3M Company (NYSE:MMM) Investor Day Call March 29, 2016 8:30 AM ET
Bruce Jermeland - Director, Investor Relations
Inge Thulin - Chief Executive Officer
Nick Gangestad - Chief Financial Officer
Paul Keel - Senior Vice President, Supply Chain Operations
Mike Vale - Executive Vice President, Consumer Business Group
Frank Little - Executive Vice President, Safety & Graphics Business Group
Mike Roman - Executive Vice President, Industrial Business Group
Jim Bauman - Executive Vice President, Electronics & Energy Business Group
Joaquin Delgado - Executive Vice President, Health Care Business Group
H.C. Shin - Executive Vice President, International Operations
Ashish Khandpur - Chief Technology Officer and Senior Vice President, Research & Development
Scott Reed Davis - Barclays Capital
John Inch - Deutsche Bank
Shannon O’Callaghan - UBS
Steve Winoker - Sanford Bernstein
Jeff Sprague - Vertical Research Partners
Joseph Alfred Ritchie - Goldman Sachs
Deane Dray - RBC Capital Markets
Julian Mitchell - Credit Suisse
Andrew Kaplowitz - Citigroup
Nigel Coe - Morgan Stanley
Cliff Ransom - Ransom Research
Martin Sankey - Neuberger Berman
Good morning. I am Bruce Jermeland, Director of Investor Relations, for those I didn’t meet last night. Welcome to 3M’s Customer Innovation Center. We had a very good turnout last night at our new R&D facility on our campus, the 3M Carlton Science Center. Hopefully, you’ve got to learn more about 3M and also got an opportunity to interact with our leadership team. A number of those leaders will be speaking this morning. Of course, we’ll hear from Inge Thulin, our CEO and Nick Gangestad, our CFO. But we will also hear from all of our business group leaders, Mike Vale, Frank Little, Mike Roman, Joaquin Delgado and Jim Bauman. And you will also hear from H.C. Shin, Head of our International Operations and Paul Keel, Head of Supply Chain.
Just a quick update on upcoming events in 2016. Four weeks from today, we will have our first quarter earnings announcement. Then the Q3 and Q4 earnings days will be July 26 and October 25. And in December, we will have our 2017 Outlook Meeting on December 13. Please mark your calendars.
Today’s agenda, we will conclude formal presentations at about 11:45 and then have 45 minutes of Q&A. We will have a break about halfway through. After we wrap up Q&A, we will have lunch downstairs where we had breakfast this morning. And then our World of Innovation will also be open for an open house. Buses heading back to the airport will start running at 1:00 p.m. and will run every half hour until 3:30 p.m. If you have luggage, make sure you grab that on the way out the door. If you have other arrangements, please let us know at the break and we can certainly make other arrangements for you to get where you need to go.
Before we begin today’s presentation, please take a moment to read our forward-looking statement. During today’s meeting, we will make predictive statements that reflect our current views about our future performance and financial results. We base those statements 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 those important risk factors that could cause actual results to differ from our expectations.
So with that, again we really appreciate your coming to the meeting today and your attention. Now, I would like to introduce Inge Thulin, 3M’s Chairman, President and Chief Executive Officer. Inge?
Thank you, Bruce. Thank you, Bruce and good morning everyone and welcome to 3M. It’s a pleasure for us to host you here today and to talk about our next 5-year plan and also give you some perspective on the journey that we are on. What I would do this morning is first of all give you the highlights of today, so you can get that early on and then follow the presentation and go through here. I will talk about our model that is based on building strength-on-strength and around efficient growth. And as you will see, we have been able to build strength-on-strength the last couple of years again and you will also see the outcome have been efficient growth and that’s also the theme as we go ahead.
So, the highlights of the day is first of all, you will see that we have a playbook that is working and you will see that constantly through all the business groups and through international. You will see that we are able to execute on the key levers for us, portfolio management, invest in innovation and business transformation. We have a model where we are winning with our customers in order to make sure that they deliver on their promises to their customers. And we call that customer first and you will see that as well today in terms of initiative. You will see that we will further enhance our capital structure and allocation that we started a couple of years back. You will also see that we maintain our strong track record of returning cash to our shareholders. And then we will today announce our 2016 to 2020 financial objectives that you saw came out this morning and we are also reaffirming our 2016 outlook. So, that’s basically the highlights that you will be able to go away with as we end the morning here at 11:30.
Now, let me start by talking about building strength-on-strength and how we have been able to position ourself to win and win more. And I go back to 2012 in terms of laying out on the journey what we have been doing. So if you recall in 2012, that’s where we laid out the new 3M visions and our six strategies. We also laid out the financial targets for the 5-year plan, which we are now in 3 years to. And then we also established a robust portfolio management system. That was where we started in 2012. When we went into ‘13, we prioritized the three levers that we will talk about today. We enhanced our capital deployment plan and we strengthened our code of conduct, which was important for us to do. As you know, you need to protect the enterprise and everything you do.
When we went into ‘14, we defined the fundamental strength of the company. And they are important, because they together with the portfolio work is taking us on the journey, on the road where we tried to go. And then we also reshaped our leadership behaviors. We had up to that point leadership attributes and we reshaped them to behaviors, because it’s all believed that what you do as a leader is based on your behaviors. And then as we went into ‘15, we deployed and unified 3M brand strategy, which is 3M Science Applied to Life. And we restructured our organization as you recall, it took something into account about 1,500 to 1,700 people in order to position us well for the future and then put in place the efficient growth model. So, when you look upon what we have done here step by step in order to build up the model, there is quite a bit that have going on and I will comment more on that.
But let me start relative to the vision that we laid out. And it was important for us, because the vision is what is guiding us. And a vision is all about what you do, how you do it and where you do it. It should be calling out the competitive strengths of you as a company. It should be a stretch and it should be authentic to you of who you are as an enterprise. And 3M has – for 114 years, 3M has waked up every morning and asked themselves, how can we advance, enhance and improve? That is what we are all about. And how we do it? We do that with technologies, products and innovation. And where we can do it? We can in fact do it for every company, in every home and for every life.
So when we put that vision together, it was an important element for us in order to talk about who we are, how we do it, where we do it and how we can expand around the world. And if you think about every life, it’s a big statement, where every life for us it’s about healthcare, it’s about schools, it’s about sustainability and community. So, it’s very well ingrained in everything we do. At the same time, we laid out six strategies that are type of the enabler for what we tried to do. And the fourth one, all about growth, the fifth one is about us, people and the last one is around operational excellence. But when we laid them out, they were very precise in terms of articulation. So, you see the first one, expand relevance to our customers was very precisely around our customer and our relevance to them. You can see in the second strategy we took gain profitable market share. It’s not gain market share, profitable market share. And you can see the third one starts with a statement invest in innovation. And I think you saw something around that yesterday. It was just the small piece of it, but we said we will move from 5.5%, closer to 6%.
And then as you will see later here both in terms of diversity and performance theme and then operational excellence, we will touch on as you go. So, they were very precise in terms of how they were laid out and how we have executed versus them and they still stay in place as we move ahead. So, that became our playbook and I will say this is the playbook that you will see the business is driving towards. You have the vision, you have the strategies, you have the business conduct and you had the leadership behaviors. And there is three key levers that is creating more value for the enterprise as we move ahead: portfolio management, invest in innovation and business transformation and that is the theme in everything you will see and we are executing on it and the playbook is working very, very well for us. It’s important for all of us and for us and for you to understand the framework is there cemented in the organization and it is working. Now, the outcome of that is that we have a playbook that have created very successful portfolio for us.
And here, you have the five business groups in terms of result from last year, with a revenue of $30.3 billion and an operating margin of 22.9%, another year of margin expansion that is coming back-to-back relative to performance. And you can see in terms of the performance for each business group, all business groups are now above 21% in operating margin. So very solid businesses, all doing very well and all have an efficient growth model for their specific market. So very diverse in terms of the business models and also very diverse geographically and you will hear H.C. Shin talk about the international piece.
Now, we also were able to find the real fundamental strengths of the company, which is in the vertical model we are using, which is one of the key elements where we are able to return good cash flow conversion to you and good return on invested capital. And the four things that we collectively can use in the company is technology, manufacturing capabilities, the global capabilities and then the 3M brand equity. The four of them is key element and differentiation for us of why we can deliver so good result in each of the five business groups and in international versus our competition. And I will talk a little bit more of them as we go and you will hear more from the business heads later, but the important element in order to understand why do we take as we do and why do we produce quarter by quarter, year per year in terms of the performance. It’s also important element when we look upon our portfolio in terms of eventually purchase a company or diverse something to look upon the portfolio outcome and lay this into the fundamental strengths in order to really understand how fast can we be successful if we purchase another company.
Now, we execute the proven model of success globally. And as you know, in all economies, you have the evolution of infrastructure coming first, followed by manufacturing, after that, safety coming in place, then you have retail and then finally healthcare is the evolution of all economies and it’s true for all economies around the world. This is the way it goes. You need first to build out the infrastructure. So after that, companies can start to invest more in terms of manufacturing capabilities. When the manufacturing capability is there, safety regulation is coming, very often driven from companies that is coming from the developed world. When economies start to go, people start to spend money in retail. And then finally, even if there is healthcare system in all countries from the beginning, it’s becoming really sophisticated at the end of that cycle. If you think about that and think about all businesses, we can participate in all steps of that evolution, which is the strength of 3M. So, that’s again the diversity of our portfolio that can be used all around the world. And as you have seen in the financials, our healthcare business is the most profitable for us, fastest growing and has the lowest penetration outside of the developing economies. So, when we look upon our evolution going forward, we look very, very positive on what we can do in the next 5 and 10 and 15 and 20 years.
Now, our capability as a company, historically have always been that we have been able to outperform the economy. And historical, we look upon at a 1.5x IPI, Industrial Production Index. We have done that for the last 5 years. We have done that for the last 10 years. So, you can say that 1.5x is the model. We have the capability and capacity to do that. And that was in fact how we laid out the model last time when we met in St. Paul, which was November 8, 2012. That was the way we looked upon it. So, you look here. 2.3% growth in production index during ‘11 to ‘15. We grew 3.4x. So again, 1.5x that is what we know that we can deliver and that is all about efficient growth. So, we are able to outperform economy 1.5x and we are able to get leverage with us and get margin expansion as you have seen. So, very, very important element for us.
Now, as we look forward the same is here in terms of there is an IPI projection of 1.3%. There is no doubt in my mind and in our mind that we should not be able to continue to deliver 1.5x IPI. So, the new target we are putting out today is 2% to 5% growth in organic local currency growth in the next 5-year plan. So, the capacity there, the capabilities in there is no reason for us to not be able to do that and that is why we announced that this morning. And if you look upon that 2% to 5% for the company, it’s slightly different in between the different business groups. So you can see Healthcare will be 4% to 6%; Safety and Graphics, 2% to 5%; Industrial, 2% to 4%; Electronics and Energy, 0% to 4%; and Consumer, 3% to 5%. Collectively for the company, ‘16 to ‘20 organic local currency growth target will be 2% to 5%. So, it’s an important element.
And then as we announced this morning, our long-term financial objective for ‘16 to ‘20 is as following: it’s 8% to 11% earnings per growth, it’s 2% to 5% in terms of organic local currency growth, it’s 20% return on invested capital and it’s 100% free cash flow conversion. So, that’s the new 5-year target that we laid out this morning and we feel very confident in the objectives that we have even they are aggressive, but still realistic. And you will see as we go through the presentations today, how we will come there?
Now as I said earlier, it start all with the customers. And we have really stepped up the initiative the last couple of years relative to understand the business models of our customers. And then for us is to be able to help them to deliver on their promises. Our customers promise their customers something and we need to understand that in-depth, because if we don’t we will not be able to be relevant to them and serve them in the way that they expect. So, you will see from the presentations today this is a big deal and been my objectives. And I came into this role to make sure that we are stepping up those activities in order to understand how we can serve our customers better.
One way to do it is around sustainability. Sustainability is a big opportunity and can for many be looked as a threat. And when you look upon our technology platforms, we doubled down on sustainability 3 years ago. And a reason for that was that we have done everything correct as our own enterprise relative to our operation, but it became very clear when you talk to companies around the world that they have on their top 10 list always sustainability as an issue or topic for them, mostly in terms of threat. We took an offensive approach to it relative to say the things we can do with our technology platforms that can help them. And that is what we are working on.
Now, sustainability is measured and talked about in different ways by different companies. But the point here is it’s a big opportunity for us to make sure that we can help them with solutions based on what they are doing either in their own manufacturing processes or with products they are selling to their customers. So, it’s a big initiative and we can really help in terms of what we are doing with them. It’s interesting when we laid this out, because for me, when I laid it out initially, it was clearly, yes, around sustainability as a standalone point. It became an incredible big door opener with CEOs all over the world, because most companies today and most CEOs are sitting and thinking about what can I do, what do I need to do relative to sustainability in my business. And they are listening to that and that’s opening up big opportunities for 3M, which is beyond sustainability in order to make good contacts all over the world. So, a very important initiative for us.
Now, let me talk about the three key levers that we have had in place for a couple of years, would continue to do it in terms of portfolio management, invest in innovation and business transformation. And let me start with portfolio management, which was a key element where we started in order to align the organization to capitalize on the best opportunities, but I think more importantly at the time, to be aligned with the customers and the markets and it was also to be able to have an execution model that was agile as we move ahead. Now, we have done quite a bit and here is the outcome of that that mostly is seen as one announcement at the time. But if we look upon it, we went from six sectors to five business groups. We have gone from 40 businesses to 26 businesses. This is all under the concept of making sure that we can prioritize for the best opportunity, be more relevant to our customers and make sure that we really take a hard look at our portfolio.
The benefit relative is that it’s greater scale and relevance to our customers, no doubt; have increased agility, we can move faster; have reduced costs and efficiency and productivity, and at this point in time, that’s around $300 million just in this initiative; we have been able to reallocate resources to the best opportunities, which then include, of course, investment in R&D and look upon our merger and acquisitions activities. So, this had been an important element if you go back to the first strategy, which I said improve relevance to our customers. That was where it started. That was to look upon the structure of the organization, not so much, yes, for the structure, make sure we align to the market, to our customers and can respond faster to them based on their needs.
As part of that, we also talked about activities in merger and acquisitions and we have taken actions. So on acquisition, you can see a couple of acquisitions here. Capital Safety that I think you got a good picture of yesterday night; Membrana that is in Industrial Business Group, into purification; Ivera that is into Healthcare; and then we purchased the last 25% of Sumitomo 3M operation from Sumitomo Electronic and then we made the Treo Solutions also acquisition also into Healthcare. So very good activities based on the strategy we are moving forward and based on the portfolio in place. At the same time, there is four businesses here that we thought will be served better with another owner. Library Systems was sold, license plate converting operation in France, Static Control in our Electronics and Energy business, and then Polyfoam that I think we just announced a couple of weeks ago. So, we have worked the portfolio diligently based on the analysis we did in terms of where we would like to go. So, this is some in and outs and you will hear the outcome of that from Nick Gangestad later today financially.
We also took an active approach relative to health information system and asked ourself where will this create most shareholder and stakeholder value? This is a business that are growing very fast, very profitable, so not one of those businesses that we will have had in the left-hand corner of the portfolio. It was actually in the right-hand corner of the portfolio. I think this was the right thing to do for shareholders and stakeholders to take a hard look at that and say, where can this create most value for all of us? We made a full assessment, strategic option look at it. We talked about it like keep it, spin it, sell it. And after we went through everything, we decided to keep it. This is a fantastic business. And it’s not only for us to keep it, it’s to keep and invest in it. And you can see here we accelerate now the plan here and we accelerate the trend by growth of 200 to 400 basis points. So, very important business for us. We will keep it. But I think in terms of what we are doing, we feel good that we even take businesses that are performing very well and ask ourself the question, does it belong with us or should it go somewhere else? In this case, it’s belong with us and we are keeping it. And I think Joaquin Delgado will make a couple of more comments on it.
Invest in innovation, the second lever. Research and development is the heartbeat of 3M. And first of all, we are looking for increased R&D productivity. We make big investment, but we will also expect big returns. We will enhance our commercialization effectiveness to make sure we are more successful the way we execute the plans. And then we will invest in scale of new growth platforms and you will hear a couple of them later today.
The important thing here is the left hand side, is we have two models in terms of get input relative to the output. One is called customer-inspired innovation. That one is called i2i, Insight 2 Innovation. And think about it like customer-inspired innovation is when we work with one specific customers on platforms often spec-ins. And you think about Insight 2 Innovation, i2i, is very much a market-driven approach. So, insight from customer and panels. And I think Ashish showed both of them yesterday and you will hear about them as we go through the presentation today, but they are important. That is what is driving the investments we are doing for the output.
In the middle, you have the 46 technology platforms. And the unique thing with that is they are owned by the company. They are owned by 3M. They are not owned by one division or one subsidiary. They are there in the middle. And that’s the open innovation internally with 3M, but also open innovation with our customers. So, that is what could be used and can be combined that you saw some of it yesterday and you will see more today, combine for solutions with our customers. And then of course, as I said, as our primary strategy is organic local currency growth, we also expect big outcome from those investments. So, it is the heartbeat of 3M. We are committed to it. And we are coming closer to the 6% investment as we laid out. I think we came at 5.8% as of last year and we are moving it forward and it’s the key element for our success as we move ahead.
Now, we also launched our new brand platform, 3M Science Applied to Life. And it was important for us to do that in order to position 3M, so customers and potential customers really understand what we can do for them. And it’s coming back to our vision. You go from the vision now to the brand platform and they are connecting very, very well together. And I will say that the outcome of that, we have been on that for a year, has been very, very favorable in terms of our own perception with our customers in the market. And as you heard in the video before, science is just science until you make it do something, change something, improve something. And that is what 3M is all about. We are not a commoditized company. We are always on the edge of new innovation in order to make sure that our customer becoming more competitive and can win in their marketplace. So, a very, very important element where we think now we have put all those pieces together, from investment in research and development to a much more effective commercialization model, with customer first as a key element for that.
And then the third one is around business transformation. A business transformation is starting and ending with a customer. It’s very important. That’s what it is. It’s an efficiency model for us, but it’s also linked right into our customers. And we continue to have a successful ERP rollout as we move ahead and Nick will talk a little bit more about that later today relative to the progress. And it will increase service level to customers and reduce our costs to serve.
And there is a couple of elements in here and Paul Keel will also touch on this later. But I think the important thing is we are building global service centers. We have business service operations in place. We have supply chain COEs that Paul will talk about. And as you know, as we laid out before and the plan is working, here is the $500 million to $700 million annual savings and a $0.5 billion working capital improvement by 2020, going very well. And as of this first quarter, we successfully implemented in Germany, which is a huge operation for us and everything went well there and that came back-to-back from our implementation in Nordic, which is four countries that is complex by definition, both with operation in terms of manufacturing and commercialization offices. So, doing very, very well for us, an important element.
When you think about that strategy also in terms of efficiency, Lean Six Sigma get the bigger place for us and we are stepping up big time. And we do it because we can deploy Lean deeper and more broadly. We have now one person on our operating committee, Jesse Singh that is totally dedicated to Lean Six Sigma. And it’s about simplifying optimized processes specifically in supply chain and manufacturing. And it’s also to increase employee engagement and leadership development focus. So, this is a fantastic initiative for us and we have been on this for 15 years on Six Sigma. Now, Lean is taking a bigger piece of it and there is big benefit for us. And I think when I think about 3M, we are a company based on processes and project management, Lean Six Sigma working very, very well for us and you will see the benefit here as Paul Keel talked about his material specifically. It’s a very important element that we are stepping up our activities too.
Now, nothing will work if you don’t go to the fifth strategy. It’s around our people. And it is an important element. And one way to think about it is even when time are becoming tough, what are two things you shouldn’t compromise on? You shouldn’t compromise on your people in terms of their development and you should not compromise on technology platforms and evolution, because that is what would drive you forward in everyday of the year, people and technology conversion. And as I said yesterday, there is two things in my mind that is driving the economy, it’s demographic shift and it’s technology conversion.
So, if you go through the fifth strategy around people, we have a new leadership way in 3M. We invest a lot for everyone to get development, but in terms of the leadership and development of leaders, we have now four programs in place: one called Spark, one called Ignite, one Amplify and then one Catalyst. And it’s important, because this is to develop the leaders in the company. So, that’s coming on top of everything else we do and we made a big commitment and re-ramped our all development program for 3M as we moved in last year for the future. And there is more to that, as you know, everything from wellness, screening and prevention, where we have to make sure that we give our people everything they need in terms of stay healthy and make sure that they are up to speed everyday in terms of what needs to be done. And then it’s going the whole way, of course, of competitive rewards and investment opportunities. So, we have a very comprehensive program around our people, which is important for us and is part of the strategies that we laid out and it’s the fifth one.
So, you think about that. Our playbook is working. There is no doubt in our mind that we have been able to execute on that one the last couple of years. It will stay in place. There is total alignment in the company around it. And from a leadership perspective, at least from where I sit, when you have alignment around a plan and people know what they expect from them, you start to deliver. And I think that we have done that in the past, and I’m very confident that we will do that as we move ahead. So I will end here then by again, just lay out what we announced this morning in terms of our long-term financial objectives and the 5-year plan with EPS growth of 8% to 11%, organic local currency growth of 2% to 5%, return on invested capital of about 20% and then a free cash flow conversion of 100%.
So, that’s the opening for me. I thank you and I hope we will have a really good morning here. And then I will introduce Paul Keel, our Senior Vice President for Supply Chain. So, thank you very much.
Alright. Thank you, Inge. Good morning, everyone. I would like to cover three points with you this morning. I will begin by talking about how supply chain provides strong competitive advantage for our company. We will then go through our strategy for extending this advantage and then we will close by talking about three very specific value drivers that underline our strategy.
Now, our playbook is central to value creation and in supply chain, so I would like to begin here. We are guided by our vision. We are directed by the six strategies that Inge talked about. We are energized by our new code of conduct. And ultimately, we are measured as leaders by our behaviors. Now on the right side of the chart, of course you recognize the three levers. In the subsequent slides, you are going to see that they are very much interwoven into how we manage our global supply chain.
Now to further set the context for my comments, I would like to point out that manufacturing is one of our four fundamental strengths, very important. But manufacturing is just one component of supply chain at 3M. We also lead logistics, engineering, procurement and a number of other activities. And as such, we benefit from and reinforce all four of the fundamental strengths. Let’s get into some specifics on the competitive advantage that stems from these fundamental strengths. So, on this slide on the left, you again see the four strengths, the foundation of the competitive advantage for the company. On the right side of the chart, you see our industry leading gross margins. I wanted to start with gross margins, because cost of goods sold is such a good general measure for the health of the supply chain.
A couple of comments to connect the left and the right side of the charts, our proprietary process technology, plus our manufacturing scale, allow us to achieve the lowest unit cost in most of the categories in which we compete. Our global capabilities support uniformly high service and quality levels, which in turn allow us to better serve global customers. Our iconic brand, synonymous with quality, which supports pricing reflective of that higher value that our solutions offer. And all these then comes together in our gross margins, placing us in the top decile of our industry peers.
Now as importantly, I will show you in a subsequent slide we have a proven ability to drive year-over-year cost of goods sold reductions, which gives us confidence that there is much more to come in this regard. Having laid out the basis of our advantage let me talk about how we’re working to extend this. So, on this slide, you see the four core elements of our supply chain strategy, beginning in the top left with regionalizing our supply chains to reduce complexity. In the lower left, we are working to harmonize some key supply chain processes in alignment with the company’s broader business transformation effort. In the lower right, we are fortunate to have a rich portfolio of disruptive process technologies that we are working to deploy more quickly. And in the center of this slide, you see Lean Six Sigma, which underlies everything. It is the foundation of our culture of customer centricity and operational excellence.
Let me walk through each of these beginning with regionalizing our supply chains. Now, regional supply chain creates value in a number of ways, all beginning with reduced complexity. This simplification comes in the form of shorter supply chains, fewer SKUs and common processes. Now, reduced complexity in turn manifests itself in some of those quality and cost advantages that I just mentioned. A regional supply chain nicely balances the benefits we get from being geographically proximate to our customers with scale economies that come from managing a supply chain across a broader geography. And those advantages show up in terms of the various operational impacts or enhanced customer service. And these benefits are further amplified with the addition of a common ERP platform, like the one we are deploying currently and I will say more about in just a moment.
Now at 3M, we execute through our people, and regional supply chains also support this. So for example, in our EMEA COE in Switzerland, we drew from over 30 countries to put in place a 250-person high-performing team, two-thirds of whom have advanced degrees. This would have been a much more challenging task had we not had this strategy in place. Investing in innovation through disruptive process technology is the second of the four elements. Innovation, of course, is at the core of all we do here at 3M, central to our vision, central to our six strategies and central to the three levers.
With our deep roots in science, conversations about innovation here often begin with R&D. We talk about our annual investment approaching 6% of sales, the 46 core technology platforms you saw last night and you see again on this slide, more than 105,000 patents. But R&D is just one of a much richer fabric around innovation. In addition to almost 6% of sales in R&D, we invest another 4.5% to 5% in CapEx infused with equally innovative process technology. Of the 46 core technology platforms, about one-third are process related. More than one-fourth of our total patents are the same. In addition to this, we have countless trade secrets that we choose not to patent in order to keep our hand even better shielded from competition. We think of it as 3M Science applied to our supply chain. It’s what we do in our plants, our engineering work centers, our process labs each and everyday.
So, this slide gives you a sample of just a few of the many process technologies we deploy in our supply chain. To the right of each bar, you see the actual IRR of investments we have made in each of these technologies over the past 3 years. Now we have organized the technologies into two groups. The dark blue bars are proprietary inventions that you will only find at 3M. The light blue bars are more off-the-shelf technologies. You will find these in other companies, but they are typically deployed in proprietary ways here at 3M.
So, let me give you an example of each just to bring it to life a little bit. At the top of the dark blue bars, you see low surface energy coatings. Now, 3M has deep chemistry expertise. This is most visible typically in the chemistry and products we provide to our customers. For example, our engineered Novec fluids, which are used for fire suppression or electronic surfactants. Jim Bauman is going to talk more about this in his presentation. We also leverage that chemistry expertise though internally. In this case, a group of very low viscosity fluids that we use to coat the surface of different production lines to enhance productivity.
At the top of the lighter blue bars, you see robotics and automation. Now, no one in this room is going to be surprised to hear about automation in a supply chain discussion. But the returns we are able to drive I think might raise some eyebrows, in the mid 60s for instance. We are able to do this because of the scale economies inherent in so many of our processes. Pick a 3M product that you know well, post-it notes, scotch tape, Tegaderm dressings. These products run at line speeds several fold what you will find in a competitive plant. And when you automate this level of process capability, as you can see, the returns are very attractive. Now, those of you who have been following us for a while know that Lean Six Sigma is the foundation of our culture of customer centricity and operational excellence. Our journey thus far can be described in two phases. The first phase, the launch of Six Sigma and the current phase we are in now, adding on Lean on top of this foundation.
Now, we launched Six Sigma in 2001 focused on learning the terms, adopting the tools and deploying future leaders into key black belt and master black belt assignments. By 2008, we have become pretty comfortable with the tools and we are getting pretty good at the language. Many of those black belts and master black belts had graduated back into senior leadership roles. In fact, several of the corporate operating committee members you met last night have benefited from these assignments in their careers. Now in 2009, we launched Lean, following a similar strategy to the one that worked so well in Six Sigma. We focused on the building blocks, continuous improvement, elimination of waste, focused factories, etcetera. And similar to Six Sigma, those Lean leaders have now returned into the business. And just as Six Sigma has been woven into our culture, the same thing, we find is happening with Lean. So this year, as Inge mentioned, we will celebrate the 15th anniversary of Lean Six Sigma at 3M. It has very much become the seabed of how we develop our leaders and how we fuel business success.
So, let me say a bit more about that strategy. Now, I mentioned that LSS is the foundation and we built a very strong foundation. But we’re now layering on additional layers of value. Since inception in 2001, Lean Six Sigma has generated over $16 billion of benefit for our company. We have completed more than 100,000 projects and we have trained more than 75,000 employees. And despite being more than a decade into the journey, we find that the impact from Lean Six Sigma continues to grow. In 2005, an average project for us yielded about $300,000 of benefit. By 2010, that number had grown to $450,000. Today, the average Lean Six Sigma project at 3M yields over $0.5 million in benefit and this progress notwithstanding, I would tell you we are much closer to the beginning than the end of our journey with a particular upside in terms of Lean.
So, now Lean is fairly well-entrenched in supply chain. We have deployed it to 95% or so of our plants around the world, but we have really only scratched the surface in other target-rich environments like front office service operations or back office processing centers. Now, we have talked about supply chain as a source of competitive advantage. I have given you a high-level outline of our strategy for extending this advantage. Now, let’s talk about three specific value drivers underlying this strategy.
I would like to start again with COGS. I mentioned that we have proven an ability to drive sustained year-over-year improvement in our cost of goods sold. Over the past 5 years, we have leaned out 210 basis points from our cost structure. This equates to an annual operating benefit of around $700 million. Now, despite our industry leading margins in the 5-year run, we see continued upside ahead. So in recent years, like many of our peers, we have benefited from price and raw material tailwinds. Looking forward, though we have clear line of sight to another 150 to 200 basis points of COGS improvement supported by the three value drivers you see here, our supply chain centers of expertise, business transformation and footprint optimization.
Let’s walk through each beginning with the COEs. So today, we have three COEs in place, supporting regions of the world particularly important to us as a company. Starting in the lower right and working our way around clockwise, our first COE was established in Singapore. We started with just a plant, serving global electronics customers operating in that area. Now today, that COE manages 8 sites around APAC. We have more than 40 plants in that region. So much more room for growth. Our second COE was established in Panama. It too leveraged as much of what we learned in Singapore. So, it has local manufacturing and it manages multiple sites in the region. But with Panama, we introduced a third feature to our COE. Knowing that a common IT platform would magnify the impacts that COEs can bring, we moved Panama forward in our global ERP deployment schedule, and we took it live just last summer.
Now in the center of this slide, you see our newest, largest and most capable COE. It manages all 55 of our plants across all of EMEA, more than a $6 billion in production. And while we are just in our fourth year of operation, we have already seen widespread improvement across multiple dimensions of our supply chain. Let me quantify some of this impact for you. So, on this slide, you see a group of fairly typical supply chain metrics organized by a fairly typical supply chain responsibilities, service cost, quality, development of people. But look at the bullet points for a moment and I think you will find the impact is fairly atypical. So first, in terms of the widespread support that a COE brings, back orders, costs and attrition are all down; customer service, sourcing and LSS benefit are all up. In some cases, the magnitude of that impact is notable. Take COGS again, down 170 basis points, equating to an annual benefit for this region alone of around $100 million.
And third, I would point out that we have achieved these gains in a fairly short period of time, which gives us confidence that there is much more to come. So, because a COE can positively impact so many aspects of the supply chain, it follows that capital invested in these structures ought to generate an outsized return. It’s exactly what we found. So last year, 3M had achieved ROIC north of 20%. Investments in our COEs are highly accretive to this return. So as a consequence, we are directing an increasing portion of our CapEx budget to these productive structures from just 3% of our growth CapEx in 2013 to almost half today. And you can hear a lot today about business transformation and the progress we are making. Half the company’s data and 4 of the 9 core ERP processes are part of supply chain. So, we have a dedicated supply chain business transformation team in place that jointly reports to myself and Julie Bushman, who is our Senior Vice President of BT and IT.
So, I want to give you an example of just one of the many ways that we create value for our customers and our shareholders through the intersection of supply chain and business transformation. By the end of this year, West Europe will be our first region fully deployed on our new ERP system. This means we will have permission-based visibility into material demand and usage across an entire region. And this data allows us to even better optimize inventory, purchasing and production. I showed you on a previous slide that COEs drive widespread operational improvement across the supply chain. Business transformation amplifies these effects.
Footprint optimization is the third value driver I want to outline this morning. Now, 3M has more than 200 plants around the world and you can see these organized from largest to smallest on the bar chart at the left. Our supply chain is anchored around a group of what we call Super Hub sites. These are 4x to 5x larger than a typical plant and are home to many of those disruptive process technologies that I mentioned earlier. I am going to show you on the next slide these sites are much more productive and effective than a typical plant.
Now, on the right side of the chart, you see a longer tail of smaller facilities. Some of these plants are specialist sites. They are a unique source of supply for a distinct customer segment. They are critical to our supply chain and we continue to invest in them, but some of the sites are less competitive, which creates for us an opportunity to consolidate volume into those Super Hub sites. So, a key benefit of footprint optimization is leveraging those scale and technology advantages of our most capable sites. On the left side of the chart, you can see that our larger plants are on average 40% to 45% more productive than our smaller plants. In the same way that they are more effective from a cost perspective, they tend to drive inventory turns of about 15% faster. Now not surprisingly, we find the same phenomena holds true in our distribution network. Our large regional DCs drive cycle times 20% to 25% faster than small local DCs. So, the focus of our footprint optimization plan is to consolidate volume from our less competitive sites into our most capable operations.
Let me give you a bit more detail on this. The focus of our footprint optimization plan is threefold to improve customer service, to drive operational efficiency and to increase our cash flow. And this plays out in a number of ways, faster cycle times and reduced handoffs, leveraging economies of scale to drive better asset utilization, shorten supply chains and reduce stocking locations. Now in total, we only plan to remove about 5% to 10% of our total production space, but this will have a meaningful improvement in terms of results, including a 3 to 4 point improvement in customer service, an annual improvement in cost of goods sold between $125 million and $175 million, and a reduction of our global inventory of about $100 million. This plan does require an investment of about $500 million to $600 million over the next 5 years, but will result in returns north of 20%, accretive to the 20% ROIC commitment we make to all of you.
I would like to close the same way I began with our vision, because just as supply chain benefits from and reinforces the four fundamentals strengths, the same holds true with our vision. And we are fortunate because we touched on all three components. So, of the 46 core technology platforms, 15 of these are squarely focused on our supply chain. It’s easy to intuit the role that supply chain plays in creating products to enhance every home. Of the more than 60,000 unique and differentiated solutions we offer, the vast majority are manufactured in a 3M facility. And we have a special responsibility in leveraging innovation to improve every life. In addition to manufacturing, logistics, sourcing, engineering, we also lead EHS and sustainability for the company, which means we have a special responsibility to protect the lives of all 3Mers as well as the communities in which we operate.
So, I hope my comments this morning have helped bring supply chain’s role in the company vision into greater focus. I look forward to fielding any questions you might have in the upcoming panel discussion. And with that, I would like to introduce my colleague, Mike Vale, who will share some thoughts on our Consumer Business Group.
Good morning, everyone. It’s a pleasure to sit back and share with you the story of how the consumer business within the company has been winning with the retail markets globally over the last 5 years and how we see the business positioned to continue driving sustainable and efficient growth over the next 5 years. What I am going to talk to you about today is a little bit of overview of the businesses, the context that we see and the external markets and how that informs us towards both our operating model and our international growth opportunity and how we are leveraging and activating the 3 value creation levers of the company: portfolio management, invest in innovation and business transformation.
I am going to start off by saying this is a business that really I think embodies all aspects of the 3M vision. Because when you look at our products and our brands, we can be in every company. We can be in every home and we can be in every life. And while you saw yesterday that we are a company that’s built on technology, so our products are really around pressure-sensitive adhesives, thin film processing, electrostatic non-woven materials our consumers know us as the brands Post-it, Scotch, Scotch-Brite. So while we are embodying every aspect of the 3M vision, we are also focused on driving the strategic intent of this business, which is to bring 3M brands into the daily lives of consumers, because that’s how our consumers know us, as the brands.
Today, this is a strong business, a strong business that’s becoming stronger. When you look at it, we have growth rates that are exceeding the segments that we play in. We have margins that are at the top end of our peer set. We have a diversified portfolio, whether you look at it from a product standpoint, a channel standpoint or a geographic standpoint. There are attractive growth opportunities within the space, both in the U.S. and in international. We lead with new products because this is the core differentiating pillar of a 3M business as it is for us. But we’re overlaying new capabilities to amplify that growth, as you’ll see in a second. And we continue to balance investments for the long-term sustainability and health of the business while driving operational excellence and portfolio management.
So today, the business is structured in four market-facing, channel-oriented businesses, three of which are $1 billion plus, all of which are growing faster than the market segments that they serve, all of which have attractive margins that are expanding and allowing us flexibility and room to maneuver and invest to continue relevant, effective and sustainable growth. The markets that we play in are large. They are global. They are growing. We are stable. And when you look at the diversity of the segments from household cleaning to home improvement, to the office education markets, to health and wellness, when you look at all the segments that we play in here, what you are seeing is a reflection of the diversity of the consumer habits, which we bring solutions to and you are seeing the diversity of the 3M technology platforms with which we are impactfully bringing solutions and products from.
That diversity of portfolio, that diversity of market segment really helps us in managing a market that is changing in front of us. So, when you look at consumer markets globally, there is a mixture of stability overlaid with change. The market themselves from a long-term growth prospect are very favorable to us, from the causal drivers that we see led by population growth, rising wealth, urbanization, access to product, that’s becoming more and more prolific, whether it’s through modernization of retail channels globally or through increasing digitization of the business model. All of these factors play into increasing consumption and long-term positive outlooks for overall consumer markets. Now that stability and growth trend of the market is overlaid with a very dynamic business model environment.
So, when you look at what’s going on in channels at service market, you use a very dynamic business, where store formats are changing, where retailers are investing to digitize their model, where advanced analytics is becoming more and more prolific, where brands and the ability to create and test brands is becoming easier. So again, you see this overly of a very stable long-term market approach overlaid with a very dynamic business model environment and we are adapting to that. So, when you look at how this business has evolved over the last 3 to 5 years, what you are going to see is a business that is reinforcing the core aspects of its business model, technology-led products, brand strength, customer intimacy, but overlaying on top of that new capabilities that amplify our core strengths.
So, when you look at our model today, what you see here is the combination of core and new. Our core will always be our capability to take 3M technology platforms and create products that are truly differentiated and visibly differentiated to the consumers to group those products on our brands and great brand strength that resonates and connects consumers and to be wherever the consumer is shopping in a multi-channel approach, that has been the core of the business model for many, many, many years within 3M. But about 4 to 5 years ago, we realized when we looked at the context of the model that we need to be more. And the fact is that we have been very successful as a 3M business in retail, but we have to become more like a retail business inside 3M. And the implications to that were let’s build new capabilities, consumer insights, digital marketing, design thinking, shopper marketing, all of these new capabilities that maybe core to a pure CPG company but were still relatively new to a business that was fundamentally grounded in technology and that will remain fundamentally grounded in the applications of technology. But now our business model has extended and we are spanning from starting at the consumer much more strongly with the why and what of a product or solution and extending all the way now to the shopper in the store, which is about the where and the how of the purchase trip. And by creating that extension, by building those new capabilities, we have fundamentally, I think, strengthened our ability to compete and lead in these market segments while leveraging what will be and always is the core fundamental strengths of this business model, which is technology-led innovation.
The model is also scalable globally. Consumer habits are universal. So, the habit of cleaning your kitchen is a universal consumer habit around the world. It just looks different. So, when you look at this business, we have significant opportunity to scale and extend the portfolio across the world. Unlike the rest of the groups, we are more indexed in the U.S. than we are in international. That reflects the strength of the brands, the strength of the technology, the strength of the business model within the U.S. markets, but we have a tremendous opportunity to continue growing strongly in international and build the business to be 2x the scale it is today in international, because of what we see coming. Today, 55% of the global middle class is centered in the United States and in Western Europe. Within 5 years, 55% to 60% will be in Asia. So we are moving the model and focusing our attention on driving towards this external and international opportunity, leveraging established positions in some of our key subsidiaries and focusing in very clearly on some emerging market opportunities shown there with the 7 countries that I have listed, which represent 3 billion consumers across 7 countries. Alright.
We have a clear plan that we have been deploying and we have been winning in international. Now when you look at the plan, it’s not about recreating the brands. It’s not about recreating the portfolio. It’s about extending the core brands and product portfolio that we have and customizing it to the local needs of the consumer, but it’s also about recognizing the evolution of retail channels and the purchase path that consumers take in international markets. And it follows a very, very clear path that we have proven out in some of our established subsidiaries and were going to continue to drive in our emerging subsidiaries. While we do that, we are also evolving the model.
So every consumer business is fundamentally local, alright? Consumer habits are fundamentally local, but there is a lot of commonality, commonality of needs. So while we are focused on effectively customizing the portfolio and brand and model to local needs, we are also looking for opportunities to balance that effectiveness of customization with efficiency of centralization and regionalization where we see commonality of purchase power, commonality of culture, commonality of channel maturity. So, the fundamental path that we lay out now for how we drive to this opportunity really comes down to continuing to leverage the three value creation levers of the company: portfolio management, invest in innovation and business transformation. 4 years ago, we were structured with 7 businesses. Today, we have consolidated and structured down to four businesses with greater scale, with greater clarity, with greater efficiency, continuing to grow at 1.5x or more in the market segments that we play in and expanding operating margins almost 200 basis points over the last 3 years.
But the path on portfolio management has been more than just the organizational structure of the business group. It’s gone down into various components of the overall model, whether it’s how are we managing a product portfolio that is really 40 different product commodities; how are we managing a broad span of geographies while focusing on those 7 key emerging markets; how are we deploying more effectively our R&D assets on the biggest opportunities; how are we managing a portfolio of brands that has iconic brands, such as Post-it, all the way down to strong trademark positions, such as SandBlaster; and how are we managing our supply chain in a way that builds, as you saw from Paul, the cohesiveness, the connectivity and unlocks value, unlocks value for us to redeploy more for efficient growth, to invest back into the innovation. So, the portfolio management approach that we have been taking over the last 3 to 4 years has been multifaceted and has been the core of how we have been able to unlock better than market growth rates and expanding operating margins while continuing to reinvest into our innovation story for growth.
And when you talk about efficient growth in retail, what you are really talking about is increasing consumption, increasing consumption in volume in the core categories that you are playing in or upgrading the existing users that are in that market. And we look at it in actually two pieces of a puzzle: what we bring to market in innovation in terms of product and brand and how we go to market in terms of commercialization tactics on managing the shelf, on expanding our distribution coverage models and how to activate in-store or on webpage impactfully on a daily basis or in the large seasonal events that we play in.
Fundamentally, though, we continue to drive the strategic purpose of this business, which is to extend 3M technology effectively into retail. And when you look at the space, as you saw yesterday, one of our greatest differentiating strength in the marketplace is the access to the 3M technology platforms that we have. So, no other peer group that I know of in this space simultaneously plays in mass, in office markets, in pharmacy, in home improvement, in the value channel, in 27 different categories simultaneously at scale with relevance, with effectiveness and with sustainability. We are able to do that because we are able to tap in collaboratively and cohesively to the 3M technology platforms and use them to build relevant category leadership positions and that is what the model is about for ourselves and for our retail partners. The ability to create a category, the ability to refresh a category, the ability to disruptively extend the category, this is the greatest value that we bring to our retail partners because very few companies in this space can lead the way to the future. Many people can follow. In fact, we have a lot of people who follow us, but very few can actually lead categories forward, and that is really what creates relevance and sustainability in the market with the consumer and with the retail channel itself. And that is overlaid now with the impact of new capabilities.
So over the last 4 years, we have brought insight and design capabilities to the business, and we are building them to scale. 3 years ago, we had no one in customer insights in the group. Today, we have 25. 5 years ago, we had maybe 5 to 6 people on design. Today, we have 60 globally. And this allows us to create different opportunities and different narratives around product portfolios to create a varied and broader path to the future in multiple categories that we play in and it lets us find need sets that weren’t there before. So, we spent a lot of time looking at the intersection of changing demographics and active wellness and we spent a lot of time looking and studying and talking with consumers around this space. And what you find is a lot of need sets that are known that you can refresh, but then you find areas of unmet need, unarticulated habits that occur and this is an example of what insight and design can do for you. The idea of a health support, where you see a consumer that wants to be active and wants to be safe, but is taking off the support unconsciously in certain situations, why? I don’t want to get it wet. I don’t want to get it dirty. I don’t want to take it into the space – into a space or activity where I absolutely need it, but I am unconsciously taking it off. I don’t even know I am doing it, alright? These are how insight and design thinking, insight into the need and the habit leads you to unarticulated and unknown opportunities for growth in a space of active wellness that as you saw before globally could be $2 billion in size for us.
And embedding our brands into the consumers’ life with technology. So you saw yesterday in one of the breakout sessions the Command product line. The habit that we Are approaching in this business is the idea that the number one constraint for people to actually change their space is fear, fear of getting it wrong, fear of damaging the wall, fear of putting – having to reposition. So, we are empowering consumers to fearlessly change their habit without having to damage their space. So again, putting the brands forward in a way that’s technology empowered but is addressing one of their fundamental need state.
And brand clarity and discipline is another evolution that we have gone through over the last 4 years. So as you see now, the inclusion of technology and insight and design thinking, the clarity and cohesion of brands is a fundamental change that’s occurred in this business over the last 4 to 5 years. Our ability to create compelling, impactful, authentic brand positioning that resonates with consumers and connects with them globally in a cohesive way is usually impactful for us, because the journey to purchase now, the purchase path for the consumer is nonlinear. It’s multipoint, nonlinear, where before it was very straight. We have gone from the first moment of truth of finding a product in the store to the zero moment of truth of finding a product online, to going towards the negative moment of truth of having a search engine recommend product for you before you even start to look for it.
So, this path of purchase has become nonlinear, iterative and very, very digital. And it is the single biggest customer imperative for us. There is a lot going on in retail markets today. Formats are changing, analytics are coming in, but the single biggest path – the single biggest change in our customer set today is the ability to integrate online, the ability to digitize a model, to have a seamless experience for the consumer in the store and on the webpage and we are driving towards this very – in a very disciplined and consistent fashion. Within 5 years, upwards of 15% of this business will be online and a double-digit growth rate and that is global and that is across multiple channel segments. So, it’s the pure-play, Amazon, Tmall, Ali Baba customers as well as the dot-com platforms of our bricks and mortar retailers. And it’s driving the imperatives and the strategic pillars of selection, of content, of demand generation, of linkage of supply chain and intimacy of customer.
While we do that, we continue to transform the business. You saw the business transformation. We are focused on leveraging what you have seen in the front and back office optimization of what we are doing in the company. We are optimizing the supply chain very much in line and what you saw in Paul’s presentation today. We have over a dozen Scotch-Brite makers around the world, for example, that we are connecting, consolidating, standardizing, centralizing and optimizing. We are regionalizing the business model in specific parts of the world, North America, Latin America, Western Europe, where again we see commonality of culture, commonality of purchase intent, commonality of channel maturity. And we are updating the organization, adding on – reinforcing the core strengths of the business on technology, technology development and deployment, fundamental marketing, but overlaying the new growth amplifiers of design thinking, consumer insights and shopper marketing.
So, in summary, I feel very, very confident that this is a position – this is a business that’s positioned to continue to deliver growth rates that are above the market segments that we are playing in, to continue to drive and expand the operating margins that we see, to continue to leverage the core capabilities of what’s made this business strong, competitive, and to continue to build relevant, effective and sustainable positions in the marketplace.
So with that, I will thank you and I will turn it over to my colleague, Frank Little, who is going to talk about all the great things going on in Safety and Graphics today.
Thanks Mike. Thank you, Mike and good morning. It’s my pleasure to be with you here this morning to talk about our Safety and Graphics business group. Let me start by giving you a brief overview of our group and I will follow that up and then talk about how Safety and Graphics is using the three 3M business levers of portfolio management, investing in innovation and business transformation to enable efficient growth and accretive results for the company.
Our group is composed of four different businesses with sales of $5.5 billion and operating income margin of 23.7%. The largest is our Heartland personal safety business at $2.4 billion. And here we focus on advancing worker safety, security and productivity. The next largest is our commercial solutions business at $1.5 billion. And here, we focus on improving the safety and security of infrastructure – I am sorry, the brand experience and commercial productivity of our customers. The third business is our traffic safety and security business at $1.3 billion. And here, we do focus on improving the safety and security of infrastructure. And then finally, the fourth business, our industrial minerals business at $0.3 billion, where it’s very much about increasing the value from every ton of product that we mine by providing differentiated roofing granules that offer superior protection, energy savings and compelling esthetics.
I think it’s important to understand the strategic intent of Safety and Graphics. And here, we really try to address key long-term macro trends that are facing our customers overall. It starts with advancing safety and security to protect lives. As Inge mentioned earlier, as economies develop, safety becomes a greater priority and need. This is the key mission for our group. It’s also about enhancing our customers’ brand equity. With an evolving culture of instant messaging and feedback, brands are winning by delivering consistent and compelling experiences. Our products help our customers deliver their brand promise to their customer. It’s also about improving our customers’ competitiveness. In today’s world of resource and budget constraints, delivering sustainable and productive solutions is more vital than ever, and our product of innovation really enables more productive and sustainable products for our customers to use. I think among our competitors, we are really uniquely positioned to help our customers with all of these elements, embracing this focus through our customer-first approach. By helping our customers deliver on their promise, we become their valued partner. They win, and we win.
Let me talk about how evolving safety regulations represent a major opportunity for our business group? On this map, you can see in most of the developed world, where there are strong standards and enforcement. And you can see in the blue on the map where there are improving standards in enforcement in some of the rest of the world and then in the final and the greater black area where you see weak or emerging standards overall.
And let me share some sobering facts with you. Falls account for 37% of deaths in U.S. construction. In 2014 alone, global terrorist attacks increased by 35% and the total deaths from these tragedies increased by 80%. There are over 120 million workers that are exposed to dangerous noise levels in the workplace today. Over 1 million people die in traffic-related accidents with over 20 million additional injuries. And in 2012 alone, there were more than 7 million people who died from air pollution-related health issues. Now, we work with regulatory agencies around the world to addresses these needs. We bring significant scientific expertise to help support standards development and this results in expanded awareness of good safety practices and in turn, expands our business opportunity.
Within Safety and Graphics, as within the rest of 3M, our corporate playbook is working well. We share the vision, the strategies, the code of conduct and leadership behaviors of the company overall. And we use 3M’s business levers of portfolio management, investing in innovation and business transformation to improve our competitiveness everyday.
Now let me share a little bit more insight on how we do this. Let me start with how we’re applying portfolio management to strengthen our business portfolio overall. In the upper left, in 2012, Safety and Graphics included 9 businesses with sales of $5.4 billion and operating income of 22.4% and these businesses were spread across the spectrum of both strategic and shareholder attractiveness. Over the past 3 years, we have taken deliberate steps to integrate multiple businesses, divest the license plate converting and library systems business and acquire Capital Safety. This has built a much more robust portfolio of four larger and better performing businesses on our group.
Our 2015 sales of $5.5 billion represents a local currency CAGR of 4% over the period and our operating income has improved by 130 basis points. Additionally, with these actions, we have increased our scale and relevance to customers, we have flattened our organization to drive speed and agility in what we do, we have driven more dynamic resource allocation amongst larger growth priorities, and we focused our investment to build industry leading depth in our core businesses.
As a result, let me share with you how we are positioned to win in our personal safety business. We have expanded our leadership in respiratory protection with key acquisitions in other important categories, started with Aearo, an industry leader in hearing protection and now Capital Safety, an industry leader in fall protection. As we did this, we strengthened and leveraged each of 3M’s four fundamental strengths: technology, manufacturing, global capabilities and brand.
In personal safety, we are now poised to deliver industry leading depth and profitable growth across a broad array of segments within the overall $33 billion market. With leading technical depth and global reach now in multiple categories of protection, we are strengthening our capability to serve traditional industrial segments like manufacturing, mining, transportation and oil and gas. And we are able to use the strength and leading position across categories to accelerate our capability to serve other segments like agriculture, utilities, construction and pharmaceuticals. All the while, we are using the fundamental strengths of 3M to bring new solutions to our customers that help protect lives.
I would also like to share with you a brief update on the integration of our exciting Capital Safety acquisition. Together, we have been building on the winning strengths of our businesses. I would just say our integration is on track and meeting our profit expectations. We are building sales synergies across our global footprint as we expected to do. We are expanding our portfolio reach into new market verticals. We are integrating our manufacturing operations in the right geographies. And we are achieving R&D scale and leverage that we have never had before globally. As we progress, much like in previous acquisitions, the strong Capital Safety brand of DBI-SALA and PROTECTA are strong additions to our leading 3M safety brand overall.
Now, let me share how we are positioned to win in our commercial solutions business. Over the past 2 years, we have consolidated three former businesses, graphics, cleaning and workplace solutions and architectural markets to form this business. As we have done this, we have gained from stronger resource prioritization, business operations efficiency and go-to-market capabilities. Now, we have a stronger portfolio of solutions for our customers, leveraging scale in all those four fundamentals strengths of 3M. Our focus here is really about growing our relevance as we help our customers deliver on their brand experience promise.
We are now able to address many segments within a market opportunity of over $27 billion. Our focus on the retail, hospitality and food service segments position us well to address a more consumer-driven growth trend. And our focus in transportation, banking and commercial building segments balance this with a commercial operations driven growth trend. Across our portfolio, there is significant room for growth in both developed and developing economies in these segments. And I would say in a world of instant feedback, the need for consistent and compelling brand experience delivery represents a significant growth opportunity for us. Providing combined solutions across our entire product portfolio helps our customers elevate their brand experience delivery to their customers. By partnering with our customers not only do we help them protect their brand reputation, but we also help them stand out in the crowd.
Let me share with you how we are positioned to win in our traffic safety and security business. Over the past few years, we have consolidated three former businesses, the security systems, the track and trace and traffic safety systems business together to form this. As we have done this we have divested or harvested weak performing areas and gained from stronger prioritization and efficiency in the business overall. Now, we are able to build on those four fundamental strengths of 3M pretty clearly. Our focus here remains on growing the core traffic materials area and improving the profitable growth overall. We are now positioned well to address a more comprehensive scope of infrastructure solutions in a market that’s over $20 billion. Regulations in our core retro-reflective sheeting business continue to evolve to require better standards of reflectivity, and we have the technology to enable this progression. Internationally, there is significant opportunity for growth penetration in both transportation and the transportation infrastructure safety segments. And I would just say, in a world of increasing danger, there is a growing need for stronger public security and intelligent systems capability.
Now, let me transition from our progress in portfolio management to how we are using 3M’s second lever of investing in innovation to strengthen our business. Within Safety and Graphics, we have three major technology clusters, which we are deploying across our business. Let me show some examples on this page. Our non-wovens material technology enables superior filtration capabilities not only in respirators, but also control scouring capabilities in cleaning pads. Our tapes and film technology enables better performance in our Scotchlite reflective tapes for garments, our roofing granular coatings and our diamond-grade shine reflective sheeting. In our systems and hard goods expertise, powers of development have advanced digitally connected safety gear, license plate recognition systems and biometrics tracking systems. The depth of the technologies available with 3M and unique collaborative culture within 3M enable us to bring compelling solutions to our customers.
Now, let me talk about three game-changing innovations in our personal safety business, many of which I hope you saw last night during our tour of the 3M safety roadshow of semi and fall protection track. I will begin with our ExoFit STRATA fall protection harness. This platform addresses a $1.5 billion segment growing at 3% to 5%. This harness offers superior fit and features, a revolutionary weight distribution system, and improves the comfort of the worker with greater airflow. Next is our digitally connected personal protective equipment system. This platform addresses an emerging segment growing at more than 25%. It enables automated and remote monitoring for workforce. It increases the overall workforce productivity. And it helps our customers manage equipment usage, maintenance and worker data. Our third example is our E-A-Rfit hearing validation system. This platform addresses a $600 million segment growing at 2% to 4%. This is the world’s first dual ear protection validation system. It enhances worker hearing protection and records attenuation response levels with the speed and accuracy never seen before. These are just a handful of examples of how our innovative solutions advance safety, increase productivity and also protect lives.
Also on display last night was some advanced products in our commercial solutions division. We displayed our advanced car wrap films, one of three examples of game-changing innovations. This platform addresses a premium segment growing at over 10%. It delivers extensive on-trend designs. You can use mix-and-match films and over-laminates and it creates entirely new effects with new ways of creating those effects on the vehicle. In addition, we have created a new line of Envision Wrap films. This product platform addresses a $1 billion segment growing at 3% to 5%. Now, using an entirely new basis of material, this is the world’s first non-PVC wrap film, which creates a sustainable solution. It delivers higher performance with easier and faster installation as well.
And then finally, leveraging 3M’s non-wovens and abrasives technology, we have created a revolutionary stone floor protection system. This platform addresses a $1 billion segment that’s growing at 3% to 5%. It offers a comprehensive floor care and maintenance solution, it enhances the natural stone appearance, and it greatly improves the durability and shine factor of the stone surface. These examples bring to life how 3M innovation is clearly enhancing our customers’ brand equity and improving our customers’ competitiveness in their operations.
Finally, let me introduce three game-changing innovations in traffic, safety and security. I will begin with our intelligent traffic materials. This platform addresses an emerging segment growing at over 7% within the larger traffic sheeting business. It really represents embedded data and readability in materials, enabling connected vehicle infrastructure with enhanced materials and helps our customers build better solutions to eliminate accidents and deaths moving forward.
Next is our digital printing materials system. This platform address a productivity segment growing at more than 8% within an overall industry of $3 billion. Here we are able to deliver faster, flexible and an inventory-efficient sign production capability to our converters. And it uses a matched 3M system and components system to enable higher durability and faster print capability in the production of these signs.
Our third example is a touchless fingerprint scanning system. This platform addresses a $2 billion segment growing at 3% to 5% globally. This is the world’s first fast, hygienic and high-resolution fingerprint scanning that’s non-touch, introducing better throughput and productivity into the operations of border control. So, I think you could see here clearly our innovation is addressing our customers’ most pressings needs by advancing not only safety and security of infrastructure, but also delivering productivity and security solutions. Having discussed how we employ the first two levers to drive efficient growth, now let me transition to the third lever, which is business transformation.
In Safety and Graphics, we are using our business transformation-driven processes and tools to increase our competitive scale and efficiency. In the past 2 years, we have had early successes with consolidation in our business, driving improved scale and leverage and strengthening the overall portfolio mix. We have also made a significant investment in Lean Six Sigma, increasing our black belts and delivering an additional $50 million of savings in the past 2 years. We have also focused on organizational productivity where we have integrated our business structure and delivered $40 million in savings in SG&A.
Since 2013 as we have done this, we have not only grown, but we have increased our operating income by 170 basis points. Moving forward, we will continue to improve our business competitiveness and we will focus on supply chain operations, footprint optimization and centers of expertise utilization as well as service level improvements. We will continue our investment in Lean Six Sigma, with more of a focus on lean manufacturing adoption across all of our sites and a value stream methodology for how we operate our sites. And then, we will also continue our focus on organizational productivity, leveraging the global processes and service centers that we are spoken about earlier as well as continued business services consolidation. We see much opportunity for strengthening our accretive contribution to 3M moving forward.
So in conclusion, Safety and Graphics is working hard to drive competitive improvement and deliver accretive growth and profitability using 3M’s business levers. We bring all 3M elements of the vision to life: 3M technology advancing every company, 3M products enhancing every home and 3M innovation improving every life.
So thank you. I would now ask Bruce to come up and give us some instructions as we head into break.
We are running a little bit ahead of schedule. For those online and in the room, please be back in the room at 9:25 and we will kick off with Mike Roman, our Executive Vice President of Industrial. Thank you.
Welcome back to everybody in the room and online. Next speaker we will have up here is Mike Roman, the Executive Vice President of our industrial business. Mike?
Alright. Thank you, Bruce and good morning. It’s my pleasure to present our industrial business. I would like to start with an introduction to what we do to win in our industrial marketplace and how this helped deliver efficient growth in 2015. So, we win by actively managing our portfolio to prioritize both our organic investments and our acquisitions. We win by leveraging our four fundamental strengths to maximize value. We win by utilizing customer insights to deliver differentiated, high-impact new products. And we win by transforming our businesses to drive a competitive advantage for both our customers and our enterprise. And in 2015, this led to strong growth in key markets, increased operating margins, 100% free cash flow conversion, M&A that when integrated into our business, the total was truly greater than the sum of the parts, we also restructured to drive greater efficiency into our business; and we did a very good job of controlling the controllable in what were some challenging industrial market conditions.
For the rest of my presentation, I would like to cover these three topics. First, I will go deeper into who we are, where we play and how we win in each of our industrial markets. I will then share a couple of examples of how we leverage our fundamental strengths to create differentiated performance for our customers. And then we will look at how we are utilizing the three key levers to create extraordinary value for our customer and shareholders alike.
So, let’s start with who we are. So pictured here are the 7 operating businesses that make up the Industrial Business Group. We have four leading, global, high-value product platforms: industrial adhesives and tapes, abrasive systems, advanced materials including our ceramic business, and filtration. We also are a market leader in three key industrial markets, automotive aftermarket, automotive and aerospace and commercial transportation. Beyond these three key markets, we play in many highly attractive industrial markets. And here you see ranked in order of our estimate of their addressable market size, our top 11 markets – market segments. You can see by the projected growth rates for each of these market segments that we expect each of these markets to contribute to our growth over the plan period. So, I thought I would go a little deeper into a couple of these market segments to give you a better insight into what we do to win and how we are able to win and provide differentiated performance for our customers.
So, let’s start with what it takes to win in automotive. So, winning in automotive begins with putting our customers first. In automotive, that means we align our organization around our top 20 global OEMs. We get very close to them, sales, marketing, supply chain, technical top to top. We engage them on a regular basis. We get deep understanding of their challenges, leading to opportunities for designed-in unique solutions from 3M. We also get a very clear understanding of their value chains and so we can better support their tier suppliers. This deep engagement leads to an understanding of the market trends and what’s behind the market trends and you can see some examples here around fuel efficiency, light-weighting and electrification. This understanding leads to customer-inspired innovation, acoustic control, lightweight assembly and increasingly, solutions to help enable the use of aluminum in automotive manufacturing. Ultimately, all this turns into high-value 3M products, 3M Thinsulate acoustic control, glass bubbles for light-weighting and acrylic foam tapes to help solve the increasing complexity of the bonding solutions as automotive manufacturers introduce new materials and dissimilar materials. Each of these were on display last night, so hopefully you had a chance to see the capabilities of some of these products.
We also get a clear view of the future, where our customers are going. And you see pictured here are some examples that we are working on with Jim Bauman’s Electronics and Energy business team, pointed at what we can do to help the electrification of the automobile in the future, so display films, bonding and optics solutions and electronic materials. This customer engagement, this customer-first model, enables us to consistently post organic growth that grows above the build rates of our customers.
Another example is what we do for winning in filtration. Similar to automotive, we focus on large global accounts. We align ourselves to these customers, in this case, focused much more on their process efficiency, getting a deep understanding of what they needed to do to become more efficient in their manufacture or development of their products. This leads to a deep understanding of market trends here around filtration, higher purity requirements, what it means to be more efficient with filtration in their process. Customer-inspired innovation leads to new single-use products, new hybrid purification solutions that are used in bio-pharma and bio-processing manufacturing, ultimately turning into high-value products here as well, micro-filtration, ultra-filtration and increasingly smart filters. We also get a clear view of the future. We need to advance our technologies in membranes, bring new gas transfer technologies and ultra-filtration solutions as well.
Our 3M purification business that’s part of industrial has a very strong position with these customers and has been a leading growth engine for us in Industrial Business Group. And now with the acquisition of the Polypore Separations Media business, which we call Membrana, we have exciting growth synergies that we can take advantage of and take this growth – the strong growth business for us even further into the future. So, I thought I would take just a minute to give you an update on how we are doing with that Membrana acquisition. So, here you see pictured Membrana now proudly part of 3M. This is a placard that went up over Wuppertal, Germany, the headquarters of the Membrana business in Polypore, the day we closed, August 3, 2015. Membrana brings with it, to our business, leadership in a couple of key market segments, life sciences and industrial. In life sciences, they are a leader in hemodialysis therapy and blood oxygenation. In industrial, they are a leader in gas transfer technologies as well as water treatment. And they do this by ultra-filtration technologies built around their hollow fiber and flat sheet membranes.
I am very happy to report that to-date this acquisition is exceeding our performance expectations. Maybe the more exciting thing is what we found as we brought the teams together. We have identified how to leverage our fundamental strength of technology to advance opportunities in Membrana. We have identified more than a dozen technology platforms in 3M that can enable concepts that Membrana had on in the laboratory. Just one example that I highlighted here, where we are able to use advanced materials, polymer processing, precision processing and surface modification to take a concept to a real product possibility, a feasible product for the future, product technology that can help with low-fouling membranes, new super hydrophobic gas contactors and new high flux nano-filtration, so very exciting opportunity for us to leverage our technology platforms and drive accelerated growth in the Membrana acquisition.
When you look beyond those couple of examples, it’s vital that we have optimized go-to-market models to engage all of our customer types and customer segments across the globe. And so it’s not just for the purposes of engaging them in terms of sales and marketing, but it’s vital that we get customer insights back from them to help drive our innovation. So, here is a simplified model about how we think about that and how we actually deploy it.
So starting in the middle there with the pie chart, you can see at a high level, our product sales in Industrial Business Group, a majority of them are designed in or specified products, products that we work directly with customers on, OEM, original equipment manufacturers, their tier suppliers and intermediate customers, like we list here a converter. Similar to what we do in automotive, we have to align ourselves to these customers. We engage them directly. We scale that according to global, local, regional types of customers and we align ourselves around them. And we leverage that customer-inspired innovation model to work with them directly understanding deeply their challenges and turning that into insights that we can then drive innovative new products from.
Also important to us is a large part of our sales that come through what we call consumables. So, these are products that are more often bought than sold or specified. They are products that we sell through a variety of industrial distribution models as well as increasingly through e-commerce. It’s important – these are differentiated performance products. And so it’s important that we understand the customer insights back, so we continue to innovate differentiated products in this consumables space. We have developed and optimized go-to-market model we call the industrial market center, which enables us to deploy regionally locally to customers specialized end user engagement, field sales and specialists in our product categories. We are increasingly increasing this – extending this reach through digital engagement and also through e-commerce. And we use, in this case, the Insights 2 Innovation model where we can look more broadly across markets and across customer segments to identify those insights that can lead to innovative new products. I will highlight a couple of examples of new products that have come out of both of these Insights 2 Innovation models a little later in my presentation.
So next, I would like to just share a couple of examples of how we are leveraging the fundamental strengths to create a competitive advantage for us in our customers and I will start with technology. So, one of the strongest ways that we can leverage the fundamental strength of technology is when we can combine multiple technology platforms from our 46 platforms and create new product platforms that can impact companies and customers across business segments in 3M. And a great example that I hope most of you saw last night is our precision-shaped grain technology. This resulted from our deep understanding of our technologies in abrasives, combining that with ceramic technologies, adding in process technologies around micro-replication and precision processing to create a game-changing new abrasive technology, not just game changing for our abrasives systems industrial customers, but also for our construction and home improvement retail customers and for our automotive aftermarket collision repair customers. This technology is also being added now to our non-woven Scotch-Brite abrasives, our surfaces conditioning kinds of abrasives and improving the performance and providing game-changing capabilities there as well impacting businesses from retail to industrial.
That same non-woven technology, when you take it and combine it with polymer processing and surface modifications to create new high temperature materials and apply it with our deep understanding in acoustic control, we can introduce entirely new capabilities in our Thinsulate acoustic installation products to be used in the engine compartments as well as in the rest of the automobile. Also, it applies across Aerospace and Commercial Transportation, so exciting big new platforms for us when we can combine those multiple technology platforms.
Manufacturing fundamental strengths also provide a strong competitive advantage for us. And you can see three examples of how we do that pictured here today. In manufacturing technology, inventions and process technology give us differentiated performance: differentiated performance in products, differentiated performance in costs, differentiated performance in quality. You can see three examples that we leverage big time in our business: precision processing, micro-replication and particle and dispersion processing. As Paul talked about, we are leveraging the centers of expertise and the strategy around footprint optimization to give us a strong advantage in serving our customers as well. We also are taking advantage of the greater end-to-end business planning and visibility that comes with business transformation to provide a competitive advantage for our customers. And we are doubling down on Lean Six Sigma, extending our Lean value streams, taking another step-up in productivity improvement. And we are actually leveraging master black belts and black belts to help successfully deploy the business process redesign that’s a part of business transformation.
I would like to cover, on the last part of my presentation, the three key levers that help drive value. So, we are actively managing our industrial portfolio to consistently outperform our markets. On the left hand side, you see how our 7 businesses are arrayed based on strategic and financial attractiveness. We use this portfolio view to prioritize our organic investments, really prioritizing where we can drive accretive growth rates, where we can return the greatest value and where we can create the greatest return on invested capital. We also use this portfolio view to look deeper at where we can implement more efficient business models, really creating space to make room for those investments and those high-priority organic growth opportunities. So, we reallocated resources as we make those business model changes. We also use this view to identify selective divestitures, like the Polyfoam divestiture that we announced earlier this year.
When you take our portfolio management view and you combine it with a deep understanding of the fundamental strengths and a view of where our priorities are in terms of markets and geographies, we are helping to shape a stronger M&A strategy. When we can leverage our fundamental strengths, apply that and drive opportunities into accretive market growth spaces, we can add new industrial platforms that can provide differentiated performance for our customers and shareholders alike. And the Membrana acquisition is a great example of a result of this kind of process.
Beyond portfolio, we are using this view to prioritize our geographies for – prioritize geographies for our industrial businesses. And like the rest of 3M, we must win in the United States, West Europe and China. I have also included Mexico here for really three reasons. The first is the increase in manufacturing that’s going on there because of the reshoring of production from Asia. There is also an increase in automotive production, very important to our businesses and increasingly our customers and channel partners are operating across North America. So, it’s important that we have a view of how to support them, including Mexico, the U.S. and Canada, so Mexico a very important growth driver for us in that global strategy.
Turning to invest in innovation, as I said, we leveraged customer-inspired innovation for designed-in products and insights to innovation for consumables. A couple of great examples of new products coming out of the customer-inspired innovation model, our new high-bonding tape applications for customers and appliances. They are introducing new engineered plastics, new materials, dissimilar materials. They have unique new bonding requirements that require new product development. We are also expanding our Trizact family of abrasives to help enable greater use of aluminum in automobile production.
On Insights 2 Innovation, this allows us to look across customer sets. And when we did that looking at our auto care customers, we found an underserved part of that customer segment and that is auto care specialists that want to do their finishing by hand. And so we have introduced an entirely new category under Meguiar’s, our Mirror Bright brand, which is very popular with those auto care specialists. We also identified an opportunity to bring low volatile organic compound versions of our industry-leading spray adhesives. This new sustainable formulation, while maintaining the superior performance that we have in our products, is exciting and delighting our customers and a very, very fast growing product category for us as we introduced it.
I thought I would also take time to update you on something that I first introduced to some of you in the industrial outlook meeting in December of 2014. In that meeting, I was talking about some of the new innovative products that we’re developing out of our customer-inspired innovation model, but I also highlighted some of the big growth opportunities that we have in our core. And these were the three that I shared at that time, three areas that we could accelerate by building out new applications for our existing products by broadening our penetration in our markets and adding some new market growth as well. And I just want to give you an update on each of those.
So, in our category of broad adhesives offering, we developed new applications in 2015 that led to more than $100 million in first year sales. We now have our Cubitron II precision-shaped grain technology deployed across our coated, bonded and precision grinding and finishing product categories. And it’s delivering strong double-digit growth in the face of slow growth industrial markets. And we talked about leveraging our Thinsulate acoustic solutions and penetrating across more makes and models. And we are doing just that, delivering now an accelerated growth to more than 2.5x the market. So, we are well on track to deliver the $600 million of accumulative sales that I talked about over that next 3-year period, 2015 to 2017.
So with that, I would like to wrap up with just a view of what we are focused on in Industrial Business Group in business transformation. And for us, it starts and ends with the customer. We are focused on simplifying and standardizing our processes, making us easier to do business with, enabling successful business transformation, improving our business communications and our end-to-end visibility for our customers, as I said, leveraging Lean Six Sigma to do this most effectively. That will help improve our efficiency, our use of working capital, but it enables greater service for our customers as well. And in this process, we are focused on just that, making sure we are close to our customers before, during and after we deploy business transformation that we provide a competitive advantage all the way through. So, that’s our exciting opportunity to create competitive advantage for them with business transformation.
So with that, I will just wrap up and summarize our Industrial Business Group value proposition. We operate in highly attractive industrial markets, providing accelerated growth opportunities. We are leveraging industry-leading platforms to solve our customer problems, ensuring sustainable differentiation. We are utilizing global, leading go-to-market models, strengthening our competitive advantage. We are deploying the fundamental strengths of technology, manufacturing, global capabilities and brand, creating differentiated value. And we are utilizing the three key levers of portfolio management invest in innovation and business transformation as performance multipliers leading to efficient growth in 2016 and during the entire plan period.
With that, I will say thank you and I will introduce Jim Bauman to present our Electronics and Energy business. Thank you.
Thanks Mike. Well, good morning and welcome to an update on the Electronics and Energy Business Group. The agenda that I will follow today is who we are, how we win, how we are growing the portfolio, how we are executing the plan, and then I will wrap it up with a summary.
In the Electronics and Energy Business Group, we are aligned to and we support the vision of the company. Our technologies enable our customers to differentiate, to make them more competitive. They rely on us for reliability, quality, improved performance. We enhance our end users’ experience and we improve every life through improved productivity through connectedness and comfort.
The Electronics and Energy Business Group is a $5.3 billion in sales business. We have operating income margins of 21%. 60% of our business is captured in electronics and 40% is captured in the three energy businesses. We do serve large and growing markets. Many of the markets, like utilities, maintenance and repair, construction, telecommunications have been businesses we have served for decades and they are core to the company. These are a diverse set of markets. They are dynamic. But one thing that’s required in all of these markets is to have customers who have competitive advantage. And they rely on us to provide them solutions to accomplish those competitive advantages.
And so how do we do that? This is about what we do. So first of all, we connect energy, low-voltage, medium voltage, high voltage, tapes, splices and terminations. We manage light in very creative and unique ways that allow our customers to create value. We connect data and voice from tower to home through copper and fiber. With increasing processing speeds, device speeds, we manage thermal and electromagnetic interference. And we clean and protect in a number of different electronic applications.
I would like to transition to how we are executing the 3M playbook and creating value using the three levers. Portfolio prioritization is a lever in action. We have reduced from 9 businesses to 5. This has allowed us to increase scale and our customer relevance. We have improved productivity, faster execution, less meetings, less layers of management. And all of this in turn has created operating income margin improvement of 330 basis points. The portfolio is strong and getting stronger and let me talk to you about that portfolio.
The first area is in electronics and this is display materials. When we are aligned with our customers and our customers’ roadmaps, we win. They are looking for brighter, thinner, more durable, more flexible, more power efficient. So, let me give you the example on the right hand side of the chart. We took our customers from a component mentality, a very discrete set of individual parts, and moved them to what ultimately became an integrated display. So, you ask, well, so what? Well, so what means driving almost a millimeter of thickness out, 60% reduction, still creating a brighter display, a thinner display, a more durable display and ultimately, a more power efficient display. This is the way we win in the display market. We also have in our portfolio a business called electronics materials solutions. This is a business that operates across the entire value chain of electronics. We have materials that enter into the semiconductor manufacturing and packaging areas. We have tapes and accessories that move into electronics subassembly and electronics assembly and we have interconnect products that run operations and automation.
So, let me talk to you about an example in the electronics materials area and this is around semiconductor. I think we all recognize that there is plenty of data proliferation demanding an increase in semiconductor production. In the semiconductor area, there is about an $8 billion opportunity in semiconductor materials and we have several very differentiated products in this space. The first is a material that was an expansion in application from the material Mike described in terms of that precision grinding material, called Trizact. We are now using this in planar waferization. We allow – the semiconductor operations using Trizact can reduce scratches, improving their yield.
Another application is Novec and this is advanced node photo-resist. As pitch becomes much smaller in semiconductor devices, it’s harder to rinse out some of the materials they use, our Novec materials, our leading application in that fine-pitch semiconductor area. Another example and I know this will resonate with a number of you is the transition from LCD to OLED. We all know that OLED displays are growing and in fact, in the OLED handheld, our small display business growing over 20%. Our customers, whether LCD or OLED, require function and efficiencies, durability, visual quality and design. We apply our technologies to both of those display technology through bonding, light management films and sensors. We are very excited about the advent of flexible OLED, where we can apply our light management films.
We are also expanding into automotive electronics. By 2030, 50% of the component cost of an automobile will be electronics. What we will do is leverage our existing partnerships. Mike talked about it, the automotive OEMs, the deep understanding at the tier. We will combine that with our experience in the electrical battery, in the consumer electronics side, creating a portfolio of products to expand and build our business. We have relevant technology today. We have over a $100 million display business in automotive. We have applications in bonding and battery and thermal materials as well. So, we are very excited about the growing automotive space.
Let me transition to energy. Energy is another very dynamic space. Think about the big monolithic utilities that are now advancing to a far more distributed network that has a number of different requirements. The global mega-trends and these market forces are instructing and shaping the way we will address energy into the future through energy efficiency and preservation, availability and affordability as well as reliability and security. So, let me give you a couple of examples about that.
So the first, we are working with glass fabricators in the glazing and light management segment and one of the products is the daylight optics. We can literally direct light, sunlight, coming in through a window either up or down or both. What does that accomplish? It reduces the glare. It perhaps can improve the lighting during different periods of the day. We are also working on renewable and distributed power sources. This is an emerging area. Power and storage OEMs are advancing and we have technologies in fuel cells and batteries.
And lastly in utilities, there is a major emphasis around grid monitoring, both for data acquisition to understand how the grid is operating as well as in security. We have a number of pilots underway right now on grid monitoring, some of these located in manholes, sensing, detecting and instructing our customers in the utility businesses on how to perform better in terms of managing that grid. And we have a very strong core in our energy markets. These two businesses, vinyl tape, window film, represent $0.5 billion in sales revenue and we continue to innovate products into these spaces. We are increasing penetration through new manufacturing capabilities in vinyl tape. We have been making vinyl tape for 70 years. And in the last 5 years, we have grown this commodity by 5%. We are also creating and innovating new products in the window film business for ease of application and low cost and we will continue to outperform growth in that market as well.
So, our strategy starts with the customer. We have done a lot of work in portfolio management. We are building on our privileged position with customers and expanding our 3M energy position. We are differentiating a new technology and it’s all built on world-class manufacturing and our inspired global talent. The way we build that product pipeline, the algorithm we use is to move from customer insight. When we have that line of sight, especially in electronics where they have told us what the roadmap is and we can create a development and an execution alignment behind that, we win with our product solutions. And the way it works is we take those 3M technologies and we iterate. And we iterate with our customer, we build prototypes and we ultimately build the new products that you see on the right hand side of this chart, flexible OLEDs, digitization of energy sensors and ultimately optical interconnects, which you can see there sized against the dime, where 16 fibers can feed the types of densities that are required for data management today.
We also take those technologies and we expand through applications. So this is an example around Novec fluids. We started with fire suppression. We moved into cleaning in the semiconductor business. Perhaps a number of you saw the emerging cooling applications and we are just beginning to build out in data centers. The demand for cooling for the high-speed, high-density boards of tomorrow is going to require new technology. Fans aren’t going to work anymore and they are so expensive to operate. We have solutions for that. We have pilots underway right now in sustainable chemistries to replace something called SF6 gas that’s used in switch gear in many of the utilities. SF6 gas has a global warming potential of 23,000. Novec is one. There is a lot of incentive for these manufacturers to move to a much more sustainable chemistry.
And next one I would like to do is move from application to a subject that Paul talked about around disruptive technologies. So I’m going to take you on a little ride. This ride is around this disruptive technology. And it’s about making this precision tip, the tool that we used to make that tip. So on the right-hand side of this chart circle is a 1 micron by 3 micron tip that connects two film pieces. Now 1 micron by 3 micron, in comparison, a human hair, average human hair, about 45 microns. So to make this tool, imagine that you are in your car and you are driving 477 miles an hour through a gate. No problem. Now that gate happens to be moving about 3 miles an hour side to side, and you have a half inch of clearance on either side. Now, you have to do that 660 times per second for 17 hours. And what you will have done is created a tool that allows us to make that tip. Okay, again you ask, so what? Well, that tip is what allows us to create that integrated film and depending on what you are carrying in your pocket for a smartphone would allow that thinner film stack to be created.
So, on the top part of this chart, when we combine different materials with different types of disruptive technologies and we can integrate, we create some great winning solutions for our customers. We are also strengthening our business through portfolio prioritization and business transformation and we are delivering that value through portfolio management, Lean Six Sigma and our footprint optimization, as Paul alluded to this morning, in regards to taking action around some of those smaller sites. Our operating income margins growing 330 basis points from 2013 to 2015. So, Electronics and Energy business group is aligned to the vision of the company. We are driving efficient growth and we are very, very excited about the future of our business.
And with that, I am going to turn it over to my colleague, Joaquin Delgado and he is going to talk to you about the healthcare business.
Hello, good morning. In the next 20 minutes, I am going to be talking to you about the healthcare businesses. And we start with the vision. Our vision is the same vision as the rest of the company. It is about 3M technology advancing every company, 3M products enhancing every home and 3M innovation improving every life and it’s this last element of the vision that really motivates our employees. Everyday, our employees had a choice to go for many different companies, so many different businesses and they decided to work for 3M and in the healthcare businesses, because they want to improve lives every single day. And I will show you how we go about doing that.
Our playbook is the playbook of the company. They start with the vision that I show and Inge and my colleagues have been sharing with you, because they go with the strategies that we do, our code of conduct, the leadership behaviors that each one of our employees has to exhibit and then the three levers. And I want to show you how we take this playbook and we apply it to the healthcare business and the healthcare industry to drive value for all of you and you, the shareholders. So, what I am going to cover is that number one, this is a growth business in an attractive market, that we are focused strategically on care pathways innovation and I will tell you what is a care pathways – a care pathway and how we are innovating, that our portfolio is driving efficient growth and this efficient growth is going to continue, not only in 2016 but beyond.
So, let’s talk about this growth business. We serve five industry segments. In the medical device area, we have two businesses: infection prevention, $1.5 billion and critical and chronic care solutions, $1.2 billion. In the healthcare IT space, we have a business that we call health information systems. It’s about $800 million. In the oral care, we have our oral care solutions business, $1.2 billion. In the pharma segment, we have our drug delivery systems, about $400 million. And the food and beverage industry, we have our food safety business, about $300 million. In total, we are $5.4 billion, with operating income margins around 32%.
The businesses delivering value in large and growing healthcare segments, these are the five industry segments. In medical devices, it’s about a $53 billion space and its growing 3% to 4%. The healthcare IT is $11 billion and is growing in 5% to 8%; oral care, $12 billion, 3% to 6%; drug delivery is a $21 billion space, growing 3% to 5%; and food safety, so the smallest one, $3 billion and it is growing about 8% to 10%. So, large growth spaces, large opportunities for us to continue growing.
Also, we have a fantastic opportunity in developing markets. Developing markets present a very significant growth opportunity. I told you that when I met with you last time and we continue being very bullish about that. About 80% of our sales are in developed economies. 20% is in developing economies. It is a $1.1 billion business. And since I talked with you in 2012, we have been growing at 12% in developing economies.
There are three key trends in developing markets that we see that create needs that we can address and therefore grow. These three trends are growing middle class with the desire with better access and quality of care. The second, increased incidence of chronic diseases, which requires a faster advancement in the standards of practice of care, which means that the path that these developing countries are going to take is going to be leapfrogging, very similar to what these countries did in telecommunication when they skipped landlines to go to mobile telephony, same with the kind of goal, the same path that developing countries went to treat about the chronic diseases and we see that the advance of care is moving much faster than what we did before. And the third one is private healthcare sector expansion, which typically deliver a higher care to patients than what public systems do.
As I said, our strategic focus is on care pathways innovation and this is driven by the healthcare industry trends that continue to evolve. And they continue to evolve in accelerating a drive towards maximizing value for the patient. So, everybody wants four things: broader access to care; reduced cost of care because in most of the countries, it’s one of the largest components to the GDP spending in that country; improved healthcare outcomes; and then all of us around the world want to have a better patient experience than what we have been receiving historically.
We see that there are four industry success enablers: prevention; care pathways innovation; digitization; and health economic-based outcomes. A health economic-based outcome is that the outcome is going – has to be based on the clinical outcome that it delivers that solution, but also the economics that are associated with it. So, we see more and more the need to make the decisions by not only just in clinical data, but it’s in economics data put – being put together.
When we look at these four industry enablers which you are going to see that we are following, we see care pathways innovation that is the most transformative enabler for the whole industry. And the way that we define care pathways is the process to deliver care, reduce variability in clinical practice and improve outcomes. And there are two types: treatment processes and business process. For example, a treatment process will be how a crown is being put or how an orthodontic treatment is done or how a given wound is treated. A business process could be coding or could be reimbursement. So, we look at those two.
So, from this perspective, our strategic intent is to deliver care pathways innovation for improved and cost efficient health outcomes for our customers, their patients and their customers. So, if we look from this perspective of care pathways, well, you can see that in each one of the five industry segments and in each one of the businesses that we serve in these industry segments, we have defined what are the care pathways where we want to bring innovation to make our customers successful with their patients and their customers and in doing so grow our businesses at a much faster rate.
Our portfolio is driving efficient growth. We have been managing, like the rest of the company and the rest of the businesses, very actively our portfolio. We have done with one consolidation of businesses, looking at increasing our relevance in a fast-changing market, the oral care market, where we saw that this market was being consolidated, that our customers were looking at the oral care market not just from the point of dentistry alone or the point of orthodontics, but the whole oral care together. So, we combine our dental businesses with our orthodontic businesses and we create our oral care solutions divisions.
We have done some divestitures to maximize our shareholder value, one technology sale, three technology licenses and one small divestiture on technology that we saw that we have an alternative technology that we commercialize and we didn’t see that, that technology had value with us. And then we have been doing acquisitions, three acquisitions to strengthening and broadening these care pathways that we have been talking about, two of them in the healthcare IT space, Code Ryte and Treo Solutions, and one in the vascular access care pathways with Ivera Medical.
We create our future organically and that’s the way that we grow. And these are some of our top R&D programs, as you can see, focused on two areas: prevention and digitization. In the care pathways of surgical site protection, a couple of programs, with $1.5 billion opportunities in soft tissue management and in endoscope decontamination and reprocessing. In advanced wound care is a $1.7 billion opportunity for us with two different programs, one dermal/epidermal healing and debridement. I will talk a little bit more about this debridement process. In food testing and detection, it’s about a $1 billion opportunity with chemical detection for allergens and toxins. In inhalation drug delivery, a $3 billion opportunity for us by looking at taking the inhalers and making them smarter to increase the patient’s compliance by linking it to different applications and to the caregiver and the user. And I will show you more detail on that. On computer-assisted physician documentation, $4 billion opportunities in healthcare analytics and I will talk more about it. And then in digital oral care, you had yesterday the opportunity to look at our intraoral scanner. And also digital orthodontics that we are working on is a $1.6 billion opportunity. Through this, we consistently invest about 8% of our – of sales in research and development.
So, let’s talk about some of the problems. The first one, on computer-assisted physician documentation, there is a lot of waste in the healthcare system. In the United States, about – there are about $11 billion a year of waste in miscoding. There are about $5 billion of lack of reimbursements on the other hand, because there are missing diagnosis details which could happen if they haven’t been done properly. They could have been reimbursed. There is copy and paste mistakes with electronic records that are the focus of the Centers for Medicare & Medicaid Services and a lot of duplicates on notes. This creates an opportunity of about $4 billion to create documentations to support the transition to value care – value-based care from activity-based care, then to ensure that the documentation quality reflects the care that has been provided.
And you could say why us? Well, we have the expertise in natural language processing, which allow us to – our systems to read the medical records and instruct the right information, then the proprietary methodology to take that coding and do the right risk adjustments on performance and then integrate that between the providers and the payers. So, we have last year we introduced one product, 3M 360 Encompass MD System and we are going to introduce two new products this year. One, address this issue of copy-and-paste and we will identify high-risk duplication text in the medical records and then alert the clinicians that, that’s not the correct one. And then the second one is that what we call the patient insights suite, where we start providing population health management and patient engagement tools for the professionals.
In wound management care pathways, one of the very important areas when you start treating the wound is the preparation of the wound. And it is the removal of the dead tissue that is in the wound, so the new cells can grow. That’s called debridement. So, the market, what it needs is a platform that can do the biofilm disruptions can remove this dead tissue in a safer and gentler way and then it allows to a faster wound bed preparation. What we are providing is a new novel antimicrobial platform that is delivered through a different set of form factors that does disrupt this biofilm formation and therefore promotes a faster wound healing and is gentle enough to be used in very fragile skin. And we are targeting about 10 million hard-to-heal wounds that are impacted by this biofilm.
In the area of respiratory disease management, what the market needs is devices that are more intuitive to use that connect the patient to the caregiver, so the caregiver can know whether the patient is following the protocol and the patient also knows whether he or she is following the protocol and is being monitored by both of them. We are in a unique position, because we were, in 1956, the first ones that developed the first press and breathe inhaler and then years later, we were the first one to bring to the market the inhalers that were activated just by breathing of the patient. We are going to be introducing next month to our customers an electronic inhaler that connects the inhaler to the patient, the patient to the caregiver and transfer data so we can promote adherence, connects the patients with the caregiver and overall reduces the cost of care, because there will be more compliance by the patient to be used in the inhaler.
We complement our organic growth around innovation with acquisitions. And you can see here, since 1983, how we have been adding different acquisitions to strengthen these care pathways where we want to make our customers successful. They really add a lot of value and I just want to show you and some of you that were able to take the tour yesterday, you saw how we are combining the product that we got from the acquisitions of Ivera Medical, those Curos caps that we have put, with our 3M vascular access portfolio, all the different films, with antimicrobials that are for vascular access. And we have then put those together – since we had put those two together, the acquisition of Ivera Medical, it has been growing since we acquired it last year by 45%. So, we can bring the synergy between acquisitions and then the organic growth on our technology platform that we have.
Like the rest of the company, we are immersed in business transformation and we are using it not only just to standardize with the rest of the company how we go to market, the tools that we use, but also we are redefining how we serve our customers. How we engage our customers, on the left hand side, you can see on the chart how we are increasing common tools to use inside sales forces, deployment of our global CRM to serve better our customers as well as you see more digital tools to do marketing and reaching our customers. Education of professionals and our customers’ employees are very, very important for us. It is what advances the practice of care. And we have always had fantastic educational programs. We brought them all together under one umbrella, which we call the 3M Healthcare Academy, with common systems that cross all the different care pathways.
In 2015, we educated more than 285,000 professionals around the world, either on site, whether our sites or their sites or online. And then we are taking, from the operational point of view, taking business transformation to continue our operational excellence via Lean Six Sigma and to drive the global footprint optimization. And also, we are taking the opportunity to continue investment and expansion enhancement of our global quality management systems to ensure ongoing compliance in a rapidly changing regulatory landscape that you have seen not only in the United States but around the world.
We expect to grow in 2016 and in the years to come. And for us, it’s efficient growth like the rest of the company. And for us, efficient growth means a few things. Number one, organic growth, drive organic growth in the range of 4% to 6% from 2016 to 2020 is to continue to invest in innovation and specifically on commercialization, on two things, increase sales coverage around the world, especially in developing economies and then invest in clinical and health economic studies to really have more impact with our commercialization and the innovation that we bring in those care pathways. It is to continue managing actively the portfolio, both from the point of view of acquisitions to accelerate organic growth and also to maximize the growth in higher value product categories. And it’s about sustainable solutions for our customers, drive sustainability to create value for our customers.
In terms of organic growth, we have to grow and win in the largest geographies: the United States; EMEA; and China/Hong Kong. In the period of 2012 to 2015, we grew 4.5% in the United States and we want to continue growing, accelerate the growth by increasing the customer relevance with the new product launches, some of them we have shown them to you today increase coverage across the continuum of care, not in the acute center, not only in the hospital, but in the whole continuum, all the way to the home and then win in healthcare information technology, because still the United States is the area because of the high degree of digitization of records is where the largest opportunity exist.
In the EMEA, we have been growing at 2.3%. And in this area, we want to drive our highest growth potential portfolio, advance the quality of care in all the different countries, especially in the developing countries and increase our sales, marketing and R&D effectiveness. And in China/Hong Kong, we have been growing at almost 13%. We want to accelerate this growth by expanding sales and marketing coverage, advance access to the market with new solutions and then increase our commercialization effectiveness.
Sustainability, we have heard Inge and my colleagues, is core to our solutions. We want to be the recognized leader in sustainability in the healthcare industry. And in fact, we were awarded last year the Practice Greenhealth Champion for Change in sustainability. We want to innovate and provide sustainable solutions to our customers, but also delivering excellence in our operations in terms of sustainability and enriching our community. And last year, we established the first-ever customer-focused Healthcare Sustainability Leadership Summit, where we brought a lot of the participants into the healthcare industry and we learned from each other best practices sustainability. And we are going to repeat it this year based on the feedback that we got from the participants.
So wrapping up, this is a successful growing business in the healthcare industry that has significant opportunities still for accelerated growth globally. We are a trusted partner to our customers. We are committed to bring innovations to advance the practice of care to make them successful and to make their patients and their customers also successful and we do this all around the world with a very strong global footprint and really bringing the element every single day of 3M innovation improving every life to each one of our customers, to each one of you and everybody that we interact with. Thank you.
And with that, I am going to introduce my friend and colleague, H.C. Shin, to talk about our International Operations.
Thank you, Joaquin. Good morning, everybody. It’s my great, great pleasure to talk about International Operations, talk about how international is responding to the tumultuous global environment and why – and how we are growing in those environments? It’s a great thing to have one creative vision and strategy in the company that allows us to mobilize 53,000 people around the world. We are on the common goal which is efficient growth. We have operations virtually everywhere in the world. As you very well know, we have a great reputation as a company. We have a great employment brand. There is a great asset for us. And Inge pointed out this morning the 3M portfolio allows us to play virtually in every stage of economic development. We can play in developing market as well as we can play in developed market as well.
If you look at our portfolio from developing and developed, by 2020, it will be about half and half and we get there by focusing on the market. I think the keyword is market here. There are different market segments that we can focus on to create growth. A lot of people ask how can you grow when markets are not? How can you grow on the low growth environment in developing market and developed? I think there are plenty of ways to grow by making the right choices. I will give a couple of example. There are markets that are growing very, very rapidly. In fact, there are many market segments that are growing double-digit. After the 2011 tsunami went in Japan, the infrastructure, the building market in Japan is growing a very robust pace. The transportation market in China is growing double-digit. Even in West Europe, the sustainability-related market like a smart grid, energy savings market is growing at 11%. So, there are plenty of ways to grow in those markets regardless of the pace of economy. So, our plan is to grow in those selected market segments, think surgical, making the right choice in which market to grow, because there are opportunities out there, whether it’s developing and developed, because somebody is getting market share everyday in China and Brazil and 3M should be the person who will get the market share and we are getting the market share.
The next thing here is the case to how to grow when a market is not growing is to move people. We cannot hire a whole bunch of people to accomplish this. So, we have to reshuffle people, move people to focus more on those key markets. In the last 6 – for the last 3 years, international moved about 6,000 people. So, they changed it up from slow growing market to high growth market. So, this is how we think about growing in slow growth environment, be very surgical in your market segment and move people to take advantage of those markets.
We are one of the four fundamental strengths of 3M and we will continue to strengthen our capability to play in the global marketplace. We are also leveraging 3M’s fundamental strengths like technology. You saw the facility yesterday. We have 54 of not as big as the one that you saw yesterday, but we have 54 of those in different parts of the world. That’s the connection point between 3M and customers that we call Customer Technical Center. We are leveraging our manufacturing capability and 3M brand is a great asset for us to operate anywhere in the world.
So, let’s take a look at the global landscape and how we respond to those landscapes? The subject of how 3M is responding to the tumultuous global environment, well, any company these days is very crucial to our operation. The pace of change in the global market for the last few years has been dynamic and tumultuous to say the least. And I don’t think that the gyration will stabilize anytime soon. So, we think it’s the new normal. This is how we operate. In 3M, we have well laid-out processes to effectively respond to those tumultuous global dynamics. The keyword here is to control the controllable. Inge talked about that particular phrase as a framework and that is how we operationalize. There are a lot of things that we can control, cost of goods sold, SG&A spending, just to name a few.
Well, the key here is to create that we call operational precision, using Lean Six Sigma to provide the type of productivity that we need to go through this time. So, our key objective is to create that operational precision using Lean Six Sigma to deliver the margin and continue to expand the margin. At the same time, I talked about our growth strategy is to be very surgical in choosing which markets that we play and move people. So, now you know which are – those two are our growth and productivity strategy in a slow growing environment. And we have been doing this on the corporate guideline for the last couple, 3 years, is working beautifully for us. And we have no reason to believe that we will not be able to continue to respond very successfully in the coming years.
So by doing so, we were able to improve our margin by 100 basis points and improve the inventory turns in the last couple of years. And we are going through a different scenario planning. If something happens, we have a complete process to respond, how to do that. It’s done by local people who really understand local market and local customers in different parts of the world. So, we think our responsiveness, I would call it responsiveness, has become one of 3M’s competitive advantages. And we continue to sharpen our pencil in terms of our capability to do so. And I actually feel very comfortable in our ability to do so under any global dynamics that may unfold in the future.
Here is an example of how China has done the same thing on the quite challenging situation in China. As you know, China has been slowing down their economy. And we also saw our growth rate kind of slow down. But I talked about operational precision just a maniacal focus on operational improvement is what they have done. In fact, they have expanded the margin for the last three consecutive years on the relatively declining growth rate of China as a nation. In fact, we saw 12.7% margin growth in China last year. And we think we can grow the growth rate back up to somewhere between 4% to 7%. Frankly, that’s my minimum expectations, because we set up the China plant last year now to reflect the new reality of China as a nation and I am going to explain that in a little bit more detail in my China talk.
So, let’s talk about three strategic levers of 3M, starting from portfolio management. Portfolio management is about making choices, making choices of where to play and how to win. Particularly from the standpoint of where to play, we have to pick the right market segments. We have to play in high growth market segments. There are always high growth segments regardless of economy. There are always people who get the market share. And that is our plan. Let’s pick the right market segments and that may change from time to time. That may change from geography one versus geography two. It’s very, very critical to make the right market choice surgically and we can play. If we can do that without increasing a lot of headcount, that’s even better. In fact, that is our way of growing during this slow growth environment. As you see here, we see more growth coming from more domestic consumption-driven economies. Obviously, like healthcare, consumer safety-type products but there are some emerging mega-trend that gives us a very good opportunity. Under the sustainability heading, there are a whole range of smart grids, the water contamination, the air, energy savings there are just lots of solutions that we can offer under the heading of sustainability. So, I am going to talk about three market segments and then I will take you through some geography penetration that we are planning to do.
So, I will start from healthcare. Joaquin talked about healthcare. We love healthcare. That’s the fastest growing and most profitable business for international. It has been growing very, very nicely. And I think we can accelerate the growth rate in healthcare. Why? Because healthcare spending is increasing rapidly, whether in developing – even in developed market, healthcare spending is growing very, very nicely. Second reason is that we have a great product portfolio and proven business model. We can go to any hospital and we can talk about solutions like infection prevention and we can come out with an order. So, can we increase the penetration like in China? We are not penetrated in some of the Tier B hospitals in China. Hey, let’s put some more sales and marketing off in the street, because we have product, we have solutions that can work. So, that is the plan. Let’s do more education and training for clinicians and key opinion leaders. Let’s move some of the supply chain and R&D capability, more investment close to the marketplace. So, it is fundamentally what we have been doing, so by doing more, we can grow healthcare to more than almost 8% in the next several years.
Safety and security, we think is a current and future megatrend. 3M has a wide range of solutions already, as you know, in worker protection in the workplace, whether traffic management or highway management, as you know, whether public protection in terms of water, contaminated air. But at the same time, if you look at the public security that Frank talked about in the advent of heightened security, border control, the issue of migrant crisis in Europe, this goes on and on in terms of opportunity around personal identification. You saw some of the demonstration yesterday, some of our biometric system, could be a great solution for this type of megatrend. This is a high growth market and we can play in a high-growth market which is public safety and the entire area of worker safety as well.
Consumer retail business is a unique growth opportunity for us. Mike talked about middle-class consumers. 3.2 billion middle-class consumers will be there by 2020. 54% of them will be in Asia-Pacific, and about 67% of middle-class consumers will reside in Asia-Pacific by year 2030. 3M is very, very positioned in Asia-Pacific to grow our consumer business. Our brand is very, very recognized, whether it’s 3M or Scotch-Brite or Post-it notes and we are working with a local team to continue to grow this. There are some niche channels that we are playing, like pharmacy channel, home improvement channel and omni-channel, e-commerce, for example. So, we are very bullish frankly about how we can grow consumer business in a marginal creative way, not only in Asia-Pacific, but frankly, anywhere around the world.
So, let’s switch gears to the geography. So, I talked about market, right. So, three markets that we are focusing on, I will talk about geographies, countries or regions that we are focusing on. The way to think about geography is also the same thing. We have to make the right choices. We don’t want to play in A versus Z. So, we have to make the right choices. It comes from our analysis. We have an annual process to analyze where is the right regions and countries to play. About 58% of all incremental GDP in the next 5 years will come from Asia-Pacific. So, we must win in Asia-Pacific, including China. West Europe is critically important for us. It’s a very large impactful business for us. So, we must win in West Europe.
So based upon this analysis, we picked several countries that we can focus on. So, I will walk you through kind of the helicopter view of the world, starting from China. So, I talked about China and discussed with you how we responded to the rapidly slowing economy in China by bringing operational precision to improve the margin and continue to gain market share. This is how we gain market share. China, we are doing the same thing. We are making the choices. China is rapidly expanding to more domestic consumption-driven economy. As you know, healthcare spending is still growing very nicely. Retail customer market is growing double-digit. Okay? The whole range of worker safety in China is growing very rapidly. So, we are focusing more on those domestic consumption-driven market segments in China. And this business is growing very, very nicely in China, in many cases, double-digit. Okay?
So if you look at a certain 5-year economic plan that was just announced, it’s really about spending more in domestic consumption-driven economy and I think we are well poised to take advantage of those trends coming from China. I talked about transportation industry in China. China is making 22 million cars this year by far, the largest amount in the world. They will need 6,000 aircraft in the next 20 years, think about the magnitude of industry. The amount of high-speed rail they are putting on everyday, it’s just mind-boggling. If you look at the 3M portfolio, we really have a great portfolio in transportation industry, worker safety solutions, cabin comfort like acoustic insulation or lighting inside the aircraft, with a lightweight material to reduce the weight of the vehicle, or just simply consumables that you saw yesterday, tapes, adhesive, what we call MRO Maintenance Repair products. So, we can bring all of this to the high-growth segments in China to grow the market. China, the same thing, we have not increased the headcount in the last couple of years. We are doing this by moving people. So, I give you our strategy, playing in the high growth market and move people around to achieve that. That’s what I mean by efficient growth. We grow about – in a efficient way, but not in a wasteful way.
We are also seeing some good e-commerce opportunity from China. In fact, we can grow e-commerce to up to $500 million in the next several years. Southeast Asia is a great market for us. It’s growing. The macro-economy is very good. Geopolitical dynamics are relatively stable compared to other regions of the world. So, we continue to invest here. In fact, we have a great capability already in Singapore in terms of manufacturing and are in the capability of financing to continue to leverage that to grow the business here close to double-digit in a few years. West Europe is a must-win geography for us. Over the last 3 or 4 years, West Europe, we see a huge, I should say, is a very good market margin expansion, to be able to do so by focusing on Lean Six Sigma, to be able to do so by focusing on cost of goods sold and SG&A productivity. And to have very, very good margin expansion coming from West Europe now, they have to grow specific growth programs to grow in West Europe.
So, those are four elements of growth: Germany plan, sustainability, e-commerce and customer first. Germany plan, we setup in 2015, calls for growing more in an accelerated fashion in the fourth largest economy as Germany continues to rebound economically as a country. In fact, if you look at the sustainability area like smart grid solutions, weight reduction materials for the vehicle, vehicle electrification, we see some very, very good opportunity. So, I think our operational improvement will continue to allow us to grow now in an accelerated fashion and in a margin accretive fashion and that’s our plan in West Europe.
In terms of investing in innovation, we have to grow our new products about $8 billion every year and that cannot happen without direct contact to the customer. So, we will continue to leverage the local megatrend and regional megatrend. We will continue to align with the customer. That’s why customer first is so important, putting customer at the center in what we do, just like the interaction that you saw yesterday. Imagine, 120,000 of those interactions taking place annually between 3M and customer to make connection between 3M technology and customers’ needs. That’s how we create this type of new products.
We have many, many local and regional megatrend driven opportunities around the world. If you look at our program in China, just clean air solutions like our respirators or clean water, our water filtration systems, or food safety, these three alone can be multi-hundreds of millions of opportunity for 3M. I presented to you last year about these specific programs. In Mexico, there is a rampant identity fraud and identity theft. So, we are working with the Mexican Police Department to put in place our biometric fingerprint system to provide personal identification solution. In India, over 100 smart cities are either refurbished or built and we have a great opportunity to participate in those projects with our energy saving solution, developing management solutions and many other solutions that we have around the concentration market.
In terms of business transformation, as Paul mentioned, we are aligned with our supply chain. We continue to focus on Lean Six Sigma and build capability around three supply chain Centers of Expertise, continuous optimization of footprint and we continue to realize the maximum value of ERP and that’s how we think we can expand the margin for the last couple of years and more to come.
So in summary, I think we have shown a very good track record of growth and productivity at the same time in international. I think we have effectively responded to a very tumultuous global dynamics for the last few years. And we are very confident in our ability to do so on a go forward basis. And I think we are very, very poised to deliver efficient growth by making the right choice in market segments and by making the right choice in terms of resource de-allocation and that’s how we would like to think about growing in slow growth environment. And we are doing it by leveraging corporate three strategic levers and we are focusing also on people and leadership development.
So with that, I will turn it over to our CFO, Nick Gangestad. Thank you very much.
Thank you, H.C. and good morning everyone. I would like to start by thanking all of you for attending today and last night. We very much appreciate the time and energy you are putting into learning more about our businesses and about our plans here at 3M. During my presentation this morning, I will hit a few things. I will cover how our business model is generating strong free cash flow and premium returns on invested capital. I will discuss how we are investing in our business to fund efficient growth. You have heard that phrase talked about much of today. I will talk about how we are investing to make that happen. And then I will cover how we are further enhancing our capital structure and our capital allocation. And then I will wrap up with a summary of our 5-year financial objectives.
Before I head into the main portion of the agenda, let me just comment on what we are seeing so far in 2016, where we remain on track for the planning estimates that we shared in our December Outlook Meeting. As we further stated in January, giving a little more color about first quarter, we stated that we are expecting first quarter organic growth to be very similar to what we saw in the fourth quarter, which was down slightly. And as the quarter is progressing, we are seeing four of our five businesses tracking either at or above what we were expecting at that time. Those are Healthcare, Consumer, Safety and Graphics and Industrial. Our Electronics and Energy business is trending below our expectations. We are seeing end-market demand weaker in the Electronics and Energy business. So, we are trending to a first quarter organic growth that is low double-digit decline due to softer consumer electronics. Geographically, our EMEA region is performing well and our Asia-Pacific region is trending below our initial expectations, primarily due to the softness we are seeing in Electronics and Energy. In the ERP front, we continue to have build momentum, where we had another successful deployment, this time in Germany, in our German companies and that momentum is going to continue to build as we go throughout 2016. And finally, we announced an 8% increase in our dividend in February, which marks 99 years of paying a dividend without interruption.
So, now on to the main portion that we are here to talk about, about our 5-year plan and I will start by sharing how 3M’s business model is generating strong cash flow and returns – premium returns on capital. As Inge mentioned at the beginning of today, we established six strategies and a timeless vision back in November 2012 and we have continued to build on that to create a strong foundation. And in our 2016 to 2020 plan, we expect to build on those strengths and continue to win as a company.
On the next slide, I will cover our free cash flow. We generate within 3M’s strong and consistent cash flow due to the strength and diversity of our business model. Our cash flow has grown at a compound annual growth rate of 10% since 2012 and that gives us the ability to invest in our business and return significant cash to shareholders. We are focused on increasing our manufacturing utilization across the enterprise and we are focused on improving our working capital turns to enhance our free cash flow conversion capability. One of the advantages of our business model is the ability to generate strong cash flow through the economic cycles we encounter as evidenced by our performance over the last decade. We are targeting 100% average free cash flow conversion over the 2016 to 2020 time period.
Let’s now move on to return on invested capital. We continue to generate industry leading margins and return on invested capital. Some of the factors that help drive that premium ROIC include efficient capital utilization, a vertically integrated supply chain since we manufacture many of our own raw materials. Also helping this is our actions to minimize our global cash balances and our disciplined capital allocation. These actions, on top of our four fundamental strengths, which you have heard referenced throughout the day, are helping to support our strong margins and our strong and premium return on invested capital. We are expecting to generate a 20% return on invested capital over the 5-year planning period.
Let’s move on to how we plan to invest in our business to fund efficient growth and that concept of efficient growth that you have also heard referenced throughout the morning. To give a better way to understand our perspective on investing for growth, let me explain our view of growth, our growth potential over the next 5 years. Our planning assumption for Industrial Production Index growth over the next 5 years is that IPI grow somewhere between 1% and 3% on average over the next 5 years. And as Inge mentioned, our 2% to 5% organic local currency growth is consistent with us continuing to achieve our track record of outperforming the market economic growth. If I break it down between developed and developing, we expect to see developed market growth for 3M between 2% and 4% and we expect our growth in developing markets to be between 3% and 7% over the 5-year time horizon. By now, look at this by business. Our 2% to 5% total company organic growth will be paced by healthcare at 4% to 6% organic growth. We expect our Safety and Graphics business to grow organic local currency between 2% and 5%. We expect our industrial business to grow between 2% and 4% organically and Electronics and Energy to be flat to up 4% over this 5-year timeframe. And finally, we expect our organic growth in our consumer business to be between 3% and 5%.
Let’s now cover our investments we are making to fuel this growth. As you have heard from presenters throughout today and last night, innovation is the heartbeat of our company and technology is one of our four fundamental strengths. We connect over 46 technology platforms to solve real problems for our customers. By solving these problems, we are enhancing our relevance with our customers, along with supporting our premium margins and returns on invested capital. We expect our R&D investment over the next 5 years to be approximately 6% to sales. We remain focused on more impactful and efficient innovation to enhance our value to our customers.
Now, let’s review our plans for CapEx spending. Our investments in CapEx also fuel our efficient growth and our profitability. Portfolio management is one of the factors that guides and impacts our CapEx investment decisions. Our manufacturing assets and our capabilities are another one of our four fundamental strengths and they are leveraged across our business portfolio. It is very common in 3M for several businesses to be sharing the same manufacturing asset. We are also, as I mentioned earlier, vertically integrated and that we manufacture many of our own raw materials such as adhesives and films, doing so helps drive our premium margins and our premium return on invested capital. During the 2016 to 2020 time period, we expect to invest between 4.5% and 5% of revenue in CapEx to support our efficient growth.
On the next slide, I will cover portfolio management and the expected benefits we plan to see from acquisitions over the planning period. There are a few principles that guide us as we manage our portfolio. First of all, we have prioritized our portfolio and those efforts will continue. As we have prioritized between Heartland and Push Forward businesses within 3M, we continue to bolster our technologies and adjacencies in our Heartland businesses and we are building scale in our Push Forward businesses. And when we look at portfolio actions, acquisitions, divestitures or consolidations, we look at them through the lens of our fundamental strengths. We have an ongoing rigorous review process in how we look at acquisitions, with the single purpose being how do we create value, how do we create sustainable and accretive end market growth and how do we capture cost and sale synergies quickly through our integration and sustain those benefits. As a result of our actions in acquisitions, we expect our acquisitions between 2015 and 2020 to add approximately 1%, on average, to GAAP earnings per share over the 5-year plan.
I will share a few deals on our most recent deals – some information on our most recent deals. We have completed five acquisitions since 2013, two of them in our healthcare business. Those are Treo Solutions and Ivera Medical. We also purchased the remaining 25% of our subsidiary, Sumitomo 3M in Japan. We acquired Polypore’s Separations Media business, now Membrana, as part of our purification business within Industrial. And we acquired Capital Safety, which is now part of our Safety and Graphics business. Combined, we invested $4.6 billion in these five acquisitions. And by 2020, we are expecting a cash return on invested capital in aggregate of 12% from these five deals. Our enhanced acquisition integration process is resulting in more impactful deals, more strategically aligned deals and better financial returns from the ones we complete.
Let me now cover how we are managing our global pension plans. We continue to actively manage our global pension obligations. Our structural plan changes are largely complete as we have closed and transitioned most of our defined benefit plans over to defined contribution plans. Our global pension plan and OPEB plans are well funded. At the end of last year, they were 86% funded. And we are expecting future aggregate contributions over this 5-year time horizon to be $1 billion to $2 billion of cash contributions. We are estimating a $400 million reduction in our pension and OPEB expense from 2015 down to what we expect it to be in 2020. The majority of that reduction is occurring in 2016. This reduction in pension expense we expect, on average, to improve earnings per share by 1% over the 5-year plan.
On the next slide, I will cover the benefits from our supply chain optimization, which you heard Paul Keel talk about earlier this morning. We are working on plans to further optimize our supply chain and to enhance our ability to service our customer and to drive efficiencies. As Paul said, we expect to spend between $500 million and $600 million for these plans over the next 5 years. The first 25% of that investment, or $125 million to $150 million was already anticipated and built into the guidance that we shared for 2016. It’s been included in how we have built our 2016 plans. These actions that we are taking over the next few years to optimize our supply chain footprint we expect to benefit our income by $125 million to $175 million on an annual recurring basis by 2020. In addition, we expect that we will be able to remove $100 million of inventory out of our supply chain by 2020. We are targeting these supply chain optimization actions to generate rates of return that are accretive to 3M’s overall average return on invested capital.
I will now turn the page to look at business transformation. Business transformation is one of our three key levers. It starts and ends with our customers. We create value for our customers by enhancing the effectiveness and the efficiency of our operations. Our strategies continue to progress as we implement global service centers, business service operations, supply chain centers of expertise, and all three of those are improved by standardizing our global business processes and the governance we exert over those processes. Business transformation will deliver significant operational savings to 3M over the next 5 years. We anticipate annual pre-tax operational savings of $500 million to $700 million by 2020 and a one-time $0.5 billion inventory reduction once fully deployed.
I will spend a few minutes going into more details on these savings that we expect to realize on business from business transformation. The $500 million to $700 million of pre-tax savings that we project by 2020 is coming from three areas: 25% is coming from business service operations; 25% from our establishment of global service centers; and the remaining 50% from our supply chain centers of expertise, which you heard Paul talk about earlier this morning. We expect these benefits to start this year. In fact, part of our earnings bridge for 2016 included the start of those benefits beginning this year. And we expect it to increase to $500 million to $700 million annually by 2020. Over the course of the 5-year plan, we expect business transformation to add 1.5% to our earnings per share growth on average.
Let’s take a closer look at business service operations. We have established business service operations centrally in the company and then supplemented with regional capabilities around the world. And these benefits are being realized by us consolidating our customer-facing processes and simplifying those processes by standardizing them and optimizing the service models that we provide to our customers. We have built and will continue to build robust self-service portals for our customers to transform service delivery for them and to improve and increase our lights-out processing. We are enhancing our alternative sales coverage models and our digital services and we are leveraging our size and scale to improve service while reducing the cost to serve our customers.
Now, let’s cover the benefits from our global service centers. We established global service centers in Poland, Costa Rica and the Philippines. We started in Poland 15 months ago and then later added in Costa Rica and the Philippines. These service centers are adding benefits by allowing us to consolidate and standardize transactional processing of transactional activities, improving our service delivery. This lowers our cost to serve via process standardization and leveraging these geographic locations. This also gives us the ability to further improve our acquisition integration process and capture cost synergies sooner. We are leveraging Lean Six Sigma for process automation and process improvement in each of these service centers. Global service centers maximize our regional effectiveness and optimize our transactional service delivery.
On the next slide, I will cover supply chain centers of expertise and how they are driving operational efficiency. Our global ERPs are a major enabler for our regionalization strategy by driving standardization of our global business processes and enabling operational efficiency around the world. As Paul mentioned, we have established three centers of expertise: one in Switzerland, one in Panama and one in Singapore. These COEs provide centralized order flow. They help us drive manufacturing efficiency. They enhance our fulfillment distribution capability and increase our raw material sourcing effectiveness. We expect multiple financial benefits from these COEs, including lowering our cost to serve, improving our manufacturing utilization, reducing our working capital investment and lowering our effective tax rate. The implementation of these COEs also improved our ability to serve our customers.
Let me now share our plans for lowering our effective tax rate. We expect by 2020 to deliver a tax rate of 27%, down 2 percentage points from our tax rate in 2015. The primary contributors for this reduction include expanding the scale and the effectiveness of our COEs as well as impacting additional supply chains, adding additional supply chains and reducing operational cost within those COEs. In addition, we are streamlining our operations to enable more efficient tax utilization of our international cash. We expect these actions on our tax rate to add approximately 0.5% to average earnings per share growth over the 5-year timeframe.
Let’s now take a closer look at our plans for our capital structure and our capital allocation. Our 2016 to 2020 plan calls for continued enhancements of our capital structure and capital allocation. We are increasing our cash deployment, which continues to be funded by our strong cash flow generation, supplemented with added leverage. The diversity of our global business portfolio, which generates strong and consistent cash flows through economic cycles, provides us a solid foundation for added leverage. Our first priority is to invest in the business to drive efficient growth. Our strong balance sheet also remains a strategic asset for 3M to create value. We do that by maintaining flexibility to respond quickly to strategic opportunities while simultaneously returning cash to shareholders.
Let’s now take a look at our deployable capital over this 5-year planning period. Our strong business model is expected to generate between $45 billion and $50 billion of cash from operations over the next 5 years. In addition, we are planning to add $10 billion to $15 billion of leverage. This brings our total deployable capital to $55 billion to $65 billion of cash.
Let me now breakdown how we plan to deploy that capital. As I mentioned earlier, our first priority is to reinvest in the business to fund long-term organic growth. Our plan is to invest between $16 billion and $19 billion in the combination of R&D and capital expenditures. We continue to drive productivity within R&D and we expect to invest approximately 6% to revenue in research and development. And on CapEx, we expect to invest between 4.5% and 5% to sales in capital equipment and assets. Combined, we will invest nearly 11% to sales in research and development and CapEx over the planning period. Second, we plan to return cash to continue our track record of returning cash to shareholders via dividends. We expect to deploy between $14 billion and $15 billion in dividends during this 5-year plan. We have increased annual dividends for the last 58 consecutive years and we have paid dividends without interruption for 99 years. This past February, we announced an 8% increase in our dividend for 2016 and we expect our dividends to grow in line with earnings over time.
Let’s now cover the funding of our global retirement plans. As I mentioned earlier, we plan to allocate between $1 billion and $2 billion to our global retirement plans over the next 5 years. Our global pension plans continue to be well-funded at 86% and we have no mandatory U.S. funding requirements. Over the past several years, we have updated our plan designs to meet market demands for portability meaning we have shifted away from defined benefit plans to defined contribution plans.
On the next slide, I will cover our capital available for strategic opportunities. So after funding our organic growth, after continuing to pay an attractive dividend, after contributing to our global pension plans, we expect to have between $24 billion and $29 billion remaining for acquisitions and share repurchases. Our highest priority for opportunistic deployment is to allocate capital to strategic acquisitions and augment our organic growth. On share repurchases, we expect to maintain a minimum threshold. And our level of repurchase activity is also based on relative value, along with the other demands on capital, such as potential acquisitions. We expect share repurchases to add between 2% and 4% to annual earnings per share growth over the 5-year plan.
On the next slide, I will wrap up on how we plan to further enhance our capital structure and capital allocation. We started a fundamental shift in our capital structure back in 2012, a change in our structure to ultimately reduce our total cost of capital. As I mentioned, our 2016 to 2020 plan calls for incremental leverage of $10 billion to $15 billion, which will reduce earnings per share by approximately 1% per year due to higher interest expense over the 5-year planning period. We can execute this capital structure plan while continuing to maintain flexibility to pursue strategic opportunities and return cash to shareholders.
So, in summary, let me end where Inge started the day, with the highlights. We see our business portfolio and our foundation as one where we are positioned to win. We are executing on our key levers to create efficient growth. Those key levers are our portfolio management, our investments in innovation and business transformation. We are winning with our customers by helping them deliver on their promises. And we are continuing to enhance our capital structure and our allocation of that capital. We are maintaining our strong track record of returning cash to shareholders and we are announcing our new – we announced our new 2016 to 2020 financial objectives as well as affirming the 2016 outlook that we shared in December.
In conclusion, we plan to deliver, over the next 5 years, earnings per share growth between 8% and 11%; organic local currency growth between 2% and 5%. We expect to deliver return on invested capital of 20% and we expect free cash flow conversion of 100%.
Thank you for your attention this morning. Please give us a moment to assemble and then we will open up for questions.
While we are assembling, we are about quarter after 11. So, we will plan on wrapping up the Q&A right around noon. As a result of being about a half hour earlier in finishing, we have moved up the first bus departure to 12:30 for those that want to get to the airport. The last bus will still stay scheduled to depart at 3:30.
A - Inge Thulin
Alright. Yes, Andrew? Andrew?
With regard to both capital allocation and balance sheet, the guidance for M&A seems to imply high [indiscernible] M&A. Is that a correct [indiscernible]? And then part two is [indiscernible]
Andrew, could you repeat the last part of that?
It was just the incremental leverage that you are going to assume being applied to the same kind of [indiscernible]?
On a gross debt basis, that’s approximately correct. But let me go back to the M&A portion. So in our capital allocation, we laid out there is between $24 billion and $29 billion we see available for deployment into strategic opportunities. That’s in combination both M&A and share buybacks. And this is a little departure from how we have guided in the past, where there was a discrete amount for M&A and a discrete amount for share buybacks.
Yes, I just took the ball around the corner.
Yes. So depending on the opportunities we see on M&A as well as the relative value for share buybacks, you could very easily see us in the range of the $5 billion to $10 billion that we had previously guided. We could see it – we could see that even above that $10 billion that we had guided in the previous 5-year plan, but it is a lot, very much dependent on the types of opportunities that we see, both within strategic acquisitions and in the value of our own shares. So it’s a little more opportunistically looking than how we had described it before.
I think also you should think about an acquisition piece. If you looked upon in terms of timing, where you are now versus 3, 4 years ago, there is no doubt in my mind today, based on the portfolio work we have done and our own understanding of the fundamental strengths of the company that we have a much clearer view of where we would like to go and also understand how fast can we add value ourself by doing those acquisitions. And we are not here to criticize the past. But as you will recall, there was a time where 3M did a lot of very small acquisitions. So, they had an impact in a country specifically, but very little in a region or globally. So, it didn’t move really the needle for the company and there was a lot of work anyhow in terms of assessment of try to integrate, etcetera. I said then that we would like to do slightly bigger acquisitions and also acquisitions that at least you have an impact on a regional basis. Based on the working – and I think Capital Safety is an example of that where we certainly have – now have a good understanding of the portfolio where we have the strengths and where we can add value. So by that saying as we move ahead without talking size, I think at least myself and the team that we feel much more confident if something is coming up that is a little bit more sizable than we have done in the past in order to execute that and feel a high confidence that is the right asset for us and that we have an integration team now in the company that can help us to execute.
Just one reminder for when you ask your question, so people on the webcast can hear, there is a microphone in front of you with a button. So, please press that button and speak into the microphone and announce who you are. Thanks. Scott?
Scott Reed Davis
I don’t know if I can contort myself too far here, but I can’t remember my question at this point. And I am not going to announce myself. I will just stay anonymous used to get in trouble when I am on a transcript and my name attached to it. I am trying to figure out – I am trying to reconcile a little bit of the capital spending that given how good you guys have become at Lean Six Sigma in general, I would guess that there would be some sort of a growth rate where you wouldn’t have to add a lot of capital. So in my mind, I was thinking once ERP has been rolled off, you have had a little bit of a capital payback that capital spending would come down. Is the – it’s kind of the – is the capital spending plan more conservative based on more like a 5% growth rate or is there a wish list of things? I never thought about you guys of under-spending capital, so I can’t imagine you have a big catch-up spend in any regard. But just help us understand how you think about that spend versus the growth rate versus post the CRP spend?
Well, Scott Davis, I will let – the 4.5% to 5% is driven by a few things. First of all, there is some aspect where we look at our historic capability. And if we look at how much we invest just in maintaining our capital, that’s typically between 35% to 40% of our total CapEx is going just to maintaining our existing capital base. Your point about as ERP starts to the capital portion of ERP starts to come down that, that may create some opportunity, yes, there is. On the flipside, the strategic footprint actions that we are talking about, that $500 million to $600 million of investment, there is a portion of that, approximately half of it, that is capital that we are investing in order to enhance our efficiencies in the future as we go through those actions with our footprint. So, that – it’s a combination of several things, but 4.5% to 5%, we think is about the right range. We also want some added investments in those disruptive manufacturing technologies that Paul referenced and the automation that he referenced as well.
I think also that it’s coming back and thinking about our business model. So, if you think about it like 6% in research and development, which is sizable and it’s important for us to do, then you add on the manufacturing capabilities. Let’s say, that’s 4.5% or 5% historically. The important thing to understand with 3M or the two components together is that all business models is based on that. So, we are not so much a commodity-based company, meaning if we didn’t invest heavily in research and development, we could also double outsource the lot. But a lot of the outcome from our research and development is very advanced, very advanced and we will not outsource that. So, we would like to keep it together. So, I think the strings of the model, the way I think about it and I would like you to think about the two of them together is important. The day we say research and development is not that important, let’s reduce that to 3.5%, I think we can take down on the capital side as well. We can start to outsource. That’s a different model. This is a different model. We are becoming a different company and I wouldn’t like to lead a different company than 3M. So, this model is important for us.
Scott Reed Davis
Just clarifying, I apologize, but what type of productivity I guess was kind of – part of the question I was asking is that I can understand that 5% core growth, how you may have capital needs. With 1% core growth, you may not have much in capital needs. I mean, what do you think about that breakeven point where your productivity capital balances out?
Our 4.5% to 5% is aligned with our 2% to 5% organic growth to stay in there. From a productivity standpoint, part of what you saw was how Paul laid out our plans for cost of goods sold in the coming years. In the last 5 years, we have had much of our cost of goods sold benefit being driven by commodity price reductions as well as selling price increases, and to a smaller extent, productivity. In the coming 5 years, our actions around our supply chain centers of expertise, that’s going to drive productivity. Our footprint is going to drive productivity as well as our continued focus on Lean Six Sigma. All of those things are going to drive productivity. And productivity as part of COGS will help play a bigger part in reducing our cost of goods sold as a percent of sales than it’s played in the last 5 years.
Thanks. John Inch. So, I want to go back to the capital available for M&A commentary and valuations have gone up very recently. Actually, if you run – Nick, you run your math it almost implies kind of $1 billion toward M&A is sort of the placeholder for a year, depending on what valuation you are paying, right, for these companies. So, understanding the desire to perhaps look at something bigger, but is the overall message that we should not be expecting a multibillion dollar deal over the horizon, you will keep your options open, but for now, we sort of should be looking at kind of 1 to 2 a year, which would get to sort of that 1%, is that the way to think about it?
Well, I think you should think about it. When we laid out the last plan, we said $5 billion to $10 billion and we have spent $4.6 billion, I think. And so think about it in terms of when it’s coming our way and it’s strategically important, we will move on it, right? So, you have Capital Safety was $2.5 billion. Sumitomo piece was $800 million, etcetera. So, I will say that it could be in the $2 billion to $2.5 billion like Capital Safety was if it’s meeting the strategic criteria. And we can, from a fundamental perspective, drive return very, very fast into it. I don’t think it would be $10 billion at one swing. I don’t think it will be that. And we would stay close to our core, and we will stay very close into what we have the businesses that we understand and can build on that.
Just as a follow-up, Electronics and Energy, your framework, 0% to 4%, think of all the money you guys spend, you have got all these laudable products and you have got all its growth in emerging targets, a 0% outcome in 5 years would be terrible?
That would not be good. It will not be good.
I would think that at some point, if you get to the halfway point and that’s what you are actually realizing, that segment needs some sort of a more meaningful or impactful shakeup than sort of some incremental – like a couple of finance...
I think you should look upon that business in the following way. First of all, you should look upon it what we have done with in terms of reshaping the portfolio and tried – well, improved the margins and we have had growth in there. When you look for the next 4 years, I think we are – or 5 years, I think we are also very tempered what happened now in 2016. So, I will agree to you. We have higher expectation on Mr. Bauman and his team going to see a real growth in the next 5 years. That’s clear. When we looked upon it in terms of how it’s starting out, I think we are tempered to say, 0% to 4% is what we are laying out in our expectation. But I agree with you, 0 as in the 5-year plan, that’s not good enough. So we agree on that.
Shannon O’Callaghan from UBS. So Inge, you mentioned 1.5x IPI the last 5 years and the last 10 years. A lot has changed at 3M from 10 years ago and 5 years ago. And 1.5x IPI is actually a great result, right, I mean to grow that much above IPI. But it seems like there is a lot more going on here and you have been taking up the R&D and trying to create disruptive products. Are you – what would it take for you to see that go above 1.5x IPI, because it seems sort of – the consistency of that number seems inconsistence with what’s happened to 3M over that timeframe?
Yes. So, you see more activities in order to improve the capabilities for growth, yes. What I would say, first of all, as a hope that you know when we – I wouldn’t like to layout a plan that look unrealistic or over-promise something. That’s my management style and I think it’s important. I would like to layout a plan where we can with certainty deliver what we have said. We have – so you look at 1.5x, some years have been 1.7x, some year a little bit lower, but it all depends on how some of our markets are moving in between growth rates. And so I will say that 1.5x, I am very confident. Would I like to see it coming to 1.7x? Yes. And if I see that capability coming in the next 1 or 2 years, I would tell you. And we will all deliver on that based on the economy. But I will say that where we are today, the confidence is high for me and for the team that we can do 1.5x IPI.
Now, I think also important to think about as we move further out into the plan, 3, 4, 5 years further out and maybe longer that our portfolio will change. Healthcare will be bigger of our portfolio and so would Consumer in general speaking terms. So then, by definition, there is maybe GDP that is the best assessment for them. I think the growth rate for the company will be higher and to better margins, to be honest. I think what it will take now is this big initiative that we have that we call customer-first, that will make an impact. I am absolutely sure it will make an impact, but we are relatively early in that process. It takes time for us to put the processes in place and can capitalize on that. And I think that will be a big deal for us. But I think maybe we are another 2 years out before we see the real impact on it. So, I wouldn’t – we wouldn’t like to lay something out in the plan now or stepping in that to 1.7x, right? And as you know, it’s easy to put that 1.7x and we have a great morning here, but then we need to deliver as he move ahead, right and rather deliver for you guys what you expected versus under-deliver.
Just are you happy with the – since you laid out the last plan, are you happy with the progress on disruptive technologies and things that at some point you expect to payoff into growth?
Yes, I will say that the plan that we laid out 2012, I am very happy with execution of that plan, I am very, very happy. And I feel that we are in a much better position today in order for us to be able to deliver on our plan than at that point in time was a plan. And I am sure you guys looked at that and say, okay, show us, right? There was a plan, but we have not really showed an execution. Where we sit today, we executed on what we said. Now, we are pleased to solve it that you maybe had hoped on a little bit better. So, something went better, something you had hoped that you could accelerate, etcetera, but generally speaking, I am very pleased with the way we have executed the plan. And I have high confidence in the plan we layout here today.
Yes, Nick, just trying to level set some of the differences between the investment you are putting in and the benefits you are getting out of the business transformation. So maybe just remind us – and you had defined a bit differently than I think you defined it on the quarters – recent quarters. How much is – is the 0.5% a year for business transformation? How much on a net basis is that adding in ‘16 and should we think about that improvement moving in the linear fashion? Is it kind of lumpy, where maybe ‘17 is less of a contribution or is it pretty steady throughout? And then just a little more of a short-term question, can you just talk about the transition that you guys saw from December to January to February and then what maybe you are seeing in early March here? There is just a lot of things moving around in a short cycle industrial basis that it seemed like there was a bit of a pivot point in January, perhaps some catch-up. Maybe you guys could reflect on that and tell us what you are seeing in your short cycle industrial businesses around year end and then here in early March – through early March?
First of all, on business transformation, we have an expectation that by 2020, this will be adding $500 million to $700 million of operating income. On one of the slides I shared, I show a graph that shows how that’s progressing. So it’s somewhere in between a linear and a hockey stick, to use a Minnesota term, that it does accelerate as it goes on. And 2016 is the first year we are talking about any financial benefits from it. Up until then, we have been talking about expenses. This year, we are expecting approximately $50 million of benefits or about $0.05 a share of benefits in our 2016 walk. That’s what that’s $50 million is what’s growing to $500 million to $700 million over the course of 5 years.
Net of the cost, the $500 million to $600 million of costs you are – that was my question.
We are at a point where the cost has stabilized.
The actual cash is coming down, but we have capitalized some of that. So, the net expense of this deployment has reached a net-neutral point for the next few years.
And then just the short cycle industrial question, December to January?
Yes, I think we don’t see any shift versus what we said last time, where we said that first quarter will be very – first quarter ‘16 will be very similar to fourth quarter ‘15, right? We don’t see a change there. In terms of Industrial, generally speaking, I will say that there was still some slowness in January and February, March, a little bit better, and it feels better, but it doesn’t mean that we will see – I think we need to go into the second and third quarter before we can make that assessment, but it looked like it’s slightly better, but it started out slow.
Actually just a couple of unrelated questions now, one for Nick first and then maybe Inge. Just again looking at the earnings bridge and some of these points have been addressed. The way this bridges together doesn’t look like it leaves any room from for incremental margin improvement and I am guessing a lot of that’s embedded in ET and other things. But can you kind of address that in just terms of the way the percentages kind of add up and there is nothing incremental coming off the top line?
Yes, Jeff, if you take each of the pieces that I talked about, several of them imply margin expansion. So, what I talked about on business transformation, margin expansion from there, what I talked about with our supply chain footprint optimization that implies some margin expansion. But the margin itself is not – you will notice it’s not one of the financial targets that we have put out. Most of the pieces imply margin expansion. The only thing that over time is bringing margin – likely bringing it down is investments in M&A. Typically in the first 2, 3 years of an acquisition, that’s eroding our margin. So the overall plan does imply some margin expansion. We are just not setting a target for how much margin expansion that will be.
Great, thank you. Actually maybe one for Inge and one for Mike on Consumer. Inge, could you just address kind of the issue of R&D productivity? It was mentioned in one or two of the presentations. You didn’t spend a lot of time on it today. It maybe dovetails a little bit into the Shannon’s question of, you are dealing with: a) what the world can give you; but then b), what does 3M do on top of that? And as you are ramping up R&D, how are you measuring actually the productivity of that R&D?
Yes, we – so first of all, I think it’s important to make a clarity internally as well relative to research and development having the same expectation relative to productivity than any other function. And from a leadership perspective, that’s important to make sure that we are all in the same boat, we have all the same expectation, etcetera. So, there is productivity targets in terms of output from research and development. And we have always measured that on the NPVI, New Product Vitality Index, that’s the outcome of it. And that is a 5-year metric, which is then indicating products sold today that didn’t even exist 5 years ago, is the NPVI. Now, we had that in past history almost like a primary metric. It is not a primary metric. It’s a secondary metric. The primary metric is organic local currency growth. NPVI will help you in order to drive that forward. NPVI is different in between different businesses. These need to be very high in Electronic and Energy. It can be somewhat low in healthcare due to the cycles, etcetera. And we are talking about – you should be 30% to 35% in a business generally speaking, except healthcare can be a little bit low in order for you to compensate for any cannibalization you have in the business or any erosion, et cetera. In terms of productivity out of the laboratory, I am pleased with it.
Coming back to the question we had before of those new programs that we invested in, we had 30 programs as we started. Of those 30 programs, 8 are commercialized and 6 has been stopped and the sales of them from that category was last year $200 million. And we are expecting $400 million this year. So, it’s doing well and there is no big issue with it. I think it’s more a message relative to efficient growth in productivity that is whoever you are in 3M, wherever you are and especially if you talk about just the heartbeat of the company, we maybe expect even more of that if you are the heartbeat of the company in order to drive efficiency in the organization.
If you don’t mind, just would like to take advantage of having all the other guys up there. On the consumer side, I was just curious obviously the online omni-channel is growing rapidly coming off a small base, but are you actually able to measure yet or do you think you will be able to measure how your share is performing in that environment? It does seem like that opens the door a little bit for maybe arguably inferior products, but still to gain customer mind share when you’re just clicking a mouse as opposed to...
That’s for Mike Vale, yes.
Yes. First of all, yes, we can measure what’s going on. One of the great things of being – about being on an online platform is the access to the data. And a lot of the providers are able to share the data with us, because they have the same interest that we do of growing categories. What I would say, though, is that for our view is that while digitization on the model increases overall access of consumers and products so you can hear comment, there could be new entrants to the market and that is true, but we think it is a net amplifier for us in the context of our ability to showcase our technological superiority is much more effective and efficient on an online platform than it is at the shelf. Okay? So, our ability to embed high-resolution digital content video that is then contextually connected to the perspectives of consumers in ratings and reviews allows us to create a much more impactful presence on an online website than maybe we would at a shelf in a store. Okay? So for us, I firmly believe that online marketing and digitization of the model is going to be a very big amplifier for our overall business.
Joe? You have to hold it there.
Joseph Alfred Ritchie
There you go. So, my first question for Nick. So, when you take a look at the different buckets on the 8% to 11%, it seems like you have given us a good path on how you expect to get there. Fully recognize that pricing has been a benefit to you over the last few years and you have expected that to start to curtail, but why wouldn’t pricing be a benefit over the next planning period? Just given all that you’re doing from an R&D perspective, the success that you are having with disruptive technologies, it would seem like it should be a tailwind for you as well moving forward.
Well, Joe, when we look at this over a long time horizon and we strip out price adjustments we’re making that are a direct or indirect result to FX movements, we find that our ability to increase prices averages about 30 basis points a year. And that’s likely something that we will continue to see into the coming years. We are not projecting a noticeably higher number on that, but it’s – what I am partly saying is it’s not a big number on the price front that we’re anticipating once we strip out the FX impact.
Joseph Alfred Ritchie
Okay, fair enough. And maybe one follow-up for Inge, now we have talked a lot about M&A today, clearly, you made decisions at the start of this planning process to potentially to divest some businesses and then to keep health information systems. Are we through the divestitures in the portfolio at this point or are there still potential opportunities across the portfolio?
Yes, we are never done with the portfolio work, right. We will continue to do that. But as you recall, when we started we had $2.5 billion under strategic review. That is today down maybe to $100 million or $200 million. But it’s not the division it’s product lines in different divisions. They are working that through. So, there is nothing today that is burning, I would say, from underperforming businesses. On the other hand, I think as we did with health information system and I believe it’s my role to ask the question. Certainly, if there is something that could create more value for shareholders if it belonged somewhere else, right? So, I would say there is nothing that is in front of me on my table as we speak, but portfolio management will be an ongoing process. And I think we have done a pretty good job up to this point in time in order to evaluate different options, etcetera. Health information system, as we announced when we went out was it could be sold, could be spun or we could keep it in. And in that evaluation we found that we are the best owner and we will not only keep it, we will now accelerate investment into that business, but I feel good that we ourself made that evaluation and came to the conclusion.
Thank you. It’s Deane Dray. Since innovation and R&D is such a key topic for last night and today, I just want to come back to that topic, Inge, where you mentioned about measuring the output of R&D. And it’s great we have Ashish back on the panel here. So maybe I would have asked this last night, but two thoughts here in terms of the productivity of R&D. One is that 3M has had this fabulous program where you have unbudgeted time for your senior engineers, I think it’s 15%. And how do you – is that still in existence and what has the success been there, because that’s not necessarily – you are basically writing a blank check to the engineers and just how has that all turned out? And Inge, you said six programs were stopped and that’s part of an R&D program. You have to embrace failure and you have to take some swings and you are going to miss sometimes, but Ashish, how do you embrace failure within the R&D program?
So first of all, we don’t consider it a failure. I mean, we don’t even think it’s a failure. It’s part of the process. And especially with these disruptive platforms, they were high risk platforms and they are Heimbach programs and there is inherently higher risk in them. So, we fully anticipated that some of them will not make through the line. And if we didn’t have them, then we would have not pushed the limits, right? We – that’s what we are trying to do. So, with respect to your original question on 15% time, I think we still have that program. It’s a 15% culture, where people – we still encourage it from the management, we support that with – that people are going to use company resources to follow their ideal passion. We want a lot of ideas to come through from the bottom up. The question then is, how fast can we manage them and prioritize them and get to either eliminate them, eliminate means stop the programs or resource down fast if they are high impact based on our customer insights and the market models – market insights that we have gathered. So, I think combining we are getting better in this push-pull model if you want to call that. We want more ideas to come, but we also want to filter off quickly what’s the market and the customers are telling us and then resourcing them fast as needed, so...
I think if you think about that 15% rule in an environment like this, it is very important in order for you to attract the best, because if you don’t have that, it will become very mechanical. So, you are going into an innovation model that is very mechanical and the big brains with the big ideas, you will not stay in that environment. So, I think it’s a very important element of what you do, right, in order for you to evaluate that as you move forward. And there was a time where I think 3M put too much processes on research and development. So, the creativity is basically going away. And you wouldn’t like, in that organization, to get the creativity to go out the door. You wouldn’t like that to happen. Now, you need a very strong process in everything else you do, right? So, it’s very important to understand. We have very strong processes with customer-inspired innovation and i2i. So, we have very strong processes with ideas coming in and we know what we are doing, but I think it’s important to have this element of some type of art around all the science we are doing, right. So, you get the brains going the whole time. So, it’s an important management element, I think.
Thanks. Julian Mitchell. Just a question on Electronics and Energy, about 35%, 40% of that business is electrical and energy. That’s had no growth, I think to 4 years now. So, I just wondered what you thought 3M’s competitive advantage in the electrical and energy pieces specifically are. And if you were to think at some point that it maybe worth an exit from those businesses, how easy that is to do given the commonality of manufacturing within the 3M?
Yes. Yes – no, I have not been thinking of an exit of those businesses at all. So, on that question, no, I have not been thinking of it and it is a very important business for us. If you take the electrical part, that’s almost a core business of 3M. It’s one of the divisions we have there is actually Heartland division for us. So, it’s very, very important for us to stay in that business and to be able to innovate ourselves to the next step in that whole industry, which we should be able to do. The electronic part is a part as we know that has volatility in it as the market is going up and down, but that’s reality of that business and we play there. And the reason why we play there is we have a lot of technologies that are playing right into them. And as soon as you are specked in, it’s all about efficiency and cost out and we know how to do that as well. So, both of those businesses are very, very important.
And I think it’s – I think we are at the point now in that business where we have worked hard on the portfolio. We have improved the margins. For those of you that follow us from the beginning of that journey, we started at 15.7% and taking it to 21% and consolidated from 9 division to 5. Now, we have to see how can we build that for the future? And again, there is no difference in between that business group and any other business group to say it needs to be organically and/or complemented with an acquisition if that’s something that will work well for us. But if you think about the energy and utility business as such, it’s a core element of what we know how to do in that business.
Inge, in the past, you have talked about Safety and Graphics as maybe the next business to breakout. And I know it’s had some issues obviously with oil and gas, how do you look at that business now? And is it the next business to breakout or is healthcare now sort of I mean, I know healthcare has been doing well, but in your mind, what business is sort of in front in terms of an inflection point at this point?
Yes, I will say when I talked about Safety and Graphics as the next business to breakout, it was in content when I talked about Electronic and Energy when they did all the work on their portfolio and the margin start to expand and move forward. That was the same with Safety and Graphics. And I have still the same position in Safety and Graphics. A lot of work has been done in terms of consolidated internally with the divisions. Some businesses were exited and a couple were purchased into it and they are doing very, very well. So, it’s correct they are moving forward as expected and doing very, very well. Healthcare is constantly growing very well, very high margin, etcetera and we have a very robust model there as we move ahead. And we knew what happened to Electronic and Energy, so we talked about that. And Consumer, I will say consumer is a business that we often forget in those discussions. Everything that have been done in other business groups – actually, Mike Vale was head of that. Mike Vale came back from Brazil and was given that business in, I think August or September 2011. I told Mike then that this is what needs to be done, but it was not in the framework we are talking, no, right, because I have not announced the framework. But actually, consumer was the first one in terms of consolidated divisions and drive efficiency in the model. So, I think all of them have done a very, very good job and I think there is more to expect from Safety and Graphics and hopefully also industrial. Mike Roman is here from Industrial as well, yes.
Nick, just a quick follow-up, your raw material guidance for this year and currency guidance are relatively conservative. I know it’s early in the year you don’t want to give guidance upon it – in guidance. But at the same time, where we are would suggest that there is a decent amount of tailwind from both. Is that the correct characterization or...
Yes. Andy, for – on both of those, in typical fashion, we put out ranges. Right now, on the commodities side, our view of it is we are right at the high-end and possibly $0.01 or $0.02 better than what we stated in December when we laid out the commodity benefits and the ranges. On the FX, that’s a little less clear to me to say that we are at that point. Right now, I would say we are still in that range, but in the bottom half of that range if the dollar stayed where it is right now.
Thanks. So Inge, going back to your comment on the portfolio, you mentioned that the consumer healthcare naturally grows organically, but most of your acquisitions have been within Industrial and Safety and Graphics. So, I am wondering if you have got ambition through the plan to be a bit more aggressive on inorganic growth within consumer and healthcare?
In consumer and healthcare, yes, so we have done acquisitions, in fact, both in consumer and healthcare over the last couple of years, but very small. And we have not found any, up to this point in time, in consumer outside of United States where we could lever it into our model and be successful. And you look upon consumer on a geographical base we are very, very, very strong in the United States. We have a good position in Latin America. We are very weak in West Europe and that’s all due to historical activities back when we started our subsidiaries there. And I will say that is probably not worth to really make a big swing for us in West Europe. And Asia is type of spotty, doing well in multiple places. So I think acquisitions will and can happen for Consumer, but they will also be very, very regional, I assume, in order for us to be successful. And because often, in that space – and we need to have a good position in the country we go in. And as you know, in the consumer, retail brand is the important thing. So brand need to be very, very well established in the local market in order to win. So, then we would do it. Healthcare, we have done multiple. And I think Joaquin showed what we have done over time in order to build out the portfolio there. We will build out in all places we can if we get an attractive strategic option for us where the multiple is as attractive. And the multiples are high today and we are doing very well in our research and development area and able to expand very, very much. So, I think it will happen. No one is excluded. No one is excluded and it can happen. I don’t say it will, it can happen based on the target and the multiple, etcetera.
Okay. And then a quick follow-up for Mike, it sounds like from your comments that you view e-commerce as a net benefit for 3M. How do the economics of online sales compare to traditional channels? Is there any difference in gross margins or operating margins between the two?
I would say that on the whole the gross margins that we see are within the range of our – the rest of our channel format. The cost to serve is different because of the platform and the model, but what we have to do to activate and drive traffic and conversion is also different on an online platform versus in-store. So, the two generally tend to balance out, and there is not an extreme difference between what we see between online platform and in-store.
Cliff Ransom. I was beginning to feel a little like Arnold Horshack sticking my hand up, going, ooh, ooh. I would like to address this question to any of the platform heads. I understand that cost-cutting is sometimes very useful to the customer, but the metrics that are most important that you can drive with employees are even more fundamental than that, safety, quality, delivery those are often the ones that are also the most important to the customer. How do you feel about how you measure your own progress in your divisions? Are the metrics the right ones?
Yes. I see that from the perspective – look, we first started with customer. And the customer, it translates to service, quality, then we continue with our employees and we are looking at their health and safety, follow our operations and nobody gets hurt. We look at the communities. And then we look at our cost basis. This is really the hierarchy of first customer, then our employees, then our costs on how we are going to address those ones.
I think it’s a good question. But I think it’s important to make the distinction of – if you say cost out is important for the customers, of course, but you need to make sure that you provide products and service to them, otherwise you will not retain them. So, that’s the basis. I think that what we don’t compromise is the investment in terms of new product growth. What we constantly challenge is our own structure. We are asking ourself the whole time, can we afford it, meaning can we afford it, should we have it in place, can we streamline the organization, can we have fewer layers in the organization, do we need the same grades of people everywhere? I think that’s why you constantly have to ask yourself, can we afford it, meaning at the end of the day, will the customer pay for that? Customer will pay for good quality and superior service, they will pay for that, but you are coming to a point that they are not willing to pay for big internal organization. And that’s one of the reasons why we went on this consolidation and we went from six to five business groups and from over 40 to 20 plus divisions is to reduce what could be viewed over time as unnecessary structure. And as I said, that’s about $300 million out. And we are on that constantly. And I feel good about that, because everyone in the organization today are type of challenged, every opening we have, do we really need it, what is it adding for value, etcetera. So, I think that’s the important part. But if you start to cut in an – in any company, if you start to cut on cost that has an direct impact to the customers, that’s the beginning to that. That’s the beginning and that’s what 3M is all about.
I have got one quick follow-up, if I may, the same kind of question. Let’s just date the Lean Six Sigma push to 4 years at 3M for the sake of this question. There is a tendency to think about Lean thinking on the factory floor. Tell me how you feel about the opportunities for Lean thinking off the factory floor, in corporate land, in transactional processes, etcetera, relative to what you have gained in manufacturing?
For you, Paul.
So Cliff, today, you heard us talk about three components of business transformation that will add value. We talked about our manufacturing centers of expertise. We talked about our business services, front-end operations and we talked about our global service centers. All three of those have transactional processes in them that lend themselves perfectly to a Lean mindset of elimination of waste and continuous improvement. I would say, in the COEs, is our deepest penetration of Lean. More than 95% of our plans have a Lean system deployed to them. I would say we have great opportunity in the other two and we are very focused on leveraging what we have learned in our plants and distribution centers to those other operations.
One final question. Martin?
Okay. Martin Sankey, Neuberger Berman. Looking at – I recognize that in a long-term goal setting is sometimes an exercise in balancing objectives and targets, but according to me that given the company’s ability to generate cash flow, willingness to increase leverage to repurchase shares that maybe have you – what – in terms of putting together this long-term plan, have you given the thought to maybe accelerating organic investment to reduce – given the higher – it’s high IRR and accelerate maybe investing more on organic growth and manufacturing productivity, which might offer improved IRR and organic growth, but perhaps, resulted in 95% to 100% free cash flow to net income conversion. How do you thought through that in formulating this long-term plan?
Martin, we continue to look for opportunities to improve our operations, and CapEx is one of those places. If we end up with opportunities to put us at the high end of that 5% or even past the 5%, we are certainly looking for those opportunities. The 4.5% to 5% I would characterize as our best view of the opportunities that we have in front of us right now in a line of sight to be investing in. But I wouldn’t say we will get bound by that and be looking away from opportunities that create value above and beyond that. We just haven’t historically seen that and we haven’t – us going beyond that and we are not anticipating that we would go beyond it. And we feel Martin we have built into that quite a bit of incremental investment for those opportunities you are mentioning.
I think also if you think about the planning process in the way that when we laid out our 5-year plan 3 years ago – that was a 5-year plan. As we moved in now 3 years, the forest, meaning the market changed a little bit, right, growth tempered down, etcetera. We need to hang in to that 5-year plan for 2 more years, because we were afraid of we wouldn’t take action that we needed in order to execute on that. So, we then developed a new 5-year plan and introduced it 3 years into the first plan. So, think about it the whole time like you have the forest and the map. And if the map is your plan doesn’t really work any longer with the forest, you have to change the plan. And I think that’s what we are doing. So rest assured, as we are going and if something happened in the marketplace where we take different action, we will not just look at our plan in the map and say, we need to follow this. We will just look upon and then adjust as we go into the best interest for us and then for our shareholders.
So you would trade on free cash flow conversion in order to accelerate growth if you saw the opportunity?
If it were the right opportunity that’s creating value, then all four of those are metrics that we have to balance and probably not be slavish to just one of them, but all of them trying to do what maximizes the contribution of all four metrics.
Alright. I am going to turn it over to Inge for a few brief comments. And then I will remind you, we have lunch again downstairs for those of you that are staying, along with the Open House and the World of Innovation and thank you for your time and turn it over to Inge.
Okay. Thank you, Bruce. And the only thing I would like to say here is first of all, on behalf of the 3M team, thank all of you for coming in. We really appreciate that and it was a pleasure for us to be able to share with you yesterday the new investment we have done in the company and give you a little bit additional information on how we operate and how the playbook is working, etcetera. You have hopefully seen that in terms of the planning. It’s robust, it’s there and it’s in a way straightforward and simple and in some cases, very mechanical, but that’s what you need to have in place in order to operate almost $100 billion market cap company for success. And as I said earlier, me, personally, feel very good about what we have in place. I feel very, very good about our management team, the process we have in place and a good understanding, where we go as we move ahead. So by that, I, on behalf of the team here, 3M team in the back and all of us up here, thank you very much, and hope to see you soon in many of those one-to-one meetings. So, thank you very much for coming.
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