Ladies and gentlemen, thank you for standing by. Welcome to the 3 Chem 4th 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, January 24, 2017.
I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3M.
Thank you, and good morning, everyone. Welcome to our Q4 2016 business review. On the call today are Inge Jeline, 3M's Chairman, President and CEO and Nick Gangstedt, our Chief Financial Officer. Each 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 3m.com under the heading Quarterly Earnings.
Before we begin, let me remind you of the dates for our investor events in 2017 as highlighted on Slide 2. 1st, starting with earnings. This year's conference calls will be held on April 25, July 25 and October 24. 2nd, we'll be hosting a European Investor Meeting on June 6 7 at our headquarters in Neuss, Germany. Please hold the dates.
Additional information will be provided 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 turn to Slide 4, and I'll hand off to Inge. Inge?
Thank you, Bruce. Good morning, everyone, and thank you for joining us. I will begin my remarks with a recap of the Q4, and later in the call, I will provide some comments on our full year performance. Our team had a good finish to 2016 as we delivered double digit growth in earnings per share along with strong margins and a robust cash flow. We also continue to position 3 ms for the future through our 3 key levers while returning significant cash to our shareholders.
With respect to EPS, we posted earnings of $1.88 per share, an increase of more than 13% year over year. Total sales across our enterprise was $7,300,000,000 up slightly versus last year's Q4. Organic growth company wide was 2% with 3 of our 5 business groups delivering positive organic growth. As I indicated in our October earnings call, organic growth in Industrial turned positive in the 4th quarter. This business had a strong finish to the year with 5% organic growth, which was broad based across the portfolio.
Safety and Graphics posted 2% organic growth with a good performance from Personal Safety, one of our Heartland businesses, as well as from roofing granules. As we expected, organic growth in Healthcare was similar to the 3rd quarter at 1.3%. We expect HealthSpa to regain its momentum as we move further into 2017 and as our additional growth investments begin to pay off. Organic growth in consumer was down 1%. While this business experienced positive point of sales across its retail customers, it was negatively impacted by inventory reductions throughout the retail industry.
Electronics and Energy closed out the year with another quarter of sequential improvement, posting organic growth that was down yet slightly while once again expanding its operating margins. Looking at margins across our entire company, we delivered another strong broad based performance. Margins were up more than 200 basis points to nearly 23%, ranging from 30% in Healthcare to 21% in Safety and Graphics. At the same time, we generated healthy cash flow with a free cash flow conversion rate of 154%. Our strong and consistent cash flow enabled us to invest in the business, but also return significant cash to our shareholders.
And in the Q4, we returned SEK 1,600,000,000 to shareholders through dividends and share repurchases. In summary, we had a good finish to 2016, and I will now turn the call over to Nick, who will take you through the details. Nick?
Thank you, Inge. Let's begin with Slide 5, where I will break down the 4th quarter change in sales. Organic local currency sales grew 1.6% in the quarter, with organic volume up 1.5% and selling prices up 0.1%. Divestitures reduced sales by 0.4 percentage points. This impact relates to the divestitures of non strategic businesses, further evidence of our ongoing portfolio prioritization and focus on our best opportunities.
Finally, foreign currency translation reduced sales by 0.8 percentage points. Considering all factors, 4th quarter sales in U. S. Dollars increased 0.4% versus last year. On a geographic basis, U.
S. Organic growth increased 1.2%, led by a mid single digit performance in Industrial. Healthcare and Safety and Graphics businesses also grew organically in Q4. Turning to Asia Pacific, organic growth was up 2.4% with Healthcare and Consumer leading the way. This growth was partially offset by a decline in electronics and energy during the quarter.
Within Asia Pacific, organic growth increased 6% in China, Hong Kong and 3% in Japan. Excluding our electronics businesses, China, Hong Kong was up 11% and Japan grew 2% organically. EMEA organic growth declined 2.4%. West Europe was down 1% as growth in Safety and Graphics and Industrial was more than offset by declines in our other business groups. Central East Europe and Middle East Africa declined mid single digits year on year, impacted by ongoing challenges in Saudi Arabia and Turkey, which we expect to persist in the near term.
Finally, Latin America Canada was growing area with organic local currency growth of 4.1%. We saw solid growth in 4 of our 5 businesses, led by high single digit growth in Healthcare. At country level, Mexico delivered strong double digit growth, while Canada was up 3% and Brazil increased 1%. Please turn to Slide 6 for the Q4 P and L highlights. Company wide 4th quarter sales were $7,300,000,000 and we generated earnings of $1.88 per share, a Q4 record.
GAAP operating margins were 22.7%, up 220 basis points year on year, which we delivered while making incremental strategic investments of $50,000,000 to drive future sales and profit growth. On the right hand side of this slide, you'll see the components of our margin performance. Starting with the benefits, price and raw materials combined increased margins 50 basis points versus Q4 2015. Market prices for many raw materials were once again favorable year on year and our global sourcing team continues to deliver savings above market. Core price growth was down slightly in the quarter as we took targeted actions to drive organic volume growth.
Moving to restructuring, you may recall that in the Q4 of 2015, we announced a restructuring plan to enhance our competitiveness and productivity. The associated benefit from this action boosted 4th quarter 2016 operating margins by 40 basis points year on year, in addition to the positive comp related to the Q4 2015 charge itself. Pension and OPEB expense declined year on year as has been the case throughout 2016. This increased Q4 margins by 90 basis points. Organic volume and utilization was neutral to margins in the quarter, a marked improvement versus the headwinds we experienced through the 1st three quarters of 2016.
Improved organic volume growth was a factor in this improvement, particularly in our Industrial and Electronics and Energy businesses. Turning now to headwinds. Foreign currency impacts, net of hedge gains, decreased margins by 20 basis points in Q4. Legal and other reduced margins by 30 basis points in the quarter, primarily due to higher year on year costs from legal settlements. Incremental strategic investments lowered margins by 70 basis points
in the
quarter. As we indicated during our December outlook meeting, we are increasing investments in a number of core platforms to accelerate growth in 2017 and beyond. At the same time, we continue to take actions in Q4 to better optimize our global manufacturing footprint, improve service to our customers and drive ongoing productivity. Finally, while you don't see it
on this
chart, Q4 corporate and unallocated costs were higher than anticipated, largely due to the aforementioned legal costs. For the full year 2017, we anticipate corporate and unallocated costs will be in the range of $225,000,000 to $275,000,000 Let's now turn to Slide 7 for a look at earnings per share. 4th quarter GAAP earnings increased 13.3% to $1.88 per share. As you see, a number of factors impacted our earnings. Growth and margin expansion added $0.16 to per share earnings in the quarter.
Acquisitions and divestitures increased earnings by $0.04 per share, driven by gains on the divestiture of the pulpy mask business within industrial, along with the sale of non core intellectual property in electronics and energy. Foreign currency impacts, net of hedging, reduced pretax earnings by $18,000,000 or the equivalent of $0.02 per share. Higher balance sheet leverage led to an increase in net interest expense year on year, reducing per share earnings by $0.02 Our 4th quarter and full year tax rate came in lower than we had projected due to a combination of increased benefits from our supply chain centers of expertise along with improved geographic profit mix. The 4th quarter tax rate was 28.2% versus 29% in last year's 4th quarter, which increased earnings by $0.02 per share. Finally, average diluted shares outstanding declined 2% year over year, which added $0.04 to 4th quarter EPS.
Please turn to Slide 8 for a look at our cash flow performance. 4th quarter operating cash flow was $2,200,000,000 Free cash flow conversion was 154% in Q4 and 104% for the full year. For the 3rd consecutive year, free cash flow conversion exceeded 100%. In the 4th quarter, we invested $436,000,000 in CapEx, bringing our full year $1,000,000,000 to $1,500,000,000 Also in the Q4, we returned $1,600,000,000 to shareholders via dividends and gross share repurchases. For the full year 2016, we returned $6,400,000,000 to shareholders, including cash dividends of $2,700,000,000 and gross share repurchases of $3,700,000,000 For 2017, we expect gross share repurchases in the range of $2,500,000,000 to $4,500,000,000 Let's now review our business group performance starting with Industrial on Slide 9.
Industrial posted Q4 sales of $2,500,000,000 leaving the company with organic growth of 4.6%. Our automotive OEM business led industrial delivering strong double digit growth, continuing its consistent track record of outpacing growth in global car and light truck builds. Advanced Materials, Automotive Aftermarket and our Separation and Purification business all posted solid mid single digit growth year on year. On a geographic basis, Industrials organic growth was broad based across all regions with mid single digit growth in Latin America and Canada, the U. S.
And Asia Pacific, while EMEA was up low single digits. The Industrial business delivered strong operating income of $553,000,000 in the quarter, with margins up 260 basis points to 21.9%. The margin improvement was driven by the gain on sale of Polymask, past restructuring actions and ongoing productivity improvements. Please turn to Slide 10. Safety and Graphics delivered another good quarter with 4th quarter sales up 2.2 percent organically to $1,300,000,000 Our Personal Safety business posted solid mid single digit organic growth in Q4.
This included double digit growth in China, Hong Kong, where we continue to experience strong end market demand for our personal safety solutions. The Roofing Granules business delivered another solid quarter of high single digit growth, which capped off a consistently strong year. On a geographic basis, Safety and Graphics growth was led by Asia Pacific and Latin America Canada, which were up mid single digits. You may recall in December, we announced the sale of our identity management business. We continue to expect the divestiture will be completed sometime during the first half of twenty seventeen.
Safety and Graphics operating income was $270,000,000 in the quarter and operating margins decreased 100 basis points to 20.8%. Adjusting for the divestiture gains and restructuring charges that occurred in Q4 of 2015, operating margins increased 120 basis points year on year. Please turn to Slide 11. Our Healthcare business generated 4th quarter sales of $1,400,000,000 Organic growth was up 1.3% in line with our expectations. Healthcare growth was led by a double digit increase in food safety, followed by solid growth in both drug delivery systems and medical consumables.
Organic growth in oral care was down slightly as the business continued to be impacted by soft end market conditions and channel inventory adjustments. Health Information Systems also declined organically year on year due to a slower rate of software installations in a tougher market over the past year, along with a challenging comp against last year's record Q4. Looking ahead, our customer pipeline is strong. Therefore, we expect growth in Health Information Systems to accelerate throughout 2017. On a geographic basis, Healthcare delivered high single digit growth in Asia Pacific with particular strength in China, Hong Kong, which was up double digits.
Latin America, Canada and the U. S. Also posted positive organic growth in the quarter. Healthcare's operating income was $410,000,000 and margins remained strong at 29.8%. Importantly, we generated these returns while investing an additional $30,000,000 to enhance growth in core platforms across the business.
Next, let's cover Electronics and Energy on Slide 12. 4th quarter sales for in our electronics related businesses, an improvement over recent quarters as end market conditions and channel inventories became more stable. As we explained at our outlook meeting in December, we are gaining penetration with leading electronics OEMs in China and also investing to capitalize on the rapid growth in automotive electronics. Our energy related businesses declined 2% organically, with growth in our telecom business more than offset by declines in electrical markets and renewable energy. As a reminder, at the end of 2015, we exited our backsheet business in renewable energy, which reduced energy related organic sales by 3.5% in Q4 of 2016.
On a geographic basis, sales in Latin America and Canada grew organically in the low single digits, while Asia Pacific and EMEA declined. Electronics and Energy delivered a strong operational quarter with operating income of $326,000,000 and margins of 26.9 percent, up 10.3 percentage points year on year. The year on year improvement was driven by a few factors that impacted Q4 margins in both 2015 2016. First, in Q4 of 2015, we incurred charges related to portfolio and restructuring actions, which reduced Q4 2015 margins by 3.40 basis points. 2nd, in the Q4 of 2016, the business realized a gain from divesting non core intellectual property, which added 270 basis points to Q4 2016 margins.
Adjusting for these items, Q4 margins increased year on year by approximately 400 basis points. Looking at the full year, operating margins were 22.3%, up 120 basis points year on year. I'll finish with our Consumer business on Slide 13. 4th quarter sales in Consumer were $1,100,000,000 And as Inge mentioned, growth was impacted by channel inventory reductions in the U. S.
And to a lesser extent, West Europe. So from a pure sell in perspective, our 4th quarter organic growth was down 0.7%. On the other hand, from a point of sale or sell out perspective, our Q4 growth was positive and in line with our historical trends. So we expect consumers organic growth will be back to more normal historical levels during the Q1. Despite these channel adjustments, we posted positive worldwide organic growth in 3 of our 4 businesses, namely Home Improvement, Consumer Healthcare and Home Care.
The Kitchenery and Office Supply Business, which was most impacted by channel adjustments, declined year on year. Looking at consumer geographically, growth was led by a mid single digit increase in Asia Pacific, while the U. S. Was flat and EMEA declined year on year. Consumers operating income was $228,000,000 with operating margins of 20.9%.
Margins were down year on year for 2 primary reasons. One, we rationalized 1 of our manufacturing sites during the quarter and 2, the business accelerated growth investments in the quarter. We continue to see good opportunities to invest and drive growth within the portfolio. In fact, we increased investments in Q4 in our category leading Command and Filtrete product lines. Both posted double digit organic growth in the U.
S. This past holiday season. That wraps up our review of 4th quarter results. Please turn to Slide 14, and I'll hand it back over to Henge for some final comments before Q and A. Henke?
Thank you, Nick.
The Q4 kept a successful year for our enterprise as we executed the playbook and delivered a strong operational performance. We increased our earnings per share by 8%. Margins were up more than 100 basis points to 24% with 4 of our 5 business groups posting margins margin expansion. In addition, we delivered free cash flow conversion of 104%, which is our 3rd year, our return on invested capital was above 20%, jumping in at 23% this year. We achieved all of this in a year of flat growth.
As you can see, we are executing well and controlling what we can control. 2016 was also a notable year with respect to our dividend as we marked 3 ms's 100 consecutive year of paying dividends to our shareholders. For the full year, once we combine dividends and share repurchases, we returned a total of SEK 6,400,000,000 to our shareholders. During financial results, we continue to build for the future through our 3 key levers, which are significant value creators for us. Let me start with portfolio management, an ongoing process that is all about strengthening and focusing our portfolio, which improves our competitiveness and make us more relevant to our customers.
This includes consolidations within 3M along with the divestiture of non core businesses, and we are active in both fronts in 2016. Portfolio Management is benefiting our customers in 3M as we now have greater scale and are able to better prioritize our resources. This includes growth investments. And at our December outlook meeting, we highlighted the incremental 100,000,000 we are investing to accelerate growth in our core platforms. We will now move on to the 2nd level, investing in innovation.
In 2016, we invested $1,700,000,000 or nearly 6% of sales in research and development, which is the heartbeat of our company. This supports both our short and long term growth objectives along with our premium margins and return on invested capital. Last year, we also celebrated the opening of a new laboratory in Saint Paul, while earning more than 3,000 patents around the world. Business transformation is the 3rd lever, which starts and ends with our customers. Last year, we will continue to make good progress with the rollout of our ERP system in West Europe, which is nearly complete.
In West Europe, we have now deployed in 11 countries of 4 largest distribution centers in our supply chain center of expertise. Globally, we now have a total of 16 countries live and the new ERP system and our 3 global service centers are also up and running. We are already beginning to realize productivity gains from business transformation, which will increase in 2017 and beyond. By 2020, it will result in CHF 5 $100,000,000 to $700,000,000 in annual operational savings and another $500,000,000 reduction in working capital. Looking upon our performance in 2016, 3 ms Playbook is working.
From an operational perspective, we are executing well and delivering premium returns. At the same time, we continue to make investments that will enable us to capitalize as growth conditions improve. As a result, we are positioned to build on our momentum and deliver another strong performance in 2017. Please turn to Slide 15. Here you see our planning estimate for the year, which are unchanged from December outlook meeting.
We estimate earnings per share in the range of $8.45 to $8.80 an increase of 4% to 8%. Organic growth is expected to be 1% to 3%. We anticipate another good cash flow performance with a conversion rate of 95% to 105%. With that, I thank you for your attention, and we will now take your questions.
And our first question comes from the line of Scott Davis of Barclays. Please proceed with your question.
Hi. Good morning, guys.
Good morning, Scott.
Good morning, Scott.
When I look at my
list of companies at least, you guys tend
to be obviously about as global as anybody gets and have a pretty broad supply chain. And my question is, how do you plan spending when even 2017, I mean, how do you plan spending when you don't have a real great sense of tariffs and trade and how all that could be disrupted in the next couple of years? Does it play into the planning at all? Or do you just continue on?
Well, as you know, hi, good morning, by the way. As you know, we are laying out very much a localization strategy in terms of our business for all subsidiaries around the world. So at this point in time, we continue to lay out the plan, as we have talked about. We are making investment in what we see the most important businesses for us to grow both in United States and overseas based on that strategy, right? So by definition, even if we have both global customers
and local customers, we need to make
the investment based on what
they are and what they quarter specifically, there is some very interesting movements, I think, coming back a little bit to historic performance relative to growth, right? We had that 1% growth in developed markets, but we are 3% in developing markets. So there is type of movement going also coming back into developing economies, which is interesting. And as you heard Nick said, if you take China, China was 6% organic local currency built all in. Excluding electronic was 11 And when you look upon our 5 businesses in China specifically, it was fantastic growth for all of them.
We have Safety and Graphics grew almost 20%, Consumer, 17% Healthcare, 15% and Industrial, 12%. So we need to continue to invest based on the growth in those segments. So we don't make a change at this point in time relative to the planning for the year. And as we said in December, we are adding another $100,000,000 this year in order to accelerate commercialization of products. But I would say, generally speaking, it's early in the year as we know, but we saw some trends here that are positive relative to growth coming, right?
You saw Industrial Business Group, almost 5% growth and it was broad based all over the world. They grew in every geographical area around the world. So very encouraging as I look upon it. And Germany had for Germany, they have positive growth for the 3rd consecutive quarter for us. So I feel more positive as we move into 'seventeen even if it's early.
And just a quick follow-up. When you guys think about I've never asked this question before, I don't know why I haven't. But is
there such a thing as book to
bill in Electronics and Energy? Or is it too short cycle for that?
Once again, can you repeat the question?
Sure. Is there such a thing as like book to bill or something like that in Electronics and Energy where you get a sense of which quarter of this year coming up you turn into positive territory? I'm trying to I don't know why I've never asked that question before, but I don't think you've ever referenced it. Trying to get a sense of which quarter you might see positive growth in E and E. Yes, Scott,
let me take that one. We don't have a formal metric that we're measuring on a book to bill ratio in our Electronics business. It is a fairly short cycle. We're working with all of our customers there to be projecting what the demands are in the future. But unlike some other industries, this is not one where we have a book to bill ratio.
That's what I thought, but I had to ask. So thank
you guys and good luck to you. Thank you. Thanks, Scott. Our next question comes from the line of Julian Mitchell of Credit Suisse. Please proceed with your question.
Hi, good morning.
Good morning, Julien.
Good morning. Just a question firstly on the consumer business. I don't recall you talking about the slowdown much at the mid December meeting. So I wondered if it was something the inventory reduction was something that became apparent very late on. And is there any color you could give around sort of days or weeks of the excess inventory in those channels today?
Julian, as far as the consumer business and the trends we saw throughout the Q4, much of this differential we saw between sell in and sell out occurred in December and in particular in the last half of December. In regards to inventory, we don't really see the channel as having excess inventory now. We see we consider it a fairly normal inventory channel level in our consumer channels.
And then if we look at the margin bridge, it was sort of curious a little bit that the utilization piece and organic volume was not a contributor. It was flat even though the sales growth performance was actually pretty good. Was there anything unusual in Q4 that weighed on that specific line in margins that meant the operating leverage was not as high as it could
or should have been?
Julian, that's and I'll just put it in perspective. We've had that particular item being noticeably negative on our margin for the 1st 3 quarters of this year and getting that to be neutral for us for the Q4 with our 1.5% volume. That's the main thing that happened for us in the 4th quarter. There isn't some particular headwind buried in there, but it was for us a notable trend change from where we've been in the 1st 3 quarters.
Do you still feel good about the
$0.10 to $0.20 of EPS accretion in 2017 from utilization?
Yes, we do, Julien. That line, that component of our EPS walk as well as every other line, we're still feeling very confident in right now, Julien.
Great. Thank you. Our next question comes from the line of Andrew Kaplowitz of Deutsche Group. Please proceed with your question.
So just a follow-up on industrial. We know you have significant short cycle exposure within industrial and you did have easier comparisons in the quarter. But I think as I said, growth sort of jumped pretty meaningfully. Can you give us some more color on how much of the improvement was maybe the energy component within Advanced Materials looking less bad or we know you have the big defense contract ramping up with Advanced Materials. How should the rest of the industrial business improving?
And how do you feel about your 1% to 3% growth forecast now for 'seventeen? Can you put over 4% in 4Q?
Well, first of all, there were it was broad based growth in Industrial, both in terms of the businesses and in terms of geographical area. So there was not one specific business that type of stood out in terms of growth. Even if you saw or Nick comment on the again, again, the fantastic performance for the automotive OEM business. But it was broad based. And it's coming back, I would say, a little bit as we have talked about earlier in terms of evolution of economies.
And I think you see now as becoming more output from manufacturing around the world, we are very early in that process. And if you look upon PMI, United States had a PMI of 54.7% in the quarter, China, 51.4% and Germany, 55.6%. So you think about that in terms of big economies, that will help us as we move forward. And as I said, it was broad based. Now to your second question, how we then feel about 1% to 3% for the year as we came out of 5%, feel good, feel good.
Too early to change that as we sit here today. But generally speaking, I would say feel good about industrial businesses. And if you think about it in terms of size, this is onethree of 3 ms. And when we start to get good momentum in that business, that's helping us a lot, right? So you saw they had good growth, and we talked about that on the last earnings call that they will grow in Q4, Q4 and they did.
And so it's very good. But I said it's too early to change anything as we move into
the year, right? So let's see after Q1 how we position it. Andy, just one more detail on that I'll share. We've been talking about this for a quarter or 2 that we have some defense contracts we were awarded and those shipments were going on in the Q4. Our BODYARMOR shipments added about 150 basis points to the total industrial organic growth in Q4.
So stripping that out, the core underlying is right around 300 basis points of growth.
Okay, Nick. That's helpful. And then maybe you've talked about Brim's ability to achieve 30 to 50 basis points of price versus cost in 'seventeen. You obviously did 50 basis points in 4Q. But pricing in the U.
S. Continues to look competitive. It was a bit worse in 4Q than it was in 3Q. You mentioned sort of going after some additional organic growth. Can you talk about CIM's ability to offset a pretty competitive U.
S. Pricing environment with the better sourcing and with the help of business transformation that you talked about? Are you still confident in positive price versus cost contributing to that $0.20 to $0.50 of organic global currency growth that you have?
Yes, Andy, there's a lot of subjects you hit there in one question.
As far
as the underlying price growth in the U. S, what we see in our view is our fundamental pricing power is not changing. It's still very strong. We did in the case of the U. S.
Take some targeted actions to help drive organic volume growth for us. Also for the total company, and this is going outside the U. S, this is a quarter where we saw less pricing actions related to FX movements. And you see that with our and that's down noticeably from where we've been in the 1st 3 quarters of this year. So all in for 'seventeen, we're still expecting the positive core price growth in the U.
S. And globally. Now the other parts of it of our ability to use sourcing to continue to add to our earnings and to our margin. I laid out a month ago that we expect between $0.10 $0.15 of EPS accretion through our sourcing effort and everything we're seeing now we see that on track. Much of that is being driven not by just pure market prices, but it's now being driven by our own efforts to be substituting raw materials and taking
advantage of our negotiation power.
Thanks, Tim. Thank you.
Our next question comes from the line of Joel Ritchie of Goldman Sachs. Please proceed with your question.
Hey, good morning guys.
Good morning, Joel.
Congrats on the 100 years of paying a consecutive dividend. Not a lot of companies can claim that. The first question I have is on healthcare. You talked a little bit about regaining momentum and I recognize that you had some product introductions in the quarter. But you also still have some headwinds on oral care.
And I'm just curious, given the headwinds also potentially from the ACA, I'm just wondering like what gives you kind of confidence that you could really see the momentum pick up as we progress through 2017?
Well, first of all, most of our businesses are doing very well there, right? So food safety is still growing very well. Drug delivery system did well as well. And then consumables in the medical space did well. So if you take that together, right, there is underlying momentum in the already second already second half of twenty sixteen and that now will start to generate growth coming into Q2 and Q3 for the year.
The pipeline, as Nick commented on, the pipeline for healthy information system is very strong. So yes, slow down a little bit in terms of execution and deployment of those softwares into the hospitals, but the pipeline is very, very strong. So I would say that when you think about it, generally speaking, we know that with investment in the areas we invest in health care, which is around coverage, is around health economics and it's about some research and development, specifically coverage will pay off rather sooner than later. And again, we see that the developing economies are starting to pick up for us. So the confidence is high that we will see the growth coming as we move into 2017.
Okay. And then maybe my follow-up question and getting back to price cost for a second. Nick, maybe talk a little bit about the fact it looks like you got about 10 basis points or so on pricing this quarter. We're moving into more of a kind of like commodity reflating environment. And so how does that dynamic going to work as we progress through 2017 on your ability to continue to get price?
Yes. Joe, the total posted 10 basis points, if we strip out the FX portion of that, then we're looking at flat to down very slightly of core underlying there. As I look at how this progresses throughout the year, we actually have a pretty steady view throughout the year, Joe, of it not changing much of just having our core underlying price growth often in that 30 to 50 basis points. I think the wild card on there is FX. The dollar has been moving a lot and that as far as what we post for price growth in the quarters will be volatile in the coming quarters with some volatility based on what happens with the U.
S. Dollar, primarily in developing markets.
Okay. Okay, got you. Thank you very much.
Our next question comes from the line of Stephen Winoker of Bernstein. Please proceed with your question.
Thanks and good morning all.
Good morning, Stephen. Just
on back to the pricing questions. Specifically, you mentioned targeted actions that you took in the U. S. To drive some volume. Can you give us a little more color on what segments you were talking about, what areas?
Yes, Steve, it's in particularly isolated places. There are some places in our consumer business where we took actions like that, also in our industrial business. Those are the most common places where we took those types of targeted actions, Steve.
Okay. And was the trigger
for that kind of thing competitive actions? Was it particular projects? I'm just trying to get a sense for kind of implications for the broader pricing power of those businesses.
Steve, we take those actions when we see an opportunity either in the competitive landscape to take share that we otherwise wouldn't have or in some cases, it's a reaction to where we see pricing pressure from competitors and we price accordingly to maintain some of the shares. So it's some of both, Steve.
Okay. And then just more specific question on E and E. Can you just give a little more sense on display material systems? How much was OLED impact this quarter? And what the other kind of impact besides OLED was?
The OLED impact, just to put it in perspective, last December when Jim Baumann was laying out the OLED impact that we felt that would have on 2017 sales. We put a range between $50,000,000 $150,000,000 of impact. We saw a number impact for total year 2016 right in the middle of that range. And for the Q4, I would call it very similar to that of in the $20,000,000 to $30,000,000 range of impact on our total revenue. That's the OLED impact on what we're seeing in the Electronics and Energy business.
Okay. And any major offsets to that?
Yes. As I mentioned, we are targeting to be increasing our penetration in some of the OEMs in China, electronics OEMs in China, and we're seeing some success there. We're also targeting growth in automotive electronics and we're also seeing some successes there as well. Okay, thanks.
Our next question comes from the line of John Inch of Deutsche Bank. Proceed with your question.
Thanks, everyone. Good morning.
Hey, John.
How did the dental business do sequentially? I don't remember you talking about that when you're describing the puts and takes in the healthcare performance. It was under pressure, right, the Q3. Would you see similar trends in the Q4?
Yes, John. We saw our oral care business down slightly, partly from softening end user demand and also what we see as continued channel contractions in the oral care business.
Do you have any
sense of the underlying it's one thing if it's 1 quarter, because sometimes dental is seen as a little bit of a carry in the coal mine, right, for the economy. But the economy, based on your own commentary and what other companies are saying, seem to be picking up. So what do you attribute then, I suppose, the continuation of the soft dental? Is there a way you could sort of frame what you've seen and maybe provide some historical context?
Yes. I think what you saw here in the last quarter, this is what you saw in the last quarter of the year, basically, the 2 things is inventory reduction in the channel because it's very much distribution oriented. And that's based on lower demand in the end market. And I think that was broad based relative to United States and West Europe. Now if you think about both in consumer and you think about the business like oral care, the supply chain there is very sophisticated.
So what we have to look upon is sell in and sell out. And I think in those cases, what you will see as demand will, by definition, should go up. And I think facts are telling us that in that industry in oral care, then we will build up inventory again as you go into the year. But for us, we look upon those businesses. They are very good partners of us, and they are very professional, very, very professional in their supply chain.
So they did the right thing in terms of adjusting their level of inventory if they see a softness. What they are telling us now is they see demand coming back as you roll into 2017. If you move from oral care and go back, and I don't I was not sure that came across. If you take our consumer business, that was down 1% in terms of sell in from us. Sell out on our top customers in U.
S. Was 3%. So in 3%, that's the historical base for consumer for the last couple of years. So from that perspective, I think the retail channel, as they saw, maybe some softness for them, generally speaking, in the end of the holiday season, we see the right thing. They have managed through their inventory.
And for me, that's a very professional way of doing business. Our sellout was the same, indicating for me as we move into '17 that inventories will be filled back because the demand is there in the end market. But I think they did the right thing in terms of the retail channels.
Well, I certainly gave away your
products as Christmas gifts, so don't blame me.
We can do more. We can do more.
Yes, yes, bigger gift bags. Okay. Just as a follow-up, you mentioned investing non core IP in the electronics energy business. Nick, could you expand on this? Like what exactly is this?
And do you have this reserve of IP that in theory you could keep investing to take gains or was this a one off event or just a little more context on what ultimately happened in that segment, please?
John, I think that this is much more of a one off. There was a particular set of IP that we had developed and were using years ago, we reached a point where we felt we no longer needed it for our own business and we were licensing that IP. We chose in the Q4 to sell that IP and our relationship with that particular IP we had in Electronics and Energy. To your question of is it a broad thing that we have a stable of these we're ready to go with, the short answer is no. Okay.
And then when you say it wasn't core, what does that is there anything you'd say about the IP you sold? Like what was it for or is it pertaining to anything to
downsize or something? No, it's something related to our Electronic Material Solutions division and it's that's about as deep as I'll go with it, but it really is not related to anything we've divested.
Got it.
Thanks very much. Appreciate it.
Thank you.
Our next question comes from the line of Robert McCarthy of Stifel. Please proceed with your question.
Good morning, everyone. Good morning.
Yes, I guess the first question is in terms of just thinking about your overall explicit exposure to energy and kind of the wider implications and not the effects of your portfolio to energy, Given what we've seen in the downturn, have you seen any encouraging trends across your businesses that you decide to say, with a stabilization in energy prices, you could start to see incremental growth in the back half of this year. Could you give us a comment about what you're seeing
across your portfolio with respect to that?
Yes. I think, first of all, the answer is yes, we should see an uptick in the end of 2017 in the energy space. And we have a very strong solid business into utilities, right? That's a core 3 ms business. And in fact, it is a half land division.
That division will do well. What they have is they have an element of some project based businesses. We have talked earlier about ACCR and some pipe coating as well. That had a type of a negative effect in terms of comparison for 2016 and should benefit that business as you move into 2017. The other business that we had a good quarter here is actually communication, what you will call telecommunication, but communication had a good quarter for us with 10% growth.
It's a smaller business for us, but we did well. So I think the energy space for us should improve as we move into 2017. How do we think about the offsets
in association with this kind of price cost in raws in the context of that though?
Rob, as we contemplated where we see our raw material pricing going in 2017. We took a view of oil in the range of somewhere between $50 $60 a barrel. And that's why we're seeing diminished impact from market prices on our commodities benefiting us in 2017 versus what we've seen in 2015 2016. So we're anticipating that and taking that into account. Most of our raw material or commodity benefits we're seeing are going to be the results of 3 ms efforts we're doing to take costs or substitute in lower commodities.
So it's there is an offset there and we think we've pretty accurately taken the offset on both the revenue side and the cost side into account.
And one final one. I mean, obviously, I don't think you provide or disclose where your CapEx is spent explicitly, although obviously anecdotally you do. But just looking at kind of the typical Note 17 in your 10 ks, so you can just kind of see a flavor of where your PP and E is. Is this disproportionate in the U. S.
Unsurprisingly. And obviously, the PP and E has been growing reasonably well in the U. S. While it's been relatively flat, I would say, across the balance of the portfolio. Could you comment on explicitly your CapEx kind of strategy for the U.
S? Any kind of metrics you could use? And really the spirit of the question is obviously with the prospect of a change in the tax loan association with the deduction of capital expenditures in the U. S. Potentially.
That's the nature of what I'm asking about.
Rob, if you look at our total CapEx, we spent 1 $400,000,000 on CapEx in 2016, a little more than half of that was spent in the United States. And it goes into a number of things, Rob. It goes into some of our business transformation investments. It goes into maintaining our capital base. We of all the areas of the world, the U.
S, we have a very well developed capital base of manufacturing sites and investing in CapEx to maintain that. Also some expansion in the United States that we've been investing in. So a little over half of it. It's around the world though, Rob, we are investing in capital. I think it started out this morning talking about we're investing in capital to align with where our customers are and aligning demand.
So where we've been in the last few years, we've seen a little less international demand and a little higher U. S. Demand and that has impacted our capital allocation. And going forward, we still anticipate a significant amount of our capital. For the next year or 2, I wouldn't be surprised that it's going to maintain being over 50% in the U.
S. Thanks for your time.
Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question.
Thanks. Good morning.
Good morning, Nigel.
Yes, just obviously investment spending picked up
this quarter relative to 3Q.
So just wondering if you can be reasonable granular in terms of where you're spending. And in particular, you referred to some price actions to drive volumes in the U. S. Is that all under investment spending?
I'll take the last part of that first, Nigel. The changes in pricing that I talked about, that would not be part of investment spending. What is included in our strategic investment spending that we called out that's impacting our margin by 70 basis points this quarter. There's 2 components. 1 is, us taking actions on addressing our manufacturing supply chain footprint that we laid out last March at our 5 year outlook meeting that we've been taking actions and that is part of what occurred in the 4th quarter.
But also what's in that is investments we're making in growth in core platforms within 3 ms. And that was part of what we also laid out in December of in 2017, we're accelerating our investments of approximately $100,000,000 in these core growth platforms. We started that investment in the Q4 of 2016 and that makes up a little over half of the total of that strategic investments that we laid out for Q4 in our margin.
Okay. That's helpful. Thanks, Nick.
And then a follow on question on FX. We've seen demand and divergence in the currency pairs, RMB weaker, real stronger. How is that impacting the translation impact, how is that impacting your margins? And the spirit
of the question is,
my understanding is that your EMs are generally higher margin than DMs. Is that still the case? And is there any significant margin impact from translation of the currency movements?
Yes. Nigel, what I've seen over time and what I'm seeing this quarter and into the future is, it's less impacted by that particular mix. How it impacts our margin more dramatically is actually our hedging. And sometimes it becomes counterintuitive, Nigel, that when the dollar when we start to have the dollar stronger and negative impacts on our earnings per share from a stronger dollar, we can, for a period of time, see higher margins as our hedging gains step in and boost that margin. We have lower sales dollars from the translation, but higher margins.
That's been a more impactful factor an overall margins we post than the mix of where the currencies are strengthening or weakening against the U. S. Dollar.
Right. Okay. I'll hop offline. Thank you very much.
Our next question comes from the line of Shannon O'Callaghan of UBS. Please proceed with your question. Hi, guys.
Good morning, Shannon.
Hey. So at 1.6%, I mean, you're already kind of getting close to the midpoint of the organic side for the year and you've got healthcare clearly way below what you would normally expect to get and consumers negative. It seems like it feels pretty good about industrial continuing to be strong. So is there any other offset here because it would seem that you'd be tracking closer to the higher end of that organic guide, all else equal unless there's something you expect to slow?
For 2017, Shannon, the 1% to 3%, we're still right there. Yes, we like the fact where we ended in Q4 from an organic growth, but it's also in line with what we were anticipating in total, and it's in line with where we felt we needed to be for the 1% to 3% that we guided for 2017.
We would like to go ahead of ourselves, right? So we I think it's important just to make sure that we roll into the year and see more evidence of the positive movement we saw here in the end. But as you said, the investment we are doing, the all initiative we have around growth, right? Because you look upon 3 ms as you see it now, the efficiency in this organization is incredible. And you see the what we do in terms of EPS growth, free cash flow conversion, return on invested capital, if we can get growth up even more, that will get a very good return for all of us.
So that's why we've been focusing on them and make sure that we will execute on that. But we will not overpromise anything to you at this point in time.
Thanks. And then just on Mexico, I mean,
you talked about, I think
you said double digit growth there again this quarter. 3 ms has always been good at kind of monitoring and monitoring, managing through different kind of global risk areas.
I mean, what's your current
view there? Are you seeing any change
in activity? And do you
do any kind of scenario planning around your position there in particular?
No, we don't. We have had very strong growth in Mexico for quite some time, and it's just an important local market for us, right? We have been there for many, many years in Latin America. Latin America, we have a very good growth rate for this quarter, and we have been in that part of the world with our domestic business since 1946, right? That's we start operation in Brazil in 1946.
We have huge operations there, and it's very much locally driven. And that is our strategy. So 10% growth in Mexico in the quarter is a good result. Brazil had 1%. So it looks like they're coming back a little bit.
But we are not changing anything, as I said, as I start the call here. Our strategy is around localization. And we if you go back to what you talked about, we never left United States. We expanded international based on the local market opportunity, right? So I think that's how you should view 3 ms in the business model that we are using.
Okay.
Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners.
Just a couple of things, a lot of ground covered here. First, Nick, I
was just wondering back to
the December guide, although the broad strokes have not changed, are
you within the range of
all those individual kind of bucket items that you gave us down through pension, tax, etcetera, etcetera?
Jeff, yes, the short answer is yes. A couple I'll just put on the I'll explain. Pension, I'd originally guided 0 to $0.10 headwind. Now that we have that all locked in, that will be an $0.08 headwind for the year. And then tax rates, since you've ended a little lower, we're still seeing a 28% to 29% tax rate in 2017.
Back in December, I was saying I expect it to be a little bit of a tailwind. It will probably be more neutral on it for us for 2017 right now.
Okay. And also this is for Nick. Could you just update us on your stranded cash? Probably all your cash is outside the U. S.
Or some 90%. But
do you
cap the brakes near term on share repurchase, waiting to see if you get some kind of repatriation or something? Or do you kind of proceed as normal on the borrowing and repurchase company you've been on?
Yes. Our total cash, Jeff, is we have just a little over $2,000,000,000 of cash outside the United States. It's not a large number. I'm sure you're aware of this, Jeff. We've been going through a number of efforts to be optimizing our global cash position and we've been managing that global cash balance down, especially our international cash balance down.
So our current capital allocation plan, we can execute that without any kind of tax reform or any kind of action. And it's really too early for me to comment on if something were to happen of what we do. We're obviously prepping and preparing and will act accordingly to take advantage of whatever kind of legislation occurs. But I think it's too early for me to comment on how that would change our capital allocation right now.
Thanks. And just finally, if you wouldn't mind, any color that you could share on January? Has there been any kind of change in behavior as we flip into the new year, particularly in shorter cycle industrial markets and particularly would be of interest?
Yes. Just as far as the year is starting, we're not seeing any kind of change in the trajectory that we were anticipating. It's consistent with what we were expecting when we guided 1 to 3 and nothing really changing out of the norm for us, Jeff. Thank you very much.
Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with
Jeff, I'll ask Jeff's question in a slightly different way about what you're seeing. Inge, I think you said that there are reasons to get excited. And I was wondering if you could share any anecdotes, obviously, with our changing guidance, that makes you more excited.
Yes. As I said earlier, when you look upon it in terms of performance for this quarter and the momentum you have seen after some time when it's been slower growth, right? But if you start to look upon elements that look positive for you, for me, that will be like we had a good quarter in United States, right? United States grew 5% in the quarter. Japan grew 2% and China grew 11%, excluding electronic.
Electronic, again, was 6%. And we have had 3 consecutive quarters in Germany with growth. If I look upon that and I think about big economies in the world, United States, Germany, Japan, China, on a positive movement forward, I feel better about that. I'm overly excited because overall, you also have some tempering in Central East, Europe and Middle East, Africa, and that will hold for some time. But I would say that, that's what I see.
I see I saw our industrial business have a good growth, and then I take those geographical pieces together. 16 Graphics continue to have a solid performance. Healthcare, I'm convinced, will come back for us. And then as I said earlier, consumer, when you look upon stay in and sell out, it's not a concern. But I think if you take for all of us the big picture of growth coming in the 2 biggest economies in the world, then you add Germany and Japan to that.
If you are 3 ms, which is about technology conversion and demographic shift, that looks slightly better today than it is 6 to 9 months ago.
Let me just ask a follow-up question. 1 of your competitors highlighted that they're seeing a meaningful positive impact from the change in one child policy in China. What are you guys seeing in Healthcare and Consumer in China? Can you identify it? It?
And does it provide any potential upside to your thinking for the second half of the year?
It should. It should by definition. And if you look on those two businesses for us in China specifically, we had 17% growth for consumer in the quarter. We have 15% growth in healthcare for the quarter. So and that's a positive outcome.
And those business, even if they are smaller for us, if you look at on our portfolio in China, the 2 biggest in size for us is electronic and energy and industrial, right, because of the evolution of that economy. But what will come is consumer and health care. So when you're running them at 15% to 17%, that's a good signal for us. And we have a huge penetration opportunity there. We are both local domestic markets, right?
So no export by definition.
And you have the capacity to meet demand?
Absolutely.
Our next question comes from the line of Steve Tusa from JPMorgan. Please proceed with your question.
Hi, guys. Thanks for going over
the hour here to fit some of us in. Appreciate it.
Hi, Steve. Good morning. Lots of questions just on the kind of the forward look here into the early part of the year. The Street has you guys ETFs kind of flat year over year, but normal seasonality from the Q4, if we adjust some of these gains, etcetera, out, gets you to something that's a little bit higher than that, particularly in the kind of Q10 ish range.
Is there anything unusual about the year over year comp that
we should be keeping in mind for the Q1? Maybe just
a little bit of color.
I know the distribution had you guys flat, but they have you growing for the year. So the trends out of the Q4 kind of change that view and make you feel a little bit better about being able to grow earnings here in the Q1? Steve, for
the quarters of 2017, I would call this a remarkably stable year of nothing particular to call out quarter by quarter to be thinking about. The only thing on the margin that I on the edge that I'd say is strategic investments that I talked about earlier that we started in Q4. Those will be more heavily weighted in the 1st part of the year. In fact, I expect strategic investments in Q1 to be very similar to what we saw in the Q4. Okay.
So you expect to grow earnings in every quarter, essentially? I think Steve, you're trying to turn me into a quarterly guidance here. For the year, we're That's a pretty vague question. I'll just leave it. We don't see a lot of differentiation of the core underlying business quarter to quarter.
Okay. So when you guys talk about strategic investment, that's, I would assume, outside of R and D because R and D as a percentage of sales was, I think down a little bit in the quarter, that stuff that is not considered just R and D, I would assume?
Yes. Matt, the vast majority the very little of our strategic investments, if any, is R and D. This is really about commercialize for the growth side of it, it's really about investments we're making in commercializing what we already have. Okay.
Thanks a lot.
And Steve, just one more point. I'm going to repeat a point from December. Growth, we expect to be largely aligned for the year across most of our businesses. The one exception is healthcare. I just want to remind you, we expect healthcare growth to accelerate as the year goes on.
Great. Thank you. Okay. Thanks, Steve.
That concludes the question and answer portion of our conference call. I will now turn the call back over to Inge Tuohin for some closing comments.
Thank you. To wrap up, the Q4 completed a successful year for our enterprise. In 2016, we executed our playbook and posted strong financial results in terms of EPS and margins along with free cash flow and return on invested capital. At the same time, we continue to simplify organization and improve our cost structure while making investments for the future. As a result, we are positioned for a strong 2017, 2018 and will capitalize as growth conditions improve.
Thank you 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 participation and ask that you please disconnect your lines.