Ladies and gentlemen, thank you for standing by. Welcome to the 3 ms Second Quarter Earnings Conference Call. During the presentation, all participants will be
in a listen only mode.
Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded, Thursday, July 25, 2019. I would now like to turn the call over to Bruce Jermeland, Vice President of Investor Relations at 3 ms.
Thank you, and good morning, everyone. Welcome to our Q2 2019 business review. With me today are Mike Roman, 3 ms's Chairman and Chief Executive Officer and Nick Gangshead, our Chief Financial Officer. Mike and Nick will make some formal comments, and then we'll take your questions. Today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3m.com under the heading Quarterly Earnings.
Please note, we are reporting our results under our new business group structure starting with the Q2. Additional business group performance details can be found in the appendix of this presentation along with our May 30 8 ks and our Investor Relations website. Lastly, let me remind you to mark your calendars for our Q3 earnings call, which will take place on Thursday, October 24. Please take a moment to read the forward looking statement on Slide 2. During today's conference call, we will make certain predictive statements that reflect our current views about Tran's future performance and financial results.
These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10 ks lists some of the most important risk factors that could cause actual results to differ from our predictions. Finally, please note that throughout today's presentation, we'll be making references to certain non GAAP financial measures. In particular, measures which exclude the impact of the deconsolidation of our Venezuelan subsidiary. Reconciliations of the non GAAP measures can be found in the appendix of today's presentation and press release.
Please turn to Slide 3, and I'll hand it off to Mike. Mike?
Thank you, Bruce. Good morning, everyone, and thank you for joining us. I'm encouraged by our company's progress and performance in the Q2 coming off a difficult start to the year. While we continue to face slow growth conditions in key end markets, our execution was strong. We implemented our restructuring while effectively managing costs and reducing inventory levels, which I will discuss on the next slide.
Our team is building momentum going into the second half as we focus on what we control and as a result, today we are affirming our guidance for the full year. At the same time, we remain focused on our 4 priorities for long term value creation: portfolio, transformation, innovation and people and culture. In the Q2, this included our acquisition of Acelity, an excellent complement to our health care portfolio and which we expect to close in the Q4. Please turn to Slide 4. As you recall, on our last earnings call, we laid out specific and aggressive actions to strengthen our performance.
In the second quarter, we made significant progress with each of those actions. First, the restructuring has been finalized across the enterprise, which resulted in a pretax charge of $148,000,000 We continue to expect annual savings of $225,000,000 to $250,000,000 with $110,000,000 in the remainder of this year. Beyond the restructuring, we are driving increased cash flow through several other actions. For example, we adjusted our manufacturing output and reduced inventory levels by over $250,000,000 in the quarter. We also curtailed indirect costs by more than $80,000,000 year over year.
While we
are making positive strides in our operations, there is still more to do, and we will remain focused on managing costs and improving productivity. As we do this, we will continue to invest in organic growth through research and development and CapEx to deliver on our promise to innovate for our customers. Please turn to Slide 5 for a summary of our Q2. Organic growth company wide was minus 1%, in line with our expectations. Growth was led by our Healthcare business at 4%, which was a good improvement versus Q1 and Consumer grew 1%.
We saw continued end market softness in China, Automotive and Electronics, which tempered growth in our other two businesses. Growth in Safety and Industrial declined by 5%, while Transportation and Electronics was down 1%. With respect to EPS, we posted adjusted earnings of $2.20 per share, which includes a $0.21 charge for restructuring and a $0.07 benefit from a pending divestiture, which Nick will cover in his remarks. Underlying margins were 22.2%, which excludes 140 basis points of impact from the restructuring. So we are making good progress relative to our Q1 margins up 21.4%.
Importantly, we delivered this improved margin performance even while reducing production and inventory, which reflects the strength of the 3 ms value model. I want to take this opportunity to thank our people for rising to the occasion and for executing our plans with focus and urgency. And while there is more work left to do, 3 ms's foundation remains strong. We have deep competitive advantages, incredible technology platforms, advanced manufacturing, global capabilities and leading brands. We have market leading businesses and strong relationships with our customers.
Moving ahead, we are focused on investing for the future and continuing to deliver operational improvements, which will enable us to better serve our customers and maximize value for all of our stakeholders. That wraps up my opening comments. I will come back to discuss our guidance after Nick takes you through the details of the quarter. Nick?
Thank you, Mike, and good morning, everyone. Please turn to Slide 6. 2nd quarter organic sales declined 0.9%, in line with our expectations. Volumes were down 140 basis points, while selling prices were up 50 basis points. The net impact of acquisitions and divestitures increased sales by 10 basis points, while foreign currency translation was a 180 basis point headwind to sales.
All in, 2nd quarter sales in U. S. Dollars declined 2.6% versus last year. Looking at growth geographically, the U. S.
Was flat organically versus last year's 6% comparison. Last year's Q2 was boosted by increased customer demand ahead of our U. S. ERP go live. Healthcare grew mid single digits with consumer up low single digits.
Transportation and Electronics was flat, while Safety and Industrial declined. Asia Pacific declined 90 basis points in Q2, with Healthcare delivering positive mid single digit organic growth, while each of our other business groups declined. Organic growth in China was down 80 basis points with growth in Healthcare and Transportation and Electronics, which was more than offset by declines in Safety and Industrial and Consumer. For the year, we now expect organic growth in China to be down lowtomidsingledigits versus a prior expectation of flat. As we continue to experience challenging end market conditions, particularly in the electronics and automotive industries.
EMEA declined 3.6% on a nearly 6% comparison in last year's Q2. Latin America and Canada grew 70 basis points with Brazil, Canada and Mexico each up low single digits. Please turn to Slide 7 for the Q2 P and L highlights. Companywide, 2nd quarter sales were $8,200,000,000 with operating income of $1,700,000,000 Operating margins were 20.8 percent, which included a 140 basis point impact from our 2nd quarter restructuring and other actions. As anticipated, the biggest impact to Q2 operating margins was the year on year decline in organic volume, along with cost absorption penalties from lower production volumes as all business groups work to reduce inventories in the quarter.
These factors resulted in a 200 basis point reduction to margins versus last year's Q2. Acquisitions and divestitures combined brought down margins by 50 basis points, primarily due to the acquisition of M*Modal. Higher selling prices continued to more than offset raw material inflation, contributing 30 basis points to 2nd quarter margins. For the year, we continue to expect selling prices to more than offset raw material costs. And finally, foreign currency, net of hedging impacts, increased margins by 40 basis points.
Let's now turn to Slide 8 for a closer look at earnings per share. 2nd quarter adjusted earnings were $2.20 per share. That was a bit better than we anticipated, primarily due to improved productivity along with the held for sale status related to a pending divestiture, which I will cover shortly. Let me now cover the reconciling items to 2nd quarter earnings. Negative organic growth, along with absorption penalties from lower production and inventory levels, reduced per share earnings by $0.19 in the quarter.
Acquisitions and divestitures combined increased 2nd quarter earnings by $0.01 per share versus last year. This result includes a $0.07 tax benefit related to the held for sale status of the pending divestiture of the gas detection business that we announced in June. Restructuring and other actions lowered Q2 earnings per share by $0.21 Our 2nd quarter underlying tax rate was higher year on year, which decreased earnings by $0.07 per share. And finally, we reduced average diluted shares outstanding by 3% versus Q2 last year, which added $0.07 to per share earnings. Please turn to Slide 9 for a look at our cash flow performance.
2nd quarter free cash flow was $1,200,000,000 with a free cash flow conversion rate of 110%, which includes a 14 percentage point benefit from the deconsolidation of our Venezuelan subsidiary. 2nd quarter capital expenditures were $421,000,000 up $56,000,000 year on year. For the full year, we continue to anticipate CapEx investments in the range of $1,600,000,000 to $1,700,000,000 During the quarter, we paid $830,000,000 in cash dividends to shareholders and returned $400,000,000 to shareholders through gross share repurchases. We continue to expect full year repurchases to be in the range of $1,000,000,000 to $1,500,000,000 Please turn to Slide 10, where I will summarize the business group performance for Q2. I will start with our Safety and Industrial business, which declined 5% in the quarter.
Similar to Q1, we saw continued broad based softness and channel inventory reductions across most of the portfolio. These factors particularly impacted our automotive aftermarket, abrasives and closure and masking systems businesses. Personal Safety was up low single digits in Q2 against a double digit comparison a year ago. And roofing granules turned positive this quarter, growing low single digits organically. Looking geographically, Safety and Industrial's organic growth was led by a 1% increase in Latin America Canada, while Asia Pacific, EMEA and the U.
S. Each declined. Safety and Industrial 2nd quarter operating margins were 22.1% with an underlying decline of approximately 200 basis points. Margins were impacted by negative organic growth, reductions in manufacturing output and inventory along with our 2nd quarter restructuring actions. Moving to Transportation and Electronics.
2nd quarter sales were down 120 basis points organically compared to last year. The electronics related businesses were down low single digits organically, with growth in Display Material Systems more than offset by declines in Electronics Material Solutions. Our automotive OEM business was down 5% year on year, impacted by a 7% decline in 2nd quarter global car and light truck builds. Commercial Solutions declined mid single digits against last year's strong comp. Transportation Safety was up mid single digits and Advanced Materials continued to deliver strong organic growth, up high single digits in the quarter.
Geographically, organic growth was flat in both the U. S. And Latin America Canada, while Asia Pacific and EMEA declined. Transportation and Electronics 2nd quarter operating margins were 24.1%, down 2 40 basis points. Similar to Safety and Industrial, margins were impacted by manufacturing and inventory reductions, along with a 30 basis point impact from restructuring.
Turning to Healthcare. As anticipated, this business improved versus Q1 as our team delivered 3.5 percent organic growth in Q2. Organic growth was broad across most of our Healthcare business, led by a high single digit increase in Health Information Systems. Medical Solutions, our largest business in health care, was up mid single digits, and we continue to look forward to Acelity becoming part of this business later this year. Food Safety grew organically mid single digits with oral care up low single digits.
Finally, drug delivery was down mid single digits, in line with our expectations. On a geographic basis, Asia Pacific and the U. S. Led the way, each up mid single digits. Healthcare's 2nd quarter operating margins were 20 6.4%, which included a combined 2 10 basis point impact from the M*Modal acquisition and restructuring.
Lastly, 2nd quarter organic growth for our consumer business was nearly 1%. Sales grew low single digits in consumer healthcare, stationery and office and home improvement, while home care declined. Looking at Consumer geographically, organic growth was led by a 2% increase in the U. S. And Latin America Canada, while Asia Pacific and EMEA declined.
Consumers operating margins were 20.6% in the 2nd quarter, which included a 40 basis point impact from restructuring. That wraps up our review of 2nd quarter results. Please turn to Slide 11, and I'll hand it back over to Mike to discuss 2019 guidance. Mike?
Thank you, Nick. Today, we are affirming our guidance for the full year. We expect organic growth of minus 1% to plus 2%, along with adjusted earnings of $9.25 to $9.75 per share. Please note that this guidance does not include the pending Acelity acquisition or the pending divestiture of our gas and flame detection business. We also continue to expect a return on invested capital of 20% to 22% and a free cash flow conversion rate of 95% to 105%.
Though there is uncertainty in the global macroeconomic environment, we are maintaining our guidance as we will see continued momentum from the actions we implemented in the first half. Before turning to Q and A, I would like to address a topic that is top of mind, which is PFAS, specifically PFOA and PFOS, which are the subject of the litigation we face. As CEO, there are a few things that I want people to know about this issue and our company. 1st, 3 ms voluntarily phased out of the production of PFOA and PFOS in the early 2000s and was the 1st company to do so. Since then, we have been committed to using our expertise and resources to improve the knowledge of PFAS, support remediation and give people confidence in their water.
3 ms has invested $100,000,000 in testing water sources. We have invested another $50,000,000 for filtration systems as these substances can be effectively removed, which 3 ms has been doing for more than a decade. We have entered into voluntary agreements with states and communities where we manufactured these compounds. We have also contributed to peer reviewed journals backed by hundreds of studies conducted by 3 ms and other researchers on the potential effects of PFAS.
At the
same time, we are continuing to work with the EPA along with state and local governments to support thoughtful regulations and solutions based on science and facts. We also believe that an independent scientific body should partner with regulators to review all available studies to enhance the quality of decisions. And while the understanding of PFAS continues to evolve, the scientific evidence does not show that PFAS caused harm to people at past or current exposure levels. More broadly speaking, being an environmentally responsible company is core to 3 ms. We started our groundbreaking pollution prevention pays program more than 40 years ago, and we continue to step up our leadership to address climate and environmental challenges.
Earlier this year, we committed to move our entire global operations to renewable energy. And last year alone, 3 ms Solutions helped our customers avoid 15,000,000 tons of emissions. Sustainability is a value that matters deeply to our people, to our customers and to me personally. It is a point of pride for 3 ms, and we will defend with vigor our company's reputation in the court of law and in the court of public opinion. That concludes our prepared remarks, and we'll now take your questions.
And our first question comes from the line of Andrew Kaplowitz of Citi. Please proceed with your question.
Hey, good morning, guys.
Good morning. Good morning.
Mike or Nick, can you talk about the cadence of the quarter as it went on? Some industrial companies have talked about a bit of a stabilization rate in Q2. Did you see that at all in Safety and Industrial or Transportation Electronics? And last quarter you said destocking from your customers cost you something like 100 basis points of revenue growth. Was it similar impact in Q2 as it does look like your auto OEM business performed a bit better than the underlying market?
So have you seen any signs of industrial or auto destocking is closer to ending?
Yes, Andy. Throughout the quarter, the trends were pretty stable as we saw our sales progress through each of the 3 months. I can't say we really discerned any positive or negative trend as the quarter progressed. If I shift it internally, we did see our momentum in terms of reducing production and pulling inventory build as the year went on. In regards to channel inventory, I said about last quarter about 100 basis points of what we impacted channel destocking.
We were again seeing channel destocking impacting us in the Q2, in particular in the SIBG Business, Safety and Industrial Business Group. We think that was a very similar destocking impact to what we saw in the Q1. And as far as automotive, we were most noticeably impacted by destocking in China, and that just was not the same event in the second quarter. It was a pretty much more normal relation of auto builds to our penetration and less channel destocking going on in relation to auto.
Okay. That's helpful. And then you mentioned in the presentation that you'll see $110,000,000 in the second half of the year or $0.15 You still have to have a decent step up in EPS in the second half, even outside the benefit to make the midpoint of your guide. So how much of the step up is in your control? Can you give us some more color on how much of your business transformation and factory optimization initiatives can help you in the second half?
I think these programs in terms of savings are continuing to ramp in the second half and in 2020.
Yes, Andy, a few things are going on. First of all, we have continue into the second half of the year. So that will continue to be a headwind that we're facing in the second half of the year. We will be getting the restructuring benefits of $0.15 that we talked about as well as I'll just say overall disciplined cost management in light of a of what we would call a slowing economy right now. So some of that our own discipline and execution will be impacting us in the second half.
On the margin, there are some other things that will impact us. FX, which has been a neutral to a headwind in the first half of the year. That will be likely if FX rates stay where they are, that they will be coming positive to us in the second half of the year. But mainly, it's just going to be improved execution over what we saw in particularly in the Q1.
Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.
Thanks. Good morning, everyone.
Hey, Joe. Morning, Joe.
Hey, Nick, maybe just kind of staying on the how to think about the margins for the rest of the year. Obviously, like a big headwind this quarter was the manufacturing and inventory reductions. And you guys have given some estimates for what you expect productivity to be like this year. And clearly, you're also moving ahead with indirect
cost reduction. So I don't know, is the right way to think about it
as you progress through the year that So I don't know, is the right way to think about it as you progress through the year that these things are going to offset each other? Or should we be thinking about them as a tailwind? I'm just trying to trying to understand how to think this through.
Joe, if I think about where we're going to end for the full year, let me just start out by saying, when I look at collectively where all the sell side analysts are in their view of the total year, my view is it looks like you collectively have it dialed in about right. What I'm seeing collectively amongst all of you means it lines up very closely with our own internal view of how things will progress for the full year. If I look at, in particular, in Q3, Joe, right now, we're expecting organic growth in the second quarter to be somewhere between flat to low single digit organic growth. And as far as margins, what we've been seeing happen throughout the year and what we expect to continue to happen as we progress into Q3, Q1 to Q2, absent the restructuring actions, was a sequential improvement in margins as we focus on execution. We think that sequential improvement going into Q3 is going to continue.
So we expect our margins to be 23% or higher in the 3rd quarter. And so what we're seeing there is some momentum building on our margin story. And so I'd say, Joe, those are the headlines to think about and how you're thinking about the second half of the year.
Got it. That's super helpful, Nick. And I guess, maybe, Mike, very helpful commentary earlier on PFAS. I guess, just as obviously, it's hard to assess how this all shakes out. But I'd be curious to get your views on like timing on when we could think about when we'll start to get some sort of resolution as it continues obviously to be a bit of an overhang on the shares?
Yes. Joe, when you think about timing, respect to timing, let me kind of talk about what we can say today. And it's not a lot, but it will give you a couple of things to look at. The first trial, if there is a trial related to the Wolverine cases in Michigan, that's the that would be at the end of Q1. These are kind of fuzzy time lines.
They're not fixed, but that's kind of the expectation when the first trial is related to that, if there is a trial would come to us. AFFF, the MDL, the multi district litigation, we wouldn't expect any actions on that until late 2020. So that those are kind of a frame of the litigation and timing. And as we learn more, as I said in my comments, we're gaining an understanding all the time. As we learn more, we'll update you as we go.
Okay. Thank you.
Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.
Good morning. Can you hear me?
Hey, Andrew. Yes. Good morning, Andrew.
Just a couple of follow-up questions. Could you just walk us through core gross margins ex restructuring sequentially versus the Q1? And how should we think about progression on that side of the equation through the year? Thank you.
That's the
first question.
Okay, Andrew. A little bit of this will be a repeat from what I said to Joe, but our core underlying margins
No, the gross margin, yes.
Gross margins. Thank you for clarifying that, Andrew. So our gross margins in the Q1, if we pull out the costs related to some litigation activity that we had in the first quarter, our core underlying gross margin was 48%. In the second quarter, that went down, if I pull out the restructuring down to 47.5%, and that's being impacted, we think, we estimate by 100 to 150 basis points in the second quarter by the aggressive actions we're taking in pulling out inventory in our production. So underlying operations, we're seeing good execution on what we're working there.
And we expect those gross margins to continue to be impacted by us taking actions on our inventory. But we also do see our gross margins improving slightly into the 3rd quarter.
So if we pull that out and just to clarify, if we pull that out, you're sort of recovering slowly from that 48% into sort of more historical range of 49%, 50%. That's a fair statement if you take out inventory.
That's Andrew, that's a fair statement.
And then on inventory, I assume that improved free cash flow forecast for the year, I think, in Slide 23, if I'm Slide 24, that's all working capital, right?
Yes. Our projection we're keeping our projection of free cash flow conversion. Well, I think you're actually going into a deeper slide. Improved working capital is the biggest thing impacting our free cash flow conversion and dollars for 2019.
And if you were to quantify how much incremental working capital reduction opportunity do we have for the next 12 to 18 months?
We I'll isolate it just to inventory right now, Andrew, in answering that question. 250 that we took out in the second quarter, we think there's another 100 or 2 that we can be taking out of the second half of twenty nineteen. And then as far as 2020, it's a little early to say, but we've been targeting to get down to 85 days of inventory outstanding. That's where we're targeting to get to the end of this year. If we're going to bring that down further in 2020, we'll likely be giving that guidance later in this year or early next year.
Thank you very much.
Really appreciate all the detail. Yes. Thanks, Andrew.
Our next question comes from the line of Julian Mitchell of Barclays. Please proceed with your question.
Hi, good morning. Thank you.
Hi, Julian. Hi, Julian. Hi, Julian.
Hi, Julian. Hi, Julian.
Hi, Julian. Hi, Julian. Hi, Julian. Hi, Julian. Hi, Julian.
Maybe just focusing on Q3. So I think you talked about flat to slight organic sales growth firm wide. Maybe just help with a couple of aspects of that. One would be, does that assume further channel destocking? And how severe would that be in Q3?
Not your own underproduction efforts, but channel destock. And then what are you assuming for the transport and electronics business within that after what was a pretty good Q2?
Yes. Julien, it's probably good to step back and recognize we've been seeing the global economies slowing as we came through Q2, but this is a trend that we've been seeing since late last year. And I would say, if you look at now 3rd quarter as we move sequentially forward to deliver on what Nick was just talking about, it really is a stabilization of the markets that we're facing and the trends that we're seeing. And to go below that, it would have to the economies would have to degrade even further. And if you look at channel, Nick talked about what we saw in the Q2 relative to the Q1.
We think when you look at the total year as it plays out, a majority of the inventory adjustments in the channel are taking place in the first half. So it will be a lesser impact even though there will be some impact in the second half. So that plus a easier comp as you get into Q3, if you look at the go live that we had with our ERP deployment last year, that would all add up to that trend.
Thank you very much. And then
just on your question about TPG, we would see them down in the second half from where they are in sequentially from where they are in Q2, but in line with the market outlook that we've been talking about. We don't I think early in the year, people have been talking about been hoping for a stronger recovery in automotive and electronics, but we see a more conservative view of that now with build rates down and continuing to be soft as we go in the second half, maybe stabilizing a bit versus where they are in the second quarter, but still down. So we see sequentially down in TCV G.
Julian,
just to add a little bit to what Mike said there. For transportation and electronics in the 3rd quarter particularly, we expect that to be down low to mid single digits in the 3rd quarter. We and that's in line with what we're expecting as far as guidance for the full year for Transportation Electronics. We've guided that we think for the full year that's somewhere between flat to down 3%. And if you had any if I had to estimate right now, I'd say we're much we're leaning more towards the low end of that range for Transportation Electronics for the full year.
That's extremely helpful. Just following
up on that, Nick.
As you said, that's trending towards the lower end. Also, I think from a regional standpoint, you took down your China assumption for the year. So maybe help us understand in the context of the overall reaffirmed organic sales growth guide for 3 ms for 2019, which are the regions or segments that are coming in maybe at the higher end or looking a little bit brighter today than back in April?
Yes. So Healthcare, as far as the guidance that we've given for the full year on that, that's one we see more likely in the high end of the range and transportation electronics more likely towards the low end. Consumer, I put right in the middle of the range that we've laid out. And SIBG, we see it in the range, but that also could be in the bottom half of the range. As we guided negative 1% to plus 2% for the full year last quarter and as we're affirming it, There is also a sense that we had of there may be some places where things come in a little weaker, and we're seeing that happen, and that gives us the ability to continue to maintain that guidance going forward.
Perfect. Thank you. Our next question comes from the line of Nigel Coe of Wolfe Research. Please proceed with your question.
Thanks. Good morning.
Hey, Nigel. Hi.
I just want to kind of follow on
to that one really. Just trying to think about what that all means to that minus 1 to plus 2. So it seems like you're sort of biting towards slightly above the midpoint based on what you see today. Would that be fair, Nick? So looking at maybe flat to up slightly for the full year?
Yes, Nigel. I mean, the midpoint of that range is up 50 basis points, so flat to up 50 to 100 basis points. So like that's a, I think, a very fair zone for where our most likely landing spot is.
Okay. That's helpful. And I'm not sure I missed some of the prepared remarks. Did you quantify the impact of inventory headwinds this quarter? So that down might be bps, what was the sort of the sell through that you saw excluding inventory headwinds?
Nigel, there's 2 different inventory points we talked about on channel inventory contractions. That last quarter, in the Q1, we said it was about 100 basis point impact to revenue. We think 2nd quarter was something similar to that. And Mike also clarified that we think while we still have some ahead of us for channel contraction, we think the majority is behind us. In terms of within our company, as we have been reducing inventories ourselves, reducing our production, we've said that I've said that we think that impacted our margin in the second quarter by 100 to 150 basis points.
Okay. That's very clear. Thanks for the detail. And my follow on question is really on the location and indications of some of the one timers this quarter, there was a $0.07 tax gain. Does that land in the tax line or was that somewhere else, Nick?
And then secondly, the restructuring is 112% operating, 36% non operating. The payback was based on $0.20 of restructuring. Is that the right way to think about it? Or does the payback sort of come down because some of it's gone operating? And maybe just touch on the nature of that non operating restructuring charge.
Okay. Nigel, just parse out the 2 pieces you're asking about. The $0.07 benefit we incurred in relation to the held for sale status for our gas detection business, that ran through the tax line, the income tax line of our income statement. The $148,000,000 total restructuring, we had $112,000,000 of that impacting our operating expense and the balance $36,000,000 of non op. And that's exactly in line with what we were expecting.
We were estimating approximately $150,000,000
The fact that some
of the tuning non op versus operating doesn't impact at all the projected benefits we have going forward of approximately $110,000,000 yet this year and on an annualized basis, dollars 225,000,000 to 250,000,000 dollars As far as where that restructuring happened, I would say, geographically, it happened around fairly well dispersed around 3 ms. And as far as business, of the 112 that was in operating expenses of that and about 25% of that was in our businesses. Now the benefit, that $110,000,000 of benefit, that will be felt by our businesses through the second half of the year, and it will be fairly proportionate to the size of each of our businesses as far as the benefit they'll see in the second half.
Our next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Please proceed with your question.
Hi, good morning guys.
Good morning Josh. Nick, just a point of
clarification on the inventory destock that you saw externally by your customers. You said that 100 basis points in the Q1 kind of looks similar in the Q2. But auto, I think China auto specifically got better. So within that, something must have gotten worse. Where did we see that get worse?
As far as anything that got sequentially worse versus the Q1, Josh, Nothing comes out particularly strong. I think in aggregate in China, we continue to see China destocking on a more broad basis, but we didn't see it in our automotive business of any significance. What we saw across our Safety and business, that view, Josh, was very similar in terms of the total destocking impact that we were seeing of 100 basis points both quarters.
Got it. That's helpful. And then I know it's a little early to think about 2020, but I guess thinking back with historical context for how destocking and restocking cycles go, should we expect to just be selling to kind of market demand as we get to the end of this? Or presumably in China, there's kind of a bit of irrational exuberance on both sides of the equation that as soon as things turn, destock turns into restock. Is that historically been the case?
Or should we just think about 2020 starting point as, hey, maybe we lose some of that destocking headwind?
Yes. Josh, maybe a couple of things. If you look at the channel and I would say the value chains, customer value chains, they react to the dynamics in the end markets pretty quickly. What you saw in
the destocking in the
first half, they were reacting quickly to the build rates in automotive electronics. We expect that to stabilize in the second half. We'll see some additional destocking because of some of the slowing that we saw in Q2, but it will stabilize. So really to start to think about what happens in 2020 or even late in the year, it will depend on the end market dynamics. If they recover and their demand goes up, then you would see a pretty strong turnaround in restocking.
But if it stabilizes and the projections and outlooks economically are more stable in the second half, then it would be balanced as we get into the second half. And then it depends on what happens in demand as we go into 2020. Got it. That's helpful.
And then just a follow-up on business transformation and the savings associated with that.
Obviously, there's a lot
of moving pieces in the organization right now with restructuring and some of the demand dynamics and the internal destocking. How are you benchmarking on some of the business transformation savings and kind of non savings related kind of other benefits that would happen throughout the organization? Is that something where those kind of go by the wayside or harder to execute on? Just an update on how that's tracking.
Yes. Ed, we've always talked about transformation as a focus that starts and ends with the customer. But it is really making us more agile, more efficient and more competitive. And that creates value. All of those create value.
And it also helped us realign the company around the 4 businesses, the go to market models of customers that we have. So it's enabling us to connect our customers even better as we move ahead. And it's a lot more than an ERP deployment. It's the entire ecosystem around that and it's digitizing our enterprise. All of that's adding efficiency.
And so we are committed to the savings that we talked about at the beginning. It's a value realization that we would have by the end of 2020. But it does help us drive productivity. It does help us become more efficient broadly. And we talked about how that starts to show up in our margins over time.
It's an enabler for us to continue to create premium margins as we move ahead. So it is going to be a driver of the savings that we've talked about, but also of that efficiency that will carry us forward. All right. Thanks, guys. Thanks, Josh.
Our next question comes from the line of Steve Tusa of JPMorgan.
The $0.07 of the tax benefit, I mean, my tax line wasn't I don't know about everybody else's, but my tax line was relatively in line. Was there then a kind of
a higher than expected effective tax rate?
And does that sustain itself? And also, is that a $0.07 benefit kind of now in a run rate per kind of quarter here? Or is that was that kind of a onetime discrete item?
Steve, first of all, it's a onetime item. Let me just describe it in a little bit of detail. The gas detection business that we own is in a position where we plan to sell it and the tax basis that we are holding that asset at is greater than the planned selling price, but it's also the book value of what we hold with that asset is below the planned selling price. So when we sell it, we will take an operating income capital gain on that. But from a tax perspective, it will be a loss.
Now, I'm a bit over my skis here describing accounting nuances to you, but the accounting rules are once you place an asset in a held for sale status, if it's in a tax loss position, you take the tax benefit immediately even before the deal actually consummates. So that $0.07 is a result of us putting it in that status. So that's not an ongoing repeating thing that we'll be seeing. As far as the underlying operations, Melfi, there's not any big one thing offsetting that. There's always little nits back and forth in the tax rate.
And the underlying tax rate for the full year, we still think is going to be in the range of 20% to 22%.
Okay. And then the gain, when it comes to the divestiture, you said, is that still $0.20 and that's still to come and not in the guidance?
It's still not in the guidance. Yes, that's still not in the guidance.
Okay. And then one last one, just on the second half. Are you planning for kind of there's a lot of things moving around, but are you planning is this in your mind kind of normal seasonality for you
guys for the second half of the year? Normal seasonality, if I look at it on a sequential basis, probably more normal. But the only thing that's abnormal is last year was a bit abnormal for us with some of our pull ahead sales into Q2. So from a sequential basis, we're not seeing this year progressing on an abnormal path. I think it will be fairly normal.
Okay. And then just one last quick one. The $0.07 it's in the tax line, correct, in the models, the $0.07
That is correct, Steve. Okay, great. Thanks a lot, guys.
Our next question comes from the line of Deane Dray of RBC Capital Markets. Please proceed with your question.
Thank you. Good morning, everyone.
Hey, good morning,
Dean. Hey, the 3 problem areas that have been pressuring 3 ms for like more than the past year, auto, electronics in China. So the China you called out has continued to be soft, but notionally on a geographic basis this quarter, it did not stand out as a particular negative. So can you comment on that and what kind of color you see across your businesses in China in particular and related to kind of the tariff and trade frictions?
Yes. Deane, we do talk a lot about China auto electronics and kind of get them all together. But maybe just if you step back and look at China for 3 ms, we continue to see strength in our healthcare business, up high single digits. And so that was driving strong growth for us. We also saw strength in our medical solutions business in particular.
Transportation Electronics was up low single digits in the quarter. We saw a significant decline in automotive OEM, but that was countered offset by electronics up low single digits. We saw strong growth in our transportation safety business there and our advanced materials business. So there was some strength areas that helped China balance out. As I said earlier, sequentially, we see transportation electronics a little softer in the second half.
And so we're taking a conservative view around build rates and electronics outlook as we built our view of the second half, and that's part of impacting China. But second quarter, some strengths and a good performance against a strong comp year over year.
That's helpful. And then on Electronics, everyone wants to paint Electronics all with the same brush, both product lines and geographies. But you made the comment earlier that display film was actually up and relatively strong and it was Electronics Material Solutions that were softer. Maybe just share with us the nuances about why you would see those different dynamics within the supply chain, maybe there's some semiconductor exposure there as well, but color would be helpful there.
Yes. And I think that your last point is the place to start. Our Electronic Materials Solutions business has a broader exposure in electronics, including semiconductor, fabrication, data centers, which continues to be a helpful market and growing. But it's got a little different exposure. Display materials certainly has the consumer electronics piece and the biggest part of the revenue there is consumer electronics.
But we're also moving into higher growth areas like automotive electrification and we continue to see growth there. We continue to see some good results. And I would say consumer electronics, we saw a little bit of an uptick in display demand in Q2, a little stronger than maybe we even expected as we started into the quarter. Some of that is you start to see a little bit of buying in anticipation of the second half season for consumer electronics. And so we saw a little bit of that starting in Q2.
And that hits display materials more so much and a much bigger impact than in electronic materials.
That's helpful. And just last point is more of a comment than a question is, I really appreciate the comments about PFAS and where that stands and the level of transparency that 3 ms is providing here. I'm just struck by how much misinformation is on the Internet regarding the chemical, references it to being a forever chemical. And the reality is there are a number of very effective ways to remediate the chemical from water. They're all proven to be effective.
The question of how much do you want to spend, how big is the water body and your timeframe. So the remediation on this looks like it's doable and you all are taking an appreciated approach to this.
So just wanted to add that.
Yes. Thank you, Dean. And we understand the concerns people have about their water. We take the issue seriously, but we are also seeing that we can make a difference in remediation, and we'll continue to
be transparent and update
you as we go ahead. Thank you.
Question comes from the line of John Inch of Gordon Haskett. Please proceed with your question.
Thanks, everyone. Good morning.
Good morning, John.
Nick, just to clarify,
so the $0.20 when you say it's not in the guide, just to be clear, the $9.25 to $9.75 would not include $0.20 of pending gain from the sale of Gas and Flame. Is that correct?
John, that's correct. It does not include the pending gain from the sale of our gas detection business, nor does it include any impact that will come from Acelity when that is that in and when and if that closes, which we expect will be later this year.
Right. And then Nick, in the P and L, the other expense income line of minus $2.56 versus $51 a year ago, I'm assuming Venezuela charge of $1.62 is in that. And is the delta, the $36,000,000 of non op restructuring kind of getting you to $58,000,000 And does that number run through it doesn't look like it was running through the adjusted number, but maybe you can help me with just the bridge there.
Yes. That other that will include the Venezuela. It will also include $36,000,000 from the restructuring actions we took that were not part of operating expense. Those are the 2 biggest things in there.
And there's nothing else in there consequence. And the $36,000,000 does run through as the cost runs through the adjusted number. Is that correct?
That is correct. That is correct.
Okay. Are there any just while we're on gas and flame, are there any other businesses? I guess this was part of safety, right? Are there any other businesses, Mike or Nick, that you're looking at that may be potential candidates for divestiture?
John, portfolio management is one of our top priorities. And as you know, it's an ongoing process for us. And we're actively managing this aspect of the portfolio, really looking at all of our businesses and their fit with our value model. We've shown that when we don't have the right fit, we'll take action. But that's something an ongoing process.
We'll keep you updated.
I guess my question is, did this just come about? Or were you have you been working on it for a little while? Or what was the Jonas' over?
This particular case, the gas detection business, when we made the acquisition of Scotts Safety, this was part of our strategy at the time of acquisition. So this was we've talked about on portfolio how we think about complementing our organic priorities with acquisitions that leverage our fundamental strengths. Scotts Safety was one of those, moves us into a high value space in this personal safety marketplace. Gas detection, we identified that earlier that, that wasn't part of our strategy and now we're acting on it.
Got it. And then just a couple more cleanups. I think you said maybe, Nick, can you just update us on your expectation for share repurchase in the second half? And then I think you raised the dividend by 6% in the Q1. Maybe Mike, philosophically, you've got a lot of you've got a few pressures on your cash call at the moment.
Are you committed still to an annual dividend increase kind of looking out?
Yes, John, let me take that. 1st, as far as the dividend, our position for many several years has been that we expect it to grow our dividend to grow in line with earnings over time. Now this particular year is with a 6% increase that's outstripping our earnings growth. But the concept of us continuing to increase earnings year our dividends year over year, I'd say that's a philosophy and approach we continue to expect. But I would say as far as expecting a dividend increase that over time, it will parallel fairly closely our earnings per share growth.
And then John, remind me of the first part of the question.
Oh, thank you.
As far
as share repurchase. Share repurchase, yes.
We're I've guided 1 to 1.5 for the full year. That would imply, at most just a few $100,000,000 in the second half of the year.
And just I'm sorry for this last point. But if the obviously the earnings are going down, it's a philosophy you grow dividends with the earnings, but if the earnings are going down, are you just going to hold the dividend or and then wait for the catch up? Is that kind of the implication? I'm not actually trying to hold you to a number. I'm just trying to understand the philosophy.
No, the philosophy would be
over time. I would think unlikely that we would decrease
hold flat or decrease the dividend. That we would decrease hold flat or decrease the dividend even if there was 1 year of an earnings decline. If I go back to other times in our history where we've had an earnings decline, we still have some small increases in our dividend.
Our next question comes from the line of John Walsh of Credit Suisse. Please proceed with your question.
Hi, good morning.
Good morning, John. Good morning, John.
So in the prepared remarks, you kind of talked about higher pricing being able to offset inflation for the full year. Just want to pull apart that price piece and just we've seen a deceleration, right, but we should still expect price positive for the full year on an absolute basis?
Yes. I'll go even further, John. So we've averaged about 70 basis points of price growth in the first half of the year. My best estimate for the full year is we'll be right in that range. So I wouldn't characterize it as a deceleration.
I think about 70 basis points first half. I think something in the range of 70 basis points second half is our best view on that now and remain quite confident that it will more than outpace what we're seeing from a raw material and tariff inflation impact.
Got you. And then just thinking about the 3rd quarter organic growth, the flat to up low single digits, that still implies that the growth on growth would decelerate because you have an easier comp in Q3 of 2018. Just maybe some color that you saw exiting the quarter June, July, anything you can kind of talk to as to the trajectory you're seeing currently?
John, the biggest trajectory change that I'll say that colors the flat to up low single digits in the 3rd quarter as far as versus the comp is my earlier statement that we expect transportation electronics to be down low to mid single digits. I think that will be the thing that colors why sequentially versus an easier comp, it's not quite the same level of growth you would expect. When I look across the rest of our businesses, your analysis you just went through, I think it's a pretty valid analysis.
Great. Appreciate it. Thank you.
Thanks, Sean.
Our next question comes from the line of Laurence Alexander of Jefferies. Please proceed.
Good morning. Two quick ones. Can you just give a little bit more detail on the trends you're seeing in aerospace?
It seemed
a bit weaker than what we've heard from other companies. And secondly, on PFS or PFS and PFO, that litigation area, Can you characterize whether the U. S. Standards are tougher or easier than in Europe? And maybe just sort of help us get in front get ahead of where the food contact debate is because I think that that's like another cloud of noise that shouldn't really be affecting you, but I think sort of people are sort of focusing on the European side there.
Yes. Lawrence, maybe starting with Aerospace. When we talked about the business, we talked about Automotive and Aerospace together as one business. And when you look at the divisions that we share and then we report the revenue from it, it's together. Our aerospace business actually has shown some good growth as we come through the first half of the year.
So it's smaller than our automotive business, but it's an important business for us and doing well. So I don't think we're saying anything different in that respect. What I would say about thinking about Europe versus U. S. And PFAS or PFOS regulation, the regulations are really evolving right now.
I don't think it's clear to I don't think I can clearly compare U. S. Versus other international Europe regulations. It's very evolving, and we're working with regulators broadly, both federal and local. Okay.
Thank you.
Our next question comes from the line of Jeff Sprague of Vertical Research Partners. Please proceed with your question.
Thank you. Good morning, fellows. Hi, John.
Hey, obviously, a lot of ground color covered. I thought it might be interesting to just flip the script a little bit to things that look okay or a little bit better. So in particular, your confidence level consumer maybe being kind of middle of the guide, healthcare maybe better. Just a couple of finer points on what you see going on there, what would drive that, where are we at in kind of the drug delivery comps, etcetera?
Yes. So I would say, if you look at Healthcare, we talked about it had a good quarter. And behind that is a strong market growth. So this is a we're in a place where we've got good market dynamics and our businesses are performing well. We had our biggest business, our Medical Solutions business, up mid single digits.
We saw strength in the U. S. We saw strength in China as I talked about it. Our Food Safety business was up mid single digits. Our Health Information Systems business was up high single digits.
So it's pretty broad based performance as we went through the quarter. We did see a decline in drug delivery as we expected in mid single digits in Q2. We have been talking about how we see that stabilizing as we go through 2019, and we do see some improvement sequentially as we go into the second half in that business. So that will actually help the overall performance of the Healthcare business. So second half, we also have the same comparables year over year dynamic.
We have a little easier comparable in the second half. So strong market dynamics, our portfolio performing well broadly and I think a strong outperformance against comps in the second half. You look at consumer, we're at 1% and as Nick's comments said, kind of middle of the range as we look for the total year. We look we've got good balance between our sell in and sell out. And all of our businesses in the Q2 were growing with the exception of our home care business.
And we see that sell out dynamic setting up a good middle of the range kind of performance in the second half against some growth in retail spending in the macro.
Is there anything to conclude or any comp issue as it relates to that home care business? What was actually going on there?
I think we saw maybe a little bit of a comp year over year. We had some of the same go live of the U. S. ERP deployment impacting the that business. And I would say consumer is large, larger in the U.
S. Than some of our other businesses. It's about half of our global revenue is in the U. S, so it's a bigger footprint. So it has a slightly higher impact when you have that pull ahead, and it did impact all of those businesses in 2018.
That concludes the question and answer portion of our conference call. I'll now turn the call back over to Mike Roman for some closing comments.
To wrap up, I am encouraged by our company's progress in the Q2. Our execution was strong in the face of continued slow growth conditions in key end markets as we effectively managed costs and improved our cash flow. Moving ahead, we remain focused on continuing to drive operational improvements, investing for the future and delivering for our customers and shareholders. Thank you for joining us.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.