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 Tuesday, July 24, 2018.
I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3 ms.
Thank you, and good morning, everyone. Welcome to our Q2 2018 business review. On the call today are Ingo Tewin, 3M's Executive Chairman Mike Roman, our Chief Executive Officer and Nick Gangstedt, our Chief Financial Officer. Inge, Mike and Nick will make some formal comments, and 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 3 ms.com under the heading Quarterly Earnings.
Before we begin, let me remind you of the dates for our upcoming investor events in 2018 found on Slide 2. Please mark your calendars for our Q3 earnings call on October 23. Also, our next Investor Day, which will be held at our headquarters in St. Paul, Minnesota, with a welcome reception the evening of Wednesday, November 14, and a formal presentation program on Thursday, November 15. More details will be available as we get closer to the event.
Please take a moment to read the forward looking statement on Slide 3. During today's conference call, we will make certain predictive statements that reflect our current views about Trem'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. Please note that throughout today's presentation, we'll 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 4, and I'll hand off to Inge. Inge? Thank you, Bruce, and good morning, everyone.
As you all are aware, Q2 was my last quarter as the CEO, and I have now moved on to my new role as Executive Chairman of the 3 ms Board. Mike Roman is our new CEO, and I'm pleased with the orderly transition between me and Mike, which we have worked on for the last year. In a moment, I will turn the call over to Mike and our CFO, Nick Gangstedt, and you will see that once again we had a very strong quarter with robust organic growth, margin expansion, EPS growth and good cash flow. But before doing that, I would like to make a few comments. First, I would like to recognize all of you who have covered, analyzed and invested in 3 ms.
I have enjoyed our many interaction, and I have always appreciated your input along with your integrity and professionalism. I would also like to thank all of our 91,000 3Mers around the world for your contributions and support. Working together, I'm pleased at what we have accomplished over the last 6 years. We have enhanced and focused our portfolio. And as a result, today we are far more relevant to our customers and the marketplace.
We have strengthened our innovation engine and improved our cost structure and began to transform 3 ms for the future. We have reached our vision of advancing every company, enhancing every home and improving every life. All of this is reflected in our financial results and in the premium value we have created for our customers and premium returns for our shareholders. At the same time, I'm equally confident in our future. The Board of Directors and I have no doubt that Mike is the right person to lead our company as CEO and continue building strings on strings.
As I look across our enterprise, it's clear that we have the leadership, market position and capabilities to continue to build on the fundamental strength of 3 ms. With that, I will turn the call over to Mike for a summary of our Q2. Mike?
Thanks, Inge, and good morning, everyone. Let me begin by saying that I am honored to serve as the Chief Executive Officer of this incredible enterprise and lead our team into the future. I would like to express my gratitude to Inge for his vision, leadership and ongoing partnership in his new role as Chairman. Over the last 6 years, we've made great progress in building out the 3 ms playbook, which has created a tremendous foundation for us. Moving ahead, we are focused on continuing our momentum, generating extraordinary value for our customers and premium returns for our shareholders.
Now let's review our 2nd quarter results, starting on Slide 5. We had a strong quarter, highlighted by broad based organic growth and a double digit increase in earnings per share, along with record sales and rising margins. Looking at the numbers, total sales were $8,400,000,000 an all time high for 3 ms. We delivered strong organic growth of 6% with positive growth across all business groups and all geographic areas. Please note that we have an upcoming ERP rollout in the United States.
And in anticipation of that deployment, some of our customers decided to accelerate their purchases. We estimate that this added approximately 50 to 100 basis points of growth in the 2nd quarter, all of it in the U. S. Results. Moving on to earnings, we posted GAAP earnings of $3.07 per share, up 19% year on year.
Adjusted earnings were $2.59 per share compared to $2.25 a year ago. This demonstrates that our teams around the world continue to execute well. Underlying margins were strong at 24%, with all business groups above 21%. Beyond financial results, we are committed to building 3 ms for the long run, while returning cash to our shareholders. In the Q2, we invested $468,000,000 in research and development and another $365,000,000 in CapEx.
We also returned $2,400,000,000 to shareholders, including both dividends and share repurchases. Please turn to Slide 6. There's a lot to like this quarter across our entire portfolio. Our industrial team posted good organic growth of 6%, a nice pickup from the Q1. Growth was broad based with particular strength in our filtration platform where we are leveraging our membrana acquisition to accelerate penetration in biopharma and life sciences.
Safety and Graphics delivered another outstanding quarter of 9% organic growth along with robust margins. For the 4th consecutive quarter, our personal safety business grew double digits as we continue to build and extend our industry leading portfolio in this market. In Healthcare, we continue to expand worldwide with organic growth of 4%, led by our Medical Solutions business with mid single digit growth. Healthcare also posted double digit growth in developing markets as investments in those areas are paying off. This is a great business for 3 ms, and we will continue to invest to strengthen it for the future.
Organic growth in Electronics and Energy was 5% on top of 10% growth in last year's Q2. Within this business group, we have done a lot of portfolio work over the last several years to improve our relevance to customers and the marketplace. This has led to improved growth and a sustained improvement in margins. Last month, we continued to build on this portfolio of work with the sale of our communication markets business. After a thorough review, we decided that selling this business will result in the greatest value creation for 3 ms and our shareholders.
This is a good example of how we are actively managing our portfolio to best utilize the 3 ms model. Going forward, we will continue to prioritize high growth opportunities in electronics and energy, such as automotive electrification, data centers and semiconductor fabrication. Finally, organic growth in consumer was 4%, which included good performances across our leading brands. We saw continued strength in home improvement along with a strong start to the back to school season. In summary, I'm pleased with our performance in the Q2, and I thank our teams for their many contributions.
Our playbook is working, and we are just getting started. We are well positioned to grow into an even stronger and more successful company. Looking ahead, we'll continue to optimize our portfolio, strengthen our innovation and accelerate our transformation while developing our people. Nick will now take you through the details of the quarter. Nick?
Thank you, Mike, and good morning, everyone. Please turn to Slide 7. Sales grew 5.6% organically in the 2nd quarter. Increases in selling prices contributed 110 basis points to sales growth in the quarter and were positive across all geographic areas. The net impact of acquisitions and divestitures contributed 80 basis points to sales growth in the quarter.
Foreign currency translation increased sales by 1 percentage point. All in, 2nd quarter sales in U. S. Dollars increased 7.4% versus last year. In the U.
S, organic growth was 5.6%, led by Electronics and Energy, Safety and Graphics and Consumer. EMEA increased 5.8% in Q2, driven by strong growth in West Europe that was led by Electronics and Energy, Industrial and Safety and Graphics. Asia Pacific delivered 5.5% organic growth, led by Healthcare and Safety and Graphics. Organic growth was 12% in both China, Hong Kong and India, while Japan was down 2%. Finally, Q2 organic growth in Latin America, Canada was 6%, led by Healthcare and Safety and Graphics.
At a country level, Canada was up high single digits, while Mexico and Brazil both delivered mid single digit organic growth. Please turn to Slide 8 for the 2nd quarter P and
L highlights.
Company wide, 2nd quarter sales were $8,400,000,000 Operating income in the 2nd quarter was $2,400,000,000 which included a $400,000,000 benefit from the Communication Markets divestiture gain net of related actions. 2nd quarter underlying operating margins were 24%, excluding the net benefit from the Communication Markets divestiture. Let's take a closer look at the components of our margin performance in the 2nd quarter. Leverage on organic growth, improved productivity and lower year on year portfolio and footprint actions contributed a combined 2.90 basis points to margins. Selling price benefits more than offset raw material inflation, adding 30 basis points to operating margins.
Foreign currency, net of hedging impacts, reduced margins by 20 basis points. Lastly, during the Q2, we settled several respiratory and oral care related lawsuits, which decreased margins by 70 basis points. Let's now turn to Slide 9 for a closer look at earnings per share. 2nd quarter GAAP earnings were $3.07 per share, up 19% year over year. Underlying earnings were $2.59 per share when adjusting for the Communication Markets divestiture gain net of related actions.
Let me now discuss the primary drivers of the year on year increase in Q2 earnings per share. The benefits of organic growth, productivity and lower year on year portfolio and footprint actions added a combined $0.47 to per share earnings in the quarter. The previously mentioned legal settlements reduced Q2 earnings by $0.07 per share. Higher year on year net interest expense and retirement benefit expense decreased earnings by $0.06 per share. Our underlying Q2 tax rate was 19.8%, which increased earnings by $0.16 per share.
The lower tax rate was driven primarily by U. S. Tax reform and the continued benefits from our supply chain centers of expertise. Lastly, lower shares outstanding added $0.04 to per share earnings. Please turn to Slide 10 for a look at our cash flow performance.
2nd quarter free cash flow was $1,500,000,000 up 14.5 percent year on year. Free cash flow conversion was 83% in the quarter. This includes a 16 percentage point headwind from the divestiture gain of the Communication Markets business and related actions. 2nd quarter capital expenditures were $365,000,000 up $63,000,000 year on year. For the full year, we continue to anticipate CapEx investments in the range of $1,500,000,000 to $1,800,000,000 During the quarter, we paid $802,000,000 in cash dividends to shareholders and returned $1,600,000,000 to shareholders through gross share repurchases.
Through the first half of the year, we repurchased $2,500,000,000 of stock and now expect full year repurchases to be in the range of $4,000,000,000 to $5,000,000,000 versus $3,000,000,000 to $5,000,000,000 previously. Let's now review our business group performance, starting with Industrial on Slide 11. The Industrial Business Group delivered 2nd quarter sales of $3,100,000,000 up 5.7% organically. Industrials growth was broad based across all geographic areas and businesses. Our Advanced Materials, abrasives and separation and purification businesses led the way with high single digit growth in the quarter.
Looking at the rest of the industrial portfolio, our industrial adhesives and tapes, auto and aerospace and automotive aftermarket businesses all delivered mid single digit growth in the quarter. On a geographic basis, Industrial's organic growth was led by a 7% increase in EMEA, followed by mid single digit growth in each of the other areas. Industrial delivered 2nd quarter operating income of $724,000,000 Operating margins were 23% with underlying margins up 180 basis points, excluding the impact of last year's Q2 portfolio and footprint actions. Please turn to Slide 12. 2nd quarter Safety and Graphics sales were $1,800,000,000 up 8.5% organically, with strong growth across all businesses and geographies.
As Mike mentioned, our Personal Safety business continued to post excellent growth, up double digits in the quarter. The integration of our Scotts Safety business is performing well, and we are pleased with the performance of the business. Commercial Solutions was up high single digits, while the Transportation Safety and Roofing Granules businesses were both up mid single digits. Geographically, organic growth was led by 10% growth in EMEA with high single digit increases in both the U. S.
And Asia Pacific. Latin America, Canada grew 6% organically in the quarter. Operating income was $480,000,000 with operating margins of 26.4%. Please turn to Slide 13. Our Healthcare business generated 2nd quarter sales of $1,500,000,000 up 3.8 percent organically.
Our Medical Solutions business, which is our largest segment in Healthcare, grew mid single digits in Q2. Oral Care was up 3% with continued good growth internationally, particularly in developing markets. Food Safety grew high single digits, while Health Information Systems grew mid single digits. Finally, our project based drug delivery business declined low single digits year over year. On a geographic basis, Asia Pacific and Latin America Canada led the way, both up high single digits.
EMEA grew 5%, followed by 1% in the U. S. We saw continued strength in developing markets, up double digits led by China, Hong Kong growing in the high teens. Healthcare's 2nd quarter operating income increased 7% to $435,000,000 and underlying operating margins were just over 30%, adjusting for the impacts of a legal settlement and the commercialization investments for our new Claroty aligners. Next, let's cover Electronics and Energy on Slide 14.
Electronics and Energy organic sales growth was 5.2% in the 2nd quarter. Sales were $1,300,000,000 The electronics side of the business grew 4% organically, led by mid single digit growth in Electronics Material Solutions. Our energy related businesses were up 9% organically, led by electrical markets, up double digits. As mentioned, we closed on the sale of substantially all of the Communication Markets business in the quarter and expect to close the remaining portion by the end of the year. On a geographic basis, the U.
S. Led with high single digit organic growth followed by mid single digit growth in both EMEA and Asia Pacific. Latin America Canada was up low single digits. 2nd quarter operating income for Electronics and Energy was $865,000,000 with underlying operating margins of nearly 28%. Please turn to Slide 15.
2nd quarter sales in Consumer were $1,200,000,000 and organic growth was 4.3% year on year. Our home improvement business grew double digits organically, continuing its track record of strong performance. Our leading brands continue to win in the marketplace, particularly Command and Filtrete, both up double digits. The Home Care business and Stationery and Office Supply business each delivered low single digit growth in the quarter, while consumer healthcare declined. Looking at consumer geographically, growth was led by a 7% increase in the U.
S, followed by mid single digit growth in Latin America, Canada. In the second quarter, we continued to see strong consumer demand for our products in the U. S, particularly in the e commerce channel. Finally, operating income was $261,000,000 with operating margins of 21.4%. That wraps up our review of the 2nd quarter results.
Please turn to Slide 16, and I'll cover our updated 2018 guidance. Our full year organic growth expectations remain unchanged in the range of 3% to 4%. With respect to earnings, we now expect full year adjusted EPS to be in the range of $10.20 to $10.45 versus the prior range of $10.20 to $10.55 The update to the range reflects the impact of the divested income associated with the Communication Markets business. Finally, please note that we now expect that foreign currency translation will add approximately 1% to full year sales growth versus a prior expectation of 2%. With that, we thank you for your attention, and we'll now take your questions.
And our first question comes from the line of Scott Davis of Melius Research. Please proceed with your question.
Hi. Good morning, guys.
Good morning, Scott.
Inge, you will be missed. You did a fantastic job as you know. My big shoes to fill, but I'm sure will do great as well. Anyways, you're quite welcome. Guys, one thing that caught my eye just in the prepared remarks was your ERP rollout comments.
Can you tell us,
is that in every segment? Is that how big of a deal is this? And what's your confidence level that the pull forward was just 50 to 100 and not something greater than that? Is it possible to have that kind of precision?
Yes. Scott, we've been working on deploying our business transformation, our ERP rollout globally for a number of years. And we have largely completed our deployment in Europe, West Europe in particular. And now we as we came into 2018, we are focused on the U. S.
And so it's a very well laid out plan of deployments by region, by business, by supply chain operations. And so we are over the next 18 months now deploying in the U. S. So we're very specific deployment by business. We did deploy our healthcare business at the end of last year.
And so, we have experience with that business in the deployment already complete. And now, we're deploying the rest of the businesses in the U. S. As we go through the next 18 months. So we have pretty clear view on which customers are impacted with the deployment at which periods of time.
And so we have very good, I think, pretty clear view of how much of the accelerated sales are in line with the deployment now that's taking place in the U. S.
Okay, fair enough. And then as a follow-up, I mean, we've seen some pretty big moves in EM currency over the last quarter. And what can you guys I mean, what's the playbook? Do you have to go in there and raise prices? I mean, do you realign some supply chains?
I mean, what's the playbook when to manage that volatility?
Yes, Scott. And the playbook on there really isn't changing. We seek to have natural hedges against currency risk and how we set up the supply chain and then we layer on top of that some financial hedges. And those financial hedges don't ultimately change the underlying financials over a longer period of time, but we have hedges that we enter into going out 1, 2, 3 years to buy time for us to adjust our cost structure, our supply chain in order to end up with a competitive supply chain in a revised FX environment. So in the short term, what we often do, especially in emerging markets, we will adjust prices to partially offset the FX impact.
And then we will adjust our supply chain, adjusting where we're manufacturing based on FX movements. That tends to take a little longer time though, Scott, and not in the short term, but we often have to change and requalify sources of supply to make that happen. For the year, Scott, I will say we started the year guiding that FX with rates as they stood at the end of the year, we thought that they would positively impact our earnings by about $0.10 Through the 1st few months of the year, the dollar weakened more and that pushed our EPS benefit that we were expecting slightly above that $0.10 In the last few months, we've seen the dollar strengthen and we now see ourselves slightly below that $0.10 And through the first half of the year, we have seen a $0.06 EPS benefit from FX. And if we see meaningful changes to that $0.10 we originally guided, we'll provide updates on that accordingly.
Fair enough. Okay. Good luck, guys. Thank you.
Thanks, Matt. Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.
Yes. Good morning.
Good morning, Andrew.
Inger, congratulations. Thanks, Mike. Look forward to working with you and the team.
Thank you, Andrew.
Same here, Andrew.
Just a question on guidance. If I look at income before taxes that you guys have on Slide 22, basically, I think prior outlook was 7.7% to 8.2% and now it's 7.8% to 7.9%. And I think the press release indicates that most of it is just adjusting for missing revenue and earnings from the divestiture, but the composition sort of doesn't make sense. Can you tell us what the moving what the big moving pieces are as we move from 7.7.8 2 range to 7.8 to 7.9?
Yes. Andrew, there's a few moving pieces there. First of all, as you noted, now that we have divested of our Communications Markets division, there's some income that, that would have been generating in the last 7 months of the year that, that will no longer be generating. And that's what's encompassed in our adjustment to our EPS guidance for the year. In particular, what you're talking about there, there's also an impact from net interest expense.
So in terms of our earnings bridge that we laid out at the beginning of the year, there's a couple of moving parts in addition to this communication markets adjustment that we announced today. First is we are buying back more shares. And we originally guided that, that would be $0.10 to $0.15 of benefit. We now see ourselves at the high end of that range, so that's on the positive. We also are borrowing more money, so our net interest expense is going up.
So we started the year guiding that net interest expense would be a benefit to our EPS of $0.05 to $0.10 we now think that will be approximately flat for the year.
Okay, got you. So these are the 3 moving pieces. And just a question going back to the ERP question. A, I assume your guidance sort of incorporated. Did you guys anticipate this pre buy in the second quarter?
And the second, just how do you guys think about sort of managing disruptions from ERP implementations in North America? Because Western Europe and I do appreciate that Western Europe was a much more significant undertaking in terms of shutting down facilities, moving stuff around. But you did have negative top line comps there for a while. So going to the second half, as you have to manage ERP disruptions in North America, what gives you confidence that there will not be hits to organic growth? How are you guys going to manage it?
Sorry, I
don't answer your question. Yes. I would maybe start with as we've talked a lot about with our business transformation, it really starts and ends with the customer for us. So we are in our deployments, that's where we start. We focus on how to do the best for our customers, minimize impact and provide benefits with where we're going with business transformation.
And I would say, as we deployed in Europe, that was true. I mean, you are asking the customers to significantly change how they interact with us. But on the other side of that change process is a lot of benefit for how we work together. And so I think we saw that in Europe. And I we had the deployment and some of the same things we're seeing now in the U.
S. Where we had some accelerated purchases. I don't think we would characterize it the way we did that we saw growth impacted by that business transformation. That was other dynamics in the marketplace and even some of the things that we're doing around portfolio. So and maybe to a degree, some of the things we're doing about some of the strategic investments there.
But the layout with a focus on customers and how we manage that, that's part of what we're doing in the U. S. Now. We're engaging them day in and day out, communicating with them early about how this is progressing, working with them very closely about managing through any disruption as we scale down the legacy systems and scale up the new ERP and surrounding capabilities. And so that process, we are managing supply all the way through the calendar of those steps.
And this accelerated buy, we expected some accelerated buy. We were working with our customers as we got closer, how much interruption would they see, how much accelerated buy made sense if and it's really up to them. Ultimately, they're making the decision on what they buy based on the information we're communicating with. I would say it's in line with what we've seen as we've deployed through West Europe. And I think it's projecting that we're doing good job of deployments.
They're on track and progressing well.
So from your perspective, there is high degree of visibility on organic growth in second half?
Yes. Related to the ERP deployment, absolutely. Thank you.
Our next question comes from the line of Andrew Kaplowitz of Citi. Please proceed with your question.
Good morning, guys. Congrats and good luck again.
So there's
obviously been a little more noise here with the rollout. But can you give us a little more color on how should we think about your organic sales growth guidance by segment? If we look at your annual guidance, you guys have talked about Healthcare at 4% to 6%, maybe you're trending a little below there, but Safety and Graphics is trending way above. Is there a bit of a trade off there? And then are the other segments generally in line for the year?
Is that how we should think about it?
Yes. Andy, thanks for the question. Just a few things. As far as the impact of this ERP go live impact and the way it's impacting different segments in the U. S, we see these impacts primarily in our industrial, Safety and Graphics and Electronics and Energy Business Groups.
It's not really having a material impact on consumer and really no impact on our Healthcare business. So in terms of how you think about that impact in the 2nd quarter and the 3rd quarter and 4th quarter, it's really those three businesses that were impacted. Now in terms of our guidance for the year, we continue to see industrial globally. We had originally guided 3% to 5%. We see that most likely in the bottom half of that range and that aligns with the updated total company guidance that we provided in April.
We do see healthcare probably closer to the 4% growth for the total year. And Safety and Graphics, which we'd of of our original guidance. The others are consumer and electronics and energy. We see those solidly in the ranges that we first put out.
Nick, that's helpful. And maybe I could ask you about pricing. Obviously, very strong pricing in the quarter. When you look at price versus raws, it actually accelerated or was better in Q2 than Q1. I know you said it was going to be an elevated year for pricing, but are there any particular end markets where pricing is particularly strong?
And then do you think the headwind on price versus raw material costs could be less than the $0.05 to $0.10 for the year that you updated us on last quarter?
Yes. The $0.05 to $0.10 Andy, just to be clear, that's just the raw material headwind that we updated that. And as far as price growth, it's actually, Andy, quite broad. It's I won't point out one business or one geography as really driving these results. It's really quite broad and deep where the price growth is.
In terms of impact on margin, I think I said earlier that I we continue to see that as being positive for the year. And halfway through the year, we continue to see that highly confident that our price increases will more than offset whatever we see for raw material headwinds for the year.
Our next question comes from the line of Julian Mitchell of Barclays. Please proceed with your question.
Hi, good morning. And I'll echo the comments on thanks to Inger and welcome to Mike. In terms of, I guess, maybe a first question on a couple of the end markets. Any updated thoughts on the automotive outlook, particularly in your industrial business? And also within Electronics and Energy, there had been this bifurcation earlier in the year where device sell through was soft, but the sort of CapEx or Electronics Materials business was very strong.
Just wondered how you've seen that playing out more recently. And are you worried about the CapEx portion or EMS decelerating given what's happening with device sell through?
Yes. Thank you, Julian. So starting with the automotive, we continued year to date through the first half, we continue to see strong growth relative to the build rates globally. So remember, we're managing a global automotive business focused around key account relationships with the OEMs globally. And we're seeing continued good performance on our spec ins and penetration into the marketplace.
And so good growth year to date relative to the build rates. Some improvement in the build rates in the Q2, still looking at IHS projections, up over 4% slightly over 4% 2nd quarter. Again, total year still in line with that 2 point 2% kind of number and always watching quarter to quarter kind of the ups and downs there. But performing well and when you bring together our automotive electrification capabilities and what we're doing in our technology and applications around that, we continue to see a very robust outlook for outgrowing the build rates. If you turn to Electronics and Energy, we continue to see, I would say, strong growth in what we've been talking about as high growth electronic segments around automotive electrification, around data centers, semiconductor fabrication.
That continues to move forward. And semiconductor fabrication behind maybe part of your question there with where CapEx is being spent, still seeing significant growth opportunities for us. The rest of the electronics, I would say electronics in general is playing out in line with the way we laid it out at the beginning of the year. And that was more, I would say, modest growth in the consumer electronics part of our portfolio and stronger growth in that those higher growth segments. There's some, I would say, some shifts here or there in the quarter, but pretty much playing out as we expected in our Electronics and Energy business pretty much right down the middle of the range that we had laid out at the beginning of the year as well.
Thanks. And then my second question would just be around, if you look back to your sort of EPS road map from Slide 8, way back at the December outlook meeting from Nick's presentation. I think you've given a very thorough update on sort of 2 of the main chunks in that. But maybe any color on the productivity piece, how that's trending in terms of footprint optimization, business transformation and the manufacturing productivity in terms of, I guess, what are the saving how are the savings from those various programs tracking in the first half versus what you'd expected? And when there are any gyrations in the sales line causing you to accelerate some of the productivity plans?
Yes, Julian, the in terms of the 2018 roadmap that I provided last December and then we updated it in January after tax reform, the other components are staying where we expected, but let me give a little color on it. Even organic growth with the roll down that we had in our growth expect total year organic growth expectation for the year. We see more of our growth coming from price, which is accretive to EPS. So our organic growth impact on earnings remain unchanged. Footprints optimization, much of that, Julian, was just not repeating the charges that we took in 2017.
There was some incremental and some charges and some benefit, those largely washed in 2018. We are expecting the majority of that true benefit to be coming in 2019 2020. So that is progressing exactly as we expected. Raw materials, as I noted, we adjusted that down from that original guidance. Business Transformation and productivity, both of those are tracking to the ranges that we put in that they're performing exactly as we expected.
Great. Thank you. Our next question comes from the line of Deane Dray of RBC Capital Markets. Please proceed with your question.
Thank you. Good morning, everyone. And Ingo, wish you all the best and congrats again to Mike.
Thanks,
Dean. Hey, I'd like to follow-up on some of the business line specific questions that Julian started there. And Mike, can you address how auto aftermarket did in the quarter versus some of the fall off we saw in the Q1? And then in oral care, we saw the total growth. How did the U.
S. Market do specifically? Has the distribution channel calmed down? Maybe talk a bit more about this launch. It looks like that Clarity will compete directly with Invisalign and is that what are the competitive dynamics there?
Yes, sounds good. So starting with the industrial automotive aftermarket question. Industrial, we saw broad based growth across all geographic areas, all businesses, and we highlighted some of the leading growth there. We saw mid single digit growth in our automotive aftermarket business in Q2. Coming out of Q1, we were really looking hard at the market.
We saw end demand soften as we came out of Q1, but the total year was projecting nominal growth for that marketplace. We expect it to improve as we went through the year, and we saw that start in Q2. We saw the demand pick up. We saw our opportunity in the marketplace pick up across developed economies in particular and the U. S.
Leading that. So we saw the kind of improvement we expected with automotive aftermarket and we're projecting the total year in line with where we started at the beginning. Turning to oral care, oral care is an important business for us. We're recognized as a leader in a number of positions, leveraging our material science, and we continue to innovate and look to invest and grow this business as we move ahead. It really does leverage our strengths.
If you look at the overall growth in 2nd quarter, 3% for worldwide growth, down slightly in the U. S, improving over Q1. And again, what we're expecting is to see some improvement globally and led again by developing markets, but improving as we go through the year, still some room to go and improvement in the U. S. As we move ahead.
We did announce and introduce our CLARITY aligners at the American Association Orthodontists show in May. And we believe that this now positions us to have the broadest set of solutions across orthodontic platforms. And we're actively onboarding orthodontists right now. So it's really a play for us to help have a broad based suite of solutions for the orthodontists in the global market. We're getting so far getting very good and positive feedback.
Got it. And just as
a follow-up on tariffs and maybe Nick can clarify the point that you expect to be positive in price costs. Does that include the tariffs that have been announced and acted? And what's the look forward on potential risk as this may get escalated?
Yes, Deane, The guidance that I said is inclusive of tariffs that have been enacted. So when we're talking tariffs, there's a number of tariffs. First, the steel and aluminum under the National Security Act and that impact as well as the Section 301 List 1. Those 2 that have already been enacted, we see having a fairly immaterial impact on us. We estimate that to be approximately $10,000,000 or $0.01 a share on an annualized basis.
The direct and indirect impact of those tariffs. We are actively monitoring and assessing the potential impact from Section 301 List 23 if those were implemented and any potential retaliation that could occur with those. And we're prepared to act with sourcing changes, supply changes and pricing changes if enacted. So my initial statement stands that we think pricing will offset raw material impacts there. And if tariffs expand, we continue to see that happening.
We're not quantifying the impact of those latter 2 since they haven't been enacted yet, But we are prepared with actions to minimize the impact of that.
Thanks, Steve.
Our next question comes from the line of Laurence Alexander of Jefferies. Please proceed.
Good morning. Two quick ones. First, on the price versus raws dynamic, if raw material pressures peak out, do you think you can maintain the same pace of price? Or is a certain amount of the price mix just the raw material offset? And secondly, on Asia, specifically in China, can you parse out a little bit the trends driving the pickup in Chinese growth year over the acceleration from Q1 to Q2.
Is that just consumer and health or is there something else going on there?
Yes. Lawrence, on the price raw materials, we are likely seeing that our commodity prices and the increases we're seeing there likely at a peak level. And our pricing projections, our selling price projections are consistent with that. And that's part of our anticipation that in a more stable world going forward with commodities, we'll continue to have our prices our selling price increases more than offset what we're estimating now for commodity price increases. And we really don't see that changing.
And if the commodity prices start to change again, we will be prepared to act.
Yes. And Lawrence, just taking a look at China, we had strong growth in Q2. Electronics performed very well as we continue to, I would say, win business with the companies based there, including the China OEMs. We also saw strong growth in our domestic facing businesses, kind of the domestic economy facing businesses. We've had a strategy to prioritize growth here in line with what China is doing to develop their economy.
And so as you noted, healthcare is a strong leader of that growth in the first half of the year. Big part of our consumer business is performing very well. Safety and Graphics also really with the domestic facing portfolio doing well. And even if you look at our industrial business, we have platform businesses in our industrial business group that are performing well as performing well too. And that would be a good example, our industrial adhesives and tapes business doing very well in China.
So it's broader than just healthcare and consumer, really centered around where the growth is occurring in the broader China market. Thank you.
Our next question comes from the line of Nigel Coe of Wolfe Research. Please
proceed.
Hello, Mr. Coe, your line is open. Please proceed with your
question.
Am I live?
Yes, you're live, Nigel.
Sorry about that. Some technical issues here.
So apologies if it's
been addressed already. I was a little bit late during the call, but the $0.15 probably NIC of restructuring associated with the gain on the comps business. Is that just related to the E and E comps segments? Or is this broader? And maybe just some color in terms of what actions you're taking with the $0.15
Yes, Nigel, that's the actions that we're taking are to address stranded costs that are left after the divestiture of our CMD business. So they're addressing structural costs that this divestiture is leaving. We started those actions in Q2, and we expect to take more in the second half of the year to offset the what could have been a negative impact if we had left those stranded costs in the company going forward.
Okay. And would that be a payback, roughly quick payback, 12 month payback or a little bit longer?
We expect that, that will be paying back for us next year. Some of those actions will trail into next year in terms of when the cost savings start to happen, but we'll be starting to see that benefit in 2019. And Nigel, one other thing, I'm not sure if you were asking this earlier. This charge is almost entirely being taken at a corporate level and not in our Electronics and Energy business.
Got it. Okay. And then just a follow on question on the guidance, the way the guidance set up as second half. We're getting questions in terms of it's still somewhat back end loaded, particularly when we think about the way the FX is coming through the P and L and of course comms comes out first half and second half. What's best in the second half versus the first half to get at the midpoint of the guidance range?
For the second half of the year, we do expect that we'll be seeing more benefit from share repurchases than we saw in the first half. We do think productivity will be better in the second half than what we saw in the first half. And then in terms of commodity prices from a year on year basis, we expect that that will be fairly neutral between the first half and the second half. Pricing will likely be better in the second half than in the first half.
Pricing to show. Okay, thanks, Nick.
Our next question comes from the line of Jeff Sprague of Vertical Research. Please proceed with your question.
Thank you. Good morning, everyone. Hey, just a quick cleanup for me on Healthcare and then maybe a bigger picture question for Mike. Healthcare U. S.
Growth has been a little on the soft side year to date and in the quarter, perhaps it's dental, but are we observing some hangover from pull forward on sales there from ERP last year in the healthcare business? Yes, Jeff, healthcare in the U. S, where you're seeing the impact, broadly we had strong growth our Medical Solutions business is leading the way there. Maybe just a note about that too. We've been talking about this as our medical consumables business in the past, but it really is focused on value based care and health economics and it's a much and more integrated portfolio around that.
So I'm going to be talking about is medical solutions. So leading the way, we saw good growth in the U. S. Also in food safety and health information. Oral Care was down slightly.
The bigger drag in the second quarter was our drug delivery business. Again, we talked about project based business. We saw a decline in Q2 from that business, and that was the bigger impact. So broader base, stronger growth that will position us well in the U. S.
As we move ahead. And then you had?
Yes. And then just on
the Mike, on the portfolio, obviously, you've been working closely with Inge all along, and I guess things will always be kind of under review. But with CMD out
of the way here now,
do you view the portfolio as relatively stable or there's more that you're working on internally and want to reevaluate? If you look at where we are focused as we move ahead, the playbook is working. Our playbook is working, but there are opportunities in each of those three levers, including portfolio management. We are now an active portfolio manager and we do have a robust pipeline of how we look at our portfolio and we'll be working to best utilize the 3 ms model and optimize the portfolio around our model for value creation. So are going to continue to be an active portfolio manager as we move ahead.
It's about prioritizing resources. It's about targeting where we go with M and A and it's also about reviewing our businesses as we go. So I see that as very much part of our future value creation opportunity and it's a priority for me as I step into the role. Thanks and best wishes to Inge. Take care.
Yes. Thanks, Jeff.
Our next question comes from the line of Steven Whittaker of UBS. Please proceed with your question.
I'll echo everybody's comments here. So a lot of ground. I just want to dig a little bit more into that important price point, the 1.1% in the quarter. You mentioned it was quite broad, but you usually also talk about sort of splitting out currency impacts and other impacts versus underlying business year on year relative to taking pricing on existing items and new products sometimes driving a big part of it? I'm just trying to get a sense for the kind of operating robustness of that number and the repeatability of it as we're looking through not only imply the rest of the year, but later into next year, too?
Yes, Stephen. Yes, as I said, it's broad based, 100 basis points up in the U. S, EMEA was up 180 basis points, Latin America, Canada, 2 10 basis points and APAC, up 40 basis points. And that 110 basis points is inclusive of our Electronics business, which is normally a price down model. If we pull electronics out, our underlying price growth was up 130 basis points.
And as far as geographies and what we see as potential there, we continue to see we don't see that going down. Part of your question, Steve, was also on FX impact. Right now, we estimate there was only about $20,000,000 of that $110,000,000 or $130,000,000 depending on how you look at it, a price growth that was coming from FX. The vast majority of it is coming from core underlying price growth. And it's really a reflection of the value we create for our customers.
And this is a new point I'm making here. It's based it's partially being driven by improvements in our global price management that our business transformation initiative is enabling. The ability to have better governance and better control over that pricing, we're starting to see that benefit and that's part of what you're seeing change here. Okay.
That's helpful. And Mike, Jeff just referred to it on the divestiture side of the portfolio change side. But as I'm looking at acquisitions, Scottsafee was a great strategic play for you guys. Are you what do you see in terms of the pipeline right now? Should we be expecting anything in the bigger size range soon?
Or are things on hold at all as you're kind of going through the transition? What should the expectations be on the acquisition front?
Yes. Thanks, Stephen. For me coming in, as always, organic growth remains our first priority. And so we're going to continue to prioritize investments in R and D and CapEx and product commercialization. With that in mind though, in managing our portfolio, we're looking at M and A as an opportunity to create value.
We're going to maintain the flexibility to pursue additional strategic acquisition opportunities like Scotts Safety. And we have been, I think, very clearly focused on strategies that leverage our fundamental strengths, unique value creators to 3 ms, our ability to integrate successfully these acquisitions and to create market leadership positions like we've been doing in personal safety. So we are active. Our top priorities, as I look ahead, are Healthcare and Industrial. Safety and Graphics continues to be a priority, those are very much focused on integrating Scotts Safety at this time.
With that said, all five businesses are active, and we have strong overall pipelines for us to work with. And so for me, it's about really moving ahead and identifying those opportunities that are clearly linked to those strategies where we can create differentiated value.
Great. That's helpful. Thanks and good luck.
Yes. Thanks.
Our next question comes from the line of Steve Tusa of JPMorgan. Please proceed with your question. Hey, guys. Good morning.
Hey, Steve.
So just a better understanding some of the moving parts here, back to Nigel's question on the kind of seasonality. You pulled forward a bit of sales here in the Q2. You've got a pretty tough comp in the Q3. Anything on that kind of comp that we should be aware of? I mean, does is it kind of like second half looks like first half whereas Q1 was lower than Q2 kind of a 3% range?
Is that kind of how we're thinking about the second half split between 3Q and 4Q on organic? And then also just on EPS, you had a low tax rate, the tax rate kind of the low end of the range this quarter. Maybe that steps up a little bit in the Q3. Will you grow earnings here sequentially in the Q3?
Yes, Steve. In terms of growth, let me give some guidance of how we're seeing growth between the 3rd Q4. Mike talked earlier about the impact of our U. S. Go live with our ERP system and the amount of the revenue.
So that impact, as we expect that to be us to be giving back some of those sales in the second half of the year, we expect that to disproportionately impact the Q3. And as you noted, between the two quarters, Q3 is the tougher of the 2 comps between the 3rd and the 4th quarter. That all in, we are looking at the 3rd quarter being lower growth than the 4th quarter, both of them aligned with our expectation of 3% to 4% for the total year. But I'm not going to be surprised if we have a lower number in Q3 given what we're seeing right so far for the year, and it's in line with our 3% to 4% guidance. And then in terms of EPS for each quarter, try to avoid giving EPS guidance on a quarter by quarter basis, but we continue to see ourselves very firmly delivering in that 10 on an adjusted basis, the 10.20 to the 10.45 for the total year.
Okay, great. Thanks a lot.
Our next question comes from the line of Joshua Aguilar of Morningstar. Please
So drug delivery down low single digits year over year. And I think last quarter was the same case off of tough comps. Obviously, this is
a more project based business as
you guys said. And I remember in your Investor Day in 2016, you were talking about some of the advantages from drug delivery like analytics and patient compliance. More long term, are you guys still optimistic about the future trends there generally with drug delivery? And can you give us an update about what you're excited about?
Yes, Josh, what you're referring to, some of the opportunities that we see for growth in that business. And we still we see opportunities to take that business to a positive growth business as we move ahead. It will continue to be a project based business. So quarter to quarter, it can be lumpy and up and down, but we do see opportunities. We have some unique capabilities and technology there that we can apply as we move ahead.
Okay, great. Thanks.
Yes.
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.
To wrap up, we had a strong performance in the 2nd quarter, led by broad based organic growth, expanded margins and a double digit increase in earnings per share. We are executing our playbook and are positioned to deliver a successful 2018. Thank you again for joining us this morning, and have a good day.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your