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3M Company (NYSE:MMM)

Sanford C Bernstein Strategic Decisions Conference

May 28 2014 10:00 AM ET

Executives

Inge Thulin - Chairman, President and CEO

Analysts

Steven Winoker – Sanford C. Bernstein & Co.

Steve Winoker

Good morning again. Thank you all for coming to our 30th Annual Strategic Decisions Conference. I am Steve Winoker; I cover U.S. Multi-Industry and Electrical Equipment including 3M. We are very fortunate once again for the fourth year running to be joined by Inge Thulin, Chairman, President and CEO of 3M, a company on track to more than $32 billion of sales this year by numbers. Gross margin in excess of 48%, operating margins crossing 22% and return on capital in the high teens with a dividend payout ratio of almost by again my definition dividend payout ratio of about 45% and buybacks we are planning in $2 billion to $4 billion range this year. The 2017 target itself, we are talking about 4% to 6% organic growth, 9% to 11% EPS growth, more than 20% ROIC and 100% free cash flow conversion plus CapEx rising to the $1.9 billion to $2.3 billion range. So impressive numbers.

Inge has been at 3M for more than 30 years, but took over the helm almost two and half years ago now in February of 2012.I am sure you would all like to know that the stock is up 61%, since that time almost 17% out performance versus the S&P. So with that I would like to hand it over to Inge. And then we will go to Q&A here for-- follows our chat following that, like to remind all of you now that we have those anonymous index cards, free to fill out questions, raise them up, runners will bring them up to me and as always I prioritize those over my own.

Inge Thulin

Thank you, Steve. And good morning to all of you. It's a pleasure to be here this morning and talk about 3M. And I would like to start by giving a couple of comments relative to division of 3M before I start to talk about our strategies, our three key levers and some of the fundamental strengths that is driving return to our investors. So we laid out a very clear vision that is explaining what we are all about and the purpose of 3M. And as you know our vision is about what you do, how you do it and where you do it. It should be authentic to you, it should call out a competitive advantage and it should be authentic and holistic. And when you think about 3M in terms of our geographical reach and our portfolio base. For us, we can in fact advance, enhance and improve every company, every home and every life around the world. In terms of addition a good stretch and we can do it in terms of the every company we are if it is sophisticated industry, we have the platform, we are there to help to spec-in in order to for them to produce more cost effective products. If it is in every home and most people will think immediately about Scotch-Brite, Scotch - Post-it, Filtrete but it is more than that. It is many products in homes that we have helped other companies to produce, if that is refrigerator, stoves, claffings, TV et cetera. And then every life for us is around health care, schools, sustainability and community.

So that's an important element relative to the purpose of the company. That has been supplemented by six strategies and the strategies here are interconnected, interdependent and very important for us. The four first ones are all about growth. The fifth one is around people and the last one is around operational excellence. Very important in a way that you see in the first strategy which is around where to play that we talk about relevance to all customers. We believe if you are not relevant to your customers, the life will be pretty tough for you. You can see in the second strategy that we call out profitable market share. Market share gains are important that it need to be profitable. And you can also see that in the third strategy, it starting with the statement, invest in innovation. Innovation is the heartbeat of 3M. We are very committed to it. And one of four reasons why we are able to give you prime return on your investment in 3M.

Now we are an enterprise of $31 billion so as we end the last year. And you can see here that in the five year plan we have an organic local currency growth target of 4% to 6%. We have five business groups. All going from the size of almost $11 billion to almost $4.5 billion in size. And it is Industrial which has $10.6 billion with a target in the plan of 3% to 6%. Health Care that is $5.3 billion with a target 4% to 7% growth. Consumer that is $4.4 billion with a target of 3% to 6% growth. Safety & Graphics $5.7 billion and a target of 4% to 6% and then Electronics & Energy $5.4 billion and target of 4% to 7% growth in the five year plan.

Now there are four things that are the fundamental strengths of 3M. And they are important to understand because that is what is driving our returns. And also key elements in order for us to get leverage of everything we do. The first one is around technology. And it is more important because that is why we are able to share and combined elements of the base, broad based technology portfolio to produce unique, differentiated products translated to premium margins. That is a key element of 3M and I'll comment in a second relative to our technology platforms.

The second one is around manufacturing. We have a good footprint and we have a very good technology that including process and trade secrets that can be used in order to product products to very low unit costs. The third one is our global capabilities where we have a very big and huge subsidiary network around the world. And we have done business for many, many years in all countries around the world. It is an important element because when we commercialize we do that locally in every country around the world and as an infrastructure in place to all 30 divisions in the company to utilize. And then finally our brand equity. If that is 3M as a standalone for enterprise or if it is brand to specific markets, if it is listed on stethoscopes in healthcare, micro pore tape, if it is tagged around transparent dressing et cetera. The brands are very important for us and really fundamental strengths that's how we build out the businesses.

As we move ahead there are three key levers in order to create even more value for us. It is Portfolio management, Investing in Innovation and Business Transformation. And I will make some comments on all three of them. They are important in order for us to build an even strong 3M as we move ahead. The first one around portfolio management. We have categorized our portfolio in order for us to make sure we have the good understanding of the future, additional investments that needs to be done. And you can see here we categorized them in Heartland, Push Forward and Strategic Review. Heartland divisions or five divisions in the company stand for one third of sales revenue and slightly more in profitability. Commonality for them is that they are utilizing multiple 3M technology platforms. They are global in scale, they have very strong brand equity and we are able to be one of the leaders in those markets that we are participating in. The market that they are competing is growing slightly below the average of 3M Company. Push Forward is very much the same category efficient as Heartland divisions with a difference that they are not globally in scale yet. They are not using all the technology platforms and the opportunity is big for us. Meaning that the market that they are competing is growing above the average of 3M. Meaning additional in investment here will give us better return, faster growth as we move ahead. And then you can see Strategic Review businesses that during the last five years when we made this analysis, had underperformed relative to 3M's high standard meaning all of them made business, all of them made money, all of them are good businesses but they had underperformed relative to average. So what we are doing there is type of addressing that and sees how we can improve their performance.

Now we have a very strong global presence and as I said we have done business internationally for many years. And when you look upon the change in their portfolio on a geographical base, you go back to 2003, 21% of all business at that time was in developing economies. As of last year that's 35% and we estimate that in the plan moving forward to be 40% to 45%. Now why that is very attractive for us is when we look upon our portfolio, and we look upon the evolution of a country, what is happening in all countries in terms of evolution is that the first step is that infrastructure is built. When infrastructure is in place manufacturing start to expand, meaning also developed companies and countries, economies are investing. After that safety regulation are improving. Goes to standard need to be the same as in the developed world. After that when people have start to earn money and can start to spend the consume retail business is taking off. And then finally health care regulation is becoming developed and implemented in those countries.

When you think about our businesses, we are part of all those steps in the evolution of a country. And as I showed you earlier and as you know some of those businesses step we take off later in that cycle is also the most profitable for 3M. So this means that we are part of the evolution of any country around the world and upside is very good for us on the geographical basis with very good upside return for investors.

Now one thing that we decided to do is also to step up relative to investment in research and development. I said that in the third starting with a statement. Invest in innovation. Historically, we have spent 5.5% to 5.6% in research and development. And we are stepping that up to closer to 6%. And this is the heartbeat of 3M. It is important for us in order to make sure that we have investments that we are targeting very specifically on new products as we move ahead. And it is also differentiation where you can see that you can get a global competitive strength in order to do that in all markets around the world. And it will maintain an increased value to your customers. And that is of course one of the reasons that we have premium operating margins on returns on invested capital.

Now we last year spent $1.7 billion and which is now moving to 6% of sales by 2017. And important thing is to front end of this. You can have at technology platforms which are blessed to have but we also have a very robust process in the front end of the organization. We basically use two processes. One is called Customer-Inspired Innovation which is used very much for spec-in businesses. And then we have something we called Insights 2 Innovation or i2i which is very used on consumable businesses. Those two processes is the starting point for us relative to later outcome from the technology platforms and a commercialization of those products. It is a very powerful tool that is used in all businesses around the world and interconnected with our customers in order for them to have a say they really in terms of what we develop based on our platforms.

Now organic growth is our primary strategy but we'll compliment with merger and acquisitions. And they will be based on the portfolio work that we did. So we build on a portfolio prioritization, will be in terms of building out relevance in target areas, will be in higher growth spaces and could also be increased focus on technologies. And we have also during the last two and half years enhanced our integration capabilities. So we feel that for the right type of deal that we are ready to make move in this area as well.

We have laid it out very good relative to our playbook where you can see that in the Heartland it is to bolster technology position and pursue adjacencies and that's coming our way. And in the Push Forward, is to build scale and facilitate market penetration on a global base. And it's also in terms of the process where we had in the past a bottom-up process we have complimented that. We now also have a top -down on a corporate level in order to make sure that we in some cases can see acquisitions that can be broad based in different business groups. And the one we did last year was a Ceradyne is an example of that. And then you can see of course the value creation for us is important for us when we do these and they should be accretive to our financial target as we move ahead.

And the third lever is business transformation and is fast to get more effective and productive an ideal 3M and also of course increased our customer intimacy and responsiveness. A very important tool for us in order to become even more productive as we move ahead. And as to do with the whole planning process from customers to whole way back to manufacturing.

When we think about our return to shareholders. You can see on the dividends side at 2014 is the 56 years consecutive year with annual increase. And as you know that increase was 35%. We have paid dividends without interruption for 97 years now. And you can as we move ahead you should think about assumption here that increases will grow in line with our earnings over time. When you think about gross stock repurchases you can see here that in the prior for 2003 to 2012, we had $18.7 billion of cash return to shareholders during that period of time. And 2013, it was $5.2 billion and we estimate now to be $4 billion to $5 billion for this year. And you should think about it like the share repurchase program would add 2% to 3% to earnings growth annually. So we have done a work historically relative to return to shareholders and our objective is to continue to do that also as we move ahead.

We laid out our five year plan back in 2012, on November 8, 2012, as Steve has comment on that in the introduction here we can see an EPS growth of 9% to 11%, organic revenue growth of 4% to 6%, return on investment capital around 20% and then free cash flow conversion around 100%.

Just to comment on the first quarter that's to -- there you can see our earning per share was $1.79, up 11.2%. Sales were $7.8 billion, up 2.6% in dollar terms but in organic local currency growth of 4.6%. And you can see Health Care had a 6% growth, Industrial and Safety & Graphic 5%, Electronic & Energy 4% and Consumer 3%. You can also see that our margins went up to 21.9% which is an improvement again year-over-year versus already high margins last year. And as I said we return $2.3 billion of cash to shareholders via dividends and share repurchase.

So by that I hold it here and I think we go over see division here again then after that we go over and take the Q&A here. So thank you very much.

Question-and-Answer Session

Steve Winoker

Thanks, Inge. And just to remind everybody please raise your cards in the air because we got to collect and bring -- brought up to me. In the meantime, Inge, I am now reflecting on the number of years you've already been up here both as COO and now as CEO. And the changes have been significant right. You reorganize into five units, you brought as I would argue focus on prioritization to the organization. That mean saying no too many things as well yes in a consensus disruptive environment historically, you had strategic portfolio review that you talked about, you have a desire to pick up M&A as well. Sedition some long standing businesses if necessary if they are not fixed. You have increased leverage on a balance sheet. You picked up dividends to pay share buybacks as well CapEx. All you are investing for growth. So lots of changes since you have been there. Would you care-- what would you characterize as evolutionary? What's been behind the sense of urgency for these changes? How is the culture changed to accommodate all of that?

Inge Thulin

Yes. Well, we don't look upon this as evolution or revolution. We look upon it like a way for us to improve an already strong 3M. And as you said earlier, I've been with 3M for over 30 years. And had a good feeling when I came into the position of what I thought was pockets of excellence and then pockets of things that we could improve as we move ahead. And very early had a process where we together with the management start to look upon certain thing of the company. Division was one thing that was developed at that time and the six strategies was developed with a management team which is bigger than they direct reports to me. Why that was important was that the other thing we did was after the strategies what type of set top-down, we developed tools and metrics in order to measure them. And that was developed by the organization. That took us from February of 2012 until June and it was a process where a lot of people in the company were involved in order to help us to do that. And I think that was a key element to get buy in for changes. So people felt that they were part of it. And we did an internal opinion survey here like six months ago and the result was very good relative to understanding what needs to be done. So I think it is -- there was no bad reaction and I would say that historically because everywhere I have done business in the past, I always prioritize the businesses. And I know what will happen, the first reaction is always for those people that believe that they are on the left hand corner and may be is not so appreciated right so I spent a lot of personal time with the leaders on those businesses in order to make sure that there was clear that it is not personal, it is business and number two, we identified so we can help you in order to improve. And I think that's the fundamental of businesses when you not have the best time, there is no reason to, you scream every quarter why he is not working. Well, I think the point is identified with facts and gauge and help them in order to improve best one you had. So I would say the process worked very well and it was a process of little bit of top-down from the beginning but a lot of engagement immediately after that. So I think it is working well for us and the results are coming and I feel good about that process.

Steve Winoker

Are you early would you argue in the organizational change from here or now you feel like you are in a stabilized mode and if they question -- what's next in terms of what's changing for the company?

Inge Thulin

Well, I think first of all business is always changing. And we need to change with that. We have consolidated a lot. As I said in the first strategy we are -- it was very clear message of customer relevance. That mean that people look upon the strategy and they type of okay, there was a clear message. If we not a relevant to customers we will not win. So and many things happened into organization where we consolidated and realigned divisions in order for us to be more relevant and bigger in the front end with customer, faster to do business with. But also the investment and research and development which is relevance to our customers. So I would say that this is an ongoing process always. And a portfolio management is nothing to do this year now is gone. That will continue to move as you go ahead. And you do it for the right reasons.

Steve Winoker

So we have a number of questions from the audience. Some are around portfolio management and the strategic areas. Some are around the current environment. Let's see if we can knock off some of the current environment issues first. I think true that you guys are in a pretty unique position actually with regard to the global economy. So can you describe what you are seeing in terms of the current organic growth environment across geographies and segments as well? And volumes versus price wide.

Inge Thulin

Yes. We talked about 2014. We've said 3% to 6% organic local currency growth for the year. First quarter we came out 4.6%. So you think about it is in the middle of what we have said .There was some positive things in the first quarter. And yes I comment on that because I think it is important as we move ahead. West Europe we had a 3% organic local currency growth. And we have said for the year flat to 3%. We came in 3% to first quarter and we see things are moving positively in West Europe even if it is coming from a lower level. And for me that's an important sign because in my view there is -- West Europe is 24% of the global GDP and West Europe is a big domestic market. The things that you may be don't like with West Europe in terms of labor laws et cetera but they are big market is there domestically, so that was good. So I feel a slight momentum going there. In Asia, we had relatively good growth. We had electronic generally speaking that is moving around from different countries out there had 5% growth. You look upon China specifically, you take base business in China was 8% which is up from 7% a year ago. So a slight uptick in China. And where we look upon China for the total year we think that would be middle -- mid to high single digit of growth. But so that's okay. In Japan, had a very good first quarter but there are some elements going on there relative to change in the VIT system. So we had a good growth at first quarter. We believe that will be low to mid single digit for the year. United States, for us was 3% organic local currency growth which was slightly below our expectations. But we also -- we know why and the reason was two. One was construction. We are beginning late in traffic signage. A lot of those projects were move forward due to weather. And then it was traffic installs on the retail and consumer. So that was the two things that related to first quarter. So I am not concerned about that. Latin America is -- we had 11% growth organic local currency growth in Brazil, $0.11, we have 15% in Mexico, generally speaking that region may be have slowed a little bit versus past years. But still moving along very well and Latin America for us really very good balanced portfolio there. And it is probably the most developed -- developing region of the world for us. So I would say that we are not changing any guidance for the year relative to growth we told 3% to 6%, anything I feel personally a little bit more confident that our model is working, right. I was pleased with 4.6% organic local currency growth on our big business. I felt good about that, not totally happy but I start to feel a little bit better.

Steve Winoker

Okay. One of the follow up question here is about -- how big is your business in China today? How --

Inge Thulin

It is around 9% of the total revenue of the company and Japan is more or less the same size.

Steve Winoker

And you mentioned I think you mentioned mid single digit just now growth expectations for China.

Inge Thulin

Mid to high single digit

Steve Winoker

So that's -- the question is here if China GDP in fact turns out to be mid single digit over the next few years, what rate would you expect, what multiple of China specifically?

Inge Thulin

Yes. We are -- if you look upon our total business. We are expecting 1.5 times IPI, Industrial Production Index. That's how we measure it. And that's what we expect from China despite how their economy will grow. My view on China is that's the second biggest economy in the world. There is still growth of very acceptable and respectable and we need to capitalize on that. And the penetration is still very low in China. So I would say that we should do at least 1.5x IPI in those economies as we move ahead. And I know that we have capacity and capabilities to do that. So that's why estimating as we go ahead.

Steve Winoker

And may be we can dig into China just a little bit further. The challenge historically for 3M in China, one of the business is consumer, given the relative strength of consumer and so many other parts of the world for 3M, how do you feel that's going and do you see that accelerating and may be little perspective on that may be help there too.

Inge Thulin

Well, it is improving. If you look upon the portfolio in Asia generally speaking about China specifically the two biggest business is there based on economic development is always industrial and electronic and energy. That they are going together early on in their economy. So they are the two biggest for us. Not surprising that smaller is health care and consumer based on the chart and safety. So it is following the evolution. Now if you think about the way I showed that the consumer is the fourth and health care is fifth. That is in the evolution of an economy. Sometime health care would go earlier. And the reason for that is that there is a key opinion leader that are driving the decision around purchases on a global base in health care versus consumer retail is brand -- local brand that is in your mind. So we all grew up at a place in the world where brands are becoming an important element very early. And that can take long time to break through relative to what you do. So I would say in some cases and China is one of those cases where health care is a little bit ahead of consumer for us. With that said, we are making good progress in consumer but it will take a little bit longer time for the reasons I said that it take time to build the brand equity in those environment, right. So but it is the smallest business for us in China and we are committed to build as we move ahead. We were -- if you think historically around the company our consumer business in Europe is on the relatively small and the reason for that is that back in the 50s or so I don't think 3M was more focused on industrial at the time and had a lot of big regional competitors that they -- they decided that a time not to take on right. In China, we have decided to take it on.

Steve Winoker

And you are not -- I mean the question of how you are late in that or not in China on consumer and local competitors? Are they at scale, any of them?

Inge Thulin

No. We are not late but to be honest I will like to be further ahead but it is not too late. And I think the important thing you go back and think about the fundamentals of 3M where brand equity is one, the brand equity is in that business, right. That's why people -- you think about 3M, after that generally speaking people think about Post-it, Scotch, Filtrete, Futuro, Ace et cetera, that's right in and out. And we will be there.

Steve Winoker

There is broader investor question here about the emergence of Chinese competition across more of your market and seen at both locally and broadly. What is the competitive environment like?

Inge Thulin

Yes. I think in all of the developing economies over time the local competition is increasing in a way. And it can often be may be into utility businesses so close that is more linked into government and so forth. So I think you have always to look upon as well, there is local competition. You need to make sure that you invest locally in order to win that game with them. And that is why 3M always invest locally for the domestic market. We have never-- there is a capital thing I think is important to think about 3M. All investments we do overseas we do for that local market. We never go to a country in order to capitalize on low labor cost and something in order to export. So we invest in order to capitalize on that local market. That is also important to think about. We never left United States. So every expansion that we have done is for that market. So as United States you think you go back 10 years or something where we talked about U.S. is very slow is coming back, we never left. We have the same capability and capacity in United States today as we had 10 years go. So I think good about that in terms of momentum going and shifting around the world that we are able to serve the local market in all those countries.

Steve Winoker

Well, I guess while we are on the topic the U.S. investment, are you seeing or you believer either industrial resurgence or manufacturing resurgence in the U.S. based on two faster deals?

Inge Thulin

Yes. I think it is coming. The output in manufacturing is improving in the United States. And as I said for us it is not too expand more of capacity necessarily because we never left. So but we are doing well in industrial businesses in the United States and also in health care to be honest, right. So I think that there is an advantage over time I assume for United States in terms of manufacturing, yes, I think so, so that's why I think it is important that you always balance your investment and make sure that you stay close to your capabilities. For us, United States is $10 billion or is one third of the company. And we have all capabilities here in terms of research and development. The big center is here right. And manufacturing capability is here and is our home arena, right. Our brand equity is raised on so United States, my definition is a good place for us even over time it is becoming smaller into portfolio because international is growing by definition.

Steve Winoker

There is a question from investors here; you have had prices a tailwind for some time now. To what extent is there -- are you seeing any kind of price deflation tendency and is it -- are you challenged in terms of your ability to increase for take prices?

Inge Thulin

Yes. We had -- first of all in most cases we are price leaders. And as two reasons why we can take price. One is research and development, flow of new product that is adding more value. And the other reason why we would take is in order was -- we are in some type of deflation then we will do it. First quarter, we had 1.2% price increase. And that was based on those two elements. As the year is going I think it will moderate a little bit but it would still be positive over the year for us. But we have always been able to run a good operation relative to price. And I think in all businesses except for electronics and energy, right. Electronic and energy is different by definition, right. So it is a different game there. But all other we are able to utilize our capabilities. And key to it is research and development. It is an absolutely key element and that's why I am saying that on the third strategy invest in research and development is the heartbeat of the company that is why we are able to give good return to shareholders.

Steve Winoker

So you mentioned electronics and energy, that's a different beat in terms of pricing which I understand. Does that make it less attractive for 3M as a market?

Inge Thulin

No. First of all if you have to separate electronic and energy. But if you take electronic which I -- let's talk about that. It is very attractive for 3M due to the fact that they are based on technologies. And it is which we know and can provide a lot of solutions to them. And then number two, as soon as you spec-in it is price out. And we know how to do that. We are very efficient in terms of operational excellence. So I would say that electronic space was, is very interesting. You have to yes to -- get the business modeling place that can deal with it, right. And it is very fast moving business but we can deal with it. And we are happy with our business and they are improving quite a bit over the years. And if you think about the margins health care is the highest, electronic and energy is on the low end in the company, still premium margins for that industry, right. So they are able to -- and then you have three other businesses just in the middle. So -- I am very pleased with that business in that environment.

Steve Winoker

Okay. Question from the audience. Why emerging markets are margins higher than developed market margins? And how sustainable is that? You have already answered this question 50 times.

Inge Thulin

Yes. Well, there is -- if you think about our margins, generally speaking the way to look upon it is actually to think about United States and West Europe, so let's assume you have 22% margins right. United States and West Europe is slightly lower than that. The difference is not in terms of research and development investment and/or the price point for the product. The differentiation is in SG&A infrastructure in those types of countries, in the developed world. So we have learned over time there was different time when we build our business in United States and when we build our business in West Europe, this is today, right. So today we have a much lean organization in place. We don't build subsidiaries infrastructure in every single country et cetera. So we are very effective in the way we are running it. So I would say if it is sustainable over time as we go and it is a focus for us in management to make sure we don't build up unnecessary infrastructure in those countries.

Steve Winoker

There is a great question about your current utilization rate across your businesses. How do you look at that and what might that may be? And what kind of incremental margins are possible if growth is actually higher than you expect?

Inge Thulin

Yes. First of all, it is -- we have said in terms of margin. We've said that -- the plan is around 22%. Can we run margins higher short term? Yes, I think we could but for me to do business is like putting on your glasses and you have one-- on one side you have a telescope and on the other side you have a microscope. And what we do is we drive with the microscope to return on that quarter. But we also do strategic investments as we go. And I think in the first quarter that was around 90 basis point. So things that we did for that quarter specifically in terms of some small restructuring in West Europe, some investments in research and development et cetera. So you need to do them as you go. So I think on the margin side if it was very short term could be more but I don't think I do and the management do our job done relative to long-term investment for the company. In terms of utilization and capacity, we have capacity as we speak and we will make some investments in some specific areas where that would be more demand as we go right. There are some areas around the world where demand will increase dramatically I think short to long term and I am thinking specifically the area of respirator or so forth which is a huge, huge business for us. We do very well and I am committed to make investments so we have capacity there to serve that market. It was big deal in Asia.

Steve Winoker

I know it is a hard to generalize but what's your target utilization? Your idea of utilization is typically --

Inge Thulin

Yes. That's difficult to give a general answer to that.

Steve Winoker

Okay. So I will pass on it, fine. Can you discuss may be one or two of the new areas investing for disruptive technology R&D?

Inge Thulin

Yes, well, there is a couple of areas relative into they feel in area this is a big opportunity for us where we have some new technologies that I think will revolutionary -- revolutionary product for both automotive industry and consumer electronics. And then we have one or two very interesting development into health care specifically into what is mostly known for as one management where you see -- we see some technologies but I think we will really improve the value for the hospital side as we move ahead.

Steve Winoker

Okay. I am going to have move on portfolio management for the sake of time here. To what extent as you move into larger acquisitions. Is it more difficult for you to -- for 3M to add value to brand distribution technology versus smaller acquisition? How do you thought about that?

Inge Thulin

No. I think it is -- so I think that's an important element. If I go back to those four elements, still saw the elements that we have to look upon where we evaluate the potential acquisition. So say how -- can we really add value out from those four elements. And we will be able to do that. So the important thing is that you touch as many of those four elements before you do it. Now, history of three umbrellas to the acquisition is we have done relatively well. We have -- we did in health care, the ESPE was an acquisition, Unitech was an acquisition. Those are both into orthodontic business, [Rayson], which is in infection prevention done very well and also we did multiple acquisition. In fact, the whole Health Information System was an acquisition from the beginning. We did Aero technology was into personal safety including filter, did very well. We did Ace and Futuro in consumer and we did Winterthur in industrial embracive. All then did well and if you think about it they match very well to those four, if not all in all cases but to the four elements. Where we did not do so well was in smaller acquisition. So smaller acquisition have been most struggle for us I would say and so as a learning dad, they don't need to be huge but I am not keen to do too small far away that we not get leverage on those four elements in the company. So I will not say that it is more difficult on bigger that you can utilize those four fundamental 3M strength.

Steve Winoker

Okay. And there is a question around the acquisition environment; could you describe the current acquisition competition from PE price development of acquisitions?

Inge Thulin

Yes. I think it is -- there is a lot of money on the side line and I think the point here is to make sure that you evaluate yourself what you will like to do, right. I mean so you have to make sure that -- and I feel good that we have done the portfolio analysis work. We know the four elements that would add value for us. And then after that we have to look upon and it should be into markets that are end markets. End markets that are sustainable over time and over time it should be accretive to the financial target we have laid out. So I think it is as simple as that. And as you know we are very company that is very process oriented and very good at product management. So we are working the system very well and we do the right the thing for the shareholders relative to the money.

Steve Winoker

There are three four in for (inaudible) around the strategic review businesses. May be comment on one question on the percentage of earnings again or revenue from those and to what your course of action is likely -- either are you looking out in terms of sales and reduction, leadership changes, what kind of things are you doing to management?

Inge Thulin

Well, we stopped it -- when that process started like little more than two years ago, that bucket down there, the value that was $2.5 billion. Today, that's slightly below $1 billion. Actions have been taken -- if you are in that category either you gone and fix it to sustain you're combined it, you harvest it or you divest or exit. We have combined a couple of them and we have divested one which was the fishing business that was divested. So progress has been made in all cases to the better. And as I said is not billion there as we speak but it is not so much that if there is $ 1 billion or $1.5 billion or $500 million, the point is this is an ongoing process. It is ongoing processes where you have evaluated the businesses the whole time. So I think the important thing they will be active by definition is not if you are in that category to say that you need to divest. The objective that is may be the last one; the thing is how do you fix it? Can you combine it if you get more relevance with customers in the front end and drive out cost internally and/or are that technologies that you can utilize in the company so you harvest that business based on the front end of the organization? But I think there are some people are and I think it is natural. People go often to the conclusion that it is harvest or it is divesture needed not necessary.

Steve Winoker

Okay. And on that saw another question here also. You had 10 plus areas what I call middle chosen. That is left off the main focus areas. How are you managing that?

Inge Thulin

Yes, those are businesses that are doing yes to fine; they are businesses where you have combined so you have businesses before that were traffic safety system that was combined with security systems. So what are they all doing is, we have moved them type of out from a strategic review in there and now we given -- in that case we also made an acquisition actually to bolster that position. And now we have to see if they will go into Push Forward or in Heartland. They will not fall back right. So those are businesses doing yes fine, yes we maintained in the investment in them and have given them the resources in order to improve and then now it is up to that leadership to move ahead. You made a comment which I think is important, you talked about leadership. The other thing that is important when you do that portfolio analysis, you also then get in understanding, a better understanding of what leadership is required to lead businesses in all those categories because it is slightly different. And if you don't know where certain business is belong is very easy for you that you may be pick a leader that is not totally suited for that category. So I think that's other very important advantage if you believe in leadership as you move ahead.

Steve Winoker

So given we are running out of time and last question here from the audience. I am going to expand it a little bit as technology evolves to connected cars and homes and we are able to (inaudible) and participate and then I just like to add also may be comment on the importance of digitization and analytics if you like that for 3M?

Inge Thulin

Yes. Well, first of all we realigned organization in electronics based on their evolution. So we participate very actively in all of these relative I would say global interconnectivity. It is a big huge opportunity for 3M not only from selling solution to it but is also when you start to think about it, is also how you can utilize workforce around the world. Because people can now work at different places around the world. And you need to attract the best brain in order for you to compete on a global basis. So there is two elements into this when I think about it, it is commercialized in terms of what you do. And then we have formed a division called display materials and system division, totally focused on that space you are talking about. So that's one and that's a big opportunity for us and we have been in that business for long time. But then I think in terms of global interconnectivity that is a mega trend, that is for companies like 3M should look upon that also as an opportunity to utilize more of the workforce around the world specifically women. Specifically women in some part of the world where it could be difficult for them in order to move around in big cities and so forth. So I think there is a big opportunity on both side for us. Both on the workforce side and in terms of the product sales.

Steve Winoker

Okay, all right, Inge, lot of time. Thank you so much. I appreciate it.

Inge Thulin

Thank you.

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