Research

Great, that's helpful. Thank you.

David Meline

Sure.

Operator

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

Joe Ritchie – Goldman Sachs

Two quick questions; first on pricing. The currency fluctuations is notwithstanding, it still seems like you're getting 50 to 60 basis points in price and David, if I'm correct with your raw mat guidance, you're now. Do you think it's probably going to be trending towards another 50 to 60 basis points in the raw mat benefit for the remainder of the year?

So is there any reason to believe, that you're not going to get at least price cost benefit of 1 point for the remaining three quarters?

David Meline

What we expect price cost for the balance of the year. What we have guided originally was on pricing that we thought, it will be very modest for the year. Obviously, with the stronger first quarter performance significantly supported by the fact that we were having to offset foreign exchange.

We expect that pricing performance to decline through the year, but nonetheless be positive and then on the raw material side, as I have already indicated I'm expecting if we look at that $0.05 to $0.15 range we set out for the year. I'm expecting that right now as we see it will trend towards the high end of that range.

I think from that, you can probably get to the specifics that you were just asking about.

Joe Ritchie – Goldman Sachs

Okay and just a follow-up on that a little bit. You [indiscernible] 60 basis points potentially extra currency this quarter. You're continuing to invest at a higher rate on R&D, so is there any reason to believe that pricing should step down for the rest of the year. On just not thinking that.

David Meline

Yes, it's a good question. I mean we have a number of actions that are calendar year based and so what we do expect is that, we will see some decline through the year, which I why we had originally guided that. It would be modest price impact on the core base.

Joe Ritchie – Goldman Sachs

Just one question on the buyback, it looks like the gross buyback this quarter was around $1.7 billion. I think your guidance for the year was $3 billion to $5 billion. So perhaps, one if you can just comment on what the net buyback was for the quarter and then also what would get you to maybe flex the $3 billion to $5 billion higher in the coming quarters.

David Meline

Sure. So first of all the next buyback in the first quarter was $1.4 billion against the $1.7 billion gross. If you paid attention of the trends over the last couple of years, what's happened is, we've substantially seen a reduction of the outstanding on exercised option. So that's cut about an half over the last several years.

So that will cause our net to be much closer to gross than it has been in the past. So that's one of the reasons, why we see it much closer this quarter. Secondly, in terms of the overall gross for the year. Basically the way I think about this is, if we go back to the fact that what we said we would do now, is we would move our capital structure to be better optimized going forward.

And so we are starting to allocate the capital to put that in place and that started last year as we drew on cash. This year, we've said we would increase our leverage by $2 billion to $4 billion and if you look in the first quarter with the actions that we took, our leverage went up by about $1 billion against the $2 billion to $4 billion guidance for the year.

So it's right in line what we'd indicated we would be doing and we also did modify the outlook for the year on the gross buyback to $4 billion to $5 billion from $3 billion to $5 billion based on, the fact when we add up all the pluses and minuses. We concluded that would be the right level for us here in 2014.

Joe Ritchie – Goldman Sachs

Okay, great. Thank you.

David Meline

Sure.

Operator

And our last question comes from the line of John Roberts of UBS. Please proceed with your question.

John Roberts – UBS Securities

Since you're open to looking at multibillion dollar acquisitions. I don't think you've ever done a hostile, but we've had this due development of using activists to facilitate big acquisitions, is that something that would be too aggressive for someone like 3M to consider?

Inge Thulin

First of all, thank you for the question. I don't think that's the way you should move forward and when you look upon those type of things. We will like to do, strategically important acquisitions that would add value for everyone involved including 3M and our shareholders and the customers that was part of that.

So I think that should be done in very careful way as we move ahead.

David Meline

Yes, if I could add. Our experience – a couple of comments there; one is we did indicate at year end that as we looked at on our own capital deployment and looked at our capability both in terms of our performance on businesses we've been acquiring in recent years as well as the integration capability that we put in place to ensure that we will continue to have good performance going forward and given the size of the company and how we are deploying capital, our conclusion was it would be appropriate for us to no limit the scope of acquisitions to say $1 billion or less, which is been the history of the company.

So hence, we indicate that we would be open to doing things larger than a $1 billion because likewise we don't like to surprise people, as we take action. So that's one piece of our thinking. In terms of the subject of hostile versus non-hostile. What I would tell you is that, one of the advantages we have as a company is typically.

When we do approach companies with the possibility of acquiring, the reaction is typically very good because 3M is known be the kind of company that invests to build businesses and therefore, we found that generally speaking the reaction is good and that's our preference to take that type of approach frankly, if you think about the culture and a company that makes sense to us.

We are about building businesses here and that's we would continue to plan to do.

John Roberts – UBS Securities

As I look across the portfolio. It seemed to me, the electronic and energy area might be the one that could benefit most from a major acquisition. Maybe the scale might help with the margin improvement, you're trying to achieve there and valuations, I would suspect a more reasonable and that's based into lot of the other competitors that have had struggles in that area over the past couple years as well.

Inge Thulin

Well, I think all five business group can benefit from actions in this area and it's an ongoing portfolio management activities that we are working on. So I will not call out, one business group over another one relative to, how we can build strings on strings in those business groups because when you look upon our strength in each of the five business group, it is very strong.

So I think in each and individual business group that will add value by us working on the portfolio management as we are doing at the time.

John Roberts – UBS Securities

Thank you.

Operator

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

David Meline

I'd like to thank everybody for joining us today. Thanks for listening. Thanks for your attention to 3M. Have a great day. Good bye.

Operator

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

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