3M Company's (MMM) CEO Inge Thulin Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: 3M Company (MMM)

3M Company (NYSE:MMM)

Q2 2014 Earnings Conference Call

July 24, 2014 09:00 AM ET

Executives

Matt Ginter - VP, IR

Inge Thulin - Chairman, President and CEO

Nick Gangestad - CFO

Analyst

Scott Davis - Barclays Bank

David Begleiter - Deutsche Bank

Steven Winoker - Sanford Bernstein

Andrew Obin - Bank of America Merrill Lynch

Nigel Coe - Morgan Stanley

Deane Dray - Citi Research

Laurence Alexander - Jefferies

Jeff Sprague - Vertical Research

Ajay Kejriwal – FBR Capital Markets

Joe Ritchie - Goldman Sachs

Stephen Tusa - JPMorgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 3M Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) 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, July 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 second quarter 2014 business review.

I've a few brief announcements before we begin today’s business discussion. We will hold our next investor meeting on Tuesday, December 16 at the Grant Hyatt Hotel in New York City. Please hold 8 AM to noon on your calendars. Also make note of our upcoming earnings call dates scheduled for Thursday, October 23 of this year and Thursday, January 29 and Thursday, April 23 of 2015.

Note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations Web site at 3m.com under the heading Quarterly Earnings. Please take a moment to read the forward-looking statement on slide two.

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.

Now please turn to slide three, 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. 3M performed strong in the second quarter, once again posting organic growth across all business groups and all geographic areas. Our team delivered record sales and rising margins and did so while continuing to build for the future.

Let me take you through a few highlights for the quarter. Earnings were $1.91 per share, up 11.7% year-over-year. Sales rose to $8.1 billion, which marks the highest quarterly sales in 3M history. Organic local currency sales growth was 4.8%, lead by electronics and energy at 6%. Health care, industrial, and safety and graphics, each grew 5%, and consumer grew 4%. Geographic growth was paced by Asia-Pacific at 7%. Europe Middle East Africa and United States both grew 5% followed by Latin America Canada at 3%.

Premium margins remain a hallmark for 3M. In the second quarter margins rose to nearly 23%, up 80 basis points from last year. I am pleased that all five business groups delivered margins greater than 20% demonstrating the breadth of our strength. As you know, we are managing toward a better optimized capital structure. This will enable us to invest more in the business and return more cash to shareholders.

During the second quarter, we returned 2 billion to shareholders through dividends and share repurchases. And as you see on slide four, last week we announced our plan to acquire the remaining 25% of our Sumitomo subsidiary at the price of $885 million. This business is a leader in many of our industrial divisions plus electronics and energy. In addition, we see significant opportunities in Japan’s addressable markets for healthcare, safety and graphics and consumer businesses. Upon closing of the deal, 3M will have full control of one of our largest and more successful subsidiaries. We look forward to growing this business even further in the future.

Now please turn to slide five. Today, we’re reaffirming our earnings and organic growth outlook for the full year. We continue to expect earnings per share of $7.30 to $7.55 and organic sales growth of plus 3 to plus 6%. Currency impact should reduce full year sales by approximately 1%, and we still estimate the tax rate of 28% to 29% with free cash flow conversion at 90% to 100%.

I'd like to mention a few other notable things from the second quarter. In April, 3M earned United States Environment Protection Agency’s Energy Star Award for the 10th consecutive year. No other industrial company has been so recognized by the EPA. Research and development is the heartbeat of our company. And in May, we were pleased to receive our 100,000 patent.

And last month, we appointed Nick Gangestad, as our Chief Financial Officer. I would like to take this opportunity to thank David Meline for his contribution over six years including three years as CFO which followed three years as Chief Accounting Officer. Nick now became CFO also after serving three years as Chief Accounting Officer. Previously, Nick held key leadership positions in multiple business groups around the world and he's well prepared for this his new role. He is a 27-year veteran of 3M and I've personally known and worked with Nick for the last 10 of those years. He has worked directly with me on executing our financial and operational strategies and I am happy to have him as our CFO.

And by that, I’ll give the call over to Nick. Nick?

Nick Gangestad

Thank you, Inge, and good morning everyone. Let me just say that I am excited to lead 3M’s finance team and to help the 3M leadership team create even greater value going forward. And to those of you on the line that I have yet to meet, I certainly look forward to meeting you in the future. Now, please turn to Slide 6 and I’ll take you through our income statement.

The Company operated well in the second quarter with sales exceeding $8 billion for the first time in our history, compared to last year sales were up 5%, operating income up 9%, and earnings per share up 12%. Productivity was particularly strong this quarter, which helped fueled more investment in SG&A and R&D as we continue building for the future. And at the same time, we expanded operating margins by nearly 1 point. I'll go into a little more detail on the margin change. Leverage on organic volume added 30 basis points to second quarter operating margins and the combination of lower raw material cost and higher selling prices contributed 1.2% each points year-on-year.

Selling prices continue to be supported by technology innovation, which is a key fundamental strength of the Company and helps drive unique customer solutions and an increasing flow of new products. We also began raising prices in mid-2013 to help offset currency weakness in select developing countries. This will result in our price performance moderating in the second half of the year beginning in Q3.

And on the raw material front, we are benefiting from lower market prices and from our sourcing teams' efforts to reduce cost even further. Reduced pension and OPEB expense added 50 basis points to second quarter margins.

Strategic investments this quarter reduced margins year-on-year by 40 basis points. This included increases in new disruptive R&D programs, business transformation and ERP cost, and restructuring. Foreign exchange impacts excluding the positive price recovery I just mentioned reduced margins by 60 basis points. All in all second quarter earnings increased 12% to a $1.91 per share. Foreign currency impacts reduced earnings by $0.04 per share and the higher tax rate reduced earnings by another $0.05 per share. Average diluted shares outstanding declined by 5% versus last year's second quarter, which added $0.09 to second quarter earnings per share. All things considered, this was a good quarter for the Company.

Slide 7 outlines the details of our second quarter sales change. Worldwide organic local currency growth was 4.8% with volumes up 3.5% and selling prices up 1.3%. Our businesses have done a good job of executing under growth plans. Acquisitions added 10 basis points to sales growth and foreign exchange had no impact on the second quarter worldwide sales. On a total U.S. dollar basis sales rose 4.9% versus the second quarter of 2013.

As was the case in the first quarter, Organic sales growth was positive across all major geographic areas. Asia-Pacific organic growth was 6.6%. Organic growth was again broad-based with all five business groups growing led by our electronics and energy and consumer businesses. Organic growth was 7% in Japan or 2% ex-electronics. China, Hong Kong, grew 6% organically in Q2 with or 10% excluding electronics, which was an improvement versus the first quarter’s underlying growth rate.

Organic growth in EMEA was 4.8% in the second quarter. West Europe grew 3.5%, Central/East Europe grew high single-digits and Middle East/Africa grew at a double digit pace. EMEA’s growth was strongest in safety and graphics, electronics and energy and industrial. Our teams in EMEA are executing well in 2014.

In the United States second quarter organic local currency growth was 4.5%, up from Q1 and led by healthcare and safety and graphics.

Finally, Latin America/Canada grew 2.7% organically with electronics and energy and healthcare leading the way. Mexico generated double-digit organic growth and Brazil was down slightly.

Organic local currency growth was 7% across all developing markets and 4% in developed markets.

Now let’s turn to cash flow, turn to slide number 8. Looking at first half 2014 results, free cash flow was 2.1 billion or 143 million above 2013 levels. Operating cash flow was up 59 million and capital expenditures were 84 million lower versus the prior year. We expect the full year CapEx to be approximately 1.5 billion to 1.6 billion in 2014, down slightly versus a previous expectation of 1.7 billion to 1.8 billion. We are encouraged to see that our portfolio management efforts are providing greater clarity regarding business unit priorities and their related CapEx needs.

Improved plant productivity is also freeing up capacity as we continue to improve our plant efficiency and add lean capability over time. Through the first six months of 2014, we converted 85% of net income to free cash flow versus 84% in the first half of 2013. We continue to expect full year conversion to be in the range of 90% to 100%. At our 2013 December Investor Meeting, we articulated plans to manage toward a better optimized capital structure going forward and to allocate capital accordingly. The plan calls for additional balance sheet leverage which we'll use for two purposes.

First, to invest in order to expand and improve our businesses and second, to increase cash returns to shareholders. We are executing this plan in 2014, evidenced in-part by last week’s announcement that we will acquire the remaining 25% non-controlling interest in Sumitomo 3M which Inge covered earlier. We will finance this deal with non-U.S. cash and we expect it to close in the third quarter. We also paid 1.1 billion in cash dividends in the first six months of 2014, up 246 million year-on-year. Gross share repurchases were 3.1 billion during that same period.

For full year 2014, we expect gross share repurchases will be in the range of 4.5 billion to 5 billion versus a previous expectation of 4 billion to 5 billion. Net debt at the end of June was 2.8 billion, up 1.5 billion versus year-end 2013. During the second quarter, 3M issued 625 million of five year debt at a cue point of (1 and 5/8%) [ph] and 325 million of 30 year debt at a cue point of (3 and 7/8%) [ph]. Next I will go through the results for each of our business groups, starting with industrial, please go to slide number 9.

Our industrial business continues to perform nicely with second quarter sales of 2.8 billion and 5% organic local currency growth. Our 3M purification business again grew at a double-digit pace in the second quarter and we also posted nice growth in automotive OEM, aerospace and commercial, transportation, abrasives systems, and industrial adhesives and tapes. On a geographic basis, industrials organic growth was 7% in Asia Pacific and 5% in both the U.S. and EMEA. Latin America/Canada was down slightly in the quarter. Second quarter operating income was 670 million. Operating margins were 21.9%.

Recall that each our business groups is absorbing incremental investment in 2014 related to business transformation and ERP implementation. This had the effect of reducing Q2 margins for each of our five businesses by 30 basis points.

Let’s now look at Safety and Graphics, found on slide 10. You will see that Safety and Graphics sales were 1.5 billion in the quarter with organic growth of 5%. Personal safety is a heartland division in 3M and one of our largest in terms of sales. It was once again the fastest growing business within Safety and Graphics posting high single digit organic growth in Q2.

We also saw positive growth in Commercial Solutions and in Traffics, Safety and Security systems. Sales in our roofing granules business declined versus last year’s second quarter. Safety and Graphics grew organically in all major geographic areas led by EMEA at 7% and U.S. at 5%. Operating income was 353 million in the second quarter and operating margins were a solid 23.6%.

Please go to Slide 11. Electronics and Energy also turned in a good second quarter performance. Sales were 1.4 billion, up 6% in organic local currency terms. Our electronics related businesses posted organic local currency growth of 11%. Growth was strong in both display materials and systems and in electronics materials and solutions. In our energy related businesses, sales increased 1% organically.

Second quarter organic local currency growth was 9% in Latin America, Canada; 8% in Asia-Pacific; and 6% in EMEA. The U.S. was flat year-on-year. Operating income rose 23% to 293 million and operating margins were 20.6%.

Next, I will take you through Healthcare found on Slide 12. Building on a strong first quarter performance, our healthcare business once again delivered strong growth and profitability. Second quarter sales were just over 1.4 billion. Organic local currency sales growth was 5% and margins were strong at 30.7%. All businesses contributed to healthcare’s growth in the second quarter. Health information systems, critical and chronic care, and infection prevention led the way.

In April, we also further strengthened our health information systems business by acquiring Treo Solutions, a leader in using data analytics, to redesign payments structures and help transition healthcare providers to value based care models. Integration efforts are running ahead of expectations. Healthcare’s organic sales grew in all geographic areas paced by Latin America, Canada, and Asia-Pacific at 7%, the U.S. at 6% and EMEA at 3%. Operating income was 434 million and again operating margins were 30.7% adjusting for Treo operating margins were 31.1%.

I’ll wrap up with the consumer business group found on Slide number 13. Sales in the consumer business group were 1.1 billion with organic local currency growth of 4%. Our construction in home improvement business delivered strong double organic growth in the second quarter and we also posted positive growth in our consumer, healthcare and home care businesses. Stationary and office supply sales were basically flat year-on-year.

Second quarter organic growth across consumer was 4% in the U.S. which was up from Q1. Back to school activity began in late Q2 so we’re off to a good start there. Elsewhere, consumers’ organic growth was 8% in Asia-Pacific and 4% in EMEA. In Latin America/Canada, sales were down slightly in organic local currency terms. Operating income was 241 million with operating margins of 21.1%.

That wraps up my review and I will turn it back to Inge.

Inge Thulin

Thank you, Nick. As you can see, there is a lot to like this quarter across the entire company. In industrial for example automotive volumes grew four times the rate of global (automobiles) [ph]. And in 3M purification formally known as CUNO, organic growth was 13% and we see this business accelerating in many areas of the world. I am encouraged by the growth in consumer of the modest first quarter which includes a nice improvement in the United States. Our home improvement division together with consumer healthcare and homecare all showed good growth.

Our safety and graphic business performed well. Personal safety for example grew 9% globally including more than 25% in China. In healthcare, we continue to expand worldwide with 12% growth in developing markets this quarter. I am pleased that all healthcare businesses grew on a global basis.

Finally in electronics and energy, our portfolio management actions continue to payoff. Over the past couple of years, we have consolidated several divisions to better align with customers and improved our competitiveness. Those actions along with strong volumes drove margins higher in the second quarter. Through six months, margins were 19% and we expect the full year to trend towards 20%.

So overall I want to thank our entire 3M team for delivering another strong broad based performance. And going forward we will continue to gain even more value through our three strategic levels; portfolio management, investing in innovation and business transformation. Those levels are helping us deliver solid results today while also building a stronger foundation for long term success.

Thank you for your attention. And with that we now welcome your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Scott Davis, Barclays. Please proceed with your question.

Scott Davis - Barclays Bank

Not much to pick on in the quarter it was solid overall. But one thing that wasn’t clear in the slides at least on Slide 9 industrial was -- margins were down 60 bps -- 30 bps of it but I would have thought with organic growth of about 5% you would have some operating leverage on that. So maybe just some clarification on why those margins were down.

Inge Thulin

Hi Scott, this is Inge. When you think about our business group in industrial that’s the biggest business group for us and also the business group that we are historically and still today entering first when we go into new markets based on the size and scale and so forth and that’s the way we have talked about how we build out businesses from infrastructure, industrial, safety, consumer and healthcare, as the economies evolve. So if you think about that business on a global scale the way we operate it, that’s like 32% of total company. When you go to developing economies, it’s slightly more, it’s 35%-36% and then you go to emerging market which is closer I would say to 45%. So when we looked upon it and yes as you said -- so why was this happening. The real reason there is actually they have a bigger slowdown in the emerging market in the developing world.

So I am not concerned at all about it, in fact when I looked upon industrial in terms of the growth which is the important element, we saw 5% growth in United States, we saw 5% in Europe Middle East Africa and we saw 11% in China. So when I looked upon it overall I am pleased with industrial but the reason is the 30 basis point as you call out and then as that portfolio in that type of emerging market as we all know at the moment there is some small turbulence I would say if you think about Central East Europe we have a little bit of the impact in Latin America, et cetera, that’s the reason. But I am not concerned and I don’t think you should be concerned either. We have a very good team there that are running those businesses very well. And so automotive very good, purification again a fantastic quarter, so all core businesses are doing well there.

Scott Davis - Barclays Bank

Okay, that helps a lot. And Inge just because you referenced macro, I mean, I think we’ve had 15 companies report so far this quarter. And I can’t tell whether the world to getting better or the world to getting worse. What is your view on global macro, maybe by region?

Inge Thulin

Yes, well, first of all, there is the macro picture and then how we expect to perform in that world, if you think. So, first of all, I will say, in West Europe, if you think about us, we guided a year from flat to 3% and we came out first quarter with three, actually this quarter more or less the same and we still think that that will be the range for us for the year. So, that’s a little bit on the positive side for us in terms of our execution.

In Asia, we saw a slight improvement in China, or what I would call base business and for me, then base business, yes, so we talk the same languages if I take out electronics because that is moving around in Asia in between countries. Our base business in China consecutive went from 8% to 10%, and has a big improvement versus a year ago. And our Japanese business in fact in total grew 7%. And if you, again, look upon the base, that was 2%. So I will say Asia is going sideways slightly up; West Europe as we expected, United States, small strength; and we had a better second quarter than first. And as you recall I said at that time, I am not concerned about U.S., because I had a feeling it will come back in the second and that was correct. I think the place where we see a little bit of modest challenge is Latin America where we said before for the year 8 to 11 and we think now may be mid digit for the year. So, slightly down but it’s offset for us by other regions of the world. So, I think that’s what we are saying still 3 to 6, so I will say that I don’t see much of a movement versus what we have talked about earlier. Latin America slightly slower, West Europe slightly better, U.S. slightly better and also big geographical areas, so that will compensate more what you can see as I will identify as a temporarily slowdown in Latin America.

Operator

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

David Begleiter - Deutsche Bank

Thank you. Good morning. Inge, very strong results in electronics and energy, can you give us a little more color on the margin expansion you've had in the first half and I guess a little bit more margin expansion in the back half to get to the [indiscernible] you are guiding to?

Inge Thulin

Yes, first of all as you recall we looked upon our portfolio, it’s almost two years ago now and we consolidated many businesses that was related to electronic and energy in the company that in some cases we had in different components of the company. So, we streamlined organization and consolidate in order for us to be faster to market and be able to respond to the customer need. So, we did that and we combined the division and the outcome of that is that we got a lower infrastructure to work with. We have got better utilization of assets and we are faster to respond to markets and we have moved, I will say from in some cases product sales to more system sales which is now paying off.

So, I think we had 11% growth in electronics and a lot of that is coming to the new approach with this display material system division that is now selling components into solution for the electronic market.

So, I would say it’s a combination of efficiency into organization, better utilization in manufacturing and then we had the volume upticks that came direct on based on the work we're doing with the customer. So, if you think about where we have taken that business for the last 18 months or so from 15 to 17 and actually this quarter we did over 20. But the plan is to go towards 20 and that’s where we are for the year. I think the plan is 19 plus and I think that’s where it will end up for the remainder of the year and certainly will be a good year for that group. And they have really responded well to our portfolio management initiatives.

David Begleiter - Deutsche Bank

Very good and impressive. And one more thing, Inge just in safety this double-digit growth you've seen in personal protection, how sustainable is that growth in the back half of the year?

Inge Thulin

Well, we have a very strong position in that business historically. It’s a fantastic platform for us and is very global in scope and we are, I will say the leader in that whole space relative to respiratory protection. It’s sustainable and I think the trends are positive for us and if you think about some parts of the world where it's very strong regulations like United States and West Europe and so forth and we're doing well there. And then you have I will say developing economies and I will put China into developing economies. So, if you think about China in terms of mega trends in China that’s -- its air pollution, its water and its food safety.

When air pollution is playing very well to our very strong position in this business, so when you see 9% growth for quarter, 25 plus in China, this is sustainable as a business on a global space. And one of the reasoning, we have scale and we have a very professional team in place and it’s a regulatory business, so it’s good for us, generally speaking -- regulated business.

Operator

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

Steven Winoker - Sanford Bernstein

Inge, just a quick question or Nick, on the Sumitomo impact, you said it’s closing September 1st, you've got a 12 month, $0.08 impact, you are not changing guidance. So that first four months which I guess I would have assumed would be more cost and benefit, you're just making up for that elsewhere. How should be think about the dilutive or accretive impact before the end of this year?

Nick Gangestad

Yes, Steve, this is Nick. You are correct, we said that’s approximately an $0.08 benefit over the 12 months and we are expecting this to close on September 1. At this point, we felt it was premature to up our -- change our guidance at this point we’re halfway through the year, everything's going right down the middle of what we’re expecting. And just as this is a slight upside to our original expectation we have other things that are on a slight negative, for example, FX impact. We started the year thinking that would be flat to hurting us by $0.05 we’re now in the $0.07-$0.08 range of impact. So, all in all, we think everything is staying very close to our original guidance.

Matt Ginter

Steve, maybe one, Steve, this is Matt maybe one follow up. The transaction should not have a lot of cost associated with it from an integration standpoint. But third quarter we expect really de minims impact on earnings and assuming we close on September 1st as expected we’d expect some slight accretion and you could think about it on a straight line basis using that $0.08 as a guide.

Steven Winoker – Sanford Bernstein

Fantastic, that’s very helpful. The other point is on CapEx, that roughly $200 million lower guide in last quarter and you called out some of the lean and other impacts that you’re having. But this is a strike me as a really potentially massive shift in terms of what you’re getting out of this. Can you maybe talk also, are there any things that you’re deferring what you aren’t doing even year-on-year it’s lower now. And should we kind of rethink our business model on CapEx side for 3M going forward based on what you’re getting as indicated here or am I making too big a deal out of it?

Nick Gangestad

Steve I appreciate the question. Our business model, over a longer period of time as we invest between 4.5% and 5% of revenue in CapEx, and we started the year with an estimate on the high end of that range. As we’ve gone through the year and we’re seeing those benefits which I talked about earlier, we’re seeing an opportunity that we don’t need some of the capital that we started out the year anticipating we may need. There is really I would say Steve, to your question should we change the modeling going forward, no. We’re basically in that 4.5% to 5% range and we expect to stay there. As temporary what we’re seeing of the benefits this year and really reflects great results that the team is doing so far this year.

Inge Thulin

We don’t hold back on any investment relative to our growth, so there we continue them as we have laid out. But again for me this is a positive sign relative to the operation here in terms of in some cases better utilization around the world. And if you think about our strategies, the fourth strategy that as we laid out where we talk about intensified capabilities to achieve regional sales sufficiency, I think we’ve been able to start to move in that direction. But it’s too early to change the model by definition but I think as this year, this is what it look for us and then we think is the right time now, we have to correct that for the year.

Operator

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

Andrew Obin - Bank of America Merrill Lynch

Just want to follow up on Steve’s question, just thinking about energy and electronics, I know this was a big focus for the team in terms of improving efficiency of this business. You guys have eluded sourcing initiatives, you have eluded planned productivity initiatives. Do you care to quantify the impact of those and when, if not now, when do you think we will hear about sort of more discrete items there?

David Meline

Andrew, in terms of productivity, we have, in the past, we’ve shared in our margin walk how we see productivity impacting, or positively or negatively, our results. If you think back to a year ago, we were showing with utilization a negative impact on our financial results. This quarter we’re not showing that, year on year we’re seeing a benefit by that lack of headwind. And in measuring productivity in our plants something that was slightly negative in 2013 has turned slightly positive for us in the first half of this year.

Andrew Obin - Bank of America Merrill Lynch

Okay. But it just seems a sort of a broader initiative than just quarter over quarter change. But I guess we can take that offline. The other question though on the CapEx question, you did have CapEx yet you left your cash realization target intact. So, is there extra cash consumption on the working capital side or you're just being conservative right now?

Inge Thulin

I think we just would like to keep the flexibility as we go here. So the way I think about it and we think about, we’re like six months into the year and we would like to keep the flexibility as we go. There is just two more quarters and we were able hopefully to talk more about it on the next quarter as we move ahead.

Operator

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

Nigel Coe - Morgan Stanley

Nicky, you mentioned the (expectation) [ph] of pricing would start to [indiscernible], what about the other side of the equation, raw materials, it looks like raw materials are pretty flat year-over-year in 2Q, I am just wondering what you see in terms trends in some of your key raw materials?

Nick Gangestad

Nigel, on the raw material front, we’ve been seeing our raw material prices in aggregate drop between 1.5% and 2%. We saw that in the first two quarters of the year. We expect that to continue and if you think back to the guidance we gave at the beginning of the year, we expect the raw materials to benefit us by $0.05 to $0.15 for the year. We still see ourselves in that range probably tracking closer to the high end in that range.

Nigel Coe - Morgan Stanley

Okay, so is the raw material still down year-over-year in the second of the half of the year?

Nick Gangestad

Yes, Nigel.

Nigel Coe - Morgan Stanley

Okay and then secondly on the ERP, just wondered if you could maybe just talk about where [indiscernible] plan on the rollout for this year. I know that the early phases resulted in lower corporate as you work in cost more to the segments. I know the corporate was a little bit lower year-over-year. I am wondering is the EPR continuing to have that impact particularly in corporate segments.

Inge Thulin

Yes, we on plan relative to the rollout. We have talked about earlier. I have rolled out now in five countries around the world. We have in addition to that rolled out four distribution centers in West Europe or Central East Europe, so we have done one in UK, we have done one in France. We have done one in Poland. And yes, beginning of this month, we rollout the biggest one which is in (Jüchen) [ph] in Germany, our biggest distribution center in West Europe.

And I was in fact myself over there, yes, the week before and then follow-up slightly after that and walked the floors relative to make sure with the team that we were prepared for that to cutover and I am very pleased to say, it’s going very well relative to that execution.

So, I will say that even as you know when you make those moves right, you always learn a little bit on every place and we have and I will say, we, yes, take those learnings and we step up our mitigations and the team in place in order to be more effective as we implement as we go ahead.

But in terms of the financials you see then in terms of cost, it’s still accurate, there is no change to that and I will say that as we move ahead probably we will like to make sure we maybe can accelerate some of the implementation in places where we can get even better financial benefits. So maybe not changed a figure in terms of [indiscernible] but see if we can capture something earlier and get more focus around it. But so far so good, but again as you know there is always a little bit of a change management as you do those type of things right, but I think the important thing, the prime metric for us is customer satisfaction.

Nick Gangestad

And Nigel to add, this is Nick. I want to add one point on that. The 30 basis point increase in spending that we’re seeing in our five businesses are from spending that we are now putting into the businesses to do this and this is not a shift between corporate miscellaneous and the businesses. If you’re looking at the corporate miscellaneous piece, the year-on-year change there is really driven by a reduction in our pension expense largely as we had laid out at the beginning of the year.

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 some more color regarding the growth investments. You said it was a 40 basis point hit that’s broadly across 3M, but how does that impact the individual segments and what kind of return are you expecting on both the pure new products but as well as the restructurings?

Nick Gangestad

Well, Deane, our strategic investments come in -- there is multiple categories there, one is our invest in innovation as you’re alluding to, and that is still an investment mode where we’re working to develop those new technologies for the future and we’re not expecting an accretive benefit to growth from those investments in 2014 and little in 2015.

For the rest of our strategic investment that we’ve talked about, part of that is restructuring and part of that is our incremental investment in business transformation and ERP. Those are tracking approximately where we’ve expected on the restructuring front where about halfway through the year and where we’ve spent about half of what we expect to spend for the year on restructuring. Benefits in the last half of the year, we still see in low single-digit millions of dollars, we expect more benefit from that into the tens of millions of dollars in 2015.

Deane Dray - Citi Research

And for Inge, what’s interesting at the very end of your prepared remarks you cited some upside in the business, the Cuno filtration business. There was a big multiple paid in that business a while ago but it looks like it’s beginning to deliver the way you all had envisioned it. So, what is that longer opportunity for Cuno in the portfolio, when you've hinted in the past you might be interested in doing some water investments and how do you see that opportunity?

Inge Thulin

Well, I think first of all that what we call now purification right is a business that during the last couple of years really improved for us, so let’s put out a little bit of perspective, you talk about when we purchased that the multiple was high and so forth, right. I think initially when that was purchased, we didn’t integrated fast enough into 3M, so if you think about what we are looking for as fundamental growth drivers for every business is around technology, manufacturing, global capabilities and brands. Those are the things that we need to capture when we purchase something.

I think in that case we hold and that’s now many years ago but I think we hold it aside too long before we really start to drive the value that 3M will add in those four categories. The last three years that have now taken place and they have done a fantastic job in my mind relative to efficiency and operational excellence, consolidation of manufacturing start to lay in some of the technologies that can help them and then start to use the global capabilities in terms of our footprint. That’s why you now see quarter-on-quarter sequential good growth, there were 13% this quarter was very similar first quarter of this year and in many market we see huge opportunities as we go ahead based on our current portfolio.

It’s always difficult to give you a figure as you look upon it but again I go back and say that it’s clear that clean water and clear air is a very important element in most parts of the world and specifically I will say in developing world. And that’s also where we see a fantastic growth rate for this business, so this is a very good space for us and I am very pleased where we stand today with that business and we will continue to invest as we go ahead for more growth and also efficiency into organization.

Operator

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

Laurence Alexander - Jefferies

Good morning. Two quick questions, your Greater China business, how fast is that growing now and in the comment about the energy related businesses growing only about 1% and telecom being the leading part of that, can you talk about how weak the rest of that business was and were there any other end markets that had decelerated in the quarter?

Inge Thulin

Well let’s start with what we call China, Hong Kong in terms of that operation. We had in this quarter we moved from Q1, 8% growth to 10% growth in the quarter for China and if you compare that on that base business that was only 1% Q2 last year. So, year-over-year good improvement and over last quarter also slight improvement, so that’s moving forward positively and again you see in businesses there that you take industrial was 13% growth in the quarter, healthcare was 17%, consumer and office 20% and you have safety and graphics just over 10%. So, it’s moving ahead very well and I think we are past the time where China was a 25% growth for the quarter but we are running that now at 10% with slight uptick, so that’s good and we feel good about where we stand today in China.

Relative to the energy piece, there is some tender business going on in that business and that can hit us a little bit short, you saw telecom had 4% growth and then some of the other businesses was down but it was not much big figures on the downside. And there is some, I will say tenders that is going because some it is government related and utility related, so it can move a little bit in between quarters but nothing to be really concerned about. And we have one of our Heartland divisions is part of that, so it was not much down, just a little bit. We're very pleased that telecom grew 4% that was a good figure for us.

Operator

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

Jeff Sprague - Vertical Research

I was wondering if we could just go back to the cash flow discussion a little bit, a good discussion so far, just wanted to kind of talk about working capital a little bit. Nick or Inge as I think about kind of the ERP and the distribution centers and the like, is there a release of working capital that we should be expecting if it's not this year into next year? So you’ve got really kind of very little operating cash flow growth year-to-date. So I don’t know if that’s tied to these distribution centers or if you could just kind of comment on how that plays out going forward?

Nick Gangestad

Yes Jeff, on the cash flow and the working capital managing our inventory continues to be one of our important priorities and improving our inventory churns making some progress there we expect more progress on that in the coming quarters. Specifically to your question about business transformation ERP and the impact that could be having over the long term we are convinced that where we’re going with business transformation and ERP that we have significant opportunities to improve our working capital and in particular inventory management and generate benefits there. In the short term in particular in the second quarter with some of our go live activity we had there was minimal I’ll call it in the $10 million to $30 million increased inventory in some of the channel in anticipations of go live activity.

Inge Thulin

But if Jeff your question was the longer term, it was a little hard to tell on our end. We have talked about a longer term opportunity in working capital but it’s that bigger win is not something we’d expect in the next year or two necessarily. We’ve sized that above 500 million.

Jeff Sprague - Vertical Research

Okay, thank you for the clarification there. And I am just wondering on share repurchase, kind of is there -- we obviously can do the math on the share price and figure out what a dollar buys these days, but is there any additional pressure on just kind of other dilutive effects, options exercises or anything else that kind of heats against that gross number?

Nick Gangestad

No, there is nothing out of the ordinary there, Jeff, that’s happening on a dilution basis. We did pick up our activity some in the first half of the year, we saw it as good opportunity and on the dilution front very-very similar to trends to what we’ve seen in the last year.

Operator

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

Ajay Kejriwal – FBR Capital Markets

Thank you. Good morning. Just maybe on energy, so the work you’re doing on consolidating the divisions I guess showing in the margins here. So the question is, is this improvement, is this a couple of quarter phenomena or do you think this could be -- there could be runway for couple of years here and the business has been below company margins. So do you think there is opportunity to take margins up to more near the company average levels?

Inge Thulin

Well think about it in this way, we are running around 22% to 23% margin as an enterprise. We have some businesses that is running in the middle of that and you have two that is type of one is higher which is healthcare and then you have electronic and energy that is lower. And as you recall when we started the journey this was around 15 plus, that industry by definition that’s a good margin in that industry by definition and that will always be a differentiation. So I will say that this move from 15% closer to 20% over this period of time was our expectation.

If it will go more up in the area of 25% to 30% I don’t think that’s realistic for that market in order for us to do that. But I think any business in 3M our expectation is that you should be close to the average out the company. And our organization there today is more streamlined and I think we are better prepared also to deal with some eventual volatility in that market on the electronic side that we know will come from time to time, that’s part of that business and we train that business so that’s okay.

Ajay Kejriwal – FBR Capital Markets

Good, that’s helpful. And then Treo, could you maybe provide some color on the margin profile there? And then how should we think about the trajectory and the impact on segment margins, as it kind of integrate that business?

Inge Thulin

Well, first of all, that’s an integration into our healthcare -- health information system, so that business have been growing, the health information system have been growing very well for us the last five to 10 years. And you should think about it in terms of that this acquisition is actually an addition in order for us to get more relevance into different parts of the segment.

So health information system today is a growing business and we are doing that for providers in coding, grouping and analytics. And that’s to the hospital providers. Now we will get access to vast set of payers that then they can help to connect the two of them. So as the model is moving from volume base to quality outcome this is what will help, so I will look upon it as an integrated part of the current business we have and it’s a relatively small business as you know. So, it’s more for us to be able to get access and connect the two entities together.

Operator

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

Joe Ritchie - Goldman Sachs

Thank you. Good morning everyone. So, my first question is just on price cost, clearly another good quarter above 100 basis points but looks like last time FX was a benefit. Can you just quantify the tailwind that you got in the quarter from FX on the price cost basis?

Nick Gangestad

Yes, Joe thanks for that question, for the quarter on the top-line we really saw no impact from FX, everything netted out to nothing. What we're seeing is a negative impact on our margin this year, year-on-year is a fact that we had significant hedging gains a year ago as part of our strategy and the lack of those gains is causing that margin year-on-year erosion, margin erosion, really has nothing to do with 2014. It has to do with the gain we took last year on our hedging.

Matt Ginter

Joe, as part of your question, how much price we have gotten due to currency?

Joe Ritchie - Goldman Sachs

Yes, that’s right, Matt.

Nick Gangestad

As we've said last quarter about half of our price we really see as currency related and we think that will be running its course soon. We instituted a lot of price increases related to currency in the middle of last year and so that’s the primary driver why we're saying we expect that price growth to moderate in the last half of 2014.

Joe Ritchie - Goldman Sachs

Okay, that’s helpful, Nick and one follow-up may be for Inge. Inge you mentioned that you brought down your growth expectations for LatAm. It looks like you had negative volume growth in the quarter and so may be if you could just provide some positives and may be areas of weaknesses that you are seeing in a region today?

Inge Thulin

Yes, Latin America, first of all we have probably the best portfolio mix in that part of the world, and so we feel very good relative to our overall platform as we move ahead and as you know we have been doing business in Latin America since I think 1946 was when we started in Brazil. When you look upon it now, there was a little bit of temper specifically in Brazil I will say, Brazil was flat to down, Mexico was up 12%. So, I would say Brazil had an impact for different reasons and then for us at least what we are selling personal safety into the mining was also on the lower end. So, I think that Brazil was for us the downturn this quarter specifically and then Canada was flat. You have Latin America/Canada together, Canada flat, Brazil down, most other up and Mexico up 12%.

But as I said this is a part of the world that is the most developed of our developing regions and we know how to do business there. So, step up for me always when I look upon Latin America over the years and I follow that as I led international for eight years before I came into this job. We have a constant growth over time in Latin America but that could be a little bit of dip in a quarter but that’s not the overall concern for us. We are just short term stay the course and capitalize on the future.

Operator

Our next question comes from the line of Stephen Tusa of JPMorgan. Please proceed with your question.

Stephen Tusa - JPMorgan

Good morning. Just on the price cost thing on the deflation I guess on your raw materials. How much of that, I guess you said to 100 to 150 basis points for the first half, how much was it precisely in the second quarter and then how much of that do you think is blocking and tackling and kind of structural like every year you can kind of bang out certain amount of that, it just seem to be kind of a nice tailwind for a while now?

Nick Gangestad

I appreciate that question because it gives me a chance to make it clear here that the benefits we see on raw materials are not just a passive benefit that 3M gets by being in the market. There are some benefits we get thanks to the market but a lot of this, Steve, is driven by what our sourcing team is doing in 3M to bring about those benefits. So, of that total 1.2%, 1.3% benefit that we're seeing in the second quarter, there is a portion of that that’s raw materials probably a little less than half of that that’s raw material driven. And that raw material portion is made up of several components. One is just outright market conditions where we're enjoying that benefit. Second is what we're doing from a 3M perspective to drive those benefits and use our power in the market to benefit there and then the third is, there is a portion of that that involves us substituting one raw material for another to 3M's advantage. So it’s a broad perspective of what’s driving that number, Steve.

Stephen Tusa - JPMorgan

So I guess out of the 1.2 to 1.3 how much is just maybe to narrow it down, how much is it market exposure related half like 25% of that or?

Nick Gangestad

I think it’s around half, Steve, as we looked at the raw material deflation this quarter. Yes, you could think of it and it varies a little bit from period to period, but it’s about half market and half due to the additional value we can add.

Stephen Tusa - JPMorgan

That’s very helpful and then one just quick follow-up on electronics. The cycles have been kind of notoriously tough to predict in, I am not sure if there is a good way to forecast this, but how do you feel about the growth there in the second half, I mean sequentially it was definitely stronger than we were expecting it up high single digits, should we think about normal seasonality in the back half of the year and what's your sense of kind of inventory the customer decision again?

Nick Gangestad

You start on the inventory side. We don’t see any build up in the channel so I think that it’s at a normal level as in the past. So if we start there based on your last point of your question, otherwise I will say look it like you can think about it in normal way all the season, but also for us we work with all suppliers in that industry. And it will all be dependent on the end market demand in the end, so for us definitely will be the growth driver or less growth driver as we move head. But I don’t think there is any change for us at this point in time relative to the outlook for the growth of electronics and energy in that business.

Stephen Tusa - JPMorgan

Hey, guys, one last quick one just on the -- you have an easier comp in the third quarter, tougher comp in the fourth quarter on growth or I think maybe other way around, but anything than the comps that moves around as far as stability of growth rates in the second half?

Nick Gangestad

Are you talking electronics or total companies?

Stephen Tusa - JPMorgan

No, just total 3M organic, looks like the midpoint averages around 4% growth that maybe conservative or not, but should one quarter be better than the other because of the comparisons?

Nick Gangestad

No, I think -- you can think about it in the following way. If you go back to 2013, first half we had 2% organic local currency growth. Second part, we had 4%. First part of this year, we are close to 5. And I think you should think about this we move ahead for the year that based on the range we’re giving is 3 to 6, so I think it would be very much in that range for the last quarter.

Operator

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

Matt Ginter

I would like to thank everybody for joining us today. We appreciate your engagement and interest in 3M. We look forward to talking you soon. Goodbye.

Operator

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

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