Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone keypad. It is recommended that you use a landline phone if you're going to register for a question. As a reminder, this conference is being recorded Tuesday, October 23rd, 2018. I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3M.
Thank you. Good morning, everyone. Welcome to our third quarter 2018 business review. With me today are Mike Roman, 3M's Chief Executive Officer, and Nick Gangestad, our Chief Financial Officer. Mike and Nick will make some formal comments, then we'll take your questions. Please note that 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. Before we begin, let me remind you of the dates for our upcoming investor events found on slide two. First, we will be hosting an Investor Day at our headquarters in St. Paul, Minnesota, in a few weeks with a welcome reception the evening of Wednesday, November 14th, where we will be highlighting how 3M Science is advancing our priority markets for growth, along with a formal presentation program on Thursday, November 15th.
The presentations will discuss our new five-year plan, along with a preview of our 2019 outlook. If you plan to attend the event and have not yet responded, please RSVP right away. Second, our Q4 earnings conference call will take place on Tuesday, January 29th, 2019. Please take a moment to read the forward-looking statement on slide three. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. Please note that throughout today's presentation, we will be making references to certain non-GAAP financial measures.
Reconciliations of the non-GAAP measures can be found in the appendices of today's presentation and press release. Please turn to slide four. I'll hand off to Mike. Mike?
Thank you, Bruce. Good morning, everyone, and thank you for joining us. In the third quarter, 3M delivered a double-digit increase in cash flow and earnings per share, along with strong margins despite slower growth. We also continued to execute on business transformation while deploying capital to invest in our future and return cash to our shareholders. Looking at the numbers, our team posted total sales of $8.2 billion in the quarter. We delivered organic growth of 1%, which is on top of 7% growth in last year's third quarter. As you recall from the discussion on our July earnings call, our ERP rollout in the U.S. resulted in revenue shifting between Q2 and the second half of the year. Today, we estimate the pull forward into Q2 was approximately 100 basis points, with the vast majority coming out of Q3.
Moving on to earnings per share, we posted EPS of $2.58, an increase of 11% year-over-year. Our company continues to deliver a strong return on invested capital along with premium margins. Company-wide, we generated margins of 25%, with all business groups above 22%. Our team also increased free cash flow by 24% year-over-year, with a conversion rate of 114%. This is a testament to the strength of our portfolio and business model and our focus on driving productivity every day. We also continue to invest in R&D and capital to support organic growth while returning cash to our shareholders. In the quarter, we returned $1.9 billion to 3M shareholders through both dividends and share repurchases. Please turn to slide five for a look at the performance of our business groups for both the third quarter and year-to-date.
In the third quarter, three of our five business groups, Electronics and Energy, Industrial, and Safety and Graphics, posted organic growth of 2%. Health Care and Consumer each had areas of strength, but also areas that were softer than expected. Health Care's growth declined by 1%, primarily due to continued weakness in our drug delivery business. Organic growth in Consumer was down 2%. This business group was impacted by channel adjustments between quarters with our major retail customers, though the sellout of our products remained strong. In his comments, Nick will provide more detail on the third quarter performance of each business group. Given the shift of sales between quarters due to business transformation, it is also helpful to look at our performance through nine months. Safety and Graphics posted 6% growth, followed by 3% growth from both Industrial and Electronics and Energy. Health Care posted 2% growth with Consumer at 1%.
Company-wide, we have delivered organic growth of more than 3% year-to-date. I will come back to share our updated guidance after Nick takes us through the details of the quarter. Nick.
Thank you, Mike, and good morning, everyone. Please turn to Slide 6. Sales grew 1.3% organically in the third quarter and are up 3.3% year-to-date. Increases in selling prices contributed 120 basis points to sales growth in the quarter, with positive price growth across all geographic areas. The net impact of acquisitions and divestitures contributed 20 basis points to sales growth in the quarter. Foreign currency translation decreased sales by 1.7 percentage points. All in, third quarter sales in U.S. dollars were down 20 basis points versus last year. In the U.S., organic growth was 0.5% with positive growth in Electronics and Energy, Industrial, and Safety and Graphics. Q3 organic growth was impacted by the deployment of our new ERP system in the U.S. during the quarter. Year-to-date, organic growth in the U.S. is up 3%. Asia Pacific delivered 3.2% organic growth, led by Health Care and Safety and Graphics.
Organic growth was 10% in China/Hong Kong, while Japan was down 7%, or up 1% excluding our electronics-related businesses. Year-to-date, Asia Pacific is up 4.5% organically. EMEA declined 90 basis points in Q3, with West Europe down 2%. From a year-to-date standpoint, EMEA is up 2%. Q3 organic growth in Latin America/Canada was 2.1%, led by Health Care and Consumer. At a country level, organic growth in Brazil was 5%, Mexico was up 3%, while Canada was flat. On a year-to-date basis, Latin America/Canada is up 4% organically. Please turn to Slide 7 for the third quarter P&L highlights. Company-wide, third quarter sales were $8.2 billion, with operating income of $2 billion. Third quarter operating income margins were 24.7%, up slightly versus last year. Let's take a closer look at the components of our margin performance in the third quarter.
Organic volume, productivity, and lower year-on-year portfolio and footprint actions added 70 basis points to margins. Selling price benefits more than offset raw material inflation, which added a net 30 basis points to third quarter margins. For 2018, we now expect full-year raw material headwinds inclusive of tariff impacts of -$0.15 per share versus a prior range of -$0.05 to -$0.10 per share. We continue to expect benefits from selling price to more than offset raw material headwinds. Nearly offsetting these margin benefits during the quarter was a 50 basis point headwind from foreign currency, a 30 basis point impact from acquisitions, and a 10 basis point headwind from the Q2 divestiture of the Communication Markets Division. Let's now turn to Slide 8 for a closer look at earnings per share. Third quarter GAAP earnings were $2.58 per share, up 11% versus last year.
The benefits of organic growth, productivity, and lower year-on-year portfolio and footprint actions added a combined $0.12 to per share earnings in the quarter. Acquisitions added $0.01, while the divested income and transition cost from the Communication Markets Division divestiture were an earnings headwind of $0.03 per share. Foreign currency, net of hedging, reduced per share earnings by $0.08 as the U.S. dollar strengthened against many currencies throughout the quarter. For the full year, we now expect an earnings headwind from foreign currency of -$0.05 per share versus a prior estimated benefit of $0.10 or a reduction of $0.15 per share versus previous expectations. Higher year-on-year net interest expense and retirement benefit expense decreased earnings by $0.05 per share. Our Q3 tax rate was 21.3%, which increased earnings by $0.22 per share.
This earnings benefit was primarily driven by the U.S. tax reform. Lastly, a reduction in shares outstanding added $0.06 to per share earnings. Please turn to slide nine for a look at our cash flow performance. As Mike noted, we continue to generate strong operating cash flow, allowing us to consistently invest in the business and return cash to shareholders. Third quarter free cash flow was $1.8 billion, up 24% year-on-year with a conversion rate of 114%. Third quarter capital expenditures were $377 million, up $52 million year-on-year. We expect these investments to be approximately $1.6 billion for the year. In addition to investing in our businesses, we returned significant cash to shareholders in Q3, including $794 million in dividends. We also returned $1.1 billion to shareholders through gross share repurchases.
We continue to expect full-year gross share repurchases to be in the range of $4 billion-$5 billion. Let's now review our business group performance, starting with Industrial on slide 10. The Industrial business group delivered third-quarter sales of $3 billion, up 2.2% organically, with growth across all geographic areas. Our automotive OEM business continues to drive increased penetration across applications such as structural tapes, adhesives, acoustics, lightweighting, and electronic solutions. Overall, our business was up 5% in the quarter compared to global car and light truck builds, which were down nearly 2%. The automotive aftermarket business declined low single digits organically due to softness in the collision repair market. Our industrial adhesives and tapes business and filtration business were both up low single digits in the quarter. Finally, the advanced materials business led the way with double-digit organic growth in the quarter.
On a geographic basis, Industrial's organic growth was led by a 3% increase in Asia Pacific, followed by the U.S., up 2%. Industrial delivered third-quarter operating income of $667 million, with operating margins of 22.1%. Please turn to slide 11. Safety and Graphics sales were $1.7 billion, up 2.2% organically in Q3. Growth was led by our personal safety business, up 5% organically on top of a 14% increase last year. The integration of Scott Safety is on track, and the business continues to exceed our expectations. Transportation safety grew mid-single digits, while commercial solutions was up low single digits. Finally, our roofing granules business declined mid-teens as shingle manufacturers slowed production in the quarter. Geographically, organic growth was led by 5% growth in Asia Pacific.
Operating income in the third quarter was $412 million, while operating margins were 24.8%, which includes a 150 basis point headwind from the Scott Safety acquisition. Please turn to slide 12. Our Health Care business generated third-quarter sales of $1.4 billion, down 1.1% organically versus a 7% comp last year. Holding back both third quarter and full-year organic growth in Health Care has been the continued softness in our drug delivery business, which is dependent on pharmaceutical regulatory timelines and customer R&D budgets. This business saw a 25% year-on-year decline in Q3 organic growth, which negatively impacted overall Health Care organic growth by 250 basis points. While our drug delivery business is experiencing near-term challenges, the pipeline continues to strengthen, and we expect the business to stabilize in 2019. Oral care grew 2% organically, with improved growth in the U.S. and continued strength in developing markets.
Our 3M Clarity Aligners launch is off to a good start as the number of new cases ramps quickly, and we expect continued momentum going forward. Our Medical Solutions business declined slightly against a strong comp of 7% from a year ago. Through nine months, this business was up 3%, with particular strength in vascular access and advanced wound care solutions. Food safety continued to deliver strong organic growth in the quarter, up high single digits, while health information systems grew mid-single digits. On a geographic basis, Asia Pacific led the way, up 10%, with Latin America/Canada up 4%. EMEA was down slightly, while the U.S. declined mid-single digits, primarily due to last year's strong comp. Health Care's third quarter operating income was $446 million, and operating margins were nearly 31%. Next, let's cover Electronics and Energy on slide 13.
Electronics and Energy organic sales growth was 2.3% in the third quarter. Sales were $1.4 billion. The electronics side of the business grew 1%, led by a mid-single-digit increase in electronics material solutions. This business continues to experience strong demand, particularly in the semiconductor and data center markets. We continue to see our content per mobile device grow globally as we apply 3M science to the advancement of this market. Our energy-related businesses were up over 6% organically, with strong growth in renewable energy and pipe coating solutions. On a geographic basis, the U.S. was up 5%, while both Asia Pacific and Latin America/Canada were up low single digits. Third quarter operating income for Electronics and Energy was $457 million, with operating margins of 31.7%. Please turn to slide 14. Third quarter sales in Consumer were $1.2 billion, and organic growth declined 2% year-over-year.
Our home improvement business grew low single digits organically, while the other three businesses each declined in the quarter. Looking at Consumer geographically, organic growth was led by a 5% increase in Latin America/Canada. The U.S. was down slightly, impacted by our Q3 ERP rollout. We continue to see strong consumer demand for our products, with mid-single-digit point-of-sale growth. EMEA declined mid-single digits, as we have been actively managing our product portfolio. Asia Pacific declined 7%, as we have seen lower channel demand for our Consumer respiratory solutions. Third quarter operating income was $291 million, with operating margins of 23.5%. That wraps up our review of third quarter results. Please turn to slide 15, and I'll hand it back over to Mike to review our updated 2018 guidance. Mike?
Thank you, Nick. With three quarters behind us, we are updating our guidance for the full year. We now anticipate organic growth of approximately 3%, versus a prior range of 3%-4%. With respect to earnings, we expect adjusted EPS in the range of $9.90-$10, against a previous range of $10.20-$10.45. Our change in EPS guidance is largely due to three factors: Our updated growth expectations, along with our updated guidance for currency and raw materials that Nick mentioned earlier. Looking at the remainder of 2018 and beyond, we know there's a lot more we can and will do to deliver for our customers and shareholders. We are focused on driving growth, being relentless in putting our customers first, and continuing to transform 3M to deliver greater productivity.
This means we will continue to work to optimize our portfolio, prioritizing resources to our most attractive opportunities. We will strengthen our innovation model and continue to invest in research and development, which enables us to create unique solutions that advance, enhance, and improve outcomes for our customers. In addition, we will continue to invest in high-growth, high-value product platforms, such as automotive electrification, advanced wound care, and data centers. We will also step up our efforts to fully leverage the progress we've made on business transformation. With our most recent deployment in the U.S., we have now successfully deployed 70% of our global revenue on the new ERP system. I am pleased with the success of our rollouts in Europe and the U.S. This was a significant undertaking, and I thank our team for their tireless efforts.
Moving ahead, we'll be able to focus even more on leveraging the power of business transformation to improve service levels to our customers, improve productivity, and accelerate value realization. At our investor day next month, we look forward to sharing more details about our plans. With that, we thank you for your attention and will now take your questions.
Ladies and gentlemen, if you would like to register a question using a landline phone, please press the one followed by the four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. Please limit your participation to one question and one follow-up. One moment, please, while we compile the Q&A roster. Our first question comes from the line of Scott Davis of Melius Research. Please proceed with your question.
Thanks. Good morning, guys.
Good morning, Scott.
I've covered your stock a long time. I just don't recall the type of volatility you had in the Health Care business. The drug delivery you mentioned was down 25%. Can you give us a little bit more granularity behind what causes or is causing that kind of volatility right now?
Yeah, Scott. As we talked about on the opening here, the organic growth was impacted by drug delivery down double digits. Also, we did have a strong year-over-year comp as we came through Q3 of 2017. Broader, we see solid growth in oral care. Our food safety business continues strong growth. Health information systems, strong pipeline, right where we expected. Much of the rest of the portfolio is in line with expectations. I would say that the drug delivery business continues to be the challenge against what we saw for the growth for the total year.
I'm not sure that answers my question. Is there an inventory destock at the customer level? I'm trying to just think about. I'm assuming the end consumer is still consuming these drugs.
Yes
What's going on in the part of
Yep
pharmaceutical companies, at least? That's what I'm asking.
Yeah. Our drug delivery business, we've talked about it as a project-based business in the past. It really is. We work in partnership with pharmaceutical companies really dependent on their regulatory cycle. Also, we have a significant R&D partnership as well, those are project-based businesses as well. We see a strong pipeline ahead. We are working through a challenging performance in 2018. We see stabilization as we get into 2019, strong growth. We have a good view of our pipeline, but it's not impacting positively as we go through the second half of this year.
Okay. That's a good answer. Consumer, you talked about the inventory channel destock. Is this kind of a new normal where it seems like the retailers are just holding less inventory? Do you view it as a new normal adjustment kind of one time, or is this something where you anticipate some additional destock here going forward?
Yeah. It's been something that we've seen with the office channel over the last year and a half, almost 2 years now, where you see a restructuring of the channel, and you see a destocking as the traditional office channel restructures around the new normal for them. I think we see it more broadly as well, that our point of sale is strong, up mid-single digits across our portfolio. The retail channel is, at least as we come through this second half of the year, seeing additional restructuring. We expect some of that to continue as we move ahead. This is a space that's been disrupted significantly, and it's something that we expect to see some individual channels as we move ahead. Really, it's the broader base in the second half that's impacting us now.
Okay. Thank you, guys. Good luck.
All right. Thanks, Scott.
Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.
Thanks. Good morning, guys.
Morning, Joe.
Morning, Joe.
Can we maybe start on just U.S. growth? I recognize that the ERP transition probably impacted growth a little bit this quarter, and I think, Mike, you mentioned 100 basis points earlier. I'm just trying to parse out how much of the 50 basis points of growth you saw this quarter is related to ERP versus what you're seeing from an end market perspective, just given that the U.S. has been so strong across industrials for most of the year?
Yeah. If you look at that 100 basis points that we talked about, that's a worldwide view. It's really 250 basis points of impact on the quarter in the U.S. As I mentioned, we saw most of that, the vast majority of given back in Q3. Year-to-date, the up 3% is more in line with when you look through that, what we're seeing. We see positive growth in Industrial, Safety and Graphics, Electronics and Energy, really we see the macro more broadly in the U.S., positive and steady. I would say we're back talking about our Health Care organic growth being impacted by our drug delivery business in the U.S., the strong year-on-year comp in the U.S., especially strong in that area.
I would say Consumer organic growth was impacted by that U.S. ERP as strong as any one of the businesses in our portfolio. They had their full share of that 250 basis points.
Mike, is it your assumption going into 4Q that the ERP overhang kind of subsides, or is that something that just carries into 4Q as well?
Yeah, I think that's the view. We saw the vast majority come out in Q3, that's not the big impact as we go into Q4. Yep.
Okay, my one follow-up just on China. Obviously, through the first three quarters of the year, things have held up very good. We're seeing signs of things slowing down, particularly on the Consumer side. I'm just curious if you can give any color around the trends that you saw through the quarter and what you're seeing specifically with the Chinese Consumer.
Yeah, we mentioned the slowing in the Consumer respiratory protection space as one of the impacts. We see other signs of slowing in China. The automotive build rates are down significantly, and that has a knock-on effect, you see some broader softness in Industrial as we go into Q4. We're seeing the same thing. That's why we'd see ourselves tracking more to an 8%-10% range for China for the year.
Okay. Thanks, guys.
Yeah. Thanks, Joe.
Our next question comes from the line of Andrew Kaplowitz from Citi. Please proceed.
Hey, good morning, guys.
Morning, Andy.
Morning, Andy.
Mike and Nick, can you give us more color what happened in Europe this quarter? We know you're expecting a slowdown in the U.S. given the ERP. You just talked about China, but EMEA seemed to fall off significantly for you versus last quarter. I think Western Europe was up 6% last quarter and down 2% this quarter. As Western Europe, is the U.K. decline a quarter just more lumpiness, or is there something a little more worrisome there?
Our broader Europe is tracking to the low end of the range that we had for the year and the 1%-4%. As we came into the quarter, the Industrial and auto build rates softened a bit, and we saw softening across West Europe, and organic growth declined in the quarter, up slightly year to date, and we think up slightly for the full year. At the bottom end of the range. I think it's also being impacted by some of the portfolio actions that we're taking as we've talked about as we've gone through the year, part of our plan to improve the overall performance of the portfolio and the profitability of West Europe as we move ahead. Tracking low single digits at the bottom of our range for the year.
Mike, do you have decent visibility though into that low single-digit growth as you go forward? Because it's been a very lumpy region for you.
I think we have good visibility across the portfolio and the markets. I would say that the softening in the automotive and the build rates have an impact there. We've been talking about this being towards the low end of the range all year, really because of the outlook we have across the markets and our portfolio, and also some of those actions we've been taking. I think it's consistent, a little softer than expected in Q3, but again, for the full year, we think it's about in the range where we expected it to be.
Nick, your price versus raw material of +0.3, pricing up 120, obviously good results there. Can you maintain positive price versus raws even if tariffs continue to ramp? Could you talk about how you're adjusting raw material sourcing under supply chain to adjust to the inflationary environment, especially as we see more tariffs moving forward?
Andy, we are continuing to see raw material price increases, so far, our pricing has more than been offsetting that. Andy, it's our expectation that that will continue. We're anticipating continued increase in raw material prices and layering on tariffs that we expect our pricing strength to continue to more than offset that. If I fast-forward a little into 2019, we think tariffs will be having a negative impact on our total sourcing costs. There's a number of things we're doing around that. Sourcing changes, supply chain changes, but also pricing changes. I'll talk more about this on November 15th, our view is we have approximately $100 million headwind from tariffs, that our pricing will more than offset that and raw material price increases into 2019.
That's all for Nick. Thanks, guys.
Thanks, Andy.
Our next question comes from the line of Julian Mitchell of Barclays. Please proceed with your question.
Hi, good morning.
Good morning, Julian.
Morning. Just a question around the moving parts in the P&L. Particularly, I guess your SG&A was down sort of 90 basis points as a share of sales, R&D down 40 basis points as a share of sales to offset the falling gross margin. Is there any change to the view that R&D to sales of 6% is the right number? What's the risk, I guess, that the R&D and SG&A expenses have to sort of snap back up over the next 12 months?
Yes, Julian, let me maybe take the R&D part first. Research and development, as you've heard us talk, it's the heartbeat of 3M. It's the center of innovation, and it's the key for us sustaining our performance, premium margins, our growth, our return on invested capital. It's still a top priority for us and a top priority for me as CEO. We're going to continue to invest in it, continue to target that approximately 6% to sales. If you look at the quarter, majority of the year-over-year decline in the quarter was really due to a couple of factors. FX, of course, the contract R&D work that I talked about in the drug delivery business was part of it, also the divesture of the Communication Markets. There's some quarterly up and downs as we make investments in experiments and a number of projects.
It's still very much the focus there. If you look at SG&A, I think that's another one that our spending is not completely smooth, but we're making improvements as well on productivity. That's one of the things that we're getting as we move forward with business transformation, as we take now 70% of our revenue on the business transformation, we have opportunities to leverage our service models and gain some improvements there. At least a little bit of what we saw in the quarter was starting to see some productivity there. I think of the actions that strategic investments we've been making impacting that as well.
Thanks. My follow-up question would be around Health Care. You had laid out, or the management team had laid out the 4%-6% top line growth aspiration two and a half years ago. Health Care has consistently run at or slightly below the bottom end of that range, even prior to the drug delivery issues. Do you think that's the addressable market growth coming in light, or do you think there's a need for 3M itself to step up M&A and/or R&D to close the gap with the growing market?
Yeah. Julian, I would say I talked about the broader portfolio. We have much of the rest of the portfolio beyond drug delivery that's in line with our expectations. If you step back and look at the 4%-6% and where we are now in the 2%-3% range versus that 4%-6%, or even as we kind of reset and said 4% as we came through the year, it's largely drug delivery and slower oral care. We saw a better oral care performance in the quarter as we've moved through the year, kind of what we expected. Still, when you look against that 4%-6%, those are the two impacts that are biggest impact. The year-over-year comps are part of it in the quarter, if you look at the total year now, those are the impacts.
We expect Q4 to be a return to our historical growth rates in healthcare. As we lap some of the drug delivery comps, and we get those broader performing portfolios to have a bigger impact.
Great. Thank you.
Good.
Our next question comes from the line of Steven Winoker of UBS. Please proceed with your question.
Thanks. Good morning.
Steve.
Hey, Mike. I just want to characterize what you're really seeing out there. You've already, from a growth perspective, if you take out the ERP impact, if you take out what you would describe as kind of disrupted channel-related distributor and retail destocking. I guess you have slowing China and some European challenge, and you take out the drug delivery. Are you seeing kind of any short cycle slowing globally from a demand perspective, or do you think these are all kind of more 3M-specific issues that you're going to be getting through, and then normalizing?
Yeah, Steve, I think you characterized it well, the areas that we've talked about already. We have highlighted a number of businesses where they're specific to our markets and our businesses in those markets. I would say that we performed well in automotive, as Nick noted. We performed well in the automotive OEMs, relative to their build rates. Their build rates continued to move down, negative actually, in the quarter. Part of the slowing in China and part of the impact in Europe as well. We highlighted as well, Safety and Graphics has been at the top of the range that we had guided for the year and really we expect them to be there at the end of the year, but we're impacted by a negative mid-teens growth in our Industrial Mineral business. That's another one.
Again, maybe it's our focus on the construction markets and some of the challenges we see in some of those end markets, but that was definitely softness in one of our markets. Broader, we see a steady and positive macro, and broader, our portfolio, the majority of our businesses continue to do well against that broader macro.
Okay. I suppose on that, it doesn't change your sort of normal one and a half times IPI thinking.
Well, yeah. On the broader portfolio, absolutely. As we move ahead, that's the model that we look at. Individual businesses impacting the way they did here in the quarter and maybe a couple of them as we go through the second half, those will take away from some of that near term. Yeah. That's absolutely our performance. That's our focus, that's our expectation, that's our capacity and capability that we've demonstrated.
I don't want to misread your portfolio optimization comment towards the end of your prepared remarks. That is something that 3M certainly had been emphasizing for some time with Inge and with you before. Do you mean something different here? What do you mean by that?
Well, you said it. Portfolio management's been one of our key levers. It's a driver of value for us. You look at the performance we have in Electronics and Energy and Safety and Graphics as we come through the year, those businesses are performing well. They've been an area that we focused a lot of our portfolio actions around. It's what we've done to reposition and reshape those portfolios through acquisition and divestitures and other actions. I think that's an example of where we take that lever and really create value. We're always looking at that. We're always realigning our businesses around our portfolio priorities. It's how we reshape the company for near-term and long-term success. I guess, I said it at the last call as well, we are an active portfolio manager.
This is what we do to take full advantage of the 3M model as we move ahead.
Okay. If I could just sneak in one specific thing for Nick. On the inventory days and I suppose receivables, just slight increases that are going on there. I assume that's all ERP related, or is there something else going on?
No, Steve, that's exactly it. We had built some inventory in advance of going live in the U.S. with our new ERP system, and we wanted to do that in order to ensure we were fully satisfying our customers and their supply chains. The increase you're seeing there is that not bleeding off quite as fast as we had planned, but we see over the next couple of quarters that inventory coming down.
Okay. Thanks, guys. Good luck.
Thanks, Steve.
Thanks, Steve.
Our next question comes from the line of John Inch of Gordon Haskett. Please proceed.
Thanks. Good morning, everyone.
Hey, John. Morning, John.
I got it. Mike, it sounds like you're characterizing Europe, and maybe Asia Pac a little bit, as relatively stable. I think that's kind of the messaging that I'm getting. Maybe at a slightly decelerated basis. I want to just kind of confirm that's what you're seeing, that Brexit or any other issues are not necessarily sequentially affecting your businesses. On that basis, is this causing you this kind of low-level activity stability? Because you're a very big company in Europe. Is it causing you to allocate your R&D or your growth initiatives in any kind of a different way to try and stimulate things more quickly to circumvent auto? I'm just curious on those fronts.
Yes. John, I think you characterized West Europe and Europe overall the way we kind of view it right now. Again, we see some markets like auto impacting Europe as well. Drug delivery, of course, impacting Europe as well. More broadly we see a steady economic backdrop. We're not looking at other significant changes there. Asia, I guess I would characterize it maybe at the low end of our range that we had looked at for the year. Softer overall, but again, steady across more broadly with some signs of slowing, as I said, in China.
If you look back at West Europe, your question there, we deployed the Business Transformation there over 2015, 2016, 2017, we're now taking advantage of that, we are, I would say, doing a couple things where it's enabling us to prioritize better where we really do invest in our best parts of our portfolio. It's the models that we have in place, the service models that we have in place there up and running, be able to leverage a area-wide ERP capability. Those are really enabling us to, I think, bring even sharper focus on prioritizing. That's part of our active portfolio management, is prioritizing where we put our resources for growth, shifting resources to those higher growth areas.
We're also, as planned, taking some actions to, I would say, streamline our structure in EMEA and even Latin America as we get ready for the go-live, taking advantage of Business Transformation. That's really also helping us to focus on the markets and the areas that are most important and best opportunities for growth as we go ahead.
On the point you just raised about Business Transformation, ERP, maybe this is for Nick. Nick, do you have a sense of how much BT may have actually net contributed in the quarter? I know you haven't really updated your $500-$700 target in a while from Business Transformation specifically, but can you give us at least an elementary sense as this is coming through? Are we looking at the low end or the high end of that range or a new range altogether?
As far as the savings, John, what we've been saying and continue to say is that by 2020, we expect this to generate between $500 million and $700 million of operating income benefit. This year, we're on track for approximately $100 million of savings versus last year. That will bring our total savings since we started it on an annual basis up to $250 million. We remain track on the $500-$700. Not ready to call whether we think more likely low end or high end, but we still see ourselves in that range by 2020. As Mike mentioned earlier on this call, we have a lot of the deployment behind us now, and that's allowing us in 2019 to be putting even more energy and resources into realizing the value realization that we've been projecting.
A little bit of a shift of a little less on deployment and more on the value realization and the business process changes that will create that.
To be clear, the $100 million is a net number, right? Like that's all flowing to the bottom line pre-tax?
That's exactly right, John.
One more just nitpick here. Why haven't you updated the $500-$700? I mean, this goes back a few years ago, right? Is there some obvious reason why, just based on the nature of the way this stuff is working, that you haven't actually provided some sort of look forward based on progress or realized results? Is that just because the U.S. was saved for the last, and it's the biggest slug, or is there some other reason why this thing is not being updated or would've been updated sort of more quickly?
Yeah. We last updated that number in 2016 when we laid out a five-year plan, and we've continued to progress as we expected towards that. November 15th, when we lay out our next five-year plan, we'll be updating that of where this goes even beyond 2020. Partly, John, it lines up with longer-term plans that we lay out, and you can expect to see more from us on this in November.
Got it. Thanks very much. Appreciate it.
Thanks, John.
Our next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Please proceed.
Hi. Good morning, guys.
Hi, Josh.
Good morning, Josh.
I know there have been a lot of questions on growth and maybe not quite what we would've expected in terms of some of the bigger global controversial end markets like auto or the Consumer in U.S. and China don't seem to be as big of a drag, a lot more 3M-specific stuff, which I think some of the earlier questions have noted. Do you feel like over the next couple quarters, and I don't want to get into 2019 too specifically, but do you think there's a smooth handoff where some of the 3M-specific issues or some of these sub-markets start to balance out, and we can still kind of swim upstream versus some of the more controversial ones like auto? Is there potential for say, some of that to bleed down further into your business?
Josh, if you look at some of the businesses we've highlighted today that are impacting growth as we come through Q3 and the second half, a couple of things will happen. One, we'll lap some of those comps as we move ahead. They're going to improve. I mean, we expect to improve those businesses. I mentioned in Drug Delivery that we stabilize based on what we have in the pipeline as we get into 2019, and we return to growth as we come out of that. So we can look forward, we can see that stepping into it. Automotive is maybe a little more complex in the dynamic. I mean, we are outgrowing the build rates and have consistently done that.
With what we're doing with automotive electrification, we see our ability to do that, to continue and even leverage our innovation further in the future. We're still dependent on the build rates. So what happens in those build rates as we move ahead, where it goes in key markets like U.S., Europe, China, those are going to impact it. The outlook right now is for fairly nominal, low growth, negative growth as we come through the quarter, in third quarter, but slow growth as we move ahead. I would say we'll continue to outgrow that. That'll continue to be a growth contributor with what we've been able to do there. Other markets, Industrial Minerals, what happens in the end market demand will dictate that more than us as we get into the future quarters.
I think it's a little bit market dependent, but the examples that we've talked about, I think we do see ourselves being able to continue to rise up in our growth relative to those markets. If you go turn to Consumer, the thing I would look at is our sellout continues strong. Our brands, we've got category leading brands that are performing well off the shelf. We've got to work through, and I think our team's done a very good job of working through the channel disruption that's going on there and managing through that. We've got very good visibility as we move through that, especially in developed markets, and we expect that sellout to eventually rise up and carry the day. We'll look for that as we go ahead, too.
Gotcha. That's helpful. If maybe I could just follow on with the teaser for what you may talk about here in a few weeks in November. Clearly a lot of questions about growth here on today, and I think, business transformation phase 1 has been a lot more margin centric, and there's always been an aspiration for phase 2 to have a growth component. Is that something we could start to hear a little bit more about in the coming weeks, or is that still a few years off in terms of being qualified?
Josh, it goes to John's question and Nick's discussion earlier, too. Our business transformation was focused on putting the ERP and much broader than ERP, other system capabilities in place, new models, transaction efficient models in place in our supply chain and in our back office. That's what we're doing with business transformation. As we do that, as we now get 70% of our revenue on the new systems, we can start to leverage that in other ways as well. We'll be talking about that at the November 15th investor day. We'll talk about where we see opportunities to do that on the commercial side and also in supply chain.
Perfect. Thanks, Mike.
Yep.
Our next question comes from the line of John Walsh of Credit Suisse. Please proceed with your question.
Hi, good morning.
Morning, John.
I guess, just trying to put a finer point on the new organic growth guidance. A squiggle does imply a range, I was just curious, as we think about Q4, would you expect to see organic growth accelerate from the 1.3 we saw this quarter? How should we think about that?
Yeah, John, we're just a little over 3% through the first nine months of the year for growth. When we're estimating 3, that's our best estimate of what the total year growth will be. I don't see a very wide range on that. Maybe 20 basis points plus or minus, but not a very wide range on that. Yes, included in that is an expectation that we see higher organic growth in Q4 than what we saw in Q3.
Great. Thank you for that. You touched on the savings portion of business transformation and how to think about that, but how should we think about the spending? Obviously, this year there was some restructuring around getting out of the stranded costs, but how do we think about the actual spending levels that you are absorbing in your earnings construct as we think about that into 2019?
John, you're specifically talking about our business transformation and what we're spending on that?
However you want to-
Yeah
kind of define. If you want to take a broader term, that's fine.
Yeah.
If you want to just kind of specific to one program.
John, in terms of the business transformation, over a number of years, we've been saying this is going to be an incremental spend of a little over $1 billion. As we look at our spending over the last few years, in terms of cash outflow, that has been declining. In terms of total spending hitting our income statement as we start to amortize some of what we've built there, it's been remarkably flat year-on-year of the total spend that we're putting into our Business Transformation Initiative. Right now, my view is that's going to continue in a pretty stable level for the next couple years.
Great. Thank you.
Thanks, John.
Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning. Can you hear me?
Yep.
Yeah.
Hey, Andrew.
Just a question on Safety and Graphics. I think you guys highlighted a lot of headwinds when you were at Laguna, but that one is a bit of a surprise to me. A couple of things, organic growth, 2%, margin decline year-over-year. Particularly, you guys highlighted roofing granules declining double-digits. As I recall, this was one of the businesses that was supposed to drive big growth and big margin expansion, post everything you've done to it in terms of repositioning this business. Can you just talk what happened in the quarter, and has something changed here, or is it a one-off?
Andrew, the roofing granules business is the smallest business we have in Safety and Graphics, and it's a business that has been enjoying, in the U.S., some of the construction increases that are going on in construction. There's a cyclical or a temporary nature depending on what's happening with storms. This business is very closely tied to shingle production. Right now, shingle manufacturers are making less shingles, and it's a very tightly integrated supply chain. For the last couple of years, this business has been on a path of high growth, we reached a point in the third quarter that growth has come down. The growth going forward is going to be tightly correlated to what happens with shingle manufacturers and the amount of production they're doing.
Just broader for Safety and Graphics margin decline year-over-year and sort of this growth at maybe 2%. I always thought this was the business that was supposed to go. This was the showcase of how you can sort of realign your portfolio and achieve better margins and better growth. I guess maybe a broader question here.
Yeah, broader question. Right now we're estimating this business to be about at the midpoint of the 4%-6% organic growth that we guided at the beginning of the year. That midpoint is absorbing what we're seeing as the impact from the roofing granules business. As far as the total growth in the third quarter, seeing mid-single-digit growth in our personal safety business against a 14% comp in our personal safety. That is by far our biggest business. Andrew, we continue to have a lot of confidence in our Safety and Graphics business and its ability to grow and be a leader in growing 3M's total organic growth. A lot of confidence there.
As far as the margin, we are absorbing 150 basis points of margin impact from Scott Safety, we'll be starting to lap ourselves on that as we acquired that fourth quarter last year. I no longer will see that as being a drag to the margin going forward and potentially accretive after that.
Just to follow up sort of the counterpoint to Safety and Graphics, everybody was concerned about Electronics and Energy, you guys actually posted really good growth relative to expectation, and margin was north of 30%. Is this margin sustainable, or was that one-time items, or how should we think about that?
Yeah, Andrew, if you look at a history of Electronics and Energy, Q3 tends to be the high point for our revenue and our margin for that business. Year to date, our margins are 28.4%. That's up 170 basis points, that includes the impact of exiting our Communication Markets business. Yes, the portfolio management we've been doing and the things we're doing and investing in research we see as being accretive to our margins in that business. I would not call the 31 plus that we are at in this quarter as a new level. It's more-
third quarter is typically the high point.
There's no one-time big item. It's just everything went right for this business in the quarter. Is that fairly-
That's exactly-
describing?
That's exactly right. Everything going right in this business this quarter. No one-time issue.
Well, terrific. Thank you so much.
Thanks, Andrew.
Our next question comes from the line of Steve Tusa of J.P. Morgan. Please proceed with your question.
Hey, guys. Good morning.
Hey, Steve.
Morning, Steve.
Just so I kind of understand the comments on R&D correctly, are you saying that kind of the productivity that you're getting out of business transformation, et cetera, is allowing you to kind of structurally spend a lower level of R&D than the 6% going forward?
Steve, I guess my message here is that we've not backed off of what we've been targeting with our R&D investment. This idea of investing to enable us to drive more of those priority growth platforms, more of the disruptive new technology. That's what we talked about when we moved from 5.5% to sales to 6% to sales. While in the quarter we're down at 5.3%, our strategy and our plan is to invest in line with what we had talked about when we said we're targeting 6%. It's not an efficiency that we're gaining. There are some one-time kinds of impacts on the quarter, just a little bit of an ebb and flow. We expected a little lower spending just by the layout of our R&D programs as we went through the year. We had the Drug Delivery contract R&D work down.
We had impact of FX, we had the divesture of Communication Markets. No, you should expect us to continue to drive that. This is not a BT enabled. We certainly do expect to get returns out of these investments, and we'll adjust as we move ahead. Near term, that's not what's going on.
Okay. That makes a lot of sense. When we think about how you're positioned and where your mindset is for the next several years. The last few years, you've had a couple that have been pretty good, but not too many in the kind of double-digit EPS growth range, and that's despite some very heavy stock buyback activity. Will you provide a new framework for EPS at some point, new under your watch at least? Or is the 8-11 still a relevant number, and it's really steady as she goes on that front? Are we going to get an update on that?
Well, that's certainly one of the things we'll be talking about at the November investor day. We'll be laying out our five-year plan and the framework for that five-year plan. I think that's something we'll cover in detail there.
Okay, great. Thanks a lot.
All right. Thank you.
Our next question comes from the line of Nigel Coe of Wolfe Research. Please proceed.
Yeah, thanks. Good morning.
Morning, Nigel.
Morning, guys. Just want to go back to the E&E margins. You mentioned everything went right, this is, I think, the second or third quarter where we've seen divergent trends between E&E and the rest of the portfolio. Maybe just expand on how you're seeing such strong operating leverage in E&E versus the inverse trends elsewhere.
Nigel, what we've been seeing, and I mentioned this earlier on this call, we're continuing to see good penetration and content that we're putting into electronic devices. We're seeing good growth in places where we're selling into data centers and semiconductor. That growth is helping us and is being accretive to our margin. In addition, the divestiture of our Communication Markets business within that, which had been dilutive to our margin, that is now, for all practical purposes, out of that business, and we're also seeing some accretive benefits from that. That's what I was saying, that many things going right this quarter as we've focused on that portfolio and what we're investing in, and we're seeing a lot of that pay off.
The key message is that as we exit this year, obviously recognizing the seasonality from speaking in 4Q, whatever E&E is this year is a good base for future years.
Yeah.
Mike, just a broad question again, just kind of thinking about November. When we look at the last 3-5 years, core growth has been in the 2.5%-3% range on average, 2.7% for the last three years. I know that you're not going to be satisfied with that kind of growth range. What, in your mind, is the biggest constraint on growth here? Is it the R&D pipeline? Is it commercialization? Is it go-to-markets? Is it some share loss competition? What is the biggest retarding force on core growth here?
Nigel, growth is a big focus as we drive forward. It's what we expect. We expect our innovation model to deliver, I would say, above-market growth and premium margins. That's really, I think, the hallmark of successful innovation, and for us, that's been really our history. When we deliver on that's what we see. We expect to see that outgrow the macro and to be able to do that consistently as we move ahead. That is the focus. That's what we'll talk about at the investor day. That's what we'll be focused on with our team. That's where we start our focus as a team.
Okay. Good. Okay, thanks.
All right. Thanks, Nigel.
That concludes the question and answer portion of our conference call. I will now turn the call back over to Mike Roman for some closing comments.
In summary, our third quarter included good performances in many respects, including double-digit increases in cash flow and EPS, along with strong margins. As I look across our portfolio, most of our businesses continue to do well, but there are also areas that we must work to improve. Looking ahead, how we allocate capital and continue to reshape our portfolio are keys to delivering even greater value to both our customers and shareholders. These are strengths of 3M and will continue to be priorities for us moving forward. Thank you again for joining us this morning, and we look forward to seeing you in St. Paul in a few weeks. Have a good day.
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.