3M Company (NYSE:MMM) Q3 2014 Earnings Conference Call October 23, 2014 9:00 AM ET
Executives
Matt Ginter – Vice President of Investor Relations
Inge Thulin – Chairman, President and CEO
Nick Gangestad – Chief Financial Officer
Analysts
Scott Davis – Barclays Capital
Ram Sivalingam – Deutsche Bank
Andrew Obin – Bank of America Merrill Lynch
Steven Winoker – Bernstein Research
Joseph Ritchie – Goldman Sachs
Ajay Kejriwal – FBR Capital Markets
Jeff Sprague – Vertical Research Partners
Stephen Tusa – J.P. Morgan Securities
Nigel Coe – Morgan Stanley
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, October 23, 2014.
I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.
Matt Ginter
Thank you and good morning everyone. Welcome to our third quarter 2014 business review. You’ll see a list of upcoming events and dates on Slide 2. We will hold our next investor meeting on Tuesday, December 16th at the Grant Hyatt Hotel in New York City. The meeting will begin at 8 am and conclude around noon. Invitations will be sent today, so please RSVP as soon as possible. Also, make note of our earnings call dates for 2015, scheduled for January 27th, April 23rd, July 23rd and October 22nd.
Today’s earnings release and the slide presentation accompanying this call are posted on our Investor Relations website at 3m.com under the heading Quarterly Earnings. Please take a moment to read the forward-looking statement on Slide 3.
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.
If you please turn to Slide 4, and I’ll hand off to Inge Thulin, 3M’s Chairman, President and Chief Executive Officer.
Inge Thulin
Thank you, Matt, and good morning, everyone. I appreciate you joining us today.
The third quarter for 3M was marked by steady execution and strong growth delivered in a mixed global economic environment. For the fifth consecutive quarter, we posted organic growth in all business groups and all geographic areas. Our team’s execution also produced raising margins and the highest quarterly sales in 3M history. At the same time, we made investments in research and development and our commercialization capabilities to ensure long term success.
Let me take you through a few highlights of the quarter. Earnings rose to $1.98 per share, up 11.2% year-over-year. Sales were $8.1 billion, a 3M record. Organic growth was 4% companywide on top of 6% growth in last year’s third quarter. Leading the way with 5% growth was Healthcare, a business that is pioneering medical advancements in emergency rooms, hospitals and dental clinics around the world.
Electronics and Energy grew a solid 4% with particular strength in our electronics business. Industrial also grew 4% with special encouraging growth in the United States. Consumer delivered 3% growth, including significant gains in our do-it-yourself business.
Safety and Graphics also grew 3% led by our personal safety division. Organic growth was positive across all geographic areas paced by the United States at 6% and Asia Pacific at 5%.
I’m pleased that operating margins are very robust. Margins rose to 23%, up 1.4 percentage points year-on-year. All business groups delivered margins greater than 22%, another company first. Margin expansion combined with 4% organic growth is further evidence our portfolio management actions are delivering hard results.
Free cash flow was strong in the third quarter, allowing us to deploy more resources to enhance the values of our businesses. And we returned $1.8 billion to shareholders to dividends and share repurchases.
On September 1st, 3M also completed acquisition of the remaining 25% of our Sumitomo subsidiary at the price of $865 million. And three weeks ago, I was in Japan to visit our team along with our biggest customers. We discussed the growth opportunities in the market around infrastructure, healthcare, consumer and other areas. Our 3M Japan team is excited to grow into an even bigger and more profitable enterprise.
Overall, I’m pleased with our third quarter performance. We executed well and delivered strong growth across the company. Nick will now take you through the details. Nick.
Nick Gangestad
Thank you, Inge, and good morning, everyone. Please turn to Slide 5 where I’ll review the third quarter income statement.
Q3 was a strong quarter and we are on track to deliver the sales and income targets that we communicated entering the year. The company continues to operate well with a good balance of growth, margins and cash generation.
Third quarter sales were an all-time record, $8.1 billion, an increase of 3% year-on-year with 4% organic growth more than offsetting the stronger U.S. dollar. Operating income rose 9% to $1.9 billion and earnings per share rose 11% year-on-year. We generated good productivity in Q3 and increased operating margins by 1.4 percentage points while investing in important programs for the future.
I’ll dig a bit deeper into the components of the third quarter margin improvement. Organic volume leverage added 20 basis points to third quarter operating margins. And the combination of lower raw material cost and higher selling prices contributed 80 basis points year-on-year.
Underlying selling prices remained firm across many of our businesses supported by technology innovation and strong new product flow. Raw materials were again lower versus last year’s comparable quarter. Commodity prices remained steady and our sourcing teams continue to create new opportunities to reduce cost across the globe.
Lower pension and OPEB expense added 50 basis points to third quarter margins. Strategic investments reduced third quarter margins by 40 basis points. This includes increases in new disruptive R&D programs, business transformation and ERP costs and restructuring.
Foreign exchange impacts reduced margins by 10 basis points and the Treo acquisition was just slightly dilutive to third quarter margins as we integrate that business. Inge also mentioned that we acquired the remaining 25% minority equity position in Sumitomo 3M on September 1st. But because that subsidiary was already being fully consolidated in our results, it had no impact on operating margins. It was, however, $0.01 accretive to earnings per share in the third quarter.
Finally, productivity and other items added an additional 50 basis points to margin year-on-year. Earnings were $1.98 per share, an increase of 11%. Foreign currency impacts reduced earnings by $0.02 a share in Q3, given the broad based strength of the U.S. dollar and the higher tax rate reduced earnings by $0.08 per share.
Average diluted shares outstanding declined by 5% versus last year’s third quarter which added $0.10 to third quarter earnings per share.
Slide 6 outlines the details of our third quarter sales change. Worldwide organic local currency growth was 3.9% with volumes up 3.2% and selling prices up 0.7%. We’ve now achieved 20 consecutive quarters of positive organic sales growth.
The Treo acquisition added 10 basis points to sales growth and the stronger U.S. dollar reduced third quarter sales by 1.2%. On an all-in basis, sales rose 2.8% versus the third quarter of 2013.
Organic local currency sales growth was positive across all major geographic areas, making this the sixth consecutive quarter that we have done so. The United States outpaced all geographic regions in the third quarter with organic local currency growth of 6%. U.S. growth was led by Industrial at 8%, Safety and Graphics at 7% and Healthcare at 6%.
Asia Pacific organic growth was 4.9% in Q3. Healthcare and Electronics and Energy led the way with growth of 9% and 7% respectively. Organic local currency growth was 7% in Japan or 3% excluding electronics. China, Hong Kong grew 4% organically in Q3 or 3% excluding electronics against a challenging double-digit comp growth in last year’s third quarter.
EMEA posted organic local currency growth of 0.8% in the third quarter. Central/East Europe and Middle East/Africa each grew in the mid single-digits while West Europe declined 0.5%.
While we have seen pockets of slowing in some West European countries, our teams there are executing well in the face of some economic headwinds. Organic growth within EMEA was positive in Healthcare, Safety and Graphics and Industrial, but declined in both Electronics and Energy and Consumer.
Finally, Latin America/Canada grew 0.4% organically with Healthcare leading the growth. Mexico generated double-digit organic growth and Brazil was up mid single-digits.
Venezuela remains challenging but our team is managing through the situation well and the currency risks are under good control. Revenue was down in the third quarter in Venezuela which reduced organic growth across Latin America/Canada by 6 percentage points.
Now let’s turn to cash flow. Turn to Slide #7. Free cash flow was strong in Q3 with 103% conversion versus 61% in last year’s comparable quarter. Operating cash flow increased $560 million driven by multiple factors, including higher net income, lower working capital, lower pension contributions and lower cash taxes.
Year-to-date is a similar story with 91% free cash flow conversion versus 76% in 2013. We expect full-year conversion will be in the range of 95% to 100%, up from 90% to 100% previously.
Full-year capital expenditures are expected to be in the range of $1.5 billion to $1.6 billion, which is consistent with our prior view. We continue to manage the company towards a better optimized capital structure. Our plan calls for additional balance sheet leverage which we’ll use for two purposes.
One, to expand our businesses and two, to increase cash returns to shareholders. We are executing on that plan in 2014 and beyond. For example, as Inge mentioned, on September 1st, we closed on the acquisition of the remaining 25% non-controlling interest in Sumitomo 3M for approximately $865 million.
We have also paid $1.7 billion to shareholders in the form of cash dividends during the first three quarters of 2014, up $365 million versus 2013. And in terms of buybacks, year-to-date growth repurchases were $4.4 billion, up $835 million year-on-year.
We now expect full-year 2014 repurchases will be in the range of $5.5 billion to $6 billion versus a previous expected range of $4.5 billion to $5 billion.
Net debt at September month end was $3.5 billion, up $2.3 billion versus year end 2013 due to both higher debt levels and lower cash balances.
Next, I’ll go through the results for each of our business groups starting with the largest business – Industrial.
Please go to Slide #8. We had a good third quarter in Industrial with sales of $2.8 billion and 4.2% organic local currency growth. This strength was broad based as nearly all businesses posted positive organic growth.
Our aerospace and commercial transportation business generated double-digit organic local currency growth and we also saw a strong growth in 3M purification, automotive OEM, advanced materials and industrial adhesives and tapes. The United States was by far the fastest growing region of the world for Industrial with 8% organic growth in the quarter.
Again, U.S. growth was broad based with notable performances in three of our heartland businesses, namely automotive aftermarket, abrasives and industrial adhesives and tapes, along with aerospace and commercial transpiration and automotive OEM.
Elsewhere around the world, organic local currency growth was 4% in Asia Pacific, 1% in EMEA, while Latin America/Canada declined 1%. Industrial’s organic growth continues to outpace that of worldwide industrial production and it’s clear we are taking share in some key industries. Automotive OEM is a good example where 3M’s 7% organic growth in the third quarter was three times the rate of global automotive builds.
Third quarter operating income industrial was $660 million and operating margins were 22.2%, up a full point versus the third quarter of 2013 and in line with recent quarterly trends.
Let’s now look at Safety and Graphics found on Slide 9. Third quarter sales in this business were $1.4 billion, up 3% on an organic local currency basis. Organic growth was led by our personal safety business along with traffic safety and security systems. Sales declined organically in roofing granules.
As with Industrial, the United States led all the geographic regions with 7% organic local currency sales growth in the quarter. Personal safety products and traffic safety and security systems again led the way.
Organic growth was 3% in EMEA, flat in Latin America/Canada and declined 1% in Asia Pacific.
Operating income in Safety and Graphics was $340 million and operating margins increased 1.6 percentage points to 23.5%. Strong operating leverage, along with the benefits from recent portfolio actions helped drive the increase.
Please go to Slide 10. Our Electronics and Energy business continue to post solid results in the third quarter. Sales were $1.5 billion and organic local currency growth was 4%. Operating income was $338 million and margins rose 1.8 percentage points to 22.5%.
Organic local currency sales grew 8% on the electronics side of the business due to solid end customer demand combined with successful spec in [ph] wins at several OEMS.
In energy, organic local currency sales declined 2% in the third quarter. The electrical markets business was flat in the quarter while telecom and renewable energy both declined year-on-year.
On a geographic basis, organic local currency sales increased 7% in Asia Pacific, 3% in United States and were up slightly in Latin America/Canada. EMEA declined by 6% in the quarter.
We have a strong group of businesses in Electronics and Energy, strengthened further in the past couple of years via multiple actions to better align to our customers and improve the portfolio. The team continues to execute well as evidenced by the growth and margin improvements seen throughout the first nine months of this year.
Please turn to Slide 11. Healthcare had another very good quarter with sales of $1.4 billion, an organic sales growth of 5.4%. Every healthcare business posted positive organic local currency sales growth led by double-digit performances in both drug delivery and health information systems.
We also grew organically in all major geographies with Asia Pacific up 9%, the U.S. and Latin America/Canada up 6% and EMEA up 3%. Healthcare’s third quarter organic sales growth was 11% in developing markets, marking the 11th consecutive quarter that we’ve grown at 10% or higher. Developing markets represent substantial opportunities for 3M and we continue to build our capability to capitalize on future opportunities.
Third quarter operating income in Healthcare was $432 million and margins were strong at 31%, including some modest dilution from Treo which was acquired on April 1st of this year. Integration efforts are tracking to our expectations and the business is exceeding its sales and profit objectives.
Last year’s third quarter margin of 32.1% included a 1.4 percentage point benefit from a gain on the sale of a non-strategic asset. If I adjust for this year’s acquisition and last year’s one-time gain, margins increased 70 basis points year-on-year.
Healthcare is a strong set of businesses and one of our highest investment priorities. Over the past several years, we’ve made substantial improved investments to bolster our healthcare businesses in China, Germany, Poland, Thailand, India, the United Kingdom and the United States.
Last week, we announced a $58 million capacity expansion in the United States to support growing demand for 3M medical tapes, dressings, surgical drapes and other wound care products.
I’ll wrap up with the consumer business group found on Slide #12. Third quarter sales in the consumer business group were $1.2 billion with organic local currency growth of 3%. Consumer is home to several of 3M’s best known power brands such as Post-it, Scotch and Scotch-Brite.
For the retail consumer, these are household names, but in fact, many other 3M brands are also enjoying success in the marketplace. Take for example our Filtrete brand filters which significantly improve air quality in the home. This business grew double-digits organically in the third quarter as we gained share in the U.S. and expanded the category globally.
Our Command brand adhesives also generated double-digit organic growth in the quarter boosted by a strong back-to-college season. College dormitories are a growing market for 3M Command solutions because our products eliminate the need to pound nails into walls when hanging pictures, decorations or other items.
Filtrete and Command helped propel our do-it-yourself business to 10% organic growth in the third quarter. Sales in the consumer healthcare and homecare businesses also grew organically in Q3 while stationery and office supply was down slightly.
Looking at the consumer business geographically, organic local currency growth was 5% in Asia Pacific and 4% in the United States. Back-to-school sales were strong in the U.S. mass retail channel. Consumers organic sales were down slightly in both EMEA and Latin America/Canada. Operating income was $272 million with operating margins of 23.2%.
That wraps up my review of the quarter. Please turn to Slide 13 where I will address our forward outlook.
Three quarters in, we are updating our guidance for the full year. We are expecting earnings to be in the range of $7.40 to $7.50 per share versus the prior expected range of $7.30 to $7.55 per share.
With respect to organic local currency sales growth, we are narrowing the range to 4% to 5% versus the previous expected range of 3% to 6%.
Given recent strength in the U.S. dollar, we are now estimating that foreign currency impacts will reduce sales by approximately 1.5%. Previously, we anticipated a 1% FX headwind.
From an earnings perspective, FX for the full-year is now expected to be an approximate $0.15 per share headwind, $0.10 of which has occurred in the first three quarters of the year. We anticipate $0.05 of FX headwind in Q4. Our tax rate estimate is narrowed to 28.5% to 29%.
And finally, as I mentioned previously, free cash flow conversion is expected to be between 95% and 100% for the year, up from a prior range of 90% to 100%.
Now I’ll turn the call back to Inge for some additional comments.
Inge Thulin
Thank you, Nick. As I look across our enterprise, one eye is always on the microscope, driving results day to day, month to month, quarter to quarter. And I remain very pleased with those results.
The other eye is on the telescope, ensuring we’re investing for the long term prosperity. Three strategic levers are strengthening our foundation for the future. The first is portfolio management.
I mentioned our Japanese acquisition along with portfolio actions in Electronics and Energy. Earlier this year, we also realigned divisions in our Safety and Graphics business group. And on Tuesday, we took action within our Industrial business group. Our personal care division was merged into industrial adhesives and tape division. This will increase customer relevance, create broader research and development and manufacturing capabilities, boost efficiency and position the business for greater success.
The second lever is investing in innovation. Innovation is the heartbeat of 3M. It generates unique solutions for customers and raising value for shareholders. That is why research and development is in the center of our plan. We are increasing research and development investment to about 6% of sales by 2017.
We’re also funding 26 product platforms specifically aimed to create new sustainable growth to disruptive technologies. I’m very encouraged that we are beginning to see initial product commercialization from some of those programs in healthcare, infrastructure, consumer and other markets.
In September, we opened our 46th global customer technical center in the United Kingdom which showcases the breadth of our technology. Those facilities provide an ideal setting for our scientists to meet directly with customers and explore solutions to their unique challenges.
This is a very important element as 3M is in the business of inventing things that are both new and useful. These investments are critical to bolstering our competitive edge into the future.
The third lever is business transformation. This will allow us to deliver quicker and greater value to customers by creating a more ideal 3M. The backbone is a global ERP system. We are currently live in five countries.
Most recently, we also successfully deployed our largest European distribution center in Jüchen, Germany. With each deployment, we are learning more and using those lessons to refine our plans going forward.
I remain encouraged by our progress and I will give you a further update on our December 16th investor meeting in New York. To support our ERP system, we are also in the process of creating a standardized global business process. Ultimately, this will leverage 3M’s size and scale to drive productivity and improve service to customers.
Those were the three strategic levers propelling our forward fuel. Yet, underpinning each strategy we adapt is the 3M team. Our company has many core strings. Chief among them is our people – their creativity, their skill and their ability to execute no matter the force of external headwinds.
I thank our entire 3M team for delivering a strong third quarter even in a mixed global economic environment. Because of them, we are delivering consistent results today while remaining on track to meet our long term targets.
Thank you for your attention. With that, we now welcome all your questions.
Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from the line of Scott Davis of Barclays. Please proceed with your question.
Scott Davis – Barclays Capital
Thanks, operator. Good morning, guys.
Inge Thulin
Good morning.
Scott Davis – Barclays Capital
Inge, the numbers are great obviously and you did mention some macro concerns particularly in Europe. Is there any sense that you see particularly now that you at least have half the month of October through that your customers are starting to get concerned about macros and inventory to your [ph] stocking, any real slowdown or is this volatility that we’re seeing in the marketplace maybe a little bit ahead of itself?
Inge Thulin
Yes. No, we see what you see and as you’re calling out, you’re talking about Europe a little bit, right?
Scott Davis – Barclays Capital
Yes, yes.
Inge Thulin
So I think for us in the quarter, as you see on our result for West Europe, we slide down slightly versus Q1 and Q2. That was, I will say, a small temper in Germany relative to the industrial sector. But the consumer and retail piece in that market, meaning the domestic business were still doing okay if you talk about Germany as a country.
And the interesting thing in Europe was that there are many countries there that have dragged the performance in West Europe as of the last couple of years like Iberia, Italy, Benelux, in some cases, Alpine. And they show slight growth. So even – and we saw growth in U.K. as well.
So I will say that we saw a slight decline in the industrial piece but it’s not alarming by definition for us. And when we look upon data, when we look upon IPI growth, GDP growth, PMI growth, et cetera, you can see a temper, specifically PMI, that is related to the manufacturing space but is not a concern at all.
I will say also when we look upon West Europe in total with a slight decline in growth, if you pool all pieces together, we can in fact pace that down to some utility businesses that are project-based that we had a comparison that was a little bit tougher for us. And that business is coming back next year.
So I will say that we got sideline in terms of West Europe if you combine it with total international.
Scott Davis – Barclays Capital
Yes. And Inge, how about China? I mean, we see good and bad over there. Last time I was there, it seemed like half the businesses were fine, half not fine. But what – I mean, your business in China, I think about, if my notes are right, has been slowing a bit the last several quarters if I back into it. Are you seeing anything there that causes concern?
Inge Thulin
Well, we look upon the same metrics as I talked about for Germany, so IPI, GDP, PMI, et cetera. And when I look upon that for China, it look actually slightly better than the figures I talked about for Germany.
So for us, we had a 4% growth in total. If you exclude electronic, it was 7%. So we are mid to high single-digit in our base business. And that is where we have been for the last I will say one to one and a half year. So for me, when I look upon China looking forward, even if they are building out, as we all know, they are building out a domestic business that is good for 3M with our consumer and healthcare business and even if there’s a little bit pressure on the export business, I will say for us we see now us to be in mid to high single-digits. And it’s very consistent for the last couple of quarters.
So it’s not – from that perspective looking forward, it’s not an alarming figure for me.
Scott Davis – Barclays Capital
Okay, very helpful. Well, I’ll pass it on. Congrats, guys, and good luck.
Inge Thulin
Thank you very much.
Nick Gangestad
Thank you.
Operator
Our next question comes from the line of David Begleiter of Deutsche Bank. Please proceed with your question.
Ram Sivalingam – Deutsche Bank
Hi, good morning. This is Ram Sivalingam sitting in for David.
Inge Thulin
Good morning.
Ram Sivalingam – Deutsche Bank
Good morning. Inge, a very, very strong margin quarter obviously, the best I think since 2010. As we go through Q4 and into ‘15 segment wise, where do you see upside or downside to margins?
Inge Thulin
We would talk more in December 16 relative to ‘15. And as you can see, we have improved this year very much in Electronics and Energy. That was based on the plan, right? So you recall that business and we go back now a couple of years, we have done a lot in that business in order to improve our performance, both in terms of growth and margins.
As you have seen that we constantly have moved them upwards. And we have said for this year that they should come closer to 20, maybe not the whole way to 20 full year, but that is what they will be.
And you also know that three of the businesses are basically on corporate average in terms of margin. And then you have Healthcare that is slightly higher I will say. So you will see us be able to continue the work we are doing on our portfolio and so forth. But I don’t know that I can at this point in time call out someone.
I think if you look upon it, it’s very robust and broad based now which is good for us.
Ram Sivalingam – Deutsche Bank
Sure, that’s very helpful. And maybe one quick follow-up. This move we see in the energy space, does it have any impact that you can see on your energy business or on your raw material side?
Nick Gangestad
You’re specifically talking about oil prices?
Ram Sivalingam – Deutsche Bank
Exactly.
Nick Gangestad
Yes, Ram, we are – there’s a portion of our raw materials, not a significant portion that are based on oil prices. Right now, we don’t expect a significant impact from that. If we do look forward into the coming year, we’ve had a couple of years where raw materials have been a tailwind to us and we do expect that to continue into 2015.
Ram Sivalingam – Deutsche Bank
Understood. Thank you very much.
Inge Thulin
Thank you.
Operator
Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.
Andrew Obin – Bank of America Merrill Lynch
Yes, good morning, guys.
Inge Thulin
Good morning.
Nick Gangestad
Good morning.
Andrew Obin – Bank of America Merrill Lynch
Just a question/observation. If we net out productivity in investment, it seems that we have turned positive for the first time since I think Inge you have become this company’s CEO. And I’m just wondering –
Inge Thulin
Positive in terms of what?
Andrew Obin – Bank of America Merrill Lynch
Well, if I net out the margin impact, right, for –
Inge Thulin
Oh okay, yeah. I know that. Okay.
Andrew Obin – Bank of America Merrill Lynch
– discounts and productivity.
Inge Thulin
Yes, yes. Yes.
Andrew Obin – Bank of America Merrill Lynch
Right. It sort of turned quite negative in 2012 and then it’s been negative. And it’s the first time it’s now a contributor.
Inge Thulin
Yes.
Andrew Obin – Bank of America Merrill Lynch
And I’m just wondering, is that sustainable or do we revert back to being negative as you continue to invest for repositioning?
Nick Gangestad
Andrew, there’s several things driving that productivity that you’re noting. With the growth we’re seeing, we’re seeing improved factory utilization. But also what we’re seeing in our productivity improvements is the result of our prioritization and portfolio management that you are seeing a difference there.
Our business model is to drive those productivity improvements and as we’ve talked about with our strategic investments, to invest that to improve our capability going forward.
Andrew Obin – Bank of America Merrill Lynch
Right. But do we think we’re going to go back to sort of where it’s a driver in margin or do you think it can actually turn positive – it’s sustainable and positive or neutral.
Nick Gangestad
Andrew, I don’t see us going back into negative productivity with the current economic situations we’re facing. I see it continuing neutral to slightly positive. But some of that consumed by our continued strategic investments.
Andrew Obin – Bank of America Merrill Lynch
Sure. The second question, just can you give us more color on Brazil because it’s an area where we get a lot of questions from investors. It seems to be a concern. But you keep posting positive numbers. Can you just give more color on industrial versus consumer businesses and if you’re seeing any sort of yellow flags?
You keep telling us you guys are going to do okay and believing you keep doing okay. But any color will help.
Inge Thulin
Well, we were positive in Brazil this quarter. And as you probably recall, last quarter was more of a concern. So we actually turned more positive in this quarter. We had a 4% organic local currency growth. And by the way, we had 15% organic local currency growth in Mexico.
So I always say when you look upon it, we have a big industrial business down there. And they grew at every at the average of the company. So I’d say Brazil was types of average in terms of the growth type of mid-single digit for this quarter. And my own prediction is it will be slightly better as we move ahead.
Now when you talk about some others and their performance and so forth, I cannot comment with that. But I can tell, we have been in Brazil since 1946 as we probably have talked about before. So we have a very solid organization there where we have all function in place.
We have a strong manufacturing footprint in order to deliver in that local market. We have a very capable research and development organization and we have a commercialization arm that we, as you know, always going in with first.
So I think one of the success factors for us is we have all functions in place in Brazil and been there for a long time. We know the market, know the culture, we’re able to develop solutions for their market and produce it there in their home country. So I think that’s maybe one differentiator for us versus some other people.
But we saw slight uptick in this quarter versus last quarter. And I’m very happy with that business there. And I’m more optimistic moving forward than opposite.
Andrew Obin – Bank of America Merrill Lynch
Fantastic. Thank you very much.
Inge Thulin
Thank you.
Operator
Our next question comes from the line of Steven Winoker of Bernstein Research. Please proceed with your question.
Steven Winoker – Bernstein Research
Hi, thanks, and good morning.
Inge Thulin
Good morning, Steve.
Steven Winoker – Bernstein Research
I guess an impressive margin performance. That 1.4 would be even higher I guess if we exclude that healthcare gain as well. But I’m trying to just maybe understand what’s implied in the margin side just – I know you don’t want to talk about 2015, but at least fourth quarter, in terms of what you’re expecting for those dynamics on that breakout chart that you gave us on Page 5.
I mean how should we be thinking about how those any major changes in any of those pieces might look over the next quarter anyway?
Inge Thulin
As I look out in the next quarter, we expect deals and continued benefit on price of raw materials. Pension of course will continue as a benefit. And productivity probably still continuing as a benefit. FX right now which was fairly neutral on the third quarter, I think it’s more likely to think of that as a negative on the fourth quarter.
Steven Winoker – Bernstein Research
Okay. All right. And the other question is I guess over a long period of time, various management in 3M have talked about the sustainability of healthcare margins. And we’ve often heard about whether that’s in the kind of mid 20s, high 20s, low 30s. Inge, maybe just provide a little bit of your perspective there. I mean should we really be thinking at this point that there’s no reason to believe that you can’t sustain R&D investment sales investment and still deliver those kinds of margins? Or is there a pricing pressure in some of the various developed countries that is going to make that more challenging?
Inge Thulin
Well, high 20s or low 30s, they are very good. And we have a very effective model and we are very confident that the solutions that we are providing both in the developed world and the developing world will let us continue to be competitive not only the marketplace in terms of market share, but also due to our capabilities in manufacturing which is a very strong side for us to have manufacturing capabilities that is holding our cost on very low and competitive positions.
So if you think about the healthcare space, generally, for many, many decades there have always been pressure in those markets. So I can recall myself when I lead back in Europe early ‘90s and so forth, there was this German Healthcare Reform Act. It was exactly what is going on from time to time in countries. So we are used to be able to scale and leverage our businesses as we go ahead.
So I’m not overly concerned about us being able to maintain margins at the very high level. Now we are continuing to invest and you have seen and when you look upon our mix, 75% of our business in healthcare is in developed economy. And only 25% in developing.
And the growth will come there overtime and we’re able to renew product and technical solutions able to put new price points based on the evidence of improved customer satisfaction in that segment.
So it’s a good space for us. We continue to invest and we are very, very local in all those markets. And domestic market, local market is good for us. We know how to do that.
Steven Winoker – Bernstein Research
Okay. Fantastic. Just one point of clarification also. Based on your Venezuela comment, so just to be explicit, Latin America, Canada would have been 6.4% ex-Venezuela. Did I understand that correctly?
Nick Gangestad
You understand that correctly.
Steven Winoker – Bernstein Research
Okay. Great. Thank you.
Inge Thulin
Okay. Thank you.
Operator
Our next question comes from the line of Joseph Ritchie of Goldman Sachs. Please proceed with your question.
Joseph Ritchie – Goldman Sachs
Hi, good morning everyone.
Inge Thulin
Good morning.
Joseph Ritchie – Goldman Sachs
So my first question is on free cash flow and the balance sheet. And Nick, can you provide a little bit more detail on the strong free cash flow conversion this quarter? I mean was there anything one time like an inventory flush that helped it?
And then on the balance sheet, specifically you guys called out an increase of $1 billion in buyback, is the next buyback also increasing by a billion?
Nick Gangestad
Yes, a couple of questions there. First of all, on the free cash flow, no, there is not one particular thing that swung that up. It’s a combination of several things. Good inventory management, continuation of low needs through, be funding a strong pension, good CapEx spending in line with our expectations. It’s really the combination of several things that are resulting in that 103% free cash flow conversion we saw this quarter.
To your second question, the $1 billion raised on top and bottom of the range on growth share repurchases, that $1 billion would also apply to the net share repurchases range too.
Joseph Ritchie – Goldman Sachs
Okay. Great. That’s helpful. And then maybe staying on the balance sheet for a second. Inge, perhaps you can provide a little color on the M&A environment. Clearly, you’ve got the Sumitomo deal done but maybe talk a little bit about the pipeline, what you’re seeing out there today.
Inge Thulin
Yes, the pipeline is good for us as we look upon it. We have done a couple of acquisitions during the last 12 months as we talked about. Sumitomo was one that maybe you guys was not thinking so much about before we did it. But it was a very good one if you look upon the financials there. And with Treo which was a smaller one. And as Nick said, we are executing that very, very well actually and ahead of both top and bottom line relative to expectation.
So every business group has a good, robust pipeline and we are looking upon them. I think the important thing for us when we look upon them, we need to make sure that first of all, they fit into our portfolio now that is categorized in terms of where we would like to go.
And then also the four fundamental strings of 3M which is around technology, manufacturing capabilities, brand and the global capabilities. So we need to make sure that those four fundamentals are directly linked in so we can drive additional value as fast as possible when we do them.
So I would say our pipeline is okay. The multiples are maybe too high based on how we think about it today. And as you know, the primary strategy for us is organic local currency growth. And that is why we are beating up the investment and research and development.
And when I look upon what we are delivering from an organic local currency perspective, and done now for quite some time in the range of, as you know, we have about 4% to 6%. So I’m happy with that. I think that’s one of the things we have to remain focused on that acquisitions will be complementary and they should be strategically important and we should be able to drive value immediately for us and for you.
Joseph Ritchie – Goldman Sachs
Okay. Great. Thanks. Maybe if I could sneak one more in on the electronic and energy margins that the margins. The last three quarter have been incredibly good. So maybe talk about the sustainability of what you’re seeing in that specific business.
Inge Thulin
So first of all, we have to go back and think about what we did in that business. We started by realigning those businesses and reduced a number of touch points out to the customers. And we did that at least two years now it seems. We tapped or realigned that organization and formed an organization that did a couple of things.
First of all, we’re able to touch the end market. We’re able to connect back to our technology platforms and respond much faster with solutions to a very fast moving market. So I think that was a key element. And we also made sure that we could get better asset utilization as we aligned the businesses. And as you know that will also then drive productivity into our organization structure, et cetera.
The business have gone, since it was formed over two years ago, I think from 15, 17 and now at 15, 17 I think we start 17 this year. We are touching closer to 20 as we have said for the year. That business by definition is a little bit more volatile than the other businesses for us. But our expectation here at 3M and on that business is that they should be part of almost close to the average of the company as we move ahead.
So I think we’re on a much better place today based on the streamlines work we have done around the organization structure which all have been in the benefit for the customer in terms of responsiveness and for us, relative to asset utilization.
Joseph Ritchie – Goldman Sachs
Okay. Great. Thank you for taking my questions.
Inge Thulin
Thank you.
Operator
Our next question comes from the line of Ajay Kejriwal at FBR Capital Markets. Please proceed with your question.
Ajay Kejriwal – FBR Capital Markets
Thank you. Good morning.
Inge Thulin
Good morning Ajay.
Ajay Kejriwal – FBR Capital Markets
So were really strong here. You’ve actually seen acceleration. It looks like you had 2.6% in first quarter, 4.5%, second, and now 6%. And I guess it’s not easy on accounts because you had a really good quarter last year as well.
So Inge, maybe share your thoughts on what’s driving this. What are you seeing broadly? How much of this growth here is end market versus some of the work you’re doing? And might this be some restarting that could be contributing?
Inge Thulin
Yes. No, I don’t – first of all, let’s – the business, if you look upon our businesses, we had good growth in all of them, different business group in United States led by industrial. So industrial had 8% growth in United States. But you had also Healthcare of 6%. And you have Safety and Graphics of 7%. So very strong robust growth.
And in our view, it’s not a build of inventory in the channels as we can see it. The economy has improved and we are able to capitalize on that. Now if you think about what we have done at 3M and I don’t know if you recall that, but let me take you back two and a half years, so – yes, more than two and a half years, when we start to refocus our U.S. organization we had at that point in time, very much an organization that in many function were global and there’s this total accountability and responsibility relative to execution on the United States subsidiary if you remind that discussion.
And that work started actually in May of 2011 and have continued since in terms of making sure that there is a specific execution arms for every division in United States as well as we have had in Germany and Japan and Chile and Russia, et cetera.
So I think there’s two elements into it as I reflect on it. One is that we are capitalized on the economical situation in the United States. And number two, I believe that we also have moved our organization to a much more focused execution – we’re a much more focused execution model in United States. So it’s both and it’s broad-based as I said. We have business still growing 6%, 7%, 8% in United States in the quarter. That’s very, very good.
And we have seen a tick up here shortly as you said from Q1 to Q2 to Q3, we see an uptick and a growth in United States.
Ajay Kejriwal – FBR Capital Markets
Excellent. That’s very helpful. And then Nick, maybe on the tax rates. So it’s gone up a little bit here. I guess a part of it is mixed. But how should be think about the trajectory as you implement some of the planning initiatives say into next year?
Nick Gangestad
Yes. Every quarter as you can imagine, there is puts and takes that cause the rate to fluctuate some up and down. We had some benefits of third quarter last year, not repeating. We also had some onetime expense this quarter actually related to your more long-term question, a onetime charge related to the establishment of our distribution center that we set up in the EMEA region.
And so as you think about this long-term, we’ve guided to expecting a 27% tax rate by 2017 and we see ourselves on track to that.
Inge Thulin
Thanks, Ajay.
Operator
Our next question comes from the line of Jeff Sprague of Vertical Research Partners. Please proceed with your question.
Jeff Sprague – Vertical Research Partners
Thank you. Good morning, gentlemen.
Inge Thulin
Good morning, Jeff.
Jeff Sprague – Vertical Research Partners
Good morning, good morning. Just a couple of things. I know you don’t want to get into a big discussion about next year, but with all the global gyrations, I thought maybe some of the non-operational things, you could at least give us a little insight on, right, the state of the globe. Maybe it’s anybody’s guess. But pension has kind of come back to the floor. It’s possibly an issue for companies and we’ve got this mortality table dynamic out there. So I’m wondering if you could give us a little bit of color there if there’s anything to think about.
And then just FX too, I mean we can all kind of try to work through our own guesstimate. But is there anything to be aware for 3M on how you’re hedging or translation versus transaction to just kind of be mindful of as we try to think about what next year looks like?
Nick Gangestad
Yes, Jeff, a couple of things. Of course you know we’ll share full details in December on many things. But for a couple that you’re asking about, I think they’re both worthy of mention right now.
First of all, on the second part of your question on FX, with the movement we’ve seen in the U.S. dollar in recent weeks, our estimate if we were to take FX rate as they exist right now is that year-on-year in 2015, we expect about $0.10 headwind on earnings per share. That’s a net after hedging impact. And in comparison, that’s to a $0.15 headwind that we’re expecting in 2014.
On your first part of your question on the pension, multiple factors going into that – the asset returns we’re experiencing this year, the discount rate expectation and the mortality table. If I take all three of those in combination, we’re looking – we’re estimating at least $100 million headwind going into 2015 on earnings per share on our earnings next year.
I think that covers what you were asking, Jeff.
Jeff Sprague – Vertical Research Partners
Yes, it does. And maybe just one more and I’ll move on. I think your tax rate has crept up this year in your guide because you were anticipating the extenders and everything. And it looks like that’s not happening. But should we expect any tax rate headwinds? And I kind of ask the question in the spirit of this U.S. strength? Is there any kind of move in the mix of your earnings that are actually tax rate negative that we should be thinking about or anything else that’s idiosyncratic to 3M that may affect the tax rate?
Nick Gangestad
Yes, Jeff. The tax rate is impacted by our mix of profits we earn around the world. Our current guidance of 28.5% to 29% takes into account that current mix we’re expecting for 2014. And on the extenders, we currently are still building that into our estimate for 2014. And if it doesn’t pass, that would likely put us at the high end of the range that I’ve talked about.
Jeff Sprague – Vertical Research Partners
Okay. All right. Thank you.
Inge Thulin
Thank you, Jeff.
Operator
Our next question comes from the line of Steve Tusa of J.P. Morgan. Please proceed with your question.
Stephen Tusa – J.P. Morgan Securities
Hey, good morning.
Inge Thulin
Good morning, Steve.
Stephen Tusa – J.P. Morgan Securities
Clearly, some very good execution against the tougher Forex and global environment out there. The margin was definitely stronger than we were expecting I guess. In the context of what I see here as kind of a 75% incremental margin year-over-year and the thing that kind of stands out the most obviously is this productivity line.
Utilization, I kind of understand, what do you mean by portfolio management exactly? What is that?
Nick Gangestad
Portfolio management, Steve, is some of the actions we’ve been taking as part of our strategic investments to in some cases combined businesses for efficiency and better relevance to our customers as well as some restructuring expenses that we’ve taken. That when we say portfolio management in that regard, that’s what I’m talking about.
Stephen Tusa – J.P. Morgan Securities
So it’s not like a year-over-year. This is like blocking and tackling on cost takeout from business combinations?
Nick Gangestad
Exactly.
Stephen Tusa – J.P. Morgan Securities
Okay. And then just in the fourth quarter here. I guess it seems a pretty steady state organic growth you’re guiding to, any kind of movement around the various pieces of the business geographically in the fourth quarter?
Inge Thulin
No, not where we can see at this point in time. See, we have guidance there, we are 4% to 5% for the year and we feel confident around that.
Stephen Tusa – J.P. Morgan Securities
Okay. Great. Thanks a lot.
Inge Thulin
Yes. Thank you, Steve.
Operator
Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question.
Nigel Coe – Morgan Stanley
Oh, good morning. Thanks for the –
Inge Thulin
Good morning, Nigel.
Nigel Coe – Morgan Stanley
Good morning. Nick, you mentioned $100 million for the pension at the current discount rate [ph], does that then feed [ph] mortality tables because I get $100 million just with discount rates. But you mentioned mortality table as well.
Nick Gangestad
Yes. Nigel, that’s taking three things into account – us adopting the new mortality table, a roughly 50 basis point drop in our discount rate and the asset returns that we have experienced and are expecting to experience for 2014.
Nigel Coe – Morgan Stanley
Okay. And that’s very helpful. And then obviously the margin strength has been discussed [indiscernible] so far. If I had to speak into the next layer, looking at the SG&A as portions of sales down I think about 70 basis points year-over-year and R&D flat. And I’m wondering, given that global IPI has come in a little bit weaker than we all expected, is there any element of just putting back a little bit on growth investments, a bit more action on cost control at this point just given the movements we see in SG&A and R&D?
Nick Gangestad
Nigel, what we’re seeing on the movement there is function of our normal drive on productivity. It’s not really a change in our trajectory on our growth investments that we’re making. Those are continuing. We are on year-on-year seeing a pension benefit that’s impacting SG&A. And then to the later point I made, the portfolio management where we’ve been taking some restructuring actions, we’re starting to see some of the benefits that those manifest in our SG&A expenses.
Nigel Coe – Morgan Stanley
Okay. That’s great. And just finally, microchip born, if you like, on electronics end markets earlier this month, are you seeing any weakening at all in all the markets for 3M?
Inge Thulin
No, we did not see that at all. So our electronics business did very well as you saw with, I think we called it out with 8% organic local currency growth. So we didn’t see anything on that.
I think the external data at least going back to Q2 was indicating then at that market went sideway overall, right, so now then it’s for you if you’re in that segment then depending what you are in that segment, then it’s coming down to execution. Make sure that you capitalize on the market overall. Based on our portfolio, we didn’t see that.
Nigel Coe – Morgan Stanley
Okay. Thank you very much guys.
Inge Thulin
Okay.
Operator
That concludes the question-and-answer portion of our conference call. I’ll now turn the call back over to 3M for some closing comments.
Matt Ginter
Oh real quickly, thanks for participating this morning. It was a good call. We look forward to seeing you December if not before. Have a great day.
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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