Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone keypad. It is recommended that you use a landline phone if you're going to register for a question. As a reminder, this conference is being recorded Tuesday, October 25th, 2016. I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3M.
Thank you. Good morning, everyone. Welcome to our third quarter 2016 business review. On the call today are Inge Thulin, 3M's Chairman, President, and CEO, and Nick Gangestad, our Chief Financial Officer. Each will make some formal comments. Then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on our investor relations website at 3m.com under the heading Quarterly Earnings. Before we begin, I would like to address our upcoming investor events highlighted on slide number two. First, we have set the dates for our 2017 quarterly earnings calls. They are January 24th, April 25th, July 25th, and October 24th. Second, we'll be hosting our 2017 outlook meetings on the morning of Tuesday, December 13th, at the Grand Hyatt Hotel in Midtown Manhattan. Invitations for this event will be sent this afternoon, so please RSVP as soon as possible.
We hope to see you there. Next June, we'll be hosting a European Investor Day at our Germany headquarters in Neuss. A welcome reception will be held the evening of June 6th, followed by management presentations and a plant tour on June 7th. Please hold the dates. Additional information will be provided closer to the event. Please take a moment to read the forward-looking statement on slide three. During today's conference call, we'll make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to slide four. I'll hand off to Inge.
Thank you, Bruce. Good morning, everyone. Thank you for joining us. In the third quarter, our company delivered increased earnings, robust cash flow, and a broad-based margin performance, with each of our business groups posting margins greater than 22%. At the same time, we continued to execute on business transformation, took actions to strengthen the portfolio, and increased investment in future growth. The third quarter also marked our company's 100th straight year of paying dividends, which we increased for each of the last 58 years. With respect to EPS, our team posted earnings of $2.15 per share, up 5% year-on-year. We delivered total sales of $7.7 billion, flat versus last year's third quarter. Organic growth was down 80 basis points, while the combined impact from acquisitions and FX increased sales by a similar amount.
Looking closer at our organic growth, we once again delivered positive growth from three business groups, Consumer, Safety and Graphics, and Healthcare. Consumer paced our company's growth at 3% with positive growth in all businesses. Safety and Graphics grew 2% organically, led by Roofing Granules and Commercial Solutions. Organic growth in our Healthcare business was 1.5%, which was tempered versus recent quarters due to some softness in the U.S. healthcare market. Industrial's organic growth declined 1%, and we continue to anticipate growth in this business to turn positive in the fourth quarter. Finally, Electronics and Energy was down 8% in the quarter, in line with what we indicated during our last earnings call. Even in a challenging macro environment, the strengths of our business model has enabled us to deliver premium returns and generate healthy cash flow.
Company-wide, we increased margins 40 basis points to nearly 25%, ranging from 32% in Healthcare to just shy of 23% in Industrial. At the same time, we increased free cash flow by 19% year-over-year, with a conversion rate of 117%. Our strong cash flow allow us to invest in the business while also returning cash to shareholders. In the quarter, we returned $1.4 billion to our shareholders through share repurchases and dividends. We also continue to build our enterprise for the future. I will make some comments on our recent progress. Please move to slide five. You have heard me talk many times about the 3M playbook, which is the key enabler of our short and long-term success. The playbook includes three levers that are creating value for enterprise and that we continue to make good progress on.
Two of the levers, investing in innovation and portfolio management, are important for our long-term growth objectives. In addition to ongoing investment in research and development, we continue to prioritize our portfolio and make targeted investments to support organic growth. We also drive growth through acquisitions, which complement organic growth and enhance our technology capabilities as well as partnerships, which combine our strengths with those of other organizations. Most recently, we finalized an acquisition and established one partnership, both related to Healthcare. You will recall that in February, we decided to retain and further invest in our health information system business. To bolster our technology capabilities in that area, in September, we acquired Semfinder, a medical coding company based in Switzerland. This acquisition helps us accelerate penetration in international markets, which is important as more countries move towards electronic medical records.
To further strengthen health information systems, earlier this month, we announced a collaboration with Verily, the life science business of the Alphabet company. This is a partnership between two highly creative and innovative companies that will leverage our expertise in Healthcare coding with their expertise in data analytics and software. Ultimately, we will develop tools to help providers increase the quality and affordability of Healthcare, which comes back to our company's mission of advancing every company, enhancing every home, and improving every life. Beyond growth investments, we are taking other recent actions to prepare 3M for the future. Three weeks ago, we finalized the sale of a non-core protective films business that will further enhance and focus our Industrial portfolio. We're also making solid progress on our third lever, business transformation, with two recent ERP rollouts in West Europe.
As a reminder, we have now deployed ERP in 15 countries and in four of our largest European distribution centers. In summary, I'm pleased with our team's performance in the quarter in terms of controlling what we can control while also building for the future. With that, I turn the call over to Nick, who will take you through the details. Nick?
Thank you, Inge. Good morning, everyone. Please turn to Slide six for a recap of our Q3 sales performance. Organic local currency sales declined 80 basis points in the third quarter, with volumes down 1.4% and selling prices up 0.6%. Our acquisitions of Capital Safety and Membrana, net of three small divestitures, added 0.3 percentage points to sales. Foreign currency translation increased sales by 0.5%. In U.S. dollar terms, worldwide sales were flat versus the third quarter of last year. Looking at organic growth by geography, the United States declined 0.3% in Q3. Our Consumer and Safety and Graphics businesses generated positive organic growth, which offset declines in Industrial and Electronics and Energy. In Asia Pacific, organic growth was down 2.2%. Solid growth from our Consumer, Healthcare, and Safety and Graphics businesses was more than offset by a double-digit decline in Electronics and Energy.
Organic growth increased 1% in Japan and declined 2% in China/Hong Kong. Excluding electronics-related businesses, Japan was up 1%, and China/Hong Kong grew more than 4%. Let's now take a look at the EMEA region, starting with West Europe. West Europe delivered 1% organic growth, led by Germany, Sweden, and Spain. From a business perspective, growth was led by Healthcare and Safety and Graphics. Central East Europe and Middle East Africa declined year-on-year, impacted by ongoing challenges in Turkey and Saudi Arabia. In total, organic growth across EMEA declined 1% in the quarter. Finally, organic growth in Latin America/Canada was 1.2%. Mexico grew 5%, and Brazil rose 2%, while Canada declined 3%. Please turn to Slide seven for the third quarter P&L highlights. Third-quarter sales were $7.7 billion, and we generated record third-quarter earnings of $2.15 per share.
GAAP operating margins were again strong at 24.7%, up 40 basis points year-on-year. The combination of lower raw materials and higher selling prices contributed 100 basis points to our margin improvement, while lower pension and OPEB expense increased margins by another 90 basis points. Productivity gains related to last year's Q4 restructuring expanded margins by 40 basis points in Q3. Looking at headwinds, first-year acquisitions reduced margins 10 basis points. This includes the impact of Capital Safety and Membrana. We continued to accelerate strategic growth investments across the portfolio and took actions to further optimize our manufacturing footprint, which reduced margins by 40 basis points. The impact of lower year-on-year foreign currency hedge gains decreased margins by 50 basis points. Finally, organic volume declines, along with related utilization impacts, reduced margins by 90 basis points. Most impacted were our Industrial and Electronics and Energy businesses.
Let's now turn to slide eight for a look at EPS. Earnings per share in the third quarter were $2.15, an increase of 4.9% versus the third quarter of 2015. Margin expansion, net of organic sales declines added $0.05 to earnings per share in Q3. Foreign currency impacts, net of lower year-on-year hedge gains reduced pre-tax earnings by $20 million, or the equivalent of $0.02 a share. The third quarter tax rate was 28.5% versus 29.6% in last year's comparable quarter, which increased earnings by $0.03 per share. Favorable developments on international tax audits had a positive impact on the Q3 rate. We reduced average diluted shares outstanding by 2% year-on-year, which added $0.04 to third quarter EPS. Please turn to slide nine for a look at our cash flow performance.
We generated $1.9 billion of operating cash flow in the quarter, a $244 million increase year-over-year. Lower cash taxes drove the increase, offset in part by higher year-on-year pension contributions. Q3 CapEx investments were $347 million, in line with last year's third quarter, and we now expect full-year CapEx in the range of $1.4 billion-$1.5 billion. Third quarter free cash flow conversion was 117%, up 16 percentage points versus the same period last year. For the full year, we continue to expect free cash flow conversion in the range of 95%-105%. As a reminder, our fourth quarter conversion is typically the strongest of the year. In addition to investing in our businesses, we returned significant cash to shareholders in Q3, including $670 million in dividends, up $35 million year-on-year.
We also returned $774 million to shareholders through gross share repurchases, or $2.8 billion year-to-date. We now expect our full year gross share repurchases to be in the range of $3.5 billion-$4.5 billion, versus a prior range of $4 billion-$6 billion. Let's now review each of our business groups, starting on slide 10. Our Industrial business posted sales of $2.6 billion in the third quarter, with an organic growth decline of 1.1% year-on-year. Our automotive OEM business grew high single digits again this quarter, continuing its long track record of increasing market penetration and outpacing the rate of global car and light truck builds. We also posted positive organic growth in our automotive aftermarket business. Advanced materials declined double digits year-on-year, impacted by persistent weakness in the oil and gas market.
Looking by geography, Industrial's positive organic growth in Asia Pacific was more than offset by declines in Latin America and the U.S. Third quarter organic growth in our U.S. Industrial business improved slightly versus the first half of 2016. We expect to see further improvements in Q4. The Membrana acquisition, net of one small divestiture, added 1.4% to Industrial sales growth in the quarter. Membrana continues to exceed our sales and profit expectations. Our Industrial business delivered operating income of $591 million in Q3, margins were up 30 basis points to 22.9%. Please turn to slide 11. Third quarter sales in Safety and Graphics were $1.4 billion, with organic growth of 2%. Q3 organic growth was led by our Roofing Granules and Commercial Solutions businesses. Roofing Granules posted another strong double-digit increase in the third quarter. Demand in this market has been strong throughout 2016.
On a geographic basis, organic growth in Safety and Graphics was led by Latin America and Canada, which increased mid-single-digits, followed by positive growth in Asia Pacific and the U.S. Operating income was $364 million, and operating margins were once again strong at 25.1%, up 220 basis points year-over-year. Q3 margin expansion was boosted by lower year-over-year acquisition costs related to Capital Safety and solid productivity efforts across the portfolio. Please turn to Slide 12. Our Healthcare business delivered sales of $1.4 billion in the quarter. Organic growth was up 1.5%, led by a double-digit increase in food safety, along with positive contributions from drug delivery systems, critical and chronic care, and health information systems. Organic growth in oral care solutions was flat, which was impacted by soft market conditions in the U.S. On a geographic basis, Healthcare delivered mid-single-digit growth in Asia Pacific.
Latin America, Canada, and EMEA both posted low-single-digit growth, while the U.S. was flat. Organic growth was up low-single-digits in developing countries, a bit softer than recent quarters. Healthcare organic growth in Q3 was below recent trends, and we expect soft market conditions to persist in the near term. Healthcare's operating income was $429 million, and margins remained strong at 31.5%. Importantly, we generated these returns while continuing to increase growth investments across the business. Next, I'll cover Electronics and Energy on Slide 13. Third quarter sales in Electronics and Energy were $1.3 billion, down 8.1% organically. Organic sales declined 8% in our electronics-related businesses. Market challenges persisted across most consumer electronics applications, which impacted volume growth. Channel inventory levels have improved versus earlier in the year, but further adjustments occurred in Q3.
Our team continues to focus on driving spec-in wins and increasing customer relevance across all consumer electronics OEMs. Our energy-related businesses declined 9% organically. Electrical markets declined high-single-digits, and renewable energy was down double-digits. As a reminder, we exited our renewable energy backsheet business last December, which reduced energy-related organic growth by nearly 300 basis points in the third quarter. Our third quarter operating income for Electronics and Energy was $312 million, and even in a challenging growth environment, our team delivered healthy margins of 24.2%. Please turn to Slide 14, where I will cover our Consumer business. Consumer had another strong quarter, with sales of $1.2 billion and organic growth of 2.9%, which led the company. Geographically, Consumer's organic growth was led by Asia Pacific and the U.S., both up mid-single-digits, along with solid growth in Latin America, Canada.
Looking by business, organic growth was positive across the entire Consumer portfolio, paced by a mid-single-digit increase in our home improvement business. Within home improvement, our Command mounting products, ScotchBlue painter's tape, and Filtrete filters once again posted strong organic growth. We continue to accelerate growth investments to enhance the value of these important brands. Consumer generated operating income of $317 million, with margins of 26.2%, up 100 basis points year-on-year. Positive organic growth, portfolio prioritization, and ongoing productivity efforts drove the margin improvement. Please turn to Slide 15 for an update on our 2016 planning estimates. We now expect 2016 GAAP earnings in the range of $8.15 to $8.20 per share, versus a prior range of $8.15 to $8.30. The narrowed range equates to approximately 8% EPS growth year-over-year.
For full year, organic sales growth is now expected to be approximately flat, at the low end of our previous range of flat to up 1%. Foreign currency translation is now anticipated to reduce sales by approximately 1%, versus a prior range of down 1%-2%. Acquisitions net of divestitures will add 1% to full-year sales growth. The full-year tax rate is now expected to be approximately 29%, versus a prior range of 29%-29.5%. Lastly, we continue to expect free cash flow conversion in the range of 95%-105% for the full year. With that, we thank you for your attention, will now take your questions.
Ladies and gentlemen, if you would like to register a question using a landline phone, please press the one followed by the four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please mute your handset before entering your request. Please limit your participation to one question and one follow-up. One moment please while we compile the Q&A roster. Our first question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.
Thanks, good morning, everyone.
Morning, Joe.
My first question, I guess, is going to be on Healthcare. It's been such a great business for you guys for such a long period of time, and the growth we saw this quarter was about the slowest growth we've seen, I think, since 2009. Your comments from earlier that you expect the soft market conditions to persist. I'm just curious, what specifically slowed down this quarter in that business?
I think, first of all, geographically, U.S. slowed down, and it slowed down basically in the last months of the quarter. I think there's two other elements out there in the world that happened to that business. Some it's developing economy, where Brazil had a little bit of slowdown. It was more than we expected. As you know, things are going on in Central East Europe, specifically in Turkey, that temper it, generally speaking. When you look upon it from a business perspective, if you temper in the United States, which we did, that would go over all businesses, right? We just, I think, try to move some purchases forward, maybe one to two quarter. That's what we're talking about, like midterm or short-term tempering.
I would say all businesses, except one, which is oral care, had positive organic local currency growth, and oral care was flat. Still showed growth, but it was tempered. By definition, I'm not concerned at all relative to the future of that business. We continue to invest for the future. We've done quite some investment, as you know, over the last couple of years, right? There's no concern. It was just that it slowed down, and it was basically in the last months of the quarter.
Got it. That's helpful coloring. I guess, just following on the kind of soft market conditions to persist comment, does that mean we should be expecting kind of 1%-2% type growth in this business moving forward? Or how are you guys thinking about that?
No, we don't change the guidance relative to that business moving forward at all, right? I think you should think about it for the fourth quarter of this year, will maybe be very similar to the third quarter, and then it will come back in the first quarter. I cannot tell you here and now, and we cannot tell you here and now when in the first quarter that will come. It come early, mid, or late in the quarter, but it will come. We don't change the guidance at all for this business moving forward into 2017.
Got it. Okay. No, that's helpful. Maybe my follow-on question is on the buyback. I saw that you guys reduced the buyback guidance for the year. I think when we last spoke, we talked about if perhaps M&A was not going to come through, that maybe we'd see a little bit more aggressive share repurchases in the second half of the year. I'm just curious, maybe talk a little bit about the M&A pipeline, and just the reasons for the reduced buyback guidance. Thank you.
Relative to the pipeline, it's still very good in terms of what we are looking upon in all businesses. As I've said earlier, there's some prime target in terms of business groups there. If you think about it, with Industrial one-third of the company, of course, we have interest in that business. Healthcare and Safety and Graphics continue also to be prime objectives for us. The pipeline is very solid for all of the five business groups. As always, we have a look upon it from a strategic perspective and then make sure that the valuation is acceptable for us. Nick will make some comments here relative to buyback.
Yeah, Joe, as you've seen, year to date, we've repurchased $2.8 billion of our stock. In Q3, the market was trading at near all-time highs. You've heard me say this before, that one of the factors that influences our repurchase activity is relative value and price. As you note, that's why we stepped up our activity earlier in the year in the first quarter. Over time, the pace of our repurchases is dependent on other demands on capital, such as M&A, along with the relative value of the stock. Those things are what's impacting us now putting the guidance at $3.5 billion-$4.5 billion for the year.
Got it. Thanks, guys.
Thank you.
Our next question comes from the line of Andrew Kaplowitz, Citi. Please proceed with your question.
Hey, good morning, guys.
Good morning, Andy.
Nick, you said publicly that you're cautiously optimistic that you can grow margin in 2017, obviously, your overall markets have been a bit weaker than you expected. As we get closer to 2017, do you still have confidence that you can grow margin? How should we think about the contributions of the drivers of the margin expansion? Business transformation should be a more meaningful driver than this year. Price/ cost still help, maybe mix helps, obviously we know the pension and FX as offsets. Maybe any more color that you can give us as we're getting closer to 2017 here?
Sure, Andy. As you can imagine, we're still working on our 2017 outlook, on December 13th, we'll provide more details on that at our outlook meeting. At a high level, Andy, we expect an external growth market to continue moving sideways in 2017. That's the overall external picture we're anticipating. From a business perspective, we do expect our Industrial and Electronics and Energy businesses to have improved growth rates in 2017 versus what we've been seeing in 2016. Then to part of your question on margins, Andy, we're still expecting price raw materials to be positive to earnings and to margins in 2017, probably at a lower level of contribution to margin enhancement than what we've seen in 2016. Then business transformation, I expect that to have an increased positive impact on our earnings per share and that margin in 2017.
I think you've heard me say that we expected, we're realizing approximately $50 million of operating income benefit from business transformation as part of in 2016, that's part of our journey, moving to $500 million-$700 million of savings by 2020. I'd expect 2017 to be a continued progression on that path. That said, we are, as you mentioned, we're going to have a couple of headwinds. Pension is likely to be a headwind for us. If I were to take current rates where they are, I'm estimating this will be about a $150 million headwind for 3M in 2017. FX will likely be a headwind for us, not so much based on movements in exchange rates, but the fact that we won't be repeating some of the hedging gains that we experienced in 2016.
All in, those lower hedge gains will probably hurt our margins by about $100 million. All in, Andy, that's the puts and takes of a preview of what I expect we'll be talking about in a month and a half.
Okay, Nick, that's very helpful. Inge, maybe can I ask you about Industrial? You said the U.S. looked a little better, but overall, it seems like Industrial, it didn't get as good as the comps got easier. Abrasives turned down again, it looks like sequentially. You do have easier comps, as you mentioned, for Q1. You expect growth. In Advanced Materials, it should shift, especially as you got this defense contract from last quarter. Should we resume low single-digit growth moving forward, and how confident are you of that in that business?
Yeah. As you said, it's been U.S. that hold back Industrial during the last couple of quarters. It was better in Q3, that's positive. We will see positive growth for Industrial in Q4. That will be driven exactly as you said, relative to we start to deliver now on the body armor, and we see some uptick in some of the other businesses. It's very much the comp that will be a driver for us in Q4 and as we go into Q1. I'm very confident in our Industrial Business Group relative to growth going forward. The reason for that is we have worked now for quite some time, not only in Industrial, but in all Business Group, in order to make sure that we get the portfolio that is relevant for us in order to serve our customers.
You have seen in the last couple of years, some heavy lifting going on in the portfolio work, not only in Electronics and Energy, but in Safety and Graphics and in Industrial as well. When I look upon it, we are moving the company to spaces and places where we are more relevant and that we can also capitalize on technology conversion, meaning also driving better margin for us. In fact, we have fired some of our portfolios over the years. It takes some time as you go through that process. It's not like you start to shift your portfolio and you start to shift your infrastructure in the company, and everything will come immediately. I'm very positive that we now start to see Industrial turning a corner here as we move forward. We will see the first quarter happen here in Q4.
Thanks, Inge. Appreciate that.
Thank you.
Our next question comes from the line of Scott Davis of Barclays. Please proceed with your question.
Hi, good morning, guys.
Morning, Scott.
I want to get a sense of when I look at Electronics and Energy, you have your anniversary, the renewable energy exit, that's 300 basis points. Pound for pound, that means you'd be down 4.5% not 7.5%. Do you have a sense of when you have after that, you start to get double easy comps, I guess you will. Is this a business that can turn actually positive in 2017 or just less negative? I know your comment earlier is it would get better, but can we count it in not hurting us anymore, I guess is my question.
Good morning, Scott. I think first of all, you have to look upon that business in terms of the overall portfolio. For this quarter, you have to make a couple of comments. We did better in Electronics than we thought, and it was slightly tougher in Energy. In the Energy piece was some big project that was delayed, specifically in telecom and in utility. I think that's, again, coming back to uncertainty in the market. It was not much of a shift, but there was a little bit of shift. All in, we were down 8%, exactly as we told you at the last earnings call. I feel good about that piece. Going forward, as we have shifted portfolio there as well, we will, as we go, start to see some positive evolution relative to growth rate.
We are moving to segments that are growing faster and where we are more relevant. If you look upon it will be around automotive electrification, data centers, sustainability chemistry, and grid automation. That will be a shift as you go relative to where you today can look upon. It's very much design and assembly. We have a range in the 5-year plan, as you know, of 0-4%. We are in the 1st year of that plan, which is then down. It will be still the low end of that range. As we roll in here for the future, we should start to see some more positive movements forward for us in terms of growth rate.
Okay. That's very good. As a follow-up on M&A, I know-
You said the other thing that's probably, you look upon the margins now in that business, right? That business is now running almost 24%. You think about that, where we started. We started at 15%-16%. That's work not only of cost out and structure out, it's also the portfolio work that had been going on. For me, when I look upon that business, and I think for all businesses, we should be positioned to win in places where we are relevant and can capitalize on technologies that will drive productivity and efficiency for our customers, and also margins for us.
I think 8% down, you would like to grow, but we're able now to, as I've said earlier, even when we are tempered on top line, we are able to deliver based on our new model, and we couldn't have done that to you 5-6 years ago. If we were down 8%, it would be terrible on the margins. I feel confident now with our model there. As we move forward, now we will start to see some positive growth.
I remember those days well.
Yeah.
Just a quick follow-up, guys. On when you're looking at transactions, and I think in the past you've said you'd like to start to look at some things that are a little bit bigger. What are the probabilities we see in deals larger than Capital Safety over the next 12 months?
That's a very good question. It's a very good question. I don't know. I cannot give you probability of that, but as I said, the portfolio is rich in terms of candidates. I rather do slightly bigger than smaller. As I said earlier, we have, during the last couple of years, stepped up our probability or the output of what we have done. By definition, in order for us to move the needle forward, they should be more sizable than we did in the past. I think I hold it to then when the news is coming out, we look upon the size of them.
Fair enough.
We are ready. I think we are in a good position to do what we need to do in order to bolster growth, with or without acquisitions. Also, organically, we're doing okay.
Okay, good. Thank you for the answer.
Thank you.
Our next question comes from the line of Julian Mitchell of Credit Suisse. Please proceed with your question.
Hi. Good morning.
Good morning to you.
Good morning. First of all, if you could give a little bit more color on the slowdown you saw in the EMEIA region, in recent months relative to Q2. I know you talked a little bit about Turkey had slowed. Did you see anything broader, anything in Western Europe, for example?
If you start, first of all, of Central East Europe and Middle East Africa. Of course, we saw, due to the situation there, we saw Turkey slow specifically, and I think there was some slowdown also in Saudi Arabia. I think if you look upon that region in total, yes, it's a tough situation. It's a tough situation there, and I think we have just to wait out for the geopolitical situation to be settled before you start to see some big growth coming back there. Impact on Western Europe. We had a very good quarter last quarter in Western Europe, and pleased with the quarter this quarter as well. Slightly slower growth, but still Germany had 3% growth in the quarter, coming on a quarter last quarter that was 6%.
You add them together because a quarter or year doesn't start and end with a date, right? You look upon that, you take the biggest economy in Western Europe, Germany, 6%, let's say they are going now around 4%, and the business transformation is helping them. I think the biggest concern Julian is making will then be Central East Europe and Middle East Africa in terms of growth rate at this point in time. I visited, and Nick as well, Europe just a couple of weeks ago, and there's good momentum in the market there. Very much driven by automotive, by the way. If automotive is doing well, we are doing well as well. You saw this time, good growth in Sweden, good growth in Spain, Germany 3%. It's better growth than United States.
Very helpful, thanks. My follow-up question would be around electronics, and within that, on the OLED transition, specifically I just wondered how you thought about your cost base on brightness enhancement film, in light of that transition. I guess, you've already started to see some impact from the OLED transition this year. Do you think that impact is significantly larger next year or pretty much steady in terms of transition rates?
Yeah. I think when you think about the cost, think about 3M as a company that are using multiple technology platforms, right? We have 46 technology platforms that is owned by the company, not one specific division or country. Again, number 2, that we have manufacturing assets that can be used in multiple businesses. As you can see now, the margin in that business, EEBG, as a business group, is on a very respectable level. I would not be concerned on the cost side of the asset. On the technology transition, as I've said before, always when there is a technology transition, you can short-term lose a little bit and then come back. I think it's important to know, both in LED and OLED, we are providing solutions to those devices also that have OLED.
It's slightly less than versus LED, we are still in that business, and it's expanding in a way. I will say you go into next year, I will look upon it maybe similar to 2016 as we roll into the year.
Thank you.
We have worked on that for a long time. This is not a surprise to us. That means that technology is in the pipeline, and as I said, technology transition is always giving you either a short-term uptick immediately or you have to have a little bit of drag, but it will not be very long.
Thanks.
Thank you.
Our next question comes from the line of Steven Winoker of Bernstein. Please proceed with your question.
Good morning. This is Peter on for Steve.
Morning, Peter.
I was hoping maybe we could talk through some of the core pricing dynamics a little bit. Just sort of parsing out between how much pricing was to offset FX segments and how much was core sort of pricing increases. It looks like price in the U.S. was negative, but in many regions with positive price, those were regions that had negative FX. If you could talk through that a little bit.
Of course, Peter. Yes, for the third quarter in total, we recorded 60 basis points of price growth, and 30 basis points of that was related to pricing adjustments we make in relation to FX. We can split that right down the middle. 30 of it is core underlying price growth and another 30 related to FX. Many of you have probably heard me say over time that stripping out FX that our core ability to price ranges between 30 and 50 basis points. We saw third quarter as another consistent quarter in that trend. In regards to the U.S., we were down slightly in price. That's really consistent with where we've been for the total year in the U.S., with prices more or less flat. There's selected businesses at any given time where we're choosing to raise price.
Some where we're choosing to lower price based on competition. In the case of the U.S., there's been selected cases where we've adjusted our pricing in our strategies to gain market share.
Okay, thanks. Maybe actually just sticking on the price or price raws. Earlier, I think it was Q3, you said you were expecting 100 basis points of benefit for this year. I know you've addressed next year. Is that still the range you're looking at?
Yes, we're still expecting price raws to be adding approximately 100 basis points to our margin for total 2016. Very similar to what we saw in Q3, which was also 100 basis margin benefit.
Okay. That's great. Just maybe last one on the same point. What was the split between price and raw in the quarter?
Of the 100 basis points of price raw materials, 70 basis points is coming from lower raw material prices, that's really a combination of both some benefits we're seeing in commodity prices, but increasingly reliant on our own sourcing teams, negotiations, and productivity efforts. That's 70 basis points, and then the other 30 basis points from the price I talked about earlier.
Right. Okay. Got it. That's helpful. Thank you so much, guys.
Yep.
Thank you.
Our next question comes from the line of Shannon O'Callaghan of UBS. Please proceed with your question.
Hey, guys.
Morning, Shannon.
Morning, Shannon.
Morning, Shannon.
Hey, on the Electronics and Energy margins, being up at 24% even on the down volumes, how should we think about that segment now? You've got all the other segments sort of 22% or better. The comps are easing there. Should we now expect that that kind of joins the rest of the group here at 22% or above on an annual basis?
22% for the EEBG. Is that what you asked?
Yeah. Electronics and Energy, seasonally, it's a little stronger here at 24, but you've gotten every other segment up to 22, and now you've changed the business model there. The volumes are easing. Is that a reasonable entitlement view of where that segment should go?
Yeah, Shannon, we expect E&E's margin for the total year of 2016 to be about 20% operating income margin. It remains one of the businesses that we continue to see overweight margin expansion capacity in the coming years. We're certainly striving to get it up to the company average. I think you'll see it overweight for margin expansion in the next couple of years.
Okay, thanks. Then just on this sort of temporary Healthcare slowdown that you're seeing, just a little more color on what's driving that. I understand it's temporary, and you're confident in the future, but is it more channel inventories? Are there specific uncertainties that are driving a pullback? Did it seem like it was kind of broad-based in the U.S.?
Yeah. I think the reality of business is that it will be both, right? It starts by people holding back a little bit, and then they work down the inventory, right? It's not an inventory correction in any sort of shape or form. I think it's just that people have a little bit of uncertainty here in the quarter of how this will shake out, and then they're ready to go again. I think it's a normal reaction for anyone around the world when you're going into a period of uncertainty relative to will there be any changes of policies as you move forward, et cetera. To be honest, I'm not concerned at all. As I said, we like to see more growth there, of course, with the margins we have, but it's not an overall concern at all.
Okay. Thanks, guys.
Thank you.
Our next question comes from the line of John Inch of Deutsche Bank. Please proceed with your question.
Thank you. Good morning, everyone.
Hey, John.
Morning. Inge, I realize you have various industrial initiatives you're working on. You gave me your compares in the fourth quarter and obviously into next year. What about the markets, the broader U.S. industrial markets in which you serve? What do you see happening today in terms of the sequential trend? Is it getting better or is it flat? Did the end of the quarter get a little softer as some companies experienced? What did you see? Again, not your initiative. I realize you've got initiatives and you're outperforming, but how are your markets industrially doing?
Yeah. Well, as you saw, the U.S. IPI was negative 80 basis points in the quarter for Q4. You think about that in terms of some negative thing there. We see indications of positive movement in the industrial space relative to manufacturing. We are not immune to the overall industry. At least what is projected now for the IPI, it was actually in Q3, was down 80 basis points in IPI output. For us, as we move ahead, we will see positive growth in Q4. If you look into the year as we move ahead, industrial is growing for us over many segments, if you like. Even into Safety and Graphics, and some pieces also in Energy. We see slightly positive movements in that total market segment as you move into next year.
Yeah. I'm sorry, Inge, what indications are you looking at where you say there's positive movement relative to manufacturing? You were talking about the macro. Is that sort of a customer commentary, or are you talking about inventory, or what exactly are these indications?
Yeah, I think it's both. It's like when you work with a customer, you have the indication of they start to see an uptick in order. I cannot comment on inventory. I don't think we have seen any change in inventory, to be honest. I think it's an okay level at this point in time.
Switching to Electronics and Energy, could you size for us how big your businesses are that would touch in some manner LED or OLED? How big are these businesses? Is it like $1 billion, $1.5 billion, something like that?
John, our electronics business is $3 billion out of the Electronics and Energy business. The Display Materials & Systems division within electronics is about 60% of that total $3 billion, so about $1.8 billion. Much of that is connected with LCD, but not all of it.
Yeah. What do you believe is the mix today of LED in these applications versus OLED or O-L-E-D?
Well, it depends, John, on device. Right now, mobile phones is the most significant device impacted between LCD and OLED. We see that as approximately 30% OLED today in 2016 and about 70% still LCD.
The rest are lower in the mix?
Right. For instance, television, still vast majority LCD or LED, and tablets is a pretty small number there as well.
Just lastly, is the collapse of the British pound actually helping you in terms of your position in Britain and Europe, or is it a headwind? Relative to, I realize the FX, like the hedging gains issue, I'm sort of excluding that in the context of the pound's collapsed, euro's down, it's not down that much. All else equal, is this a net positive or a negative for 3M? Maybe you could put it into context for us.
John, it's about as close to a net neutral as you can imagine, outside of FX. From a standpoint, we make some things in U.K. that we export. We also import things to U.K., it's very close to net neutral. Just having the pound devalue, that of course has a negative impact. I think you're asking more the underlying, we're not a gainer or a loser in that.
You're fairly agnostic to those, the pound for instance. Like if the pound goes to parity-
Yeah
You're fairly agnostic to that scenario.
From a pound perspective, for a 5% move in the pound.
That would be about a penny and a half negative impact on us, just taking the FX impact of our U.K. It's about 3% of our total global business. Just to size it up how the pound movement impacts our total earnings per share.
Got it. Thanks very much. Appreciate it.
Yeah.
Okay.
Ladies and gentlemen, as a reminder, we ask that you please limit your participation to one question and one follow-up. Our next question comes from the line of Nigel Coe of Morgan Stanley. Please go ahead with your question.
Thanks. Good morning, gents.
Morning, Nigel.
May I ask, first on the help you clear on the 2017 kind of puts and takes? I'm going to ask you to maybe comment on top line a little bit, because quite a few of your peer group companies are sort of [audio distortion] on 2017. I'm wondering, you mentioned macro sort of sideways, which I think is probably in line with expectations. What sort of growth rates do you think 3M can generate in another flat year? I'm asking in the context of a 3% organic consensus expectation for next year. Is 3% even up in play here, or any comment there would be helpful.
Yeah. Nigel, I'll have to ask you to wait until December 13th for more specific numbers on that.
Sure.
Directionally, my comments about the external economy continuing to go sideways, I think that's a fair representation about how we're planning right now. Incrementally that we see better improved growth in both Industrial and Electronics and Energy. The actual numbers, let's wait till December 13th to talk about those.
Okay. No, it's worth a try, I guess. On pricing, I was quite surprised to see Latin America, Canada still above 5%, given that the currency movement has started to level off year-to-year. I'm wondering, is that more of an inflationary type of impact that we've seen with that pricing, and therefore, will that be stickier going forward?
Yeah. Nigel, when I look at Latin America and our price growth there, yes, we saw the real strengthen quite a bit in recent months, but we're still seeing high inflation in the economy in Brazil, which is giving us the opportunity to be having price growth that's matching what's going on in the economy. Yes, it's much more around inflation than it is around FX right now.
Plus 5 you think is sustainable going forward?
Sustainable going forward, I probably wouldn't go that far to call that sustainable. A lot depends on what the inflation rate continues to be, and I think that will be influenced by what happens with FX rates in the coming quarters.
Okay, I'll leave it there. Thank you very much.
Our next question comes from the line of Robert McCarthy of Stifel. Please proceed with your question.
Good morning, everyone.
Morning.
I guess the first question I would have is, given the prospect for sideways growth, which isn't particularly surprising given the macro backdrop we've seen over the past couple of years, does that allow you to do anything differently in terms of your execution of global excellence or SKU rationalization, in terms of picking up the pace anywhere? Do you think it's just kind of steady state? Does the environment that's presented to you create more opportunities in general on structural restructuring, business transformation or cost take out to accelerate some actions that you otherwise wouldn't take given the demand environment?
I think, first of all, I don't think we are in a situation that we were 2008 or 2009, where really everyone was pushed into extraordinary thing in order to improve the operations because there was no choice. I think we are in a situation now where we can work a model of do it when we can versus when we must. I think that's an important differentiation to think about it. Everything we are doing now with the type of centralization, if you like, even if it's on a regional base, will help us a lot. We are just marching forward on that. We're marching forward in order to make sure that we build an organization for the future for 3M, that both can grow and is becoming even more effective relative to operational excellence in the company.
We will grow as fast as we can, but we are not taking any risks relative to be able to serve our customers. I think that's the important element. We are here to deliver to you what you expect, but we're also here, of course, to deliver to our customers. I think you have this balance always when you implement new initiatives that you would like to go fast, but you have to make sure that you really understand the implication with the customer. I think that's the answer to your question. That I and the team here, we are pushing as hard as we can to come as fast as possible to the most effective model. You have always to think about customer first when you make those changes.
By definition, when you think about what we do in West Europe now, in terms of our inventories and so forth, yeah, of course, it will be less SKUs because you consolidate inventories at fewer places, et cetera. That will roll out, and I'm sure that you have heard, and I know you have, relative to our footprint initiatives, that is both in terms of manufacturing sites and in terms of distribution centers. The answer is, we are going as fast as we can, but we are not jeopardizing our service level to the customers.
Okay. Thank you for that. Just one brief follow-up. I guess in terms of the growth for sideways for 2017, it is what it is. We are going to get more color on that on December 13th, the Analyst Day. Going in terms of the setup for your portfolio right now and kind of dovetailing the comments you made in your prepared remarks, are there certain segments that you think you can significantly outgrow the end markets that present themselves through product introductions? Is there a set of cards that you like with respect to your portfolio, specifically to 2017 or 2018, where you think you have capability for significant outgrowths?
If you think about our business model, we have a proven model that we are able to outgrow IPI and for GDP by 1.5x IPI or GDP. That is, of course, not happening every year. If you look upon it for 10 years, we have been able to do that. With all initiatives that we have taken in the company relative to the portfolio, relative to improved commercialization processes, et cetera, we should be able to do slightly better than that as we move ahead. I do not make a distinction in between certain segment that some will outperform more than others. We should be able to outperform at least 1.5, maybe 1.7 as we move ahead in every segment we compete in, because that is the expectation. That is why we are there.
If we do not do that, we are not relevant in that segment to our customers, and then we have to do something different. The other comment I would like to make is, we cannot predict when a turnaround is coming in the economy. We cannot predict that. I do not think anyone can. One thing I would like you to know, we are ready. We are ready. With everything we have done the last couple of years in terms of the portfolio, in terms of the structure, in terms of stepping up the investment in research and development from 5.5% closer to 6%, and the supply chain model enabled by business transformation that all start and end with the customers. We are ready. When it comes, we are ready in the forefront to capitalize on that.
Thanks for your time.
Thank you.
Our next question comes from the line of Deane Dray of RBC Capital Markets. Please proceed with your question.
Thanks. Good morning, everyone.
Morning, Deane.
Just a quick question from me and Nick, regarding the lower tax rate this quarter. You mentioned a favorable audit, did you also repatriate as much cash as you had talked about last quarter?
Yeah, Deane. As you know, we typically set a repatriation plan at the beginning of the year. We sometimes modify that. If anything, well, it's gone up slightly of what we're repatriating from what our plans were at the beginning of the year. It's eked up a little, but not significantly, Deane.
Got it. Just to clarify, I might have missed this, on the strategic investments in the quarter, the manufacturing restructuring, what segments were those addressing, and do you plan to do more there?
Yeah. The strategic investments that we had in the third quarter, some of them touch multiple businesses, including Healthcare and Industrial in the third quarter. In total, we're still expecting that we're going to accelerate that pace throughout the year in 2016. It's been ramping up each quarter, I'm highly confident the fourth quarter will be the highest quarter for strategic investments for 3M for 2016, and pretty close to being in line to what I originally guided last December.
Got it. Thank you.
Thank you.
Our next question comes from the line of Laurence Alexander of Jefferies & Company. Please proceed with your question.
Hi, just a quick one. Can you peel back a little bit what you're seeing in China in terms of end markets or your business lines which are getting better versus worse, and how you're thinking about competitive pressure in the wake of ongoing SOE reform?
Yeah. Hey, good morning, Laurence. Yeah. Well, first of all, if you take our operation in China, ex-electronic, we have 4% organic local currency growth in the quarter. If you take in electronics into it, which actually was down 11%, we were down 2 percentage for China. Now, there is clear improvement is what I will consider domestic-driven businesses. If you take the five business groups for us in China, S&G grew 18%, Consumer 12%, Healthcare 8%, and Industrial 2%, and then Electronics and Energy was down. If you think about that, we had four of five business groups in China growing, and it was very much in Consumer, Healthcare, Automotive Aftermarket, Automotive OEM, and Personal Safety. I think that what we have talked about for quite some time about, it's not really a shift. It's to grow out the domestic businesses. It's coming.
On the other hand, it's a little bit slower, we think, versus the original plan. If you think about our business, if you take the electronic part, which is very much in Asia and in China, we had a 4% growth in China. You would like it to be 12, but it's four and it's the biggest subsidiary outside of U.S. for us. I am slightly positive as we move ahead relative to China. Now, that team is driving productivity big time. The model there today versus five years ago is different. Where everything was about growth. We grew 15%-20% year-over-year. We don't any longer. We grow four. Now productivity is a key element for us, and I think that's important. We have good margins, and we continue to expand margin there. I hope that helps in terms of explaining China.
Just competitive pressure in any areas where you're seeing any real shift that matters?
No, I think you have over a year seen more domestic businesses or companies type of stepping up. I would say, in all honesty, yeah, in some segments, which is maybe more commoditized, it could be a challenge. For us, as you know, we work very much with technology conversion and with brand equity, it's less impact to us. Of course, there is competition, I would say, I will more relate that maybe to local companies that try to build coming into the market. Mostly, I would say in commodity-related businesses, meaning it's a price game, it's not a performance game. You have to ask yourself, in the end of the day, if you're 3M, would you like to play in that area, right?
As I said, in EEBG, I'd rather fire some SKUs if I don't make money and have lower growth but better margin.
Got it. Okay, thank you very much.
Thank you.
Our next question comes from the line of Steve Tusa of JPMorgan. Please proceed with your question.
Hey, guys. Thanks for fitting me in at the end here.
Hey, good morning.
Good morning, Steve.
Good morning. I didn't quite get the answer on electronics for next year. You said it's going to be better, but does that mean growth?
Yeah, Steve. I'm going to leave it just as we expect it to be better.
Okay.
We'll talk more in December 13th of what we see for the total growth range for Electronics and Energy in 2017.
Okay. That's fair. What's going on in Healthcare? 1.5% comp was a little bit lighter than I expected. Anything to do with the tough comps of last year? Is it the health information systems business that's maybe seeing a bit of hiccup after the strategic evaluation? Would you point to anything in Healthcare that we should be watching over the next couple of quarters?
No. As I said earlier on the call, it's basically U.S. that have a temporary itself for the quarter. I wouldn't be overly concerned about that. As I said earlier, you had some developing market like Brazil, I think we saw a slowdown as well. More than that, I wouldn't be overly concerned about it, and I am not, and I think that's maybe the best place for me to be in it, that I'm not overly concerned. As I said, maybe in Q4, we will see equal quarter to Q3 until some uncertainty is in place. We continue to invest. I just told you about We did one acquisition in Switzerland for health information system, and then we also signed a partnership with Verily. Both Verily and 3M, two very creative, dynamic companies that are building our platform.
We look very positively to not only health information system, but all businesses in that business group.
Okay, one last quick one, just on Q4. Nick, I think the implied price cost margin tailwind is about 40 basis points. If I back into the 100 you're guiding to for the year, given you've been above that so far for the year, is that about the right number for the fourth quarter? Is that just conservatism or is that kind of a new solid run rate to expect going forward? Just keep trying to kind of split the hair close there a little bit.
Yeah, Steve, we have been seeing the benefits from raw materials flipping as we move from quarter to quarter. The 40 basis points where you're doing the math of coming out with 100, I call that more just a function of rounding where the actual math might come out a little higher than that, and we're just rounding it to approximately 100 basis points.
Oh, okay. Makes sense.
I don't like to overread that, Steve.
Got it. That makes sense. That's our job to overread everything. Sorry. Thanks. Talk to you soon.
Okay.
Thanks, Steve.
Thanks.
That concludes the question and answer portion of our conference call. I will now turn the call back over to Inge Thulin for some closing comments.
Thank you. Looking ahead, we remain focused on executing the 3M playbook and preparing our company for the future. As you know, we have done a lot of work over the last several years to adjust our portfolio, improve our cost structure, enhance our technology capabilities to make us even more relevant to our customers. While the macro environment is challenging at the moment, we are positioned well for when global growth conditions improve. This is true both for developed and developing markets, where we have the experience, the market position and depth of capabilities to capitalize on the win as the economies recover. With that, I thank you for joining us this morning, and we are looking forward to see you in New York on December 13th. Have a great day. Thank you.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.