Before we start today's events, I just want to remind you of some upcoming dates of events for 2017. Our earnings call there, the dates in January, April, July October. Also next summer, we will be hosting our 1st international investor event in Neuss, Germany on June 6 7. So please mark your calendars accordingly. Today's lineup, we'll start off with Ingo Tulin, 3 ms's Chairman and Chief Executive Officer.
And we'll wrap up with Nick Gangsett at the end, our Chief Financial Officer. In between, you'll get the opportunity to hear from Ashish Kanpur, who will talk about talk to us regarding innovation, Julie Bushman, who will touch on business transformation. And then you also have the opportunity to hear from 3 of our 5 business leaders, Mike Roman, who heads up industrial Jim Baumann, who heads up the the for the day. We'll take a break roughly about 9:30 or so. If we're running ahead of time, we'll stay ahead of schedule.
We'll leave about 40 minutes of Q and A at the end, and we'll get you out of here no later than noon. Before I turn it over to Inge, I draw your attention to our forward looking statement. Please take a moment to read it. During today's outlook meeting, we'll make certain predictive statements that reflect our current views about 3 ms'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 10 ks list of the most important risk factors that could cause our actual results to differ from our predictions. So with that, I'll hand it off Inge. Thank you. Thank you,
Bruce, and good morning, everyone. It's nice to see you again, and hope that we will have a good morning here talking about 3 ms's outlook for 2017. What I would do is I would talk about the highlights for the day. I would talk about how we have built strings on strings for the last 5 years, positioning us very well as we move into 2000. And the outcome of all this is all around efficient growth as you will see through the presentations today.
The headlines for today is, 1st of all, you will see that we are very, very ready and well positioned for success in 2017. In our mind, we are in a position past history. Our playbook is working, and we will talk about all the key levers today in terms of portfolio management, invest in research and development and innovation and business transformation. You will also hear from Nick Gangstad in the end of how we will continue to deploy our capital to invest for both long term success as well to return cash to 2017 outlook, as you probably saw this morning in the press release, is 1% to 3 percent total company organic local currency growth and 4% to 8% EPS growth. But before we go there, let me ask talk again relative to the journey we're on and that we started back in 2012, which is important relative to understand and have confidence as we move forward.
We started back in 2012 by clarifying the vision and the strategies for the company, but we also start the portfolio management work that is ongoing. It was an important element for us as we moved ahead. When we move into 2013, that was where we crystallized the 3 key levers that will drive more value for our shareholders as we move forward. And as you probably recall, in this room, 2013, we also announced enhanced capital deployment plan. When we went to 'fourteen was where we clarify our leadership behaviors, and we also make sure that the fundamental strengths, which are 4 in terms of technology, the efficient growth, but also went forward and more offensive by deploying a new 3 ms brand strategy, which is 3 ms Science Applied to Life.
And then as we move into 'sixteen, we accelerate our business transformation deployment, which you will hear Julie Buschmann talk about later today, and we also created a new 5 year plan that we announced in March when you all came to St. Paul. So you look upon this journey, we have worked a lot during the last 5 years in order to get the fundamentals even stronger for 3 ms, ms, It is a It is a stretch, and it's also something that should call out a competitive advantage for you as an enterprise. And what we do and have done for 114 years is advancing, enhancing and improving. That's what 3 ms is all about.
And we do that through technologies, products and innovation. And where we can do it, we can do it for every company, we can do it in every home and we can do it for every life. And life for us is health care, is education, is community and it's come there. And how do we do it? Well, we do it through 6 strategies that we'll launch in 2012 and that now are operationalized in every entity inside O3M.
And as you can see, the 4 first of them are around growth. And there's a couple of key words I would like to call out. First one, relevance to our customers, was very important for us that we became more relevant to our customers. Gain profitable market share is in strategy number 2. It's not market share.
It's profitable market share. And I think you see that relative to the improvement we have done in our margins. The third one is invest Ashish will talk about that later just after me. And Ashish will talk about that later just after me. And then we continue to build on our high performance team.
And then finally, operational excellence. The Lean 6 Sigma is the core of everything we do, and some comments will come later on that. So you take the playbook for 3 ms, it's very simple in a way because if you think about it here on the left hand side, that is our vision, our strategies, our 3 ms conduct in terms of business ethics and our leadership behaviors. That is what is guiding us day out and day in. On the right hand side, you see the 3 key levers that will create more value for us today and as we move ahead.
And you have seen a lot of activities here in terms of portfolio management, invest in innovation and business transformation. And you will hear about all those three elements today as during the presentations. Now here is the outcome of the playbook relative to 'sixteen. So we are around $30,000,000,000 in revenue, and you can see around 24% in operating margins. €6,000,000,000 And today €6,000,000,000 And today, you will hear about Healthcare from Mike Vail you will hear from Industrial from Mike Roman, and you will hear about Electronics and Energy from Jim Baumann.
Consumer, that is led with Joaquin Delgado and Safety Graphics by Frank Little. They are also here if you have any question relative to those businesses. But a very, very good diverse portfolio that is very strong. And you can see 24% operating margin on a company level, and that's range everything from 31% in Healthcare as at low at 21% in electronic and energy. So think about that, 21% in electronic and energy is the low end for this enterprise.
Now there is 4 fundamental strengths of the company. And if we start on the left hand side, it's around And we invest around 6% in technologies. It's 46 technology platforms that are owned by the company, not by 1 single division or country, and it can be utilized inside of the company. You can see here we are able to share and combine elements of the broad based technology. So it's not only that we own the technology platform, we can combine them for an outcome that is very, very important.
And as I always say around technology, technology is not only to do things better, it's to do things different. And when you do things different, that is where you have the real game changer relative to your marketplace. Manufacturing, where we can utilize 3M's manufacturing footprint and technologies, including processes, trade secrets. So if you think about it from that perspective, here we invest 4.5% to 5%. So if you have 6% in technology and 4.5% to 5% in manufacturing, that's a core strength of 3M.
It's a core strength for us in order to create more value and get better return to our investors. And then we have global capabilities where we have wholly owned subsidiaries in country. That means we decide the priorities in those countries. And if you have been around for 70 years or many years in 70 countries, you have a lot of connections locally, so you know what to do wherever the cycle is of those businesses. And then finally, the 3 ms brand.
That's the brand position for us that has positioned us around quality, consistency and the way we do business in terms of ethics. So those 4 fundamentals are important for us in everything we do, and they are a vertically integrated model. We own it as an enterprise. Everyone can use it in a company. Now I've shown this slide for many years, and I've been in office here now for almost 5 years.
But I think, in fact, I was sure that when I led international before that for 8 years. This is the evolution of any economy, and it's always start by infrastructure build out. When that is in place, manufacturing will move to the next step. When manufacturing is in place, safety will come. Safety regulations will improve.
Then after that, when disposable income is increasing and standard of living is improving, retail start to move. And then finally, health care is coming into play. This is an evolution for any country Healthcare is coming slightly before retail for 3 ms. Healthcare is coming slightly before retail for 3 ms. So the model is correct for all economies.
But for 3 ms, in terms of how we can capitalize on it, HealthCare is coming slightly before retail. And the reason for that is that Health Care is based on health economics, is based on key opinion leaders and papers of treatment. And for us, in our solutions, that's a real power. Retail is often based on, as we know, brand equity with local brands in those countries, so it takes slightly longer time for us. But if you think about that in terms of our portfolio with the margins we have in health Care in a very, very fast growing business, this is very good.
Now our portfolio is strong in any cycle, short, mid, long term cycle. And if you think about this, at least myself was for long time thinking, well, this will stop and end when you're coming up to the peak of retail and health care, but it's not. We just saw the outcome of the election in United States, the biggest economy in the world, where 3 ms 40% of its business is restarting. It starts again with focus on infrastructure and manufacturing. So for us, this model is fantastic, and it's working even better and becoming stronger.
And one thing you should think about relative to Infrastructure and Manufacturing, when people think about who will benefit short term there, we will be ahead of that because we are the suppliers to those businesses that will short term capitalize on this. So when I look upon this slide, even if I used it maybe for 10 years, it's becoming more and more powerful and means more and more relative to 3 ms model. And whatever cycle, whatever country, we are very, very strong to capitalize on that. Now it is all about efficient growth, and I think this means organic growth that outperformed the markets. And it's important for us because it's sustainable, it's premium returns at and when it comes to margins, cash flow and return on invested capital.
So that is what we are all about, is to give back very good returns to you in margins and return on invested capital. Now I would like to talk about the 3 key levers on what we have done and what we will do as we move ahead, and I will start with portfolio management. This was important for us because the portfolio management work that started back in 2012 was all about improved relevance to our customers and to gain profitable market share. Yes, to make sure we prioritize right, where we could win and we could give a good return to our shareholders. And it was around aligning the organization with clarity so we knew where we should put our money for the best opportunities.
It was also to clarify the effective deployment of capital, where should we invest. And then it was, of course, to divest nonstrategic businesses and eventually organization with many, many entities down to few entities, you will have an IGA, entities down to few entities, you will have an IGL execution. You have less internal meetings. You have less infrastructure cost in the enterprise, meaning you're becoming more and more effective and you're becoming much, much faster. And we have gone from 40 businesses to 25 businesses.
That is to create a much more powerful portfolio for 3 ms. That is to create agility in the organization. That is to take out unnecessary cost that is not adding any value to the customers. Push Forward. Both of those elements at the time was around as we look upon the portfolio, we also knew with more clarity where to go and where to go out.
And as you can see here is a couple of example of bigger acquisition we have done in terms of capital safety. There was a $2,500,000,000 acquisition. Membrana, that was around $1,000,000,000 And then we purchased the last 25% of our Japanese organization from Sumitomo Electronics, and I think the price there was around €850,000,000 or €875,000,000 We have also left businesses that was not core to us any longer, even if good businesses was not down to the core and we do better at other places. And as you probably saw, we announced last week that we're exiting Identity Management business, and we sold that for 8 €50,000,000 That's a business that will be better off with another owner after we went through the strategic work with it. Also important to know that this was diluted both to growth and our margins in the company and was not core to us.
So I think you look upon that and what we have done in terms of looking upon the portfolio, we have done a lot of things that have strengthened us for the future. Now it's all about growth. And what we are doing, we're actually taking money, invest for the future in something we call core search. And we're investing over USD 100,000,000 already in 20 17 in order to contribute 50 to 100 basis points of additional growth for the year. These have already started.
They've already started in 2016 here in the last quarter, and the movement is going. We have identified programs that are all in to push forward or our core businesses, meaning they're already strong, they're already growing, and they are very profitable. And we have aligned the whole organization relative to put those money in the commercialization part of the organization so we can move forward and get more growth as we are moving ahead. And at least for me personally, focus off something that is not strategic important for us and get right into the core and accelerate growth, I know that will work, and it will be a very, very important thing. Now let's talk about investing in innovation, which is the 2nd lever on that chart, And this is an important element for us.
Research and development is the heartbeat of 3 ms. It's also why there is a differentiation of what we are doing. It's also why we have better return than most, if not all, of our competitor in each of the 5 business groups. And I think the important thing here is to make sure that we can not only do things that is better, but things that are different. And as I said earlier, that is the power of 3 ms.
We can do things differently.
We just don't look upon things and
try to do it ms. We can do things differently.
We just don't
look upon things and try to do it better. We do that as well. But when you do the real investigation and investment
relative to how can
you do things even different and and investment relative to how can you do things even different and better, that is what is the power of 3 ms. So think about it like, as I said, we have 46 type of open internally to everyone in the company. And then by definition, they also open to our customers because we work with our customers externally. And how we do that is on the left hand side. We have 2 processes, only 2 processes how we get input relative to what we should work on.
The first one is called customer inspired innovation. The second one is called insight to innovation. So if you think about customer inspired innovation, that's saying customer is very direct with our customers. We work direct with the customer, meaning their probability of success on the other side is extremely high because it's exactly what they would like to have, either specked in or designed in or anywhere in their process. And then you have insight to innovation.
Think about that more like where it's a market that give impact to a panel. Those are the 2 things that is important. So it doesn't start in the middle and then try to do something. It starts on the left hand side with the process with good input from the market and the customers. And the outcome is, of course, high impact outcomes in terms of both extending our core and building new growth platforms as we move ahead.
Now we do more than that. We actually invest also in more partnering and scaling up new platforms. And this is something that will have a payoff from 5 to 10 years, but it's also activities where we say, hey, we can be very strong here, but we should and can work with other companies. And I have 4 examples here, and you will hear about them all today. And the 4 example I have is in automotive in terms of electrification, intelligent infrastructure is around active safety is around structural adhesives and around population health management.
So you will hear about Automotive and Electrification Intelligence, both from Jim Baumann and from Mike Roman. You will hear about active safety from Ashish Kanpur. You'll hear from Mike Roman around structural adhesives. And in terms of population health management, which is health information system, where we just made a deal with a company that Mike Hale would talk about that is around health information system as we move ahead. So very, very important platform where we think we have very, very strong power as we move ahead for the future.
3rd level, business transformation, which starts and ends with the customer. And I can tell you that I have never been more confident in this initiative than I am today. It was something we started a couple of years back. It's all about efficiency. It's all about more productivity.
And that's a big price for us here, a big price for us and for you who invest in the company. And you can see here, we think here is a capture of €500,000,000 to €700,000,000 annually in savings, and there's €500,000,000 of working capital improvement by 2020. This is huge. This is huge. We started with some smaller pilots, and then we have moved ahead.
And I can as I tell you, what I see today is very, very encouraging. And we start to see the benefit already now. So if you take about in terms of the globe, we are now live in 16 countries. In Europe, that we have had focused on execution here lately, we're almost done. 11 countries is up and running, The 4 biggest distribution centers and then our supply chain center of expertise in Switzerland are all linked up to the system.
This is very clearly not IT system. This is something that starts and end with the customer. And you have countries here that are in the forefront like Canada and Germany. We already see the clear benefit not only in the margins improvement, but also in customers, which is the whole idea with it. So it's a very, very encouraging movement for us, and Julie Bushman will talk specifically around that.
Now two things I would like to cover also here is, first is Lean 6 Sigma. We have been on Lean 6 Sigma. We started with 6 Sigma, and then we added Lean later since 2000 and 1. We have 76,000 trained employees globally. We have completed over 100,000 projects, and we have had €16,000,000,000 in savings during those 15 years.
It's embedded on what we're doing. And I would say we're becoming better and better at it every day. And fact, some of you that are here today, we are causing that communication with relative to how we can come become better. And I think that's the value of 3 ms in a way. We are listening to you.
When you have expertise that can help us, we will listen and we will invite you to come and look upon our operation, etcetera. And as late as yesterday night, I think I had e mail communication with 1 of you here in the audience relative to what we are doing based on good input and good guidance, etcetera. We are becoming better every day in this, and this is about efficiency and operational excellence. And Lean 6 Sigma is here to stay. And if you think about it in terms of it's both efficiency and improvement today, and it's a leadership development program for the future.
So very, very important. And then I would like to make comments on sustainability, which is creating opportunities for 3 ms. We have been very serious ourselves relative to sustainability and have 42 years ago, we started a program, pollution prevention pace, called 3P, something that still today is very relevant for us and other people and companies try to replicate and duplicate, and we share that with them. Then we have also, for 17 consecutive years, been on Dow Jones Sustainability Index, and we are now accelerated our investment, but we go more offensive. More than 3 years ago, we doubled down on sustainability.
And the whole idea is our technology platforms can help other companies and our customers to come with better solutions. And I think it's every company today that I know of are thinking about sustainability as a topic. For many, it's maybe a threat, but they know they need to address it. And this is what we, from 3 ms, can help and objectives relative to sustainability. And I think that's taking me to one thing when I said earlier that we believe that we are better positioned than ever relative to create more value for our customers.
We have an initiative called Customer First. Customer First is about understanding our understand that, you will only be a transactional player. You need to understand what did they promise their customers and how can you play in that chain. And I think it's important to understand very early because that also where you get more growth, but you also get efficiency in the system. And if there is a way that you cannot fulfill that, what they have promised, then you should go away and do something else.
It's coming down to priorities in terms of what are 3 ms all about, how can we focus on what we need to do, and we are here to gain profitable market share as we move ahead. So it's a very important element of us. So in ending here, I hope you will see today I'm sure you will see today that the 3 ms playbook is working. We have laid out during the last 5 years the fundamentals of the company, what we're all about, where we would like to play and how we can win. And it's about the vision, it's about the strategies, about all our leadership behaviors.
And the whole team that you will see here today, not only the individuals that we present, but the whole team are just aligned relative to what we need to accomplish. And then as I said, what is creating value for the future here is around portfolio management that business leaders will talk about individually, invest in innovation, which Ashish will talk about, and then Julie Buschman will talk about business transformation. So by that, I hold it there and hope we will have a good constructive meeting here. And by that, I take and introduce Ashish Campo, our Senior Vice President for Research and Development. Ashish, thank you.
Thank you, Inga, and good morning, everyone. It is my pleasure to give you an update on 3 ms Research
ms
in innovation is one of the 3 strategic levers in our company's playbook. We have been steadily increasing our investments in research and development from 5.5 percent of sales in 2012 to almost close to 6 percent last year and have invested $8,500,000,000 over the last 5 years. We have a proven innovation model where the R or the research part of the organization sits at the center of the company and creates technology for the corporation. This technology then gets transformed into products by the D or the product development part of the organization, which actually resides in the respective businesses. This model ensures that we continue to invest in our fundamental strength of technology even in tough business conditions and that our common pool of technologies gets commercialized in very different markets through our different businesses.
As Inger mentioned, we are a science based company with a lot of depth in technology. We have 46 technology platforms, and the unique thing about 3 ms is that no single business owns any of these platforms, but that they are owned by the company and can be leveraged by any of our businesses to serve their customers or markets. As a company, we also invest heavily in intellectual property, not only to protect our own inventions, but to obtain and sustain premium margins on our products versus the competition. But technology itself is not sufficient to create differentiated products and solutions. Our innovation truly comes from the confluence of customer and market insights, technology and our culture of collaboration and entrepreneurship.
Combining these three factors on a routine basis creates a competitive advantage for 3M. Also, as an organization, we believe that the best way to acquire insights is to be close to the customers. And accordingly, we have built a large global presence and infrastructure as well as technical capabilities close to our customers. We have 54 customer centers across the globe where our customers can experience firsthand the breadth of 3 ms technologies and how they can benefit from them. We also have labs in 36 countries where our scientists work closely with our customers to develop solutions for their specific problems.
In March, many of you had the chance to come and visit our newest lab building in St. Paul, which perhaps gave you an idea of how collaboration is in the DNA of 3 ms scientists, collaborating among themselves as well as collaborating with our our customers. And feeding this unique culture of collaboration is Technical Forum, a 10,000 plus member grassroots organization of our global scientists and engineers. And this forum actually serves as a platform for freely sharing market needs, ideas, technologies and challenges that are faced by our scientists. This boundaryless collaboration and building on each other's ideas helps 3 ms make connections between the market needs and our technologies and also helps us to transfer technology from one market area to another in a seamless manner.
For example, it was in one of these Tech Forum events where a scientist from the health care area was sharing his technology to precisely mix different components for tooth restoration that led to an invention by another scientist in the automotive aftermarket area who was trying to mix high viscosity filler materials to repair dents in a car. Because of our breadth in technology and depth in technology, our structure as well as unique culture of collaboration, we are able to take a single technology in many different markets through our different businesses. For example, our adhesive technology spans products from Post it notes, where clean removability is key to structural adhesives which hold airplanes together permanently. Not only can we take a single technology in many different markets, we can combine our technologies in a way only 3 ms can to create highly differentiated products and solutions, which and sometimes even create brand new markets altogether. For example, we have combined our acoustics, integrated systems and design, molding and electronics and software technologies to invent an electronic stethoscope that has transformed this product category from a simple listening device to an advanced diagnostic tool for the physician.
The strength and uniqueness of 3 ms is our ability to combine and evolve our technologies to serve the very different and changing needs of the markets. Let me share with you some examples of how we are evolving our technology in new and fast growing markets. Our nonwoven technology originated with the decorative sashine ribbon several decades ago and has found home in multiple markets today. For example, this technology has been commercialized as disposable respirators in personal safety markets, as scarring pads in home care and as wound dressings in health care markets. We continue to evolve this technology through new applications in fast growing markets like acoustic insulation for transportation, filtration and purification solutions in life sciences, high performance abrasives for industrial markets and flash free dental brackets for health care markets.
So you can see that we have been advancing our technology platforms based on the changing needs of the market and are able to leverage our set of technologies for several decades altogether. Our nanotechnology platform creates differentiation for 3 ms in multiple markets and product lines today. Whether it is the dental bulk fill restoratives in health care area to improve the productivity of the dentist or high performance foam tapes for joining applications in industrial markets, nanotechnology has helped 3 ms create innovations that have often transformed product categories. Presently, we
are using the nanotechnology platform
to target applications like nanotechnology platform to target applications like rapid sterilization assurance in health care markets, low maintenance and durable floor care finishes in commercial markets, components for clean energy and tough composite materials for broad uses in a variety of markets. To build upon and augment our expertise in material science, we have been developing technologies and products in the area of digital. Here, our efforts are focused along 2 different pathways: enhancing our existing material products with digital to make them smart, connected and more useful for our customers and delivering software and digital solutions that improve workflow productivity and create value based on our in-depth knowledge of our customer processes. Let me share with you a short video of a product from our personal safety business where we have connected worker safety using digital to improve the productivity of the safety manager, while also improving compliance and safety of the workers themselves. Can you play the video, please?
That video was a good example of how we are combining our digital capabilities with our material So in summary, 3 ms continues to leverage its diversified technology portfolio to create innovative solutions for our customers and our markets. We are evolving our technology platforms for the changing and anticipated needs of high growth markets, and we are augmenting our material science expertise with digital where appropriate to create value for our customers and for 3 ms. And this is how we apply science to life and are driving organic local currency growth and premium margins for our company. Thank you very much. And now it is my pleasure to introduce Julie Bushman, who will talk about business transformation.
Thank you.
Ashish, Ashish, and good morning, everyone. At 3 ms, we are well aligned around our playbook to drive value creation for our customers and for our shareholders. And I'm very pleased today to be able to present to you an update on business transformation, one of our key three levers. Business transformation creates value for our customers and our shareholders by increasing our front end capacity and agility, freeing up our sales and marketing organization to be able from the operational and transactional activities to spend more time with our customers by further enhancing productivity through standardizing global processes and optimizing our supply chain by delivering $500,000,000 to $700,000,000 annual pre tax savings and $500,000,000 working capital improvement by 20 20, and also at the same time by increasing and improving our customer service levels. Business transformation starts and ends with the customer.
So how are we making it easier for our customers to business with us? We are improving our quality as well as timeliness of service delivery. We're enhancing on demand or self serve type of capabilities for our customers. We're increasing our customer service responsiveness targeting higher levels of responsiveness. And we're enhancing our collaboration and our customer intimacy.
What business transformation is doing is it is enabling end to end transparency and insights, allowing us to better leverage data analytics and to improve that overall service performance. So we're building strength on strength, driving to higher levels of customer satisfaction. I'll come back to the financials a little later in the presentation. There are 3 key elements to our business transformation roadmap. The first and foundational is simplification through our global ERP.
2nd, optimization of our 9 global processes that are within scope of business transformation. And third, economies of scale through new service models that we're driving across ms. So now let's take a further in-depth look at the global ERP. Our ERP is the backbone of business transformation. We're driving not only the simplification in the number of IT solutions, but also moving from fragmented to simplified end to end processes that are designed inherently within the ERP.
This ERP is enabling global real time visibility and data analytics across our supply chain, our financial and our customer processes. And as you can imagine, an ERP of this magnitude requires a holistic and thorough approach, encompassing the whole company, which we have taken. We began in 2011 by establishing our overall methodology, ramping up and staffing the global organization and developing our long term roadmap from both a geographic and a functional standpoint. Our foundation was built on very strong business leadership alignment. This was followed over the next several years years with pilot deployments as we continued to build out the overall solution.
We started first with smaller sales and marketing subsidiaries, moving following by our manufacturing centers of expertise and then into our global service centers. We very successfully deployed over 80% of West Europe with our most recent go live in U. K. And Ireland on November 2. As we look towards 2017, we'll be finishing out Europe moving into the U.
S. And then followed by APAC in Latin America. We have a very strong deployment program with proven success. Our experienced global deployment team works together with the local and the regional teams around the world to ensure the readiness of our customers, our vendors and as well our employees. We provide a very extensive preparation for employees at all levels of the organization from a change management as well as a training perspective.
Our global system is mature now, and we have very robust testing, controls and validation in place. And we've established global standards and significant quality audits around our data to ensure readiness as we deploy. So we've walked through the foundation of business transformation, our global ERP. Now let's talk a little more detail about the other two key elements of our road map. We are optimizing across all the critical process areas in the company.
You can see on the right hand side of the chart the breadth of our demand, our supply and our support processes. This is a significant scope. With this, we're moving from managed complexity to automated simplicity. We're better understanding the connections between these processes, where defects can occur, risk areas and hand offs. We're leveraging Lean 6 Sigma.
We have more than 50 dedicated black belts to the business transformation efforts and with over 100 active projects. We have detailed improvement plans in each of the process areas that include the change impacts, the KPIs, targets for improvement that align to our 4 corporate financial metrics. All of this is with very strong governance from the center of the company. Most significant to our business transformation value realization is this 3rd key element of our road map, our new internal global service models. We're delivering operational excellence by consolidating activities, creating specialization and driving continuous improvement.
We're leveraging economies of scale through these three service models to deliver that $500,000,000 to $700,000,000 annual operating savings by 2020. Let's talk about these three service models and how we're already delivering benefits. Business service operations delivers premier customer experiences by enhancing and simplifying front end operational processes. Our goal is to improve service delivery to customers by providing robust self-service access to things like pricing, order status, digital content and shipping information. At the same time, we're working to take the manual effort out of order processing and pricing through simplification.
We're also implementing an expanded sales coverage model of inside sales and digital services. We intend to deliver best in class customer experience while reducing our overall cost to serve. Our global service center strategy is to consolidate transactional processes with focus by specialized resources. Examples of some of the services that we have transitioned to our GSEs are things like our financial close, HR requisition sourcing payments, new material or stock number setups and IT testing just to name a few. We are standardizing and streamlining these processes using Lean 6 Sigma and automation, again leading to a lower cost serve.
And finally, supply chain centers of expertise, optimizing our supply chain, helping us deliver manufacturing costs at best in class levels, while improving our overall service to customers. So examples of how this is happening. We're increasing productivity in our plants with improved information on material, labor, machine variances. We're increasing our planning efficiencies with end to end data and analytics. We're reducing transportation costs from improved visibility in freight management.
We're improving the collection of procurement data, enabling additional sourcing efficiencies. And we're also reducing our duties and brokerage fees through a new global trade system and a new process. So you can see here the breakdown of the $500,000,000 to $700,000,000 in operating income improvement by each of the 3 service models. Overall, business transformation value realization will have a 2017 EPS impact of $0.05 to $0.10 and as well incremental value realization of $50,000,000 to $100,000,000 And as you can see here, the distribution in 20 17 is more heavily weighted to our global service centers and the impact from business service operations. Our teams across the company are mobilized.
They're engaged in this transformation. We've recently had successful deployments across West Europe demonstrating our ability to execute at a high level. The simplification and streamlining of our global processes is happening across the company. Every day, we're gaining new insights and end to end transparency that's allowing us to better leverage data analytics. And the new service models are being built out and already delivering operational value.
So in summary, business transformation is generating operational and customer benefits today and well into the future. Now I would like to introduce Mike Groman, our leader of the industrial business. Thank you.
All right. Good morning. It is my pleasure to present our Industrial Business Group and our outlook for 2017. This is an outline of what I'd like to share with you today. I'll start with an overview of who we are, then take a look at where we play and the market dynamics that we face in our outlook for 2017.
Then I'll share some specific examples of what we're doing to accelerate growth as we begin the new year. So who we are begins with this idea of strengths on strengths, building strengths on strengths. And we are building a foundation for growth based on the strengths that are represented in our 3 ms playbook. And this starts with the sense of purpose that we have in our vision and how we take that purpose into our industrial business strategic intent to advance our industry, really all of our customers with what we do to transform how we engage them, how we transform and deliver new products to them and how we're continuing to transform and deliver even greater levels of leading service in our industry. We also get a clear focus from the playbook on the 6 strategies and the code of conduct and our leadership behaviors, a focus that enables us to build sustainable business for the long run.
We also gained confidence from extraordinary value that we're able to create with the big levers. And it is those levers that are helping us to build a strong foundation for growth as we enter the new year. With what we're doing with portfolio management to shift to high growth, high value portfolios and how we're leveraging this to optimize businesses facing challenging cycles. We're taking advantage of investments in innovation to increase our investments in new product platforms as well as expand our application engineering, and we're transforming ourselves in the way we go to market as well as how we face our customers and our operations. Pictured here are the businesses that make up the Industrial Business Group, a $10,300,000,000 business projected to grow at 1% to 3% in 2017.
All 6 businesses are global leaders in their marketplace. 4 of these businesses represent high value product platforms that face multiple markets: our tapes and adhesives abrasive systems advanced materials, which is a combination of our specialty polymers as well as our ceramic technology businesses and our separation and purification business, which is an integration of our 3 ms purification with the Membrana acquisition. We also have 2 businesses that are global leaders in key markets, and they enable us to take the broad 3 ms portfolio into direct engagement with key customers in automotive, aerospace and automotive aftermarket. Let's take a look at the markets that we face and the outlook we have for 20 17. Our top 6 markets represent more than $115,000,000,000 of addressable market opportunity in 20 17, and all six markets are projected to grow.
In addition, underlying these markets are key trends that also favor growth for 3 ms. Trends such as new materials used in the construction of finished good products by our customers trends such as increase in automation and robotics, which require more precise products in their application and also a strong trend in sustainability, which creates opportunities for us as well. I'd like to take a little deeper look at the 2 markets that we have facing into the automotive: automotive OEM, where we develop and specify products that are part of the bill of materials for automotive OEM customers and automotive aftermarket, where we design and specify products that are used in collision repair and auto care. These two markets have been growth leaders for us as we've come through 2016. Growth leaders because of the underlying growth dynamics in the marketplace as well as our ability to drive penetration in those applications.
I'm often asked, can we continue this growth going forward? Can we continue to outperform these markets? And I'd like to take just
a minute to give you some insights into what we do
in each of these marketplaces that can automotive OEM, and you see the growth drivers behind this marketplace. The key growth driver is the build rate of automobiles and light trucks. And in 2017, we'll see more than 90,000,000 new vehicles produced. Fuel efficiency and electrification are also key drivers for our portfolio of products and solutions. Here, we outperform when we're able to solve new customer problems and meet their specifications, when we can introduce new disruptive technologies and when we can drive penetration across makes and models around the world.
We leverage a portfolio of products pictured here, tapes and adhesives, films, acoustic insulation and increasingly light weighting solutions. Looking at the automotive aftermarket, here our growth is driven first by repairable accident rates, and we saw 5% increase in the United States in 2016. Total miles driven as well as an increase in the size and age of the fleet are key drivers for both collision repair and auto care. In this market, we win when we are able provide solutions that enable our customers to be more efficient and more profitable, when we can deliver technology to help advance their performance and increasingly, when we can bring total solutions across repair and auto care. Pictured here is a portfolio that we bring into collision repair, masking, abrasives, paint systems and increasingly structural adhesives.
We can continue to drive this penetration strategy well into the future, allowing us to continue that strong growth and ability to outgrow these markets. Stepping back and looking at the broader industrial marketplace, we see some improving trajectory in 2017 that we can take advantage of and capitalize. On the left hand side, our broad industrial market indicators that we're correlated with, And we see industrial production index improving across all major geographies. Imports and exports have been improving as we've come through the second half of twenty 16, and we expect that to be positive in 2017. And the Purchasing Manager Index in key geographies is indicating expansion, something we're also hearing directly from our customers.
And as we look into our CRM pipeline, we can see indications that our sales per billing day is looking to start the new year strong. On the right hand side are 2 areas of trends that will also help in improving trajectory in 2017. The first is market cycles that have been a headwind for us in 2016 start to moderate and even improve as we move into the new year.
Our product sales
into oil and gas are stabilizing. Our defense business is improving and our demand for our specialty polymers is increasing. We also see a couple of trends as we look to the channel that we can also take advantage of. Our transnational distributors around the world are increasing share, and our B2B e commerce is growing at multiples of the market. And with our brand and portfolio, we are well positioned to take advantage of both of these trends.
Turning and looking globally at the key regions we face and our largest regions around the world, we see some trends also that improve the trajectory for 2017. Looking at the U. S, Greater China area, including China, Taiwan and Hong Kong, the DACH region, including Germany, Austria and Switzerland and Japan, we see a common trend that is helping to build momentum for us. And that is what our teams have done to shift their focus to domestic industrial markets. And these are domestic customers, our industrial customers who are producing products for domestic consumption.
In the United States, we are taking advantage of driving increased penetration in general manufacturing as well as increasing our penetration in those automotive aftermarket automotive aftermarkets. We also see an opportunity for our expanded portfolio in construction. In Greater China area, we're building momentum in this shift to domestic industrial, led by our abrasives and our tapes and adhesives portfolios. We also see a significant opportunity for penetration in both local and joint venture automotive OEMs manufacturing there. And the trends in Greater China area favor our separation and purification portfolio as well.
In dock, we see an opportunity to drive penetration in an improving general manufacturing marketplace as well as a significant opportunity to drive additional spec in with large global OEMs that are based in that region. In Japan, over the last 10 years, as electronics and automotive manufacturing has shifted outside home country, we have been our local team has been shifting their focus to domestic industrial markets. And we have strong momentum off of this, helping to lead our growth in Asia in 2016. And we see an opportunity there as well to specify additional applications with large global OEMs based there. And those large global OEMs based in those regions also provide an opportunity for growth elsewhere around the world where they manufacture outside their home regions.
Now I'd like to look at some specific examples of how we're accelerating growth and how we're enhancing our portfolio, prioritizing high value new products and digitizing our go to market model. We are actively managing our portfolio in order to consistently outperform our markets. This led us to consolidate from 9 to 6 divisions, improving our relevance with our customers as well as improving how we focus on high priority, high value new product opportunities. We leveraged this same view of strategic attractiveness to shape our M and A and how we think about our portfolio. This led to the acquisition of membrana and also the divestiture of Polyfoam and Polymask, looking closely at the fundamental strengths of technology, manufacturing, global capabilities and brand in each of those cases.
We also use portfolio management to look deeper into our portfolio of products and businesses. We've identified new business models for some of our legacy businesses, models that help us optimize the value they can create, take greater advantage of leveraging the 3M leveraging the 3 ms brand and also think about how we do innovation. We still work to innovate in these parts of portfolio, but innovate to maintain a strong market leadership or market position. These new models create space for additional investments in high growth, high value product areas like the biopharma filtration and acoustic insulation innovation, our growth. We also leverage our portfolio view to identify opportunities for near term growth.
And here are two examples of where we are making a surge investment as we go into 2017. The first is in our engineered abrasives, where when we demonstrate our superior performance with our customers, we win. And so that's what we're doing as we move into the new year, increasing our investment, expanding the numbers and frequencies of the demos in front of our customers. We're also investing in new applications of our precisely engineered abrasives for automation and robotics. And we're making investments to be more flexible in our make to order product capabilities to meet every customer need.
Looking at assembly solutions, we are focused on increasing our investment to win new customers. Here, we are investing in deploying additional technical expertise, both online and offline. Bringing that capability to our customers enables them to see the broad portfolio that can enable their customer designs and see how our products are fast and easy to use improve their productivity. Getting in front of them, we win new customers. Together, these surge investments will help accelerate growth, delivering more than 50 basis points of growth in the new year.
And while we're correlated with broad industrial market indicators like IPI and imports and exports, we also are able to take advantage of strong trends underlying our markets and create new products and drive new innovation to drive greater growth for our business group. Here are pictured several strong trends in our marketplace. A demand for greater and greater energy efficiency is leading to increased demand for portfolio of lightweighting solutions. Automotive electrification drives opportunity for our electronics businesses, as you'll hear from Jim Baumann later in the morning, but it also demands new materials, new materials that require new assembly solutions. Our customers are focused on driving increased process efficiency, and they're demanding a step change in productivity and yield from our products and applications.
And more and more customers are demanding improvements in sustainability, not only new raw materials, more sustainable raw materials, but partners who have a strong track record of being sustainable in their day to day operations as well. And as I said, automation is a strong trend in general manufacturing. This requires higher performing, more precise and higher quality products to use in their applications. And digitization is having a broad impact on industrial businesses, including customers now looking for total solutions in their application beyond one product, but to a total system solution. And so we have an approach to take advantage of these trends and drive innovation.
We have a systematic approach through the three strategies pictured here. In customer driven, we're focused on leveraging customer inspired innovation with 1 to 1 customer engagement, identifying their articulated and unarticulated needs. We leverage insights to innovation to look across markets and customers and develop new product opportunities through that. And we've increased our investment in application engineers, having more people close to our customers solving their problems with our existing portfolio. Under disruption driven strategy, it's about creating disruptive new 3 ms technologies, technologies that can create new markets or can meet the demands of leading edge customers.
And finally, an M and A driven strategy where we are building out through M and A at our existing platforms or adding new platforms, in each case, leveraging the fundamental strength so that we can continue to deliver differentiated growth once the acquisitions are integrated into our businesses. This is leading to a balanced approach and a balanced result in high impact, high return new products. And you see examples of each of those strategies pictured here. Under customer driven, we are bringing our Cubitron II, our precisely engineered into new applications in collision repair. And we have a partnership with a company called Festool, a leading provider and manufacturer of abrasive sanding systems to bring a dustless solution combining our 2 capabilities.
This is helping us to extend our leadership in this $1,000,000,000 plus business for 3 ms. Under disruption driven, we are innovating and bringing a portfolio of building insulation solutions to help advance commercial construction, helping to invigorate a fast growing $500,000,000 construction market business. And under M and A as an example of technology that we've acquired through the something called friction shims, which are used to transfer power in automotive transmissions. And we've combined the technology from Ceradyne with our technologies, our manufacturing processes and our global capabilities and brand and engagement that we have with the automotive OEMs around the world to bring a new higher performing version of friction shims, giving a step change improvement to our customers and helping us expand this $500,000,000 3 ms business. And finally, we are winning in the marketplace and creating competitive advantage with how we are transforming our customer engagement, how we're engaging our OEM direct customers, our value added resellers, our industrial distribution partners and a broad range of customers through e commerce.
And an important part of this is what we are doing to digitize our B2B go to market models. When you look at end users, we're creating a high touch online connection, going deeper into customer insights and analytics that we understand exactly how to engage our customers where they want, when they want. We're leveraging business transformation to help expand the access for our channel partners across our portfolio and to streamline how we engage with them. And in e commerce, we are leading a build out of rich content as well as embedded brand stores with our partners. All of this is adding to us being able to win new customers leveraging these digital strategies.
So there you have it, a compelling case to invest in the 3 ms Industrial Business Group, a case built on highly attractive portfolio of businesses and market positions, a case built on an improving trajectory for our market dynamics and a case built on what we're doing to accelerate growth through new products and a transformed go to market model, all of this leading to delivering more than 1.5 times our market and growth in 2017. Thank you.
So good morning. I'm Jim Baumann and I'd like to welcome you to the outlook update for the Electronics and Energy Business Group. The agenda I'm going to follow today is who we are, how we're improving our business and I'm going to give you some examples of how 3 ms is advancing a connected world and how that's going to grow our portfolio. Enabling connectivity in every company, home and life has never been more pervasive. Our 3 ms vision and the strategic intent of the Electronics and Energy Business Group aligns well to advancing a connected world through our technology products and innovation.
Electronics and Energy is a $4,800,000,000 business group. 60% of our business is in electronics and 40% is in energy. In electronics, In electronics, we provide high performance films, which you know quite well, but we do so much more. Our $1,000,000,000 design material business includes products that enable precision assembly, keeps devices running cooler through thermal protection and we have products that shield from signal Novec products offer a sustainable choice to problems ranging from fire protection to electronic cleaning. And with low global warming potential we provide solutions that enable uniformity, cleanliness and precision.
And with our Novec fluids and the use of Trizac technology for wafer pad conditioning. In energy, you know us as a company that's been developing and supplying reliable connection to utilities for over 70 years. Whether it's to the grid or to the communications network, our infrastructure solutions are designed for ease of installation in very demanding applications and environments. And our high performance films in the energy segment are used in a variety of different applications from controlling sunlight in buildings and vehicles to reducing the cost of cooling and heating. Our tapes, adhesives and coatings provide dependable electrical insulation, they seal against moisture and they're providing mechanical protection, even extending the life of wind blades.
And we help our customers And we help our customers supply a reliable connection to the grid, reduce the cost per watt to produce energy and reduce their costs of continue to improve our business through portfolio prioritization and we've taken a number of actions consolidating, divesting and exiting businesses to strengthen our portfolio. And this has increased our customer relevance. And we've been able to reallocate resources driven over 300 basis points of operating income. And that's allowed us to focus on differentiated, longer cycle, higher value markets. So on the left hand side of this chart is our core.
It's a large addressable opportunity, but it's slower growing. On the right hand side is our higher growth markets. These are longer cycle. We have initial penetration in these businesses with some very, very exciting applications. And these markets clearly offer faster growing, higher value opportunity.
And our access to these higher value markets is built on the 3 ms playbook that you've been hearing about this morning. We're using 3 ms technology platforms as our foundation. We then build strength on strength by leveraging our relationships with existing customers as well as those that are emerging as leading innovators in these spaces. In every one of these markets, we have a position, we have a growing portfolio aligned to these customer needs. And this is not a new formula.
3 ms wins every day in the marketplace with this combination of linking technology and leveraging customers, and this is our key to success into the future. So before I talk about how we're going to advance a connected world, let me give you a view to our 2017 outlook for Electronics and Energy. We are projecting an organic volume growth of minus 3% to plus 1%. Our core is made up of some slower growing markets, which includes especially smartphone, tablet and PCs. We are estimating the LCD to OLED transition to be a 1% to 3% headwind depending on mix and volume.
That's $50,000,000 to $150,000,000 for our business. There's also the impact of the portfolio we exited, such as the backsheet business. And we have a number of businesses that are going end of life and our project based businesses as well. Our core growth programs are going to concentrate in LCD and additional growth in semiconductor with our new applications. With our reallocated resources, we're aggressively going after data center solutions, gaining automotive spectrum in electronics and expanding new applications in Novec fluids.
So 2016 has been a challenging year for us, but we're well positioned to take advantage of our new portfolio and make progress in our growth plans this year. In fact, it's my personal goal and my team's imperative to grow the electronics and energy in 2017 despite the headwinds. And we can do this with a number of really good growth aligned to our direction. So let me transition now to how we advance this connected world. By 2020, it's estimated that over 25,000,000,000 devices will be connected, including mobile devices, our automobiles, energy resources, wearables and industrial robots.
Content is going to explode with 80% of that being video. That means infrastructure is going to double in order to handle that growing bandwidth. This will have a case on how 3 ms takes advantage of this megatrend. In electronics, we enhance visual experiences far beyond display screens using our deep expertise in optical science. We're known for enabling thinner and brighter displays, but we also use to advance the next generation of electronic devices.
We enable design and function by combining multiple sets of advanced material technologies to manage light, heat and signal interference. And we're improving data centers today by enabling higher interconnect density and novel interconnect designs that meet the needs of data center reliability and energy consumption. And we're advancing a connected car with solutions in displays, battery materials and thermal management systems. I'm going to talk more about each of these in a minute, but let's first begin with enabling design, function and enhancing visual experience. Today, we have a $1,100,000,000 smartphone business.
$600,000,000 of this business is in films. It's a business that was largely built on LCD technology. We're highly engaged with customers today and we understand their roadmaps. We're also highly engaged with all the leading manufacturers around the world. We have proven the ability to differentiate the portfolio we supply in the smartphone market.
We're a leader in optics electronic materials. And we have the ability to quickly scale high volume manufacturing around the world. Top of mind is our OLED offering. And let me highlight a number of applications we have today in these devices. First of all, recognize there is an OLED display in part of this device.
However, we have a number of offerings across the entire enclosure and across the entire device and we're penetrated into existing OLED smartphones and we're going to continue to concentrate on this growth. This is our opportunity to specify 3 ms solutions. In the future, we're even more excited about our ability to enable new flexible and foldable designs with our advanced film technologies. Flexible and foldable OLED requires unique film technologies. We're working with leading customers now to help bring we're working with leading customers now to help bring those innovative design ideas to life.
And our business extends far beyond display. For example, our products that improve the performance of data centers. Data centers are about capacity, reliability, speed and signal integrity. These are customer requirements that serve that we serve today and we're going to serve in the future. The market is $5,000,000,000 It's growing 10% and it's driven by growth in cloud and hyperscale computing.
We see data rates and traffic increasing three fold over the next 5 years. And today, 40% of the energy demand for data centers is in cooling. And finally, maintaining uptime and reliability is critical as well as the cost of unplanned downtime can exceed $10,000 per minute. So 3 ms Novak fire suppression fluids, which have been used in data centers for over 10 years, help operators avoid downtime caused by equipment damage from potential fires. Our Novec Engineered Fluid also help manage heat to improve energy efficiency.
This is an emerging area where we are providing fluids for immersion cooling. We're working with 10 high speed, high performance, high capacity data centers with immersion cooling applications. Several are commercial and we see this growing. Yoversa's conventional cooling methods, Finally, our optical interconnect solutions enable the adoption of higher data speed and signal integrity using unique optical connections at the board level. We're in a development program now with a company that could deliver $100,000,000 platform for us in this area.
We're also advancing the connected car. And you know the market drivers very well. This is the use of larger heads up and high definition displays and it's growing over 10% per year. The cost of electronics and vehicles are going to surpass all other costs by 2,030. Plug in, hybrid, battery powered vehicles are going to become mainstream.
And we have decades of automotive industry experience. And we work closely with OEMs, tier suppliers today to improve display quality, improve battery density and enable new designs by combining multiple sets of advanced technologies to manage heat and signal interference. And our technology solutions touch nearly every We're deploying the 3 ms technology toolkit to solve new problems. In fact, we have an application today in a well known car where we provide a non metallized solar film in the windshield. The film provides heat management, but more importantly, it's a vehicle without signal interference due to that non metallized solution.
This is technology that grew from our multilayer optical films. As more and more sensors are incorporated in the vehicle, especially in the wind shield, we're enabling a car to be connected to the outside world. And in the area of power density, the industry has been working on batteries for over a decade to improve that density by 1% to 1.5%. We have a technology in development today and being tested by a number of battery manufacturers that delivers 6% to 10% improvement. That's game changing.
These technologies are how we advance a connected car. And in energy, increasing connectivity is becoming equally important. We advance a connected energy world by connecting people at the speed of light with our fiber optic solutions. We advance a connected energy world by connecting by improving the reliability and efficiency energy delivery with our cold shrink terminations that can be installed in a fraction of time without the need of special equipment or permits. And we're advancing distributed power networks by helping utilities gain visibility to their underground distribution networks.
Sensor termination cable accessories, combined with multiple sets of advanced materials are making solar, wind and energy storage more efficient and more reliable. So let me tell you about our solutions for grid automation. In developed countries, electrical and gas distribution infrastructure is aging, and it's leading to that high profile safety incident such as the recent manhole explosion right here in New York City in September this year. At the same time, there's growth in distributed energy resources and this is creating integration challenges across the grid. And in developing countries, peak load is rising 2 to 3 times faster than average And it leads to blackouts like the one that happened in India that left over 300,000,000 people without power.
In countries like the U. S, the UK and Singapore, the distribution network is moving underground. In the U.
S, the percentage of underground
distribution increased from about 20% to over 40% in the last 10 years. And our locating and mapping solutions help utilities precisely locate underground assets and this helps them manage their costs as well as avoid costly mistakes. And as I mentioned earlier, our sensor termination cable accessories help utilities gain visibility to their underground distribution grids by providing highly accurate voltage and current in real time. And they can retrofit these by simply replacing a standard medium voltage termination with our product. This means a utility can gain grid automation automation capabilities as part of their scheduled maintenance and their upgrades.
At 3 ms, we're also focused on on energy wind and storage. And we see renewable electricity capacity growing by roughly 40% by 20 21. However, the additional capacity causes some challenges. You're all familiar with the California DUC curve, where oversupply occurs midday as solar floods the grid, but then it comes offline just as people are coming home and ramping up demand. This represents a great opportunity for energy storage, both into the distribution center as well as behind the meter.
Cybersecurity concerns and the increasing severity and frequency of disaster events are driving regulation and customer demand for backup power. This opens up opportunities for our fuel cell and flow cell batteries. Beyond forklift trucks, where we have applications today, fuel cells are becoming increasingly competitive as alternatives to generation sets and improved technologies are going to become serious power storage devices for the future. And our solar light redirecting films, which is a micro structured reflective film applied on a solar panel, recaptures and redirects light that would otherwise be lost. And 3 ms's vortex generators help wind farm operators optimize blade aerodynamics to achieve high energy yields.
So this has been a challenging year for the electronics and energy business due to many market dynamics. But it's also an exciting time as we evolve our portfolio through game changing technology and customer relevance to advance a connected world. And this is how we're going to my pleasure to introduce Mike Vail, who's going to it is my pleasure to introduce Mike Vail, who's going to talk about 3 ms's healthcare business. Thank you.
Thanks, Jim. So it's my pleasure to be able to talk to you about 3 ms Healthcare Business and our outlook for 2017 and beyond. My presentation this morning is going to look at a number of core the business overview and the key themes of the business how we see ourselves winning in an attractive but changing landscape and how we are going to drive growth acceleration in 2017 and beyond by focusing on high growth markets, key geographies, driving impactful technology supported by clinical evidence into the based company. But there are many unifying factors that bind the company together, none as powerful as the 3 ms vision statement. When you look at this, 3 ms Healthcare embodies all aspects of the 3 ms vision, as all 3 ms businesses do.
But as you heard Inge describe this morning, healthcare is uniquely identified with that last statement, 3 ms Innovation improving every life. And our healthcare employees worldwide come to work every day driven and passionate about that mission statement and about executing our global strategic intent, which is care pathway innovation for improved and cost effective health outcomes. This is a strong business, consistently delivering market leading growth rates at industry leading operating margins. And in 2017 and beyond, we will continue to deliver those growth rates and performance, driven by the depth that we have in all of 3 ms fundamental strengths, the new product pipeline and portfolio that we are bringing to market and that we are leveraging already in the market and the fact that we are investing in core aspects of the business today and developing new capabilities to amplify our growth new capabilities to amplify our growth impact in the market for tomorrow, all while staying disciplined in our focus on driving the 3 value creation levers of the company, portfolio in sales, deliver operating margins of above 30%. We are structured in 5 core market segments ranging from medical consumables to oral health, to drug delivery systems, to health information systems, and finally, food safety.
All of these markets are large, they're global, and they're growing. And when you look at the slide here, when you look at the portfolio of the business, we are unique in this space. No other healthcare capability to bring the platforms effectively into market for our healthcare consumers. We're very confident about our growth outlook going into 2017 and beyond because the markets themselves continue to be quite attractive. The causal drivers of consumption continue to point to increased in medical and digital technology and the higher awareness and visibility of chronic and pervasive disease states.
And you see these the impact of these causal drivers macro trends reflected in the outlook of healthcare expenditures on a global basis, over the next 5 years are going to be in the mid single digits on a worldwide basis and going up to double digit growth changing. And we know this because of our intimacy and connectivity to our customer base on a global scale. The needs of our customers, whether you're in oral care or medical markets, whether you're in developing or developed economies, is the same. They want broader access of their customers to care, better patient outcomes, improved better patient experience, improved outcomes, and they want to do all 3 at reduced cost. And these needs of our customers are reflected in the dynamics that we see in the market today, again, on a global basis, both in the near term and the foreseeable future.
But 3 ms is very well positioned to win in this changing space because fundamentally, it plays to our strength. We as a company, we as healthcare are all about improving performance at reduced cost. So we are very, very confident going into this market space in our ability to accelerate growth. And that confidence is reflected because of the depth and breadth of our core portfolios across the business, but not only because of the technological strength and performance of our portfolios, but also because of the scale and pervasiveness of the challenges that we face in the market. Let me give you three examples of this.
Infections in hospitals a day are one of the greatest cost amplifiers or cost complicating factors care settings. There have been 1 in 10 patients that go into hospitals will acquire an infection while they are in the hospital. In the United States alone, there were 75,000 deaths last year from hospital acquired infections and the cost to treat those infections was over $10,000,000,000 3 ms is a leader in preventing infections within hospital and care settings. Whether you look at our sterile drapes and normal thermoal products in the OR or the biological indicators that we have in the central sterilization units of the hospital settings, we are focused on reducing deaths, reducing costs and making hospitals more effective. When you move to food safety, last year, there were 400,000 deaths globally related to food contaminated causes.
In the United States alone, there were 150 recalls of contaminated food in the market, each recall costing on average $10,000,000 per occurrence. Our portfolio, backed on petri film indicators, pathogen and allergen detection makes contaminant testing more effective across the food supply chain, and it preserves the brands and quality of our partners and protects the consumers in the marketplace. Finally, health information is a critical component of the healthcare system and is also the source of 1 of the largest waste factors in the overall system. Annually, there's roughly about $750,000,000,000 in excessive cost in the health care system that's costs in hospitals. Our 360 Encompass platform combining natural language processing, coding and grouping of healthcare terminology helps hospitals become more efficient and more effective in getting the right level of care at the right moment to patients in the care setting.
And these problems in these portfolios are global. So while we continue to drive the growth in the United States, which is our core where we have our strongest technology, our strongest market position, we will continue to drive towards expanding our position in international in both developed and in particular developing economies. And in these developing economies, in the large population centers where the macro consumption illness. We are going to see double digit growth rates and we're investing into that starting this year and going through a multiyear investment program as we drive towards building out our educational priorities in these countries, building coverage and contact at the customer, advancing and expanding market access to change and upgrade practice in the country, leveraging and customizing our portfolio to the needs in these developed economies and developing economies and building out the local team capability. Fundamentally, we are leveraging all 4 fundamental strengths of the 3 ms winning playbook.
We will access or we do access over 2 dozen of the company's technology platforms. 3 ms Healthcare sites as well as larger 3 ms super sites. We are embedded and leveraging the subsidiary network to be closer to our customers across the world. And all of this is unified under the 3 ms brand promise exemplifies quality, trust and innovation, bringing to life science applied to life. But when you look at those 4 fundamental competitive factors, competitive strengths the company, nothing is as strong for us as the depth and breadth of the technology platforms.
Our ability to develop, leverage and combine the technology platforms at the center of the company is the real differentiating competitive factor for this business. It underlies the core portfolios that we have today across all six divisions and it helps us create the platforms for the future that we will evolve our business positions into on a global basis. And we bring innovation to market in a variety of forms and ways, both refreshing our core portfolio in the spaces that we serve today, transforming the markets and the portfolios that we're in, in the core elements of the business, but also developing disruptive platforms that will take us into new spaces for growth acceleration. In 2016, over 25 percent of Healthcare's business will come from new products. And we anticipate that, that will continue to be and expand over the course of the next 5 years.
And we're focusing the technology on more and more large market opportunities to help us accelerate the already strong growth performance that this business has delivered, fundamentally focusing both on material science in the areas of advanced wound care, sterilization monitoring and food testing and detection, as well as increasingly digital science in the areas of population health measurement, inhalation drug delivery and digital oral care. I'll go through 2 of these examples for you now in more detail. So advanced wound care is a $7,000,000,000 market that's growing in the mid to high single digits. And it is driven by the need to treat wounds that are complicated, complex and persistent in nature where the body's own healing processes are ineffective. And it is tied to pervasive and chronic illness.
Diabetes is a global epidemic. It is a global epidemic and it's growing. $1,000,000,000,000 a year globally is spent on dealing with diabetes and the complications coming from diabetes. One of those complications is the impact it has on skin cohesion. As you can see here with the example of the diabetic foot ulcer.
These are very, very tough wounds to treat. It is a multistage care pathway. No healthcare company in the world has a presence in each stage of this care pathway. And impactful technology that will be in every stage of this care pathway for treating advanced wounds. We will be combining within the body.
We will be using our film technology and our nonwoven technology platforms to create form factors that will be greater visibility for the care practitioner as well as superior breathability to the wound as it is healing. The combination of all these technology factors, these technology platforms and performance in these products will deliver faster and enhanced healing rates for the patient and we feel that we have an opportunity of over $700,000,000 over the course of the next 5 years to drive this business. Let's move now from material science to digital science. As you know, global healthcare systems are moving from a volume based model to a value care based model. In order to reduce costs and drive effective outcomes in a value based care model, Hospitals and practitioners have to have access to data.
What's happened to the patient before? What's happening right now? And what are the predictive outcomes that could happen in the future. And they need it in real time. But today, healthcare systems globally are constrained by fragmented financial and healthcare clinical data.
3 ms is partnering, as we've announced, with Verily to create the performance matrix. We will take our vast expertise in health and clinical data represented in reimbursement, coding, clinical data and diagnostics. And we will combine it with Verily's scale and domain expertise and data analysis to create the population health management platform. This will be a real time platform that will process 1 quadrillion cells of data simultaneously, looking at data from providers, sources of care, patients, locations and outcomes to provide the practitioner in real time a comprehensive history and options for what to do with the patient while they are in the care setting. This is a platform that is unique to the world.
It is unique to the world and we feel that it will be able to help us attack over $500,000,000,000 of identified waste in healthcare spending globally. Since we have announced the deal with Verily, we have moved rapidly towards prototype testing, beta testing. We have multiple partners coming to work with us in the development and commercialization of this platform and we anticipate launch in Q2 of next year. But while we are a healthcare technology company, we recognize that technology in and of itself is not enough in a value based space, a value based care space. So we have been investing now and will continue to invest at a rate of 2 to 3 times prior levels in new capabilities that will showcase the impact of our technology in the market in more clinical settings.
We will be investing to expand our capability in clinical studies, which will show the effectiveness in real time broad based care settings. And we will be taking that clinical evidence and using expanded health economics capability to show the impact in a cost reduction in effective way to the hospitals and practitioners where we are deploying these product lines. We'll be investing across 12 clinical categories, focusing in 10 key geographies, and we think that this will allow us to drive over $500,000,000 of sales acceleration in the coming years. Finally, we are increasing our engagement with our customers. In 2016 alone, we have driven and educated 400,000 healthcare professionals globally through our Healthcare Academy.
We have deployed over 3 50 online courses for training and development. We have staged over 10,000 customer events and training sessions around the world. We build intimacy with our customers in both direct classroom settings and we deploy content in both static and mobile environments globally. Are increasing our presence in scientific congresses, industry trade shows and professional seminars around the world in our key geographies. And by doing this and increasing our intimacy and connectivity in the marketplace, we are able to showcase our expertise, we're able to help develop our customers' capability, we're able to change preferences in the market and catalyze action and drive purchase intent.
So when you look at the combination of all these factors, we are very, very confident in the outlook of this business to deliver the 3% to 5% organic growth and lead the company going into next year and beyond, to continue to outpace the market outpace strengths of this company, our deep technological innovation and capability to evolve it into impactful solutions in the market. And we continue to invest in the core capabilities and new capabilities of the business model, both in 2016, 2017 and beyond. I have been with the company now for roughly 25 years. And I can tell you, this is the most exciting role I've had in the company because I can see the value that we are going to create in the improvement we will make in the lives of patients around the world. This business exemplifies everything that's in the 3 ms vision.
We will continue to execute our strategic intent, care pathway innovation for improved health outcomes. And we will continue to drive the 3 ms goal of science applied to life. Thank you very much. And now I will introduce our Chief Financial Officer, Nick Gengset.
Good morning. It's great to see everyone here today and thanks for coming and joining us as we share our plans for 2017. Before I address our 2017 outlook, let me provide a few comments about how we're seeing 2016 closeout. We continue to expect to see positive low single digit organic growth in the 4th quarter, which will bring our total year organic growth to approximately flat. Our business operations remain strong and on track, and we expect another year of delivering strong cash flow and premium returns on invested capital.
On a non operational front, the recent strengthening of the U. S. Dollar is creating some earnings headwind as we finish out the year. And as a result of FX, we now expect full year earnings per share to be at the low end of our current guidance of to 8.20 or up 8% year on year. Now let's look to a summary of 2017 sales growth, earnings per share and free cash flow conversion.
As you've heard throughout the morning, our team is focused on executing our playbook and making investments to deliver our long term success. Looking at 2017, we expect GAAP earnings to be in the range of $8.45 to $8.80 per share, up 4 percent to 8%, primarily driven by organic growth and operations. We expect organic local currency growth between 1% and 3% and we expect foreign currency translation to reduce revenue between 1% 2%. And finally, we anticipate another strong year of free cash flow generation with a conversion rate between 95% and 105%. Now let's take a look at the overall financial headlines on the next slide.
In 2017, the main drivers of our year on year growth in GAAP earnings per share will come from organic growth, along with strong operational performance. And that strong operational performance will come particularly from business transformation value realization and improved utilization. And those items will more than offset the non operational headwinds we are seeing from FX and pension. We generate at 3 ms consistent and healthy cash flow due to the strength and diversity of our business model. In 2017, we expect another year of effective capital deployment funded by operating cash flow with added leverage.
As always, investing in the business to fund efficient growth remains our top priority. That includes CapEx and R and D, which propels organic growth, as well as strategic acquisitions, which augment our growth. While we invest in the business, we also plan to continue returning cash to shareholders via dividends and share buybacks. Our team continues executing our playbook and controlling the controllable. Let's move to take a closer look at 2017 organic growth.
As mentioned earlier, investing in organic growth remains our top priority. And in 2017, we expect organic growth in the range of 1% to 3%, largely volume related, along with continued positive core selling price growth. We expect organic growth to add between $0.20 to $0.50 to earnings per share in 2017. In developing markets, we expect organic growth to range from 1% to 4% and in developed markets, we are expecting growth between 1% 3%. Our 2017 plan is built on an estimate that in Global Industrial Production Index, or IPI, will grow between 1% 2%.
We expect our investment in the combination of research and development and CapEx to again exceed 10% of revenue as we continue to fund efficient growth in 2017 and beyond. Let's now look at organic growth by business. Healthcare and consumer are expected to lead our 2017 organic growth, with health care up 3% to 5% and consumer up 2% to 4%. We forecast organic growth in electronics and energy to be in the range of -3% to plus 1%. And finally, organic growth in our industrial related businesses, namely Industrial and Safety and Graphics, are each estimated to grow between 1% anticipate the second half growth to be slightly stronger than the first half, particularly in our Healthcare business.
Let's now move on to organic growth by geographic area. As you can see, we expect similar organic growth across our major geographic reporting areas. We estimate organic growth in the U. S. Will be between 1 and 3%.
We expect organic growth in EMEA to be in the range of flat to +2%, with West Europe increasing in the low single digit range. In Asia Pacific, we anticipate range.
In Asia Pacific, we anticipate 1% to 4% organic
growth with both China and Japan increasing in the low to mid single digit range. Finally, Latin America, Canada is expected to grow between 2% 4%. Next, I'll walk through our investments in research and development and CapEx, which support and drive organic growth and premium returns into the future. Let me start with R and D. As you've heard from the other presenters this morning, innovation is the heartbeat of our company and one of our 4 fundamental strengths.
We connect 46 technology platforms to solve real problems for our customers, which enhances our relevance with our customers, along with growing markets to advance our organic growth. R and D is a significant part of our commitment to building 3 ms for both short term and long term success. We expect R and D investments to be approximately $1,800,000,000 or 6 percent to revenue in 2017. Let's now move to our CapEx investments. Like R and D investments, CapEx also fuels our efficient growth and profitability.
Portfolio prioritization drives our CapEx investment decisions, ensuring we are investing fully in our most promising growth opportunities. Our manufacturing capability, which is another of our 4 fundamental strengths, is leveraged across our business portfolio. We are increasing investments on disruptive technology and automation, which continues to enhance our growth and profitability, while also advancing product quality. We expect 2017 CapEx investments to be in the range of $1,300,000,000 to $1,500,000,000 or approximately 4.5% to 5% of revenue. Let's now take a closer look at the impact of 2016 divestitures.
Acquisitions and divestitures strengthen and focus our portfolio of businesses and acquisitions augment our organic growth. In 2016, we made solid progress in managing our portfolio as we took action and sold 2 small non strategic businesses, which will create approximately a $0.05 earnings per share headwind in 2017. This headwind does not include the impact of our recently announced pending divestiture of our identity management business. Our ongoing portfolio management process frames up our priorities for both organic investments along with acquisitions and divestitures. On the acquisition front, we continue to have an active pipeline with focus areas in health and parts of industrial.
Let's now look at earnings per share impact of foreign currency. As I highlighted earlier, we expect foreign currency translation impact on revenue to be a headwind of 1% to 2 percent in 2017. Our earnings per share estimate includes the impact of foreign currency translation on sales and operations net of gains from hedging. In 2017, we expect to face a headwind of approximately $0.20 per share due to the stronger U. S.
Dollar. And for this calculation, we're using November month end exchange rates. It's also it includes the net impact of any hedging gains that we experience as a result of this stronger U. Dollar. Let's now move on to the earnings per share impact of raw materials.
We have a long track record of delivering raw material savings and we expect that to continue in 2017. Our benefits productivity efforts, which are expected to add $0.10 to $0.15 to our earnings per share. As a reminder, raw materials and purchased finished goods account for approximately 1 half of our cost of goods sold. Let's move on value realization impact from business transformation. Earlier this morning, you heard from both Inge and Julie as they talked about business transformation being one of our 3 key levers.
This lever creates value for our customers and enhances our efficiency in our own operations. Our ERP is the backbone of our business transformation efforts, providing the platform to simplify, standardize and automate our global business processes. Our focus in 2017 is on completing our West European deployments and then shifting to initial deployments in the U. S. As a reminder, 2016 was our first year of operational savings from business transformation with approximately $50,000,000 in savings.
In 2017, we are expecting another $0.05 to $0.10 of incremental year on year earnings per share benefit through value realization in business transformation. As Julie mentioned earlier this transformation. As Julie mentioned earlier this morning, our 2017 savings will be primarily generated from our global service centers and our business service operations. Let's now take a closer look at where we expect additional productivity savings. Continuous improvement and driving productivity each and every day is a way of life at 3 ms.
On top of our business transformation savings, we expect an additional earnings per share benefit of 0 point $0 to 0 point improved volume related utilization versus the headwind we've experienced in 2016. We also continue to drive Lean 6 Sigma company wide with an emphasis on our global supply chain and on business transformation. Let's now transition to the impact of strategic investments on our 2017 earnings per share. 2016 was a strong year of making strategic investments, and we expect that momentum to continue into 17. We will add to our targeted investments to accelerate growth in profitable core markets.
And another part of our business model is to continuously reinvest in the business to drive productivity. This includes our efforts to optimize our supply chain footprint. In 2017, we expect year on year incremental strategic investments to be a 0 point 0 $5 to 0 point $0.10 We estimate year end 2016 worldwide pension OPEB funded status to be 85% with the U. S. Pension plan at 91%.
Our 2017 assumptions include the U. S. Discount rate at 4.38%, which is down slightly versus last year. We are also lowering our return on asset assumption by 25 basis points to 7.25 percent as we continue to prudently manage our investment portfolio and our return expectations. Our 2017 cash contributions to our defined benefit plans are expected to be in the range of $300,000,000 to $500,000,000 As a reminder, we have closed or frozen the majority of our defined benefit pension plans around the world.
The change to defined contribution plans has provided employees with greater portability and flexibility. Let's
turn to
the next slide for a closer look at our effective tax rate impact. We plan to further optimize our supply chain and utilize our centers of expertise to improve efficiencies and drive down our structural tax rate. In 2017, we anticipate our tax rate to be in the range of 20 8% to 29%. This will result in an earnings impact of neutral to a tailwind of $0.10 per share. Our forecast is not inclusive of any future corporate tax reform.
And let me take a few moments to make a few comments on this since it's top of mind for many. For years at 3 ms, we've been engaged in corporate tax reform discussions. We are encouraged by the recent dialogue and the positive momentum on the potential of comprehensive tax reform in the U. S. We have analyzed and continue to analyze the various proposals and the potential associated impact on 3 ms and will respond accordingly to whatever outcome occurs.
Let's now shift topics to 2016 marks the 1 100th year of paying a dividend without interruption and the 58th consecutive year of increasing our dividend. As you can see, we have nearly doubled our per share dividend over the last 3 years. Looking forward, we expect our dividend to grow in line with earnings over time. The second way we return cash to shareholders is through share repurchases. And in 2017, we are forecasting to deploy between 2.5 $1,000,000,000 $4,500,000,000 of cash to grow share repurchases.
We estimate this will reduce average diluted shares outstanding by 2% to 3%, increasing our earnings per share by 0 point 15 dollars to 0 point 2 $5 As always, the timing and amount depends on relative value and other potential uses of cash such as M and A. As we continue to execute our capital structure, in 2016, we added nearly $2,000,000,000 of incremental debt. And in 2017, we expect to add between $1,500,000,000 $3,500,000,000 of incremental debt in 2017. As we continue to invest in the business, returning cash to shareholders through further shifts in our capital structure, we do expect our net interest expense to increase in 2017. This will reduce our earnings per share by approximately $0.10 Let's now move on to a summary of our 2017 capital allocation plan.
As I mentioned earlier, we expect another year of strong cash flow generation from operations. We are estimating between $8,800,000,000 $9,300,000,000 prior to our investments in R and D and pension contribution. We also plan to continue further shifting our capital structure by adding leverage of 1 $5,000,000,000 to $3,500,000,000 So our 2017 plan calls for $13,000,000,000 to $15,500,000,000 of available capital for deployment. And as I mentioned earlier in the divestiture earnings slide, our total funds available does not include the impact of our pending sale of the identity management business. The first priority use of capital is to invest in our business, which includes research and development and CapEx and acquisitions and at the same time returning cash to shareholders.
Specific to acquisitions, all businesses are engaged in our pipeline. And as I mentioned earlier, our focus areas remain healthcare, safety and parts of industrial. Lastly, cash contributions to our defined benefit plan is expected to be in the range of $300,000,000 to $500,000,000 this coming year. Now let's take a look at our total 2017 earnings bridge on the next slide. Here's our total 2017 earnings roadmap summarized on one slide.
We expect 2017 earnings to be in the range of $8.45 to $8.80 per share, up 4% to 8% year over year. Our earnings growth will be primarily driven by organic growth supported by strong operational performance as our team continues to control the controllable. In summary, I'll start I'll wrap up where Inge started this morning. Looking at 2017, we are ready and well positioned for success. Our business model is creating greater value for our customers and the 3 ms playbook is working.
And our team is focused on driving efficient growth by executing on our Lastly, we have a plan to deliver organic growth between 1% and 3% and earnings growth of 4% to 8% in 20 17. With that, we'll take a moment to assemble on the stage and then open it up for Q and A. Thanks for your attention this morning.
Just a question here.
I'm throwing up the U. S. Stimulus plan. A couple of things. Is any of it is baked into your forecast for 'seventeen?
And b, if you could go in more depth, you know, because people perceive 3 as more consumer oriented, you know, big
Happened what in terms of The stimulus
that people are talking about. Yes. Do you guys have the operating leverage and position?
Yes, we do. So first of all, is it baked in? No, it's not baked in what you saw here today in terms of if anything is happening in U. S. But we estimate it will happen.
Then I think it's timing relative to when you can see it coming into the pipeline. And I think if you're realistic around it, if you talk about infrastructure and so forth, it's probably take you some time before that acceleration will come. However, you should see earlier, which I will say is maybe in the 2nd part of 'seventeen, acceleration relative to manufacturing start to come. So when we look upon it in terms of we need to see more clarity on what will come. I think there's a positive momentum in the minds of people that things will start to move.
And the way I look upon it and we look upon it is that we should be early in that process. So you think about companies that have been talked about that will have clear benefit early on in that process. The more I start to think about that we should be ahead of them because we are supplier to most of them. Do we have the capacity and capability? Yes, we have.
And I think it's important to think about it in the following way. 3 ms never left United States. We expanded internationally. So we have the capabilities United States in terms of research and development. This is the key place for us to do it.
We have manufacturing capabilities, and our brand equity is stronger in United States than anywhere else in the world. And as I said many times before, this is our home arena. We should never lose here. So on that point, I think we are very well positioned in order to capitalize on what will happen in the economy. We are €3,500,000,000 net exporter out from United States.
So that's coming back to the point that we never moved. We expanded on a localization strategy. Now if you connect that to that chart where the evolution of the economies are, we are due to the fact it's a localization strategy, we are in whatever country and been there for a long time in order to capitalize on the opportunity. And it looked like around the world that domestic businesses will have a favorable situation in countries, right? And that's also where you can see where we look upon consumer will grow on the high end for us and so will Healthcare.
So the answer to your question is we are ready to
Nick, you guys have crushed it on the raw material side for several years now. Oil is, I think, basically you guys have it flattish year over year. Can you maybe talk about the sustainability of those raw materials benefits kind of going forward? Is this now $0.10 to $0.15 every year as far as the eye can see? And then I have a quick follow-up on healthcare.
If you look over the last 2 or 3 years, 3 ms has been experiencing noticeable tailwinds or benefits from lower raw material commodity prices. In the last couple years, that's been a combination of multiple factors. Some of it has been market dynamics where we are experienced just outright in the market lower commodity prices. But it's also been a component in the last couple of years where that's been driven by 3 ms's own efforts in sourcing. Whether it be some of our negotiation efforts that's being enabled through business transformation or material substitution is another example as we look for ways to optimize the components going into our raw materials.
That's been there and that will continue. And as we look at our our savings that we're expecting in 2017, there's very little of that that we're expecting from outright commodity price market reductions. The vast majority of that $0.10 to $0.15 of benefits we're expecting in 2017 is coming through our own sourcing efforts through material substitution and market negotiations.
And that's sustainable in the
kind of 'eighteen time period? That's been something we've been able to do in the past when we keep going. I think the only caveat I'd put on that is this is a year in 2017 where we're seeing commodity prices in the market being somewhat neutral. In 2018, we don't know. Could the commodity prices actually become an underlying headwind?
But we'll still be doing those underlying efforts to drive our own productivity with sourcing.
Okay. And then on healthcare, I know that the business slowed a bit in the Q3. There were some chatter about perhaps election related. Can you guys maybe talk about how you would see a repeal or change in the ACA as impacting your business in the near term, understanding that longer term, you guys will respond to value based healthcare, etcetera. But I guess could there be a pause at some point?
And what have you seen most recently around the election in health care in the U. S?
Well, I don't think generally speaking first of all, it's a global business. So when you look upon the result for us in the 3rd quarter, it was more than U. S. So I think that was an impact of maybe wait and see the U. S.
And then you had other geopolitical things going on, on a global base. We said on the earnings call that we estimated Q4 to be very similar to Q1. And then I think as we move into 2017, you see we have a guidance of 3% to 5%. And I think maybe as you think about it, maybe Q1 of the year will look like the 2nd part of 2016. But after that, we should be in a really good position to move forward.
I think the important thing for we have been in health care for so many years, and I think I comment at some point back that I personally was involved in health care early '90s back in Europe, right? I led health care then or some entities of health care from 'ninety one to 'ninety five before they send me into Russia to learn some real business. But during that time, 'ninety one to 'ninety five and before that, you had the German Health Care Act, etcetera. So what you see going on in the world from time to time, we have been part of that. So we know how to respond.
And I will say the value creation of our solution in health care are incredible. And when you look upon our cost of goods sold, it's world class. And so I think for us to respond with health economics, with paper and key opinion leaders plus a very effective manufacturing capability will put us in a very, very good position. So for me, generally speaking, I'm not concerned at all about our Healthcare business as we move forward, even if there maybe will be slowness in the next 1 or 2 quarters. But we are here for the long term.
We have fantastic margins, and we are in a very, very good position.
So Nick, my first question is on the organic growth contribution, 1% to 3% equating to roughly 0 point 2 0 dollars to 0 point 5 0 dollars Last year, we are here, we were expecting about 1% to 3% growth as well, but the contribution was much less. So is there an embedded higher price flow through in 2017 versus 'sixteen? Or what's the key driver of the difference?
Joel, there's as look go back a year ago when we were projecting 1% to 3%, we were pretty conservative in our estimate on price growth. And the vast majority of that was volume growth that we were projecting. It's still true for this year in our 1% to 3% growth that we're estimating on the majority of this is coming through volume. We've been historically able to drive 30 to 50 basis points of price growth, excluding FX. We continue to see price growth into 20 17.
We're not expecting it to go up from the pace that we've been at in the past couple of years.
Okay. And then maybe one question, just follow on on Electronics and Energy. So there is a pretty recent acquisition, Samsung acquiring Harman and their ability to get bigger in the infotainment space. How does that at all change the competitive dynamics for you guys? And would you consider is that an area where you're considering to vertically integrate?
Well, first of all, we are a supplier to the industry, whoever is in that space, right? And I think that was a big acquisition for them and I think based in Europe, correct, right? So it's a big space for them. We would continue to provide solution to whoever owned those companies. If you ask think about our pipeline in terms of acquisition.
That's strong in all five businesses. But the preference as we speak is in Healthcare, Safety care, safety and graphics and industrial. And the reason for that is we have still some work to do in order to make sure we're coming right with the portfolio in electronic energy. Now if you think about that acquisition that is going very much into the automotive space, etcetera, if you take that on a bigger platform, which we talked about here, Ashish talked about it, I made an example. I will say if you think about that in terms of our capabilities moving forward organically, we are very strong in the automotive industry by businesses in Mike Roma's business.
We are very strong in traffic safety by businesses in safety and graphics. And we are very strong in electronics. If you combine those 3 together, that is an incredible space for us as we move forward. And we have the connection in the industry, and we have the technology platform. Then it's up to us to build something like that.
So I will not say that it's a change for us relative to move of ownership in that industry. I think we will become stronger as we move ahead, and I think that's the strength of our technology platforms.
Andy Kaplowitz?
Thanks. So Nick, you seem like you're right on track in terms of business transformation. But at the March Analyst Day, you had talked about $125,000,000 to 175,000,000 dollars of factory optimization. And I'm wondering if that's in the $0.10 to $0.20 of other productivity that you talked about? And then Inga, in terms of business transformation, you talked about being very happy with the rollout in Europe of ERP.
Obviously, sort of the big deal is the U. S. Here as you go into 'seventeen. So are you sort of I mean, I know the numbers are the same, but are you sort of ahead of plan on what you see in Europe? And does that help you get more confidence that business transformation can be sort of upside over time versus what you guys have been talking about?
Yes.
Maybe I start and then you're going to. So first of all, maybe pleased
is a better word than happy. It's very seldom you
seem to be is a better word than happy. It's very seldom, you seem to be real happy. I'm pleased. I'm pleased with the progress, as you know, Julie. I'm pleased with the progress.
And I will say that why I'm pleased is that I see the real benefit. First of all, there's a model for us now relative to the execution. So you have a timing in this process where you have the development and then you go to deployment. So we spend quite some time on the development in order to be ready. And then when you start with the deployment, as always, you run into some challenges, right?
And we did as well. We overcome that, and I think we became a much stronger team from a business perspective to understand, 1, what needs to be done in terms of planning for it and number 2, the benefit for us as a company and for the customer. So I can tell you, when we started deployment in West Europe, I went myself over, and I think Paul Kiel was in U. K. At the time as Managing Director.
Julie and I went maybe it's a shim. I went myself to Germany to the biggest distribution center in order to kick the tires and tried to convince them that we should move forward. That was I tried to challenge them that we are not ready, and they convinced me that we need to go when we move. From that point, I then that was the starting point to understand. We are totally ready in at that time in Germany, in Europe to move forward.
That's why I'm very pleased that I see country after country after country where we have executed it, where we actually, from a business perspective, started in Nordic, which is 4 countries that you need to get together. Then we went in Germany and then Austria and Switzerland after that. And then we did France and Benelux. And now, as Julie said today, U. K.
Here early November. It's going very, very well. So you have to be pleased with that. Now I can tell you that we will complete West Europe before we move into United States. We're in a preparation for us in United States, and we will not risk anything.
We will not risk anything. And so in terms of my confidence and the way I'm more evidence of success, more evidence of success, not only on the figures, but when I talk to the people. You talk to the people in the subsidiaries, they are so happy that they get the system that these type of more efficient and they can
demand planning better
with the customers and back to the manufacturing. Demand plan with the customer, if you can demand plan with the customer and fulfill what they were looking for, that's a very good day. If you not can do it, it's a bad day. So I can see in the spirit, I can see in the eyes in big countries like Germany and I go to Nordic, they are our organization are very happy we've got the system in place that is helping them in their day to day work in the interaction with customer. And in addition, as you saw, we have €50,000,000 of benefit this year.
We estimate €100,000,000 to €150,000,000 next year. So I'm pleased. Not happy, pleased.
Nick, please. For the sake of you that maybe forgot the first part of Andy's question, I'll reiterate what that is. In March, we laid out as part of our 5 year outlook that we were going to be taking actions on our supply chain footprint. And that over the course of the next 4 years, we'd be investing between $500,000,000 $600,000,000 and taking action on that footprint, in some cases, rationalizing our supply chain footprint. And that by 2020, we expected that to be generating between $125,000,000 $175,000,000 in operating income benefits.
We are progressing very well on that plan. We've taken actions in 2016 and we anticipate more actions in 20 17. In answer to your question of how much of that other productivity, additional productivity, virtually none. This is one that is actually a little more back end loaded than the business transformation where we're seeing some of these savings starting in 2016 and growing in 2017. This takes a little longer time to fully realize the benefits as we go through our supply chain manufacturing footprint rationalization.
So there's probably a little bit, but not even a penny's worth in there, Andy.
Got it. And then Ingo or Mike, just a follow-up on industrial. It's been a little slow to turn, as you guys know, a little stubborn. You guys talked about macro indicators improving. We all see it.
You talked about organic growth turning positive in 4Q for the company. I would assume industrial is part of that and part of it is advanced materials starting to turn. You got a defense contract that's ramping up and you kind of alluded to it. So as we look at 2017, is Advanced Materials up when it comes down to it? And how do sort of look at take apart industrials when it comes down to it?
Because that's sort of
the Yes.
I think first of all that you I think Mike and his team have done a very good job the last 2 years relative to the portfolio. And I think he showed that in terms of consolidation of some businesses and one acquisition in and a couple of them out, right? So I think we are positioned in a much, much stronger in the markets where we have decided to compete. And number 2, there is a comparison, of course, that will help us as we move into 2017. And I think I made a statement that we will after 5 quarters for industrial where we were flat to down see promised me that, that is what he would do.
So you will see that and yes.
Jeff Sprague. Just a couple of questions.
First, I know you don't want
to get into quarterly guidance, but what was said about health care and maybe naturally expecting with anticipation of stimulus and other the year that be back end loaded maybe for everyone. Do you see your Q1 organic growth within the 1% to 3% band for the year? And also just on kind of a modeling point, we've heard from a number of companies and it's probably quite obvious that people have really torqued back the compensation big time to protect margins over the last year or 2. Is that a factor within 3 ms? It sounds like it's not a headwind for 2017, but is it something we should be thinking about?
And then just a follow-up for Inge after that.
Jeff, to answer the two questions the 2 questions in there, I'll take the back one first. From a compensation standpoint, are we seeing anything noticeably changing? Over the last few years, on a global scale, we see our wages and benefits expense has been going up about 3% per year. We're not expecting 2017 to be different from that. And Jeff, can you remind me the first part of the question?
Just wondering if you see your Q1 organic growth?
Yes, on the quarterly breakout. And I used the word slightly. We are not planning a radical difference between first half and second half growth. We're expecting all of them to be some pretty similar, slightly higher in the second half. I'd expect I'm expecting the Q1 first half to be in the range that we laid out for the total year.
And then I was just wondering, just looking at the portfolio holistically, really the kind of the product tempo within the portfolio. The stuff coming out the front end is very exciting and visible and tangible. Is there any acceleration on end of life given the amount of technology change that's going on? In a way, I'm kind of asking a question, are you being forced to kind of run harder to stay in place or to get that little bit of incremental bump that you're looking for? Any color there would be
help. I think, first of all, it's as I said, we are investing another €100,000,000 plus relative to commercialization of programs that are very solid already. They're programs that are growing well, very good margins, but that we maybe not have capitalized total on a global base in order to execute. I think that will help us in terms of growth. In terms of I think you talk about technology conversion in a way.
And we are always leading in technology conversion because we work so closely with customers and I think specifically on the process of customer inspired innovation. And I would say that when you work direct in that process with customers, you're always challenged to move fast because as I said in my presentation, we need to understand their business model. And they promise their customers something. And they are looking for technologies that will help them to come there. And they have deadlines.
So I would say that we have no choice. We have no choice. We need to stay ahead of what anyone else are doing. And I think my and they have deadlines. And they are very demanding relative to what we are doing.
So I think generally speaking with the investment that we have moved closer to 6% in research and development is helping us, and we are close with the customers. And we are determined to go after more growth on existing programs that we have with additional money of over $100,000,000 in terms of commercialization. That's total commercialization. So growth is not easy to come after when you have a slow economy, generally speaking, and we need take market share in many cases, and they should be profitable market share. That's also why we identified those.
These are 20 plus programs that we identified this summer during the level, decide on which one should level, decide on which one should we go after. So I think you have to accelerate the whole time, to be honest, right? You have to be on it, be on it, be on it.
Scott Davis. Thank you. Thanks, guys. Good morning. Inge, can you give us a sense when you walk around the world of what you're seeing in different emerging markets?
Because it doesn't look like year over year, your guidance in EM is any better yet. There does seem to be some improvement in places like Brazil, etcetera. So maybe just take us through the puts and takes there.
Yes. You're talking emerging markets specifically? Yes.
Yes. Please just see.
Well, I think there is one place around the world where it will I am pretty sure we take longer time as we speak, and that is Middle East, Africa. That's if you take Turkey and down in Middle East, that will be tough at least for a year plus. You see uptick in Russia. And we had, yes, people in visiting Russia last week where you can see 2x of improvement in our business and much more positive outlook. So that's good.
So I will if you go that part of the world in terms of size of business, Poland is doing very, very well. Russia start to do well. I think Turkey and Middle East, just wait and see, right? So that if you think about growth rates there. I would say if you go to developing countries in Asia, of course, the big driver there will be China.
We see China next year very much like this year, right? So for us, that will be mid to high single growth rate, low to mid single as we look
for the year.
We don't see any change there by definition. And then I would say Latin America, we believe will be very much like this year. I think Brazil, which we also had just an interaction with here a couple of weeks ago, Brazil would take another before they are coming back to growth. So I think the whole Turkey, Middle East is something that will temper that part. But you will see more growth in India.
You will see more growth in Russia. You will see more growth in Latin America, generally speaking.
And what is just as a follow-up on FX. You're still at $3,500,000,000 I think you said net exporter. I think you used to be a $5,000,000,000 net exporter maybe when you took the job, somewhere around there. But what's kind of your FX mitigation strategy? I mean, do you ramp up production in EM and Western Europe?
Down our net exports as we continue to shift our manufacturing and align it a little more closely with our customers. We're still a net exporter out of the U. S. Of approximately $3,500,000,000 That will we don't see that becoming 0. And there's a few reasons.
One is we have a very established manufacturing base in the U. S. That's highly productive and we want to continue to leverage the capabilities there. 2nd, from an intellectual property protection standpoint, there are some things we feel more comfortable having it manufactured in the United States. From but to the heart of your first part of your question on FX management, one part of that is as we've been shifting and aligning our manufacturing, getting it closer to our customers, that gives us the benefit of better servicing our customers and giving some natural FX hedging for us.
So that's part of our strategy. The part we can't naturally offset, there's a portion that we in developing markets we can often offset with pricing to adjust. And then the rest of that we go use financial hedging to diminish some of the short term exposure for that. So that's largely unchanged from our posture over the last several years and that continues to be stance going
forward. Cliff Ransom?
Thank you
very much. Just a question for some of the segment heads. Can you talk a little bit about the flow of information in your strategic planning process from you to your people that report to you in the next layer, how does it get to the bottom? And then how do you get feedback from the bottom back up?
Okay. So maybe that's I think Mike Roman can Mike Roman is a good candidate to talk about.
Coming out of the corporate strategy group many years ago. So I would say our focus is really getting focused on simple set of priorities that we're driving in our strategic plan. And they're very much aligned with what you saw as we think about how we're building a foundation for growth in 2017. And in our process of putting together a strategic plan, we engage our entire organization globally. Our sales force, our technical service people, everybody around the world is part of that.
So it's not a develop a strategic plan at the center and drive it out into the global organization. It's develop a strategic plan with input from those sources that are many times furthest removed from the center. And then bringing back to them, I think, a very clear and simple and aligned set of priorities that we can drive. And then we bring them to life with what we do as part of our ongoing programs and priorities. It's always in that context of the strategic plan.
I think we had a great improvement this year with our overall planning process. At every level, we introduced workshop kind of discussions around our strategic plan from the very beginning of our planning process. And that, among other things, have created a much deeper understanding across the organization about where we're going. So there's a number of changes, improvements we're making, but I think that it really is a team sport and it lives as we go forward. It's not an event and something that goes on to the shelf.
It's what we live day in and day out.
I think so one change we made, I think, 2 years ago two years ago was actually to include the sales reps globally in the process. So after that point, they were they did not give any input relative to the process. We changed that. And it's a very simple format, but we engaged them in order for them to be able to give input of what they see in the market, etcetera. So we feel good about that and because they will maybe see things that we, of course, not can see at the airport.
So we have taken that step forward, which I think is an important step forward.
John Inge?
Inge, at the March year ahead, Electronics and Energy, your 5 year growth targets, you presented 0 to 4. I know I asked, a couple of other people asked, and you said, well, if it was 0, it would be pretty bad. I think that was a direct quote.
In the 5 year plan.
In the 5 year plan. So a year ago, you gave a flat guidance for Electronics and Energy, and you've woefully missed it. And this year, you're actually giving an even more negative guide for it. And I'm trying to understand what is the strategic playbook? I'm presuming you probably can't sell the business because its competencies are intertwined within the rest of the organization.
Is there something else? Number 1, I guess, why do you have the confidence that it's not a repeat of 2017 of 2016? Is it just comparisons? Or what are you seeing in number 2? What can you do about this business?
Can you do M and A to it? Can you you just rapidly change pricing models? What's sort of the playbook after 2 years to the 5 year plan?
Yes. Well, I think we all can agree if you have a business that over years are dilutive to your growth and are flat to down, you have to say, yes, that's not the best. But if you I hope you could see today with Jim Baumann's presentation where he laid out, there's some fantastic opportunities as you move ahead. And I think it's like to diversify the business as well. So you have both in energy, we have good opportunities for upon due to technology conversion from time to time, there will be a challenge as that business move forward.
But it is a fantastic business for us as we, as I said earlier, can build it out to other segments around the world and connect it to our businesses. So the question of can you do something there, I'm committed to that business. I believe in that business long term. There's no doubt for me that we have a very strong position moving forward, and it's based on our technology platforms. And much more will come.
I think sometime we all are thinking very short term, of course, relative to some applications you're in now. But for me, that's only to use the microscope. I would like to use the telescope relative to see where can we position ourselves as we move forward. And you can see that business now in terms of consolidation and margin expansion. The business is smaller, but grips move forward.
When you feel now I have grips relative to our portfolio where we can win, then you can become offensive again. And it could be through an acquisition. It could be through an acquisition. But I'm also honest with you and say, I'm not there yet. I'm not there yet in terms of making sure consolidation is right and we find the right application as we move ahead.
I think that personally that Jim laid out very well today, all the stacks we have in devices where some believe we have nothing. We have a lot of applications in every device and we are type of trapped, as always, relative to the end demand in the market. But the answer to the question, this is a very good platform for us to move ahead on as we go into 'seventeen and beyond, right? But I think that business is, for me, I look if we generate 20% operating income, shifting the portfolio as we go and then in the portfolio as we go and then see something in the telescope that is much stronger. That's for me the business that I would like to lead for the future.
Scope
of scope of your operations there? Number 2
is 3% of the total enterprise.
Had 3 ms been looking to, as many U. S. Companies had been prospectively begin to move more of their ops there, consequently, you would have perhaps underinvested in certain plants and other ops that would have been just slated for mothballing and moved down. And so obviously, now we have this regime change. Do you, in fact, have to go back to these North American plants and say, fine, we can't politically or whatever move them to Mexico, but we're going to double down on automation or our investments or something internally.
It doesn't sound like that's a runway based on your own CapEx plans,
but Yes. No, we have not done that yet, and I don't know if we will. Go back to our strategy, which is a localization strategy, right? That's so we have invested in Mexico for many, many years based on the local market in Mexico. That's what we are doing.
If there's any manufacturing capabilities there for things that will be exported out, it's because we are following the supply chain of our customers. So we have automotive customers that are in some parts of the world, if that is in France or if it's in Japan or if it's in Mexico, and they demand a fast response from us, we will be there. So customer is number 1 for us. And if we would like to serve them, we they demand the investment of us to be at certain places. So I think that's the answer to it.
Shannon O'Kalia.
Maybe a follow-up, Ingo, to the telescope point there on Electronics. Assuming the LCD to OLED shift continues, when do these other opportunities become big enough to offset that and get the business to actually grow, whether it's immersion, cooling or these other things? And what's the barrier to those? I mean, it looks like the growth opportunities in markets is great. What's the barrier to it really taking off for you?
Is there still a cost barrier in terms of what making to gain wider adoption? Or so what's the barrier? And then when does the tipping point come to offset OLED?
Yes. I think and Jim will comment on this as well, of course. But if you look upon it, there is some of those business models are spec in and a little bit longer in the process that Jim will talk about. But the barrier is not, I will say, cost by definition. Ran into the energy and utility piece, right?
On the electronic part of it is basically to be able to spec in and design in as you go in order for it to be bigger. So I don't know, Jim, would you like to make some comments?
Yes. Thanks, Shannon. So I think our focus on the core in the near term and the strength of what we have there, we'll continue to build on it. Now with respect to some of those advanced technologies, I think part of it's market adoption in terms of what I described. And part of it is probably centered on, if you caught it, it's a there's some longer cycle businesses, Automotive Electrification as an example.
Our spec in today may be realized in 18 months to 24 months, maybe even longer depending on what the model expands to. So I think there's a part of that. So for us, it's really concentrating on where we have strength in the core, both in Electronics and Energy, migrating into these advanced technologies, which maybe have a little bit longer cycle time, faster growing, and we can continue to build on those. That's our direction.
Inge, maybe just one clarification on the Healthcare turn. It sounds I mean, some of the pressures there last quarter were Turkey and Brazil. It sounds like you're still pretty cautious on those. So is the turn in 2Q mainly getting through the oral care pressure? Or what else generates that turn after 1Q 'seventeen in health care?
No, I think it's not I think generally speaking, when you think about the supply chain also in health care consumables, that the type of in the distribution system, you just became careful as we move ahead. And so oral care is 1, but you have very you take infection prevention and wound management, etcetera. It's something in the logistics and supply chain system that's just temporary.
Steve Winoker.
Thanks. Nick, you keep taking up leverage incremental leverage every year, but the absolute levels are still pretty low for a company that generates the amount cash that you guys do. Where are you headed with an optimal capital structure? What is the optimal capital structure for the company?
In March of this year, Steve, we laid out over the 5 years that we saw for our capital structure as well as for our capital allocation plans, us adding over the course of 5 years between $10,000,000,000 $15,000,000,000 of leverage to our balance sheet. That puts us at the capital structure that we see ourselves targeting. Now that's in the world as it existed in March. It's still probably a good vision of what we think that capital structure looks like. But that's the range of where we think we're headed.
What would it take you to push that more aggressively?
What would cause us to go outside that balance? The presence of a large strategic acquisition opportunity would cause us to relook at that and cause us to look at added leverage potentially even a credit rating downgrade for that. It would have to be something on that scale. It's likely not going to be investments in our organic business or share buybacks that would cause us to rethink that capital structure strategy we laid out.
Okay. And Inge, I guess, if we take R and D as a percent of sales back to the 90s, that's probably when you peaked out at north of 7%. You're approaching 6% again right now. You're spending what sounds like a large absolute number, but maybe not relative to the size of the company. My question is, given that innovation, as you say, is the from the prior breakthrough investments that you've been talking about?
I think that's some good examples up there. But I guess if I look at the world's some of the world's most innovative companies, sometimes there's a constraint to that spending and given your margin levels, I just it would challenge you. Why not? What stops you from taking that number higher?
I think when you're referring to 7% plus, I think that's also where we have had pharmaceutical as part of our business. So you have to think about it from there. There's 2 industries, generally speaking, that is on the higher end of research and development: pharmaceutical and electronics. Those are on the higher end. And in our business, in fact, in electronic has a percentage that is higher and so has health care.
So it's actually more in those spaces. I think that I'm looking for really making sure that we get out efficiency and productivity from research and development. And will I be willing to spend more than 6%? Yes, if there is really good programs that will be presented, we will do it. And the move from 5.5% to 6% was related to, I would say, investment more in disruptive technologies.
And I think from the beginning, we had 30 programs there. And as you know, when you go into disruptive technology, some of them are riskier and they take longer time. I am, generally speaking, pleased with the outcome of research and development. But my point is also to say I would like to I would like us to grow faster and more organically because I know that is the most effective model to do things as we move ahead. I don't know if there is a specific target in terms of what you need to have for spending.
We have measured NPVI, new product fatality Index, for a long time. And that is an indication for me of if you do well or not. And we are 30% -plus of that. So think about it as 3 ms that you have onethree of your business today that did not exist 5 years ago in terms of new product. I think that is acceptable, to be honest.
I think in terms of you go after growth, there's a couple of things you have to address. You have to address organic local currency growth. You have also had to address erosion. So you have erosion in the business. And if you can attack erosion and get 1% or 2% less erosion a year, that's 1% to 2% growth for you.
So will you invest more? Yes, good programs are coming our way where we have high credibility in them, I will invest in them. And I think the best probability for us there is actually to something coming out from customer inspired innovation. So big programs very specifically into end customers where we can work with them. I'm willing to invest, no doubt.
Nigel Coe?
Thanks. I wanted to go back to the $0.10 $0.15 from raw materials in the bridge. You mentioned, I think, Nick, that you're getting lower prices from your suppliers. And I'm just wondering what's causing the lower prices from suppliers? Is it consolidation of the supply chain?
And what could change that dynamic? And how much of this is actually sort of an indirect benefit from ERP? Are we
seeing are we getting a better lens
in the supply chain? $5 there's
$5 there's almost none of that coming from outright market price reductions. Almost all of that $0.10 to $0.15 is coming through what I would characterize as 3 ms initiated actions. There's a portion of it and I'm estimating as I say this, Nigel, up to a third of that is coming through our own ability to with better visibility being negotiating and leveraging the full scale of 3 ms. So I could attribute some of that to what the progress we're making on our collective business transformation. It's not included in the savings Julie is talking about, but some of that is clearly part of, as we become a better global sourcing organization and leveraging the full power of 3 ms volume of what we're purchasing.
That's a portion of it. But a bigger portion of it, Nigel, is coming from our own efforts commodity by commodity, looking at is there a way to optimize the way we're making this product and in some cases substituting out one raw material for another. It's project by project and there's 100 or 1000 of them going on in our company to look at ways there to optimize. That's the majority of the savings that we're seeing and is projecting in 2017.
Okay. That's helpful. I apologize for asking the question on tax reform. I know it's very early days, but order adjustments, it's obviously part of the mix on reform. As a net exporter from the U.
S, it sounds like that might benefit you. But what about the other side of ledger? I mean, how much of your raw maps are actually imported? And how do you think about how that could play out?
Nigel, there's 3 points on the border adjustment portion. 1 is, yes, we are a net exporter. So that clearly plays to our favor with the current way border adjustments being talked about. 2nd is commodities and the movement of raw materials when we buy them in the U. S.
There is not a material amount of commodities that we are bringing over the border into the U. S. Much of how we manufacture is about often wanting to have our commodities sourced locally. And so that's why there's not a lot that crosses the border. The third point is our own strategy around intellectual property.
3 ms's intellectual property is owned in the United States. And then under the current discussions around border adjustment, that also would be a benefit for 3 ms. But as you started out saying, it's early.
Well, to source local is very important, right? You can you think about any model. If you move stuff to certain places, if you still have to ship raw material, it's very, very cautious.
Deandre? Thank you. First question for Nick. Just to clarify on your answer to Steve's question on the potential to lever up
for a larger deal. Does the current
pipeline have any
candidates over the near term? Pipeline have any candidates over the near term, let's say, that would put you into that position?
Dean, I'd say the current pipeline of what I would call likely, I would not say that that's imminent or likely. Are there things of that size that are in our pipeline that we look at? Yes, they are, but I would not put them right now in the likely camp.
That's helpful. And then for Inge, maybe comment on the divestiture pipeline. We've seen a few what would appear to be one off transactions cross. Are there businesses under strategic review, maybe potential size and timing? And you used this comment about you may not be the natural owner.
Just maybe give us a sense of what that thought process is. Does it also occur when you have a potential
2012 with a much clearer we started 2012 with a much clearer understanding on a corporate level relative to our portfolio, we have done a decent job relative to both businesses that left us and that we added into the company. When we started a process, there was what we call an under strategic review was sales revenue of €2,500,000,000 That is down today to a couple of 100 of 1,000,000. And in some cases, it's not a business stand alone. It's product lines in different divisions that are there that are maybe underperforming relative to the company. So then you just drive them them fundamental strengths of 3 ms: technology, manufacturing, global reach and brand equity.
If you have businesses that are not cannot capitalize on that vertical integrating model fully, then that is the question to say, can we really continue to drive that business effectively inside of 3 ms? And if you not are you don't need to be so called green in 4 elements. But if you're not green in 2.5 to 3, you have had difficult time to keep pace with Trion's performance. Now our performance is pretty good, I would say, in terms of your return and your margins, etcetera. Etcetera.
But the truth is if you're not able to capitalize on many of those four fundamentals, you are not successful inside of 3 ms. That is also to say when you make an acquisition, no one is coming today to me and talk about an acquisition without knowing exactly whether on the portfolio, Heartland and push and can convince me that at least 2.5 of those 4 fundamentals are green for us, so we can drive value very fast. So it's a very important element in terms of understanding the portfolio. Now there is always an LVR. In the one we sold now recently or we announced last week, the fundamentals was not there in order for us to create value for it.
It was a project based business, if you like. It was not real core for 3 ms. And the point is, let's stay close to the core and build out around that because we know we can win. So it came into 3 ms maybe 10 years ago under the umbrella of an acquisition strategy where you try to build out in spaces that maybe were 1 and maybe 2 adjacencies from what we really know. It was dilutive to growth with dilutive to margins.
Someone else can handle that, right? And let's us invest our money then in terms of maybe other acquisitions and or do commercialization on our core businesses and grow that. So it's simple from that perspective. But I think it's important. The 4 fundamentals that we talk about, you have seen, is a road map for us to really understand specifically when we add something in, right?
Can we drive value for us? And reality is also when you look upon it, if you have some businesses that are underperforming versus our criteria, often they have a challenge to
we'll wrap up with Julien.
Maybe just a couple of quick ones then. 1 for Nick would be around business transformation savings. Do those see a big step up in 2018 when we're thinking about the phasing of what's left to gain? And also, what's the earnings impact from Identity Management being divested? And then for Jim, just very quickly, euros 600,000,000 of film sales in your smartphone business, Should we assume that those fall at a double digit rate
for the next few years?
Okay, Julien. Let me get started on the first two. First of all, on the business transformation savings, we've laid out by 2020, we expect to have between $500,000,000 $700,000,000 We started in 2016 with approximately $50,000,000 And what we laid out today is that we're expecting another $50,000,000 to $100,000,000 on top of that, bringing our cumulative savings from our baseline to now $100,000,000 to $150,000,000 for what we're expecting natural progression to natural progression to us achieving that $500,000,000 to $700,000,000 of savings by 2020. In regards to the Identity Management business, I do want to remind everyone this deal has not closed and it is subject to regulatory we anticipate that it will generate approximately a $0.55 earnings per share benefit for us based on the gain that we'll be experiencing. We also at the same time anticipate that we will be taking actions directly and indirectly related to this divestiture.
And so my request is that we not that you're not baking this into the estimates for 2017 until we have clarity and certainty for this. And at the time that that happens, we'll then share the full details on the both the gain side and any actions that we think will offset a portion of that gain.
Okay. Tim?
Yes.
And then in regards to the question around the $600,000,000 film and the growth rate, the example
I gave was
that transition from LCD to OLED, percent to $150,000,000 would be most aligned to that film segment because of the LCD transition.
Okay. Well, okay. Thank you. We're done with 2 new routes. Okay.
Too bad. That's fine. Yes. Well, let me then just thank all of you for coming today. On behalf of the 3 ms team, I hope that we have been able to convey to you that we have a very solid business model.
We have a playbook that is well laid out and that is working. And we have a very diverse portfolio that is playing very well for us despite economical cycles in any country. Guidance for 2017, as we say, is 1% to 3% organic local currency growth and EPS guidance of 4% to 8%. So thank you very much for all your help and support and challenges, and let's look forward to a better 2017 that we ever can expect as we sit here today. And have a nice holiday.
Thank you. Thank you.